Supervisor Spotlight: Get to Know Kelly Brown

Kelly Brown, CPA, MST, was recently promoted to Tax SALT Supervisor. Let’s learn about Kelly and her perspective on her career, work-life balance, and helping clients.

What are your roles in the firm?

I am the co-leader of the firm’s State and Local Tax (SALT) team, where I oversee monthly meetings to provide opportunities for growth for our SALT professionals. I also oversee our growing sales tax compliance service and provide SALT consulting and nexus analysis. I enjoy working with individuals and businesses with multi-state tax obligations for compliance and tax planning.

Describe your career path.

I joined Yeo & Yeo’s tax team after four years of experience in tax and external and internal audits. I was finishing my Master of Science in Taxation degree at Walsh College and knew I wanted to focus solely on tax, so it was a great opportunity. My journey into the SALT world started with a general interest in sales tax. I had family members involved in e-commerce during the infamous Wayfair case decided in 2018, which piqued my interest. Today, as our clients at Yeo & Yeo continue to grow their businesses and cross state lines, I enjoy the challenge of addressing their questions and finding solutions to navigate the complexities of operating in multiple states.

Are there any causes or charitable organizations you are passionate about and actively support? Why are they important to you?

As a mom, I believe in advocating for the sanctity of life and supporting policies that protect the rights of all children. I believe in fostering a society that values and upholds the dignity and potential of every child, so they each have a chance to live and thrive.

What do you enjoy most about your career?

Every day is different. In my career, it doesn’t get boring because our clients are continually pulling us in to help navigate whatever is new in their world.

How do you balance your career, personal life, and passions?

A while back, I heard it isn’t “work-life balance” but “work-life harmony.” There are some times at work when we’re putting in more hours to meet regulatory deadlines and then times at home when we’re dealing with family demands – so there isn’t a set balance. It ebbs and flows with the needs of each. I’m blessed that my husband and children can roll with it all, with my husband stepping up to do whatever needs to be done during my busiest times. As a mother of seven, I enjoy the flexibility in my schedule that allows me to be there for both work and my family.

What do you enjoy most about working with clients?

I love helping our clients. It’s rewarding when you’re working with a client, and they share that they’re not worried about something because they know you have it covered. Business owners don’t go into business because they think dabbling in accounting is fun. They go into business to harness their passion and offer their customers their products, skills, and specialties. Having us focus on the accounting angle frees our clients to focus on whatever drives them and their business.

What are your hobbies or interests outside of accounting?

Spending time with my family motivates and recharges me. Last year, we fell in love with a wonderful home on Crooked Lake in Curran, Michigan. Our youngest is nearly two now, and he loves to go up and down all 57 steps from the lake to the garage over and over again – so lately, I’m taking turns chasing him! Sooner or later, he’ll play in the sand long enough for me to crack open a book, but we’re just taking it one day at a time.

When looking at broad groups of employment candidates, many organizations tend to focus on young people just entering the workforce and established workers who are looking to change jobs.

But don’t forget that there are other groups as well. One of them comprises people who wish to return to work after being out of the traditional workforce for a long time (generally more than a year). To help attract these individuals and ease their transitions back into employment, some employers have established “returnship” programs.

A bridge back

As the name implies, returnships are much like internships. Except, instead of helping someone enter the workforce, returnships enable workers to relaunch their careers without having to start all over. Another difference is that returnships are usually paid arrangements that more often, though not always, result in a bona fide job offer.

For workers, returnships are a bridge back to employment rather than a ladder. Most people who once worked in a midlevel or higher position would no doubt feel uncomfortable, if not downright miserable, starting at the bottom of the organizational chart again. Returnships offer them the opportunity to resharpen both their professional expertise and interpersonal skills in the workplace.

In addition, returnships offer those with notable employment gaps on their resumes to counter those lengthy periods of un- or underemployment with a clearly marked accomplishment leading them back into the workforce.

Benefits for employers

There are also benefits for employers offering a returnship program, including:

Access to an often-overlooked portion of the labor pool. As mentioned, many organizations may do little to nothing to reach out to those who want to come back to work but are hesitant to do so. In fact, it’s often noted that unemployment statistics generally account for only those actively seeking jobs, not those who’ve given up looking for the time being.

Many people in this population are already educated, possess professional skills and experience, and know how to problem-solve. They may need much less training to get up and running — particularly if you implement a robust, well-designed program.

An enhancement to your “employer brand.” Your employer brand is essentially your reputation in the job market as a hiring entity. It’s largely based on word of mouth — that is, how job candidates, as well as current and former employees, rate and describe their experiences with your organization. From this perspective, a returnship program can serve as an additional positive feature about you that enhances fundamentals such as competitive compensation and benefits.

Potentially a boost to diversity. One interesting aspect of returnship programs is that they may increase diversity. For example, app-based food delivery service Grubhub launched a returnship program in 2021. The company has disclosed that the program has improved gender and age diversity. Another even larger employer — PepsiCo Beverages — expanded its returnship program this year, in part because of how successful it’s been in attracting women who have taken time off as caregivers.

An idea to consider

To be clear, a returnship program may not be a good fit for every employer. An initiative of this sort will call for a considerable investment of resources in design, implementation and administration. But if you’re having a hard time finding job candidates with specific skill sets, or if you want to cast as wide a net as possible, a returnship program may be worth considering. We can help you identify and develop projections for the costs involved.

Once a business is up and running, one fundamental aspect of operations that’s easy to take for granted is billing. Often, a system of various processes is put in place and leadership might consider occasional billing mistakes to be part of the “cost of doing business.”

However, to keep your company financially fit, it’s imperative to regularly check in on your billing processes to ensure they’re as efficient, effective and accurate as possible.

Resolve mistakes quickly

Many billing problems originate from a gradual deterioration in the quality of products or services. You may be giving customers an excuse not to pay their bills if products are showing up late or damaged — or not at all. The same goes for services that aren’t provided in a timely, satisfactory or professional manner.

When it comes to billing processes, common mistakes include invoicing a customer for an incorrect amount or failing to apply promised discounts or special offers. Be sure to listen to customer complaints and track errors so you can identify trends and implement effective solutions.

In addition, regularly verify account information to make sure invoices and statements are accurate and going to the right people. Set clear standards and expectations with customers — both verbally and in writing — about your policies regarding pricing, payment terms, credit and delivery times.

On the flip side, work closely with your managers and supervisors to ensure employees are well-trained to enforce billing policies. Staff members should prioritize quick resolutions to billing mistakes and disputes. They should also ask customers to pay any portion of a bill not in question. Once the matter is resolved, the customer should be politely asked to pay off the remainder immediately.

Tighten up timeliness

For invoice-based businesses, regularly sending out bills late can negatively impact collections. Familiarize yourself with current industry norms before setting payment schedules.

Traditionally, such schedules tend to be based on 30-, 45- or 60-day cycles. But times may have changed — particularly now that so much billing is done electronically. What’s more, many companies permit their most important or largest customers to set their own customized payment schedules. If this is the case for you, be sure to adjust your cash flow expectations and projections to recognize these variances.

As mentioned, today’s technology is driving how most businesses handle billing. An automated system can generate invoices when work is complete, flag problem accounts and generate useful financial reports.

If you haven’t already, consider sending invoices electronically and enabling customers to pay online. Doing so can greatly speed up payment. Like any software, however, you’ll need to reassess it from time to time to determine whether you need an upgrade.

Control what you can

There are so many aspects to doing business that are unpredictable — the global, national and local economies; customer tastes and demands; and disruptive competitors. That’s why it’s so important for business owners to be proactive about the things they can control. Our firm can help you assess the efficacy of your billing processes and identify ways to improve cash flow.

If you’re a small employer looking to sponsor a retirement plan for yourself and your employees, your first thought might be, “Let’s do a 401(k)!” And that’s certainly an option worth considering, even if you’re self-employed.

However, don’t limit yourself to only that one popular plan type. There are other choices that may better suit your situation, be easier to administer and still provide some nice tax breaks. Here are a couple to consider.

Simplified Employee Pension IRA

This plan type is relatively inexpensive to launch and easy to maintain. A Simplified Employee Pension IRA (SEP IRA) doesn’t require annual employer contributions. That means you can choose to contribute only when cash flow allows.

Typically, there are no setup fees for a SEP IRA, though participants generally must pay trading commissions and fund expense ratios (a fee typically set as a percentage of the fund’s average net assets). In 2023, the contribution limit is $66,000 or up to 25% of a participant’s compensation. That amount is much higher than the $22,500 limit for 401(k)s.

Employer contributions are tax-deductible. Meanwhile, your employees won’t pay taxes on their SEP IRA funds until they’re withdrawn. Participants are always 100% vested in the account.

There are some disadvantages to consider. This is an employer-owned plan, so employees don’t make their contributions — you have to make them. Also, unlike many other qualified retirement plans, participants age 50 and over can’t make additional “catch-up” contributions.

Savings Incentive Match Plan for Employees IRA

The IRS describes the Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) as “ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.” It essentially lets employees contribute to traditional IRAs created by the employer.

True to its name, a SIMPLE IRA doesn’t require the employer to file IRS Form 5500, “Annual Return/Report of Employee Benefit Plan.” Nor must you submit the plan to nondiscrimination testing, which is generally required for 401(k)s.

Meanwhile, employees face no setup fees and enjoy tax-deferred growth on their account funds. Best of all, participants can contribute more to a SIMPLE IRA than they can to a self-owned traditional or Roth IRA. The 2023 contribution limit for this plan type is $15,500, and catch-up contributions for participants age 50 and over are allowed to the tune of $3,500 this year.

On the downside, that contribution limit is lower than that for 401(k)s. Also, because contributions are made pretax, participants can’t deduct them, nor can they take out plan loans. What’s more, employer contributions are mandatory — so you can’t skip them if cash flow gets tight. An employer can, however, generally deduct contributions to a SIMPLE IRA.

Stay in the game

A retirement plan is a central component of most midsize to large employers’ benefits packages. The good news is smaller organizations need not feel left out of the game. You’ve got options, too. Contact us for help assessing the costs and tax impact of any retirement plan or other employer-sponsored benefit that you’re considering.

Timely financial information is critical to a successful business or nonprofit organization. In today’s dynamic marketplace, you may need to act fast to ward off potential threats and risks — and jump on new opportunities. But if you wait until your financial statements are released to react, you’ll likely miss out. Flash reports can provide real-time data that can help management respond to changing conditions.

Potential benefits

U.S. Generally Accepted Accounting Principles (GAAP) are considered by many people to be the gold standard in financial reporting. However, the process is complicated, so accounting departments usually take two to six weeks to send out GAAP financials. It takes even longer if an outside accountant reviews or audits the financial statements. Plus, most organizations only publish financial statements monthly or quarterly.

By comparison, weekly flash reports typically provide a snapshot of key financial figures, such as cash balances, receivables aging, collections and payroll. Some metrics might even be tracked daily — including sales, shipments and deposits. This is especially critical during seasonal peaks or among distressed borrowers.

Effective flash reports are simple and comparative. Those that take longer than an hour to prepare or use more than one sheet of paper are too complex. Comparative flash reports identify patterns from week to week — or deviations from the budget that may need corrective action. Graphs and tables can help nonfinancial people who receive flash reports interpret them quickly.

Critical limitations

Flash reports can help management proactively identify and respond to problems and weaknesses. But they have limitations that management should recognize to avoid misuse.

Most important, flash reports provide a rough measure of performance and are seldom completely accurate. It’s also common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles.

Companies generally use flash reports internally. They’re rarely shared with creditors and franchisors, unless required in bankruptcy or by the franchise agreement. A lender also may ask for flash reports if a borrower fails to meet liquidity, profitability and leverage covenants.

If shared flash reports deviate from what’s subsequently reported on GAAP financial statements, stakeholders may wonder if management exaggerated results on flash reports or is simply untrained in financial reporting matters. If you need to share flash reports, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and haven’t been prepared in accordance with GAAP.

Tailoring the report

What information should be included on your organization’s flash report? This is a common question, but there isn’t a universal template that works for everyone. For instance, a consulting firm might focus on billable hours, a hospital might analyze the number of beds occupied and a manufacturer might want to know about machine utilization rates. We can help you figure out what items matter most in your industry and how to create effective flash reports for your needs.

Yeo & Yeo is pleased to announce the promotions of Kelly Brown, CPA, MST, and Zoey Provenzano, CPA.

Kelly Brown has been promoted to Tax SALT Supervisor. Brown specializes in State and Local Tax (SALT) income tax returns and related filings for C-corporations, S-corporations, partnerships, and individuals. As co-leader of Yeo & Yeo’s State and Local Tax Services Group, she leads projects involving nexus determinations, taxability analyses, identifying and quantifying state modifications and determining proper state apportionment. She holds a Master of Science in Taxation from Walsh College and, with her advanced education in complex tax topics, assists the firm’s individual and business clients as they face a challenging tax environment. She is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants and has served on the Michigan Tax Conferences’ Planning Tax Force. In 2019, Brown was among five finalists nationwide for the Sales Tax Institute’s Sales Tax Nerd Award, which recognizes professionals who demonstrate a dedicated passion and commitment to learning about indirect tax. She joined Yeo & Yeo in 2016 and is based in the firm’s Saginaw office. In our community, Brown serves on the allocation committee for the United Way of Bay County and reviews Saginaw office grant requests for the Yeo & Yeo Foundation.

Zoey Provenzano has been promoted to Manager. Provenzano joined Yeo & Yeo in 2021. Her areas of expertise include business consulting, compilation and reviews, payroll tax returns, and ESOPs, with specialization in nonprofit and construction entities. As a QuickBooks Online and Desktop ProAdvisor, Provenzano assists clients and trains staff on QuickBooks. She holds a Master of Accounting from the University of Michigan and is a graduate of Leadership Midland. She is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants. In the community, Provenzano serves as a board member for Midland Recyclers and is a choir member at Midland Center for the Arts. She also assists in reviewing Yeo & Yeo Foundation grant requests in the Midland office, where she is based.

Government officials saw a large increase in the number of new businesses launched during the COVID-19 pandemic. And the U.S. Census Bureau reports that business applications are still increasing slightly (up 0.4% from April 2023 to May 2023). The Bureau measures this by tracking the number of businesses applying for Employer Identification Numbers.

If you’re one of the entrepreneurs, you may not know that many of the expenses incurred by start-ups can’t be currently deducted on your tax return. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

Handling expenses

If you’re starting or planning to launch a new business, here are three rules to keep in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to start earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Rules to qualify

In general, start-up expenses are those you incur to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Decision to be made

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

If you own a successful small business with no employees, you might be ready to set up a retirement plan. Now a 401(k) might seem way out of your reach — only bigger companies can manage one of those, right? Not necessarily.

Two ways to contribute

With a solo 401(k), the self-employed can make large annual deductible contributions to a qualified (that is, tax-advantaged) retirement account. However, this prime nest-egg-building opportunity comes with some administrative complexity.

How much can you contribute? For the 2023 tax year, you can make an “elective deferral contribution” of up to $22,500 of your net self-employment (SE) income to a solo 401(k). If you’ll be 50 or older as of December 31, 2023, you can make additional catch-up contributions up to $7,500 for a grand total of $30,000.

On top of your elective deferral contribution, an additional contribution of up to 25% (depending on your business structure) of net SE income is also permitted. This additional pay-in is called an “employer contribution,” though of course there’s no employer other than you when you’re self-employed.

For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution. So, for the 2023 tax year, the combined elective deferral and employer contributions can’t exceed:

$66,000 ($73,500 with the max catch-up contribution if you qualify), or
100% of your net SE income.

Along with the ability to make such a large annual deductible contribution, another advantage of solo 401(k)s is that contributions are completely discretionary. When cash is tight, you can contribute a small amount or nothing. In years when cash flow is strong, you can contribute the maximum allowable amount.

In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it — which you should insist on when working with a provider (usually a financial services firm). The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other types of retirement plans don’t allow loans.

Downsides to consider

The biggest downside to a solo 401(k) is, as mentioned, administrative complexity. You’ll encounter some substantial upfront paperwork when applying for a plan with a provider.

From there, ongoing administrative efforts will be required, including adopting a written plan document and arranging for how and when elective deferral contributions will be collected and paid into the account. Also, once your solo 401(k) account balance exceeds $250,000, you must file Form 5500-EZ with the IRS each year.

Bottom line

For a one-person business, a solo 401(k) may be a smart, tax-favored retirement plan choice as long as you have the desire and cash flow to make large contributions. This is particularly true if you’re 50 or older. Of course, there are other options to consider. We can help you shop for the right retirement plan, set one up and administer it going forward.

Yeo & Yeo is pleased to announce the promotion of Jim Bellor, CPA, to Senior Manager.

“Jim has consistently demonstrated a high level of professionalism, expertise, and dedication throughout his career with our firm,” said Tax Service Line Leader David Jewell, CPA. “His promotion to Senior Manager is well-deserved and a testament to his leadership abilities and commitment to delivering outstanding client service.”

Bellor’s areas of expertise include tax planning and preparation, financial statement preparation, and estate, trust and nonprofit tax return preparation. He is a member of the firm’s Estate & Trust Services Group and the Tax Services Group. He has more than eight years of public accounting experience.

Bellor holds a Bachelor of Business Administration in accounting from Northwood University. He is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants. He is also an active member of the Midland Area Chamber of Commerce and Midland Young Professionals.

“I am excited to take on this new role as a Senior Manager,” Bellor said. “I look forward to continuing to serve our clients with excellence, managing client engagements, and playing a bigger part in driving the firm’s growth.”

If you’ve been asked to serve as executor of the estate of a friend or family member, be sure you understand the responsibilities and potential risks before you agree. Keep in mind that you’re not required to accept the appointment, but once you do it’s more difficult to extricate yourself should you change your mind.

Here are some questions to consider before accepting the offer:

What’s your relationship to the individual? If he or she is a close family member, consider not accepting the appointment if you think your grief after his or her death will make it difficult to function effectively in the executor role.

Are you willing and able to take on the duties of an executor? Generally, an executor is responsible for arranging probate, identifying and taking custody of the deceased’s assets, making investment decisions, filing tax returns, handling creditors’ claims, paying the estate’s expenses, and distributing assets according to the will. Although you can seek help from professionals — such as attorneys, accountants and investment managers — it’s still a lot of work, sometimes for little or no compensation. Ask if there’s an executor’s fee and whether the estate has set aside funds to pay for professional advisors.

What’s your location? If you live far away from the place where the assets and beneficiaries are located, the job will be more difficult, time consuming and expensive.
Do you have a good relationship with the beneficiaries? If not, accepting the appointment may put you in a difficult position, especially if you’re also a beneficiary and the other beneficiaries view that as a conflict of interest.

Will the estate pay your expenses? Even if you receive no fee or commission for serving as executor, be sure the estate will pay, or reimburse you, for any out-of-pocket costs.

Finally, some individuals appoint co-executors. For example, they may select one person who knows the family and understands its dynamics and an independent executor with the requisite expertise. So, be sure you know if you’ll be serving as executor solo or with a partner. Having a co-executor may come as a relief or it may add more complications. Contact us for additional information.

The data is coming fast and furious. When it comes to compensation in today’s workplace, many people are talking about pay transparency.

Simply defined, pay transparency is the concept of an employer openly sharing its compensation policies and practices with job candidates, employees and even the public. This includes disclosing pay ranges/rates for specific positions, as well as clearly explaining how raises, bonuses and commissions are determined. Here are some reasons why pay transparency has become so important … as well as that data we mentioned.

Expectations are rising

In February, compensation software and data company Payscale published its 2023 Compensation Best Practices Report. The findings are based on the responses of 5,000 professionals surveyed in the fourth quarter of 2022. According to the report, 45% of organizations now include pay ranges in their job postings — a rising trend from previous surveys. What’s more, 48% of employers said that transparency-related legislation is driving them to change their compensation policies. This could indicate that pay transparency might soon become a matter of compliance rather than self-motivated policy.

A different survey from the job-posting site Indeed delivered a similar message. Company data released in March 2023 showed that, over three years, the prevalence of employer-provided salary information had risen from 18.4% of organizations disclosing pay ranges to 43.7%. That’s right, it more than doubled. Indeed researchers noted that growth of pay transparency was the highest in fields focused on science, technology, engineering and mathematics — commonly referred to as “STEM.” This includes industries such as software development, banking and finance.

It may help reduce turnover

Payscale released a different study in June 2023. Its Retention Report, which contains data from an online salary survey, found that compensation transparency “decreases intent to quit by 30% when analyzed in isolation.”

The report also states that, when employees believe their pay is unfair, they’re much more likely to quit. This indicates that simply divulging pay ranges isn’t enough. Employers need to provide sound rationalizations for each position’s compensation. Organizations also need to clearly explain how pay is determined, why their compensation is competitive within their respective industries or markets, and how employees can elevate their pay levels.

Younger workers care about it

You’ve probably heard the phrase “Gen Z.” It’s used to broadly represent people born between roughly the late 1990s and the early part of the 2000s. Although generalizing the attitudes and behaviors of any generation is fraught with risks, one thing is clear: Gen Z represents the next large demographic to enter the workforce — or continue to enter, as the case may be, because many members of Gen Z are already working.

Data indicates that pay transparency is important to them. The enterprise technology and information-management solution provider Symplicity released a report in May entitled 2023 State of Early Talent Recruiting: Gen Z and the Job Search Process. The report culled data from a survey of 3,700 U.S. college students. Of those respondents, 87% said that pay transparency (and equity) was “important” or “very important.” More specifically, 53% said they’d be discouraged from applying for a position without a stated salary range.

Find your comfort level

History has shown that hiring, compensation and retention practices evolve over time. What was widely accepted years ago may not go over so well now or in the years ahead. That said, every employer needs to find its own comfort level regarding pay transparency based on factors such as its industry, labor pool and culture. We can help you analyze the financial data that goes into setting reasonable pay ranges and handling other aspects of compensation.

Your business may be able to claim big first-year depreciation tax deductions for eligible real estate expenditures rather than depreciate them over several years. But should you? It’s not as simple as it may seem.

Qualified improvement property

For qualifying assets placed in service in tax years beginning in 2023, the maximum allowable first-year Section 179 depreciation deduction is $1.16 million. Importantly, the Sec. 179 deduction can be claimed for real estate qualified improvement property (QIP), up to the maximum annual allowance.

QIP includes any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service. For Sec. 179 deduction purposes, QIP also includes HVAC systems, nonresidential building roofs, fire protection and alarm systems and security systems that are placed in service after the building is first placed in service.

However, expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework don’t count as QIP and must be depreciated over several years.

Mind the limitations

A taxpayer’s Sec. 179 deduction can’t cause an overall business tax loss, and the maximum deduction is phased out if too much qualifying property is placed in service in the tax year. The Sec. 179 deduction limitation rules can get tricky if you own an interest in a pass-through business entity (partnership, LLC treated as a partnership for tax purposes, or S corporation). Finally, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face additional restrictions. We can give you full details.

First-year bonus depreciation for QIP

Beyond the Sec. 179 deduction, 80% first-year bonus depreciation is also available for QIP that’s placed in service in calendar year 2023. If your objective is to maximize first-year write-offs, you’d claim the Sec. 179 deduction first. If you max out on that, then you’d claim 80% first-year bonus depreciation.

Note that for first-year bonus depreciation purposes, QIP doesn’t include nonresidential building roofs, HVAC systems, fire protection and alarm systems, or security systems.

Consider depreciating QIP over time

Here are two reasons why you should think twice before claiming big first-year depreciation deductions for QIP.

1. Lower-taxed gain when property is sold

First-year Sec. 179 deductions and bonus depreciation claimed for QIP can create depreciation recapture that’s taxed at higher ordinary income rates when the QIP is sold. Under current rules, the maximum individual rate on ordinary income is 37%, but you may also owe the 3.8% net investment income tax (NIIT).

On the other hand, for QIP held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if applicable.

2. Write-offs may be worth more in the future

When you claim big first-year depreciation deductions for QIP, your depreciation deductions for future years are reduced accordingly. If federal income tax rates go up in future years, you’ll have effectively traded potentially more valuable future-year depreciation write-offs for less-valuable first-year write-offs.

As you can see, the decision to claim first-year depreciation deductions for QIP, or not claim them, can be complicated. Consult with us before making depreciation choices.

GASB No. 101, also known as Compensated Absences, is a standard issued by the Governmental Accounting Standards Board (GASB) that addresses the accounting and financial reporting of employee compensated absences in the public sector. The Standard provides guidance on how governmental entities should recognize, measure, and disclose obligations related to compensated absences, such as vacation leave, sick leave, and other similar benefits. GASB No. 101 requires governmental entities to report these obligations in their financial statements and disclose relevant information to ensure transparency and accountability.

To further enhance your understanding and implementation of GASB No. 101 Compensated Absences, we have prepared this presentation that overviews the Standard. If you have questions, we encourage you to contact our team of professionals at Yeo & Yeo. Our knowledgeable professionals are well-versed in governmental accounting standards and can help with any questions or concerns regarding GASB compliance. Whether you need assistance identifying and measuring compensated absences liabilities, ensuring proper disclosures, or conducting a thorough audit, we are here to help.

Mike Rolka was a co-contributor of this article and presentation.

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For many people, summertime is moving time. With kids out of school and the weather relatively amenable in most regions, it’s the ideal time for those changing jobs or work locations to load up their stuff and head off to a new chapter of life.

If your organization, like many, has expanded its hiring reach to job candidates well outside your immediate area, you might consider reimbursing new hires for moving expenses or existing employees for relocation costs. Maybe you even want to do both. Although this can certainly be an enticing fringe benefit, the applicable tax rules have changed quite a bit in recent years.

TCJA changes

Signed into law in 2017, the Tax Cuts and Jobs Act (TCJA) suspended:

The moving expense deduction for individuals, and
The exclusion from income (tax-free treatment) for employer reimbursements for moving expenses.

The suspension period applies to taxable years beginning after 2017 and before 2026. During this period, only members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station can still qualify for the deduction and the exclusion for employer reimbursements.

What employers should know

Loss of the long-standing tax breaks for moving does affect employees, but it doesn’t mean employers can’t continue paying for employees’ moving expenses. In most cases, those expenses should continue to be fully deductible by employers. Loss of the exclusion at the employee level, however, makes employer reimbursements for moving costs more expensive for your organization.

Before the TCJA, qualified moving expenses reimbursed or paid by an employer weren’t subject to federal income tax or Social Security and Medicare taxes if paid under the accountable plan rules. Under those rules, an expense reimbursement was exempt from the taxes in question if:

The expense had a business connection,
The employee adequately accounted for the expense within a reasonable time, and
Any excess reimbursement was timely returned.

Thereby, tax-free moving expense reimbursements weren’t subject to the employer or employee portion of Social Security and Medicare taxes before the TCJA.

But, during the TCJA suspension period (through 2025), both the employer and employee portions of the Social Security and Medicare taxes apply to moving expense reimbursements because they’re treated as additional taxable wages. Federal income tax withholding also applies.

Higher costs but …

If your organization decides to continue reimbursing moving expenses, its total cost could be higher than in pre-TCJA years because of the employer’s share of Social Security and Medicare taxes. However, reimbursements aren’t limited by the previous rules that applied to moving expense reimbursements before passage of the TCJA.

So, you now have more flexibility to define reimbursable moving expenses and can relax — or even eliminate — substantiation requirements. You may simply provide payments for unsubstantiated moving expenses as a taxable employee benefit or as part of a taxable signing bonus.

Forgoing substantiation altogether does simplify administration. But, without substantiation, you can’t confirm that employees are using the payments entirely for moving expenses. You might be giving them an unnecessarily large amount.

A tricky decision

In many industries, competition for highly skilled employees is tough. Offering reimbursement for moving costs could give you an edge in hiring and retention. However, you’ll need to weigh the potential benefits against the higher cost, all the while bearing in mind that the old rules could return in 2026. Our firm can provide further information and help you make the right decision.

For many people, the disposition of a family home is an emotionally charged estate planning issue. And emotions may run even higher with vacation homes, which often evoke even fonder memories. So, it’s important to address your vacation home carefully in your estate plan.

Keeping the peace

Before you do anything, talk with your loved ones about the vacation home. Simply dividing the home equally among your children or other family members may be an invitation to conflict and hurt feelings. Some may care more about keeping the home in the family than about any financial benefits it might provide. Others may prefer to sell the home and use the proceeds for other needs.

One solution is to leave the vacation home to the family members who want it and leave other assets to those who don’t. Alternatively, you can develop a buyout plan that establishes the terms under which family members who want to keep the home can buy the interests of those who want to sell. The plan should establish a reasonable price and payment terms, which might include payment in installments over several years.

You also may want to create a usage schedule for nonowners whom you wish to continue enjoying the vacation home. And to help alleviate the costs of keeping the vacation home in the family, consider setting aside assets that will generate income to pay for maintenance, repairs, property taxes and other expenses.

Transferring the home

After determining who will receive your vacation home, there are several traditional estate planning tools you can use to transfer it in a tax-efficient manner. It may make sense to transfer interests in the home to your children or other family members now, using tax-free gifts.

But if you’re not yet ready to give up ownership, consider a qualified personal residence trust (QPRT). With a QPRT, you transfer a qualifying vacation home to an irrevocable trust, retaining the right to occupy the home during the trust term. At the end of the term, the home is transferred to your beneficiaries, though it’s possible to continue occupying the home by paying them fair market rent. The transfer is a taxable gift of your beneficiaries’ remainder interest, which is only a fraction of the home’s current fair market value.

You must survive the trust term, and the vacation home must qualify as a “personal residence,” which means, among other things, that you use it for the greater of 14 days per year or more than 10% of the total number of days it’s rented out.

Discussing your intentions

These are only a few of the issues that may be involved in passing on a vacation home. Estate planning for a vacation home may be complicated but it doesn’t have to be. The key is to sit down with your family to discuss the options. Only then can you put together a plan that meets everyone’s needs. Contact us with questions about the most tax-efficient way to proceed.

Manufacturers must comply with all relevant tax laws to avoid dire consequences. While the most attention is generally directed toward federal income and payroll taxes, there’s another potential aspect to consider: state sales tax.

The good news is that manufacturers may be able to take advantage of various sales tax exemptions. For example, many states offer exemptions for items used in the manufacturing process, such as machinery, equipment and supplies. The result? Tax savings for your manufacturing company.

Definition of “manufacturing” counts

How does your company’s home state define the term “manufacturing”? More often than you might think, the state’s interpretation differs from a traditional view. Notably, some states include nontraditional processes in their definition of “manufacturing” for exemption purposes while others may allow some leeway in the determination of when manufacturing “begins” and when it “ends.”

Your tax advisor can provide insights into the regulations affecting exemptions in your state. While the details can vary state-to-state, here are four “out-of-the-norm” situations where a manufacturing exemption may be available.

In Florida, a printer may be labeled as an eligible manufacturing business.
In Texas, a restaurant, a bakery in a grocery store and even a caterer may qualify for a manufacturing exemption on equipment purchases.
In Maine, tax regulations include certain biological processes in their definition of “production” for purposes of the state’s sales tax exemption.
In Kentucky, the state has authorized an exemption for electricity used or consumed in the commercial mining of cryptocurrency.

The lesson here is to not be so quick to dismiss the possibility of a manufacturing sales tax exemption for your company.

Determining what falls under an exemption

On the other side of the coin, some items used by manufacturers, or parts of items, may not qualify for an exemption if they fail to meet state law requirements. Generally, the determination boils down to either one of two applications:

Machinery and equipment that’s “necessary and integral” to the manufacturing process, or
Machinery and equipment that’s used directly in making a change to the physical product.

The outcome isn’t always clear at the outset. Here are a few areas that often come under scrutiny:

Production supplies. The exemption for production supplies generally is a broad one. Note, however, that a smattering of states, including California, don’t have one. In some states exemptions are available only for production supplies that come in direct contact with the manufactured product, while others provide exemptions for supplies exhausted in the manufacturing process. In still other states, the supplies must be necessary and integral to the manufacturing process. For states in the middle ground, the exemption may require the production supplies to come in direct contact with the manufactured product.

Storage and handling. Generally, the storage of raw materials or finished products is treated as a taxable part of the manufacturing process. Some states allow an exemption for storage racks if they’re used during the manufacturing process. In addition, machinery used in handling items for storage may qualify for an exemption.

Safety apparel. Absent a specific exemption allowed by the state, safety apparel worn by employees is subject to tax. Nevertheless, certain states offer an exemption, including North Carolina, where the apparel is exempt if it protects the product, but not the employee. Other states, including Georgia, allow an exemption where safety apparel is necessary and integral to the manufacturing process.

Maintenance and repairs. Manufacturers frequently have to make repairs or perform upkeep on machinery, equipment or supplies. Many states offer exemptions for repair parts. But they’re not automatic. In some cases, maintenance equipment and supplies may be taxable in your state, depending on the wording of the applicable exemption.

Janitorial supplies. Generally, janitorial supplies used to clean the administrative offices of a manufacturing plant are taxable and aren’t eligible for an exemption. However, supplies used to clean the manufacturing machinery, or areas close to manufacturing operations, may qualify for an exemption in certain states. For instance, a manufacturer can claim an exemption in South Carolina for supplies used to clean a manufacturing machine if the cleaning is integral and necessary to the manufacturing process as part of a continuous activity.

Seek expert help

Many variables exist in determining whether a manufacturer can take advantage of sales tax exemptions. To better ensure you’re not missing a tax-saving opportunity, please contact us.

President Biden has signed into law the new debt ceiling agreement that he reached with U.S. House of Representatives Speaker Kevin McCarthy (R-CA). The Fiscal Responsibility Act (FRA) suspends — as opposed to raising — the debt ceiling until 2025, after the next presidential election.

The FRA also makes a variety of changes related to domestic spending, although it falls far short of the cuts included in the Republican bill that the House passed in April 2023, with no changes to the GOP’s long-time targets of Social Security and Medicare. Nonetheless, the Congressional Budget Office (CBO) projects the law will reduce the federal deficit by about $1.5 trillion over 10 years.

The main provisions

The new law primarily tackles discretionary spending. The notable provisions address:

IRS funding. The Inflation Reduction Act (IRA), which was enacted in 2022, included an additional $80 billion in funding for the tax agency, with much of it designated for heightened enforcement activity against wealthy taxpayers. The FRA immediately rescinds $1.39 billion and pares back the funding by about $10 billion each year for 2024 and 2025. However, White House officials have indicated that they expect the funding cuts to make little difference in the IRS’s pending expansion plans because the agency planned to spend the original funding over several years. It may be able to spend some of the funds earmarked for later years earlier and then return to Congress to request more funding in the future.

Spending caps. One of the more contentious focuses of the negotiations was non-defense discretionary funding for programs such as scientific research, domestic law enforcement, forest management, environmental protection, air traffic control and nutritional assistance for mothers. The final result is a virtual freeze on this spending, facilitated in part by the reduced funding for the IRS. The spending will drop by about $1 billion in the 2024 fiscal year, compared to this fiscal year, with a 1% increase slated for the 2025 fiscal year. This amounts to a cut, as inflation is expected to grow at a rate greater than 1%. The final non-defense figures are $704 billion for 2024 and $711 billion for 2025.

Defense and veterans affairs spending. The FRA provides Biden’s budgeted funding for the military and veterans affairs for 2024, adjusted for inflation. Total defense spending will grow to $886 billion in 2024 and $895 billion in 2025.

Student loan debt. The new law codifies Biden’s previous announcement that the moratorium on student loan payments precipitated by the COVID-19 pandemic won’t be extended beyond this summer. His plan to cancel student loan debt for many borrowers — to the tune of $430 billion — isn’t part of the law. (However, the plan currently is under review by the U.S. Supreme Court.)

Work requirements. Certain recipients of Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) benefits will face new work requirements, although Medicaid recipients won’t. Specifically, the FRA raises the top age at which adults without children living in their homes must work to receive SNAP assistance, from 49 to 54, phased in over three years. However, the law includes exemptions for the homeless, veterans and individuals age 24 or younger who were children in foster care. It also includes provisions that could increase the number of individuals who must satisfy work requirements to receive TANF benefits from their state programs. Yet, the CBO estimates that the various changes will actually result in more people receiving assistance.

COVID-19 clawback. Much of the remaining unspent COVID-19 relief funds, estimated to equal $30 billion to $70 billion, will be “clawed back.” Portions of that funding will be retained, though, including a certain amount for vaccines.

Permitting for energy projects. The FRA includes rules designed to make it easier for new energy projects, including fossil fuel projects, to obtain permit approval.

The leftovers

As noted, the original House debt ceiling bill was much more aggressive. Republicans sought larger spending cuts and tighter work requirements. They also aimed to repeal hundreds of billions in tax incentives in the IRA intended to increase the use of renewable energy and combat climate change.

On the other side of the aisle, Democrats hoped to raise taxes on corporations and taxpayers who earn more than $400,000. In addition, they wanted to institute measures to reduce Medicare spending on prescription drugs.

None of these priorities are included in the new law.

The bottom line

Professionals have noted that the outcome of the latest debt ceiling challenge largely resembles the likely outcome of budget negotiations in a divided government, albeit with much more drama and more drastic potential implications for the global economy. Moreover, additional bills related to appropriations — what the parties have referred to as “agreed upon adjustments” — are expected in coming months, which could reduce the effects of some of the spending cuts.

If you and your employees are traveling for business this summer, there are a number of considerations to keep in mind. Under tax law, in order to claim deductions, you must meet certain requirements for out-of-town business travel within the United States. The rules apply if the business conducted reasonably requires an overnight stay.

Note: Under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses on their own tax returns through 2025. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.

However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Rules that come into play

The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. Although there was a temporary 100% deduction in 2021 and 2022 for business food and beverages provided by a restaurant, it was not extended to 2023. Therefore, there’s once again a 50% limit on deducting eligible business meals this year.

Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”

Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.

Mixing business with pleasure

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for four days of business meetings and stay on for an additional three days of vacation. Only the costs of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is primarily business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn’t the sole factor).

If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure it isn’t a vacation in disguise. Retain all material helpful in establishing the business or professional nature of this travel.

Other expenses

The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.

Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, let’s say you have to board a pet while you’re away. The cost isn’t deductible. Contact us if you have questions about your small business deductions.

Many people are familiar with Roth IRAs. These popular retirement accounts feature tax-free withdrawals as long as certain conditions are met. But did you know that employers can offer designated Roth contributions as part of the 401(k) plans they sponsor for employees?

Indeed, it is possible — but you’ll want to familiarize yourself with the finer points of this feature before adding it to your organization’s plan.

Key differences

Roth contributions differ from other elective deferrals in two key tax respects. First, they’re irrevocably designated to be made on an after-tax basis, rather than pretax. Second, if all applicable requirements are met and the distribution is a “qualified distribution,” the earnings won’t be subject to federal income tax when distributed.

To be qualified, a distribution generally must occur after a five-year waiting period, as well as after the participant reaches age 59½, becomes disabled or dies. Because of the different tax treatment, plans must maintain separate accounts for designated Roth contributions.

Upsides and risks

The Roth option gives participants an opportunity to hedge against the possibility that their income tax rates will be higher in retirement. However, if tax rates fall or participants are in lower tax brackets during retirement, Roth contributions may provide less after-tax retirement income than comparable pretax contributions. The result could also be worse than that of ordinary elective deferrals if Roth amounts aren’t held long enough to make distributions tax-free.

Nonetheless, if your organization employs a substantial number of relatively highly paid employees, a Roth 401(k) component may be well-appreciated. This is because participants can make much larger designated Roth 401(k) contributions than they can for a Roth IRA. In 2023, the limit is $22,500 for designated Roth 401(k) contributions versus $6,500 for Roth IRA contributions.

Catch-up contributions for individuals 50 or older are also considerably higher for designated Roth 401(k) contributions than they are for Roth IRA contributions. In 2023, the limit is $7,500 for designated Roth 401(k) catch-up contributions versus $1,000 for Roth IRA catch-up contributions.

Naturally, participants will need to know what they’re getting into. They’ll have to consider current and future tax rates, various investment alternatives, and the potential loss of some rollover options. They’ll also need to anticipate the risk of needing a distribution before they qualify for tax-free treatment of earnings, which would trigger taxation of those earnings.

For plan sponsors, the separate accounting required for Roth contributions may raise plan costs and increase the risk of error. (One common mistake: treating elected contributions as pretax when the participant elected Roth contributions, or vice versa.)

And because Roth contributions are treated as elective deferrals for other purposes — including nondiscrimination requirements, vesting rules and distribution restrictions — plan administration and communication will be more complex.

Look before you leap

The addition of Roth contributions to your employer-sponsored 401(k) could be an enticing enhancement for job candidates and current employees. However, you’ll need to determine whether your participants will truly value and use the feature before you revise your plan. We can assist you in deciding whether this would be an advisable move for your organization.

The 2023 Compliance Supplement was released, which did not classify E-Rate as a federal program subject to Single Audit. The Supplement is effective for audits of fiscal years beginning after June 30, 2022. Therefore, for the 2023 fiscal year, E-Rate reimbursement dollars:

will not be included on the Schedule of Expenditures of Federal Awards (SEFA);
will not apply to the single audit; and
will not be included in total federal awards to determine thresholds for Single Audit and major program calculations.

The above guidance applies for all fiscal years beginning after June 30, 2022. The guidance may change with the 2024 Compliance Supplement, and we will inform you if it does.

For more information, refer to the 2023 Compliance Supplement. Contact Yeo & Yeo if you need assistance.