Use the Tax Code to Make Business Losses Less Painful

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.

Qualifying for a deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
Casualty and theft losses from a federally declared disaster, or
Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:

Capital losses that exceed capital gains,
The exclusion for gains from the sale or exchange of qualified small business stock,
Nonbusiness deductions that exceed nonbusiness income,
The NOL deduction itself, and
The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.

Limitations

The Tax Cuts and Jobs Act (TCJA) made significant changes to the NOL rules. Previously, taxpayers could carry back NOLs for two years, and carry forward the losses 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits the NOL deduction to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.

A COVID-19 relief law temporarily loosened the TCJA restrictions. It allowed NOLs arising in 2018, 2019 or 2020 to be carried back five years and removed the taxable income limitation for years beginning before 2021. As a result, NOLs could completely offset income. However, these provisions have expired.

If your NOL carryforward is more than your taxable income for the year to which you carry it, you may have an NOL carryover. The carryover will be the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

Excess business losses

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships or S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000 ($578,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Planning ahead

The tax rules regarding business losses are complex, especially when accounting for how NOLs can interact with other potential tax breaks. We can help you chart the best course forward.

When it comes to estate planning, there’s no shortage of techniques and strategies available to reduce your taxable estate and ensure your wishes are carried out after your death. Indeed, the two specific strategies discussed below should be used in many estate plans.

1. Take advantage of the annual gift tax exclusion

Don’t underestimate the tax-saving power of making annual exclusion gifts. For 2023, the exclusion increased by $1,000 to $17,000 per recipient ($34,000 if you split gifts with your spouse).

For example, let’s say Jim and Joan combine their $17,000 annual exclusions for 2023 so that their three children and their children’s spouses, along with their six grandchildren, each receive $34,000. The result is that $408,000 is removed tax-free from the couple’s estates this year ($34,000 x 12).

What if the same amounts were transferred to the recipients upon Jim’s or Joan’s death instead? Their estate would be taxed on the excess over the current federal gift and estate tax exemption ($12.92 million in 2023). If no gift and estate tax exemption or generation skipping transfer (GST) tax exemption was available, the tax hit would be at the current 40% rate. So making annual exclusion gifts could potentially save the family a significant amount in taxes.

2. Use an ILIT to hold life insurance

If you own an insurance policy on your life, be aware that a substantial portion of the proceeds could be lost to estate tax if your estate is over a certain size. The exact amount will depend on the gift and estate tax exemption amount available at your death as well as the applicable estate tax rate.

However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. An effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT).

An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed so that it can make a loan to your estate for liquidity needs, such as paying estate tax.

The right strategies for you?

Bear in mind that these two popular strategies might not be right for your specific estate plan. We can provide you additional details on each and help you determine if they’re right for you.

Businesses that operate in the retail or restaurant spheres have it relatively easy when it comes to collections. They generally take payments right at a point-of-sale terminal and customers go on their merry ways. (These enterprises face many other challenges, of course.)

For other types of companies, it’s not so easy. Collections can be particularly challenging for business-to-business (B2B) operations, which often find themselves in complex relationships with key customers that aren’t quite as simple as “pay up or hit the road.”

If your company is dealing with slow-paying customers, which is hardly uncommon in today’s inflationary environment where everyone is trying to preserve cash flow, sometimes it helps to review the basics. Here are six tried-and-true strategies for increasing your chances of getting paid one way or another:

1. Request payment up front. For new customers or those with a documented history of collections issues, you could start asking for a deposit on each order. This would generally be a small but noticeable percentage of the contract or order price. You could also explore the concept of asking for a service retainer fee. Although these are typically associated with law firms, other types of businesses may use them to cover all or part of the expected costs of services.

2. Charge fees. Most customers are likely familiar with the concept of late-payment fees from dealing with their credit card companies. Applying this same concept to your collections can pay off. Implement fees or finance charges for past due amounts. Place extremely delinquent accounts on credit hold or adjust their payment terms to cash on delivery.

3. Reward timely payments. An effective collections strategy isn’t only about “penalizing” slow-paying customers. It’s also about incentivizing those who pay on time or who represent a potentially lucrative long-term relationship. Crunch the numbers to determine the feasibility of giving discounts to customers with strong payment histories or to those who have improved the timeliness of payments over a given period.

4. Communicate proactively. Set up regular e-mail reminders and place live phone calls to customers who haven’t settled their accounts. If the employee who works directly with the customer can’t resolve payment issues, elevate the matter to a manager or even you, the business owner. In B2B relationships, it’s often helpful for the manager or business owner to contact someone higher up in the customer’s organization. If necessary, consider executing a promissory note to prevent the customer from disputing the charges in the future.

5. Get external help. If, after repeated tries, your collections efforts appear unlikely to bear fruit, you should start looking into getting help from someone outside your company. This typically means engaging either an attorney who specializes in debt collection or a collections agency. View this as a last resort, however, because third-party fees may consume much of the collected amount and you’re unlikely to continue doing business with the customer.

6. Claim a tax break. One last important point about collections: If an outstanding debt is uncollectible, you may be able to write it off as an ordinary business expense. Be sure to document each customer’s promises to pay, your collection efforts and why you believe the debt is worthless. Consult with us about claiming such tax deductions. We can also offer assistance in improving your overall accounts receivable processes.

One popular fringe benefit is an education assistance program that allows employees to continue learning and perhaps earn a degree with financial assistance from their employers. One way to attract, retain and motivate employees is to provide education fringe benefits so that team members can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by individuals pursuing programs leading to a business, medical, law or other advanced academic or professional degrees.

More requirements

The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.

Job-related education

If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying the $5,250 exclusion, an employer can satisfy an employee’s educational expenses on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:

Maintain or improve skills required for the employee’s then-current job, or
Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.

Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.

Assistance with student loans

In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Starting next year, employers can help more. Under the SECURE 2.0 law, an employer will be able to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.” The result of this provision is that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers. This will take effect in 2024.

Yeo & Yeo, a leading accounting, technology, medical billing, wealth management, and advisory firm, is excited to celebrate its 100th anniversary in 2023. The company was founded in 1923 by James J. Yeo and his son, W.L. Yeo, and later joined by a third generation, Lloyd Yeo. The Yeo family shaped the firm’s reputation for integrity and personalized service, steadily growing from a small accounting partnership to a family of companies with more than 225 employees in nine locations across Michigan.

Yeo & Yeo has established itself as a trusted partner for organizations and individuals seeking to achieve their specific goals on their unique paths. Driven by a vibrant, people-first culture, the firm is dedicated to solving challenges through its four distinct but connected businesses: Yeo & Yeo CPAs & Advisors, Yeo & Yeo Technology, Yeo & Yeo Medical Billing & Consulting, and Yeo & Yeo Wealth Management.

Yeo & Yeo’s lasting success is driven by a team of welcoming, empathetic, and knowledgeable advisors acting as powerful extensions of the businesses they serve. As Dave Youngstrom, the CEO of Yeo & Yeo, explains, “We don’t just provide a service; we provide a relationship. Our clients are truly our friends. We’re in it together.”

Youngstrom is marking the centennial celebration as a moment to reflect, but is mainly focused on the years ahead. “Milestones are a wonderful time to assess and move forward with renewed energy and enthusiasm. We’re at a time of business disruption and opportunity, and it’s our mission to prepare our clients so they can thrive in their own ways. We’re so grateful for their trust in us.”

Yeo & Yeo’s commitment to relationships and connections has been a key to its success. Through the Yeo & Yeo Foundation, team members have given their time and talent and have donated more than $340,000 to over 170 nonprofit organizations across Michigan.

Looking ahead, Yeo & Yeo is well positioned to continue its legacy of business success partnerships for the next 100 years. The company is committed to investing in technology and innovation to stay ahead of the curve and provide the best possible service to its clients. As Youngstrom notes, “Our goal is to always be at the forefront, providing our clients with the resources they need to succeed in a rapidly changing world. Walking alongside them every step of the way.”

For more information about Yeo & Yeo’s 100th celebration and to see a full timeline, video tributes, and more, visit yeoandyeo.com/about-us.

Yeo & Yeo CPAs & Advisors, a leading Michigan-based accounting and advisory firm, has been named one of West Michigan’s Best and Brightest Companies to Work For – making this the nineteenth consecutive year. Yeo & Yeo takes pride in creating an environment that challenges, supports and rewards its people.

The Best and Brightest programs identify, recognize and celebrate organizations that exemplify Better Business. Richer Lives. Stronger Communities. An independent research firm evaluates Best and Brightest nominees based on key measures in categories such as communication, work-life balance, employee education, diversity, recognition, retention and more.

Yeo & Yeo’s culture is one of learning, growth and purpose. The firm offers an award-winning CPA certification bonus program, an award-winning wellness program, gold-standard benefits, and hybrid and remote work capabilities. Yeo & Yeo is also dedicated to giving back to the community through the Yeo & Yeo Foundation, an employee-sponsored organization that is a channel for giving time, talent and financial support to charitable causes throughout Michigan.

“It’s an honor to be recognized for the hard work and dedication that we put into creating a positive and productive work environment,” said David Jewell, managing principal of Yeo & Yeo’s Kalamazoo office. “It’s a testament to the commitment of our team members, who bring their skills, passion and enthusiasm to their work every day. We take pride in fostering a culture that values innovation, collaboration and personal growth, and this award confirms that we’re on the right track.”

With concerns about inflation in the news for months now, most business owners are keeping a close eye on costs. Although it can be difficult to control costs related to mission-critical functions such as overhead and materials, you might find some budge room in employee benefits.

Many companies have lowered their benefits costs by offering a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). Of course, some employees might not react positively to a health plan that starts with the phrase “high-deductible.” So, if you decide to offer an HSA, you’ll want to devise a strategy for championing the plan’s advantages.

The basics

An HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. As mentioned, to provide these benefits, an HSA must be coupled with an HDHP. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage).

In 2023, the annual contribution limit for HSAs is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the business and the participant can make contributions. However, the limit is a combined one, not per-payer. Thus, if your company contributed $4,000 to an employee’s family-coverage account, that participant could contribute only $3,750.

Another requirement for HSA contributions is that an account holder can’t be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). Once someone enrolls in Medicare, the person becomes ineligible to contribute to an HSA — though the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.

3 major advantages

There are three major advantages to an HSA to clearly communicate to employees:

1. Lower premiums. Some employees might scowl at having a high deductible, but you may be able to turn that frown upside down by informing them that HDHP premiums — that is, the monthly cost to retain coverage — tend to be substantially lower than those of other plan types.

2. Tax advantages times three. An HSA presents a “triple threat” to an account holder’s tax liability. First, contributions are made pretax, which lowers one’s taxable income. Second, funds in the account grow tax-free. And third, distributions are tax-free as long as the withdrawals are used for eligible expenses.

3. Retirement and estate planning pluses. There’s no “use it or lose it” clause with an HSA; participants own their accounts. Thus, funds may be carried over year to year — continuing to grow tax-deferred indefinitely. Upon turning age 65, account holders can withdraw funds penalty-free for any purpose, though funds that aren’t used for qualified medical expenses are taxable.

An HSA can even be included in an account holder’s estate plan. However, the tax implications of inheriting an HSA differ significantly depending on the recipient, so it’s important to carefully consider beneficiary designation.

Explain the upsides

Indeed, an HDHP+HSA pairing can be a win-win for your business and its employees. While participants are enjoying the advantages noted above, you’ll appreciate lower payroll costs, a federal tax deduction and reduced administrative burden. Just be prepared to explain the upsides. Contact us for help evaluating the concept and assessing the costs of health care benefits.

How to Maintain Your Public Charity Status and Pass the Public Support Test

Many nonprofits qualify as public charities. The public charity designation, also known as a public 501(c)(3), has many benefits. But did you know that just because the IRS determination letter says the organization is a public charity doesn’t mean it maintains that status forever? How is that status determined and maintained?

Read Yeo & Yeo’s Public Support for Nonprofits eBook to learn …

The reasons for public charity status
How to conduct support tests for contribution-driven and program service-driven organizations
What actions to take to maintain public charity status

It’s important to maintain an entity’s public charity status. This allows the entity to operate with fewer rules and regulations, as compared to a private foundation, and may allow donors to deduct a larger percentage of contributions at times. But what can be done to maintain that status?

First and foremost, an organization needs to know its public support reason and status. Every year you have Form 990 (or a 990-EZ), and it has a Schedule A. Make sure you are looking at it. Make sure you review it and understand where the numbers come from. Make sure you know what percentages you have.

You also need to understand the timing of when your organization’s tax return is normally done. Nonprofits could wait until the 15th day of the 11th month after year-end to file. But if they do, that means there are one-and-a-half months left in the next fiscal year to deal with any potential support problems. As soon as a public support test is below 33 1/3% on Schedule A (or in the case of investment income for a 509(a)(2), it is above 33 1/3%), the organization needs to start making significant plans and forecasting their public support.

Do you need help navigating your public charity status?

Yeo & Yeo’s Nonprofit Services Group serves more than 300 nonprofit organizations throughout Michigan. Our professionals’ extensive experience translates into recommendations to improve accounting controls and operating efficiencies that are practical and realistic. We provide the advice and support you need – allowing you to concentrate on your organization’s central purpose.

If you need assistance with your charity status, contact your Yeo & Yeo advisor or contact us for more information.

Accounting and auditing standards have come under scrutiny in the wake of recent high-profile bank failures. Investigations are currently underway about what went wrong with Silicon Valley Bank and Signature Bank. But it’s likely that some “gray areas” in the accounting rules were exploited to make these organizations appear more economically secure in their year-end financial statements than they truly were.

Lessons from Enron

Andrew Fastow often speaks publicly about the issue of financial misstatement. As a convicted felon, Fastow has a unique perspective on fraud: He was the CFO of Enron in October 2001 — when it became the largest U.S. bankruptcy of its time. In March 2023, Fastow presented to the Public Company Accounting Oversight Board (PCAOB), which was created by the Sarbanes-Oxley Act of 2002 to prevent another Enron-like scandal. He advised the PCAOB to consider amending the accounting and auditing rules to help prevent corporate fraud.

Instead of focusing on finding the intentional fraudulent entry, Fastow said the PCAOB should concentrate on “fraud that occurs by exploiting loopholes for the ambiguity and complexity in the rules.” The latter is more the Enron story than recording the wrong number purposely, according to Fastow.

Compliance vs. reality

To elaborate, he gave a simple example of how financial statements, while perfectly in compliance with the rules, could be divorced from economic reality: In 2014, the average price of oil was $95 per barrel. For most of the year, the price was $110, but it dropped to $50 at year end. Under the accounting rules at that time, companies were supposed to take the price of oil on the first day of each of the 12 preceding months and average it. The result of this calculation was $95, but the market price was $50 when oil and gas companies released their financial statements.

Fastow said that every oil and gas company followed the rule and used $95 per barrel to report their reserves — even though the market price was $50 at year end. “All of them massively overstated their economically recoverable reserves, which is perhaps the most important metric that Wall Street looks at when they evaluate independent oil and gas companies. The mindset among people is so long as you’re following the rules, it doesn’t matter if the financial statements are misleading,” concluded Fastow.

Complex problem

Charles Niemeier, former founding member of the PCAOB, said solving the issue of financial reporting fraud is bigger than just revamping the auditing standards. And the challenge is greater for financial reporting matters that rely on subjective judgment calls.

For instance, accounting estimates may be based on subjective or objective information (or both) and involve some level of measurement uncertainty. Examples of accounting estimates include allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets. Some estimates may be easily determinable, but many are inherently subjective or complex.

Another matter that may be susceptible to manipulation is the going concern assessment, which underlies all financial reporting under U.S. Generally Accepted Accounting Principles. The accounting rules give a company’s management the final responsibilities to decide whether there’s substantial doubt about the company’s ability to continue as a going concern and to provide related footnote disclosures. The standard provides guidance to management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that companies commonly provide in their footnotes.

We can help

Financial misstatement can happen when managers use the gray areas in financial reporting to their advantage, especially as the rules have moved from historic cost in favor of fair value estimates. When making subjective estimates and evaluating the going concern assumption, it’s important to step back and ask whether your company’s financial statements, while in compliance with the rules, could potentially mislead investors. Contact us to address questions you may have about these complex matters. We can help you understand the rules and assess current market conditions.

It’s fairly safe to say that most employers are well aware of their obligation to pay certain employees overtime under specified circumstances. What may be less clear is which bonuses and other incentives must be included in the calculation.

Recently, the Wage and Hour Division of the U.S. Department of Labor (DOL) recovered $259,474 in overtime pay for 939 employees of a manufacturer after an investigation found that the company had failed to include bonuses and other incentives in its overtime pay.

All bonuses not the same

Under the Fair Labor Standards Act (FLSA), hourly “nonexempt” wage earners generally must receive overtime pay for hours worked beyond 40 hours per workweek. A workweek doesn’t need to be a calendar week — for example, a Wednesday to Tuesday workweek would qualify. The FLSA provides that overtime must be paid at one and a half times an employee’s regular rate of pay.

Discretionary bonuses aren’t included when determining regular rate of pay. These are bonuses that an employer chooses to grant, determines the amount, and for which there’s no contractual obligation nor eligibility guidelines. However, employers must include other types of bonuses or incentives when calculating regular rate of pay, such as:

Incentive bonuses, which may include production incentives for both individuals and groups,
Attendance incentives,
Longevity bonuses
Shift and “dirty work” differentials, and
Piecework incentives.

Overtime calculations should also include on-call and cost-of-living bonuses, as well as “push money” distributed to employees of retailers that received the funds from distributors or manufacturers for promoting particular products.

The investigation’s findings

In the aforementioned DOL investigation, the agency concluded that the employer in question failed to include the following bonuses or incentives when calculating overtime pay:

Bonuses for reaching quarterly sales and safety goals,
Incentives paid for working night shifts and acting as trainers for other employers,
Bonuses for perfect attendance,
Additional pay for every hour worked during peak production seasons, and
Incentives for personal safety performance during peak production seasons.

As a result, the overtime rates paid by the company were lower than those required under the FLSA.

Consider all factors

Jamie Benefiel, a district director of the Wage and Hour Division, was quoted in the DOL’s news release about the investigation as saying: “Employers must understand all applicable rules when it comes to paying workers overtime. This includes adding bonuses and incentive pay when factoring overtime pay. Anything less robs workers of their hard-earned wages.” If your organization pays employees overtime, contact us for help complying with the latest rules and regulations.

A primary goal of estate planning is to ensure that your wishes are carried out after you’re gone. So, it’s important to design your estate plan to withstand potential will contests or other challenges down the road.

The most common grounds for contesting a will are undue influence or lack of testamentary capacity. Other grounds include fraud and invalid execution.

There are no guarantees that your plan will be implemented without challenge, but you can minimize the possibility by taking these actions:

Dot every “i” and cross every “t.” The last thing you want is for someone to contest your will on grounds that it wasn’t executed properly. So be sure to follow applicable state law to the letter. Typically, that means signing your will in front of two witnesses and having your signature notarized. Be aware that the law varies from state to state, and an increasing number of states are permitting electronic wills.

Treat your heirs fairly. One of the most effective ways to avoid a challenge is to ensure that no one has anything to complain about. But satisfying all your family members is easier said than done.

For one thing, treating people equally won’t necessarily be perceived as fair. Suppose, for example, that you have a financially independent 30-year-old child from a previous marriage and a 20-year-old child from your current marriage. If you divide your wealth between them equally, the 20-year-old — who likely needs more financial help — may view your plan as unfair.

Demonstrate your competence if you’re concerned about a challenge. There are many techniques you can use to demonstrate your testamentary capacity and lack of undue influence. Examples include:

Have a medical practitioner conduct a mental examination or attest to your competence at or near the time you execute your will.
Choose witnesses you expect to be available and willing to attest to your testamentary capacity and freedom from undue influence years or even decades down the road.
Videotape the execution of your will. This provides an opportunity to explain the reasoning for any atypical aspects of your estate plan and will help refute claims of undue influence or lack of testamentary capacity.

Consider a no contest clause. Most, but not all, states permit the use of no contest clauses. In a nutshell, it will essentially disinherit any beneficiary who challenges your will or trust.

For this strategy to be effective, you must leave heirs an inheritance that’s large enough that forfeiting it would be a disincentive to bringing a challenge. An heir who receives nothing has nothing to lose by challenging your plan.

Use a living trust. By avoiding probate, a revocable living trust can discourage heirs from challenging your estate plan. That’s because without the court hearing afforded by probate, they’d have to file a lawsuit to challenge your plan.

If your estate plan does anything unusual, it’s critical to communicate the reasons to your family. Indeed, explaining your motives can go a long way toward avoiding misunderstandings or disputes. They may not like it, but it’ll be more difficult for them to contest your will on grounds of undue influence or lack of testamentary capacity if your reasoning is well documented. Contact us for additional details.

If your business occupies substantial space and needs to increase or move from that space in the future, you should keep the rehabilitation tax credit in mind. This is especially true if you favor historic buildings.

The credit is equal to 20% of the qualified rehabilitation expenditures (QREs) for a qualified rehabilitated building that’s also a certified historic structure. A qualified rehabilitated building is a depreciable building that has been placed in service before the beginning of the rehabilitation and is used, after rehabilitation, in business or for the production of income (and not held primarily for sale). Additionally, the building must be “substantially” rehabilitated, which generally requires that the QREs for the rehabilitation exceed the greater of $5,000 or the adjusted basis of the existing building.

A QRE is any amount chargeable to capital and incurred in connection with the rehabilitation (including reconstruction) of a qualified rehabilitated building. QREs must be for real property (but not land) and can’t include building enlargement or acquisition costs.

The 20% credit is allocated ratably to each year in the five-year period beginning in the tax year in which the qualified rehabilitated building is placed in service. Thus, the credit allowed in each year of the five-year period is 4% (20% divided by 5) of the QREs with respect to the building. The credit is allowed against both regular federal income tax and alternative minimum tax.

The Tax Cuts and Jobs Act, which was signed at the end of 2017, made some changes to the credit. Specifically, the law:

Requires taxpayers to take the 20% credit ratably over five years instead of in the year they placed the building into service
Eliminated the 10% rehabilitation credit for pre-1936 buildings

Contact us to discuss the technical aspects of the rehabilitation credit. There may also be other federal tax benefits available for the space you’re contemplating. For example, various tax benefits might be available depending on your preferences as to how a building’s energy needs will be met and where the building is located. In addition, there may be state or local tax and non-tax subsidies available.

Getting beyond these preliminary considerations, we can work with you and construction professionals to determine whether a specific available “old” building can be the subject of a rehabilitation that’s both tax-credit-compliant and practical to use. And, if you do find a building that you decide you’ll buy (or lease) and rehabilitate, we can help you monitor project costs and substantiate the compliance of the project with the requirements of the credit and any other tax benefits.

The SECURE 2.0 Act, enacted at the end of 2022, expands on the retirement plan improvements made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). In general, SECURE 2.0 gives employees the opportunity to save more and save longer for retirement, at a lower tax cost.

In some cases, the new law imposes additional requirements on manufacturers (and other employers) that may add to the cost of providing a 401(k) plan or other defined contribution plan. Other provisions are optional. But both the required and optional provisions can help you use your company’s retirement plan to retain and attract quality employees in light of the current tight labor market. And if you’re a smaller manufacturer without a 401(k) plan in place yet, you may be eligible for a tax break that has become even more valuable.

New requirements

Here are two significant requirements that will go into effect after 2024:

Automatic enrollment. For new 401(k) plans adopted after 2024, generally, the plan must provide automatic enrollment to eligible employees. Employees could still opt out. If an employee doesn’t opt out, employee deferrals ranging from 3% to 10% will be made, subject to escalation provisions.

Part-time workers. Building on changes in the first SECURE Act, the new law requires companies to include more part-time employees in their 401(k) plans. Effective for plan years beginning after 2024, part-timers are eligible to contribute if they’ve completed at least 500 hours of service for two consecutive years (and are at least age 21), down from three years of service. Vesting is based on completion of 500 hours of service in a year.

Optional enhancements

Here are some optional ways SECURE 2.0 allows you to enhance your company’s 401(k) plan:

Matching employer contributions. SECURE 2.0 allows companies to designate any matching contributions, as well as fully vested employer nonelective contributions, as after-tax contributions to a Roth account. This provision is now in effect. With a Roth account, future distributions made to retired employees are generally exempt from federal income tax. This can be attractive to employees with incomes that are too high for them to be eligible to contribute to Roth IRAs or who are concerned about owing income tax on distributions during retirement.

Student loan repayments. Under the new law, manufacturers may choose to provide a matching contribution to 401(k) accounts of their employees based on their student loan obligations. This provision takes effect in 2024. Thus, employees may be encouraged to save for retirement even while they’re still paying off their student loans. This is a low-cost incentive that manufacturers can use to help attract and retain employees who may be burdened with student loan debt.

Emergency withdrawals. For distributions made after 2023, a manufacturer can amend its 401(k) plan to allow participants to withdraw up to $1,000 for personal emergency expenses. These are unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The plan administrator may rely on the employee’s certification for this purpose.

A valuable credit

Under the first SECURE Act, a manufacturer with 100 or fewer employees could claim a credit for three years equal to 50% of the administrative costs of starting a 401(k) plan, up to a maximum of $5,000. Beginning in 2023, companies with 50 or fewer employees can now qualify for a credit equal to 100% of the costs, up to $5,000.

The 100% credit is phased out for a business with 51 to 100 employees. An additional credit of up to $1,000 per employee is available for employer contributions for employees earning less than $100,000.

Other enhancements

Here are two more provisions manufacturers should be aware of:

Cash-out limit. If a plan participant is terminated from employment — whether he or she retired, quit or was fired — a manufacturer may “cash out” the ex-employee’s interest if it’s below a specified level. Previously, the limit was $5,000. SECURE 2.0 increases the cash-out limit to $7,000, beginning in 2024.

Catch-up contributions. Currently, 401(k) participants who are age 50 or older can make an extra “catch-up contribution,” subject to an annual limit ($7,500 in 2023). Beginning in 2025, SECURE 2.0 increases the limit for those age 60 through 63 to the greater of $10,000 or 150% of the regular catch-up contribution limit, indexed for inflation after 2025. One catch: For any participant with wages in the prior year exceeding $145,000, any age-based catch-up contributions must be made to a Roth account, beginning in 2024.

Learn more

Bear in mind that this is only an overview of key changes that may apply to your manufacturing company’s 401(k) plan. Other provisions may affect your company. If you have questions regarding the new law, please contact us.

In January, the Biden administration issued a policy statement indicating its intent to extend the COVID-19 national emergency (NE) and public health emergency (PHE) declarations to May 11, 2023, and then end both emergencies on that date. However, in a Joint Resolution, Congress passed and the President signed legislation ending the COVID-19 NE on April 10.

The Centers for Medicare & Medicaid Services has clarified that the legislation ending the NE doesn’t affect the PHE. This is germane for employers that sponsor group health plans because the end of the PHE may affect the administration of those plans. In fact, the U.S. Department of Labor (DOL), the U.S. Department of Health and Human Services, and the IRS recently issued frequently asked questions (FAQs) addressing how group health plans and insurers will be affected. Here are some highlights.

Diagnostic testing

Coverage requirements for COVID-19 diagnostic testing won’t apply to items or services furnished after the end of the PHE. Over-the-counter tests are considered “furnished” on the date of purchase.

For testing services, plan sponsors should look to the earliest date on which a service was provided to determine whether the service was furnished during the PHE. For example, if a health care provider collects a specimen to perform COVID-19 testing on the last day of the PHE, but the laboratory analysis occurs on a later date, both the collection and analysis should be treated as furnished during the PHE.

Plans that continue to cover diagnostic testing — including over-the-counter tests — after the PHE may choose to impose cost-sharing, prior authorization or other medical management requirements. Plans will no longer be required to reimburse out-of-network testing providers the cash price listed on their websites. Likewise, providers won’t be required to post their cash prices, though they’re encouraged to do so for at least 90 days beyond the PHE to enable claims processing for tests furnished before the end of the PHE.

Participant notification

Plan sponsors are encouraged to notify participants and beneficiaries of any changes to the terms of coverage for the diagnosis or treatment of COVID-19 because of the end of the PHE.

Generally, material modifications that would affect the content of the summary of benefits and coverage, and that don’t occur in connection with a renewal of coverage, must be disclosed no later than 60 days before the modification’s effective date. However, some plans have increased benefits or reduced cost-sharing for:

The diagnosis or treatment of COVID-19, and
Telehealth or remote care services.

If these plans revoke such changes when the PHE ends, they’ll be deemed to have satisfied their obligation to provide advance notice of the material modification if they:

Previously notified participants of the general duration of the increased benefits (such as, that they applied only during the PHE), or
Notify participants reasonably in advance of the reversal.

The FAQs clarify that previous notices satisfy the advance notice requirement only if provided during the current plan year. Do note, however, that the Employee Retirement Income Security Act requires that a summary of material modification be furnished no later than 60 days after adoption of a material reduction in a group health plan’s covered services or benefits.

Preventive services and vaccines

Non-grandfathered plans must continue to cover, without cost-sharing, qualifying preventive services related to COVID-19 — including vaccines. The coverage must be provided within 15 business days after a recommendation is made by the U.S. Preventive Services Task Force or Advisory Committee on Immunization Practices.

After the PHE ends, a plan isn’t required to cover vaccines from an out-of-network provider if the plan has a network of providers. A plan may impose cost-sharing if such coverage is provided. If a plan has no provider in its network who can provide a qualifying preventive service, the plan must cover the service out-of-network without cost-sharing.

A long way

In a recent blog post, Lisa M. Gomez of the DOL observed, “We have come a long way from the time of businesses being closed and mandatory quarantine periods.” So true, though challenges will remain for plan sponsors nevertheless. Please contact us for help managing the costs of your organization’s health care benefits.

The Inflation Reduction Act (IRA) extended and expanded the Section 30D Clean Vehicle (CV) Credit, previously known as the Electric Vehicle (EV) Credit. The credit now covers “clean vehicles,” which include plug-in hybrids, hydrogen fuel cell cars and EVs.

On April 17, 2023, the IRS will publish proposed regulations to clarify how a CV can qualify for the credit. The proposed regs effectively limit the number of currently available models that qualify, due to strict sourcing requirements that will apply to CVs that buyers take delivery of on or after April 18, 2023. The federal government is taking steps to help taxpayers identify eligible vehicles.

The previous EV Credit

The Sec. 30D EV Credit has been available since 2008. Prior to the IRA, it started at $2,500, with a maximum credit of $7,500. (Note that the EV Credit remains available for qualifying vehicles placed in service on or before April 17, 2023.)

It was also subject to a cap based on the number of qualifying vehicles a manufacturer had produced. Because of this cap, some popular EVs — including those made by Tesla, Toyota and General Motors — were no longer eligible for the EV Credit.

The extended and expanded CV Credit

The CV Credit continues to top out at $7,500, but the IRA splits it into two parts, based on satisfying new sourcing requirements for both critical minerals and battery components. Vehicles that meet only one of the two requirements are eligible for a $3,750 credit.

Specifically, an “applicable percentage” of the value of the critical minerals contained in the battery must be extracted or processed in the United States or a country with which it has a free trade agreement, or be recycled in North America. Similarly, an applicable percentage of the value of the battery components must be manufactured or assembled in North America. The IRA increases the applicable percentage for both requirements every year starting in 2023, with initial percentages of 40% for critical minerals and 50% for battery components.

The IRA includes price restrictions, too. Vans, pickup trucks and SUVs with a manufacturer’s suggested retail price (MSRP) of more than $80,000 don’t qualify for the credit, nor do automobiles with an MSRP higher than $55,000. Qualified vehicles also must undergo final assembly in North America.

The credit also is subject to income limitations. It’s not available to taxpayers with a modified adjusted gross income (MAGI) over:

$150,000 for single filers,
$300,000, for joint filers, or
$225,000, for head of household filers.

In addition, the credit isn’t allowed for vehicles with any critical minerals (after 2025) or battery components (after 2024) from a “foreign entity of concern.” The IRA doesn’t define this term, but the IRS and U.S. Department of Treasury have stated that future guidance will address this provision.

The credit isn’t refundable and can’t be carried forward if it’s claimed as a personal credit. It can, however, be carried forward if claimed as a general business credit. If a taxpayer uses a qualified vehicle for both personal and business use, and the business use is less than 50% of the total use for a tax year, the credit must be apportioned accordingly.

Relevant proposed regs

The sourcing requirements are intended to reduce manufacturers’ reliance on suppliers in countries such as China. As a result, many of the proposed regs are of greater interest to manufacturers than consumers. They spell out, for example, processes for determining the percentages of value of critical minerals and of battery components. They also explain how to identify countries with which the United States has a free trade agreement.

But the proposed regs also include several provisions with useful information for taxpayers. For example, the regs define MSRP as the sum of 1) the MSRP for a vehicle and 2) the MSRP for each accessory or item of optional equipment that’s physically attached to the vehicle at the time of delivery to the dealer. This information is found on the label affixed to the vehicle’s windshield or side window. So adding optional equipment can result in losing out on the CV Credit in some cases.

As far as the “final assembly in North America” requirement, the proposed regs provide that taxpayers can rely on the final assembly point reported on the label affixed to the vehicle. Alternatively, they can rely on the vehicle’s plant of manufacture reported in the vehicle identification number. North America refers to the United States, Canada and Mexico.

The proposed regs also discuss the treatment of the credit when a vehicle has multiple owners. They state that only one taxpayer can claim the credit; no allocation or prorating is permitted. In the case of married taxpayers filing jointly, either spouse may be identified as the owner claiming the credit on the seller’s report.

If a partnership or S corporation places an eligible CV into service, the credit is allocated among the partners or shareholders. They can claim their portion on their individual tax returns.

The proposed regs also clarify the MAGI limit. The credit isn’t available for any taxable year if the lesser of 1) the taxpayer’s MAGI for the year or 2) the taxpayer’s MAGI for the preceding year exceeds the applicable threshold. If a taxpayer’s filing status changes (for example, from single to married) during this two-year period, the MAGI limit is satisfied if the MAGI doesn’t exceed the threshold amount in either year based on the applicable filing status for that year.

The MAGI limit doesn’t apply to taxpayers other than individuals. If a qualified vehicle is placed in service by a partnership or S corporation, though, the limit will apply to partners or shareholders who claim their portion of the credit.

In the market for a CV?

While the IRS has promised additional guidance on the CV Credit, taxpayers interested in taking advantage of the credit needn’t wait. The U.S. Department of Energy has created a website that includes a list of eligible clean vehicles. The list will be regularly updated as manufacturers provide information on their vehicles that qualify for the credit. For additional information from the IRS, visit: https://bit.ly/3mkTubh. If you have questions regarding the CV Credit, please don’t hesitate to contact us.

No matter how diligently you prepare, your estate plan can quickly be derailed if you or a loved one requires long-term home health care or an extended stay at an assisted living facility or nursing home. Long-term care (LTC) expenses aren’t covered by traditional health insurance policies or Medicare. So it’s important to have a plan to finance these costs, either by setting aside some of your savings or purchasing insurance. Let’s take a closer look at three options.

1) LTC insurance

An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing, toileting, transferring (getting in and out of a bed or chair) and maintaining continence.

LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. To qualify, a policy must:

Be guaranteed renewable and noncancelable regardless of health,
Not delay coverage of pre-existing conditions more than six months,
Not condition eligibility on prior hospitalization,
Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment and that this condition has lasted or is expected to last at least 90 days.

It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium tax deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income (AGI), so some people may not have enough medical expenses to benefit from this advantage. It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.

2) Hybrid insurance

Also known as “asset-based” policies, hybrid policies combine LTC benefits with whole life insurance or annuity benefits. These policies have advantages over standalone LTC policies.

For example, their health-based underwriting requirements typically are less stringent and their premiums are usually guaranteed — that is, they won’t increase over time. Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.

3) Employer-provided plans

Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees.

Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals. And premium payments are excluded from employees’ wages for income and payroll tax purposes.

Think long term

Given the potential magnitude of LTC expenses, the earlier you begin planning, the better. We can help you review your options and analyze the relative benefits and risks.

As a business owner, you’ll likely need to have your company appraised at some point. An appraisal is essential in the event of a business sale, merger or acquisition. It’s also important when creating or updating a buy-sell agreement or doing estate planning. You can even use a business valuation to help kickstart or support strategic planning.

A good way to prepare for the appraisal process, or just maintain a clear big-picture view of your company, is to learn some basic valuation terminology. Here are five terms you should know:

1. Fair market value. This is a term you may associate with selling a car, but it applies to businesses — and their respective assets — as well. In a valuation context, “fair market value” has a long definition:

The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

2. Fair value. Often confused with fair market value, fair value is a separate term — defined by state law and/or legal precedent — that may be used when valuing business interests in shareholder disputes or marital dissolution cases. Typically, a valuator uses fair market value as the starting point for fair value, but certain adjustments are made in the interest of fairness to the parties.

For example, dissenting shareholder litigation often involves minority shareholders who are “squeezed out” by a merger or other transaction. Unlike the “hypothetical, willing” participants contemplated under the definition of fair market value, dissenting shareholders are neither hypothetical nor willing. The fair value standard helps prevent controlling shareholders from taking advantage of minority shareholders by forcing them to accept a discounted price.

3. Going concern value. This valuation term often comes into play with buy-sell agreements and in divorce cases. Going concern value is the estimated worth of a company that’s expected to continue operating in the future. The intangible elements of going concern often include factors such as having a trained workforce; an operational plant; and the necessary licenses, systems and procedures in place to continue operating.

4. Valuation premium. Sometimes, because of certain factors, an appraiser must increase the estimate of a company’s value to arrive at the appropriate basis or standard of value. The additional amount is commonly referred to as a “premium.” For example, a control premium might apply to a business interest that possesses the requisite power to direct the management and policies of the subject company.

5. Valuation discount. In some cases, it’s appropriate for an appraiser to reduce the value estimate of a business based on specified circumstances. The reduction amount is commonly referred to as a “discount.” For instance, a discount for lack of marketability is an amount or percentage deducted from the value of an ownership interest to reflect that interest’s inability to be converted to cash quickly and at minimal cost.

The IRS has released proposed regulations that provide guidance for manufacturers on the implementation of the Advanced Manufacturing Investment Credit. The credit, created by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, encourages manufacturers to invest in semiconductor manufacturing property. Among other things, the regs address the eligibility requirements and provide key definitions that clarify the credit.

The credit in a nutshell

The Advanced Manufacturing Investment Credit, codified as Section 48D of the Internal Revenue Code, is generally equal to 25% of an eligible taxpayer’s qualified investment in an advanced manufacturing facility. Specifically, the facility must have a primary purpose of manufacturing finished semiconductors or finished semiconductor manufacturing equipment.

A taxpayer’s qualified investment is its basis in any qualified property that’s 1) integral to the operation of the advanced manufacturing facility, and 2) placed in service during the tax year (after Dec. 31, 2022). The credit is effectively refundable, because taxpayers can opt to receive it as an elective payment, which will be treated as a payment against equal tax liability.

Eligible taxpayers

An eligible taxpayer is one that 1) isn’t a “foreign entity of concern” (China, Russia, North Korea and Iran), and 2) hasn’t made an “applicable transaction” during the tax year. An applicable transaction is any significant transaction involving the material expansion of semiconductor manufacturing capacity in any foreign entity of concern.

Under the regs, a significant transaction is:

A transaction whose value is $100,000 or more, or
A series of transactions in which the aggregate value is $100,000 or more.

Notably, the proposed regulations provide for a recapture of the Sec. 48D credit if a taxpayer engages in an applicable transaction with a foreign entity of concern within 10 years of placing in service the property that qualifies for the credit. The IRS can recapture the credit from the taxpayer that claimed it, as well as members of affiliated groups and partnerships and S corporations that have made a direct pay election.

Critical definitions

According to the proposed regs, property is “integral” to the manufacturing of semiconductors or semiconductor manufacturing equipment if it’s used directly in the manufacturing operation and is essential to the completeness of the manufacturing operation. Materials, supplies or other inventory items that are transformed into a finished product aren’t considered integral.

The term “semiconductor” is narrowly defined as an integrated electronic device or system most commonly manufactured with materials such as silicon, using processes such as lithography, deposition and etching. This definition excludes various semiconductor components. It specifically includes analog and digital electronics; power electronics; and photonics for memory, processing, sensing, actuation and communications applications. Semiconductor manufacturing equipment is equipment integral to the making of semiconductors and subsystems that enable or are incorporated into the manufacturing equipment.

A research or storage facility can qualify as integral if used in connection with the manufacturing of semiconductors or semiconductor manufacturing equipment. But a research facility that doesn’t manufacture any type of semiconductors or semiconductor manufacturing equipment doesn’t qualify.

Qualified property also doesn’t include buildings or portions of buildings used for offices, administrative services or other services unrelated to manufacturing. The regs identify several functions (for example, human resources, sales, payroll, and accounting and legal services) that are unrelated to manufacturing. While the list includes “security services,” it excludes cybersecurity operations from that term.

The primary purpose requirement

Under the regs, the determination of whether a facility’s primary purpose is manufacturing finished semiconductors or finished semiconductor equipment is made based on all the facts and circumstances. The regs list several relevant factors, including the facility’s design and the possession of permits or licenses needed to manufacture such products. Facilities that manufacture materials or chemicals that are supplied to an advanced manufacturing facility don’t meet the primary purpose requirement themselves.

An example in the regs concludes that the primary purpose requirement is satisfied where 75% of the property’s output is dedicated to semiconductor manufacture. The regs don’t explicitly include a so-called 75% test, though.

Stay tuned

The areas discussed above represent just a sampling of the proposed regs, and the IRS requested comments on several areas, including the scope of the definition of a semiconductor. However, manufacturers can rely on the proposed regs if they follow them in their entirety and in a consistent manner. Contact us if you have questions about the Advanced Manufacturing Investment Credit.

Yeo & Yeo’s Education Services Group professionals are pleased to present five sessions during the April 25-27 MSBO Conference & Exhibit Show at Amway Grand Plaza and DeVos Place, Grand Rapids. We invite you to join us to gain new insights into managing your Michigan school.

Wednesday, April 26

How to Prepare for a Headache-Free Audit – 9:20-10:20 a.m.
- Presenter: Michael Evrard
GASB Update: Statement 96 and Beyond – 10:40-11:40 a.m.
- Presenter: Kristi Krafft-Bellsky
Allowable Expenses – 10:40-11:40 a.m.
- Presenters: Jessica Rolfe and Dana Abrahams from Clark Hill PLC

Thursday, April 27

Frequently Found Audit Issues (MDE vs. Auditor Perspective) – 8:20-9:20 a.m.
- Presenters: Jennifer Watkins and Gloria Suggitt from MDE
Fraud Prevention – 2:00-2:30 p.m.
- Presenter: Jennifer Watkins

We encourage you to visit our booth #700 for one-on-one conversations with our education professionals. Hope to see you there!