Coming Soon: 5 Accounting Rules That Take Effect in 2023

It can be challenging to keep track of which accounting rules are changing, when the changes kick in and for which types of entities. Plus, implementing the necessary revisions to your organization’s procedures and systems often takes time and resources. Here are five updates that go live for certain entities this year.

1. Targeted improvements for long-term insurance contracts

Accounting Standards Update (ASU) No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued in 2018, but its effective date was deferred twice. It requires insurers to 1) review annually the assumptions they make about their policyholders, and 2) update the liabilities on their balance sheets if the assumptions change. Updated liabilities will be measured using a standardized, market-observable discount interest rate based on the yield from an upper-medium-grade, fixed-income instrument. This is a more conservative approach than the method used for insurance policies under previous guidance.

Large public insurance companies must implement these changes in 2023. This may initially require significant, expensive software changes. Private insurers have until 2025 to make the changes.

2. Expanded disclosures for supplier finance programs

With a supplier finance program, the buyer arranges for a third-party finance provider or intermediary to pay approved invoices before the due date at a discount from the stated amount. Meanwhile the buyer receives an extended payment date, say, 90 to 120 days, in exchange for a fee. This enables the buyer to keep more cash on hand. ASU No. 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, will require buyers to disclose the key terms of supplier finance programs and where any obligations owed to finance companies have been presented in the financial statements.

3. Changes to M&A accounting

ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, requires companies to measure contract assets and liabilities acquired in a business combination as if they originated the contract. Under previous rules, buyers were required to report acquired customer contracts at fair value.

The updated guidance generally requires buyers to report acquired contracts consistent with how they were reported on the sellers’ financial statements, if the amounts were accurately reported in accordance with the revenue recognition rules under U.S. Generally Accepted Accounting Principles. This update goes into effect in 2023 for public companies and 2024 for private ones.

4. New model for reporting credit losses

ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requires banks and other entities that extend credit to forecast into the foreseeable future to predict losses over the life of a loan and then immediately book those losses. The updated guidance is designed to provide more-timely reporting of credit losses, but measuring losses is challenging in today’s uncertain, inflationary marketplace. It primarily affects banks and other financial institutions. However, any company that has trade receivables, notes receivable, investments in held-to-maturity debt securities or contract assets will be affected.

Large public companies have already transitioned from the incurred loss model to the current expected credit losses (CECL) model. This year, small public companies, private companies and not-for-profits must adopt the new CECL model.

5. Hedge accounting changes

ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging — Portfolio Layer Method, clarifies the updated guidance from 2017 on hedging transactions. It expands the current last-of-layer method (now called the “portfolio layer” method) that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio.

The updated guidance bridges the gap between hedge accounting and the CECL standard to clarify that an entity is prohibited from including hedge accounting impact in the credit loss calculations. It also specifies how to consider hedge basis adjustments when determining credit losses for the assets included in a closed portfolio. The changes go into effect in 2023 for public entities and 2024 for private ones.

Are you ready?

In addition to educating your staff about accounting rule changes in the pipeline, you also should consider letting investors and lenders know about any changes that could have a major effect on your financial statements in 2023. Contact us for more information or help adopting these new rules.

Yeo & Yeo CPAs & Advisors is pleased to announce that Michael Evrard, CPA, will lead the firm’s Audit Services Group. The Audit Services Group helps drive change, innovation and growth for the audit practice under the supervision of Assurance Service Line Leader Jamie Rivette, CPA, CGFM.

“Mike has been a great mentor to our auditors,” Rivette said. “He has helped many of our staff grow into high-performing professionals, and he takes pride in helping clients succeed. I am excited that he will lead the Audit Services Group and continue to find ways for our staff to innovate and deliver high-quality audit services.”

Evrard is a Principal based in Yeo & Yeo’s Kalamazoo office. He is a member of the firm’s Nonprofit Services Group and the Education Services Group. He joined Yeo & Yeo in 2010. He assisted in developing the firm’s award-winning YeoLEAN audit process and provides audit services for school districts, construction companies and nonprofit organizations. Evrard is a frequent contributor to Yeo & Yeo’s blog and the firm’s Nonprofit Insight eNewsletter. He holds the AICPA Advanced Single Audit Certification and is a Leadership Genesee graduate.

“I am excited to take on this new role as the Audit Services Group leader,” Evrard said. “I am fortunate to work with a fantastic group of clients and team members at Yeo & Yeo, both in my local office and across the firm. As the future of audit evolves, I look forward to helping elevate our team with more efficient auditing techniques and technologies that will allow us to better serve our clients.”

Merger and acquisition activity dropped dramatically last year due to rising interest rates and a slowing economy. The total value of M&A transactions in North America in 2022 was down 41.4% from 2021, according to S&P Global Market Intelligence.

But some analysts expect 2023 to see increased M&A activity in certain industries. If you’re considering buying or selling a business, it’s important to understand the tax implications.

Two approaches

Under current tax law, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. That’s because the corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

What buyers want

For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.

A buyer can step up (or increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

What sellers want

In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Seek advice before a transaction

Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance before finalizing a deal. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed.

Ask any business owner whose company has been defrauded by an employee, and you’ll probably hear a common refrain: “I never would have suspected that person!” In many cases, spotting fraud perpetrators before they commit a crime is difficult, especially if you don’t work closely with them on a daily basis. But many fraudsters exhibit performance and interpersonal behaviors that can tip off owners, managers and HR professionals to more serious issues.

Overt and subtle signs

According to the 2022 Association of Certified Fraud Examiners’ (ACFE’s) occupational fraud study, A Report to the Nations, the vast majority of occupational fraud perpetrators have no previous criminal record. However, in 8% of cases, perpetrators have been terminated from a previous position and 9% have been disciplined by an employer.

The ACFE has also found that most fraud perpetrators exhibit at least one behavioral red flag before they’re discovered. Living beyond their means is the most prevalent (39% of cases) and unusually close relationships with vendors or customers are also common. Other behavioral red flags can be more subtle. A crooked employee may be the friendliest and most cooperative person in the office, but fraudsters often come into conflict with other staff members or fail to follow rules. They may also be socially isolated, unusually defensive or exhibit “control” issues.

Perpetrators in half of all occupational fraud cases engage in some non-fraud-related misconduct before or during the fraud incident. For example, they might be disciplined for bullying subordinates or frequently showing up for work late. According to the ACFE, a small number of fraud perpetrators are investigated for sexual harassment or inappropriate Internet use. Some dishonest workers also exhibit work performance problems. In the ACFE study, 15% received poor performance evaluations and 12% were denied a raise or promotion.

Nipping it in the bud

When misconduct or poor performance leads to disciplinary action, supervisors and HR professionals have a golden opportunity to potentially stop fraud in progress. After all, the longer a scheme goes undetected, the more costly it is for the organization. Fraud schemes with a duration of less than six months have a median loss of $47,000, but those with a duration of 13 to 18 months soar to a median $125,000 loss. So if you detect smoke, look for fire.

Although it’s usually a good idea to closely observe any worker who routinely flouts the rules, antagonizes coworkers or lets job responsibilities slip, be cautious. Most underperforming or difficult employees aren’t actually thieves. Talk to legal counsel before you make accusations about possible criminal activity.

Maintain controls

It’s also a good idea to establish and strictly enforce internal controls. Such controls can help protect your organization from financial losses even if you fail to notice a potential fraud perpetrator in your midst. Contact us for help.

Giving back to the communities in which
we live, work & play

At Yeo & Yeo, we’re dedicated to helping our communities thrive. The Yeo & Yeo Foundation was created to fully embrace our dynamic culture of community service and volunteerism. Through the Foundation, we give back to our communities using our time, our talents, and our financial resources.

In 2022, the Yeo & Yeo Foundation proudly donated over $130,000 to 56 organizations throughout Michigan, including $24,000 to the American Cancer Society Making Strides program through the Yeo Young Professionals firm-wide service project. Foundation dollars were donated to a broad range of causes, including child advocacy groups, food banks, homeless shelters, humane societies, veterans’ organizations and more.

“The Yeo & Yeo Foundation is a way for our donation dollars to be combined to make a larger impact in our communities,” said Alex Wilson, Yeo & Yeo Foundation Board President. “From the contributions of our people and the firm, each year, we have been able to grow our giving and help nonprofit organizations throughout our communities. I am proud of our people’s compassion and love to see our employees volunteering, serving on committees or boards and providing financial support.”

The Principals of Yeo & Yeo established the Foundation in 2018 to continue the Yeo family’s legacy of giving back. Since its inception, the Yeo & Yeo Foundation has donated more than $340,000 to over 170 nonprofit organizations across our Michigan communities and beyond, made possible by our people’s contributions and firm support. The Foundation is employee-sponsored, serving organizations the firm’s associates across all Yeo & Yeo companies are personally involved in or passionate about.

Learn more about our firm’s impact on its communities in our 2022 Yeo & Yeo Foundation Annual Report and visit our Giving Back page.

The current job market is great — for applicants. The federal jobs report released in early February revealed that the U.S. economy added a whopping 517,000 jobs in January, bringing the unemployment rate down to a historic low of 3.4%.

Employers, on the other hand, face an uphill battle. Competition is fierce to not only draw optimal job candidates, but also retain employees who may be looking to jump ship to competitors or change careers to booming industries.

When it comes to employee retention, one often-overlooked difference maker is internal communications. When organizational leaders appear aloof or communicate unclearly, employees can fall prey to rumors, distrust and misinformation. It’s important to stay engaged with your workforce.

Less talk, more listening

Organizations that get caught off guard by workforce issues such as high turnover often find the problem is that leadership is doing all the talking and little of the listening. Sometimes, the easiest way to find out what it’ll take to keep your workers happy and productive is to ask.

Although it may sound old fashioned, putting a suggestion box in the break room can pay off. Also consider using an online tool that allows employees to provide feedback anonymously. Executives can reply to queries with the broadest implications, while managers can handle questions specific to a given department or position. Share answers through organizational emails or make them a feature of an internal newsletter or blog.

At least once a year, hold a town hall with staff members to answer questions and discuss issues face to face. Even if the meeting must be held virtually, let employees see and hear the straight truth from leadership.

Ways to raise your profile

Larger employers often engage PR consultants to help executives manage both their public images and the personas they convey to employees. If yours is a small to midsize organization, this expense may be unnecessary. But each of your leaders should think about their internal communications profiles and manage them like the critical assets that they are.

For example, be sure photographs and personal information used in internal communications and on your organization’s website are up to date. A profile pic of you from a decade or two ago may say, “I don’t care enough to share who I am today.”

Although you should avoid getting up in employees’ business too often, leadership needs to keep a high profile. Have upper management regularly visit each unit, department or facility, and give supervisors and employees a chance to speak candidly. Ask execs to periodically sit in on meetings, asking and answering questions as appropriate. Employees will likely get a morale boost from seeing leaders take an active interest in their corner of the organization.

In fact, for a potentially fun and insightful change of pace, execs might set aside a day to learn about a specific company position. They could shadow selected employees and let them explain what really goes on in their jobs. Again, the leaders may pose questions but should otherwise stay out of the way. If you do implement such a program, clarify upfront that you’re not playing “gotcha” but trying to better understand how things get done and what improvements could be made.

Good faith effort

Every employer wants to be fully staffed with a highly engaged workforce. To get one, you’ve got to hold up your end of the bargain by communicating clearly, regularly and as part of a good faith effort to support employees.

The SECURE Act 2.0 became law on December 29, 2022. Like its predecessor legislation, SECURE 2.0 made several changes to retirement plans that will affect individuals and employers. However, one of the lesser-known impacts of this legislation is its effect on trusts listed as the beneficiary of qualified retirement plans, such as IRAs and 401Ks.

Before the original SECURE Act, conduit trusts were utilized in estate planning to protect retirement plan assets from creditors while also allowing required minimum distributions to be calculated on the eldest, or sole, beneficiary’s life expectancy (referred to as a stretch IRA). This strategy was very popular in many estate plans involving significant retirement plan assets. With the passing of the SECURE Act and SECURE Act 2.0, naming a trust as the beneficiary of a qualified retirement plan can have some negative and unintended consequences, as the stretch IRA is no longer available to non-eligible designated beneficiaries and can create significant income tax burdens as a result.

Under current rules, trusts with qualified retirement plan assets and have at least one non-eligible designated beneficiary, such as most adult children and grandchildren, must withdraw the entirety of the assets in the plan within 10 years. The 10-year period starts with the year after the account owner’s death. Naming your spouse, an eligible designated beneficiary, and your adult children as current beneficiaries of the same trust could cause the unintended consequence of the trust needing to distribute the qualified retirement plan assets within 10 years. Instead, suppose the trust was to have only the spouse as beneficiary. In that case, the retirement plan assets could be distributed over the spouse’s remaining lifetime and spread the income tax burden over a longer period at lower tax rates.

It is very important that estate planning documents, including wills and trusts, be reviewed to ensure that they still meet your wishes and that there will be no unintended income tax consequences due to the rules of SECURE Act 2.0. Additionally, some planning opportunities could lessen the income tax burden of your heirs if you have significant qualified retirement plan assets.

Please reach out to your Yeo & Yeo professional for additional information and planning guidance.

Generally speaking, owning property jointly benefits an estate plan. Indeed, joint ownership offers several advantages for surviving family members. However, there are exceptions and it’s not the solution for all estate planning problems.

2 types of joint ownership for spouses

As the name implies, joint ownership requires interests in property by more than one party. The type of joint ownership depends on the wording of the title to the property.

From a legal standpoint, there may be two main options for married couples:

Joint tenants with rights of survivorship (JTWROS). This is the most common form and often is used for a personal residence or other real estate. With JTWROS, one spouse’s share of the property can be sold without the other spouse’s consent. The property is subject to the reach of creditors of all owners.
Tenancy by the entirety (TBE). In this case, one spouse’s share of the property in some states can’t be sold without the other spouse joining in. But TBE offers more protection from creditors in noncommunity property states if only one spouse is liable for the debt. Currently, a TBE is available in slightly more than half the states.

Property may also be owned as a “tenancy in common.” With this form of ownership, each party has a separate transferable right to the property. Generally, this would apply to co-owners who aren’t married to each other, though in certain situations married couples may opt to be tenants in common.

Joint ownership plusses and minuses

The main estate planning attraction of joint ownership is that the property avoids probate. Probate is the process, based on prevailing state law, whereby a deceased person’s assets are legally transferred to the beneficiaries. Depending on the state, it may be time-consuming or costly — or both — as well as being intrusive. Jointly owned property, however, simply passes to the surviving owner.

Joint ownership is a convenient and inexpensive way to establish ownership rights. But the long-standing legal concept has its drawbacks, too. Some disadvantages of joint ownership relate to potential liability for federal gift and estate tax. Comparable rules may also apply on the state level.

For starters, if parties other than a married couple create joint ownership, it generally triggers a taxable gift, unless each one contributed property to obtain a share of the title. However, for a property interest in securities or a financial account, there’s no taxable gift until the other person actually makes a withdrawal.

Lessons to be learned

Joint ownership can be a valuable estate planning tool, especially because it avoids probate. However, this technique shouldn’t be considered a replacement for a will. We can help you coordinate joint ownership with other aspects of your estate plan.

Business owners: If you’re having trouble reading the U.S. economy, you’re not alone. On the one hand, the January 2023 jobs report revealed that the unemployment rate had fallen to 3.4%, its lowest level in 54 years. And inflation, while still a concern, has moderated in most sectors — staving off fears of a recession in the immediate future.

And yet concern remains about whether the economy will grow or suddenly stall. And the Fed is expected to continue raising interest rates, meaning the battle against inflation is far from won. What can you do, strategically, to neither under- nor overreact to this “interesting” situation? Sail a steady ship.

Save a little, spend a little

In a faltering economy, business owners tend to want to curb spending. Conversely, during boom times, companies are more apt to spend money to seize opportunities. Right now, the best approach may be a little of both.

Enlist employees to help cut expenses that don’t foster your business’s long-term success. Communicate regularly with staff about the need to curb spending and celebrate those who come up with effective cost-control measures.

That said, now isn’t the time to stop investing in new assets, people or technologies if they’re essential to your operations or could sharpen your company’s competitive edge.

Prioritize expenditures

A good exercise to undertake at least annually, if not quarterly, is to make a list of all expenses over the course of a year and separate them into three categories: “must have,” “nice to have” and “don’t need.” Ask your leadership team for input on which expenses should fall under each category.

Another idea for small to midsize businesses: Have a “check-signing social” in which you gather department managers to discuss major cash outlays while you sign checks or otherwise remit payments. An event like this lets managers know that you’re aware of their spending while giving them a chance to explain their rationale for the spending.

Know your suppliers

In tough economic times, businesses must keep a close eye on the stability of suppliers. If a major vendor goes under, you could be left in the lurch.

You might not have to worry quite as much about insolvencies in today’s environment, but don’t let your guard down. Nurturing good relationships with suppliers is particularly vital with supply chain issues continuing to trouble many industries. Maintain strong communication. Every so often, you may want to conduct a supplier audit to collect key data points regarding each one’s performance.

Watch out for fraud

No matter what the state of the economy, dishonest employees and outside criminals may seize the opportunity to commit fraud. Cash and asset misappropriation, as well as outright theft, are among the most prevalent types of “traditional” fraud. Cybercrimes are also increasingly common today. Hackers can steal from you or shut down your operations from hundreds or thousands of miles away.

Reduce typical fraud risks by implementing a solid system of internal accounting controls, such as segregating duties and requiring a second signature on checks over a certain amount. Also, if you’re hiring, conduct thorough background checks within legal parameters. Finally, invest time and money in cybersecurity measures to protect your systems and data.

Good news, bad news

The good news is the U.S. economy has generally rebounded well from the many changes and challenges of the pandemic. The bad news is, no one is completely sure where we’re headed. Our firm can help you gather and analyze the right financial data to make strong strategic decisions.

Accounting is a critical element when launching a successful business venture. Unfortunately, it’s also an area where startups tend to make mistakes. Here are some common (and avoidable) errors that entrepreneurs should watch out for.

Failing to track expenses

Starting a new business is exciting — and it’s natural to focus on generating revenue and building business relationships. But it’s essential to keep detailed records of expenses, including receipts and invoices. This will help you properly allocate costs, price products and services, assess and improve financial performance, and claim tax deductions.

Forgetting to reconcile accounts

Reconciling accounts involves comparing your records to your bank and credit card statements to identify and correct any discrepancies. Account reconciliation ensures that your business pays close attention to its expenses and available cash. It can also help to prevent and detect fraud by third parties and employees.

Commingling personal and business expenses

When you own a business, you need to keep personal and business matters separate for financial reporting, tax and legal purposes. In addition to maintaining a distinct workspace for your business, you should have different bank and credit card accounts. This will avoid confusion and make it easier to track business expenses. It also will facilitate budgeting and forecasting.

Incorrectly classifying workers

How much control do you exercise over the people who work for your business? Are your workers an integral part of your operations? Misclassifying employees as independent contractors can have serious legal and financial consequences. Make sure you understand the differences between employees vs. contractors and categorize them appropriately. If you don’t follow the rules, the IRS, the U.S. Department of Labor and a state tax agency might challenge the status of your workers.

Not budgeting for taxes

Since many startups run at a loss, at least initially, some owners forget to set aside money for taxes. This can lead to cash shortages and other financial difficulties when tax time rolls around. Failure to make timely federal and state tax payments can result in penalty and interest charges. And don’t forget about payroll, sales and property tax obligations, too.

Failing to set up a formal accounting system

Entrepreneurs must select and consistently follow an accounting method based on their business needs. Many fledgling businesses start off using cash- or tax-basis accounting, then graduate to accrual-basis reporting as they mature. But lenders, franchisors and investors sometimes require accrual-basis financial reporting from the get-go.

It also pays to invest upfront in simple internal controls — such as locks on file cabinets, regular software updates, network backups and antivirus programs — to help prevent theft and fraud. Startups with valuable intellectual property, such as patents, secret recipes and proprietary software, should consider protecting these assets by requiring employees and contractors to sign noncompete agreements, implementing network security policies and filing appropriate legal protections. Additional internal control measures can be implemented as your business matures.

Need help?

Taking steps early on to ensure accurate financial records will save you time, money and stress over the long run. Contact us for help getting your accounting and finance department up and running. In addition to helping set up your systems and procedures, we can provide interim CFO and bookkeeping services while you find qualified candidates to fill these positions.

Employers are generally responsible — and liable — for applying employment taxes to wage payments. To fulfill this obligation, you must determine when and where Federal Insurance Contributions Act (FICA) taxes and federal income tax withholding (FITW) are applicable.

FICA and FITW are separate employment tax regimes. Thus, when analyzing how to treat a payment, you’re best off separately determining their respective applicability, even though the end result is often the same.

What to look for

Three essential elements must be present in wage payments for services to be subject to FICA taxation and/or FITW:

1. The payment must be remuneration for services and the payment must not be specifically excepted from the definition of “wages.”

2. The type of services performed by the worker must fit within the statutory definition of employment. This determination is more specific for FICA tax purposes, because “employment” is specifically defined by statute.

3. The relationship between the service recipient and the service provider must be one of employer and employee.

If one or more of these elements is missing, the payment isn’t subject to FICA taxation or FITW. However, the payment may still constitute income and, therefore, you’ll need to report it.

FICA, the funding mechanism

Both the FICA tax regime and the FITW regime require withholding of the employee’s taxes at the source, for which the employer remains secondarily liable. When analyzing whether either FICA taxation or FITW is applicable to a particular payment, you’ll need to confirm the appropriate treatment under each regime.

In many instances, the requirement to impose FICA taxes and the requirement to withhold income taxes on a payment will coincide, even though the statutory reasons for taxation under the two regimes may not be parallel. Because FICA (the law) is the funding mechanism for the two most important social welfare programs in the United States, the correct FICA tax treatment of a payment can often be more challenging than determining whether FITW applies.

With the undercurrent of protectionism that comes with its purpose, FICA (the law) is replete with definitions, statutory requirements, convoluted cross-references, exemptions and exceptions to exemptions. What’s more, Section 3121 of the Internal Revenue Code separately defines each of the three elements necessary for the imposition of FICA taxes. This is because of the need to carefully determine whether particular types of services, and payments for the same, are intended to be covered by the Social Security Act.

In contrast, the mission of FITW — to collect taxes on payments at the source — isn’t tied to a taxpayer’s future benefits. As a result, the statutory definition of wages under Sec. 3401(a) essentially consolidates the discussion of payments for services with the types of services that constitute employment for FITW purposes.

Not so simple

Long story short, payroll taxes aren’t as simple as they may first appear. It’s in an employer’s best interest to understand precisely when FICA and FITW apply and to double-check that this is being handled properly by your staff or a third-party provider. Our firm can answer any questions you might have about your payroll tax obligations.

Many business owners spend most of their time developing strategic plans, overseeing day-to-day operations and, of course, putting out fires. Yet an underlying source of both opportunity and trouble can be human resources (HR).

Think about it: The performance of your HR department determines who works for you, how well employees are supported, and to what extent the business complies with laws and regulations pertaining to employment and benefits.

One way to ensure that your strategic HR decisions are likely to yield positive, cost-effective results is to apply a strengths, weaknesses, opportunities and threats (SWOT) analysis.

Strengths and weaknesses

When used for general strategic planning, a SWOT analysis typically begins by identifying strengths — usually competitive advantages or core competencies that generate value, such as a strong sales force or exceptional quality of products or services.

Next, you pinpoint weaknesses. These are factors that limit business performance, which are often revealed in comparison with competitors. General examples include a negative brand image because of a recent controversy or an inferior reputation for customer service.

When applying a SWOT analysis to HR, think about that department’s core competencies. These include filling open positions, administering benefits, and supporting employees who need help or are in crisis. What are its strengths? What are its weaknesses?

You can use various HR metrics to put a finer point on these relatively broad questions. For example, calculate “time to hire” to determine how long it’s taking to fill open positions and “early turnover” to see how many new hires you’re losing in the first year of employment.

External conditions

The next step in a typical SWOT analysis is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit performance or undermine strategic objectives.

When differentiating strengths from opportunities, or weaknesses from threats, ask yourself whether an issue would exist if your company didn’t. If the answer is yes, the issue is external and, therefore, an opportunity or threat. Examples include changes in hiring demographics or government regulations regarding benefits.

How to apply it

Let’s say you determine, by benchmarking yourself against similar businesses, that “time to hire” is a strength. This means that your HR staff is skilled at placing targeted, effectively worded ads; working well with recruiters; and interacting in a timely, efficient and positive manner with applicants.

In today’s environment, a strong hiring mechanism is undoubtedly a competitive advantage. If hiring and retention are weaknesses, however, you could be headed toward a crisis if you lose too many employees — particularly in today’s tight job market.

Opportunities and threats are important as well. For example, if your company seeks to strengthen employee retention through expanded benefits, you’ll need to anticipate the opportunities and challenges for your HR staff. You may need to invest in training and upskilling to make sure that they can effectively communicate with employees about the broader package and administer the specific benefits therein.

And there are likely external threats to consider. For example, an aggressive competitor may begin poaching your employees. Evolving tax regulations and compliance requirements for health and retirement benefits could catch your HR staff off-guard if they’re unaware of the changes.

Advisable and feasible

Sometimes business owners assume that HR will run itself while they dedicate themselves to growing the company. But the truth is that HR departments need to set strategic goals, just like the business does. A SWOT analysis can help ensure that these goals are advisable and feasible.

It’s certainly not news to you: There is a severe labor shortage in the manufacturing sector. In fact, according to the National Association of Manufacturers, nearly 2.1 million manufacturing jobs could be open by 2030. One way to attract and retain top talent is to provide an impressive slate of employee benefits. One such benefit is child care. And manufacturers may be able to offset some of the costs with a valuable tax credit. Here’s how it works.

The basics

The Section 45F employer-provided child care credit is part of the general business credit, which is composed of more than 30 separate tax credits that are subject to combined limits based on your tax liability. To calculate and claim the credit, a business files Form 8882, Credit for Employer-Provided Child Care Facilities and Services.

The credit is equal to 25% of an employer’s qualified child care facility expenditures plus 10% of its qualified child care resource and referral expenditures paid or incurred during the tax year. It’s limited to a total of $150,000 per tax year.

Facility expenditures

Qualified child care facility expenditures are amounts paid:

To acquire, construct, rehabilitate or expand property that’s 1) to be used as part of a qualified child care facility of the taxpayer, 2) depreciable or amortizable, and 3) not part of the principal residence of the taxpayer or one of the taxpayer’s employees;
To operate a qualified child care facility of the taxpayer, including expenses for training, scholarship programs and increased compensation for employees with child care training; or
Under a contract with a qualified child care facility to provide child care services to the taxpayer’s employees.

To qualify, expenses must not exceed the fair market value of the child care provided. A qualified child care facility is one that meets all state and local regulatory requirements and:

Is used principally to provide child care (unless it’s also the personal residence of the person who operates it),
Is open to all of the taxpayer’s employees during the tax year, and
Doesn’t discriminate in favor of highly compensated employees.

In addition, if the facility is the taxpayer’s principal trade or business, at least 30% of enrollees must be dependents of the taxpayer’s employees.

Special rules and restrictions

Qualified expenditures are amounts paid under a contract to provide resource and referral services to help a taxpayer’s employees find child care. To avoid double benefits from the same expenditures, the taxpayer must reduce its basis in any qualified child care facility by the amount of the credit attributable to facility-related expenditures. The taxpayer must also reduce other deductions or credits that are based on the same expenses.

Taxpayers may have to recapture (pay back) some or all of the credit if a qualified child care facility ceases to operate as such, or undergoes a change in ownership, before the 10th tax year after the tax year in which it’s placed in service. The percentage of the credit that must be recaptured decreases gradually over the 10-year period.

Valuable recruiting tool

As employers compete for a shrinking labor pool, employer-provided child care can be an attractive perk for current and prospective employees. The Sec. 45F tax credit can help reduce the cost of this benefit. Contact us with any questions regarding this tax credit.

An array of tax-related limits that affect businesses are indexed annually, and due to high inflation, many have increased more than usual for 2023. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2023 at $160,200 (up from $147,000 for 2022).

Deductions

Section 179 expensing:
- Limit: $1.16 million (up from $1.08 million)
- Phaseout: $2.89 million (up from $2.7 million)
Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
- Married filing jointly: $364,200 (up from $340,100)
- Other filers: $182,100 (up from $170,050)

Retirement plans

Employee contributions to 401(k) plans: $22,500 (up from $20,500)
Catch-up contributions to 401(k) plans: $7,500 (up from $6,500)
Employee contributions to SIMPLEs: $15,500 (up from $14,000)
Catch-up contributions to SIMPLEs: $3,500 (up from $3,000)
Combined employer/employee contributions to defined contribution plans (not including catch-ups): $66,000 (up from $61,000)
Maximum compensation used to determine contributions: $330,000 (up from $305,000)
Annual benefit for defined benefit plans: $265,000 (up from $245,000)
Compensation defining a highly compensated employee: $150,000 (up from $135,000)
Compensation defining a “key” employee: $215,000 (up from $200,000)

Other employee benefits

Qualified transportation fringe-benefits employee income exclusion: $300 per month (up from $280)
Health Savings Account contributions:
- Individual coverage: $3,850 (up from $3,650)
- Family coverage: $7,750 (up from $7,300)
- Catch-up contribution: $1,000 (no change)
Flexible Spending Account contributions:
- Health care: $3,050 (up from $2,850)
- Dependent care: $5,000 (no change)

These are only some of the tax limits and deductions that may affect your business and additional rules may apply. Contact us if you have questions.

According to various sources, around 10% of all insurance claims involve fraud. Insurance companies generally pass along the cost of these fraud losses to policyholders in the form of higher premiums. Unfortunately, small businesses, which are generally less able to pay premium hikes, are particularly vulnerable to insurance fraud. To protect your company from losses and minimize the likelihood of increased premiums, learn how to identify insurance fraud.

Areas of concern

There are several forms of insurance fraud that could potentially affect your business:

Workers’ compensation. In these schemes, an employee exaggerates or fabricates an injury or illness to receive workers’ compensation benefits. For example, a worker could mischaracterize an injury from a minor accident as serious or claim that an existing, non-work-related condition was the result of an occupational injury.

Medical insurance. A perpetrator might add a fictitious employee to your company’s insurance plan or use a stolen or synthetic identity to enroll a nonexistent dependent.

Healthcare provider. Here, a healthcare provider submits claims for procedures or services that weren’t performed. A crooked provider might also bill for multiple procedures when only one was performed or bill for a more complex and expensive procedure when only a simple one was performed.

Premium diversion. This fraud occurs when an employer or insurance agent misuses premium payments intended to pay for employee policies. The perpetrator could use the funds for personal or business-related expenses.

Preventing workers’ comp scams

To help prevent false workers’ comp insurance claims, develop reporting processes that employees are required to follow. Staff members should provide detailed information about incidents and any medical treatment they received. Your insurance company can provide forms and suggest best practices to encourage employees to disclose relevant information related to their claims.

Also, regular audits of workers’ compensation claims may identify patterns of fraudulent activity and uncover long-running schemes. For example, if an employee often claims on-the-job injuries but is known to engage in physically demanding or dangerous activities outside the office, it may be appropriate to scrutinize those claims.

Other best practices

To reduce the risk of workers enrolling ineligible or fake participants in your medical insurance plan, put in place verification procedures. These might include background checks and required documentation such as Social Security and driver’s license numbers. Additionally, conduct regular audits of your employee benefits to reconcile those enrolled against your company’s payroll records and department headcount.

Pay close attention to the remittance of payments to your insurance providers. If there’s a problem regarding your employer-paid contributions, your insurance company will send a letter and call. To head off problems, proactively designate someone in your organization who isn’t involved in submitting or paying insurance premiums as the insurance company’s regular point of contact.

In addition, educate employees about how to spot suspicious billing practices and provide them with a confidential fraud hotline so they can report any irregular activities. And be sure to set an ethical tone. Make sure workers understand your expectations and policies related to the insurance coverage you provide — as well as the ramifications of committing fraud, such as termination and legal action.

Work with reputable carriers

As with all your company’s business relationships, only work with reputable insurance carriers. The cost of premiums alone shouldn’t be the sole criteria when choosing an insurer. Look for companies with robust fraud detection and prevention programs that can help you identify and address fraud, should it occur. Contact us if you have questions or suspect insurance fraud in your organization.

The U.S. Department of Labor (DOL) recently announced the 2023 annual adjustments to civil monetary penalties for a wide range of benefits-related violations. Legislation enacted in 2015 requires annual adjustments to certain penalty amounts by January 15 of each year.

The 2023 adjustments are effective for penalties assessed after January 15, 2023, with respect to violations occurring after November 2, 2015. Here are some highlights:

Form 5500. Employers must file this form annually for most ERISA plans to provide the IRS and DOL with information about the plan’s operation and compliance with government regulations. The maximum penalty for failing to file Form 5500 has increased from $2,400 per day to $2,586 per day that the filing is late.

Summary of Benefits and Coverage (SBC). The maximum penalty for failing to provide an SBC has increased from $1,264 to $1,362 per failure.

Other group health plan penalties. Violations of the Genetic Information Nondiscrimination Act may result in penalties of $137 per participant per day, which is up from $127. Examples of violations include establishing eligibility rules based on genetic information, requesting genetic information for underwriting purposes and failing to meet requirements related to disclosures regarding the availability of Medicaid or children’s health insurance program assistance.

401(k) plan disclosure, recordkeeping and reporting. For plans with automatic contribution arrangements, penalties for failing to provide the required ERISA preemption notice to participants have increased from $1,899 per day to $2,046 per day. Penalties for failing to provide blackout notices (required in advance of certain periods during which participants can’t change their investments or take loans or distributions) or notices of diversification rights have increased from $152 per day to $164 per day. And the maximum penalty for failure to comply with ERISA recordkeeping and reporting requirements has increased from $33 to $36 per employee.

Multiple Employer Welfare Arrangement (MEWA) filing. A MEWA is generally defined as a single plan that covers the employees of two or more unrelated employers. Penalties for failure to meet applicable filing requirements, which include annual Form M-1 filings and filings upon origination, have increased from $1,746 per day to $1,881 per day.

Adjustments have also been made to other benefit-related DOL penalties, such as for failure to provide certain information requested by the agency.

Although the affected penalties relate to a wide range of compliance issues, not all violations will trigger the highest permitted penalty. In some instances, the DOL has discretion to impose lower penalties, such as under programs designed to encourage Form 5500 filing. Contact us for further information.

Article Updated January 26, 2023

Today, the Michigan Court of Appeals overturned a July 2022 Court of Claims ruling finding that the Michigan Legislature lacked the constitutional authority to adopt and subsequently amend (“adopt-and-amend”) two 2018 ballot initiatives.

One of the ballot initiatives would have increased the minimum wage to $12 per hour in 2023 and increased tipped wages to the full minimum wage, and the other would have required employers of all sizes to provide up to 72 hours of paid sick leave to all employees annually.

The current $10.10 per hour minimum wage remains in effect, as does the current paid medical leave law.

Please read more in the Michigan Chamber of Commerce’s Special Update.

Article Updated August 2, 2022

The Michigan Court of Claims issued a ruling on July 19, 2022, immediately reinstituting 2018 ballot proposals that:

required employers of all sizes to provide up to 72 hours of paid sick leave to all employees annually; and
raised the minimum wage to $12 per hour.

The Court of Claims judge who ruled the “adopt and amend” strategy was unconstitutional agreed to stay that ruling until February 19, 2023. This means that, for now, the current $9.87 per hour minimum wage remains in effect, as well as the current paid medical leave law. However, the plaintiffs in the case are expected to appeal the ruling on the stay as early as this week in the Michigan Court of Appeals.

Please read more in the Michigan Chamber of Commerce’s recent article.

We will continue to alert you of significant developments.

Original Article Posted July 21, 2022

The Michigan Court of Claims ruled this week that the Michigan Legislature’s 2018 “adopt and amend” strategy employed to find a compromise to two ballot initiatives increasing the minimum wage and enacting a paid sick leave law was unconstitutional. The Legislature is expected to appeal the decision in the Michigan Court of Appeals and request a stay.

Unless a stay is granted and a higher court reverses the decision, the law would immediately revert to the 2018 ballot language. This means Michigan’s paid medical leave law will require virtually every size and type of business, and class of employee, to receive 72 hours per year of paid sick leave, and the state’s minimum wage will increase to $12 an hour (and a large increase for tipped employees).

Please read the Michigan Chamber’s article that compares the current provisions for paid sick leave and minimum wage with the 2018 ballot proposal language (what’s now pending).

Many questions remain

Undoubtedly, employers have questions about what the decision means. Right now, it’s unclear whether a stay will be issued, whether the decision will be appealed, and whether employers must comply with the original ballot initiative language. The Michigan Legislature may respond to the ruling with new legislation.

For the third consecutive year, Yeo & Yeo CPAs & Advisors has been named on Forbes’ list of America’s Best Tax and Accounting Firms. Yeo & Yeo was listed among nearly 250 firms nationwide, and is one of only seven firms in Michigan, recommended for both tax and accounting services.

Forbes partnered with market research company Statista to create a list of the most recommended firms for tax and accounting services in the United States. This list is based on surveys of tax and accounting professionals and their clients, of which approximately 4,400 recommendations were considered in the final analysis.

Among other significant recognition, Yeo & Yeo was also recognized in 2022 as a top 200 accounting firm by Inside Public Accounting and a Best and Brightest Company to Work For by both West Michigan and Metro Detroit’s Best and Brightest.

With the 2023 filing season deadline drawing near, be aware that the deadline for businesses to file information returns for hired workers is even closer. By January 31, 2023, employers must file these forms:

Form W-2, Wage and Tax Statement. W-2 forms show the wages paid and taxes withheld for the year for each employee. They must be provided to employees and filed with the Social Security Administration (SSA). The IRS notes that “because employees’ Social Security and Medicare benefits are computed based on information on Form W-2, it’s very important to prepare Form W-2 correctly and timely.”

Form W-3, Transmittal of Wage and Tax Statements. Anyone required to file Form W-2 must also file Form W-3 to transmit Copy A of Form W-2 to the SSA. The totals for amounts reported on related employment tax forms (Form 941, Form 943, Form 944 or Schedule H for the year) should agree with the amounts reported on Form W-3.

Failing to timely file or include the correct information on either the information return or statement may result in penalties.

Independent contractors

The January 31 deadline also applies to Form 1099-NEC, Nonemployee Compensation. These forms are provided to recipients and filed with the IRS to report non-employee compensation to independent contractors.

Payers must complete Form 1099-NEC to report any payment of $600 or more to a recipient.

If the following four conditions are met, you must generally report payments as nonemployee compensation:

You made a payment to someone who isn’t your employee,
You made a payment for services in the course of your trade or business,
You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
You made payments to a recipient of at least $600 during the year.

Your business may also have to file a Form 1099-MISC for each person to whom you made certain payments for rent, medical expenses, prizes and awards, attorney’s services and more.

We can help

If you have questions about filing Form W-2, Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

Inflation. Labor shortages. Supply chain delays. Manufacturers have had a lot on their plates the past couple of years. Across the board, the result has been increasing prices. But raising prices without factoring in market-based considerations might not be enough.

What is production-based pricing?

Direct production costs are a logical starting point for pricing new and existing products. For example, suppose Manufacturer A spends $4 in raw materials and $6 in labor to manufacture a widget. The owner adds up these costs ($10) and applies a 10% markup to arrive at the selling price of $11 for each widget. The problem is that markups are often based on historic performance or gut instinct.

What happens when Manufacturer B sells its widgets for $10? This often happens to smaller manufacturers that compete with larger companies that can negotiate lower supply costs or companies located in areas with lower labor rates. Unless Manufacturer A can provide a compelling reason for customers to pay a premium, such as superior quality or more responsive customer service, its market share will likely diminish — and overhead costs will eventually consume profits.

Conversely, what if the $11 price point is significantly below competitors’ prices? Below-market pricing may cause demand to skyrocket — and the factory might not be able to produce enough widgets to keep up with demand. As a result, quality may suffer, or customers may become frustrated by production delays.

When demand outpaces production capacity, cash flow shortages also may occur because of lags in the cash conversion cycle. That is, Manufacturer A will need to front production costs (cash outflows), but it will take a while to bill and collect payments from its customers (cash inflows). A slight price increase can help reduce demand and the pressure it’s putting on plant workers.

Are you conducting market research?

To be a market leader, you’ll need to factor more than direct costs into your pricing strategies. This means conducting market research, which improves the accuracy of your sales forecasts. For example, salespeople can informally survey customers about which features they value most, how the company can improve the customer experience, and how much customers would be willing to pay for new products or improvements to existing products. To entice customers to participate in these surveys, consider offering free trials of new products or discounts on future orders.

It’s also important to research competitors. Pay attention to the products they offer, the prices they charge and how they position their products in the marketplace.

Any research aimed at competitors must be ethical and legal, however. For example, you shouldn’t hire a competitor’s R&D director and solicit proprietary information. But you can legitimately visit a competitor’s website and review copies of print marketing materials that are available to the general public.

Market research can help you position your company’s offerings relative to those of competitors — and determine whether future sales volume will be similar to past performance. Forecasts are often based on historical sales volume. But changes in market conditions, such as the introduction of a new competitor, changes in technology and evolving customer needs, may require adjustments to what worked in the past.

Have you allocated overhead costs?

You’ll need to forecast and allocate overhead costs to products to help make better informed pricing decisions. As with sales, future overhead costs may not mirror what you’ve paid in the past — especially in today’s inflationary, labor-constrained marketplace.

Materials and labor costs are just a few of the expenses manufacturers incur. Overhead items may be variable (such as sales commissions, packaging and shipping costs) or fixed (such as depreciation on equipment, managerial salaries and rent). As a company grows, it may need to obtain a larger factory or additional salespeople, leading to incremental fixed costs.

Looking forward

Today’s market demands product pricing based on more than just direct production costs, even if adjusted for spikes in the costs of raw materials or labor. Contact us to review and implement pricing models based on personalized market research and comprehensive costs.

Coming Soon: 5 Accounting Rules That Take Effect in 2023

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