Volume 3 – 2017
In Volume 3 of our 2017 Newsletter, we highlight:
- Washington Office is Celebrating 60 Years
- Renting Residential and Vacation Property
- Is a Living Trust Right for You?
- Leave Your IRA to Charity
- Managing Costs for the Bottom Line
- Financial Statement Changes for Nonprofit Entities
- Alzheimer’s Association Walk to End Alzheimer’s
Hochschild, Bloom & Company LLP
The Washington office is celebrating 60 years of business — 1957 to 2017.
The history of the Firm started in the late 1930s, when a young man arrived in the United States from Germany, just ahead of the rising tide of Hitler and World War II.
Peter Hochschild worked for a time in his uncle’s department store in Baltimore, took courses in accounting, and moved to St. Louis for a position in a large accounting firm.
After completing the accounting courses, Mr. Hochschild took the CPA exam. He received the second highest grade in the national CPA examination at that time and continued gaining experience until, in December 1946, he went out on his own. The Firm continued to grow with the addition of Melvin Bloom who became a partner in 1952.
A few years later in 1957 Lee Young, an attorney and CPA, decided to sell his accounting practice in Washington and devote full time to his law practice. The Firm saw Washington as a growing area and decided to buy the practice. Leon Dardick moved to Washington and became the first managing partner of the Washington office. The first office was located in the 100 block of West Main Street. Several years later the office was moved to the 400 block of East 5th Street. Finally in 1972 the Washington office was moved to the Washington Square Shopping Center, where it remains today.
Several of the clients that were purchased from Mr. Young are still clients of the Firm today. The Washington office, in the past 60 years, has had many long-term employees and promoted three to partner: John Politte, Tom Buescher, and Rita Griesheimer.
The office has definitely grown over the years and has seen many changes. The Firm is very proud of its service and commitment to the community.
Average Prices In 1957:
- Average new home $12,220.00
- Average monthly rent $90.00
- Average yearly wages $4,550.00
- Gallon of gas $0.24
- Gallon of milk $1.00
- Pound of bacon $0.60
- Dozen eggs $0.28
- Pound of butter $0.75
- Pound of ground beef $0.30
- Head of lettuce $0.19
- Loaf of bread $0.19
- Postage stamp $0.03
Renting Residential And Vacation Property
If you receive rental income for the use of a dwelling unit, such as a house or an apartment, you may be able to deduct certain expenses. These expenses, which include mortgage interest, real estate taxes, maintenance, utilities, insurance, and depreciation, will reduce the amount of rental income that is subject to tax.
There is a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days during the year. In this case, do not report any of the rental income and do not deduct any expenses as rental expenses. If you do receive a Form 1099, you will need to report the income and then list the same amount as nontaxable under the fewer than 15 days rule. Your expenses, including mortgage interest and property taxes, should be deducted on Schedule A as usual.
If you are renting to make a profit and do not use the dwelling unit as a residence, then your deductible rental expenses may be more than your gross rental income. Your rental losses, however, will generally be limited by the “at-risk” rules and/or the passive activity loss rules.
However, if you rent a dwelling unit that you also use as a residence, limitations may apply to the rental expenses you can deduct. You are considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of:
- 14 days, or
- 10% of the total days you rent it to others at a fair rental price.
It is possible to use more than one dwelling unit as a residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year.
A day of personal use of a dwelling unit is any day that it is used by:
- You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home and the other owner pays a fair rental price under a shared equity financing agreement.
- A member of your family or a family member of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price.
- Anyone under an agreement that lets you use some other dwelling unit.
- Anyone at less than fair rental price including use by a charity.
If you donate the use of your rental property to a charity for a fund-raising auction, the use by the successful bidder is deemed to count as personal use by the owner. The charitable deduction for the fair rental value is also not allowed because the gift of the use of the property is not a deductible contribution.
If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You will not be able to deduct your rental expense in excess of the gross rental income limitation (your gross rental income less the rental portion of mortgage interest real estate taxes, and rental expenses such as realtors’ fees and advertising costs).
However, you may be able to carry forward some of these rental expenses to the next year, subject to the gross rental income limitation for that year. If you itemize your deductions, you may also be able to deduct your personal portion of mortgage interest and property taxes on Schedule A.
Some states and local governments impose an occupancy tax. You may collect the tax directly from the renter and remit it to the taxing authority. Some companies like Airbnb, HomeAway, and VRBO may remit this tax for you.
If you rented part of your personal residence out, this may create a taxable gain upon the sale of your home.
If you have questions regarding any of the above information, please call us.
Is A Living Trust Right For You?
Revocable living trusts have become popular estate planning tools. Whether a living trust is right for you, however, depends on a number of factors.
A living trust is a trust that you set up during your lifetime, to which you transfer most or all of your assets. You get the income from the trust, and also have the right to withdraw principal. You can revoke or cancel the trust any time during your life. At death the trust becomes irrevocable and its income and assets are disposed of under terms specified by you in the trust papers.
Why would you do this? The main advantage of the living trust is that its assets are distributed without going through the court probate process. That avoids a filing fee in probate court. Also, trustee fees generally are lower than nonfamily executor or personal representative fees would be. However, even if probate is avoided, there will be the expense of preparing an estate tax return, valuing and transferring assets, and making a formal accounting and settlement. Also, to avoid probate, all probate assets must be included in the living trust. If some are left out, a probate proceeding still would be necessary. As a result, those with living trusts usually also have a will to direct any extra property into the trust.
Some of the other benefits and pitfalls to consider are:
- Quicker distributions — Probating a will and gathering assets into the estate for distribution can take quite a bit of time. With a living trust, by contrast, all assets already are gathered together, so the trustee can make immediate distributions and continue paying bills as usual.
- Protecting minors — Living trusts can help avoid the need to appoint a guardian to represent children’s financial interests, which can cause delay and add to administration costs.
- Privacy protection — Since probate records are public, the size of your estate, the names of beneficiaries, and the amounts each received can come into anyone’s possession. The size and terms of a living trust, by contrast, are not necessarily public matters.
- Income taxes — If you create a living trust, you will be taxed on its income in much the same way as if you continued to own the property outright.
- Estate taxes — It’s a fairly common misconception that living trusts save estate taxes, but that is not necessarily the case. The trust assets within a revocable living trust will be subject to estate tax just as if you continued to own them outright. Therefore, basic estate planning techniques are important in the context of living trusts as well as transfers at death by will.
As we said, living trusts make a lot of sense for some people and not for others. You have to consider all of the pros and cons as they relate to your particular situation to make an informed choice about a living trust. We would be happy to assist you in making the decision that is right for you. Please call if we can be of assistance.
Leave Your IRA To Charity
If you are considering leaving a bequest to a charity upon your death, consider leaving the charity money in an IRA rather than cash or other assets. IRAs are taxable to the beneficiary upon your death, but charities do not pay tax on any donations given to them, therefore, the distribution will be tax free to them. So in conclusion, if you leave money in an IRA to the charity of your choice, they will not be taxed on this distribution, however, if your heirs would receive this same IRA distribution, they would be taxed on the money when they receive it.
Managing Costs For The Bottom Line
Your company’s profitability depends not only on sales, but also on effective cost management. Are you adequately addressing the cost side of the business equation?
You probably can readily identify the products and/or services that are generating your greatest sales volume. But can you identify all the costs associated with providing each product or service? Only when you know your true costs can you effectively allocate resources to the work that is most profitable for your company.
As the business owner of a small business, you cannot be everywhere at all times. You do need to stay in circulation, regularly observing the day-to-day operations of your business, and talking to your managers and employees. By staying visible and encouraging an open dialogue, you will be in a better position to uncover costly problems before they seriously erode your company’s bottom line.
Even if you are satisfied with a current vendor, you may want to talk to the competition from time to time. You will not necessarily want to switch vendors simply because you are quoted a better price, however, you may be able to use that price in negotiations for more favorable terms from your existing supplier.
In the interests of cash flow, your company may routinely pay its bills only when they come due. While this generally is a sensible strategy, it may not be wise if you are passing up generous cash discounts for earlier payments. In the current low interest rate environment, borrowing the funds you need to take advantage of discounts may be a better move. For example, suppose a vendor offers your company a 2% discount for paying a $10,000 invoice 20 days early. Passing up the discount will cost you $200. Instead, you might borrow $9,800 from your bank, pay the discounted invoice, and repay the loan in 20 days. If the rate on your bank line of credit is 8%, you will owe about $45 of interest for a net savings of $155 on just one invoice.
Effective cost management requires good information and careful planning. If we can be of assistance, please contact us.
Financial Statement Changes Ahead For Nonprofit Entities
By: Ashley Straatmann, CPA
A new Accounting Standard Update from the Financial Accounting Standards Board (FASB) will have a significant impact on the financial statements of all nonprofit entities. Last year, FASB passed ASU 2016-14, which makes many changes to the presentation of the financial statements for nonprofit entities, including changes to the net asset classes that are presented and enhanced disclosures related to liquidity and availability of funds, governing board designations, functional and natural classification of expenses, and cost allocation methods.
Nonprofit entities will now be required to present amounts for two classes of net assets instead of the currently required three. The two new classes are “net assets with donor restrictions” and “net assets without donor restrictions”. These will replace the current net asset classes of unrestricted, temporarily restricted, and permanently restricted. The significant differentiating factor between the two new classes of net assets are whether or not a donor-imposed restriction exists. Donor-imposed restrictions can be temporary or perpetual in nature. Net assets that are restricted or designated by the nonprofit’s Board are included in net assets without donor restrictions.
Under the current guidance, nonprofit entities are allowed to choose to use either the direct method or the indirect method to report operating cash flows on the statement of cash flows. This has remained unchanged under the new standards. However, if the nonprofit entity chooses to report operating cash flows using the direct method, it will no longer be required to present a reconciliation from change in net assets to net cash from operating activities under the new guidance. This change simplifies the reporting requirements for entities who choose to use the direct method.
Under the new guidance, nonprofit entities will be required to report investment return net of external and direct internal investment expenses. This eliminates the requirement to disclose investment expenses that have been netted. Nonprofit entities will also be required to use the placed-in-service approach to report expirations of restrictions on gifts used to acquire or construct long-lived assets under the new guidance. This change eliminates the option to release the donor-imposed restriction over the estimated useful life of the acquired asset.
In addition to the changes already noted, the new standards implement many new disclosure requirements for nonprofit financial statements. Nonprofits will need to add or enhance their disclosures related to governing board designations and appropriations, as well as those related to net assets with donor restrictions. The new standards also will require quantitative and qualitative disclosures regarding a nonprofit’s liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date. This includes items such as the nonprofit’s contractual agreements that make certain financial assets unavailable to fund general expenditures, goals for maintaining financial assets, and policies for investing excess cash, among others.
Additionally, the new standards will require that all nonprofit entities present an analysis of their expenses by both functional and natural classifications, and disclose the method(s) used to allocate their costs between program and supporting functions. (This analysis and disclosure used to be only required by voluntary health and welfare entities). Finally, if a nonprofit entity has underwater endowment funds (funds for which the fair value is less than either the original gift amount or the amount required to be maintained by donor or law), there will be some additional disclosures required under the new standards that are not currently required.
These changes are effective for annual financial statements issued for fiscal years beginning after December 15, 2017 or for interim periods within fiscal years beginning after December 15, 2018. Early application is permitted, but the changes should be initially adopted only for an annual fiscal period or for the first interim period within the fiscal year of adoption.
The changes in these new standards should be applied retrospectively. However, if the nonprofit is presenting comparative financial statements, it has the option to omit the new disclosures about liquidity and availability of resources and the analysis of expenses by both natural and functional classification for any periods prior to the period of adoption.
Nonprofit entities should begin planning for these changes now, even if they do not plan to early-adopt. We are available and happy to assist you in planning and implementing this new guidance.
Alzheimer’s Association Walk To End Alzheimer’s
The Alzheimer’s Association Walk to End Alzheimer’s is the world’s largest event to raise awareness and funds for Alzheimer’s care, support, and research. The Walk is held annually in more than 600 communities nationwide. This year Hochschild, Bloom & Company participated in the Walk held in Washington, MO. HB&Co. had a total of 10 employees and 6 family members participate on our team. Washington’s Walk raised a total of $197,890.42 and had 788 participants with 84 teams.
Alzheimer’s disease is the sixth-leading cause of death in the United States and it’s the only cause of death in the top 10 in America that cannot be prevented, cured, or slowed. In the United States someone develops Alzeheimer’s every 66 seconds and of them almost two-thirds are women.
Money raised from this event will go towards funding a free 24/7 helpline offering information and referrals. It connects those facing the disease with a network of providers in their community. The funds will also be used to support legislation to create a national plan for fighting the disease.
HB&Co. is a proud sponsor of the Alzheimer’s Association to help find a cure to end Alzheimer’s.