Managing School Nutrition Programs: Financial Reporting and Auditing

School nutrition programs play a crucial role in providing meals to students. However, managing these programs involves tracking, financial reporting, and meeting audit requirements to ensure compliance with federal and state regulations. This article will explore key compliance and audit considerations for school nutrition programs.

Internal Controls and Compliance

Maintaining robust internal controls is essential for compliance. Organizations should establish strong internal controls to mitigate risks, ensuring compliance through systematic processes rather than relying on chance. Your auditors will conduct comprehensive sample tests to verify compliance with allowable costs, eligibility, and procurement procedures, including disbursements, payroll, and indirect cost calculations.

It is recommended to review your controls periodically to avoid surprises when your auditors conduct their tests. Additionally, keep detailed records of procedures, invoices, timesheets, meal counts, and other relevant documents to substantiate compliance.

Allowable Cost Principles

School districts must ensure funds are used solely for allowable operating and administrative costs. Consider the following:

Direct Costs: Verify that the controls properly identify which costs are specifically related to the nutrition program. Auditors will test disbursements and payroll to confirm they are directly related to the program and not a component of indirect costs.
Indirect Costs: Verify calculations and that transfers out of the food service fund comply with regulations.

Eligibility Requirements

Retaining proper documentation of eligibility determination and testing of eligibility are critical. Verify the accuracy of eligibility determinations and procedures during the annual certification/application process, and ensure accurate procedures for direct certification reports.

Procurement, Suspension, and Debarment

Adhere to purchasing policies aligned with federal compliance requirements. Your auditors will test policies and procedures for compliance, including disbursements.

Reporting

Accurate and timely reporting is crucial. Ensure accurate claims are submitted promptly for reimbursement requests, and ensure compliance with regulations to verify free and reduced-price applications.

Navigating Audit Findings

When audit findings occur, consider the following:

Single Audit Report: Provides reports on financial statements, internal control over financial reporting, and compliance with major programs. A description of any material noncompliance, internal control deficiencies, or material weaknesses will be included within this report if the district is over the federal award threshold requiring a single audit.
Corrective Action Plans: Lists management’s plans to address deficiencies, including explanations, responsible parties, and completion dates.
Responding to MDE Requests: Proactively address requests from the Michigan Department of Education (MDE) if internal controls, policies, or procedures need to be updated or additional information is requested.

Annual Financial Reporting Requirements

Adhere to the following for annual financial reporting:

Financial Information Database (FID): Local Education Agencies, Intermediate School Districts, and Public-School Academies must report using proper coding to avoid issues with submitting the FID.
Consistent Method for Recording: Utilize the Michigan Public School Accounting Manual for consistent financial accounting.

Ensuring Successful Management of Your School Nutrition Programs

Managing the financial aspects of school nutrition programs can be complex but essential for compliance and program success. By maintaining robust internal controls, accurate documentation, and proactive responses to audit findings, districts can ensure the continued success of these vital programs.

A single audit is required if a school district has $750,000 or more in federal expenditures for fiscal years ending June 30, 2024. This audit ensures compliance with federal regulations and provides transparency regarding the use of federal funds. This article will delve into the essential components of a single audit, emphasizing the Schedule of Expenditures of Federal Awards (SEFA) and best practices for grant compliance.

Schedule of Expenditures of Federal Awards (SEFA)

The SEFA serves as a critical document in the single audit process. It provides a comprehensive overview of federal financial assistance received by the district. Here are the key elements to include in your SEFA:

1. Award Details:

List all federal financial assistance, including grants, loan guarantees, and direct appropriations.
Specify the approved grant amount, Assistance Listing Number (AL), and project number or source code.

2. Expenditure/Revenue Information:

Include prior years’ cumulative actual expenditures from federal sources.
Document the current year’s cash or payment-in-kind received from federal sources.
Record current year actual expenditures from federal sources.
Report beginning and ending inventory and accrued or unearned revenue as of July 1, 2023, and June 30, 2024.
Make necessary adjustments to ensure accuracy.

Ensuring Grant Compliance

To maintain compliance, follow these guidelines:

Classification by program. Categorize grants by program and identify the federal department administering each program. Clearly state whether a grant is direct or flow-through, along with the flow-through agency (if applicable).
Ensure accurate totals: Total by the federal awarding agency, i.e., the United States Department of Education, program, assistance listing, and clusters.
Cluster identification: Ensure clusters are properly identified and totaled.
SEFA notes. Add accounting policies to the notes section of the SEFA. Address any differences between the district’s SEFA and the Grant Auditors Report (GAR), and provide a reconciliation for differences between federal expenditures per SEFA and financial statement federal revenue.

Checking Your SEFA

To ensure accuracy in your SEFA, consider the following checks:

Prior Year Check: Verify that the prior year’s accrued/unearned revenue and cumulative expenditures of current-year grants align with the prior year’s SEFA.
Accounts Receivable Calculation: Calculate the fiscal year accounts receivable (accrued/unearned revenue) by adding prior year accounts receivable to the difference between year expenditures and receipts.
Consistency with Financial Statements: Confirm that total federal expenditures per SEFA match total Federal Revenue per Financial Statements.

Schedule of Findings and Questioned Costs

If there are findings in your SEFA, each finding must include the reference number, federal program information, criteria or specific requirement, a condition found, cause/effect, questioned costs, management’s response, and a corrective action plan (CAP).

A CAP should be written on school district letterhead, be specific and action-oriented, and include steps, target dates, and contact information. If necessary, note dates for returning funds to the Michigan Department of Education. If there were prior year findings, each must be reviewed, and the current standing of the finding must be included in the report.

Ensuring a Successful Audit

A single audit is a critical process for organizations that receive federal funding, ensuring compliance with regulations and promoting transparency in the use of federal funds. The SEFA is a crucial component, providing a comprehensive overview of the federal financial assistance received by the organization. Organizations can successfully undergo a single audit by thoroughly preparing the SEFA, properly reporting findings, and maintaining quality control.

Ensuring compliance, accurate reporting, and effective fund management are critical to maintaining your school district’s financial health and accountability. Here, we outline some frequently encountered audit issues and provide guidance on how to address them effectively.

Key Areas of Focus:

1. Audit Submission Deadlines and Responsibilities. Timely audit submission is crucial. Audits are typically required to be submitted to the relevant state or federal education departments by a specified deadline each year. The deadline for Michigan school districts is November 1. Missing these deadlines can result in penalties, such as the withholding of state aid payments. To avoid delays, districts should confirm that their auditors have submitted the audit on time and keep track of submission receipts.

2. Understanding Financial Reports. Accurate interpretation of financial reports, such as the Grant Auditor Report (GAR) and Processed Allocation Logs (PAL reports), is essential. These reports track grants and commodity entitlements. Your auditor must verify that final statements are accurately reported on the Schedule of Expenditures of Federal Awards (SEFA) and ensure compliance with federal guidelines.

3. Managing Food Service Fund Balances. Proper management of food service fund balances is important. Excess fund balances should be monitored and managed according to regulatory requirements. The allowable fund balance can be calculated by subtracting capital outlay from total program costs, dividing by nine months, and multiplying by three months. Regular review of the fund balance can help identify and address any potential issues early. If the fund balance is over the allowable limit at the end of the fiscal year, the district can work with the Michigan Department of Education (MDE) Nutritional Services division on a spend-down plan.

4. Compliance with the Davis-Bacon Act for Federal Funds. The Davis-Bacon Act requires that prevailing wage rates be paid for contracts over $2,000 involving laborers and mechanics. This includes payments for minor remodeling, renovation or construction contracts. Compliance with this act is especially relevant for projects funded by federal programs like the Elementary and Secondary School Emergency Relief (ESSER) funds. Your auditor must ensure that contracts include required clauses and that contractors submit certified payrolls weekly. Noncompliance can lead to significant deficiencies or material weaknesses and may necessitate repayment of funds.

5. Reporting Fraud, Illegal Acts, and Abuse. Your auditor is obligated to report any known or likely fraud, illegal acts, or violations that materially affect government funds’ financial statements. This includes notifying relevant governance bodies and external regulatory agencies. Effective and timely reporting helps maintain transparency and accountability within the education sector.

6. Compliance with the Uniform Budgeting and Accounting Act. Adhering to the Uniform Budgeting and Accounting Act (UBAA), or its equivalent in various jurisdictions, is mandatory. School districts are required to approve budgets for general funds and all special revenue funds. The original budget must be approved prior to the beginning of the fiscal year (7/1), while the final amended budget must be approved prior to the end of the fiscal year (6/30). Any variance that impacts the budgeted ending fund balance can trigger follow-up actions from oversight bodies. Your auditor should review final approved budgets, identify violations, and assess the severity of noncompliance, ranging from minor issues to material weaknesses.

7. Importance of Corrective Action Plans. Corrective Action Plans (CAPs) are essential for addressing audit findings. According to the Uniform Guidance, CAPs should be separate documents detailing the planned actions to address each finding, the anticipated completion dates, and the responsible contact persons. Reviewing prior CAPs ensures that progress is being made and corrections are implemented within the appropriate timeline.

Take a Proactive Approach

Educational institutions can maintain financial integrity and transparency by ensuring timely submissions, accurate reporting, proper fund management, and strict compliance with regulations. Regular audits and corrective actions help meet regulatory requirements and contribute to the overall effectiveness and trustworthiness of your school district’s financial management.

Yeo & Yeo CPAs & Advisors, a leading Michigan-based accounting and advisory firm, has been named one of Metro Detroit’s Best and Brightest Companies to Work For for the thirteenth consecutive year.

The Best and Brightest programs recognize organizations for their commitment to excellence in human resources practices and employee engagement. It celebrates companies that go above and beyond to foster a positive work environment, nurture talent, and empower employees to thrive.

Yeo & Yeo’s culture is one of learning, growth, and purpose. Their award-winning CPA certification bonus program, wellness initiatives, and flexible hybrid and remote work options exemplify the firm’s investment in its team. Yeo & Yeo’s career maps are designed to meet employees where they are and help provide a clear path for growth and development. They have partnered with Boon Health to offer employees complimentary professional and personal coaching. Prioritizing employee appreciation, the firm hosts many company-wide events and promotes work-life integration through initiatives like half-day summer Fridays.

“We are truly honored to be named one of the Best and Brightest Companies to work for,” said Thomas O’Sullivan, managing principal of the firm’s Ann Arbor office. “This achievement is a testament to the dedication and expertise of our people, who are the driving force behind our success.”

Tammy Moncrief, managing principal of the Auburn Hills office, adds, “We are committed to creating a culture that attracts and retains talented, passionate professionals. We wouldn’t be where we are today without our people, and we are incredibly grateful for everything they do for our clients, communities, and one another.”

Receiving Metro Detroit’s Best and Brightest award is a significant milestone in a year of notable achievements for Yeo & Yeo. This year, the firm was also honored with the Outstanding Business Award from Saginaw Valley State University, recognized by Accounting Today as a Regional Leader and a Firm to Watch, and named one of West Michigan’s Best and Brightest Companies to Work For.

The Metro Detroit Best and Brightest companies will be honored on Thursday, November 7, 2024, at The Henry in Dearborn, Michigan.

The Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act — signed into law in 2022 — provides generous tax incentives to increase domestic production of semiconductors, also known as chips. More specifically, the CHIPS Act created a temporary Advanced Manufacturing Investment Credit for investments in semiconductor manufacturing property. The IRS recently issued final regulations, including some changes related to the election to treat the credit as a federal tax payment.

Credit overview

Codified in Section 48D of the Internal Revenue Code, the credit generally equals 25% of the qualified investment related to an advanced manufacturing facility — that is, a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. A manufacturer’s qualified investment equals its basis in any qualified property placed in service during the taxable year.

For pass-through entities, such as partnerships or S corporations, the qualified investment is calculated based on the partner’s or shareholder’s pro rata basis in the property. Accordingly, manufacturing partnerships and S corporations with qualifying property may pass through a portion of the qualified basis to taxpayers who can then claim a credit (subject to any limits at the partner or shareholder level).

Qualified property is tangible property that:

Qualifies for depreciation or amortization,
Is constructed, reconstructed or erected by the taxpayer or acquired by the taxpayer if the original use of the property begins with the taxpayer, and
Is integral to the operation of the advanced manufacturing facility.

It also can include a building, a portion of a building (other than a portion used for functions unrelated to manufacturing, such as administrative services) and certain structural components of a building.

Claiming the credit

A manufacturer can claim the Sec. 48D credit for qualified property placed in service after December 31, 2022, for which construction begins before January 1, 2027. If construction began before the CHIPS Act was enacted, though, only the portion of the basis attributable to construction begun after enactment is eligible.

Generally, the credit is claimed in the tax year that the qualified property is placed in service for federal tax purposes. Therefore, the property must be ready and available for its assigned function. For example, if a manufacturer begins construction related to qualified property in 2024 but doesn’t place it in service until 2025, the credit is claimed on the company’s 2025 federal tax return.

However, applicable entities can choose to make a “direct pay” election to treat the credit as a payment against their federal income tax liability. First, this direct payment will offset any tax liability of the entity and then any excess is refundable.

Final regs: 3 areas of focus

The final regs modify certain provisions in the proposed regs and provide an interim rule for determining a partner’s distributive share of the tax-exempt income. The final regs are effective and applicable as of April 22, 2024.

Here are three specific areas the final regs focus on:

Direct-pay election. Prior to the final regs, there was confusion as to the timing of the direct-pay election option for the Sec. 48D credit. Specifically, under the proposed regs, it wasn’t clear if a manufacturer should be treated as having made the election upon completing the registration requirements established by the IRS.

The final regs clarify that each qualified investment must have its own registration number. However, the election is made on the manufacturer’s tax return. A caveat: This election is irrevocable.

Double benefit rule. The IRS and the U.S. Department of Treasury expressed concerns that entities may derive duplicate benefits for expenditures. Thus, the regulations feature several provisions designed to deny double tax benefits for the same expenses, including correlation with the general business credit. Accordingly, the final regs include a comprehensive five-step process to be used to determine the allowable credit amount that may be elected. These complex issues are best left to your tax advisor.
Pass-through entities. The final regs provide more flexibility for pass-through entities. In recognition of previous agreements regarding the allocation of tax-exempt income, the final regs include an interim rule for a written binding partnership agreement entered into after December 31, 2021, and before June 22, 2023, if the partnership was formed for the purpose of owning and operating an advanced manufacturing facility or qualified property. Under the interim rule, a partner’s distributive share of the direct payment is determined based on more favorable allocation rules.

Have questions?

The IRS’s final regs provide some needed clarity regarding the Sec. 48D credit for manufacturers under the CHIPS Act. If you have questions regarding the Sec. 48D credit, contact us.

The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act was signed into law in December 2022, bringing more than 90 changes to retirement plan and tax laws. Many of its provisions are little known and were written to roll out over several years rather than immediately taking effect.

Here are several important changes that went into effect in 2024:

Pension-Linked Emergency Savings Accounts (PLESAs). More than half of U.S. adults would turn to borrowing when confronted by an emergency expense of $1,000 or more, according to a Bankrate survey — a figure that has held steady for years. In response, SECURE 2.0 contains provisions related to emergency access to retirement savings, including PLESAs. PLESAs are defined contribution plans designed to encourage workers to save for financial emergencies.

Beginning this year, employers can offer PLESAs linked to employees’ retirement accounts, with the PLESA treated as a Roth, or after-tax, account. Non-highly-compensated employees can be automatically enrolled with a deferral of up to 3% of compensation but no more than $2,500 annually (indexed for inflation) — or less if the employer chooses. Employees can make qualified withdrawals tax- and penalty-free. Employers must allow at least one withdrawal per month, with no fee for the first four per year.

Starter 401(k) plans. SECURE 2.0 creates a new kind of retirement plan for employers not already sponsoring a qualified retirement plan, called a starter 401(k). Employers must automatically enroll all employees at a deferral rate of at least 3% of compensation but no more than 15%. The maximum annual deferral is $6,000 (indexed for inflation), plus the annual IRA catch-up contribution of $1,000 for those age 50 or older. No actual deferral percentage (ADP) or top-heavy testing of the plan is required, reducing the compliance and cost burden for employers.

Employers can impose age and service eligibility requirements, and employees may elect out. Employees also can choose to contribute at a different level. Employer contributions aren’t allowed, so less record keeping is required.

Top-heavy rules. Defined contribution plans that are considered “top-heavy” must make nonelective minimum contributions equal to 3% of a participant’s compensation. This can represent a significant expense for small employers. Top-heavy plans are those where the aggregate of accounts for key employees exceeds 60% of the aggregate accounts for non-key employees.

Starting in 2024, employers can perform the top-heavy test separately on excludable employees (those who are under age 21 and have less than a year of service) and non-excludable employees. The goal is to eliminate the incentive for employers to exclude employees from the plan to avoid the minimum contribution obligation.

SIMPLE IRAs. SECURE 2.0 boosts the annual Savings Incentive Match Plans for Employees (SIMPLE) IRA and SIMPLE 401(k) deferral limit and the catch-up limit to 110% of the 2024 contribution limits (indexed for inflation) for employers with 25 or fewer employees. Employers with 26 to 100 employees can offer the higher deferral limits if they provide a 4% matching contribution or a 3% employer contribution.

Employers now can make additional contributions to each employee in the plan, as well. Additional contributions must be made in a uniform manner and can’t exceed the lesser of up to 10% of compensation or $5,000 (indexed for inflation) per employee.

Early withdrawal exceptions. SECURE 2.0 allows penalty-free early withdrawals from qualified retirement plans for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Employees have three years to repay such withdrawals; no additional emergency withdrawals are permitted during the three-year repayment period, except to the extent that any previous withdrawals within that period have been repaid. The withdrawals are otherwise limited to once per year.

Victims of domestic abuse by a spouse or partner also are exempt from early withdrawal penalties for the lesser of $10,000 (indexed for inflation) or 50% of their vested account balances. The law’s detailed definition of domestic abuse includes abuse of a participant’s child or another family member living in the same household. Withdrawals can be repaid over a three-year period, and participants can recover income taxes paid on repaid distributions.

Note: An early withdrawal penalty exception for terminally ill individuals took effect in 2023.

Employer-provided student loan relief. Younger employees with large amounts of student debt have sometimes missed out on their employer’s matching contributions to retirement plans. SECURE 2.0 tackles this catch-22 by allowing these employees to receive matching contributions based on their qualified student loan payments. Employers can make matching contributions to 401(k) plans or SIMPLE IRAs. Note that contributions based on student loan payments must be made available to all match-eligible employees.

Section 529 plan rollovers. Beginning this year, owners of certain 529 plans can transfer unused funds intended for qualified education expenses directly to the plan beneficiary’s Roth IRA without incurring any federal tax or the 10% penalty for nonqualified withdrawals.

A beneficiary’s rollover amount is limited to a lifetime maximum of $35,000, and rollovers are subject to the applicable Roth IRA annual contribution limit. Rollover amounts can’t include contributions made to the plan in the previous five years, and the 529 account must have been maintained for at least 15 years.

Required minimum distributions (RMDs). Designated Roth 401(k) and 403(b) plans provided by employers have been subject to annual RMDs in the same way that traditional 401(k)s are. As of 2024, though, the plans aren’t subject to RMDs until the death of the owner.

Act now

Many employers need to amend their plans due to changes related to SECURE 2.0. Fortunately, they generally have until the end of 2025 to make these amendments as long as they comply by the law’s deadlines. Contact us for additional details.

When it comes to expense reporting, having rigorous financial controls is critical to operating a profitable business. You should monitor expenditures incurred by employees on behalf of the company. This enables your organization to track spending, control costs and maintain accurate financial records.

Establishing and adhering to strong policies, using technology correctly and complying with tax regulations are important ways to ensure accurate expense reports. Here are six tips to help your organization get a better handle on the expense management process.

1. Establish formal expense reporting policies. It’s important to define allowable expenses and set spending limits for every employee. You should also stipulate the required documentation to accompany each expense reimbursement request. Communicate the policy to employees and have them acknowledge their compliance with every expense request they submit.

2. Set deadlines for submission. Employees need to submit expense reimbursement requests in a timely manner. Regular submissions make it easier for employees to track and remember expenses. It also provides them with quicker reimbursements for out-of-pocket expenses.

3. Encourage or require the use of credit or debit cards. Card transactions offer many benefits over cash payments. For instance, they create electronic transaction records and detailed statements for substantiation. Card usage also makes it easier for employees to separate their business and personal expenses, ensuring a more accurate and efficient expense reporting process. Many credit card companies offer potential rewards or cash back that the cardholder (either the employee or the business owner) can later redeem.

4. Require documentation and substantiation. Employees should keep itemized receipts, including paper and digital receipts, and record the business purpose for each expense. For business meetings, this should include the purpose and the people who attended. Mileage logs must include similar details, such as the purpose of each trip and who traveled in the vehicle.

5. Leverage technology. Expense reporting software can automate the receipt capture and expense categorization process and integrate with accounting reporting solutions. This streamlines the reporting process by reducing the paperwork an employee must manage and minimizing the need for manual data entry. It also improves accuracy in expense reporting and enhances compliance.

6. Audit your reporting processes. Careful review of expense reimbursement requests can help identify compliance violations and detect potential fraud. Auditing transactions can also ensure sufficient documentation exists to comply with state and federal tax regulations.

An effective expense reimbursement process depends on policies, technology and oversight. By adopting best practices, organizations can create a robust and efficient reporting process that promotes financial transparency and compliance. Contact us for help reviewing your existing expense reporting process and suggesting ways to improve it.

For employers looking to safeguard their organizations from fraud, payroll is among the most obvious targets they must protect. That’s where the money is, after all. Payroll can stand out as a bright red bullseye for criminals if not carefully guarded.

How bright? In its Occupational Fraud 2024: A Report to the Nations, the Association of Certified Fraud Examiners found that 15% of all occupational fraud schemes in the United States and Canada involve payroll. The report also revealed that, once these crimes are underway, they typically last 18 months before they’re detected, and the average loss is $2,800 a month.

Clearly, the stakes are high. What’s worse, payroll fraud can happen in many ways. Here are five of its most common forms:

1. Workers’ compensation insurance fraud. Employees who are legitimately injured on the job generally are entitled to receive workers’ comp benefits. But some employees fabricate injuries and make fraudulent claims. Crimes of this nature can elevate your insurance premiums and cause substantial out-of-pocket losses for self-insured employers.

To help prevent fraud, establish detailed policies and procedures for handling workers’ comp claims — including how to report injuries. Installing surveillance cameras to capture any workplace injuries may also help.

2. Buddy punching. This term is used to describe when one employee improperly punches a time clock for another employee to inflate hours on a time sheet. It usually means lower productivity and indicates a general culture of dishonesty. Time-tracking apps may help curtail buddy punching to some extent, but employees can still share login credentials and devices to cheat.

Be sure to create, distribute and enforce clear rules about recording time worked. If buddy punching becomes a recurring issue, require workers to verify their identities with ID cards, face recognition or fingerprints. Be sure supervisors are carefully reviewing time sheets and noting suspicious behavior.

3. Bonus and commission fraud. Many employers offer bonuses or commissions for meeting sales goals or other benchmarks. These can be valuable incentives that drive productivity. Unfortunately, they can also tempt dishonest employees to fudge the numbers. The temptation can be particularly great in stressful environments where competition is fierce and goals are tough to achieve.

Providing a level playing field and making goals achievable generally helps tamp down the kind of resentment and desperation that may lead employees to commit this type of fraud. Also, monitor bonuses and commissions paid every payroll period. If any amount seems unusual or excessive, investigate it.

4. Ghost employees. Accounting department staffers, or anyone with access to payroll records, can create “ghost” (nonexistent) employees and start issuing paychecks to them. The checks typically are deposited in accounts set up by the perpetrators. Although these criminals usually invent names for their fictitious employees, they sometimes use identities of former employees to collect wages illegally.

Regularly review payroll records to ensure there aren’t any ghosts on the books. One red flag to look for is unfamiliar names that share personal information with other employees, such as having the same home address or phone number.

5. Expense reimbursement fraud. This is an especially common form of wrongdoing. Some employees may not even think that falsifying expenses for business trips is unethical because they believe “everyone does it.” If you don’t have a detailed expense reimbursement policy that requires, for example, employees to substantiate claims with receipts and obtain manager sign off, establish one immediately.

Expense reimbursement fraud is serious and may get employers — not just their employees — in trouble with taxing authorities. Stay apprised of the latest IRS rules on reimbursing employees’ expenses. We can answer any questions you have about those rules or any aspect of payroll fraud prevention.

One of the goals in creating a comprehensive estate plan is to maintain family harmony after your death. Typically, with an estate plan in place, you have the peace of mind that your declarations will be carried out, as required by law. However, if someone is found to have exerted “undue influence” over your final decisions, a family member may challenge your will.

Defining “undue influence”

Undue influence is an act of persuasion that overcomes the free will and judgment of another person. It’s important to recognize that a certain level of influence is permissible, so long as it doesn’t rise to the level of “undue” influence. For example, there’s nothing inherently wrong with a son who encourages his father to leave him the family vacation home. But if the father was in a vulnerable position — perhaps he was ill or frail and the son was his caregiver — a court might find that he was susceptible to undue influence and that the son improperly influenced him to change his will.

To help avoid undue influence claims and ensure that your wishes are carried out:

Use a revocable trust. Rather than relying on a will alone, create a revocable, or “living,” trust. These trusts don’t go through probate, so they’re more difficult and costly to challenge.

Establish competency. Claims of undue influence often go hand in hand with challenges on grounds of lack of testamentary capacity. Be sure to create your estate plan while you’re in good mental and physical health. Have a physician examine you at or near the time you execute your will and other estate planning documents to ascertain that you’re mentally competent. Establishing that you are “of sound mind and body” when you sign your will can go a long way toward combating an undue influence claim.

Avoid the appearance of undue influence. If you reward someone who’s in a position to influence you, take steps to avoid the appearance of undue influence. Suppose, for example, that you plan to leave a substantial sum to a close friend who acts as your primary caregiver. To avoid a challenge, prepare your will independently — that is, under conditions that are free from interference by all beneficiaries. People who’ll benefit under your estate plan, including family members, shouldn’t be present when you meet with your attorney. Nor should they serve as witnesses — or even be present — when you sign your will and other estate planning documents.

Talk with your family. If you plan to disinherit certain family members, give them reduced shares or give substantial sums to nonfamily members, meet with your family to explain your reasoning. If that’s not possible, state the reasons in your will or include a separate letter expressing your wishes. Family members are less likely to challenge your plan if they understand the rationale behind it.

To deter challenges to your plan, consider including a no-contest clause, which provides that, if a beneficiary challenges your will or trust unsuccessfully, he or she will receive nothing. Keep in mind, however, that you should generally leave something to people who are likely to challenge your plan; otherwise, they have nothing to lose by contesting it.

Fortifying your estate plan

If you have questions regarding undue influence, contact us. We’d be pleased to review your circumstances and help determine if revisions to your estate plan are needed.

Every type of company needs to devise a philosophy, strategy and various policies regarding compensation. Family businesses, however, face additional challenges — largely because they employ both family and nonfamily staff.

If your company is family-owned, you’ve probably encountered some puzzling difficulties in this area. The good news is solutions can be found.

Perspectives to consider

Compensation issues in family businesses are often two-pronged because they can arise both 1) within the family and 2) between family and nonfamily employees. Salary inequities among siblings, for example, can breed resentment and fighting. However, simply paying them all the same salary can also create problems if one works harder and contributes more than the others.

Second, family business owners may feel it’s their prerogative to pay working family members more than their nonfamily counterparts — even if they’re performing the same job. Although owners naturally have the best interests of their loved ones at heart, these decisions may inadvertently lower morale among essential nonfamily employees and risk losing them.

Nonfamily staff may tolerate some preferential treatment for family employees, but they could become disgruntled over untenable differences. For instance, nonfamily employees often reach a breaking point when they feel working family members are underperforming and getting away with it, or when they believe family employees are behaving counterproductively or unethically.

Ideas to ponder

Effectively addressing compensation in a family business calls for a clear, objective understanding of the company’s distinctive traits, culture and strategic goals. A healthy dash of creativity helps, too. There’s no one right way of handling the matter. But there are some commonly used strategies that may be helpful in determining compensation for the two major groups involved.

When it comes to family employees, think beyond salary. Many family businesses intentionally keep salaries for these individuals low and make up the difference in equity. Because working family members are generally in the company for the long haul, they’ll receive increasing benefits as their equity shares grow in value. But you also must ensure their compensation is adequate to meet their lifestyle needs and keep up with inflation.

Incentives are usually a key motivator for family employees. You might consider a combination of short-term rewards paid annually to encourage ongoing accomplishments and long-term rewards to keep them driving the business forward.

On the other hand, nonfamily employees typically recognize that their opportunities for advancement and ownership are generally more limited in a family business. So, higher salaries and a strong benefits package can be important to attracting and retaining top talent.

Another way to keep key nonfamily staff satisfied is by giving them significant financial benefits for staying with the company long term. There are various arrangements to consider, including phantom stock or nonqualified deferred compensation plans.

You can do it

If your family business has been operating for a while, overhauling its approach to compensation may seem overwhelming. Just know that there are ways to tackle the challenges objectively and analytically to arrive at an overall strategy that’s reasonable and equitable for everyone. Our firm can help you identify and quantify all the factors involved.

With school out, you might be hiring your child to work at your company. In addition to giving your son or daughter some business knowledge, you and your child could reap some tax advantages.

Benefits for your child

There are special tax breaks for hiring your offspring if you operate your business as one of the following:

A sole proprietorship,
A partnership owned by both spouses,
A single-member LLC that’s treated as a sole proprietorship for tax purposes, or
An LLC that’s treated as a partnership owned by both spouses.

These entities can hire an owner’s under-age-18 children as full- or part-time employees. The children’s wages then will be exempt from the following federal payroll taxes:

Social Security tax,
Medicare tax, and
Federal unemployment (FUTA) tax (until an employee-child reaches age 21).

In addition, your dependent employee-child’s standard deduction can shelter from federal income tax up to $14,600 of 2024 wages from your business.

Benefits for your business

When hiring your child, you get a business tax deduction for employee wage expense. The deduction reduces your federal income tax bill, your self-employment tax bill and your state income tax bill, if applicable.

Note: There are different rules for corporations. If you operate as a C or S corporation, your child’s wages are subject to Social Security, Medicare and FUTA taxes, like any other employee’s. However, you can deduct your child’s wages as a business expense on your corporation’s tax return, and your child can shelter the wages from federal income tax with the $14,600 standard deduction for single filers.

Traditional and Roth IRAs

No matter what type of business you operate, your child can contribute to an IRA or Roth IRA. With a Roth IRA, contributions are made with after-tax dollars. So, taxes are paid on the front end. After age 59½, the contributions and earnings that have accumulated in the account can be withdrawn free from federal income tax if the account has been open for more than five years.

In contrast, contributions to a traditional IRA are deductible, subject to income limits. So, unlike Roth contributions, deductible contributions to a traditional IRA lower the employee-child’s taxable income.

However, contributing to a Roth IRA is usually a much better idea for a young person than contributing to a traditional IRA for several reasons. Notably, your child probably won’t get any meaningful write-offs from contributing to a traditional IRA because the child’s standard deduction will shelter up to $14,600 of 2024 earned income. Any additional income will likely be taxed at very low rates.

In addition, your child can withdraw all or part of the annual Roth contributions — without any federal income tax or penalty — to pay for college or for any other reason. Of course, even though your child can withdraw Roth contributions without adverse tax consequences, the best strategy is to leave as much of the Roth balance as possible untouched until retirement to accumulate a larger tax-free sum.

The only tax law requirement for your child when making an annual Roth IRA contribution is having earned income for the year that at least equals what’s contributed for that year. There’s no age restriction. For the 2024 tax year, your child can contribute to an IRA or Roth IRA the lesser of:

His or her earned income, or
$7,000.

Making modest Roth contributions can add up over time. For example, suppose your child contributes $1,000 to a Roth IRA each year for four years. The Roth account would be worth about $32,000 in 45 years when he or she is ready to retire, assuming a 5% annual rate of return. If you assume an 8% return, the account would be worth more than three times that amount.

Caveats

Hiring your child can be a tax-smart idea. However, your child’s wages must be reasonable for the work performed. Be sure to maintain the same records as you would for other employees to substantiate the hours worked and duties performed. These include timesheets, job descriptions and W-2 forms. Contact us with any questions you have about employing your child at your small business.

For many businesses, such as retailers, manufacturers and contractors, strict inventory control is central to operations. If you don’t track inventory accurately, you can’t effectively produce goods, meet customer demand and realize profits.

Let’s say you’re performing a year-end inventory count and you come up short. Have you miscounted or have the items been misplaced? Or has someone stolen inventory? A professional fraud expert can help you get to the bottom of such discrepancies.

Assuming an innocent explanation

Before assuming theft, professionals investigate whether missing inventory items were really stolen. Employees might have kept sloppy records or failed to follow proper procedures, resulting in “missing” inventory. For example, a company without a location assignment for each item, an effective method of tracking overflow stock, and a well-run returns system can easily misplace inventory.

If there’s no innocent explanation for inventory shrink, the expert next looks for signs that the environment is conducive to fraud. These might include:

Poor internal controls for purchasing, receiving and cash disbursement,
Reliance on one worker to perform multiple inventory duties, and
Weak management oversight of the inventory function.

If the expert believes inventory could have been stolen, records will generally be combed for evidence. Anything that doesn’t follow established inventory procedures — such as large gross margin decreases — could be a red flag.

Finding fraud evidence where red flags fly

Inventory fraud may leave a paper or electronic trail, so fraud professionals typically review journal entries for unusual patterns. An entry recording a physical count adjustment made during a period when no count was taken warrants investigation. An expert might then trace unusual entries to supporting documents.

Vendor lists also could show suspicious patterns, such as post office box addresses substituting for street addresses, vendors with several addresses and names closely resembling (but different from) those of established vendors. Even if they find no evidence of fake vendors, fraud professionals usually look at vendor invoices and purchase orders for anomalies such as unusually large invoices or alleged purchases that don’t involve delivery of goods. They also familiarize themselves with the cost, timing and purpose of routine purchases and flag any that deviate from the norm.

Confirming physical inventory

It’s important to confirm physical inventory as well. A fraud expert sometimes recommends hiring an outside firm to perform a count and value inventory to minimize risk that the fraud perpetrator will be on the team.

Whether employees or inventory specialists perform the job, fraud professionals carefully observe warehouse activity once employees realize a count is imminent. Thieves may attempt to shift inventory from another location to substitute for missing items they know will be discovered.

Automating your inventory

To help prevent inventory shrink by employees and other parties, automate your inventory control. If you don’t already use it, know that the technology is relatively affordable (even for small businesses), and that it costs much less than potential fraud losses. Contact us for vendor suggestions.

Whether hiring contractors, buying equipment or paying vendors, many businesses struggle with the procurement process. Here are some tips for streamlining your company’s purchase order (PO) approval process.

Benefits of a formal workflow

POs create legally binding agreements between buyers and vendors. For example, your business might outsource a function, such as payroll or marketing, to a third party. A systematic approval process helps your business track and control its spending.

PO approvals may involve users, purchasing managers and executives. Some companies allow low-level employees to approve orders, but most have controls in place that require managers or executives to approve orders over a predetermined dollar amount.

It’s important to use a formal order approval process. Approving orders up front helps prevent contract disputes and terminations. For instance, the procurement team may discover early on that a potential vendor lacks critical security or industry compliance to fulfill a contract. It also helps decision makers and auditors understand how business units are spending money. If your business has a standardized, automated approval process, it can eliminate missing information and minimize delays.

Steps in the approval process

The approval process should start with a PO request from a business unit for specific goods or services. Often, the procurement department provides a list of approved vendors that have already been vetted and have agreed to favorable pricing. If the employee selects a preapproved vendor, the approval process generally is expedited.

After the PO request form has been completed, it goes to the procurement department. The team reviews the request to make sure they have all the required information. Approved vendors submit a price based on the requirements. New vendors will be vetted by the procurement team. Additional information — such as proof of insurance or tax identification numbers — may be required for orders from new vendors. In some cases, a request for proposal (RFP) that specifies the requirements of the service or project may be sent to the vendor.

Once all the required information has been collected, the procurement team will either approve or deny the request. Denied requests should provide an explanation, including what additional steps are needed for approval, and a deadline for returning the request. Approved requests are sent to final decision makers for their sign off. Then a PO is issued with an assigned number.

When goods are delivered and inspected, the receiving department will match the PO number to the bill of lading. And the payables department will match the PO number to the vendor’s invoice and voucher to properly record the order in the accounting system. This workflow helps ensure that spending complies with the PO approval process, invoices aren’t paid twice or overlooked, and costs are allocated to the correct business unit.

Vetting your process

Has your business outgrown its existing PO approval process? Some startups can get by with manual spreadsheet approvals. But, as your business grows, you may decide to automate the process using a software as a service (SaaS) program. Contact us for help streamlining your PO approval process. We can help evaluate your current procedures and set up performance metrics, such as average approval time and the percentage of denied requests, to determine areas for improvement.

If your organization has struggled to accurately forecast and manage the costs of its health care benefits, you’re not alone. Global HR consultancy Mercer released a report in May entitled The CFO perspective on health, which surveyed the CFOs and other finance/accounting employees with health budget oversight at 80 employers between February and March of this year.

Of those respondents with 500 or more employees, 72% said their health care benefits costs were less predictable than other expenses. What’s more, 67% reported that health care benefits costs are a “significant” or “very significant” concern in comparison with other operating expenses.

2 critical factors

So, it’s fairly clear that those in leadership positions at many, if not most, employers are well aware of the challenge of containing these costs. But how do you do it?

The precise answer depends on the defining characteristics of your organization. But, in general, managing health care benefits costs can be made easier by learning more about two critical factors: your workforce and the health care benefits marketplace.

Starting with the first point, your optimal plan design should be driven by the size, demographics and needs of your workforce. Rather than relying on vendor-provided materials, actively manage communications with employees regarding their health care and wellness-related benefits. Determine which offerings are truly valued and which ones aren’t.

If you haven’t already, explore the feasibility of a wellness program to promote healthier diet and lifestyle choices. Invest in employee education so your plan participants can make more cost-effective health care decisions. Many employers in recent years have turned to high-deductible health plans coupled with Health Savings Accounts to shift some of the cost burden to employees.

As you study your plan design, keep in mind that good data matters. Employers can apply analytics to just about everything these days — including health care coverage. Measure the financial impacts of gaps between benefits offered and those employees actually use. Then, appropriately adjust your plan design to close these costly gaps.

Potential contributors

The second point — that is, the health care benefits marketplace — can be challenging to get a handle on. There are a wide variety of providers, plans and programs out there. Many companies engage a consultant to provide an independent return-on-investment analysis of an existing benefits package and suggest some cost-effective adjustments. Doing so will entail some expense, but an external expert’s perspective could help you save money in the long run.

Another service that a consultant may be able to provide is an audit of medical claims payments and pharmacy benefits management services. Mistakes happen — and fraud is always a possibility. By re-evaluating claims and pharmacy services, you can identify whether you’re losing money to inaccuracies or even wrongdoing.

Regarding pharmacy benefits, as the old saying goes, “Everything is negotiable.” The next time your pharmacy coverage contract comes up for renewal, have an honest discussion with your vendor rep about whether you can get a better deal. If not, it may be time to meet with one or more of the provider’s competitors.

The more you know

The truth is many employers are concerned about the unpredictability and rising nature of health care benefits costs. Gathering data points about your workforce and getting a strong grasp of the current state of the marketplace are good ways to begin addressing the problem. For help identifying, quantifying and analyzing your organization’s costs in this area, contact us.

When it comes to digital assets, it’s important to know that, unlike many assets, they leave little to no “paper trail.” Thus, unless your estate plan specifically provides for them, it may be difficult for your family to access these assets — or even know that they exist. Let’s take a look at how to properly address digital assets in your estate plan.

Inventory your assets

Make a comprehensive list of all your digital assets, together with website addresses, usernames, passwords and account numbers. These assets may include:

Email accounts,
Social media accounts,
Digital photo, video, music and book collections,
Online banking and brokerage accounts, and
Online reward programs and points, such as credit card rewards or frequent flyer miles.

Be sure to provide instructions for accessing them, particularly if they’re password protected or encrypted. Store the list in a secure location and be sure your family knows where to find it. Consider using an online password management solution to simplify the process.

Authorize access

Providing your representatives with login credentials to access your digital assets is critical, but it’s likely not enough. They’ll also need legal consent to gain entrance to and manage your accounts.

Absent such consent, they may violate federal or state data privacy laws or, in the case of financial accounts, even be guilty of theft or misappropriation. It’s unlikely that the authorities would prosecute your representatives for unauthorized access to your accounts, but it’s advisable to ensure they have explicit authority rather than rely on their possession of your login credentials.

Follow federal laws

For digital assets that you own, such as bank and investment accounts, your estate plan can provide for the transfer of assets to your heirs. But many types of digital assets — including email and social media accounts, as well as certain music and book collections — are licensed rather than owned. These assets generally are governed by terms of service agreements (TOSAs), which typically provide that the licenses are nontransferable and terminate on your death.

Fortunately, there are laws that govern access to digital assets in the event of your death or incapacity. Most states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which provides a three-tier framework for accessing and managing your digital assets:

The act gives priority to providers’ online tools for handling the accounts of customers who die or become incapacitated. For example, Google provides an “Inactive Account Manager,” which allows you to designate someone to access and manage your account. Similarly, Facebook allows users to determine whether their accounts will be deleted or memorialized when they die and to designate a “legacy contact” to maintain their memorial pages.
If the online provider doesn’t offer such tools, or if you don’t use them, then access to digital assets is governed by provisions in your will, trust, power of attorney or other estate planning document.
If you don’t grant authority to your representatives in your estate plan, then access to digital assets is governed by the provider’s TOSA.

To ensure that your loved ones have access to your digital assets, use providers’ online tools or include explicit authority in your estate plan. If you have questions on how to properly address your digital assets in your estate plan, please contact us.

Yeo & Yeo recently hosted a comprehensive webinar titled “Unlocking Compliance: Mastering DOL’s Final Overtime Rules Through Job Duties Analysis,” on June 12, 2024, featuring Mildred Kress from the U.S. Department of Labor. The session offered valuable insights into the latest updates on overtime exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act (FLSA), outlining critical changes and essential actions for ensuring compliance.

During the webinar, we gathered questions from the Q&A session and have compiled them along with the answers we provided during the event and those we’ve researched further. Some answers are direct quotes from the presentation. We will continue to update this Q&A as new information becomes available. View all of our resources on the webinar here.

Question 1

Our church has a youth minister who is paid a salary of $40,000. As part of their duties, they will attend a week-long (six days) church camp out of state, supervising youth during the summer or perhaps a mission trip with the youth (4 days). They are on call 24 hours a day for emergencies and supervise the youth during the entire time of the camp or mission event. What must the youth minister be paid? Can they be given compensatory time off in lieu of overtime? The youth minister normally works 35 hours per week.

A: For such a specific question, you should reach out to the Department of Labor.

Call or visit the nearest WHD Office

Visit the WHD homepages at: https://www.dol.gov/agencies/whd
The WHD toll-free information and helpline at 1-866-4US-WAGE (1-866-487-9243)

In general, if it is determined that the youth pastor qualifies as an exempt employee (all three qualifications need to be met- salary threshold, salary basis, and duties test), then you are allowed to let him comp his time.

If this employee is non-exempt and is “on-call” outside of regular working time, then usually, wages are paid when he is called to work. Some companies pay an additional “on-call” payment to their employees in addition to the hours worked.

Question 2

Why wouldn’t a highly compensated employee be exempt simply because they earn more than $684…why is there a second level?

A: I don’t know the reasoning behind the government’s creation of this rule, but if I had to guess, they were trying to prevent someone from receiving high compensation without working. For example, an owner’s wife is on payroll to receive money but never steps foot in the business. To be exempt from overtime, all three levels need to be met – salary level, salary basis, and job duties.

Highly Compensated Employees (as of July 1, 2024)

The regulations contain a special rule for “highly compensated” employees who are paid total annual compensation of $132,964 or more. A highly compensated employee is deemed exempt under Section 13(a)(1) if:

The employee earns a total annual compensation of $132,964 or more, which includes at least $844 per week paid on a salary or fee basis;
The employee’s primary duty includes performing office or non-manual work and
The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.

Thus, for example, an employee may qualify as an exempt highly compensated executive if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive.

Question 3

If someone under the new salary cap is not a full-time employee (they work 30 hours/week), would they get overtime pay over 40 or 30 hours?

A: 40 hours plus is the overtime threshold.

Question 4

Are salaried employees required to take a lunch break?

A: No, salaried employees are not required a lunch break under federal law.

Question 5

Do you believe that this will get tied up in the courts before the 1st of either July 1st or 1/1/25?

A: We do not know – we would find as soon as the public does. As of today, there is still no word.

Question 6

Are there some exceptions to being under the FLSA for certain nonprofit organizations?

A: Depends on what the organization is doing – run it by the DOL office.

Question 7

If an employee falls under one of the “exempt” categories, then they don’t have to have their salary adjusted to over the threshold? And if that is true, would an interior designer be considered a “Creative Professional”?

A: Yes – an interior designer would most likely be considered a creative professional; contact the office for further details

Question 8

If I have a facility director who makes under the $684 per week test but is salaried, this staff member would NOT be exempt from overtime, correct? Yes, that is correct. Another example: If I have a teacher who makes under the $684 per week test but is salaried, this staff member would be exempt from overtime, correct?

A: Teachers are exempt; Correct, under $684 would not be exempt.

Question 9

Will you be sharing the formula for total compensation?

A: Commissions, incentive pay, or non-discretionary-bonuses can only be 10% of the threshold – the employer needs to pay 90% of the threshold.

Question 10

Do church employees have to make the min. salary?

A: It would have to be specifically looked at, being it is a nonprofit

Many nonprofit organizations are covered by the FLSA. The final rule may impact nonprofit organizations with an annual volume of sales or business done of at least $500,000. In determining coverage, only activities performed for a business purpose are considered. Charitable, religious, educational, or similar activities of organizations operated on a nonprofit basis where such activities are not in substantial competition with other businesses are not considered. Employees of employers who are not covered by the FLSA on an enterprise basis may still be entitled to its protections if they are individually engaged in interstate commerce.

The Department’s EAP regulations have never had special rules for nonprofit or charitable organizations, and employees of these organizations are subject to the EAP exemption if they satisfy the same salary level, salary basis, and duties tests as other employees.

Question 11

Will employees need to punch a time clock?

A: The employer has record-keeping responsibilities once the employee is considered exempt.

Employees entitled to overtime pay are not required to punch a time clock. The FLSA requires that employers keep certain records for each nonexempt employee so those workers can be sure that they get paid what they earn and are owed, including time and one-half of their regular rate of pay when they work more than 40 hours in a workweek. Employers have options for accounting for employees’ work hours, some of which are very low-cost and burdensome. There is no particular form or order of records required, and employers may choose how to record hours worked for overtime-eligible employees. For example, when an employee works a fixed schedule that rarely varies, the employer may simply keep a record of the employee’s regular schedule and then record any variations from that schedule (“exceptions reporting”).

https://www.dol.gov/agencies/whd/fact-sheets/21-flsa-recordkeeping

Question 12

Can I require my salaried EE’s who don’t hit the salary threshold to track hours on paper and submit that tracking weekly?

A: If you have a record, that will work –

Unlike other employees, employers are not required to keep records related to the daily or weekly work time performed by employees who are exempt employees. However, employers must still keep certain records related to the identity and payment of these employees, as described in the Department’s recordkeeping regulations at 29 CFR part 516.

Question 13

What about for seasonal employees? Are there particular rules for them?

A: It might depend on the specific seasonal work – but don’t know of anything specific related to seasonal employees.

Question 14

Regarding exempt, there is some flexibility with employees such as working more or less than 40 hours to perform a job. If they revert to hourly, that flexibility is lost, correct?

A: They can work more or less than 40 hours, they will just need to be paid overtime for anything over 40 hours

Question 15

Does our first payroll of July, July 3, have to be paid at the new, salary rate even though the dates paid are for June 20-26? Or are the dates worked in July the beginning of the new, salary rate? Thus, our first new, salary rate paid out on July 11th, our second payroll of the month?

A: The latter would be correct. The dates worked starting in July would be affected by the new salary threshold. The dates worked in June would still be subject to the current pay requirement.

The next quarterly estimated tax payment deadline is June 17 for individuals and businesses, so it’s a good time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum amount of estimated tax without triggering the penalty for underpayment of estimated tax.

Four possible options

The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under one of the following four methods:

Current year method. Under this option, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of four installment due dates. The corporate due dates are generally April 15, June 15, September 15 and December 15. If a due date falls on a Saturday, Sunday or legal holiday, the payment is due the following business day.
Preceding year method. Under this option, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the return for the preceding tax year by each of four installment due dates. (Note, however, that for 2022, certain corporations can only use the preceding year method to determine their first required installment payment. This restriction is placed on corporations with taxable income of $1 million or more in any of the last three tax years.) In addition, this method isn’t available to corporations with a tax return that was for less than 12 months or a corporation that didn’t file a preceding tax year return that showed some tax liability.
Annualized income method. Under this option, a corporation can avoid the estimated tax underpayment penalty if it pays its “annualized tax” in quarterly installments. The annualized tax is computed on the basis of the corporation’s taxable income for the months in the tax year ending before the due date of the installment and assumes income will be received at the same rate over the full year.
Seasonal income method. Under this option, corporations with recurring seasonal patterns of taxable income can annualize income by assuming income earned in the current year is earned in the same pattern as in preceding years. There’s a somewhat complicated mathematical test that corporations must pass in order to establish that they meet the threshold and therefore qualify to use this method. If you think your corporation might qualify for this method, don’t hesitate to ask for our assistance in determining if it does.

Also, note that a corporation can switch among the four methods during a given tax year.

We can examine whether your corporation’s tax bill can be reduced. If you’d like to discuss this matter further, contact us.

Reliable financial reporting is key to any company’s success. Here’s why your business should at least consider investing in audited financial statements.

Weighing the differences

Most businesses maintain an in-house accounting system to manage their financials. The documents your staff prepares through your in-house accounting system are called “internally prepared financial statements.”

In many cases, internal financials are perfectly functional for the day-to-day operational needs of a small business. But they usually don’t follow every reporting standard prescribed under U.S. Generally Accepted Accounting Principles (GAAP).

When an external CPA audits your financial statements, he or she will examine various accounting documents to check whether you’re following GAAP and, afterward, offer an opinion on your statements. If the auditor issues an “unqualified” opinion, he or she agrees with the methods your in-house team used to prepare your financial statements.

If a “qualified” opinion is issued, it usually means the auditor has identified one or more GAAP reporting methods that your company hasn’t followed. This doesn’t mean your financial statements are inaccurate; it just signifies that you didn’t prepare them according to GAAP. (There may be other reasons for a qualified opinion as well.)

Looking at both sides

Who cares whether you’re in compliance with GAAP? Lenders, investors and other external stakeholders do. For example, banks may require you provide audited financial statements before they’ll approve loans, and sureties usually require them for bonding purposes. Some governmental agencies also require companies to provide audited statements to bid on contracts.

You may even save money. Small businesses with audited statements typically receive lower interest rates on loans than companies without audited statements. In addition, because of the extra steps an external auditor takes, audited financial statements are more likely than internally prepared statements to be free of reporting mistakes, such as data entry errors. For example, if your balance sheet shows that you bought a piece of equipment for $100,000, your auditor will double-check that figure by looking at original receipts.

Although audited financial statements can provide the benefits mentioned, they’re not something your business should leap into without foresight. In addition to requiring a financial investment, an outside audit will ask you and your employees to invest a substantial amount of time and energy toward its completion. You’ll need to gather and provide extensive documentation and even submit to interviews.

What’s right for your business?

If external stakeholders don’t require your company to provide audited financial statements, your CPA offers other lower-cost options, such as compiled or reviewed statements, which can help you gain insight into your company’s financial health. Contact us to determine what’s appropriate for your situation. If you decide you want an external audit of your financial statements, we’ll discuss timelines and responsibilities before fieldwork begins.

One of the types of occupational fraud schemes that became more costly for employers since the beginning of the COVID-19 pandemic in 2020 is expense reimbursement fraud. According to the Association of Certified Fraud Examiners’ (ACFE’s) latest report, this type of employee scheme now ranks fourth after corruption, billing schemes and noncash fraud.

Although the $50,000 median loss of expense reimbursement scams is less than that of some other frauds, it’s also very commonly perpetrated. According to software company Emburse, nearly 25% of 1,000 workers surveyed admitted to passing off personal purchases as work-related buys. If you let internal controls slip a bit during the pandemic and you’re seeing more exaggerated or falsified expense reports, it’s time to reinforce your fraud deterrents.

How they do it

Employees often cheat on their reimbursement reports by inventing expenses. They might, for example, stick your company with the bill for a lavish dinner with friends or expense hotel costs accrued while extending a business trip for leisure. Employees may also exaggerate the amount of legitimate expenses by, say, claiming larger service tips than they actually paid.

Other common reimbursement fraud schemes include submitting bills for trips that were never taken (such as canceled airline tickets or refunded hotel registration), claims for items employees didn’t purchase, inflated mileage totals and bills for nonreimbursable expenses, such as alcohol or leisure activity tickets. Some employees are habitual cheaters who stock up on blank receipts from cab companies and restaurants to submit with their phony expense reports.

How to stop them

Larger organizations (with more than 100 employees) are actually more likely to suffer from reimbursement fraud than smaller ones, according to the ACFE. However, any employer without strictly adhered to submission and approval rules can become a victim.

To prevent employees from cheating your expense reimbursement system:

Develop a policy for expense reimbursement that, for example, requires original receipts and documentation for expenses over a certain amount. Mandate that every employee read and sign the policy.
Make supervisors accountable for approving and verifying expenses. They should scrutinize suspicious items and any reports containing multiple expenses that fall just below the amount requiring documentation.
Regularly verify that employee credit card charges (if applicable) haven’t been canceled and that balances are being paid in full.
Establish a confidential fraud hotline if you haven’t already. Employees who know about cheating colleagues may not report them unless they have an anonymous mechanism to do so.

Make sure managers and executives are held to the same rules as other employees. And if you find that an employee has been submitting false claims, take action. This may include termination of employment and criminal charges. Consult with your attorney.

Vulnerable industries

Finally, organizations in certain industries are more likely to suffer losses from expense reimbursement schemes. According to the ACFE report, these include the construction, manufacturing, health care, education and not-for-profit sectors. For suggestions on preventing and detecting reimbursement fraud, contact us.

The IRS recently released guidance providing the 2025 inflation-adjusted amounts for Health Savings Accounts (HSAs). These amounts are adjusted each year, based on inflation, and the adjustments are announced earlier in the year than other inflation-adjusted amounts, which allows employers to get ready for the next year.

Fundamentals of HSAs

An HSA is a trust created or organized exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high-deductible health plan (HDHP). In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for 2025

In Revenue Procedure 2024-25, the IRS released the 2025 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limits. For calendar year 2025, the annual contribution limit for an individual with self-only coverage under an HDHP will be $4,300. For an individual with family coverage, the amount will be $8,550. These are up from $4,150 and $8,300, respectively, in 2024.

In addition, for both 2024 and 2025, there’s a $1,000 catch-up contribution amount for those who are age 55 or older by the end of the tax year.

High-deductible health plan limits. For calendar year 2025, an HDHP will be a health plan with an annual deductible that isn’t less than $1,650 for self-only coverage or $3,300 for family coverage (these amounts are $1,600 and $3,200 for 2024). In addition, annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) won’t be able to exceed $8,300 for self-only coverage or $16,600 for family coverage (up from $8,050 and $16,100, respectively, for 2024).

Heath Reimbursement Arrangements

The IRS also announced an inflation-adjusted amount for Health Reimbursement Arrangements (HRAs). An HRA must receive contributions from an eligible individual (employers can’t contribute). Contributions aren’t included in income, and HRA reimbursements used to pay eligible medical expenses aren’t taxed. In 2025, the maximum amount that may be made newly available for the plan year for an excepted benefit HRA will be $2,150 (up from $2,100 in 2024).

Collect the benefits

There are a variety of benefits to HSAs that employers and employees appreciate. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Many employers find it to be a fringe benefit that attracts and retains employees. If you have questions about HSAs at your business, contact us.