IRS Halts Employee Retention Credit Processing

The Internal Revenue Service (IRS) has stopped processing new claims for the Employee Retention Credit (ERC), a pandemic-era tax break for small businesses. The IRS is increasingly alarmed about small business owners being scammed by unscrupulous actors, and growing evidence of questionable ERC claims pouring in. Aggressive marketing to ineligible applicants has created unacceptable risks to businesses and the tax system.

The ERC program will be paused through at least the end of 2023, allowing the IRS to add more safeguards to prevent future abuse and protect businesses from predatory tactics.

Business owners considering applying for the credit should review the ERC guidelines and talk with a trusted tax professional, not a promoter looking to take a large percentage of the refund.

Payouts for existing claims will continue during the moratorium period, but at a slower pace due to stricter compliance reviews. Processing times could be delayed from the standard 90 days to 180 days or longer.

The IRS will provide details later about how a taxpayer can withdraw an ERC claim, an option that will be available to the filers of more than 600,000 claims awaiting IRS review. This withdrawal option will allow the taxpayers to avoid possible repayment issues and keep them from having to pay contingency fees to promoters, the IRS says.

The IRS also is working out details of the settlement initiative that will allow taxpayers to repay a claim that they erroneously received and avoid penalties and future compliance action.

For more information, see the official statement from the IRS.

Please contact your Yeo & Yeo tax professional for guidance on proceeding with ERC claims.

It’s not uncommon for employees to grumble about having to attend too many meetings. Sometimes they have a point; an excessive number of meetings can become a problem at some companies. However, there’s one kind of meeting that business owners and their leadership teams should never scrimp on: strategic planning.

That doesn’t mean you need to have one every week, or even every month. But regularly scheduled strategic planning meetings are critical for establishing, reviewing and, if necessary, adjusting your company’s short- and long-term objectives. Here are four best practices for running effective meetings:

1. Set a focused agenda. Every meeting should have an agenda that’s relevant to strategic planning — and only strategic planning. Allocate an appropriate amount of time for each item so that the meeting is neither too long nor too short.

Before the meeting, distribute a document showing who’ll be presenting on each agenda topic. The idea is to create a “no surprises” atmosphere in which attendees know what to expect and can thereby think about the topics in advance and bring their best ideas and feedback.

2. Lay down rules as necessary. Depending on your company’s culture, you may want to state some upfront rules — either in writing beforehand or by announcement at the beginning of the meeting. Address the importance of timely attendance, professional decorum and constructive criticism. Emphasize that there are no dumb questions or bad ideas.

Every business may not need to do this, but meetings that become hostile or chaotic with personal conflicts or “side chatter” can undermine the efficacy of strategic planning. Also consider whether to identify conflict resolution methods that participants must agree to follow if particularly heated arguments arise.

3. Name (or engage) a facilitator. A facilitator should oversee the meeting. This individual is ultimately responsible for starting and ending on time, transitioning from one agenda item to the next, and enforcing the stated rules. Ideally, a facilitator also needs to be good at motivating participation from everyone and encouraging a positive, productive atmosphere.

If no one at your company feels up to the task, you could engage an outside consultant. Although you’ll need to vet the person carefully and weigh the financial cost, a skilled professional facilitator can make a big difference.

4. Keep minutes. Recording the minutes of every strategic planning meeting is essential. An official record will document what took place and which decisions, if any, were made. It will also serve as a log of potentially valuable ideas or future agenda items.

In addition, accurate meeting minutes curtail miscommunications and prevent memory lapses of what was said and by whom. If no record is kept, people’s memories may differ about the conclusions reached, and disagreements could arise about where your business is striving to go.

In December 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act. Among other things, the sweeping new law made some significant changes to so-called catch-up contributions, with implications for both employers and employees.

With the new catch-up provisions scheduled to kick in after 2023, many retirement plan sponsors have been struggling to institute the necessary processes and procedures to comply. In recognition of taxpayer concerns, the IRS recently provided some relief in Notice 2023-62. In addition to extending the deadline, the new guidance corrects a technical error in SECURE 2.0 that had left taxpayers and their advisors confused about the continued availability of catch-up contributions for employees.

The new requirements

Tax law allows taxpayers age 50 or older to make catch-up contributions to their 401(k) plans and similar retirement accounts. The permissible amount is adjusted annually for inflation. For 2023, you can contribute an additional $7,500 over the current $22,500 annual 401(k) contribution limit. The contributions are allowed regardless of a taxpayer’s income level.

Under the existing rules, all eligible taxpayers can choose whether to make their contributions on a pre-tax basis or a Roth after-tax basis (assuming the employer allows the Roth option). Section 603 of SECURE 2.0, however, mandates that any catch-up contributions made by higher-income participants in 401(k), 403(b) or 457(b) retirement plans must be designated as after-tax Roth contributions.

Higher-income participants are those whose prior-year Social Security wages exceeded $145,000 (the threshold will be adjusted for inflation going forward). In addition, a plan that allows higher-income participants to make such catch-up contributions also must allow other participants age 50 or older to make their catch-up contributions on an after-tax Roth basis. The law provides that these requirements are effective for tax years beginning after December 31, 2023.

The imminent effective date had plan sponsors and payroll providers worried, due to multiple administrative hurdles. For example, sponsors must develop processes to identify higher-income plan participants — they generally haven’t had the need to calculate employees’ Social Security wages previously — and provide that information to their plan administrators. Sponsors also must institute procedures to restrict catch-up contributions to Roth contributions and communicate the changes to their employees.

The challenges are even greater for employers that don’t already have Roth contribution features in their traditional retirement plans. They have to choose between amending their plans to allow such contributions, which can take months to process and implement, or eliminating the ability to make catch-up contributions for all employees.

The IRS guidance

In Notice 2023-62, the IRS acknowledges the concerns related to the original effective date for the new requirements. In response, it has created an “administrative transition period,” extending the effective date to January 1, 2026. In other words, employers can allow catch-up contributions that aren’t designated as Roth contributions after December 31, 2023, and until January 1, 2026, without violating SECURE 2.0. And plans without Roth features may allow catch-up contributions during this period.

The guidance also addresses a drafting error in SECURE 2.0 that led to some questions about whether the law eliminated the ability of taxpayers to make catch-up contributions after 2023. The IRS made clear that plan participants age 50 or older can continue to make catch-up contributions in 2024 and beyond.

After-tax vs. pre-tax

Unlike pre-tax contributions, after-tax contributions don’t reduce your current-year taxable income, but they grow tax-free. This is a significant advantage if you expect to be subject to a higher income tax rate in retirement than you are at the time of your contributions.

You generally can withdraw “qualified distributions” without paying tax as long as you’ve held the account for at least five years. Qualified distributions are those made:

On account of disability,
On or after death, or
After you reach age 59½.

You may be able to reap other savings from after-tax contributions, as well. For example, lower taxable income in retirement can reduce the amount you must pay for Medicare premiums and the tax rate on your Social Security benefits.

But you could have reasons to reduce your current taxable income with pre-tax contributions. For example, doing so could increase the amount of your Child Tax Credit, which phases out at certain income thresholds, as well as the amount of financial aid your children can obtain for higher education.

Note: Roth 401(k) contributions are currently subject to annual required minimum distributions (RMDs), like traditional 401(k)s. Beginning in 2024, though, designated Roth 401(k) contributions won’t be subject to RMDs until the death of the owner.

Potential future guidance

The IRS also used Notice 2023-62 to preview some additional guidance regarding Section 603 that’s “under consideration.” After taking into account any comments received, the IRS stated it is considering releasing future guidance concerning multi-employer plans and other out-of-the-ordinary situations.

Don’t delay

The IRS’s extension of the effective date for the Section 603 requirements is good news for employers and employees alike. As noted, though, the requisite changes to achieve compliance will take some time and effort to put into place. Plan sponsors would be wise to start sooner rather than later.

The employee stock ownership plan (ESOP) has long shone as a beacon to employers looking to accomplish multiple goals through a benefits arrangement. A properly structured and administered ESOP can boost employee engagement, provide tax benefits and help ownership with succession planning.

However, the rules for setting up and running an ESOP are far from simple. And some employers may be inadvertently or even intentionally abusing those rules to exploit the tax advantages of these plans. Recently, the IRS issued an explicit warning to plan sponsors regarding ESOP compliance issues.

How it works

Under an ESOP, participants invest primarily in their employer’s stock as a way to save for retirement. They also thereby become partial owners of the business or organization itself. To implement an ESOP, the employer establishes a trust fund and either:

Contributes shares of stock or money to buy the stock (an “unleveraged” ESOP), or
Borrows funds to initially buy the stock, and then contributes cash to the plan to enable it to repay the loan (a “leveraged” ESOP).

The shares in the trust are allocated to individual employees’ accounts, often using a formula based on their respective compensation. The employer must formally adopt the plan and submit plan documents to the IRS, along with certain forms.

Tax advantages

Among the biggest benefits of ESOPs is that the IRS considers them “qualified” for tax purposes. Thus, plan contributions are typically tax-deductible for employers. However, employer contributions to all defined contribution plans, including ESOPs, are generally limited to 25% of covered payroll.

However, C corporations with leveraged ESOPs can deduct contributions used to pay interest on the loans. That is, the interest isn’t counted toward the 25% limit. Furthermore, dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C corporations, so long as they’re reasonable. Dividends voluntarily reinvested by employees in company stock in the ESOP also are usually deductible by the employer.

IRS warning

In a recent news release (IR-2023-144), the IRS warns businesses and tax professionals specifically to watch out for ESOP compliance issues. The tax agency alludes to the problem of the “tax gap” — which is generally defined as the amount of tax revenue the government should receive and the tax revenue it actually does.

“The IRS is now taking swift and aggressive action to close this gap,” IRS Commissioner Danny Werfel states in the news release. “Part of that includes alerting higher-income taxpayers and businesses to compliance issues and aggressive schemes involving complex or questionable transactions, including those involving ESOPs.”

In its current compliance efforts, the tax agency has encountered problems such as:

Valuation issues with employee stock,
Prohibited allocation of shares to disqualified persons, and
Failure to follow tax-law requirements for ESOP loans, which may cause some loans to become prohibited transactions.

In the past, the IRS didn’t always have the budget to investigate these kinds of abuses. However, the Inflation Reduction Act has provided funding so that the tax agency can now pursue wealthy parties that contribute to the tax gap and crack down on the financial tools they misuse — one of which is the ESOP.

A good time

If your organization currently sponsors an ESOP, now may be a good time to review or even audit your plan to ensure it’s not in danger of falling out of compliance with IRS rules. Contact us with questions or for further information.

Granted, a QTIP trust is an odd sounding name for an estate planning technique. Nevertheless, it can be a valuable strategy, especially if you’re currently in a second marriage. The QTIP moniker is an acronym for the technical term of “qualified terminable interest property.” Essentially, the trust provides future security for both a surviving spouse and children from a prior marriage, while retaining estate planning flexibility.

Notably, any federal estate tax due on QTIP trust assets is postponed until the death of the surviving spouse. At that time, his or her gift and estate tax exemption may shelter the remaining trust assets from tax.

A QTIP trust in action

Generally, a QTIP trust is created by the wealthier spouse. When the grantor dies, the surviving spouse assumes a “life estate” in the trust’s assets. This provides the surviving spouse with the right to receive income from the trust, but he or she doesn’t have ownership rights — thus, he or she can’t sell or transfer the assets. Upon the death of the surviving spouse, the assets are passed to the final beneficiaries, who may be the children from the grantor’s prior marriage.

Accordingly, you must designate the beneficiaries of the QTIP trust, as well as the trustee to manage the assets. This could be your spouse, adult child, close friend, or, as is often the case, a third-party professional.

Estate tax ramifications

A QTIP trust is designed to combine the estate tax benefits of the unlimited marital deduction and the gift and estate tax exemption. When you create the trust and provide a life estate to your spouse, the assets are sheltered from tax by the unlimited marital deduction after your death.

After your spouse passes, assets in the QTIP trust are subject to federal estate tax. However, the $12.92 million (for 2023) gift and estate tax exemption will likely shelter most estates from estate tax liability.

Planning flexibility

A QTIP trust can provide added flexibility to your estate plan. For example, at the time of your death, your family’s situation or the estate tax laws may have changed. The executor of your will can choose to not implement a QTIP trust if that makes the most sense. Otherwise, the executor makes a QTIP trust election on a federal estate tax return. (It’s also possible to make a partial QTIP election.)

Once the election is made and the estate tax return is filed within nine months after the death (plus an additional six months if the executor obtains an extension), it’s irrevocable. There’s no going back.

Right for your plan?

If you wish to provide for your spouse after your death, but at the same time ensure that your children ultimately receive the inheritance you want to provide for them, a QTIP trust might be the preferred option. Contact us to learn if a QTIP trust is right for you.

When many business owners see the term “financial reporting,” they immediately think of their year-end financial statements. And, indeed, properly prepared financial statements generated at least once a year are critical.

But engaging in other types of financial reporting more frequently may help your company stay better attuned to the nuances of running a business in today’s inflationary and competitive environment.

Spot trends and trouble

Just how often your company should engage in what’s often referred to as “interim” financial reporting depends on factors such as its size, industry and operational complexity. Nevertheless, monthly, quarterly and midyear financial reports can enable you to spot trends and get early warnings of potential trouble.

For example, you might compare year-to-date revenue for 2023 against your annual budget. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives or change your marketing strategy.

It’s also important to more closely track costs in light of the current level of inflation. If your business is starting to lose money, you might need to consider raising prices or cutting discretionary spending. You could, for instance, temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze.

Your balance sheet is important as well. Reviewing major categories of assets and liabilities can help you detect working capital problems before they spiral out of control. For example, a buildup of accounts receivable could signal troubles with collections. A low stock of key inventory items may foreshadow delayed shipments and customer complaints, signaling an urgent need to find alternative suppliers. Or, if your company is drawing heavily on its line of credit, your operations might not be generating sufficient cash flow.

Don’t panic

If interim financial reports do uncover inconsistencies, they may not indicate a major crisis. Some anomalies might be attributable to more informal accounting practices that are common during the calendar year. Typically, either your accounting staff or CPA can correct these items before year-end financial statements are issued.

For instance, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial reports typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. The interim reports, therefore, tend to paint a rosier picture of a company’s performance than its full year-end financial statements.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. So, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, management’s estimate using historic gross margins.

Similarly, accounts receivable may be overstated because overworked finance managers might lack the time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Glean more insights

Many business owners have had an “aha moment” or two when studying their year-end financial statements. Why not glean those insights more often? We can help you decide how frequently to engage in interim financial reporting and assist you in designing the reports that provide the information you need.

The Tax Cuts and Jobs Act liberalized the rules for depreciating business assets. However, the amounts change every year due to inflation adjustments. And due to high inflation, the adjustments for 2023 were big. Here are the numbers that small business owners need to know.

Section 179 deductions

For qualifying assets placed in service in tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million. But if your business puts in service more than $2.89 million of qualified assets, the maximum Sec. 179 deduction begins to be phased out.

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software.

Sec. 179 deductions can also be claimed for real estate qualified improvement property (QIP), up to the maximum allowance of $1.16 million. QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP and usually must be depreciated over 39 years. There’s no separate Sec. 179 deduction limit for QIP, so deductions reduce your maximum allowance dollar for dollar.

For nonresidential real property, Sec. 179 deductions are also allowed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Finally, eligible assets include depreciable personal property used predominantly in connection with furnishing lodging, such as furniture and appliances in a property rented to transients.

Deduction for heavy SUVs

There’s a special limitation on Sec. 179 deductions for heavy SUVs, meaning those with gross vehicle weight ratings (GVWR) between 6,001 and 14,000 pounds. For tax years beginning in 2023, the maximum Sec. 179 deduction for heavy SUVs is $28,900.

First-year bonus depreciation has been cut

For qualified new and used assets that were placed in service in calendar year 2022, 100% first-year bonus depreciation percentage could be claimed.

However, for qualified assets placed in service in 2023, the first-year bonus depreciation percentage dropped to 80%. In 2024, it’s scheduled to drop to 60% (40% in 2025, 20% in 2026 and 0% in 2027 and beyond).

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software. First-year bonus depreciation can also be claimed for real estate QIP.

Exception: For certain assets with longer production periods, these percentage cutbacks are delayed by one year. For example, the 80% depreciation rate will apply to long-production-period property placed in service in 2024.

Passenger auto limitations

For federal income tax depreciation purposes, passenger autos are defined as cars, light trucks and light vans. These vehicles are subject to special depreciation limits under the so-called luxury auto depreciation rules. For new and used passenger autos placed in service in 2023, the maximum luxury auto deductions are as follows:

$12,200 for Year 1 ($20,200 if bonus depreciation is claimed),
$19,500 for Year 2,
$11,700 for Year 3, and
$6,960 for Year 4 and thereafter until fully depreciated.

These allowances assume 100% business use. They’ll be further adjusted for inflation in future years.

Advantage for heavy vehicles

Heavy SUVs, pickups, and vans (those with GVWRs above 6,000 pounds) are exempt from the luxury auto depreciation limitations because they’re considered transportation equipment. As such, heavy vehicles are eligible for Sec. 179 deductions (subject to the special deduction limit explained earlier) and first-year bonus depreciation.

Here’s the catch: Heavy vehicles must be used over 50% for business. Otherwise, the business-use percentage of the vehicle’s cost must be depreciated using the straight-line method and it’ll take six tax years to fully depreciate the cost.

Consult with us for the maximum depreciation tax breaks in your situation.

Financial statements tell investors information about an organization’s financial performance, helping to ensure corporate transparency and accountability. But they can also be used internally to help management make strategic decisions, improve upon past results and add value. There are three parts to comprehensive financial reporting under U.S. Generally Accepted Accounting Principles (GAAP) — each with a unique message.

Income statements

Many people focus on earnings, which are reported on the income statement (also known as the profit and loss statement). This statement provides an overview of revenue, expenses and earnings over a given period.

A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product. Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

Though it may be tempting to just review revenue and profit trends, thorough due diligence looks beyond the income statement. Growth and profitability aren’t the only metrics that matter. For example, high-growth companies that report healthy top and bottom lines may not have enough cash on hand to pay their bills.

Balance sheets

The balance sheet (also known as the statement of financial position) provides a snapshot of the company’s financial health. It tallies assets, liabilities and equity.

Under GAAP, assets are reported at the lower of cost or market value. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Intangible assets (such as patents, customer lists and goodwill) can provide significant value to a business. But internally developed intangibles aren’t reported on the balance sheet. Intangible assets are only reported when they’ve been acquired externally.

Owners’ equity (or net worth) is the extent to which the book value of assets exceeds liabilities. If liabilities exceed assets, net worth will be negative. However, book value may not necessarily reflect market value. Some companies may provide the details of owners’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

Statements of cash flows

The cash flow statement shows all the cash flowing in and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. Watch your statement of cash flows closely. To remain in business, companies must continually generate cash to pay creditors, vendors and employees.

Beyond compliance

Financial reporting is more than an exercise in compliance with accounting rules. Financial statements can be a valuable management tool. However, to get a holistic assessment of your organization’s performance, it’s important to look beyond profits. Contact us for help preparing these statements and benchmarking your organization’s performance over time and against competitors.

According to the American Society of Pension Professionals & Actuaries (ASPPA), one of the several organizations that comprises the American Retirement Association (ARA), erroneous notices were issued to taxpayers claiming their 2022 Forms 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits, were filed after the July 31 deadline.

The IRS said that the erroneous messages resulted from a programming error on their part. The IRS further said it will announce in an upcoming newsletter that anyone who received the 8955-SSA late filing letter dated before September 1, 2023, can ignore it.

For more detailed information about the glitch, you can read the summary provided by the American Society of Pension Professionals & Actuaries (ASPPA): IRS Clarifies Erroneous Late-Filing Notices

You can contact your Third Party Administrator (TPA) or your Form 5500 preparer if you have any concerns about the situation.

Yeo & Yeo has joined the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting, and service firms with similar client goals. As an independent member of the BDO Alliance USA, Yeo & Yeo can expand its capabilities by drawing on the resources of BDO USA and other Alliance members. BDO Alliance USA is among the industry’s largest associations of accounting and professional service firms. With more than 800 independent alliance firm locations, the Alliance represents nearly every state and includes a comprehensive range of services.

“We solve challenges and fulfill the specific needs of our clients – but more than that, we are relationship and purpose-driven, helping our clients see what’s possible and achieve their potential,” said Yeo & Yeo President & CEO Dave Youngstrom. ” Becoming an independent member of the BDO Alliance USA opens more possibilities for our clients and our people with access to greater technical knowledge and specialty services of BDO USA and its international organization.”

The BDO Alliance USA enhances member firm capabilities by providing supplementary professional services, comprehensive management consulting services, focused industry knowledge, and internal training programs. Furthermore, the Alliance offers significant advantages for Yeo & Yeo’s team members. By engaging with other professionals and sharing knowledge, team members gain opportunities for continuous learning and growth.

Membership in the BDO Alliance USA allows Yeo & Yeo to:

Enhance client services and broaden its capabilities overall
Expand domestic and international coverage
Gain greater technical knowledge in specialty areas
Utilize professionals with experience in a wide range of industries
Access the most up-to-date technical information
Participate in the latest training programs
Provide clients with key business contacts throughout the U.S. and beyond

“Our goal is to always be at the forefront, providing our clients and our people with the resources they need to succeed in a rapidly changing world. Joining the BDO Alliance USA is just one step of many that we’re taking to stay ahead of the curve and provide the best possible service and experience,” added Youngstrom.

For more information about the BDO Alliance USA, visit https://www.bdo.com/about/bdo-alliance-usa.

About the BDO Alliance USA
The BDO Alliance USA is a nationwide association of independently owned local and regional accounting, consulting and service firms with similar client service goals. The BDO Alliance USA presents an opportunity for these firms, by accessing the resources of BDO USA and other Alliance members, to expand services to their clients without jeopardizing their existing relationships or their autonomy. The BDO Alliance USA was developed to provide Member firms with an alternative strategy for gaining competitive advantage in the face of a changing business landscape. The Alliance represents an opportunity for BDO to enhance relationships with reputable firms. The BDO Alliance USA is a subsidiary of BDO USA, P.A., a Delaware professional service corporation.

About BDO USA, P.A.
The BDO Alliance USA is a subsidiary of BDO USA, P.A., a Delaware professional service corporation. BDO is the brand name for the BDO network and for each of the BDO Member Firms. BDO USA, P.A., a Delaware professional service corporation, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

If you’re getting a divorce, you know the process is generally filled with stress. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.

Transferring property tax-free

In general, you can divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

For example, let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding period for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:

A year after the date the marriage ends, or
Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

Additional future tax issues

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.

Note: The person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.

In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Avoid surprises by planning ahead

Like many major life events, divorce can have significant tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. Contact us. We can help you minimize the adverse tax consequences of settling your divorce.

When criminals profit from illicit activities, they usually need to “clean” or disguise the proceeds of their crimes. Money laundering disconnects illegally acquired funds from sources that include theft, drug trafficking and terrorism. This makes it harder for law enforcement to connect the dots, arrest the perpetrators and seize their money.

Unfortunately, money launderers often use innocent small businesses to clean their dirty money. In some cases, businesses might be pressured to participate in money laundering. How can you keep your business safe from these criminal activities?

3 stages

Money laundering generally involves three stages:

Placement. Here, criminals introduce their illegally obtained funds into the economy, making them appear legitimate. Strategies could include separating large amounts into smaller ones and depositing them in multiple accounts, including offshore accounts.
Layering. The purpose of layering is to create a complex web of transactions that makes it difficult for law enforcement to classify funds as criminally connected. Criminals might transfer funds into and out of accounts, invest in financial securities, buy and sell real estate or set up shell companies that exist only to hold criminal proceeds.
Integration. This final stage is where criminals use or spend their now “clean” money — often on luxury goods and new business enterprises.

Such activities can occur with or without a legitimate business owner’s or insider’s involvement. However, it’s far easier to launder money if an accomplice is employed by the company and can facilitate transactions.

Frequent business targets

Any business can become involved in money laundering, but some companies are more susceptible to being used this way. For example, cash-intensive businesses such as bars and restaurants are particularly attractive to launderers because reconciling food and drink sales with inventory is typically complicated and, thus, simple to falsify.

Also, due to the size and frequency of their transactions, real estate businesses are often favored by money launderers. Similarly, the construction industry can easily be used to launder money due to the size of many contracts and the complexity of supply chains and billing practices.

Prevention and detection

To help mitigate the risk of money laundering occurring in your business, closely monitor transactions. Money laundering schemes often start with small dollar transactions, then increase in size if perpetrators believe they’ve escaped detection. Scrutinize transactions randomly and based on their frequency and dollar amounts. If a transaction appears suspicious, ask the employees involved for an explanation and consider engaging the services of a forensic accountant.

It’s also critical to know your customers. Depending on the type of business, it may be possible for you to keep customer names, addresses, transactions and other details in a database. For significant transactions or contracts, engage a third party to conduct a detailed background check. In general, the more you know about your customers, the better.

Know your employees, too. Criminal gangs sometimes place infiltrators inside businesses to make it easier to conduct illicit transactions and falsify company records. Conduct background checks on all serious job candidates. If someone’s employment history or other resume item raises questions, dig deeper before hiring that person.

As for current employees, train them to look for money laundering. Give examples of scenarios that might occur in your line of business and provide a confidential reporting method (such as a hotline) for employees to use if they spot something suspicious.

Admit the risk

The first step to preventing money laundering in your business is to admit it’s a threat. Then put controls in place to thwart it. If you suspect an actual scheme is underway, contact your attorney immediately. A fraud expert can also help you get to the bottom of any suspicions and gather evidence for potential legal proceedings.

The day-to-day demands of running a business can make it difficult to think about the future. And by “future,” we’re not necessarily talking about how your tax liability will look at year-end or how you might grow the bottom line over the next five years. We’re referring to the future in which you no longer own your company.

Succession planning is an important task for every business owner. And it’s never too early to start thinking about three of the most critical factors.

1. The involvement of your family

Among the primary questions you’ll need to answer is whether you want to transfer ownership of the company to a family member or sell it to either someone already in the business or to an outside party.

If your children are involved in the business, or there’s another logical successor from within the family, you’ll want to start mentoring this person long before you want to step down. An intrafamily successor should be someone who objectively has the education, training, experience and temperament to fill your shoes. Depending on the amount of support your replacement needs, it may take years for this individual to be truly ready.

Also bear in mind that succession planning and estate planning are linked. You’ll want to create a clear, legally defensible ownership transfer plan while you also fund your retirement or next stage of life. In addition, you need an estate plan that equitably divides your wealth among family members who participate in the business and those who don’t.

2. The market for your company

If it appears unlikely that you’ll transfer ownership to a family member, you’ll probably want to sell your company. The primary question then becomes: Will there be a market for it when you’re ready to leave? If mergers and acquisitions are relatively common in your industry, you may have little to worry about. But if companies like yours tend to be a tough sell, you might be in for a long and perhaps frustrating process.

To put yourself in a better position, start developing a list of potential buyers well before you’re ready to depart. These may include competitors, business associates and private equity firms. Essentially, you need to get a good idea of the “size and shape” of the market for your company so you can fine tune your succession plan.

3. The structure of the transfer or sale

If you do decide to name a family member as your successor, you’ll need to work with an attorney, CPA and perhaps other advisors to transfer ownership in a legally secure, tax-savvy manner that also accounts for your estate plan.

On the other hand, if you’re going to sell the company (or ownership shares) to someone outside your family, you’ll need to structure the deal carefully. One option is to sell the business to your employees over time via an employee stock ownership plan (ESOP). But ESOPs come with many rules and complexities.

Alternatively, you might set up a purchase via an internal buy-sell agreement that stipulates your partners (if you have them) must buy your shares. Or you could sell to one of the potential buyers mentioned above — again, typical parties include competing businesses, perhaps someone you know through networking or private equity firms.

The specifics of stepping down

Granted, these three factors are general in nature. There will be many specifics that your succession plan will need to cover as you get closer to stepping down. Contact us for further information.

Yeo & Yeo, a leading Michigan-based accounting and advisory firm, has been recognized by INSIDE Public Accounting (IPA) as a Top 200 Firm in the U.S. for the fifteenth consecutive year. In the 2023 IPA ranking of more than 600 participating firms, Yeo & Yeo ranked 120.

Every year, IPA, one of the most trusted sources of news, data, and analysis in the public accounting industry, identifies and ranks the top 500 U.S. public accounting firms. Firms are ranked according to U.S. net revenues and are further analyzed according to responses received for IPA’s Survey and Analysis of Firms. With consistent year-over-year growth, Yeo & Yeo achieved an organic growth rate surpassing 15% firm-wide in the prior year.

“Being positioned among numerous top-performing accounting firms across the country is an honor and reflects our commitment to quality and client service, and our ability to adapt and thrive in an ever-evolving industry,” said President & CEO, Dave Youngstrom. “This accomplishment is a testament to the collaborative spirit of our team and the trust our clients place in us.”

Several factors contribute to Yeo & Yeo’s success. The firm focuses on building strong relationships, understanding unique needs, and providing tailored solutions to its clients. Acknowledging that a company’s strength is inherently linked to its people, Yeo & Yeo also places a strong emphasis on nurturing talent. The firm invests in its employees’ professional growth and development, fostering a culture of continuous learning and improvement. Yeo & Yeo is also dedicated to giving back to the community through the Yeo & Yeo Foundation, an employee-sponsored organization that is a channel for giving time, talent, and financial support to charitable causes throughout Michigan.

With over 45,000 public accounting firms in the U.S., Yeo & Yeo proudly takes its place on the IPA Top 200 list, and extends gratitude to its clients, team members, and communities.

“Our journey is fueled by the relationships we’ve built, the innovation we’ve embraced, and the impact we’ve made,” added Youngstrom. “As we look ahead, we’re excited to continue exceeding expectations, delivering meaningful client experiences, and supporting the communities in which we live and work.”

IPA Top 200

About INSIDE Public Accounting

INSIDE Public Accounting (IPA) is a leader in practice management resources for the public accounting profession. IPA offers a monthly practice management publication and four national practice management benchmarking reports every year. IPA has helped firms across North America grow and thrive since 1987.

View the list of top-ranked IPA firms.

Let’s say you decide to, or are asked to, guarantee a loan to your corporation. Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax implications. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be caught unaware.

A business bad debt

If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.

In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this generally shows that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.

Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.

If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.

More rules

In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if you meet these three requirements:

You have a legal duty to make the guaranty payment (although there’s no requirement that a legal action be brought against you).
The guaranty agreement was entered into before the debt became worthless.
You received reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.

Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.

These are only some of the possible tax consequences of guaranteeing a loan to your closely held corporation. To learn all the implications in your situation, consult with us.

Health Reimbursement Arrangements (HRAs) are a tax-advantaged way for employers to reimburse employees for out-of-pocket medical expenses. These plans have become quite popular, partly because they come in a variety of forms that can best suit the needs of the sponsoring organization.

However, employees often need to be “sold” on the pros of an HRA. One way you may be able to boost interest and participation in one of these plans is to offer it as not only a health care benefit, but also an investment vehicle.

Interest-earning accounts

HRAs are employer-owned plans. Therefore, you can decide whether to allow participants to roll over unused reimbursement allowances from year to year. If you do, participants can amass sizable balances over time — and there’s a way for them to earn interest on those balances.

When an HRA is “unfunded,” reimbursements are paid out of the employer’s general assets. From an accounting perspective, HRA credits represent bookkeeping entries rather than actual, separate assets.

Because no separate assets are involved, HRA balances under an unfunded plan won’t earn interest in the way that, for example, savings accounts do. If an employer wishes, however, it can periodically credit additional amounts to participants’ respective bookkeeping accounts in an amount equivalent to the interest that they would have earned if their HRA balances had been held in a typical interest-bearing investment. This is called “interest crediting.”

Like other amounts offered under an HRA, these “notional” credits are nontaxable and can be used only to reimburse qualifying medical expenses. In addition, they’re subject to the Internal Revenue Code’s rules prohibiting discrimination in favor of highly compensated employees.

The trust option

As mentioned, long-term participants may accumulate substantial HRA balances if annual carryovers are allowed. This situation has led some employers to fund their HRAs through a trust — for example, by using a Voluntary Employees’ Beneficiary Association plan. Such funding might be particularly attractive if HRA carryovers represent a substantial liability on the employer’s balance sheet.

When an HRA is funded this way, the employer deposits funds equal to the HRA credits into the trust to be held in an interest-bearing account, with interest allocated to participants’ HRA accounts based on their respective balances.

Be aware, however, that funded HRAs are subject to additional requirements. Trust assets must be invested prudently under ERISA’s fiduciary standards. Also, earnings that aren’t credited to participants’ accounts can be used only to defray plan administration expenses or to provide benefits to participants. In addition, forfeitures attributed to terminated employees have to remain in the trust. (Additional rules and reporting requirements may apply.)

If you decide to fund your HRA with a trust, you’ll need to carefully consider how to communicate this benefit to participants — including the ability to amend or discontinue interest crediting in the future.

Rewards, rules and risks

With the rise of online investment opportunities and cryptocurrency, the popularity of investing has exploded. Adding an interest-crediting feature to your HRA may capture the attention of employees and increase participation in — and appreciation of — this benefit. However, the rules are complex, and there are significant risks to consider. Contact us for further information.

From utilities and interest expense to executive salaries and insurance, many overhead costs have skyrocketed over the last few years. Some companies have responded by passing along the increases to customers through higher prices of goods and services. Is this strategy right for your business? Before implementing price increases, it’s important to understand how to allocate indirect costs to your products. Proper cost allocation is essential to evaluating product and service line profitability and, in turn, making informed pricing decisions.

Defining overhead

Overhead costs are a part of every business. These accounts frequently serve as catch-alls for any expense that can’t be directly allocated to production, including:

Equipment maintenance and depreciation,
Rent and building maintenance,
Administrative and executive salaries,
Interest expense,
Taxes,
Insurance, and
Utilities.

Generally, indirect costs of production are fixed over the short run, meaning they won’t change appreciably whether production increases or diminishes.

Calculating overhead rates

The challenge comes in deciding how to allocate these costs to products using an overhead rate. The rate is typically determined by dividing estimated overhead expenses by estimated totals in the allocation base (for example, direct labor hours) for a future time period. Then, you multiply the rate by the actual number of direct labor hours for each product (or batch of products) to establish the amount of overhead that should be applied.

In some companies, the rate is applied companywide, across all products. This might be appropriate for organizations that make single, standard products over long periods of time. But, if your product mix is more complex and customized, you may use multiple overhead rates to allocate costs more accurately. If one department is machine-intensive and another is labor-intensive, for example, multiple rates may be appropriate.

Handling variances

There’s one problem with accounting for overhead costs: Variances from actual costs are almost certain. There are likely to be more variances if you use a simple companywide overhead rate, but even the most carefully thought-out multiple rates won’t always be 100% accurate.

The result is large accounts that many managers don’t understand and that require constant adjustment. This situation creates opportunities for errors — and for dishonest people to commit fraud. Fortunately, you can reduce the chance of overhead anomalies with strong internal control procedures, such as:

Conducting independent reviews of all adjustments to overhead and inventory accounts,
Studying significant overhead adjustments over different periods of time to spot anomalies,
Discussing complaints about high product costs with nonaccounting managers, and
Evaluating your existing overhead allocation and making adjustments as necessary.

Allocating costs more accurately won’t guarantee that you make a profit. To do that, you have to make prudent pricing decisions — based on the production costs and market conditions — and then sell what you produce.

For more information

Cost accounting can be complex, and indirect overhead costs can be difficult to trace. Our accounting pros can help you apply a systematic approach to estimating meaningful overhead rates and adjusting them when necessary. We can also evaluate pricing decisions and suggest cost cutting measures to combat rising costs.

As the Fed continues to do battle with inflation, and with fears of a recession not quite going away, companies have been keeping a close eye on the costs of their health insurance and pharmacy coverage.

If you’re facing higher costs for healthcare benefits this year, it probably doesn’t come as a big surprise. According to the National Survey of Employer-Sponsored Health Plans, issued by HR consultant Mercer in 2022, U.S. employers anticipated a 5.6% rise in medical plan costs in 2023. The actual percentage may turn out to be even higher, which is why cost containment should be one of the primary objectives of your benefits strategy.

Really get to know your workforce

To succeed at cost containment, you’ve got to establish and maintain a deep familiarity with two things: 1) your workforce, and 2) the healthcare benefits marketplace.

Starting with the first point, the optimal plan design depends on the size, demographics and needs of your workforce. Rather than relying on vendor-provided materials, actively manage communications with employees regarding their healthcare 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 healthcare decisions. Many companies 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. Business owners can apply analytics to just about everything these days — including healthcare coverage. Measure the financial impacts of gaps between benefits offered and those employees actually use. Then adjust your plan design appropriately to close these costly gaps.

Consider professional assistance

Now let’s turn to the second critical thing that business owners and their leadership teams need to know about: the healthcare benefits marketplace. As you’re no doubt aware, it’s hardly a one-stop convenience store. 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 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, explore whether your existing vendor can give you a better deal and, if not, whether one of its competitors is a better fit.

It’s doable … really

Cost containment for healthcare benefits may seem like a Sisyphean task — that is, one both laborious and futile. But it’s not: Many businesses find ways to lower costs by streamlining benefits to eliminate wasteful spending and better fit employees’ needs. We can help you identify and analyze each and every cost associated with your benefits package.

Michigan Department of Education’s (MDE) Michigan School Accounting Manual Committee (1022 Committee) updated guidance on GASB 96, Subscription-Based Information Technology Arrangements.

The additional guidance is related to Subscription-Based Information Technology Arrangement (SBITA) purchases with grant funds, including an update to U.S. Department of Education guidance that allows SBITAs to be charged to a grant in full if certain criteria are met. The guidance also includes frequently asked questions related to SBITAs. The updated guidance is included in Accounting Manual, Section II – Requirements, E.20 GASB #96 Supplemental Guidance.

Read the Updated Guidance

If you have questions about SBITAs, please contact your Yeo & Yeo auditor.

For additional guidance in navigating GASB Statement No. 96, Subscription-based Information Technology Arrangements (SBITA), read our whitepaper: What School Districts Need to Know About GASB 96 Implementation.