Retirement Saving Options for Your Small Business: Keep it Simple

If you’re thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved, there are a couple of options to consider. Let’s take a look at a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

SEPs are intended as an attractive alternative to “qualified” retirement plans, particularly for small businesses. The features that are appealing include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.

SEP involves easy setup

If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $66,000 for 2023. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE Plans

Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

For 2023, SIMPLE deferrals are up to $15,500 plus an additional $3,500 catch-up contributions for employees ages 50 and older.

On March 27, 2023, the Financial Accounting Standards Board (FASB) published narrowly drawn amendments to the lease accounting rules. The updated guidance clarifies issues that are relevant to rental agreements between businesses that have the same owner.

Written vs. verbal leases

Accounting Standards Update (ASU) No. 2023-01, Leases (Topic 842) Common Control Arrangements, explains how related business entities that are controlled by the same owner determine whether a lease exists. Specifically, it provides an optional practical expedient to private companies and not-for-profit organizations that aren’t conduit bond obligors. (A practical expedient is an accounting workaround that allows a company to use a simpler route to get to the same outcome.) The guidance settles questions about how to approach verbal common control leases and whether legal counsel is required to determine the terms and conditions of a lease.

The practical expedient is applicable only for written leases. Under the updated guidance, a private company electing the practical expedient must use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, how to account for it. In the case of a lease agreement that’s verbal — as is often the case between private entities under common control — the company must document the existing unwritten terms before applying the lease accounting rules.

The lessee isn’t required to determine whether written terms and conditions are enforceable when applying the practical expedient. In addition, companies are allowed to apply the practical expedient on an arrangement-by-arrangement basis.

Leasehold improvements

The accounting rules related to certain leasehold improvements have also changed for both public and private organizations under ASU 2023-01. Examples of leasehold improvements include installing carpet, painting and building out the space for the lessee’s needs. For example, a salon might install sinks and plumbing fixtures, a chemical manufacturer might need ventilation for its production process and an eco-friendly restaurant might design a rooftop garden to attract patrons.

The amendments require lessees to amortize leasehold improvements over the improvements’ useful lives to the common control group — regardless of the lease term. When the lessee no longer controls that underlying asset, the transfer of those improvements must be accounted for through equity or net asset. The improvements remain subject to the impairment requirements of Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment.

Implementation guidance

ASU No. 2023-01 is an amendment to ASC Topic 842, Leases, which was issued in 2016. This standard requires the full effect of entities’ long-term lease obligations to be reported on the balance sheet. It went into effect for public entities in 2019 and for private entities in 2022.

The new-and-improved rules will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that haven’t yet been made available for issuance. If a company adopts the amendments in an interim period, the company must adopt them as of the beginning of the fiscal year that includes that interim period.

If your company decides to adopt ASU 2023-01 concurrently with the adoption of Topic 842, you should use the same transition approach as that standard. If your company adopts the rules in a subsequent period, you can do so either retrospectively or prospectively.

For more information

Does your company rent property from a related party? We can help you report these arrangements in accordance with the updated guidance. Our accounting pros understand how to determine whether a common control lease exists and how to report leasehold improvements and other fixes that have been made to rented property.

Qualified educational assistance programs, sometimes referred to as “tuition reimbursement programs,” are a relatively popular employee benefit. Employers can use one to provide up to $5,250 per employee per year as a tax-free fringe benefit for undergraduate, graduate and continuing education courses.

However, a commonly asked question is: Can employers also use such programs to help employees repay outstanding student loans — say, from college?

Important points

The short answer is yes. Under the loan repayment provision of Internal Revenue Code Section 127, a qualified educational assistance program can be used to help employees repay certain student loans. But this benefit is available only for a limited time and other restrictions apply. Here are some important points to consider:

Expiration date. The loan repayment provision will expire at the end of 2025, unless Congress extends it.

Eligible loans. Loan repayment benefits can be used to pay principal, interest or both on any qualified education loan incurred by an employee for the employee’s education. For this purpose, the term “qualified education loan” has the same meaning as it has for the federal income tax deduction on education loan interest. This covers most loans for students who are or have been enrolled at least half-time in a degree program at an accredited post-secondary institution.

Method of payment. Employers may choose to pay the lenders directly or reimburse the employees. Direct payments may offer greater assurance that the funds are being properly used. Employers offering reimbursements should adopt substantiation procedures that reasonably assure qualifying loan payments are made.

Amount limitation. Student loan repayment assistance will be combined with any other educational assistance when applying the $5,250 aggregate annual limit on educational assistance benefits. Consequently, payments for any other types of educational assistance offered will reduce the nontaxable amount available to employees for student loan repayments.

Nondiscrimination. If an employer doesn’t make the same benefits available to all employees, it will need to demonstrate that benefit eligibility doesn’t discriminate in favor of highly compensated employees. Whether or not all employees can participate equally in it, an educational assistance program must limit benefits so that not more than 5% of the benefits paid during a year are paid to those who own more than 5% of the organization.

Documentation. New qualified educational assistance programs must be put in writing. Doing so entails preparing and adopting a document that describes all program features, including student loan repayment assistance. An employer will need to amend an existing program document to add student loan repayment benefits, unless the program already authorizes any type of educational assistance within the meaning of Sec. 127.

Notification. Eligible employees must be given reasonable notification of the program’s availability and terms.

A good fit

A qualified educational assistance program can be an excellent way to fund professional training and continuing education for employees. And, for a little while longer, it may also help attract and retain workers struggling to repay student loans. Our firm can assist you in determining whether one of these programs is a good fit for your organization.

Building flexibility into your estate plan using various strategies is generally advised. The reason is that life circumstances change over time, specifically evolving tax laws and family situations. One technique that provides flexibility is to provide your trustee with the ability to decant a trust.

Define “decanting”

One definition of decanting is to pour wine or another liquid from one vessel into another. In the estate planning world, it means “pouring” assets from one trust into another with modified terms. The rationale underlying decanting is that, if a trustee has discretionary power to distribute trust assets among the beneficiaries, it follows that he or she has the power to distribute those assets to another trust.

Depending on the trust’s language and the provisions of applicable state law, decanting may allow the trustee to:

Correct errors or clarify trust language,
Move the trust to a state with more favorable tax or asset protection laws,
Take advantage of new tax laws,
Remove beneficiaries,
Change the number of trustees or alter their powers,
Add or enhance spendthrift language to protect the trust assets from creditors’ claims, or
Move funds to a special needs trust for a disabled beneficiary.

Unlike assets transferred at death, assets that are transferred to a trust don’t receive a stepped-up basis, so they can subject the beneficiaries to capital gains tax on any appreciation in value. One potential solution is to use decanting.

Decanting can authorize the trustee to confer a general power of appointment over the assets to the trust’s grantor. This would cause the assets to be included in the grantor’s estate and, therefore, to be eligible for a stepped-up basis.

Follow your state’s laws

Many states have decanting statutes, and in some states, decanting is authorized by common law. Either way, it’s critical to understand your state’s requirements. For example, in some states, the trustee must notify the beneficiaries or even obtain their consent to decanting.

Even if decanting is permitted, there may be limitations on its uses. Some states, for example, prohibit the use of decanting to eliminate beneficiaries or add a power of appointment, and most states won’t allow the addition of a new beneficiary. If your state doesn’t authorize decanting, or if its decanting laws don’t allow you to accomplish your objectives, it may be possible to move the trust to a state whose laws meet your needs.

Beware of tax implications

One of the risks associated with decanting is uncertainty over its tax implications. Let’s say a beneficiary’s interest is reduced. Has he or she made a taxable gift? Does it depend on whether the beneficiary has consented to the decanting? If the trust language authorizes decanting, must the trust be treated as a grantor trust? Does such language jeopardize the trust’s eligibility for the marital deduction? Does distribution of assets from one trust to another trigger capital gains or other income tax consequences to the trust or its beneficiaries?

Decanting can breathe new life into an irrevocable trust. We’d be pleased to help you better understand the pros and cons of decanting a trust.

Summer is around the corner so you may be thinking about hiring young people at your small business. At the same time, you may have children looking to earn extra spending money. You can save family income and payroll taxes by putting your child on the payroll. It’s a win-win!

Here are four tax advantages.

1. Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $13,850 standard deduction for 2023 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

2. Claiming income tax withholding exemption

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,250 for 2023 (and includes more than $400 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

3. Saving Social Security tax

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

4. Saving for retirement

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $66,000 for 2023).

Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

Employers that offer a 401(k) plan should generally encourage participants to invest as much as they can and not touch the money until retirement. However, there may be instances when employees feel they need to access their plan funds before reaching retirement age.

In some of those cases, participants may qualify for a 401(k) hardship distribution. These differ from plan loans in that hardship distributions don’t need to be repaid — though they’re still subject to income taxes and a 10% penalty if under the age of 59½. Plan administrators must approve a hardship distribution under the current standard.

The previous standard

Generally, for distributions made before 2020, plans could use either of two standards for determining whether a hardship distribution was necessary: a safe-harbor standard or a non–safe-harbor standard. The safe-harbor standard:

Required a participant to first obtain all currently available distributions and plan loans, and
Prohibited elective deferrals and after-tax contributions to plans maintained by the plan sponsor for at least six months after the hardship distribution.

The non–safe-harbor standard was nominally a determination based on all relevant facts and circumstances. However, IRS regulations allowed an employer to rely on a participant’s representation that the emergency financial need couldn’t reasonably be met by certain specified means — such as liquidation of assets, loans and other plan distributions. Approval was also contingent on the plan sponsor having no contrary knowledge of the participant’s ability to pay.

The current rules

For distributions made on or after January 1, 2020, there’s only one relatively simple standard. It imposes two requirements to establish that a distribution is necessary:

Employees must obtain any other currently available distributions under the plan and any other deferred-compensation plan, whether qualified or nonqualified, maintained by the employer, including dividends from an employee stock ownership plan, and
Employees must represent in writing, which includes electronic mediums and other IRS-approved formats, that they have insufficient cash or other liquid assets reasonably available to satisfy the financial need.

Cash and other liquid assets aren’t “reasonably available” if they’re earmarked for payment of another obligation in the near future, such as rent or a mortgage. A plan administrator can’t accept an employee’s representation if the administrator has actual knowledge contrary to the representation.

Additional conditions

A 401(k) plan can impose only the minimum conditions described above or it can impose additional conditions if, for example, the plan sponsor is particularly concerned about preserving accounts solely for retirement. Additional conditions could include requiring that employees first take all nontaxable loans available under the employer’s plans.

For distributions made on or after January 1, 2020, however, additional conditions can’t include a required suspension of elective contributions or employee after-tax contributions under the rules for qualified plans — which include 401(k)s — and certain other retirement plans.

Administrative challenges

There’s no doubt that 401(k) plans are a valuable employee benefit that can help attract and retain employees. However, one of their challenges is managing the administrative requirements, including the current standard for hardship distributions. Contact us for help understanding all the tax and information-reporting rules applicable to retirement benefits.

What do you do with your financial statements after your CPA delivers them? If you’re like most business owners and managers, you breathe a sigh of relief that they’re finished, file them away and go back to running the business. But financial statements can be a useful tool to help improve business operations in the future.

Eye on profitability

The income statement is a good starting point for using your financials to analyze performance and remedy inefficiencies and anomalies. Here are four ratios you can compute from income statement data:

1. Gross profit margin. This is calculated by dividing profit after direct costs by revenue. It’s a widely used ratio, measuring a company’s ability to cover the direct cost of sales.

2. Net profit margin. This is calculated by dividing net income by revenue. If the margin is rising, the company must be doing something right. Often, this ratio is computed on a pretax basis to accommodate for differences in tax rates.

3. Return on assets. This is calculated by dividing net income by the company’s total assets. The return shows how efficiently management is using its assets.

4. Return on equity. This is calculated by dividing net profits by shareholders’ equity. The resulting figure tells how well the shareholders’ investment is performing compared to competing investment vehicles.

Profitability ratios can be used to compare your company’s performance over time and against industry norms.

Connecting the dots

If your company’s profitability ratios have deteriorated compared to last year or industry norms, it’s important to find the cause. If the whole industry is suffering, the decline is likely part of a macroeconomic trend. If the industry is healthy, yet your company’s margins are falling, it’s time to determine the cause and then take corrective measures.

Depending on the source of the problem, you might need to cut costs, lay off unproductive workers, automate certain business functions, eliminate unprofitable segments or product lines, raise prices — or possibly even investigate for fraud. For instance, a hypothetical manufacturer might discover that the reason its gross margin has fallen is rising materials costs because its procurement manager is colluding with a supplier in a kickback scam.

Contact us

Today’s uncertain, inflationary markets are putting the squeeze on profits in many sectors. But don’t accept that excuse without first investigating further. Your income statement provides critical clues into what’s happening at your company.

Examine the main components — gross revenue, cost of sales, and selling and administrative costs — to assess if specific line items have fallen due to company-specific or industrywide trends. Also, monitor comparable public companies, trade publications and the internet for information. We can help you determine possible causes and brainstorm ways to unplug your profit drains.

No matter how much effort you’ve invested in crafting an estate plan, your will, trusts and other official documents may not be enough. Consider also drafting a “road map.” Essentially, it’s an informal letter that guides your family in executing your plan according to your wishes.

What to address

Among other things, your road map may include:

A list of important contacts, including your estate planning attorney, accountant, insurance agent and financial advisors,
The location of your will, living and other trusts, tax returns and records, powers of attorney, insurance policies, deeds, and automobile titles,
A personal financial statement that lists stocks, bonds, real estate, bank accounts, retirement plans, vehicles and other assets, as well as information about mortgages, credit cards, and other debts,
An inventory of digital assets — such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, and social media accounts — including login credentials or a description of arrangements made to provide your representative with access,
Computer passwords and home security system codes,
Safe combinations and the location of any safety deposit boxes and keys, and
The location of family heirlooms or other valuable personal property.

If you’ve preplanned your funeral, include information about the arrangements. If you haven’t preplanned it, consider explaining your burial wishes in the road map.

Communicate your motives

Use the road map to explain your reasoning behind certain estate planning decisions. Doing so can go a long way toward easing disputes over your estate after you’re gone.

For example, perhaps you’re distributing your assets unequally, distributing specific assets to specific heirs or placing certain restrictions on an heir’s entitlement to trust distributions. There are many good reasons for these strategies, but it’s important for your family to understand your motives to avoid hurt feelings.

Finally, like other estate planning documents, your road map won’t be effective unless your family knows where to find it, so consider leaving it with a trusted advisor. Contact us if you’d like help drafting an estate planning road map.

The Michigan treasury department has confirmed that a tax cut triggered by the state’s budget surplus will go into effect for 2023.

The income tax will decrease from 4.25% to 4.05%, the lowest income tax rate since 2007. It will amount to $650 million going back to Michigan residents. For an unmarried filer with no children making about $52,500 a year, the state’s median income for workers in 2021, it means a reduction of about $95 over the next year. The average taxpayer, the Michigan Department of Treasury said in a release, will save about $50.

The tax change will be effective as of January 1, 2023. Withholding in paychecks will remain the same. When Michiganders file their 2023 state income taxes in 2024, they will see the rate adjustment in the form of less tax owed or a larger refund.

The tax cut is the result of a 2015 law that required the rate to go into effect if Michigan’s general fund grew faster than the rate of inflation beginning in 2023. The state’s massive budget surplus triggered the tax cut. Lawmakers will need to determine if the cut will be temporary for one year, or a permanent reduction.

If you’ve been following the news lately, you’ve surely heard or read about the sudden rise in concern about the banking industry. Although the story is still unfolding, an important lesson for business owners is already clear: You’ve got to be constantly on guard against the many risks to your company’s financial solvency.

One way that banks are advised to guard against catastrophic failure is to regularly perform “stress testing.” Doing so entails using various analytical techniques to determine whether and how the institution would be affected by specified financial developments or events.

But this advice isn’t necessarily restricted to banks. Businesses can use stress testing as well to get a better sense of how they should respond to a given threat.

Identify major risks

To get started on a basic stress-testing initiative, you’ll generally need to identify four types of risk to your company:

Operational risks, which cover the day-to-day workings of the business and can include dealing with the impact of a disaster arising from natural causes, human error or intentional wrongdoing,
Financial risks, which involve how the company manages its finances and protects itself from fraud,
Compliance risks, which relate to issues that might attract the attention of government regulators, and
Strategic risks, which refer to the business’s grasp of its own market as well as its ability to respond to changes in customer preferences.

When examining threats in each category, be as specific as possible. No detail or technicality is too small to factor into your assessment.

Meet with your team

Once you’ve identified the pertinent risks in each category, meet with your leadership team and professional advisors to improve your collective understanding of each threat. Even more important, discuss the anticipated financial impact of the identified risks and your company’s ability to absorb or adjust to the projected negative effects.

The ultimate objective is to develop a game plan to mitigate every identified risk. For example, if your business operates in an area prone to natural disasters, such as earthquakes or wildfires, you obviously need an evacuation and disaster recovery plan in place.

But other situations aren’t so obvious. For instance, if your company relies heavily on a key person, you should develop a viable succession plan and consider buying insurance in case that person unexpectedly dies or becomes disabled.

Focus on continuous improvement

Risk management is a continuous improvement process. New threats may emerge, old ones may fade — and even the best-laid plans tend go awry when left untended. Meet with your leadership team at least annually to conduct stress testing and assess the most current threats to your company. Contact us for help gathering and organizing relevant financial data and developing accurate projections.

Every manufacturer is different, so the right cash flow strategies depend on your situation. Let’s take a closer look at several areas where you may find ways to improve your cash flow.

Cash flow projections

You can’t manage cash flow unless you monitor and measure it. In good times, the income statement usually receives top billing. But in uncertain times, the balance sheet should play a more prominent role. While the income statement is a good gauge of past performance, the balance sheet provides a clearer picture of your current assets and liabilities and the amount of cash you’ll need in the coming weeks and months.

Project cash flow under best-case, worst-case and most-likely scenarios and have contingency plans in place for each. Monitor your actual results regularly to spot negative cash flow trends early and address them quickly. We can help you create a monitoring process.

Customers

Collecting from customers is key to maintaining strong cash flow, so it’s critical to evaluate and manage your customer base. If your manufacturing company is heavily concentrated in a handful of customers, consider options for growing that base, such as expanding into new markets, developing new products, or exploring new marketing techniques. Concentration risks generally happen when one customer represents more than 10% of your transactions.

Also, be sure to evaluate customers’ credit risk. Have their businesses been negatively affected by the pandemic and the resulting economic turmoil? How has this impacted their ability to pay?

Receivables

Examine ways to convert receivables into cash more quickly. Start by ensuring that invoices are issued on a timely basis. Also, provide customers with regular reminders before their payments are due. Consider offering discounts for early payment. Ask for deposits for custom jobs and milestone payments for long-term projects.

Another way to gain some stability in this area is through accounts receivable factoring. Factoring simply means selling receivables to a financial institution or other third party (the “factor”) at a discount. You obtain quick access to cash or a line of credit, and the factor takes responsibility for collecting receivables from your customers.

Before you go this route, be sure to consider the pros and cons. Pros include immediate access to cash and avoidance of many of the headaches associated with collecting from customers. Cons include the expense — factoring fees can be higher than interest rates on commercial loans — and potential customer confusion.

Vendors and suppliers

A concentrated supplier base can be just as damaging to a manufacturer’s cash flow as a concentrated customer base. The failure of a major supplier can hinder your ability to fulfill orders or meet demand. Consider ways you can build a more diversified supplier base.

Contact your vendors and suppliers to coordinate the timing of payments. They may be willing to offer extended payment terms or early payment discounts.

Inventory

Managing inventory can be a delicate balancing act. On one hand, reducing stock levels of raw materials or inventories of finished goods can help boost cash flow. On the other hand, increasing certain inventory levels can help mitigate supply chain risks and avoid raw material shortages.

Focused inventory management can help you strike a balance between conserving cash and meeting customer demand. To free up cash and reduce storage costs, consider liquidating obsolete or slow-moving inventory.

Overall efficiency

Don’t overlook the potential impact of efficiency improvements on cash flow. Look for opportunities to streamline processes by redesigning the factory layout, optimizing workflows or taking advantage of automation.

Also consider opportunities for cutting or eliminating expenses, either temporarily or permanently. Examples include reducing spending on nonessential travel, leasing equipment instead of buying it, reducing work hours, shifting work from temporary to existing permanent staff and delaying capital expenditures.

An ongoing priority

Managing your cash flow is critical during both good times and bad. We can help you monitor your cash flow and assesses its health.

Deferred taxes are a confusing topic — and the accounting rules for reporting these items often seem to defy the logic of real-world economics. Here’s a brief overview to help clarify matters.

What are deferred taxes?

Companies pay income tax on IRS-defined taxable income. On their Generally Accepted Accounting Principles (GAAP) financial statements, however, companies record income tax expense based on accounting “pretax net income.” In a given year, taxable income (for federal income tax purposes) and pretax income (as reported on your GAAP income statement) may substantially differ. A common reason for this temporary difference is depreciation expense.

For income taxes, the IRS allows companies to use accelerated depreciation methods to lower the taxes paid in the early years of an asset’s useful life. Some companies also may elect to claim Section 179 deductions and bonus depreciation in the year an asset is placed in service. Alternatively, for GAAP reporting purposes, companies frequently use straight-line depreciation. Early in an asset’s useful life, this divergent treatment usually causes taxable income to be significantly lower than GAAP pretax income. However, as the asset ages, the temporary difference in depreciation expense reverses itself.

The use of different depreciation methods for book and tax purposes causes a company to report deferred tax liabilities. That is, by claiming higher depreciation expense for tax purposes than for accounting purposes, the company has temporarily lowered its tax bill — but it will make up the difference in future tax years. Deferred tax assets may come from other sources, such as capital loss carryforwards, operating loss carryforwards and tax credit carryforwards.

How are deferred taxes reported on the financials?

If a company’s pretax income and its taxable income differ, it must record deferred taxes on its balance sheet. The company records a deferred tax asset for the future benefit it will receive if it pays the IRS more tax than an income statement reflects. If the opposite is true, the company records a deferred tax liability for the additional future amount it will owe.

Like other assets and liabilities, deferred taxes are classified as either current or long-term. Regardless of their classification, deferred taxes are recorded at their cash value (that is, no consideration of the time value of money). Deferred taxes are also based on current income tax rates. If tax rates change, the company may revise its balance sheet and the change flows through to the income statement.

While deferred tax liabilities are recorded at their full amount, deferred tax assets are offset by a valuation allowance that reflects the possibility the asset will expire before the company can use it. Deciding how much deferred tax valuation allowance to book is highly subjective and left to management’s discretion. Any changes to the allowance flow through to the company’s income statement.

Now or later?

Financial statement users can’t afford to lose sight of deferred taxes. All else being equal, a company with significant deferred tax assets may be able to lower its future tax bill and preserve its cash on hand by claiming deferred tax breaks. Conversely, a company with significant deferred tax liabilities has already tapped into tax breaks and may need additional cash on hand to pay Uncle Sam in future tax years. Contact us for more information.

Consider the following scenario: To streamline administration of continuing health care coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), an employer decides to neither send bills for COBRA premiums nor provide reminders when premium payments are late. If qualified beneficiaries don’t pay their monthly premiums by the end of the grace period, COBRA coverage is cut off retroactively to the beginning of the month without warning. Would such actions comply with the mandated rules?

Termination details

Although COBRA doesn’t require plans to send bills or premium payment reminders, some circumstances do require written communications. Most notably, plan administrators must provide a written notice of termination if a qualified beneficiary’s COBRA coverage terminates before the end of the maximum coverage period. This period is generally after 18 or 36 months, depending on the qualifying event that triggered the COBRA election.

An employer may terminate coverage before the end of the maximum coverage period for certain reasons specified in the COBRA statute, including a failure to timely pay premiums. When lawful termination occurs, each affected qualified beneficiary must receive a notice “written in a manner calculated to be understood by the average plan participant” that states:

Why coverage was terminated early,
The coverage termination date, and
Any rights the qualified beneficiary may have under the plan or applicable law to elect alternative group or individual coverage.

Generally, this notice of termination must be furnished “as soon as practicable” following a decision to terminate COBRA coverage. Providing notice before coverage termination isn’t necessarily required. However, if a plan administrator can provide advanced notice under the “as soon as practicable” standard, it must do so.

Addresses and methods

If a covered employee and the employee’s spouse live at the same address, the plan administrator can provide one notice addressed to both. A notice to one covered employee or spouse satisfies the requirement with respect to a dependent child who lives with the person who received the notice.

On the other hand, if any of the qualified beneficiaries live at different addresses, and this fact is known to the plan administrator based on “the most recent information available to the plan,” separate notices must be provided.

Like other required COBRA notices, a notice of termination must be furnished using “measures reasonably calculated to ensure actual receipt of the material.” Methods approved by the U.S. Department of Labor include traditional mail, hand delivery and electronic transmission. First-class mail is typically recommended.

Compliance is critical

Employers with 20 or more employees are generally required to offer COBRA coverage to departing staff members. As this is a federal law, it’s critical to comply with all applicable rules. Please contact us for help monitoring and managing the financial risks of offering health care benefits.

There are several reasons why you may want to move a trust to a more favorable jurisdiction. For instance, to avoid or reduce state income tax on the trust’s accumulated ordinary income or capital gains. However, before doing so, it’s critical to understand the risks.

Revocable trust vs. irrevocable trust

Many people retire to states with more favorable tax laws. But just because you move to a state with no income or estate taxes doesn’t mean your trusts move with you. Indeed, for individual income tax purposes, you’re generally taxed by your state of domicile. The state to which a trust pays taxes, however, depends on its situs.

Moving a trust means changing its situs from one state to another. Generally, this isn’t a problem for a revocable trust. In fact, it’s possible to change situs for a revocable trust by simply modifying it. Or, if that’s not an option, you can revoke the trust and establish a new one in the desired jurisdiction.

If a trust is irrevocable, whether it can be moved depends, in part, on the language of the trust document. Many trusts specify that the laws of a particular state govern them, in which case those laws would likely continue to apply even if the trust were moved. Some trusts expressly authorize the trustee or beneficiaries to move the trust from one jurisdiction to another.

If the trust document doesn’t designate a situs or establish procedures for changing it, then the trust’s situs depends on several factors. These include applicable state law, where the trust is administered, the trustee’s state of residence, the domicile of the person who created the trust, the location of the beneficiaries and the location of real property held by the trust.

Identifying the risks

Moving a trust presents potential risks for the unwary. For example:

If you move a trust from a state that permits perpetual trusts to one that doesn’t, you may inadvertently limit the trust’s duration.
Some states tax all income derived from a source within the state. If your trust holds real estate or interests in a business located in such a state, that state may tax the income regardless of the trust’s situs.
In some cases, conflicting state laws may cause the same income to be taxed in more than one state.

Also consider other taxes that may have an impact, such as intangibles tax, property tax, and tax on dividends and interest.

Making the right move

Depending on your circumstances, moving a trust may offer tax savings and other benefits. Keep in mind, however, that the laws governing trusts are complex and vary considerably from state to state. We can help you determine whether moving a trust is the right move for you.

Recently, the IRS announced 2024 indexing adjustments to the applicable dollar amount used to calculate employer shared responsibility penalties under the Affordable Care Act (ACA).

Although next year might seem a long way off, it’s best to get an early start on determining whether your business is an applicable large employer (ALE) under the ACA. If so, you should also check to see whether the health care coverage you intend to offer next year will meet the criteria that will exempt you from a penalty.

The magic number

For ACA purposes, an employer’s size is determined in any given year by its number of employees in the previous year. Generally, if your company has 50 or more full-time employees or full-time equivalents on average during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is someone who provides, on average, at least 30 hours of service per week.

Under the ACA, an ALE may incur a penalty if it doesn’t offer minimum essential coverage that’s affordable and/or fails to provide minimum value to its full-time employees and their dependents. The penalty in question is typically triggered when at least one full-time employee receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).

Next year’s penalties

The adjusted penalty amounts per full-time employee for failures occurring in the 2024 calendar year will be:

$2,970, a $90 increase from 2023, under Section 4980H(a), “Large employers not offering health coverage,” and
$4,460, a $140 increase from 2023, under Sec. 4980H(b), “Large employers offering coverage with employees who qualify for premium tax credits or cost-sharing reductions.”

The IRS uses Letter 226-J to inform ALEs of their potential liability for an employer shared responsibility penalty. A response form — Form 14764 (“ESRP Response”) — is included with Letter 226-J so that an ALE can inform the IRS whether it agrees with the proposed penalty. A response is generally due within 30 days. Be on the lookout for this letter so that you’re prepared to promptly review and respond if the IRS contacts you.

Questions and ideas

Careful compliance with the ACA remains critical for companies that qualify as ALEs. Growing small businesses should be particularly wary as they become midsize ones. Our firm can answer any questions you may have about your obligations as well as suggest ways to better manage the costs of health care benefits.

GASB Statement No. 96, Subscription-based Information Technology Arrangements, is effective for fiscal years beginning after June 15, 2022, and all reporting periods after that. This Statement is based on the standards established with Statement No. 87, Leases, and follows the same foundation, steps, and rules.

The Statement defines subscription-based information technology arrangements (SBITAs) and when such SBITAs should be recorded as right-to-use subscription assets and corresponding subscription liabilities. The Statement also covers which costs associated with the SBITAs are to be included in capitalization, and the disclosures required.

What is a SBITA?

A SBITA is a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.

The biggest challenge for organizations will be gathering and evaluating their SBITA population and ensuring completeness. We recommend that organizations review their SBITAs and collect the data necessary to assess if the changes to GASB 96 will apply to such contracts. The information that will be needed includes vendor, description, building/location, account (G/L), contract term (period of coverage), costs associated (may involve more than just subscription payments), and options to extend.

What to Do Now

Get an overall understanding of GASB 96.
Work with your IT/Technology Directors to obtain a list of SBITAs.
Complete Yeo & Yeo’s SBITA spreadsheet (the template can be requested from your Yeo & Yeo auditor).
After the assessment of SBITAs that will be affected by the implementation of GASB 96:

- Calculate journal entries.
- Work with the auditor.

Our GASB 96 for Governments brief provides more detailed information and guidance on Statement No. 96.

Contact Yeo & Yeo if you have questions about GASB 96.

Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

If you’re a calendar-year corporation, file a 2022 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.
For corporations pay the first installment of 2023 estimated income taxes.
For individuals, file a 2022 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due.
For individuals, pay the first installment of 2023 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES).

May 1

Employers report income tax withholding and FICA taxes for the first quarter of 2023 (Form 941) and pay any tax due.

May 10

Employers report income tax withholding and FICA taxes for the first quarter of 2023 (Form 941), if they deposited on time and fully paid all of the associated taxes due.

June 15

Corporations pay the second installment of 2023 estimated income taxes.

Nowadays many businesses are looking for creative ways to cut costs and preserve profits. As a bonus, some profit-enhancement initiatives can also be good for the environment. Here are some eco-friendly moves that may enable your business to cut costs — as well as build revenue and long-term value.

Cost-cutting measures

The most obvious way going green can save money is through reduced consumption of water, electricity and gas. Many utility providers will provide free audits of your company’s consumption. In the process, you may learn simple, but not necessarily obvious, steps to save resources.

For example, did you know that allowing electronic equipment to rest overnight in “standby” mode can add 10% to its energy consumption? You can lower consumption and your energy bill simply by powering down electronic equipment completely at the end of the workday.

Examples of other green business practices include:

Minimizing single-use items, such as disposable coffee cups, paper bathroom hand towels, plastic water bottles sold in vending machines and single-serve coffee pods,
Choosing paper products over plastic alternatives,
Providing recycling bins and discounts to customers who bring in reusable bags,
Using electronic methods for communication and data storage,
Maintaining work-from-home options for employees to cut commutes,
Providing financial incentives to employees who commute using public transit,
Donating unneeded office equipment and furniture, instead of sending them to a landfill,
Installing water-saving faucets and toilets,
Shipping products using full truckloads (rather than partial truckloads), whenever possible, and
Selecting suppliers that share your commitment to sustainable business practices.

Modest changes your business makes can be magnified to the extent that they inspire employees and customers to adopt the same practices personally. Plus, certain energy-efficient improvements may qualify for valuable tax breaks.

Opportunities to add value

Green business practices may sometimes increase business expenses and/or require capital investment without an immediate financial reward. However, companies that commit to going green may reap rewards over the long run.

For instance, studies show that many people would be willing to change their buying habits to help reduce negative environmental impact. That includes paying more for green substitute products and switching to more eco-friendly brands. So, going green can help generate additional revenue, grow market share and improve gross margins.

Likewise, adopting green business practices may also make your business more competitive with others that have already jumped on the bandwagon — and may give you a leg up on competitors that aren’t as environmentally conscious. Plus, a commitment to green business practices may help you attract and retain workers who have similar values. This may be a major upside in today’s tight labor market.

With business travel ramping back up again, employers might start fielding questions from staff about the tax treatment of travel-related fringe benefits.

For example, when your employees fly on business, some may earn frequent flyer miles. Should your organization treat those miles as taxable if an employee ultimately uses them for personal reasons — such as a family vacation?

IRS policy

Many employers allow employees to use frequent flyer miles earned on business travel for personal purposes. Indeed, this can be an enticing fringe benefit for salespeople and others who spend time on the road.

Generally, employer-provided fringe benefits are included in an employee’s income unless the Internal Revenue Code provides a specific exclusion. However, the IRS has historically struggled with technical and administrative issues related to frequent flyer miles.

For instance, which miles are attributable to business expenditures and which are personal? If income is generated, how and when should it be valued? Because of such issues, the IRS announced in 2002 that it wouldn’t assert that taxpayers have understated their federal tax liability because of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to business or official travel.

As of this writing, the IRS has issued no additional guidance on the issue. And in the 2002 announcement, the tax agency stated that, if the policy is ever changed, any changes would be prospective.

Exceptions to consider

The IRS policy does have some exceptions. For example, it doesn’t apply if travel or other promotional benefits are “converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.”

A conversion to cash might occur if an employee buys a ticket in coach class, uses frequent flyer miles to upgrade to first class and then submits a reimbursement request for the cost of a first-class ticket. Taxable compensation paid in the form of travel could also occur if the employer uses frequent flyer miles to buy plane tickets to a vacation destination and then gives those tickets to an employee. But if employees are simply using accrued points to buy their own vacations, doing so would seem to fall squarely within the policy.

Cash and cash equivalents

Since 2002, credit card issuers have developed reward systems that are considerably more flexible than the frequent flyer programs that were the subject of the IRS policy. Some of these permit conversion of points into gift cards at a uniform rate or redemption of points for cash. Others bypass points altogether in favor of simple cash rebates.

Cash and cash-equivalent rewards generally wouldn’t meet the conditions for excluding a benefit as “de minimis” (that is, too small to be taxable). Consequently, employers shouldn’t assume that the frequent flyer guidance will also control whether employees must be taxed on the personal use of credit card points or rebates that were earned with business purchases under programs that aren’t limited to “in-kind promotional benefits.”

Specific circumstances

If your organization has employees who earn frequent flyer miles on business travel, strongly consider creating a stated policy on whether they can use those rewards for personal purposes. From there, our firm can help you determine the tax impact based on the specific circumstances involved.