berkowitz pollack brant advisors and accountants

Monthly Archives: May 2016

IRS Rules, Partners are Not Employees in Disregarded Entities by Angie Adames, CPA

Posted on May 31, 2016 by Angie Adames

Under temporary regulations issued by the IRS on May 4th, partners in partnerships that own disregarded entities may not be considered employees entitled to benefits from those entities nor exempt from federal self-employment tax.  While the disregarded entity may be considered a corporation for federal employment tax purposes, the IRS will treat the partners, themselves, as sole proprietors subject to self-employment taxes, effective on August 1, 2016.

 

In order to ensure that partners in disregarded entities understand the context of the regulations and how it applies to them, the IRS specifically referenced partnerships in the preamble of the updated regulations. The IRS states that the regulations do not alter the existing law, which provides that “1) bona fide members of a partnership are not employees of the partnership for purposes of Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and income tax withholding, and (2) a partner who devotes time and energy in conducting the partnership’s trade or business, or who provides services to the partnership as an independent contractor, is considered self-employed and is not an employee.”

 

The temporary regulations do not address the treatment of partners as employees in tiered partnerships, but it is expected that the IRS will soon issue additional regulations on this topic.

The tax advisors and accountants with Berkowitz Pollack Brant work with individuals and businesses across a broad range industries to maximize tax efficiencies and comply with frequently evolving regulations.

About the Author: Angie Adames, CPA, is a senior manager  with the Tax Services practice of Berkowitz Pollack Brant, where she provides  tax and consulting services to real estate companies, manufacturers and closely  held business. She can be reached in the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

PATH Act Extends Work Opportunity Tax Credits for Qualifying Employers by Karen A. Lake, CPA

Posted on May 27, 2016 by Karen Lake

Under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), businesses that hire veterans and other qualified workers who face barriers to employment will have an additional five years to claim a federal tax credit equal to $1,200 and $9,600 per qualifying employee. The updated guidance extends the Work Opportunity Tax Credit (WOTC) program through December 31, 2019.

To qualify for the WOTC, an employer must request from a designated local agency certification that an intended employee is a member of the “targeted group.” This includes disabled veterans, ex-felons, designated community residents living in Empowerment Zones or Rural Renewal Communities, individuals referred for vocational rehabilitation as well as recipients of Social Security, Supplemental Nutrition Assistance Program (SNAP) food stamps and Temporary Assistance for Needy Families (TANF).

The PATH Act expands this list of targeted workers to include qualified long-term unemployment recipients, who are defined as individuals certified by a designated local agency to be unemployed for more than 27 consecutive weeks and include a period in which the individuals was receiving unemployment compensation.

While the tax code calls for the employer to submit IRS Form 8850 Pre-Screening Notice and Certification Request for the Work Opportunity Credit to its State’s Workforce Agency (SWA) within 28 days following the qualifying employee’s first day on the job, the PATH Act extends the filing deadline for employers that hired or hires those workers who belong to targeted groups (excluding qualified long-term unemployment recipients) between, January 1, 2015, and May 31, 2016, to June 29, 2016. This transition relief does not apply to businesses that hire members of targeted groups, including long-term unemployment recipient, who begin work for that employer on or after June 1, 2016.

It is important that businesses understand the Work Opportunity Tax Credit Program, as it can reduce the entity’s taxable income and cost of doing business by as much as $9,600 per qualified employee hired. The professionals with Berkowitz Pollack Brant Advisors and Accountants work with businesses in a wide range of industries to maximize tax-savings opportunities and optimize tax efficiency.

About the Author: Karen A. Lake, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals, businesses and non-profit entities navigate complex federal, state and local taxes, credits and incentives. She can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email at info@bpbcpa.com.

 

 

New Investment Rules for Private Foundations by Adam Cohen, CPA

Posted on May 25, 2016 by Adam Cohen

The Internal Revenue Service recently issued final regulations concerning which investments made by private foundations do not jeopardize the foundation’s tax-exempt status and are therefore not subject to excise tax.

Section 4944 of the Tax Code imposes an excise tax on a private foundation that makes an investment for the primary purpose of producing income or appreciating property. Conversely, investments in programs that “further the accomplishment of the foundation’s exempt activities and would not have been made but for the relationship between the investment and the accomplishment of those exempt activities” are not consider to be jeopardizing investments.

According to the IRS, program-related investments that may be exempt from excise tax when certain conditions are met may include the following:

  1. Certain investments that have the potential to earn a high rate of return
  2. Certain investments made in foreign countries that further the same exempt purposes the private foundation conducts in the U.S.
  3. Certain equity investment in for profit organizations and loans to individuals, tax-exempt organizations and for-profit entities
  4. Certain loans and capital made available to recipients who benefit from the organization’s exempt activities.
  5. Certain credit enhancement arrangements
  6. Certain equity positions in conjunction with making loans

Understanding which investments qualify as program-related investments is a complex process that should be considered under the guidance of accountants with experience working with not-for-profit organizations.

 

About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail info@bpbcpa.com.

 

When Income is Not Taxable by Kenneth J. Strauss, CPA/PFS, CFP

Posted on May 24, 2016 by

According to federal tax laws, all income is considered taxable. This includes money earned through wages and tips, investment gains and bartered transactions that involve an exchange of property or services. Yet, there are some exceptions to this rule, for which individuals may avoid tax liabilities.

Under certain circumstances, the following types of income may not be taxable:

  • Life insurance proceeds to a named beneficiary upon the death of an insured person
  • Qualified scholarships that are used to pay for tuition and books
  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for purchased products
  • Reimbursements for qualified adoption expenses
  • Certain contributions to retirement plans made through an elective deferral
  • Qualifying disaster relief payments paid to the taxpayer

It is recommended that taxpayers meet with experienced accountants to assess and confirm the taxability of income based on the taxpayer’s individual circumstances.

 

About the Author: Kenneth J. Strauss, CPA/PFS, CFP, is a director with the Taxation and Personal Financial Planning practice of Berkowitz Pollack Brant, where he works with entrepreneurs and multi-generational family businesses to develop tax-efficient estate, succession and financial plans.   He can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email info@bpbcpa.com.

 

 

6 Facts to Know about Capital Gains and Losses by Brendan T. Hayes

Posted on May 19, 2016 by Richard Berkowitz, JD, CPA

When an individual sells a capital asset he or she owns, such as personal property or investment property, the sale typically results in a capital gain or loss. A gain represents the profit an individual earns by selling the asset for more than the price they paid to acquire it. Conversely, a capital loss occurs when a sale is made for less than the taxpayer’s basis in the asset, or the amount he or she originally paid for it.

  1. Capital gains are considered income that individuals must report on their tax returns and pay the related tax liabilities, depending on the length of time they held the asset. Assets held for a year or less before being sold are considered short-term capital gains, which are taxed at an individual’s ordinary income tax rate, which range from 10 percent to 39.6 percent. Long-term gains on assets held for more than one year benefit from a reduced tax rate of up to 20 percent on the sales profits. That’s a savings of 19.6 percent from the ordinary income rate. However, for high income earners, an additional 3.8 percent Net Investment Income Tax may be incurred, depending on their modified adjusted gross income.
  2. Investors may use capital losses to offset capital gains, and the related tax liabilities on those gains. When capital losses exceed capital gains, taxpayers may deduct the difference up to $3,000 from their taxable income, or $1,500 for married couples filing separately. In these circumstances, taxpayers may carry forward losses above this threshold to the following tax year, when they may apply the losses to offset future gains. However, because short-term losses can offset net long-term gains in the same year, investors may decide to sell appreciated assets in the current tax year to yield a more preferable capital gains tax rate.
  3. Capital losses are deductible only on the sale of investment property. Taxpayers cannot deduct losses on sales of property held for personal use.
  4. When long-term capital gains exceed long-term losses, the difference is a net long-term capital gain, for which the maximum applicable tax rate is 20 percent.
  5. When investors hold an interest in securities that sell shares of stock in their portfolios, they may incur capital gains tax. Even when the gain is in the form of a distribution or a dividend reinvestment, investors will experience a change in their holdings, their basis in the assets and the related gains and losses.
  6. Investors with gains generated in individual retirement accounts (IRAs) may defer paying taxes on those gains until the time that they withdraw funds from those accounts. At that point, however, withdrawals of contributions, earnings and gains will be taxable at the less preferential long-term capital gains rate.

Understanding capital gains and losses is an important factor that all investors should consider in their financial plans. By seeking the counsel of experienced financial advisors, investors may navigate smoothly through often treacherous tax complexities and help to maximize tax efficiency and wealth preservation.

About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. He can be reached in the firm’s Boca Raton, Fla., office at (561) 361-2001 or via email at info@provwealth.com.

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Investing involves risk, and investors may incur a profit or a loss. Dividends are not guaranteed and must be authorized by the company’s board of directors.

8 Considerations when Starting a Business by Laurence Bernstein, CPA

Posted on May 18, 2016 by Laurence Bernstein

Striking out on one’s own and starting a business can yield countless rewards. However, budding entrepreneurs must take the time to plan, in advance, to make their visions a success.

 

Establish the Business Structure. Entrepreneurs have an array of choices when deciding how to structure their business entities.  Whether they choose to form a Corporation, an S Corporation, a Partnership, a Sole Proprietorship or a Limited Liability Company will depend of the nature of their businesses and their own unique circumstances.  It is an important decision that has legal and tax implications, and will determine what tax forms businesses must file. Therefore, entrepreneurs should make it a point to meet with legal and financial advisors and seek their professional counsel before electing the most appropriate entity for their new enterprises.

 

Register the Business. Business owners must understand their responsibilities to register their businesses not only in the states and often local counties where they are based but also with multiple business and professional agencies, depending on their structures and business focus. Similarly, businesses must obtain all federal and state licenses and permits required to operate legally.

 

Obtain a Federal Employer Identification Number.  Businesses must apply for an Employer Identification Number (EIN), also known as a Federal Tax ID number, to recognize the business for federal tax purposes. The EIN will need to be included on all federal tax documents, including annual corporate returns.

 

Establish Business Processes and Accounting System.  Business owners should decide, up-front, how they will maintain their business records going forward. How will the business receive cash from customers and pay vendors?  What are its reporting and compliance needs?  How will it handle employee payroll and benefits?  Organization and accuracy are key and will require a significant investment of time. Cloud-based software solutions, such as QuickBooks Online and Bill.com, help business owners reduce these time commitments by automating financial record-keeping and accounts payable processes.  They simplify data entry, organize data into easily identifiable categories, keep track of expenses, create invoices and manage accounts receivable and payables.

 

Select an Appropriate Accounting Method. Business owners must decide on and remain consistent in how they will account for income and expenses.  The two most common methods are the cash and the accrual methods of accounting. In the simplest terms, businesses employing the cash method will report income in the year they receive payments and deduct expenses in the year they make payments.  Under the accrual method, businesses will recognize income and expenses when underlying transactions occurs rather than when cash changes hand. For example, income will be recognized at the time an order is placed or a service is performed, and expenses will be deducted when an invoice is issued.

 

Prepare an Operating Agreement or Corporate by-Laws and Shareholder Agreement.  An operating agreement is a contract between the members of a Limited Liability Company (LLC) that governs the LLC’s operations and its members’ financial and managerial rights and duties.  It is similar in function to corporate by-laws, or analogous to a partnership agreement in multi-member LLC’s.  Corporate by-laws set the rules and regulations for operating the corporation. A shareholder agreement is an optional document that a corporation’s shareholders may use to create certain rights and obligations among themselves. These agreements include important decisions that are much easier to make while a business is getting started, rather than when a dispute arises years down the road.  For example, the documents may outline how the business will be taxed and how it will distribute cash and profits. They may also include a buy-sell provision that states what happens when one of the owners can no longer participate in the business due to death, disability, bankruptcy or other situation.

 

Know your Tax Responsibilities. Businesses have a multitude of tax responsibilities, including income tax, self-employment tax, excise tax, payroll tax, and sales and use tax, as well as an equally diverse range of information reporting requirements.  By understanding these responsibilities, business owners can prepare to comply with them and develop a plan for staying on track.

 

Be Prepared to Comply with the Affordable Care Act. Businesses with at least 50 full-time employees are required to offer their workers and dependents minimum essential, affordable health care coverage or be prepared to make a shared responsibility payment to the IRS.  Smaller businesses may apply for a Small Business Health Care Tax Credit equal to 50 percent of premiums paid for small business employers or 35 percent of premiums paid for tax-exempt employers with fewer than 25 full-time and part-time employees.  Regardless of their size, all employers are required to comply with the information reporting responsibilities under the health care law.

 

Starting a business is an exciting endeavor that should be approached under the guidance of experienced accounting and legal professionals.  The advisors and accountants with Berkowitz Pollack Brant have more than 35 years of experience helping businesses establish themselves, manage risks and maximize growth opportunities.

 

About the Author: Laurence Bernstein, CPA, is a senior manager in the Tax Services practice of Berkowitz Pollack Brant, where he provides tax and consulting service to entrepreneurs and privately held business owners.  He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

Be Vigilant, Protect Yourself from Rampant Identity Theft by Stefan Pastor

Posted on May 16, 2016 by Richard Berkowitz, JD, CPA

Identity theft is a serious threat to consumers throughout the year. During tax season, however, the incidence of identity-related fraud increases as scammers find new ways to access consumers’ personal data or trick them into divulging this information in order to intercept tax refunds.

 

While the IRS advises taxpayers to file their returns early to avoid the risk of theft, this is not possible for high-net-worth individuals with complex finances who must wait for documentation from their advisors, brokerage accounts and others before they can file. Therefore, investors must take the following precautions to protect themselves during tax time and throughout the year.

 

Practice Safe Use of Technology

  • Protect computers, mobile phones and tablets with passwords, PINS, firewalls, anti-spam and anti-virus software
  • Update computer security patches regularly
  • Ensure home and work Wi-Fi is password-protected
  • Avoid public Wi-Fi networks when conducting business or accessing financial accounts on mobile devices
  • Consider using file-encryption software to keep sensitive information hidden from potential thieves.

 

Stay Safe Online

  • Look for an “s” at the beginning of a website’s https address (“shttps:\\”) to confirm that the site encrypts personal and sensitive data
  • Login to secure websites using strong passwords that include a mixture of capital letters, lowercase letters, symbols and numbers
  • Use a password-keeper program or store digital data in the cloud rather than writing down passwords on paper or maintaining them on unsecure desktops
  • Be alert to phishing attempts, in which criminals pose as someone else, such as the IRS or a financial institution, and send official-looking and often demanding emails that attempt to trick potential victims into clicking on a link and revealing personally identifiable information, including one’s Social Security number, account information and login details; most reputable businesses will never ask a consumer to reveal this information via unsecured networks
  • Avoid clicking on links or replying to any email that comes from an unknown source
  • Access financial accounts by typing in a website URL rather than following a link received via email
  • Review and update social media profiles and privacy settings regularly

 

Protect Your Information Offline

  • Do not share Social Security numbers with any businesses, including doctor’s offices and retail stores, unless applying for a credit card or financing
  • Do not leave mail with sensitive information in mailboxes outside of homes
  • Shred documents containing personal information, including credit card offers, receipts, credit applications, bank statements, medical statements, etc.
  • Store personal information securely in homes or in safe-deposit boxes at the bank
  • Check your credit report annually to identify misuse of personal information and/or fraud

 

Education and a strong defense are among the best ways that consumers can deter criminals and protect themselves from becoming a victim of identity theft. This is especially true on South Florida, which was home to the nation’s highest per-person number of identity-theft complaints in 2014.

 

About the Author: Stefan Pastor is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and he is a registered representative with Raymond James Financial Services. He can be reached at 954-712-8888 or via email info@provwealth.com.

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Provenance Wealth Advisors and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

 

 

Deadline Nears for Employers to file Informational Heath Coverage Returns for 2015 by Adam Cohen, CPA

Posted on May 12, 2016 by Adam Cohen

Self-insured employers and applicable large employers with 100 or more full-time equivalent employees must remember to file with the IRS Affordable Care Act (ACA) information returns that detail the health care coverage they offered, or did not offer, to employees in 2015. While these employers should have provided their workers with individual copies of informational returns by March 31, a second deadline is rapidly approaching for filings with the IRS, either on paper or electronically.

 

Applicable Large Employers

May 31:           Deadline to file on paper Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

 

June 30:          Deadline to file electronically Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

 

Self-Insured Employers

 

May 31:           Deadline to file on paper Form 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B, Health Coverage.

June 31:          Deadline for employers that sponsor self-insured group health plans for employees to file on paper Form 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B, Health Coverage.

It is important for employers to remember that if they file more than 250 informational returns during the calendar year, they will be required to file with the IRS electronically. To do so, employers may be required to first apply for an ACA Application Transmitter Control Code.

Complying with the Affordable Care Act can be a daunting process for which employers should seek the counsel of experienced advisors and accountants in order to avoid significant penalties.

 

About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail info@bpbcpa.com.

 

How Divorcing Couples Can Manage Estimated Tax Payments by Sandra Perez, CPA/ABV/CFF, CFE

Posted on May 10, 2016 by Sandra Perez

Among the many financial issues that arise following a divorce is the allocation of estimated tax payments and prior year overpayments. Often overlooked during the throws of divorce negotiations is who gets credit for estimated payments already made and prior year overpayments elected to be applied to next year’s liability.  While married, many couples file their annual tax returns jointly and submit their estimated tax payments quarterly to account for income earned from self-employment, business earnings, interest, rent and dividends, none of which are subject to withholding tax.

However, once the parties begin to file separate returns, challenges may arise when attempting to determine to whom the previously paid estimated tax payments belong. Understanding how these estimated tax payments and prior year overpayments should be allocated can get thorny.

While these payments will typically get credited to the taxpayer whose social security number is listed first on a return, that does not have to be the case.

 

Dividing Estimated Tax Payments in the Year of a Divorce

An individual’s tax status is determined on the last day of the calendar year. If legally separated or divorced from a spouse on December 31 of the year at issue, he or she is considered unmarried and therefore required to file an annual tax return with the status of “single” or “head of household”.  To the extent a couple made estimated tax payments towards the liability for the year in question, a decision needs to be made as to who should take credit for these payments on the former spouses’ separate tax returns.  The IRS allows divorcing couples to allocate these estimated tax payments in any manner by agreement of the parties.  For example, a couple may opt to divide the payments equally, or they may choose to allow one individual to claim all of the payments, leaving the other individual with none.

Despite the freedom the IRS allows couples to exercise to make this decision on their own, reaching agreement on this matter can be as complicated as most divorce negotiations. When consensus cannot be achieved, the IRS requires the payments to be divided in proportion to each party’s separate tax liability.

While this strategy seems practical, it may cause more complications upon implementation.  This is especially so given that there is neither a reliable way to put the IRS on notice that estimated tax payments will have to be allocated on separate returns nor is there a way to communicate to the IRS how the payments should be allocated until one of the parties files a return. .

Consider the scenario of a couple with a contentious relationship in which the first listed “taxpayer” has less income to report than the second listed “spouse.” If the “taxpayer” files before the “spouse” and claims all of the estimated tax payments made, he or she may end up with a refund, leaving the “spouse” with an unexpected liability to pay in.

If both parties claim estimated tax payments that together total more than the amount they paid in, they will create confusion with the IRS. As a result, there will be a delay in the processing of the returns and a delay on any anticipated refund.

To the extent the parties can reach an agreement on how the payments will be allocated, each must include the former spouse’s social security number on his or her individual Form 1040 tax filing. Additionally, both parties may include a copy of that agreement and/or the calculation of how the allocation was derived.

 

Dividing Tax Overpayments in the Year of Divorce

Generally, in any given year, when a refund is determined, the taxpayer(s) can elect to directly receive the funds or to apply the refund to next year’s tax liability. This second option is considered to be an overpayment. Again, these overpayments are many times overlooked in a divorce. Overpayments are treated similarly to estimated tax payments. The parties can agree on how they will allocate the overpayment on their separate returns. However, if there is no agreement, the party that made the payments that gave rise to the overpayment in the prior year gets to take the credit on his or her tax return. If the parties made the payments jointly, the overpayment would be applied in proportion to each party’s separately filed tax liability.

 

What to Do

While allocating estimated tax payments and prior year overpayments can be messy, some steps can be taken to make it less so.

 

Early in the divorce process, both parties should attempt to identify what estimated tax payments they made and whether there is a prior year overpayment to be allocated. Both parties should be put on notice that they should not take any portion of the payments until an agreement is reached on same. Let each party’s tax accountant work together or with divorce counsel to determine how to best utilize the payments and avoid complications with the IRS. Include the prepaid estimated tax and overpayments as assets when determining the equitable distribution. By putting this asset in the column of the person who is going to, or has already, taken the payments on their separate return, it will offset against other assets being divided.   With proper planning and even a little creativity, both parties can maximize the benefits of these prepaid tax assets.

 

 

About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensic Services practice with Berkowitz Pollack Brant, where she works with attorneys and high net worth individuals with complex assets to prepare financial affidavits, value business interests, analyze income and net-worth analysis and calculate alimony and child support obligations in all areas of divorce proceedings. She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email sperez@bpbcpa.com.

 

How Young Couples Can Manage Financial Conflicts by Stefan Pastor

Posted on May 05, 2016 by Richard Berkowitz, JD, CPA

The results of a recent survey conducted by the American Institute of CPAs reconfirms what many already know: finances are a key source of discord among couples who are married or living together. This is especially true among millennial couples, of which 88 percent in the survey reported that financial decisions caused tension in their relationships.

Finances play a significant role in healthy relationships. It is not uncommon for partners to have different spending habits or differing financial needs and long-term goals. In fact, differences between partners can often bring balance to a relationship. However, when these differences lead to constant disagreements without resolution, it is important that both partners take a step back and understand that money issues have deep emotional ties that each partner has developed throughout his or her life. Finding agreement among contradicting beliefs and values can be a difficult process, but it can be accomplished.

One of the primary barriers to financial accord is a lack of communication between partners. According to the AICPA survey, only 42 percent of couples have discussed their long-term financial goals, 33 percent have developed a joint retirement strategy and just 51 percent have developed a monthly household budget. By engaging in open and honest dialogue, couples can gain an understanding of each other’s financial values and beliefs and their emotional connections. Sounds easy, but how does one get started on this touchy topic?

Financial planners have experience identifying individual’s distinct needs and goals and implementing strategies that aim to help them achieve financial well-being. When working with couples, financial planners can help to start difficult conversations. As neutral third parties, they can identify common ground where both partners may meet in the middle to resolve their financial disagreements or develop a plan that ensures the needs of both partners are met. Perhaps the couple should maintain separate bank accounts from which to pay bills while keeping their long-term shared financial vision intact.

Additional tips that couples can employ to minimize conflict over financial decisions include:

  • Listening to each other and making the effort to understand differing views
  • Knowing the totality of one’s household expenses and committing to a plan to pay bills on time
  • Scheduling time to discuss financial matters rather than sweeping them under the rug
  • Establishing a household budget, even if the partners contribute differently or unequally
  • Controlling debt, both individually and as a couple
  • Checking credit reports to ensure neither partner is a victim of identity theft or fraud, which could impact the ability of both to get a loan

About the Author: Stefan Pastor is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and he is a registered representative with Raymond James Financial Services. He can be reached at (954) 712-8888 or via email info@provwealth.com.

 

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Provenance Wealth Advisors and not necessarily those of Raymond James. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

 

Options for Mitigating Losses in Lost Profit Claims by Scott Bouchner, CMA, CVA, CFE, CIRA

Posted on May 04, 2016 by Scott Bouchner

Disputes involving breach of contract and commercial tort claims are not uncommon in the normal course of business. When brought before the courts, the burden to prove damages rests with the plaintiff.  However, a defendant has an opportunity to reduce or eliminate entirely its obligation to pay damages when it can demonstrate that the injured party, or plaintiff, failed to take steps to avoid, reduce or minimize its economic losses.  While the law does not require a plaintiff to “mitigate” its damages, failure to do so may result in it receiving a significantly reduced award.

The Concept of Mitigation

In cases of lost profits, damage awards are often based on the amount a plaintiff would have earned “but for” the defendant’s actions as compared to its actual earnings. The concept of mitigation focuses on an analysis of whether a plaintiff’s actual post-injury net economic profits could or should have been greater had the plaintiff reasonably mitigated its losses. If so, a plaintiff’s lost profits damages will be less when measured as the difference between the “but for” and successful mitigation-adjusted “actual” returns than if the mitigation adjustments were not performed.

Mitigation of damages “arises from the cardinal principle that the damages award should put the injured party in as good a condition had the contract not been breached at the least cost to the defaulting party…. to prevent an inclusion in the damage award of such damages that could have been avoided by reasonable affirmative action by the injured party without substantial risk to such party.” [F. Enterprises, Inc. v. Kentucky Fried Chicken Corp., 47 Ohio St. 2d 154, 351 N.E.2d 121, 125 (Ohio 1976)]

While the plaintiff’s failure to mitigate losses could result in a reduced damage award for those losses that could have otherwise been avoided, it is the defendant’s burden of proof to establish plaintiff’s failure to mitigate.

Types of Mitigation

Mitigating losses can be broadly classified as either negative or affirmative mitigation.

Negative mitigation is based on the principal that once one party breaches an agreement, the other party should discontinue its own activities in order to avoid or reduce additional expenses or losses. For example, consider a homebuilder who enters into a contract with a developer. After the homebuilder completes 30 percent of the contracted work, it receives a notice that the developer intends to terminate the contract. As a result of the breach, the homebuilder may be entitled to a claim for lost profits that it would have otherwise earned had the developer followed through on the contract terms. However, if the homebuilder chooses to ignore the developer’s notice, continue work and incur additional costs, it may be argued that the homebuilder failed to mitigate losses that it could have avoided.

Unlike negative mitigation, which often requires the plaintiff to simply discontinue its activities, affirmative mitigation requires the plaintiff to make an active effort to prevent, reduce or eliminate damages suffered as a result of the defendant’s actions. This can often be achieved when the plaintiff replaces the source of a loss, repairs it or sells it at a discount.

Replacement Mitigation. An injured party may mitigate its losses by seeking out and obtaining comparable substitutes for goods, parts, customers or suppliers it lost due to a contract breach.   Losses may be limited to those the plaintiff incurred from the time the contract was cancelled until it establishes a replacement from a comparable source.  If the replacement product or service is more expensive that the original, the plaintiff may be entitled to claim losses for the increased cost charged by the new supplier. However, if the replacement product or service is less expensive than the original, the plaintiff would theoretically lose its claims to damages because it would be placed in a better economic position than it would have been, “but for” the contract breach.

Perhaps a more challenging example of replacement mitigation concerns a contract breach that results in loss of customers. Consider a manufacturer who enters into an exclusive agreement with a large customer to purchase a fixed number of units of a product each month. Should the customer cancel the contract, the manufacturer may attempt to mitigate its losses by looking for a replacement customer(s) to whom it may sell the products.  Depending on the type of products being sold, the demand for the products, the intensity of competition from other manufacturers, the manufacturer’s ability to mitigate could be limited.

Repair Mitigation. In situations in which a plaintiff incurs losses due to a defendant’s negligence or faulty products, the plaintiff may be able to limit its losses by expending the resources necessary to repair the damage. Consider a contractor who negligently cuts a fiber optic cable that transmits voice and data communications to a developer’s building. The developer has an obligation to repair the cable as soon as possible. However, if the developer waits two months two begin repairs and subsequently incurs significant losses in that extended time period, the contractor may argue that its responsibility to cover the costs of repair should be limited to a reasonable amount of time to have the cable fixed.

Discount Mitigation. Plaintiffs may mitigate losses incurred from damaged goods by selling those products at a discount. While a plaintiff will not recoup the entirety of its lost profits, it will be able to use the proceeds from a discounted sale to offset its losses.

Regardless of the method used, an injured party should make reasonable efforts to mitigate losses, without incurring additional risks, in order to recover damages that it is due. In deciding what is considered “reasonable efforts,” the courts will look at the plaintiff’s costs, financial abilities, risk of additional losses and good faith efforts to minimize losses as well as the availability of reasonable substitutes to replace lost resources and profits.

While there are many situations in which a plaintiff may not have the ability to mitigate losses caused by the defendant, it is generally prudent that the damages expert consider whether the plaintiff has taken, should have taken or would have been able to take actions to mitigate its claimed damages, and, if applicable, quantify the impact that such efforts would have on damages awards. From the plaintiff’s perspective, the failure to consider its ability to mitigate its losses may preclude the plaintiff from addressing these issues if they are subsequently raised as deficiencies by the defendant.  Conversely, from the perspective of the defendant, consideration of mitigation may provide an opportunity to demonstrate potential flaws in the plaintiff’s analysis, and, if applicable, provide the court with a reasonable basis to reduce or eliminate claimed damages.

Supporting claims of lost profits is a complex endeavor. With the expertise of experienced forensic accountants, however, legal counsel can avoid missteps and navigate past common challenges. The advisors and accountants with Berkowitz Pollack Brant’s Forensic and Litigation Support Services practice regularly work with businesses and lawyers to provide counsel or serve as expert witnesses in assessing damages, uncovering facts during discovery and exposing weaknesses in opposing testimony.

About the Author: Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with Berkowitz Pollack Brant’s Forensic Accounting and Business Valuation Services practice. A frequent lecturer and author, he has served as litigation consultant, expert witness, court-appointed expert and forensic investigator on a number of high-profile cases. He can be reached in the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Pin It on Pinterest

Menu Title