• Tax Filing Deadline Rapidly Approaching

    29 March 2016
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    Sit down and get to work. Tax day is just a few weeks away! For those of you who have not yet filed their 2015 tax return, tax day is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. Usually April 15 is the due date, but because Friday, April 15, is a legal holiday in the District of Columbia (where the IRS is headquartered), the filing date is advanced to the next day that isn’t a weekend or holiday – Monday, April 18 – even for taxpayers not living in DC.

    In addition, the April 18, 2016 deadline also applies to the following:

    Tax year 2015 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due.  Late payment penalties and interest will be assessed on any balance due, even for returns on extension.  Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.

    Tax year 2015 contributions to a Roth or traditional IRA – April 18 is the last day contributions for 2015 can be made to either a Roth or traditional IRA, even if an extension is filed.

    Individual estimated tax payments for the first quarter of 2016 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2016 estimated taxes are due on April 18.  If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. If the refund won’t be enough to fully cover the first installment, you may need to make a payment with the April 18 voucher. Please call this office for any questions.

    Individual refund claims for tax year 2012 – The regular three-year statute of limitations expires on April 18 for the 2012 tax return.  Thus, no refund will be granted for a 2012 original or amended return that is filed after April 18. Caution: The statute does not apply to balances due for unfiled 2012 returns.

    Note: The deadline for any of the above actions is increased by an additional day, to April 19, 2016, for taxpayers who live in Maine or Massachusetts because of a holiday observed on the 18th in Massachusetts which affects the IRS Service Center located in Massachusetts that serves these two states.

    If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 18 deadline.  Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute.  If it is apparent that the information will not be available in time for the April 18 deadline, then let the office know right away so that an extension request, and 2016 estimated tax vouchers if needed, may be prepared.

    If your returns have not yet been completed, please call Dagley & Co. right away so that we can schedule an appointment and/or file an extension if necessary.

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  • Clock is Ticking for Retirement Plan Contributions

    25 March 2016
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    Were you aware that even after the close of the tax year you can make tax-deductible retirement savings contributions? Well, you can, and with the April tax deadline looming, the window of opportunity to maximize retirement and other special-purpose plan contributions for 2015 is closing. Many of those contributions not only build the retirement nest egg but also deliver tax deductions for the 2015 tax return. Let’s take a look at some of the ways a taxpayer can benefit.

    Traditional IRA – The maximum contribution to an IRA for 2015 is $5,500 ($6,500 if over 49 years old). The 2015 contribution can be made up until April 18th. If the taxpayer is covered by another retirement plan, some or all of the contribution may not be deductible. To be eligible to contribute to an IRA of any type, the taxpayer, or spouse if married filing jointly, must have earned income, such as wages or self-employment income.

    Roth IRA – This is a nondeductible retirement account, but the earnings are tax-free upon withdrawal, provided that the holding period and age requirements are met. Roth IRAs are a good alternative for many taxpayers who aren’t eligible to deduct contributions to a traditional IRA. The maximum deductible contribution for the 2015 tax year is $5,500 ($6,500 if the taxpayer is over 49 years old). The 2015 contribution can be made up until April 18th.

    Caution: The combined traditional IRA and Roth IRA contributions are limited to $5,500 ($6,500 if the taxpayer is over 49 years old).

    Spousal IRA – A non-working spouse can open and contribute to a traditional IRA or Roth IRA based upon the working spouse’s earned income, subject to the same contribution limits as the working spouse, but the combined contributions of both spouses cannot exceed the earned income of the working spouse. Contributions to spousal IRAs for 2015 must also be made by April 18th.

    SEP-IRA (Simplified Employee Pension) – SEP-IRAs are tax-deferred plans for sole proprietorships and small businesses. They are probably the easiest way to build retirement dollars, requiring virtually no paperwork. Maximum contributions depend on your net earnings from your business. For 2015, the maximum contribution is the lesser of 25 percent of compensation or $53,000. The 2015 contribution can be made up to the due date of the return, including extensions. Thus, unlike a traditional or Roth IRA, funding of a SEP-IRA for 2015 may occur up to October 17, 2016, when an extension has been granted.

    Solo 401(k) Plans – A growing number of self-employed individuals with no employees are forsaking the SEP-IRA for a newer type of retirement plan called the Solo 401(k), or Self-Employed 401(k), mostly for its higher contribution levels.

    For 2015, the maximum contribution to a Solo 401(k) is the sum of (A) up to 25% of compensation and (B) salary deferral up to $18,000. The total of A and B can’t exceed $53,000 or 100% of compensation. Note that a Solo 401(k) account must have been established by December 31, 2015, to make 2015 contributions, which can then be made up to the extended due date of the return (October 17, 2016, for most taxpayers). If a Solo 401(k) account was not established by the end of 2015, open one now for 2016 contributions.

    Health Savings Accounts (HSA) – An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary. An HSA is designed to assist individuals who have high-deductible health plans (HDHP). A taxpayer is only eligible to establish an HSA if he or she has an HDHP. For 2015, this means that the plan must have a deductible amount of $1,300 or more for self-only coverage or $2,600 for family coverage. In addition, the annual maximum out-of-pocket costs for covered expenses can’t exceed $6,450 for a self-only plan or $12,900 for a family plan.

    The maximum 2015 contribution for eligible individuals with self-only coverage under an HDHP is $3,350, while an eligible individual with family coverage under an HDHP can contribute up to $6,650. The contribution limit is increased by $1,000 for an eligible individual who was age 55 or older at the end of 2015; however, no contribution can be made as of the month that an individual is enrolled in Medicare.

    Amounts contributed to an HSA belong to individuals and are completely portable. Every year, the money not spent on medical expenses stays in the account and gains interest tax-free, just like an IRA. Unused amounts remain available for later years (unlike amounts in Flexible Spending Arrangements that may be forfeited if not used by the end of the year). Contributions to an HSA for 2015 can be made through April 18, 2016.

    Coverdell Education Savings Account – These plans were originally called Education IRAs, but that moniker created confusion because they were really not retirement accounts. They are now called Coverdell Education Savings Accounts, named after the late Senator from Iowa. Contributions, which can be made for a beneficiary who is under 18 years of age, are not tax-deductible, but the money grows tax-free if the distributions are used to pay qualified education expenses. The maximum annual contribution is $2,000 per beneficiary, but this amount could be reduced partly or totally depending on income. Contributions do not count toward IRA annual contribution limits; they are also due by April 18, 2016, to be considered as having been made for 2015.

    Please note that information for each plan or account above has been abbreviated. Contact Dagley & Co. for specific details on how they may apply to your situation.

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  • Can You Deduct Employee Expenses?

    21 March 2016
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    Do you know which expenses relating to your employment are deductible from your tax return? If you are an employee, this may cross your mind. This is a complicated area of tax law, and many expenses are deductible only if the expense is a “condition of employment” or is for the “convenience of the employer,” two phrases that are effectively the same.

    In addition, other factors affect an employee’s ability to deduct expenses incurred as part of employment. One, if an employer would have paid for or reimbursed the employee for an expense, but the employee chooses not to apply for or take advantage of that reimbursement, the employee cannot take a tax deduction for the expense. Two, only those employees who itemize their deductions can benefit from business expense deductions. Thus, if you are using the standard deduction, you cannot receive any tax benefit for your job-related expenses. In addition, even when itemizing, miscellaneous itemized deductions must be reduced by 2% of your adjusted gross income (AGI). Employee business expenses fall into the miscellaneous itemized deduction category. As an example: if your AGI is $80,000, the first $1,600 (2% x AGI) of your miscellaneous deductions provide no benefit. Last, miscellaneous deductions are not included in the itemized deductions allowed for computing the alternative minimum tax (AMT). Thus, if you are unlucky enough to be subject to the AMT, you will not benefit from your miscellaneous deductions for the extent of the AMT.

    The following includes a discussion of the various expenses that an employee might feel they are entitled to deduct and the IRS’s requirements for those deductions.

    Home Office – An employee can deduct a home office only if his or her use of the home office is for the convenience of the employer. According to the U.S. Tax Court, an employee’s use of a home office is for the convenience of his employer only if the employee must maintain the home office as a condition of employment. In an audit, the auditor will require a letter from the employer to verify that fact. Most employers are reluctant to make a home office a condition of employment due to labor laws and liability. In addition, an employee would also have to comply with the IRS’s strict usage requirements for home offices.

    Computer – An individual’s property, such as computers, TVs, recorders, and so on, that is used in connection with his or her employment is eligible for expense or depreciation deductions only if that property is required for the convenience of the employer and as a condition of employment. Even if the condition of employment requirement is satisfied, a computer’s usage must be prorated for personal and business use.

    Uniforms and Special Work Clothes – The cost and maintenance of clothing is allowed if: The employee’s occupation is one that specifically requires special apparel or equipment as a condition of employment and The special apparel or equipment isn’t adaptable to general or continued usage (so as to take the place of ordinary clothing).

    Generally, items such as safety shoes, helmets, fishermen’s boots, work gloves, oil clothes, and so on are deductible if required for a job. However, other work clothing and standard work shoes aren’t deductible—even if the worker’s union requires them.

    Education - To qualify as job-related, courses must maintain or improve the skills required by the employee’s trade or business (such as by helping the employee to meet professional continuing education requirements) or be required as a condition of employment. However, these courses must not be necessary to meet the minimum requirements of the job and must not qualify the employee for a new trade or promotion. If a course meets this definition, its cost is considered deductible as an ordinary and necessary business expense, and as such, it may be excluded from an employee’s income if the employer reimburses the employee for its cost. Note: Some education expenses may qualify for more beneficial education credits or an above-the-line-deduction.

    Impairment-Related Work Expenses – Taxpayers who have a physical or mental disability that limits their activities can deduct impairment-related work expenses. For example, an allowable expense would be the cost of attendant care at the place of the taxpayer’s work.

    Job-Search Expenses – Expenses related to looking for a new job in the taxpayer’s current occupation are deductible even if a new job is not obtained. To be deductible, the expenses cannot be related to seeking a first job or a job in a new occupation. If there is a substantial time gap between the taxpayer’s last job and the time when he or she looks for a new job, the expenses are not deductible.

    Of course, all sorts of employee situations exist, including those in which the employee works at his or her local employer’s office and those in which the employee lives and works in a remote location. The deductions available to each employee vary significantly based upon that individual’s unique situation.

    For more information related to employee expenses and what might be deductible in your situation, please give Dagley & Co. a call.

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  • Minimizing Tax on Social Security Benefits

    18 March 2016
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    Are your Social Security benefits taxable and if so how many of them are? This depends on a number of issues. The following facts will help you understand the taxability of your Social Security benefits.

    For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before reduction due to payments withheld for Medicare premiums). The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not included in the computation because they are not taxable under any circumstances.

    How much of your Social Security benefits are taxable (if any) depends on your total income and marital status. If Social Security is your only source of income, it is generally not taxable. On the other hand, if you have other significant income, as much as 85% of your Social Security benefits can be taxable. If you are married and filing separately, and you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return and thus reducing the amount of Social Security income subject to tax.

    The following quick computation can be done to determine if some of your benefits are taxable: Step 1. First, add one-half of the total Social Security benefits you received to the total of your other income, including any tax-exempt interest and other exclusions from income. Step 2. Then, compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.

    The base amounts are: $32,000 for married couples filing jointly; $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and $0 for married persons filing separately who lived together during the year.

    Where taxpayers can defer their “other” income from one year to another, such as by taking Individual Retirement Account (IRA) distributions, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to another. However, the required minimum distribution rules for IRAs and other retirement plans have to be taken into account.

    Individuals who have substantial IRAs—and who either aren’t required to make withdrawals or are making their post age 70.5 required minimum distributions without withdrawing enough to reach the Social Security taxable threshold—may be missing an opportunity for some tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one may not work for another.

    If you have questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give Dagley & Co. a call.

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  • Employers – Important Due Dates Approaching

    16 March 2016
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    Do you know which due dates are approaching you as an employer? Beginning in 2015, Applicable Large Employers are required to file a new informational return – 1095-C, Employer-Provided Health Insurance Offer and Coverage. One of these informational returns must be provided to each full-time employee and filed with the IRS, along with a Form 1094-C transmittal form, by the due dates listed below.

    An Applicable Large Employer is an employer with 50 or more full-time employees, including full-time equivalent employees. Applicable Large Employers are required to report information to full-time employees and the IRS about the coverage they offered or did not offer to their full-time employees. It is important to understand that Applicable Large Employers are required to file the 1094-C and 1095-C forms Regardless of whether or not they offered their full-time employees insurance, even if they were exempt from the insurance mandate for 2015 because they employed fewer than 100 full-time and full-time equivalent employees.

    The purpose of the new form is twofold: (1) to provide the IRS with information it needs to determine if the employee is eligible for the Premium Tax Credit and (2) to provide the IRS information it needs to determine the employer’s health coverage excise tax (the penalty for not offering affordable care to its full-time employees), if any.

    All employers need to complete parts I and II of the 1095-C for each full-time employee. Self-insured employers must also complete part III, which is the information that would be included on a Form 1095-B issued to the employer’s employees by group health insurance companies when the employer is not self-insured.

    Due Dates: The Form 1095-C to employees is due by March 31. For the 1095-C and 1094-C filed with the IRS, the paper is to be filed by May 31 and E-filed by June 30. Note: If the employer files 250 or more 1095-Cs, the forms must be electronically filed.

    If you need additional information related to this filing requirement or assistance with filing these forms, please contact Dagley & Co. as soon as possible as the due date is drawing close.

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  • Don’t Have a Retirement Plan? Maybe a SEP Is the Answer.

    12 March 2016
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    In a crunch? The year-end period is probably a very busy time if you are like many small business owners. You can’t close your books and determine your business’s profit until after the close of the year, and if this has been a good year, you may want to establish a retirement plan and make a contribution for 2015.

    There are a number of retirement plan options available, including Keogh plans and 401(k)s. However, a simplified employee pension plan (SEP) may be your best option. Unlike with a Keogh plan, you don’t have to scramble to get a SEP established before year-end.

    The reason a SEP is “simplified” is that its retirement contributions are deposited into an IRA account under the control of the SEP participant, thus eliminating most of the employer’s administrative duties. That is why these plans are sometimes referred to as SEP-IRAs.

    SEPs function much like Keogh plans, and they allow tax-deductible contributions for both employees and self-employed individuals. For an employee, the maximum contribution for 2015 is the lesser of 25% of that employee’s compensation or $53,000. These contributions are excluded from the employees’ wages and are not subject to withholding for income tax or FICA. A self-employed person can contribute 25% of his or her compensation after deducting the employer’s contribution, which boils down to the smallest of 20% of the business’ net profit or $53,000. Each year, the employer can specify a compensation amount between zero and 25% (not exceeding the maximums for the year).

    SEPs are a great option for startups and other small businesses that have unpredictable income and that may be leery of the long-term contribution matches required with other types of retirement plans. SEPs are also a great option for self-employed individuals with no employees, as the contributions are based upon net profits, allowing the business owner to select the maximum percentage while knowing that the required contribution will be small in low-income years.

    Except for when employees are covered by collective bargaining agreements, an employer that elects to make a SEP contribution for the year must contribute to an employee’s retirement account if the employee is at least 21 years of age, has worked for the employer in at least three of the prior five calendar years, and has compensation for the year of at least $600.

    Another advantage of SEP plans is that contributions are allowed after the account owner has reached the age of 70½—the age limit for traditional, non-SEP IRA contributions. This is true even though individuals must begin the required minimum distributions (RMDs) from the SEP once age 70½ is reached.

    As with all traditional IRAs and qualified plans, distributions from a SEP are taxable and subject to a 10% early withdrawal penalty if withdrawn before age 59½.

    To set up a SEP plan, you can adopt the IRS model plan by using Form 5305-SEP. This form is completed and retained for your records (not filed with the IRS). You can also open one with a financial institution. It may be prudent to adopt whatever plan is offered by the financial institution you’ll be dealing with to ensure that all plan requirements are met. If using a financial institution’s plan, be sure to discuss the plan’s fees.

    A SEP may be the best option for your business’s retirement fund. Please call Dagley & Co. for more information on how a SEP plan might work for your particular business structure or to determine whether other options should be considered.

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  • Penalty For Not Having Health Insurance Surprises Many

    7 March 2016
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    Do you happen to be one of the taxpayers that are surprised by the penalty for not having health insurance last year? The size of the penalty really astounds many. This may be a wake-up call for many who didn’t realize the penalty is being phased in over a three-year period between 2014 and 2016, and the increases are substantial each year.

    The penalty is determined by two methods, the flat dollar amount or a percentage of the taxpayer’s income, and the penalty is the GREATER of the two amounts.

    The flat dollar amount is the sum of fixed dollar amounts for the year that apply to each member of the taxpayer’s family. However, there is a cap on the total flat dollar amount, which is equal to 3 times the adult penalty for the year. The table below shows the amount per family member and maximum flat dollar amounts for each of the three penalty phase-in years.

    Year                                                  2014             2015             2016

    Adult Family Member                         $ 95.00       $325.00       $   695.00

    Member Under Age 18                      $ 47.50       $162.50       $   347.50

    Maximum Flat Dollar Penalty          $285.00       $975.00       $2,085.00

    Example: Suppose, in 2015, a family of 3 (2 married adults and 1 child) all went without insurance for the entire year. Their flat dollar amount penalty would be $812.50 ($325 + $325 + 162.50).

    The percentage-of-income penalty is a little more complicated, as the income used in the computation is the taxpayer’s household income reduced by the taxpayer’s tax return filing threshold for the year. Household income is the adjusted gross income from the tax returns for the year of all members of the taxpayer’s family who must file a tax return for income tax purposes.

    The table below shows the percentage-of-income penalty for each of the three penalty phase-in years.

    Year                                                  2014            2015            2016

    Percentage of income                      1.0%             2.0%              2.5%

    Example: Suppose the family in the previous example has a household income of $80,000 and their filing threshold is $20,600. Thus the income used in the computation would be $59,400 ($80,000 – $20,600), and the percentage-of-income penalty would be $1,188 ($59,400 x .02).

    In our example, the taxpayer’s penalty for 2015 would be the greater of the two methods, which is $1,188. This substantially penalizes higher-income taxpayers, who can more readily afford health care insurance.

    Another surprise to some taxpayers is that even if only one member of the family is uninsured, the percentage-of-income penalty applies if it is larger than the flat dollar amount for that one employee.

    In closing, the penalties are actually computed by the month, so for example, if a taxpayer is uninsured for five months, then 5/12 of the penalty will apply.

    If you have questions related to the penalty for not being insured or other tax provisions of the Affordable Care Act, please give Dagley & Co. a call.

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  • March 2016 Business Due Dates

    4 March 2016
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    If you own a business, here are some important due dates for March that you should be aware of:

    March 15 –  S-Corporation Election

    File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2016. If Form 2553 is filed late, S treatment will begin with calendar year 2017.

    March 15 –  Electing Large Partnerships

    Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.

    March 15 – Social Security, Medicare and Withheld Income Tax

    If the monthly deposit rule applies, deposit the tax for payments in February.

    March 15 – Non-Payroll Withholding

    If the monthly deposit rule applies, deposit the tax for payments in February.

    March 15 – Corporations

    File a 2015 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.

    March 31 – Electronic Filing of Forms 1098, 1099 and W-2G

    If you file forms 1098, 1099, or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, February 29 was the due date. The due date for giving the recipient these forms was February 1.

    March 31 – Electronic Filing of Forms W-2
    If you file forms W-2 for 2015 electronically with the IRS, this is the final due date. This due date applies only if you electronically file. Otherwise, the due date was February 29. The due date for giving the recipient these forms was February 1.

    March 31 – Large Food and Beverage Establishment Employers 

    If you file forms 8027 for 2014 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, February 29 was the due date.

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  • March 2016 Individual Due Dates

    1 March 2016
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    Some of your individual due dates for March are as follows:

    March 10 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10.

    Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

    March 15 – Time to Call for Your Tax Appointment

    It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.

    Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.

    Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.

    Dagley & Co. looks forward to hearing from you.

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