Lauber s Ledger. The Importance of a Chart of Accounts By Christine A. Lauber INSIDE THIS ISSUE. The Importance of a chart of accounts...

Transcription

1 THIRD QUARTER 2013 AUGUST 2013 Lauber s Ledger INSIDE THIS ISSUE The Importance of a chart of accounts Tips for a More Efficient Audit... 2 The Back Side of 529 Plans...2 Simple Steps which could Reduce Taxes on IRA Distributions...3 Standard Operating Procedures TIDBITS...5 The Importance of Corporate Minutes...5 The Importance of a Chart of Accounts By Christine A. Lauber The chart of accounts for your accounting system is a basic structural component. It outlines how things are classified and assists in the final reports. The development of the chart is a process that should begin with the end in mind. It is not random nor sequential and I don t suggest taking the sample chart of accounts that comes with your accounting software. Just as every bone in your body has a place and a purpose, so do the classifications of accounts. There are four basic pillars of categories Assets, Liabilities, Income and Expense. The Balance sheet (assets and liabilities) further subdivides them into current and long term and then specific line items. In the income statements they are divided by purpose of the item. For example, in a manufacturing entity there would be cost of goods sold, selling, delivery, administrative, finance and taxes. In a service environment, it would be detailed according to the type of expense; personnel cost, facilities, technology, marketing, etc. The numbering systems then follow the natural groupings of items, with spaces left for growth in a single category. For instance, in 1982 when I started my practice, one account was labeled computer expense. Today I have computer software, internet, maintenance, hardware, and backup. My rule of thumb is If you have more than one place to put it, your chart of accounts is too big and if you can t figure out where to put it, it is too small. The purpose of the accounts is to track data so management knows what happened. The purpose of the categories is to manage balances or costs associated with that function. Then management can assess the investment in creating technology or marketing and measure the return on investment through performance metrics. Think of the chart like an index to a reference book. What do you want to know and what label would you use to look it up. The story will tell itself. This newsletter was written and edited by the staff of Christine A. Lauber CPA Christine A. Lauber Owner of Christine A. Lauber CPA 1402 Mishawaka Avenue South Bend, IN (574)

2 THIRD QUARTER AUGUST Tips for a More Efficient Audit By Lauren Plennert Organizations across the world are continually trying to find additional ways to reduce inefficiencies and expenses. Often times audit expenses are not analyzed for potential savings because they are generally required for various reasons. However, being prepared and anticipating the auditors requests can help reduce the amount of time needed for an audit and can lead to savings for the organization. Following these simple tips and spending a few extra hours preparing for the auditors arrival will result in a more efficient engagement. 1. Communicate, communicate, communicate Communication is key between auditors and organizations. Make sure to communicate your expectations for the engagement as well as deadlines, schedule constraints and changes in the organization from the prior year. 2. Be available If an audit is scheduled for a certain time period, make sure to have the appropriate people available. Don t schedule the audit fieldwork for a time when the main contact will be on vacation or in several back-to-back meetings. Unforeseen circumstances will happen, however make sure to keep the auditor in the loop when they do occur. 3. Be prepared If this is not the organizations first audit, you should be familiar with the documents and information that are typically requested. Prepping reconciliations and pulling the necessary support ahead of time, will reduce unnecessary delays and keep the audit on track. Try keeping a list of the requests each year to reference when prepping for the following year s audit. 4. Anticipate additional requests Auditors always look into changes in the organization from the previous year as that can change their risk assessment and testing. Communicating upfront any significant changes to the organization and account balances can allow the auditor to reassess risk and make adjustments to testing methods if necessary. 5. Avoid audit adjustments An audit that typically results in several adjustments requires more time due to higher risk of material misstatement in those areas. More time and risk equals a higher priced audit. If your organization has audit adjustments, make sure to record those adjustments and understand why the adjustments were necessary so that they are not repeated next year. By following these simple tips, your organization can realize significant time and cost savings when it comes to your annual audit. The Back Side of 529 Plans Funding for college educations through 529 plans have become commonplace. Parents and grandparents can put money in the plan and let it grow tax free to fund a child s education. In Indiana, there is even a credit for up to $5,000 annually funded in Indiana plans. But what happens when you withdraw the money. The first issue is to whom the check is written. If you are withdrawing the money to fund the education, then the check should be made out to the child or the child s university. If you withdraw the money for yourself, then the check should be made out to you. The name on the check will determine name on the 1099Q. The 1099Q has three boxes. Box 1 shows the total amount withdrawn during the year. Box 2 shows withdrawn earnings. These may or may not be tax free depending on the use of the money. Box 3 shows the basis of the amounts withdrawn and these amounts are tax free. PAGE 2

3 THIRD QUARTER AUGUST 2013 Withdrawn earnings are always tax free when total withdrawals for the year don t exceed the account beneficiary s adjusted qualified education expenses. Adjusted education expenses equal tuition and related fees, plus room and board (only if the student carries at least half of a full-time load), plus books and supplies, plus computer and internet access costs; minus costs covered by Pell grants; minus costs covered by tax-free scholarships, fellowships, and tuition discounts; minus any costs used to claim the American Opportunity or Lifetime Learning tax credit; and minus any costs used to claim the deduction for tuition and fees. When withdrawals exceed adjusted qualified education expenses, all or part of the withdrawn earnings will be taxable. SIMPLE STEPS WHICH COULD REDUCE TAXES ON IRA DISTRIBUTIONS By Donna M. Behre Generally when you reach the age of 70 ½ you must start distributions from your IRA no later than April 1 st of the following year. For example if in 2013 you turned age 70 ½ you would need to take your first minimum distribution from your IRA by April 1 st These requirements apply to traditional and rollover IRAs but do not apply to Roth IRA s. The amounts distributed are then reported on form 1099R and reported as taxable income. Receiving these distributions may create additional taxable income which could cause other tax problems, such as making more of your Social Security income taxable or losing itemized deductions because phaseouts are tied to your adjusted gross income. But there are a few simple things you can do to help with tax problems required distributions can create: Take your initial required distribution early: Instead of waiting until 2014 to take the required amount, take it in Because if you wait, not only will you have to take the 1 st distribution by April 1 st, you would also be required to take the 2014 distribution before the year end, causing you to take two distributions in one year. Roll IRA into 401K: Individuals 70 and above who continue to work for an employer who sponsors a 401K or other retirement plan are not required to take taxable withdrawals from their plans until they retire. To avoid taking required distributions from their IRA s at age 70, individuals who plan to continue working should consider rolling over their IRA into their employer s retirement plan before their 70 th birthday. Doing this will delay the requirement to take distributions from their IRA s. This is especially advantageous for those who do not need the IRA distributions for income and those who are in a higher tax bracket. Tax Free IRA Distributions To Charity: IRA owners age 70 ½ are allowed to distribute up to $100,000 from their IRAS tax free as long as it is sent directly to a charitable organization. For higher income earners who make donations to charity, this makes more sense than taking a required distributions from your IRA that is taxable as income and then donating cash to a charity and claiming it as an itemized deduction. The reason being is that some of the itemized deductions will be lost because of the phase out of deductions due to a higher AGI, but the distribution to a charity would be tax free. PAGE 3

4 THIRD QUARTER AUGUST 2013 Standard Operating Procedures 101 By: Wendy Watson In my last article I touched on the importance of procedures. Not only having procedures but they need to be up to date in order to hold any value. So what type of procedures should you write? In my opinion you should write anything and everything. When new people start they come from various backgrounds generally and you can waste a lot of time with explanation and them taking notes that could have been explained in some simple How To procedures. But that is my take on it. The writing of Standard Operating Procedures or SOP is documentation of how to perform a specific function or task. It is meant to be clear and concise step-by-step instruction not an essay. Having a bunch of unnecessary words only distracts from what you are trying to accomplish with the SOP which is designed to ensure the function is handled thoroughly and properly. By doing this, it helps to eliminate any potential mistakes or headaches further down the road when trying to get from point A to B. The way I approach writing procedures is to first figure out, of course, which one I really need to attack. Many times some very basic procedures require starting with the location of where the task or function is to be performed. Let me explain this a little more. I have found that there are many companies that now obtain information and perform tasks on several different servers, such as ours. Therefore, the person needs to know where to go to do the task before you can begin defining the steps to the task or function being performed. To some this may sound somewhat insignificant; however, to the person who has never worked on a system with multiple servers, it s a game changer. I know this because I was that person who had never worked with multiple servers. Another thought to consider when writing the SOP is that your intention should be to make it as simplistic as possible so that anyone who picks up your SOP could perform the task or function. With that being said, here is a very short and basic procedure for use as an example. I start by actually performing the step and then write down what I actually did. That is what you are wanting the person to do as they are following the procedure thus it is step by step. My example is writing procedures that require accessing another server to find ABC form and it starts with: How to find ABC Forms ~ Go to and click Start on the desktop ~ Go to or locate and click Computer ~ Go to or locate and double click on X (server) ~ Look for the file folder XYZ and double click ~ Within that folder you will find ABC forms Of course we all have more detailed tasks and functions that we perform, but as long as the focus remains on keeping it simple, even the most lengthy and detailed tasks or functions can be performed with ease and minimal mistakes. Depending on the task or function I am writing procedures for; I have even included print screens with the procedure written next to it. I have found that sometimes the words just aren t enough and that a visual aid to go with the written procedures has been a great help for many, including myself. As I said previously, I haven t taken courses on writing procedures and I am not an expert. I just try to make it as easy as possible for the person who needs to perform the task or function in the future. In addition, there may be some who think that writing a procedure on something that may seem to be so simple, should be known or just is unnecessary and this may be true, but you may be surprised how something so simple can be so effective. More times than not I will take procedure overload versus not having any procedures. PAGE 4

5 THIRD QUARTER AUGUST 2013 TIDBITS Affordable Care Act Visit IRS Website for some pretty good coverage of questions and answers regarding what companies and individuals need to. be aware of and perhaps a plan of action. Financial Literacy Visit AICPA Website For all types of financial information for your well being including calculators, insurance, loans, annuities, rules of the road etc. Same Sex Marriage All legally married same-sex couples will be treated as married for federal tax purposes whether or not the couple lives in a jurisdiction that recognizes same-sex marriage. This affects all federal taxes, including income taxes, estate and gift taxes, payroll taxes associated with employee spousal benefits. Sales Tax on delivery charges Directive #23 issued July 2013 specifically exempts postage or parcel delivery charges through the US Post Office from sales tax. All other delivery charges are subject to sales tax according to the prior directive. The Importance of Corporate Minutes If you haven t learned already the importance of documentation, let me refresh your understanding. In some areas of life the rule is if you didn t write it down, it didn t happen. Certainly with the IRS, this applies to keeping a log for the use of vehicles or diaries for deducting the who, what, when, where and why of meals and entertainment. Minutes should document the significant decisions. It is a good practice for several reasons. First, even among the best of us, our memories are short. Even if we can remember we did it, we might not remember when. Second, it can provide the basis to alleviate any arguments between shareholders. Third, it can remind us of the reason why we did something. And lastly, it gives the shareholders a chance to review the year and plan for the next with deliberate thoughtfulness. Corporate minutes should be done at least annually. Some areas that are common to privately held businesses that should be documented are: Officers and Shareholders compensation. This includes not only their base pay, but also bonuses, benefit packages and other perks. Approval of shareholders loans, interest rates and terms of payment. Approval of lease agreements, especially if they are to related parties. It is also recommended that a lease agreement be signed even if it is month-to month. Approval of discretionary contributions to retirement plans. Approval of dividends to shareholders and reasons for determining the amount. Annual determination of stock value if your buy/sell agreement requires an annual valuation. An annual report of the significant events of the year. Minutes are a good investment, they don t cost much and they can save a deduction. PAGE 5

6 Christine A. Lauber Certified Public Accountant & Consultant 1402 Mishawaka Avenue South Bend, In Phone: (574) Fax: (574) Address Service Requested PRSRT STD U.S. POSTAGE P A I D SOUTH BEND, IN PERMIT NO. 305