Two Estate Planning Documents Working in Tandem: A Living Trust and a Pour-over Will

At the very least, your estate plan should include a legally valid will governing the disposition of assets upon your death. But comprehensive estate planning often goes much further. For instance, you may provide for transfers of assets to a living trust (also known as a revocable trust) to supplement your will. For many, the best part of using a living trust is that the trust assets don’t have to pass through probate.

You can take an additional step by creating a pour-over will. In a nutshell, a pour-over will specifies how assets you didn’t transfer to a living trust during your life will be transferred at death.

Complementary documents

As its name implies, any property that isn’t specifically mentioned in your will is “poured over” into your living trust after your death. The trustee then distributes the assets to the beneficiaries under the trust’s terms.

The main purpose of a pour-over will is to maximize the benefits of a living trust. But attorneys also tout the merits of using a single legal document — a living trust — as the sole guiding force for an estate plan.

To this end, a pour-over will serves as a conduit for any assets that aren’t already in the name of the trust or otherwise distributed. The assets will be distributed to the trust.

This setup offers the following benefits:

Convenience. It’s easier to have one document controlling the assets than it is to “mix and match.” With a pour-over will, it’s clear that everything goes to the trust, and then the trust document is used to determine who gets what.

Completeness. Generally, everyone maintains some assets outside of a living trust. A pour-over will addresses any items that have fallen through the cracks or that have been purposely omitted.

Privacy. In addition to the convenience of avoiding probate for the assets that are titled in the name of the trust, this type of setup helps to keep a measure of privacy that isn’t available when assets are passed directly through a regular will.

There is, however, one disadvantage to consider. As with any will, your executor must handle specific bequests included in the will, as well as the assets being transferred to the trust through the pour-over provision, before the trustee takes over. (Exceptions for pour-over wills may apply in certain states.) While this may take months to complete, property transferred directly to a living trust can be distributed within weeks of the testator’s death.

The role of trustee

After the executor transfers the assets to the trust, it’s up to the trustee to do the heavy lifting. The executor and trustee may be the same person and, in fact, they often are.

The responsibilities of a trustee are similar to those of an executor with one critical difference: they extend only to the trust assets. The trustee then adheres to the terms of the trust.

Account for all your assets

The benefits of using a living trust are many. Pairing it with a pour-over will may help wrangle any loose assets that you purposely (or inadvertently) didn’t transfer to the living trust. Your attorney can provide more information.

Given the pervasiveness of technology in the business world today, most companies are sitting on treasure troves of sensitive data that could be abducted, exploited, corrupted or destroyed. Of course, there’s the clear and present danger of external parties hacking into your network to do it harm. But there are also internal risks — namely, your “privileged users.”

Simply defined, privileged users are people with elevated cybersecurity access to your business’s enterprise systems and sensitive data. They typically include members of the IT department, who need to be able to reach every nook and cranny of your network to install upgrades and fix problems. However, privileged users also may include those in leadership positions, accounting and financial staff, and even independent contractors brought in to help you with technology-related issues.

What could go wrong?

Assuming your company follows a careful hiring process, most of your privileged users are likely hardworking employees who take their cybersecurity clearances seriously.
Unfortunately, sometimes disgruntled or unethical employees or contractors use their access to perpetrate fraud, intellectual property theft or sabotage. And they don’t always act alone. Third parties, such as competitors, could try to recruit privileged users to steal trade secrets. Or employees could collude with hackers to compromise a company’s network in a ransomware scheme.

How can you protect yourself?

To best protect your business, you may want to implement a formal privileged user policy. This is essentially a set of rules and procedures governing who gets to be a privileged user, precisely what kind of access each such user is allowed, and how your company tracks and revokes privileged-user status.

When developing and enforcing the policy, you’ll first need to identify who your privileged users are and what specific security clearances each one needs. A good way to start is to list the privileges required for every position and then compare that list to a separate record of privileges that each employee currently has. What makes sense? What doesn’t? When in doubt whether someone needs a certain type of access, it’s generally best to err on the side of caution.

Also, establish an “upgrading” process under the policy. Only trusted and qualified managers or supervisors should have the power to upgrade or reinstate an employee’s privileges, perhaps in consultation with the leadership team. Use technology to help standardize and track requests and approvals. For sensitive systems and applications, such as those that store customer and financial data, consider requiring two levels of approval to elevate a user’s privileges.

In addition, your privileged user policy should include stipulations to carefully monitor user activity. Observe and track how employees use their privileges. Let’s say a salesperson repeatedly accesses customer data for a region that the person isn’t responsible for. Have the sales manager inquire why. Subtly reminding employees that the company is aware of their tech-related activities is a good way to help deter fraud and unethical behavior.

Another important aspect of the policy is how you revoke privileges and remove dormant accounts. When employees leave the company, or independent contractors end their engagements, privileged access should be revoked immediately. Keep clear records of such actions. If a previously deactivated account somehow shows signs of activity, block access right away and investigate how and why it’s come back to life.

Do you know?

Every business should be able to definitively say who is a privileged user and who isn’t. If there’s any gray area or uncertainty regarding current or former employees or other workers, the security of your data could be severely compromised. And the ramifications, both financially and for your company’s reputation, are potentially very serious.
© 2023

If someone were to suggest that you should have your business appraised, you might wonder whether the person was subtly suggesting that you retire and sell the company.

Seriously though, a valuation can serve many purposes other than preparing your business for sale so you can head to the beach. Think of it as a checkup that can help you better plan for the future.

Strategic planning

Today’s economy presents both challenges and opportunities for companies across the country. Chief among the challenges is obtaining financing when necessary — interest rates have risen, inflation is still a concern and many commercial lenders are imposing tough standards on borrowers.

A business valuation conducted by an outside expert can help you present timely, in-depth financial data to lenders. The appraisal will not only help them better understand the current state of your business, but also demonstrate how you expect your company to grow. For example, the discounted cash flow section of a valuation report can show how expected future cash flows are projected to increase in value.

In addition, a valuator can examine and state an opinion on company-specific factors such as:

Your leadership team’s awareness of market conditions,
What specific risks you face, and
Your contingency planning efforts to mitigate these risks.

As you go through the valuation process, you may even recognize some of your business’s weaknesses and, in turn, be able to address those shortcomings in strategic planning.

Acquisitions, sales and gifts

There’s no getting around the fact that, in many cases, the primary reason for getting a valuation is to prepare for a transfer of business interests of some variety — be it an acquisition, sale or gift. Even if you’re not ready to make a move like this right now, an appraiser can help you get a better sense of when the optimal time might be.

If you’re able to buy out a competitor or a strategically favorable business, a valuation should play a critical role in your due diligence. When negotiating the final sale price, an appraiser can scrutinize the seller’s asking price, including the reasonableness of cash flow and risk assumptions.

If you’re thinking about selling, most appraisers subscribe to transaction databases that report the recent sale prices of similar private businesses. A valuator also can estimate how much you’d net from a deal after taxes, as well as brainstorm creative deal structures that minimize taxes, provide you with income to fund retirement and meet other objectives.

In the eyes of a potential buyer, a formal appraisal adds credibility to your asking price as well. And if you want to gift business interests to the next generation in your family, a written appraisal is a must-have to withstand IRS scrutiny.

Going the extra mile

You probably have plenty of other things on your plate as you work hard to keep your business competitive. But obtaining an appraisal is a savvy way to go the extra mile to get all the information you need to wisely plan for the future. We can support your company throughout the valuation process and help you make the most of the information you receive.

Business merger and acquisition (M&A) transactions have significant financial reporting implications. Notably, the company’s balance sheet will look markedly different than it did before the business combination. Here’s some guidance on reporting business combinations under U.S. Generally Accepted Accounting Principles (GAAP).

Allocating the purchase price

GAAP requires a buyer to allocate the purchase price to all acquired assets and liabilities based on their fair values. This process starts by estimating a cash equivalent purchase price.

If a buyer pays 100% cash up front, the purchase price is already at a cash equivalent value. But the cash equivalent price is less clear if a seller accepts noncash terms, such as an earnout that’s contingent on the acquired entity’s future performance or stock in the newly formed entity.

The next step is to identify all tangible and intangible assets and liabilities acquired in the business combination. The seller’s presale balance sheet will report most tangible assets and liabilities, including inventory, equipment and payables. However, intangibles are reported only if they were previously purchased by the seller. Most intangibles are generated in-house, so they’re rarely included on the seller’s balance sheet.

Assigning fair value

Acquired assets and liabilities are then added to the buyer’s balance sheet, based on their fair values on the acquisition date. The difference between the sum of these fair values and the purchase price is reported as goodwill.

Goodwill and other indefinite-lived intangibles — such as brand names and in-process research and development — usually aren’t amortized for GAAP purposes. Instead, companies generally must test goodwill for impairment each year. Impairment testing also may be necessary when certain triggering events happen. Examples of triggering events include the loss of a major customer or enactment of unfavorable government regulations. If a borrower reports an impairment loss, it could mean that the business combination has failed to achieve management’s expectations.

Rather than test for impairment, private companies may elect to amortize goodwill straight-line, generally over 10 years. However, companies that elect this alternate method must still test for impairment when certain triggering events occur.

In rare instances, a buyer negotiates a bargain purchase. Here, the fair value of the net assets exceeds the fair value of consideration transfer (the purchase price). Rather than book negative goodwill, the buyer reports a gain from the purchase on the income statement.

Get it right

Accurate purchase price allocations are essential to minimizing write-offs and restatements in subsequent periods. Contact us to get M&A accounting right from the start. We can help ensure your fair value estimates are supported by market data and reliable valuation techniques.

An update to Form I-9, Employment Eligibility Verification, will go into effect on November 1, 2023.

Starting November 1, employers are required to use the 08/01/2023 edition of Form I-9 to verify the identity and employment authorization of their new employees – citizens and non-citizens – in the United States. The new Form I-9 is fillable and downloadable.

Forms that were completed for employees hired before November 1, 2023, are still in compliance.

Attend one of the U.S. Citizenship and Immigration Services’ Form I-9 Overview webinars to learn about Form I-9 requirements, instructions for completing each section, acceptable documents, retention, and storage.

Avoid penalties for I-9 paperwork violations by correctly completing and retaining the new Form I-9 and supporting documentation.

Most leadership teams would likely agree that having well-developed training programs for all positions is integral to their organizations’ success. Yet it’s all too easy to let training slide into obsolescence, sloppiness, or even allow it to vanish entirely when staffing shortages or extreme busyness take hold.

Don’t let it happen. When employees are provided with strong initial training when hired, and ongoing training as needed, it tends to greatly improve morale, productivity, job satisfaction and retention. These are all things that will help your organization fulfill its mission and stay on strong financial footing.

Review strategic objectives

Many employers overlook the fact that creating and maintaining effective training programs is tied to strategic planning. Regularly review your organization’s short- and long-term objectives to identify what your employees really need to know how to do. Examples of strategic objectives include increasing productivity, improving customer satisfaction related to your existing products or services, expanding your product or service lines, and even transforming the organization into something new.

With these objectives clearly articulated, you can then identify the “human capital” implications by answering questions such as:

What kinds of employees will we need immediately and over longer periods to achieve our objectives?
What gaps in skills are impeding our progress?
Where are the gaps the greatest? In other words, which departments or employees should be our top training priorities?
What are the best methods of building the expertise and skills we need?

Current and future needs may run the gamut from narrow technical proficiencies to more general qualities such as creativity, problem-solving abilities and leadership skills. It’s important to distinguish between current and future needs, and to establish a timetable for satisfying them.

In addition, identify staff members who show the greatest potential for development in areas of need. Sit down with these highly valued employees and ask them about their own ambitions and career development needs. You may be able to address their goals with a formal training program, a mentorship or a combination of the two.

Ask your employees

Integrate discussions about training into your performance review process. These talks can be productive because they can reveal specific and timely ways that employees need (or want) to be trained. Supervisors should ask questions such as:

Do you feel fully equipped to do the job we expect you to do?
If not, what training do you need?
Where would you like to see yourself within our organization in five years?
What skills do you believe you’ll need to achieve those career goals?

Some employees may be suited to individualized professional development plans that involve customized training. If you go this route, bear in mind that different people have different learning styles, so be sure to pick training methods that suit the person in question. Also, incorporate performance metrics so the supervisor and employee are on the same page about what needs to be achieved.

Finally, to manage expectations and legal risk, ask the employee to sign a written statement clarifying that completion of an individualized professional development plan isn’t a guarantee of a particular job status or promotion.

Create a fruitful relationship

Both initial and ongoing training are more than just sets of instructions; they’re signs of an employer’s commitment to its employees. By providing both the information and guidance they need, you’ll greatly improve the odds that your employment relationships are fruitful ones.

Recent IRS warnings and announcements regarding the Employee Retention Tax Credit (ERTC) have raised some businesses’ concerns about the validity of their claims for this valuable, but complex, pandemic-related credit — and the potential consequences of an invalid claim. In response, the IRS has rolled out a new process that certain employers can use to withdraw their claims.

Fraudsters jump on the ERTC

The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can file claims until April 15, 2025 (on amended returns), and receive credits worth up to $26,000 per retained employee.

With such potentially large payouts, fraudulent promoters and marketers were quick to rush in with offers to help businesses file claims in exchange for fees in the thousands of dollars or for a percentage of any refunds received. The requirements for the credit are strict, though, and the IRS has found that many of these claims fall short of meeting them.

Invalid claims put taxpayers at risk of liability for credit repayment, penalties and interest, in addition to the promoter’s fees. And promoters may leave out key details, which could lead to what the IRS describes as a “domino effect of tax problems” for unsuspecting employers.

The IRS responds

The wave of fraudulent claims has produced escalating action from the IRS. In July 2023, the agency announced that it was shifting its ERTC review focus to compliance concerns, with intensified audits and criminal investigations of both promoters and businesses filing suspect claims. Two months later, it imposed a moratorium on the processing of new ERTC claims.

The moratorium, prompted by “a flood of ineligible claims,” will last until at least the end of 2023. The processing of legitimate claims filed before September 14 will continue during the moratorium period but at a much slower pace. The IRS has extended the standard processing goal of 90 days to 180 days and potentially far longer for claims flagged for further review or audit.

According to the IRS, though, the moratorium isn’t deterring the scammers. It reports they’ve already revised their pitches, pushing employers that submit ERTC claims to take out costly upfront loans in anticipation of delayed refunds.

Now, the IRS has unveiled a new withdrawal option for eligible employers that filed claims but haven’t yet received, cashed or deposited refunds. Withdrawn claims will be treated as if they were never filed, so taxpayers need not fear repayment, penalties or interest. (The IRS also is developing assistance for employers that were misled into claiming the ERTC and have already received payment.)

The withdrawal option is available if you:

Claimed the credit on an adjusted employment return (for example, Form 941-X),
Filed the adjusted return solely to claim the credit, and
Requested to withdraw your entire ERTC claim.

The exact steps vary depending on your circumstances, including whether you filed your claim yourself or through a payroll provider, have been notified that you’re under audit, or have received a refund check that you haven’t cashed or deposited. Regardless of the applicable procedure, your withdrawal isn’t effective until you receive an acceptance letter from the IRS.

Taxpayers that aren’t eligible for the withdrawal process can reduce or eliminate their ERTC claim by filing an amended return. But you may need to amend your income tax return even if your claim is withdrawn.

Seek help

Refer to the IRS page, Withdraw an Employee Retention Credit (ERC) claim, for resources that include a question-and-answer checklist to help taxpayers understand eligibility and a fact sheet containing details about the withdrawal process.

Throughout its warnings about potential ERTC pitfalls, the IRS has continued to urge taxpayers to consult “trusted tax professionals.” If you’re having second thoughts about your ERTC claim, we can help you review your claim and, if appropriate, properly withdraw it.

The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $168,600 for 2024 (up from $160,200 for 2023). Wages and self-employment income above this threshold aren’t subject to Social Security tax.

Basic details

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.

There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2024, the FICA tax rate for employers will be 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2023).

2024 updates

For 2024, an employee will pay:

6.2% Social Security tax on the first $168,600 of wages (6.2% x $168,600 makes the maximum tax $10,453.20), plus
1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns), plus
2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns).

For 2024, the self-employment tax imposed on self-employed people will be:

12.4% Social Security tax on the first $168,600 of self-employment income, for a maximum tax of $20,906.40 (12.4% x $168,600), plus
2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing separate returns).

Employees with more than one employer

You may have questions if an employee who works for your business has a second job. That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? The answer is no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.

We’re here to help

Do you have questions about payroll tax filing or payments? Contact us. We’ll help ensure you stay in compliance.

Although most tax preparers are ethical and help ensure their clients file timely and accurate tax returns, a small percentage abuse their position of trust. They may, for example, engage in fraudulent activities that harm taxpayers. The IRS has warned about tax “promoters,” which the agency defines as entities that “undermine voluntary compliance by marketing improper methods to reduce the amount of taxes legally owed.” Such promoters can expose businesses and individuals to financial and legal risk.

Wide variety of schemes

Some shady tax preparers and promoters encourage clients to submit fraudulent returns and engage in aggressive tax-avoidance schemes. Some tax schemes that you should be aware of include:

Employee Retention Credit (ERC) claims. In September, the IRS announced an immediate moratorium through at least the end of 2023 on processing new ERC claims due to scams. The ERC is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic. It was also available to businesses that experienced a significant decline in gross receipts. Many taxpayers fell victim to promoters who told them they could qualify for the ERC and now face IRS enforcement actions. So the tax agency has announced a special withdrawal process for those that filed potentially inaccurate ERC claims.

Fuel tax credit claims. The fuel tax credit generally supports off-highway and farming fuel use and encourages businesses to choose renewable resources. To inflate returns, dishonest tax preparers and promoters might encourage taxpayers to claim the credit, reduce their taxable income and receive an inflated refund. Taxpayers told by preparers to claim a credit that isn’t applicable should just say “no.”

Compromise mills. When taxpayers can’t pay their tax debt, they’re allowed to submit an “Offer in Compromise,” to the IRS. This is a request to settle the outstanding amount for less than the stated amount due. Some tax promoters market their ability to secure Offers in Compromise — and charge high fees to “determine” whether a taxpayer qualifies for an offer. Paying such fees to a third party is unnecessary because the IRS provides a free online tool (irs.gov, search for “Offer in Compromise”) that any taxpayer can use to determine eligibility. However, the IRS charges a $205 application fee.

Charitable Remainder Annuity Trust fraud. Charitable Remainder Annuity Trusts (CRATs) enable individuals to donate assets to charity as well as pay income to at least one living beneficiary. After 20 years of payments, or when a beneficiary dies, leftover funds are passed to a qualified charity. Some promoters try to convince taxpayers to establish a CRAT to avoid capital gains on property allocated to the trust account. But incorrect usage of CRATs can expose taxpayers to IRS scrutiny and legal trouble.

In addition to watching out for these schemes, taxpayers should be wary if a preparer charges a fee contingent on the size of a refund. After all, this fee structure provides the preparer with an incentive to artificially inflate tax credits and deductions and underreport income. Tax preparers who don’t want to sign a return or appear to sign with someone else’s information also merit concern.

Choose the right advisor

Some preparers and promoters use the tax code’s complexity to perpetrate scams and charge exaggerated fees. If a tax preparer produces a return that generates a significant refund, includes questionable credits or is overly complex and difficult to understand, clients should question it — and the preparer. The existence of these dishonest tax preparers makes it that much more important to engage honest and experienced ones. Contact us for more information and help.

On February 23, 2023, the Internal Revenue Service released final regulations that lowered the electronic filing threshold for certain information returns from 250 returns to 10 returns. This requirement applies to filings for calendar year 2023 and beyond, i.e., forms that are filed starting in 2024. This regulation includes the total for all aggregated forms filed.

For example, if a company has five employees (W-2s) and five independent contractors (1099-NEC), it must file all returns electronically because it has 10 returns in total.

The regulations affect persons required to file partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns. The final regulations reflect changes made by the Taxpayer First Act (TFA) and are consistent with the TFA’s emphasis on increasing electronic filing.

The e-file threshold no longer applies per form type, but filers with a combined total of 10 or more information returns must file all information returns electronically. (Corrections do not count when totaling the number of forms to file.)

The following information return forms must be added together for this purpose: Form 1042-S, the Form 1094 series, Form 1095-B, Form 1095-C, Form 1097-BTC, Form 1098, Form 1098-C, Form 1098-E, Form 1098-Q, Form 1098-T, the Form 1099 series, Form 3921, Form 3922, the Form 5498 series, Form 8027, and Form W-2G.

Partnerships with more than 100 partners must file information returns electronically regardless of the number of information returns to be filed.
Corrections must be filed in the same format as the original: e-filed or paper filed.

Key applicability dates

Some of the key applicability dates for electronic filing are as follows.

Form 1120 – must be filed during calendar years beginning after December 31, 2023.
Form 1065 – must be filed during calendar years beginning after December 31, 2023.
Forms 1099 series, Form W-2, Form 1095-B, and Form 1095-C – must be filed during calendar years beginning after December 31, 2023 (e.g., 2023 returns required to be filed in 2024).
Form 990 – must be filed for tax years ending on or after February 23, 2023.
Form 990-T – must be filed during calendar years beginning after February 23, 2023.
Forms 1042 and 1042-S by other than financial institutions – must be filed for tax years ending on or after December 31, 2023.
Form 8300 – must be filed during calendar years beginning after December 31, 2023, if a taxpayer is otherwise required to e-file other forms covered by the regulations.

The regulations vastly expand the electronic filing requirement, eliminating paper filings for all but the smallest employers. Those who have been filing on paper now need to move forward with their transition to electronic filing, paying close attention to the aggregation rules and effective dates.

To help with this process, the IRS created a new, free online portal to help businesses file Form 1099 series information returns electronically. Known as the Information Returns Intake System (IRIS), this free electronic filing service is secure and accurate and requires no special software. Though available to any business of any size, IRIS may be especially helpful to any small business that sends their 1099 forms on paper to the IRS.

For more information, refer to the IRS’s E-file Forms 1099 with IRIS. Users must sign up for a Transmitter Control Code (TCC).

The final regulations provide hardship waivers for filers who would experience hardship in complying with the e-filing requirements and administrative exemptions from the e-filing requirements.

Please contact your Yeo & Yeo tax professional if you need assistance with preparing e-file 1099s and W-2s.

The Federal Unemployment Tax Act (FUTA) requires employers to pay taxes based on their employees’ wages. In turn, these taxes fund federal unemployment benefits for eligible workers.

As an employer, if you have at least one employee who works at least 20 weeks per year, or you paid employees at least $1,500 in any quarter, you’re responsible for paying FUTA taxes. Employers are required to pay FUTA tax on amounts up to $7,000 paid to each employee as wages during the calendar year. The rate is 6%, but it can be decreased with a credit that allows eligible employers to pay an effective FUTA tax rate of 0.6%.

If your organization has been operating for any length of time, you’re obviously aware of your obligation to pay FUTA taxes. It may seem like there’s little you can do to control the cost of these taxes, or the unemployment insurance benefits you’re required to provide. However, there may be ways to better manage them. Here are five to consider:

1. Avoid layoffs and retain employees. Employers’ unemployment tax payments are partially based on the number of their employees who file unemployment claims. Thus, layoffs can be particularly costly. If your organization’s staffing needs tend to fluctuate, consider engaging a temporary staffing agency to meet short-term labor needs. Doing so will save you the time and cost of hiring employees only to later lay them off when business slows.

Also, continuously improve your hiring process to find optimal candidates for your organization and its culture. This will help lower turnover and enable you to retain employees. In turn, you’ll have fewer unemployment claims.

2. Train employees thoroughly and appropriately. Generally, workers qualify for unemployment benefits only if they lost their jobs through no fault of their own. But in some cases, even when an employer argues that an employee was fired for poor performance, the worker may still win an unemployment claim if the hearing officer finds that the employer didn’t provide enough training or provided the wrong kind of training.

3. Handle terminations carefully. If you decide to terminate an employee, consider offering severance and outplacement benefits. Doing so may potentially decrease or delay the initiation of unemployment benefits. Outplacement services that help a claimant find new work may also shorten the duration of unemployment benefits.

4. Build an intensive knowledge base of your state’s laws and rules. Eligibility for unemployment benefits is largely determined by the laws and rules of the state in which you operate. Thus, learning as much as you can about them can reveal helpful strategies.

For example, some states allow employers to “buy down” (proactively manage) their unemployment insurance costs. Essentially, this means that employers can acquire all or part of the unemployment benefits charges associated with their accounts.

In states where this is permitted, employers with an assigned experience rating and a history of paying benefits to former employees during that period can start a buydown payment. It’s typically made within 120 days of the beginning of the calendar year when the revised tax rate is effective. Such buydown payment arrangements, however, may come with hefty surcharges.

5. Work closely with a tax professional. Fully understanding the laws, regulations and latest guidance regarding FUTA taxes isn’t easy, even for employers that have been operating for years. And, as mentioned, unemployment benefit claims depend largely on state law. Contact us for further information and state-specific assistance.

Effective October 19, 2023, businesses and individual taxpayers who make payments electronically via the Electronic Federal Tax Payment System (EFTPS) must utilize Multi-Factor Authentication (MFA). The primary goal is to further enhance the website’s security and safeguard against unauthorized access threats.

This change is imperative for all organizations and individuals who make federal tax payments, including those using forms such as 941, 945, 1120, and 990 through the EFTPS website.

Action Required for Seamless EFTPS Use

Following the rollout on October 19, 2023, when you log into the EFTPS site, you will be prompted to register and authenticate through either Login.gov or ID.me. Only then can you proceed with your standard inputs, including your EIN or SSN, PIN, and password.

Your Tax Payment Dates Remain Unchanged

Note that your payments are still due on time, regardless of the website’s availability. If you require an alternative payment method during the MFA setup, you can pay by calling the EFTPS response system at 1.800.555.3453 and following the prompts.

Need Assistance?

For assistance with Login.gov, call the Login.gov help desk at (844) 875-6446.
For help with ID.me, visit help.ID.me.

If you have questions or need further assistance, contact your Yeo & Yeo advisor.

Authentication refers to the process that verifies the identity of a user, system, or device before granting access to data or resources. It’s an essential layer of protection in any network monitoring program.

Choosing a method of authentication is no trivial task. It’s not one-size-fits-all but rather a tailored strategy that considers your unique business needs.

To help you navigate this choice, we’ll delve into six different authentication methods. Each one comes with its strengths and weaknesses, and it’s important to understand them in the context of your business’s operations.

Password-based authentication

Password-based authentication is the most common and simplest authentication method for securing your network. Here, the “password” might be a username-password combination, passcode, or PIN. It’s intuitive, as many users are already familiar with such login methods. However, it’s also the easiest to exploit due to human errors like choosing simple passwords or using the same ones across multiple accounts.

It’s simple and cost-effective to use password-based authentication. However, it’s crucial to enforce strong password policies, like regular changes and complexity requirements, to avoid potential cybersecurity breaches.

Two-factor authentication/multi-factor authentication

Two-factor authentication (2FA) and multi-factor authentication (MFA) are upgrades to password-based security. Two-factor authentication generally involves a password (first factor) plus an additional layer of security (second factor).

A sample MFA process could include a one-time password sent through email or SMS in conjunction with something more secure like a fingerprint scan. Using a combination of security layers can significantly reduce the risk of data and software breaches.

Biometric authentication

Biometric authentication uses unique physical attributes like facial recognition, iris tracking, or fingerprint scanning. Biometric data offers a high security level as it’s unique to each individual and difficult to replicate.

For high-security enterprises, such as defense contractors, biometric authentication may be appropriate. Fingerprint scanning or facial recognition provides secure access to sensitive information.

Single-sign on authentication

Single sign-on (SSO) allows users to log in to multiple applications, software platforms, or websites with one set of credentials, reducing the cognitive load of remembering multiple passwords.

A healthcare company, for instance, might benefit from SSO if it uses several different databases to manage patient information. Because single-sign on places a great deal of emphasis on one set of credentials, malicious actors using AI to find said credentials is particularly concerning.

Token-based authentication

Token-based authentication relies on an authentication token, like a smart card or smartphone, containing the user’s credentials. It’s secure unless the physical token falls into the wrong hands.

Using a smart card with a password can add an extra layer of security to protect sensitive patient or customer data.

Certificate-based authentication

Certificate-based authentication uses digital certificates from a trusted source to verify identity. It’s useful for providing temporary network authentications to contractors or others needing temporary access.

Finding the best authentication fit for your needs

Organizations with sensitive data, highly regulated industries, or dispersed workforces may require advanced authentication processes. On the other hand, smaller organizations with lower budgets may find methods like biometric authentication cost-prohibitive or unnecessary, given the scale of their operations.

Here is a list of considerations you can use to help evaluate the right authentication method(s) for your organization:

Industry: Some sectors, like healthcare and finance, deal with highly sensitive data and face strict compliance requirements, necessitating more robust authentication.
Data sensitivity: The more sensitive the data, the stronger the authentication needed. Consider two-factor or multi-factor authentication if you’re handling high-stakes information.
User tech literacy: If your end user base is not tech-savvy, simpler authentication methods, such as token-based authentication, may be more appropriate.
Budget: While security is paramount, you may be unable to afford advanced biometric solutions, but can be well-served by password-based protocols or two-factor authentication.
Size: Large organizations may require sophisticated, scalable solutions like LDAP or SSO, while smaller ones might get by with simpler methods.

For personalized guidance and assistance in evaluating the best authentication fit for your organization, consider leveraging the knowledge of Yeo & Yeo Technology, a reliable partner in navigating the dynamic landscape of cybersecurity. By collaborating with YYTECH, you can make informed decisions that bolster your defenses against evolving cyber threats, ensuring a secure digital environment for all stakeholders.

Information used in this article was provided by our partners at ConnectWise.

From time to time, owners of closely held businesses might need to advance their companies money to bridge a temporary downturn or provide funds for an expansion or another major purchase. How should those advances be classified under U.S. Generally Accepted Accounting Principles (GAAP)? Depending on the facts and circumstances of the transaction, an advance may be reported as debt or additional paid-in capital.

What are the deciding factors?

When classifying a shareholder advance, it’s important to consider the economic substance of the transaction over its form. The accounting rules lay out the following issues to evaluate when reporting these transactions:

Intent to repay. Open-ended understandings between related parties about repayment imply that an advance is a form of equity. For example, an advance may be classified as a capital contribution if it was extended to save the business from imminent failure and no attempts at repayment have ever been made.

Terms of the advance. An advance is more likely to be treated as bona fide debt if the parties have signed a written promissory note that bears reasonable interest, has a fixed maturity date and a history of periodic loan repayments, and includes some form of collateral. However, if an advance is subordinate to bank debt and other creditors, it’s more likely to qualify as equity.

Ability to repay. This includes the company’s historic and future debt service capacity, as well as its credit standing and ability to secure other forms of financing. The stronger these factors are, the more appropriate it may be to classify the advance as debt.

Third-party reporting. Consistently treating an advance as debt (or equity) on tax returns can provide additional insight into its proper classification.

With shareholder advances, disclosures are key. Under GAAP, you’re required to describe any related-party transactions, including the magnitude and specific line items in the financial statements that are affected. Numerous related-party transactions may necessitate the use of a tabular format to make the footnotes to the financial statements more reader friendly.

Why does it matter?

The proper classification of shareholder advances is especially important when a company has unsecured bank loans or more than one shareholder. It’s also relevant for tax purposes, because advances that are classified as debt typically require imputed interest charges. However, the tax rules don’t always align with GAAP.

To further complicate matters, shareholders sometimes forgive loans or convert them to equity. Reporting these types of transactions can become complex when the fair value of the equity differs from the carrying value of the debt.

Get it right

There isn’t a one-size-fits-all solution for classifying shareholder advances. We can help you address the challenges of reporting these transactions and adequately disclose the details in your financial statements.

One might assume the term “trust fund recovery penalty” has something to do with estate planning. It’s important for business owners and executives to know better.

In point of fact, the trust fund recovery penalty relates to payroll taxes. The IRS uses it to hold accountable “responsible persons” who willfully withhold income and payroll taxes from employees’ wages and fail to remit those taxes to the federal government.

A matter of trust

The trust fund recovery penalty applies to employees’ share of payroll taxes, including withheld federal income taxes and the employee share of Social Security and Medicare taxes.

These monies are considered trust funds because they’re the property of the federal government, held in trust by the employer. The penalty amount is 100% of the unpaid taxes plus interest — it essentially serves as an alternative tax-collection method.

A responsible person

The trust fund recovery penalty is particularly dangerous because it can ensnare persons who ordinarily are protected against personal liability for business debts. As stated in the tax code, the penalty provides that:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

The IRS and courts take a broad view of who may be a responsible person under this provision. It has been interpreted to include a range of individuals, within or outside the business, who possess significant control or influence over the company’s finances.

Whether someone is a responsible person depends on the facts and circumstances of the case, but factors that may support that conclusion include ownership interest, title, check-signing authority, control over bank accounts or payment of debts, hiring and firing authority, control over payroll, and power to make federal tax deposits.

Thus, responsible persons may include shareholders, partners and members of a limited liability company; officers; other employees; and directors. Responsible “persons” can also be payroll service providers and professional employer organizations, including individuals employed by those entities. Outside advisors may be deemed responsible persons as well.

Important note: If several responsible persons are identified, each may be held liable for the full amount of the penalty assessed.

Willful failure

As noted in the quote above, failure to pay trust fund taxes must be willful to trigger the trust fund recovery penalty. The IRS interprets this term broadly to include not only intentional acts, but also reckless disregard of obvious or known risks that taxes won’t be paid. The courts have described various scenarios that reflect a reckless disregard, including:

Relying on statements of a person in control of finances, despite circumstances showing that this person was known to be unreliable,
Failing to investigate or correct mismanagement after receiving notice that taxes weren’t paid, and
Knowing that the company is in financial trouble but continuing to pay other creditors without making reasonable inquiry into the status of payroll taxes.

Simply put, delegating the handling of payroll taxes to a certain individual or outside provider may not be enough to avoid liability.

Risky circumstances

Few business owners or executives wake up one morning and decide to disregard payroll taxes. However, circumstances can develop that put you at risk. We’d be happy to explain the rules further and help you stay in compliance.

Manufacturing 4.0, sometimes called “Industry 4.0,” refers to the digitalization of manufacturing. That means the integration of traditional manufacturing processes and practices with cutting-edge “smart” technology.

How might Manufacturing 4.0 benefit your manufacturing company? According to companies that have already adopted some or all of its technologies and practices, Manufacturing 4.0 can enhance productivity and quality, improve efficiency, minimize costs, and increase workplace safety.

Building blocks of Manufacturing 4.0

Manufacturing 4.0 leverages the latest technological developments, including the Industrial Internet of Things (IIoT), artificial intelligence, blockchain, machine learning, automation, robotics, virtual reality, advanced data analytics and additive manufacturing, such as three-dimensional (3D) printing.

Manufacturers that make the most of these technologies to create smart factories can gain a competitive advantage. Indeed, this became evident during the pandemic and the subsequent supply chain challenges. Manufacturers that had adopted technologies that streamlined and automated the supply chain and allowed them to monitor and operate Internet-connected devices had a definite advantage.

Potential benefits

Industry 4.0’s integration of people, machines and data creates virtually limitless opportunities to improve manufacturing operations. Examples include:

Enhanced productivity. At one time, workers would wait for machines or equipment to break down before repairing or servicing them. This reactive approach led to significant downtime and lost productivity. In response, many manufacturers shifted to a preventive approach, replacing parts or performing maintenance according to a predetermined schedule (for example, every 1,000 hours of machine operation).

A smart factory takes advantage of predictive maintenance: Wireless sensors embedded in manufacturing equipment can alert a technician when service is needed — even if the technician is off-site. It may even be possible, using robotics and artificial intelligence, to teach machines to fix themselves.

Supply chain and logistics flexibility. By taking advantage of interconnected supply chains, manufacturers can track materials and products throughout the process, obtain information about changing conditions (such as weather delays, natural disasters, health risks and political unrest) and make adjustments in real time.

Workplace safety. Manufacturing 4.0 can improve factory safety in several ways. For example, sensors similar to those that notify you of the need for maintenance or repairs can also alert you to potentially dangerous conditions. They can provide warnings or even shut or slow down equipment if a worker enters a hazardous area. Plus, the ability to monitor and operate machinery or equipment remotely minimizes workers’ exposure to risks of injury or, in the case of a pandemic, infection.

Cost savings. Adopting Manufacturing 4.0 technologies can reduce costs in many ways. For example:

Robotics and automation can reduce labor costs and allow the factory to operate 24/7,
Real-time monitoring and quality control can reduce product returns and eliminate waste,
Predictive maintenance can minimize costly repairs and downtime, and
Remote monitoring can reduce accidents and injuries, which reduces costs.

Finally, technologies such as 3D printing can reduce costs by streamlining the manufacturing process and shortening delivery times.

Gauge your readiness

If you’ve yet to take the plunge into Manufacturing 4.0, be sure to gauge just how ready your company is. For example, is your current technology infrastructure able to handle the data storage and processing requirements of today’s smart factory? Is your company’s culture amenable to the type of change needed to make the transition? Are you prepared to shift your workforce to the more highly skilled labor required to oversee a smart factory? Are you ready to adapt your product development processes to a more automated environment?

If you answered “yes” to these questions, it may be time to explore the competitive advantages and other benefits Manufacturing 4.0 has to offer. We’re here to help you with analyzing the financial aspects of adopting Manufacturing 4.0.

Ever wonder how IRS examiners know about different industries so they can audit various businesses? They generally do research about specific industries and issues on tax returns by using IRS Audit Techniques Guides (ATGs). A little-known fact is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries, such as construction, aerospace, art galleries, architecture and veterinary medicine. Other guides address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Issues unique to certain taxpayers

IRS auditors need to examine all different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an IRS auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

Updates and revisions

Some guides were written several years ago and others are relatively new. There isn’t a guide for every industry. Here are some of the guide titles that have been revised or added in recent years:

Entertainment Audit Technique Guide (March 2023), which covers income and expenses for performers, producers, directors, technicians and others in the film and recording industries, as well as in live performances;
Capitalization of Tangible Property Audit Technique Guide (September 2022), which addresses potential tax issues involved in capital expenditures and dispositions of property.
Oil and Gas Audit Technique Guide (February 2023), which explains the complex tax issues involved in the exploration, development and production of crude oil and natural gas;
Cost Segregation Audit Technique Guide (June 2022), which provides IRS examiners with an understanding of why and how cost segregation studies are performed in order for businesses to claim refunds related to depreciation deductions.
Attorneys Audit Technique Guide (January 2022), which covers issues including retainers, contingent fees, client trust accounts, travel expenses and more;
Child Care Provider Audit Technique Guide (January 2022), which enables IRS examiners to audit businesses that provide care in homes or day care centers; and
Retail Audit Technique Guide (March 2021), which details tax issues unique to businesses that purchase items from a supplier or wholesaler and resell them at a profit.

Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website.

Every fall, CPAs are busy preparing for audit season, which generally runs from January to April each year. This includes meeting with clients, assigning staff and scheduling fieldwork.

Likewise, organizations with calendar year ends should prepare for audit fieldwork. A little prep work this fall can help facilitate the process, minimize adjustments and surprises, and add more value to the audit process. Here are four ways to gear up for your audit.

1. Disclose operational changes

Internal and external changes may bring opportunities and risks that could affect your auditor’s procedures. So it’s important to identify all recent developments of importance and discuss them with your auditor before fieldwork begins.

Examples of noteworthy internal events or transactions include:

Major asset acquisitions or divestitures,
New or expanded product lines,
Relocation or a new lease for commercial space,
Application for new debt (or refinanced debt),
Addition (or retirement) of owners and other key employees,
Losses and business interruptions from natural disasters, fraud or cyberattacks,
Acquisition (or loss) of a key customer or supplier, and
A change in accounting software.

Your auditor will also want to hear about external changes, such as pending lawsuits and tax audits, new sources of competition, and new regulations. When in doubt, tell your auditor.

2. Ask questions about gray areas

All transactions for the year should be entered into your accounting system before the start of fieldwork. But your accounting personnel might not know exactly how to report certain items. There have been several major changes to the federal tax code and U.S. Generally Accepted Accounting Principles (GAAP) in recent years.

If your staff is uncertain how to account for a particular transaction or when a new rule goes into effect, it’s a good idea to ask for help before closing the books at year end. Doing so will help minimize inquiries and the need to make adjusting journal entries during fieldwork.

3. Review last year’s audit

Start by looking at last year’s adjusting journal entries and management points. You should have taken steps to correct whatever problems were found last year. For example, if your controller forgot to record accrued payroll and vacation last year, double-check that accruals have been done for 2023. Likewise, if your auditor suggested that you needed stronger internal controls over purchasing, you could make last-minute changes before year end, such as segregating ordering and vendor payment duties between two employees or cross-checking vendor vs. employee addresses.

You should also anticipate requests for documentation and inquiries from auditors. Chances are you’ll create many of these schedules — such as accounts receivable aging reports and fixed asset listings — when you reconcile your general ledger. Consider compiling an audit binder before the start of fieldwork to expedite the process. It also helps to designate an internal liaison to field the audit team’s inquiries. Often, this is the company’s CFO or controller, but it can be anyone who’s knowledgeable about the company’s operations and accounting systems.

In addition, each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and defend any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves or percentage of completion.

4. Adopt a positive frame of mind

Some in-house accounting personnel see audit fieldwork as a painstaking disruption to their daily operations. They may begrudge having to explain their business operations and accounting procedures to outsiders who will highlight mistakes and weaknesses in financial reporting.

Although no one likes to be questioned or critiqued, audits shouldn’t be adversarial. Your external auditor is a resource that can provide assurance about your financial reporting to lenders and investors, offer fresh insights and accounting expertise, and recommend ways to strengthen internal controls and minimize risks. Financial statement audits should be seen as a learning opportunity and an investment in your organization’s future.

Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but also engenders a partnership between in-house and external accounting resources.

For employers, sponsoring a qualified retirement plan isn’t easy. Staying up to date on the constantly changing guidance and rules issued by federal agencies such as the U.S. Department of Labor (DOL) and IRS is a challenge. An independent retirement plan auditor can help your organization fulfill its compliance requirements and potentially reduce the risks of plan administration.

An audit’s purpose

Qualified retirement plans include traditional pensions, 401(k)s, 403(b)s and some profit-sharing plans. The primary purpose of an audit is to ensure that the plan is operating in compliance with applicable laws as well as the most recent regulations and guidance set forth by the DOL and IRS. An independent audit also reassures stakeholders that your plan’s financial statements offer reliable information.

The Employee Retirement Income Security Act (ERISA) requires annual audits of plans with 100 or more eligible participants at the beginning of the plan year. ERISA also requires plan administrators to follow U.S. Generally Accepted Accounting Principles when creating plan financial statements.

Engaging an auditor

It’s important to choose your auditor carefully. You’ll of course want to consider the prospective auditor’s professional qualifications, experience and licensing. But you must also ensure that the auditor you engage doesn’t have any financial interests in the retirement plan or plan administrator that could bias the audit. For example, the DOL doesn’t view a plan auditor as independent if that person also maintains the plan’s financial records.

The American Institute of Certified Public Accountants offers guidance on creating a request for proposal (RFP) for a qualified plan audit. An effective RFP describes the scope of the engagement — including its objectives, special considerations and expected schedule.

Risks abound

Unqualified auditors can provide bad information and leave employers vulnerable to unchecked plan failures. This could lead to a DOL investigation and financial penalties. Contact us for more information about properly conducted retirement plan audits.