February, 2014 | RKL LLP
Posted on: February 25th, 2014

Death and Taxes: Estate and Gift Tax Considerations in Pennsylvania

You work hard to provide financial security for your loved ones.  And so it only makes sense that you want to pass on as much of your wealth as possible to those you hold dear in the event of your death.  In Pennsylvania, your estate will be subject to an additional state inheritance tax, so it’s important to understand what options are available to you to minimize your heirs’ tax burden.

Reducing Estate, Inheritance and Gifting Taxes

Here’s what you and your loved ones should know about tax matters related to estates, inheritance and gifting in Pennsylvania.

  • inheritance_tax_ratesinheritance_tax_ratesinheritance_tax_ratesPennsylvania is one of 19 states and the District of Columbia that levies separate estate taxes on its taxpayers.  And the more distant a relative you are, the more you pay.Pennsylvania inheritance tax rates
  • You can get a discount on Pennsylvania inheritance tax. In Pennsylvania, inheritance tax isn’t due until nine months after the date of death, but if you pay the tax within three months, you are eligible for a five percent discount on your inheritance tax.  Most attorneys are aware of this provision and will advise you accordingly.
  • You can give $3,000 tax-free within a year prior to death in Pennsylvania.  Terminally ill individuals in Pennsylvania may want to consider gifting each of their loved ones up to $3,000 – the maximum amount of gifts within a year of  death that would not be added back as part of the taxable estate.
  • You can give up to $14,000 a year tax-free without it counting against the federal lifetime exemption of $5.34 million. This is the maximum amount that you can gift to each loved one within any given year without filing a federal gift tax return.

Have questions about gifting and estate tax matters?  RKL is here to help.  Contact your RKL advisor today or one of our local offices.

ramosContributed by Molly L. Ramos, CPA, a manager in RKL’s Tax Services Group.  Molly has more than 12 years experience in tax services, specializing in individual tax, trusts, estates, gifts and not-for-profit organizations.

Posted on: February 17th, 2014

CEOs: The Five Must-Review Items in Your Monthly Financial Statements

CEOs: The five must-review items in your monthly financial statementsIt probably goes without saying: CEOs and business owners are busy. From management meetings to strategy development and everything in-between, if you’re like most top executives, your schedule is stretched to the limit. So just how important is it to page through that monthly financial statement? Very. CEOs are not only the visionaries of their companies, but they also need to have a working understanding of the financial issues facing their organization.

The key to keeping current with your company’s financial position is to know what to look for. In fact, if you commit just a half hour reviewing these top five items each month, you’ll have the information you need to assess the sustainability of your organization.

  1. Are the internal financial statements prepared timely and are they accurate? The information contained in your financial statements is only useful to management if the financial statements are prepared accurately and distributed timely. If the company’s year-end statements are audited or reviewed by an independent CPA, the volume and magnitude of adjusting journal entries is a good indicator of whether the monthly internal financial statements are reliable. The CEO should be interested in knowing if the operational managers are routinely getting the financial data they need on a timely basis.
  2. Are we on track to achieving our revenue goals? Reviewing the “top line” of the income statement is an important beginning to evaluating the financial performance of any business. This will give the CEO an immediate impression on whether the current strategy of providing goods or services is effective. Comparing the revenue result to current budget and prior actual year is a good gauge of whether the company is trending positively in revenue growth.
  3. Are we generating “quality” revenue? This question can be best answered by reviewing the “middle line” of the income statement, commonly referred to as gross profit. Revenue minus the direct cost of goods and services sold (generally material costs, direct labor costs and other manufacturing or service related cost) results in the gross profit margin for the business. Reviewing the gross margin, both in terms of gross profit dollars and gross profit percentage, is a very important indicator of whether the overall revenue streams are producing profitable business results.
  4. Are we performing at the “bottom line”? The ultimate measurement of financial success is whether the business is producing sufficient profits at the bottom line in the form of net income. This takes into account the expenses incurred in the areas of selling, general and administrative expenses and interest expense.  Income taxes would also be included as an expense for businesses operating as c-corporations but not for “pass-through” business entities including s-corporations, LLCs, or partnerships. The ability of the business to generate sufficient net income on a sustainable basis should be of primary concern to the CEO.
  5. Do we have the financial resources needed to carry out our business plans? A review of the Company’s balance sheet can help assess whether the business has the necessary resources to carry out day to day operations, implement new business strategies, make planned capital expenditures and service its existing debt. A review of the following key balance sheet ratios and relationships can be helpful in addressing this question:
  • Current ratio (defined as current assets divided by current liabilities)
  • Net working capital (measured as current assets minus current liabilities)
  • Debt to equity ratio (defined as total liabilities divided by equity)

These metrics, particularly when comparing the trend over the period of years, will help establish whether the company is generating sufficient cash flow from operations and whether the level of borrowing from external sources is changing. They will also help you evaluate current business strategies, provide a critique of whether the recent financial performance is on target and indicate whether modifications to the current strategy should be considered.

Looking for professional insight into your company’s financial performance? RKL is here to help. Contact your RKL advisor or one of our local offices to learn more.

stonerContributed by John S. Stoner, CPA, CVA, partner and leader of RKL Business Consulting Services Group in the Lancaster office. John provides a wide range of business consulting services, including business valuation, litigation support, merger/acquisition assistance and business succession planning to  clients in the healthcare, advertising, manufacturing, service and not-for-profit industries.

 

 

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Posted on: February 10th, 2014

Why LIFO for Central and Eastern PA Manufacturers?

Central and Eastern Pennsylvania’s distinct economic climate, conservative financial environment and geographic proximity to major markets have fostered a healthy and thriving manufacturing sector. These characteristics are also important factors for why area manufacturers could reap major tax savings by leveraging nationwide inventory inflation rates via the Inventory Price Index Computation (IPIC) LIFO methodology.

The Inventory Price Index Computation.

At one time, LIFO was generally considered too cumbersome to make the tax savings worth the effort for some companies. Under the “Last-In-First-Out” methodology, companies calculate the cost of goods sold based on the price of the most recently purchased inventory – the “last in.” While companies with inflating inventory costs stood to benefit from lower taxable income, the calculations were often viewed as too tedious, even for middle-market manufacturers.

The Inventory Price Index Computation (IPIC) method allows companies to use 100% of the PPI or CPI indices produced by the Bureau of Labor and Statistics to calculate their LIFO layers. It’s a simpler alternative that allows you to easily outsource the difficult and time-consuming calculations required.

Unique Tax-Savings Advantages for Central and Eastern PA Manufacturers.

In a geographic environment where conservative purchasing agents prevail, access to rail, highways and water routes eases transportation and negotiating for competitive pricing is commonplace, Central and Eastern PA manufacturers have a unique opportunity. Utilizing the IPIC LIFO methodology, companies can take advantage of nationwide industry inflation instead of relying on their own internal inflation rate – which tends to be lower than those of our peers nationwide.

LIFO for Manufacturing DistributionIn the simplest example, if a taxpayer with prepared animal feed inventory had a $10,000,000 inventory level in 2007 and maintained generally the same types of inventory items and quantities year after year, that taxpayer would have inventory valued at approximately $15,100,000 at the end of 2012, due to the inflation of the cost of the inventory. However, if they were using IPIC LIFO, they would still be reporting the inventory at its $10,000,000 2007 value, because LIFO lets you assume that you’ve sold your most recent (and appreciated) purchases first. IPIC LIFO, in this case, results in a taxable income deferral of $5,100,000.

What to Expect

With any tax planning tool, there are some concerns, costs, limitations and risks to keep in mind. If you are utilizing LIFO methodology for tax purposes, it will need to be utilized for your financial statement reporting as well. This may result in the appearance of a depressed profit; however, a tax advisor experienced in LIFO will help clarify the reason for this to your financial statement users.

Additionally, LIFO is only beneficial if there is cost inflation in the inventory components. If there is deflation in a given year, LIFO can cause inventory values to increase when compared to a FIFO methodology, resulting in an increase in taxable income.

While the LIFO calculations have been simplified using the IPIC methodology, the process still requires experience, knowledge and expertise. It’s important to have a thorough conversation with your tax services provider to gain a complete understanding of the benefits and risks involved and develop the right strategy for your company.

Want to know more about LIFO? RKL’s Manufacturing & Distribution Services Group provides a portfolio of accounting, tax planning and compliance and specialized consulting services aimed directly at the challenges and opportunities facing Central and Eastern PA manufacturers. Learn more here or contact Steven E. Fisher, partner and leader of RKL’s Manufacturing & Distribution Services Group, at sfisher@rklcpa.com or 610.376.1595.

roblContributed by Robert M. Gratalo, CPA, MST, a partner in RKL’s Tax Services Group. Rob specializes in federal and state taxation of privately held businesses in the construction, manufacturing and distribution, real estate development, architecture and engineering and service industries.

Posted on: February 4th, 2014

Accounting for Goodwill for Private Companies

Private companies will now have an alternative method for amortizing goodwill over a period of 10 years or less as a result of a recently issued Accounting Standards Update (ASU) from the Private Company Council (PCC), part of the Financial Accounting Standards Board (FASB). The update is intended to reduce the cost and complexity of complying with current U.S. GAAP goodwill accounting guidance for privately-held companies.

ASU No. 2014-02 Intangibles – Goodwill and Other (Topic 35): Accounting for Goodwill, a consensus of the PCC, is effective for annual periods beginning after December 15, 2014, with early adoption permitted. The application of this alternative should be applied prospectively to goodwill existing as of the beginning of the period of adoption and to new goodwill recognized after the beginning of the annual period of adoption.

The Impact of Accounting for Goodwill (ASU No. 2014-02)

Significant resources of the private company can be saved as valuations may not be required where they were before. While some benefits of adopting the new standard can be realized, private companies should consult with their CPA advisor or engagement team to weigh the benefits against other factors, including:

  • The impact of the amortization of goodwill on the income statement. Previously, there would be no effect to the income statement if no impairment was indicated.
  • The limited effect of amortization to the company if financial covenants related to debt agreements exclude amortization.

A Detailed Look at Accounting for Goodwill (ASU No. 2014-02)

An entity adopting this alternative should amortize goodwill on a straight-line basis over 10 years or less than 10 years if the entity demonstrates that another useful life is more appropriate; Further, an entity that elects the accounting alternative is required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level.

Goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount. When a triggering event occurs, the entity has the option to first assess qualitative factors to determine whether the quantitative impairment test is necessary. If that qualitative assessment indicates that is more likely than not that goodwill is impaired, the entity must perform the quantitative test to compare the entity’s fair value with its carrying amount, including goodwill (or fair value of the reporting unit with the carrying amount, including goodwill, of the reporting unit). If the qualitative assessment indicates that it is not likely that goodwill is impaired, no further testing is necessary.

Have questions about this guidance? RKL is here to help. Contact your RKL advisor or one of our local offices for details and assistance in assessing the impact of adoption.

New Goodwill Accounting Guidance from PCCContributed by Michael P. Jones, CPA, a manager in RKL’s Audit Services Group. Mike specializes in serving the audit and accounting needs of commercial, not-for-profit and governmental organizations. 

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