E-Rate Funding: Not on SEFA for Fiscal Year 2023

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 is the final guidance related to fiscal year 2023. The Audit Risk Alert issued by the Michigan Department of Education (MDE) will also be updated to reflect this change. This guidance may change for the 2024 fiscal year, and we will inform you if it does.

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

The General Sales Tax Act and the Use Tax Act have been amended. Effective April 26, 2023, delivery and installation charges are exempt from Michigan sales tax and use tax if both of the following conditions are met:

The charges are separately stated on the invoice, bill of sale, or similar document provided to the purchaser; and
The seller (taxpayer) maintains its records to show separately the transactions used to determine the sales or use tax, as applicable.

Delivery charges are charges by the seller for preparation and delivery to a location designated by the purchaser, including transportation, shipping, postage, handling, crating, and packing.

Delivery and installation charges that involve the sale of electricity, natural gas or artificial gas by a utility remain subject to sales tax and use tax.

Unpaid assessment balances

Additionally, the Treasury will cancel within 90 days any outstanding balances on notices of assessments issued before the effective date and related to delivery or installation charges that are now exempt under the amendments. While Treasury will be proactive in locating and canceling assessments, taxpayers with outstanding balances for delivery or installation charges are encouraged to contact Treasury at Treas-TCB-Technical@michigan.gov.

Taxpayers cannot receive a refund for sales tax or use tax on delivery or installation charges that were remitted to the Treasury before the effective date of April 26, 2023. Neither will purchasers be able to seek refunds for sales or use tax paid on delivery or installation charges.

Businesses should update their sales tax and use tax processes so that tax is not applied to exempt delivery or installation charges. For assistance, contact Yeo & Yeo.

Traditional business models in many sectors have been disrupted by the COVID-19 pandemic, geopolitical uncertainty, rising costs and falling consumer confidence. If your company is planning a major strategic shift this year, management may need to comply with the updated accounting rules for reporting discontinued operations that went into effect in 2015.

Discontinued operations typically don’t happen every year, so it’s important to review the basics before preparing your year-end financial statements.

Defining discontinued operations

The scope of what’s reported as discontinued operations was narrowed by Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Since the updated guidance went into effect in 2015, the disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results.

Examples of a qualifying major strategic shift include the disposal of:

A major geographic area,
A line of business, or
An equity method investment.

When such a strategic shift occurs, a company must present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the balance sheet.

Disclosing the details

In addition, ASU 2014-08 calls for expanded disclosures when reporting discontinued operations. The goal is to show the financial effect of such a shift to the users of the entity’s financial statements, allowing them to better understand continuing operations.

The following disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:

Major classes of line items constituting the pretax profit or loss of the discontinued operation,
Either 1) the total operating and investing cash flows of the discontinued operation, or 2) the depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operations, and
Pretax profit or loss attributable to the parent if the discontinued operation includes a noncontrolling interest.

Management also must provide various disclosures and reconciliations of items held for sale for the period in which the discontinued operation is so classified and for all prior periods presented in the balance sheet. Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation — or if a disposal doesn’t qualify for discontinued operations reporting.

For more information

Major strategic changes don’t happen often, and in-house personnel may be unfamiliar with the latest guidance when preparing your company’s year-end financial statements. Contact us to help ensure you’re complying with the updated guidance.

The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).

HSA fundamentals

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high-deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.

There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).

High-deductible health plan defined. For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).

Advantages of HSAs

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.

Financial statements are central to understanding any business. A public company’s balance sheet, income statement and cash flow statement enable investors, lenders, the media and other stakeholders to value the company, forecast short- and long-term performance, and determine potential credit risk, among other purposes. To ensure analysis of a company is accurate and insightful, financial statements must be reliable.

For this reason, financial statement fraud — the exaggeration or outright fabrication of numbers by insiders, such as owners and executives — is extremely dangerous. It can lead to criminal charges, lawsuits, large financial losses and even the company’s demise. It’s critical that your business do everything possible to prevent this type of fraud.

More common than you might think

Financial statement fraud involving large public companies has received considerable press coverage in the past couple of decades. But small and mid-sized businesses aren’t immune to this type of fraud. In fact, such schemes generally are easier to perpetrate in small companies where there’s less oversight.

Regardless of size and sector, financial statement fraud is probably more prevalent than you think. A well-received 2023 study by a University of Toronto finance professor finds that 10% of publicly traded companies are committing securities fraud.

These schemes can involve everything from overstating revenue and inflating assests, to understating expenses, hiding liabilities and omitting disclosures. According to the Anti-Fraud Collaboration of the Securities and Exchange Commission, the most common enforcement actions involving financial statements feature:

Improper revenue recognition (43%),
Operational reserves manipulation (24%),
Inventory misstatement (11%), and
Loan impairment issues (11%).

6 red flags

Although each fraud scheme is as unique as the company it victimizes, financial statement scams share certain characteristics that can tip off fraud professionals and eagle-eyed stakeholders. These include:

Implausible revenue growth. A sudden or sustained increase in revenue, especially when the company faces harsh economic conditions, can be a cause for concern and deserves further investigation.
Relationship between expenses and revenues. Expenses typically increase as revenue grows. If a company reports significant revenue growth, its costs should also generally rise, unless there are extenuating circumstances.
Inconsistencies and anomalies. Closer scrutiny may be warranted if financial statements include numbers that are out of line with industry benchmarks, report a trend reversal with no plausible explanation or merely appear inconsistent with historical performance.
Related-party transactions. Transactions with related parties aren’t inherently problematic. There can be good reasons to engage in such transactions. But exercise skepticism if they’re hard to understand or seem to serve no purpose.
Changes in accounting methods. A company may have a legitimate reason for switching accounting methods. But such changes can mask weaknesses because they make it more difficult to compare performance between accounting periods and spot suspicious numbers.
Frequent changes in auditors. If a company changes auditors frequently, it could be a sign of conflict or represent an effort to conceal material financial misstatements.

Reducing risk

To minimize the threat of financial statement fraud, always encourage — and model — ethical business practices. This includes communicating clear expectations to executives regarding acceptable behavior. Be sure to empower rank-and-file employees (and other stakeholders) who may witness illicit activities by providing an anonymous reporting hotline.

Include a separation of duties and multiple layers of approval and oversight in your internal control policies. And make it nearly impossible for managers to override controls. Education also plays a critical role in preventing financial statement fraud. Put the basics of financial statement fraud and potential warning signs in your company’s training materials.

Personal stake

One of the most common reasons executives commit financial statement fraud is because their compensation depends on company performance. For this reason, look for ways to evaluate and compensate managers on several fronts — including on leadership and coaching — not simply on financial performance. Also rely on outside advisors who have no personal stake in your business’s financial results. Contact us for help.

The sudden onset of the pandemic in 2020 triggered a mental health crisis that has affected people everywhere. By extension, it has touched employees of many, if not most, organizations. Employers have generally ramped up mental health benefits in response over the last few years or, at the very least, become more aware of their importance.

If your organization’s benefits package includes mental health resources, it’s a good idea to check in on whether your employees are using them and if you should revise or add to your offerings.

Study results

A recent study illustrates a common conundrum regarding mental health benefits. That is, though the resources are there, employees just aren’t widely accessing them. Membership-based primary care provider One Medical recently surveyed 800 HR/benefits organizational leaders, as well as 800 full-time employees, and reported the results in its The State of Workplace Health 2023 report.

The data showed that, while 61% of respondents took advantage of their “routine care” health benefits, only 19% used their mental health benefits. The survey asked employees why they chose not to access their employer-provided mental health resources and:

22% said costs played into their decision,
25% reported feeling embarrassed about getting help, and
45% cited a busy schedule.

On the bright side, the study found that 26% of respondents said their mental health had improved in the last year, and 42% believed it had stayed the same. Then again, 32% reported that their mental health had declined since last year, though that is 2% less than the decline reported in 2022.

Benefits to consider

The cumulative message of all these data points is relatively clear: Employers can’t simply lay out a menu of mental health benefits and expect workers to partake. If you want to reap the morale, retention and productivity upsides of a well-cared-for staff, you’ve got to encourage participation through strong benefits education and communication.

Also, you may need to occasionally tweak your benefits selection to meet the distinctive and evolving needs of your workforce. Here are a few mental health benefits to consider:

An Employee Assistance Program (EAP). An EAP is a voluntary and confidential work-based intervention program designed to help employees and their dependent family members deal with issues that may be affecting their mental health and job performance. Such issues can include workplace stress, grief, depression, marriage/family problems, psychological disorders, and alcohol and drug dependency.

Revised paid time off (PTO) policies. Many employers are finding that the old “X number of vacation days and X number of sick days” approach lacks the flexibility employees need to care for themselves. Your staff may appreciate a bank of PTO that can be used for any purpose without question. Some employers are also adding “mental health days” to their lists of organizational holidays.

Trainings related to mental health. Employers are often in a unique position to teach groups of people to lessen behaviors that hurt mental health and emphasize behaviors that improve it. For example, stress management programs can train workers to recognize high-stress situations and better cope with them. Leadership training programs can help create leaders who communicate, coach and coordinate work more effectively, reducing everyone’s stress.

Bottom-line impact

There can be a very real, positive bottom-line impact to helping employees care for their mental health. But it’s a challenge that calls for a high degree of awareness and a constant eye on necessary changes. Our firm can help you identify and analyze your benefits and training costs.

Recent reports have raised anew concerns about the impending insolvency of the Social Security program, absent congressional action. Social Security reform has long been considered a “third rail” of American politics and understandably so — the options for heading off insolvency will inevitably cause pain for significant segments of the population. Yet some in Congress have stepped forward with proposals that aim to tackle the problem.

The impending shortfall

Social Security currently provides benefits to more than 66 million recipients. The Congressional Budget Office (CBO) estimates that about 78 million people, or about 20% of the U.S. population, will receive benefits from the Old-Age and Survivors Insurance (OASI) Trust Fund in 2032.

The CBO and the trustees of the Social Security and Medicare trusts have both raised alarms about how soon Social Security will become “insolvent.” Insolvency in this context refers to the point at which the trust fund will be depleted, and payments would come solely from income generated by payroll tax and income tax on benefits.

The 2023 Trustees Report states that the OASI Trust Fund will be able to pay 100% of total scheduled benefits only until 2033, one year earlier than the trustees projected last year. The program would then be able to pay 77% of scheduled benefits.

The CBO’s forecast is even more dire. It predicts the OASI fund will be exhausted in 2032. As a result, it says, payable benefits would be 25% less than scheduled benefits.

The declining ratio of workers to beneficiaries is one reason for the trust fund’s shrinkage, and the retirement of Baby Boomers has only accelerated this trend. High interest rates and historic inflation also play a large role. Due to inflation, beneficiaries saw an 8.7% cost-of-living adjustment (COLA) in 2023, the largest such hike since 1981.

According to the Congressional Research Service, the trust fund’s depletion, whenever it occurs, would create a conflict between two federal laws. Beneficiaries would remain entitled to their full scheduled benefits under the Social Security Act. But the Antideficiency Act prohibits government spending in excess of available funds, so the Social Security Administration (SSA) would lack legal authority to pay full benefits on time.

Limited options

Congress has a limited arsenal of weapons for addressing the shortfall in the OASI fund. It generally can increase trust fund revenues or reduce benefits by taking various steps, such as:

Raising the retirement age. Retirees normally begin receiving benefits at age 66 or 67, depending on their year of birth (reduced early benefits are available at age 62). Various legislators and others have called for increasing the full retirement age. For example, some have suggested raising it to age 70 for people born in 1978 or later.

The American Academy of Actuaries (AAA) points out several potential problems with this approach, though. For example, raising the retirement age is essentially a cut in benefits, and jobs might not be available for people ages 67 to 69 who would have to keep working, particularly those who perform manual labor. A higher retirement age would disproportionately affect low-wage workers and those who have higher mortality rates. In addition, it would likely increase disability insurance costs and the costs for employer-provided insurance.

Increasing payroll tax. Workers and employers each pay 6.2% payroll taxes, for a total of 12.4% on the first $160,200 of wages in 2023. Payroll taxes could be boosted in two ways — increasing the tax rate and adjusting or eliminating the wage cap.

The AAA says that, of all the many proposals and bills for addressing the impending deficit, “raising the tax rate best preserves the current system structure.” The CBO says that trust fund balances would be sufficient to pay scheduled benefits through 2097 if the total payroll tax rate was increased immediately and permanently to 17.6% (before accounting for the effects of such changes on the economy).

Others have proposed applying the tax to greater amounts of wages. Some would apply the tax to earnings greater than a specific threshold (for example, $400,000), creating a “doughnut hole” of income not subject to the tax.

The AAA explains that, if the contribution base is increased but not the benefit base, the fund could raise revenue with no increase in benefits. The effect would be similar to increasing the tax rate, but the additional tax revenue would come only from workers with earnings in excess of the benefit base. In other words, this would negatively affect higher earners.

But the AAA says that even including the additional taxed earnings in the benefit formula would help. That’s because the additional earnings in the benefit formula would be at the high end of the earnings scale, where the benefit formula percentage is lowest. Moreover, while the additional tax revenue would begin immediately, the additional benefits would slowly phase in over time.

Changing benefits formulas. COLAs currently are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers. A different inflation index could be used to slow the annual increases. This would produce net benefit reductions as smaller benefit increases in early retirement years compound over time.

Other ideas include changing the primary formula for benefits for retirees or those for eligible spouses and dependents. For example, the basic Social Security benefit is called the primary insurance amount, based on average indexed monthly earnings (AIME) — generally, the average of a beneficiary’s highest earning years over a period of up to 35 years.

The number of averaging years included when calculating AIME could be increased, which would reduce the AIME for most workers. However, the AAA says this could have “especially adverse consequences” for workers who don’t have steady earnings, such as parents who leave the workforce to care for children.

Implementing means testing. Means testing generally refers to reducing or eliminating Social Security benefits for wealthy and/or high-income retirees whose current income or assets exceed a certain threshold. Supporters of means testing argue that the program shouldn’t benefit those who don’t have financial need.

Opponents contend that cutting or eliminating benefits for the wealthy would be unfair, as those individuals have contributed and been promised benefits just as others have. They also warn that it could undermine public support for Social Security, disincentivize work in later years and encourage consumption over saving.

Some recent proposals

Despite its third-rail status, several legislators on both sides of the aisle are working to confront the Social Security solvency crisis. For example, in February 2023, Sens. Bernie Sanders (I-VT) and Elizabeth Warren (D-MA), along with several Democratic colleagues, introduced the Social Security Expansion Act.

Among other things, it would apply the payroll tax to earnings above $250,000, without crediting the additional taxed earnings for benefit purposes. It also would impose a 12.4% tax on investment income and change the inflation index for COLAs. The SSA’s Office of the Chief Actuary estimates that enactment of the bill would extend the ability of the combined OASI and Disability Insurance program to pay scheduled benefits in full and on time for 75 years. In addition, the bill would add $2,400 to beneficiaries’ annual benefits.

Sens. Angus King (I-ME) and Bill Cassidy (R-LA) are heading a bipartisan coalition exploring other options. They’re reportedly discussing the creation of a so-called “sovereign wealth fund” separate from Social Security. The fund would invest $1.5 trillion or more in the U.S. economy and accrue returns over 70 years. If it fails to produce an 8% return, the maximum taxable income and the payroll tax rate would be increased to ensure solvency for 75 years. Cassidy says this approach would “solve 75% of the problem.”

A political conundrum

Both parties acknowledge the need for some type of action regarding Social Security. Generally, Democrats oppose cuts to benefits and Republicans oppose higher taxes. And the political climate isn’t favorable for reaching a compromise. We’ll follow the developments and keep you informed of any significant changes coming your way.

Estate planning can be complicated enough if you don’t have a spouse. But things can get more difficult for married couples. Even if you and your spouse have agreed on most major issues in the past — such as child rearing, where to live and other lifestyle choices — you shouldn’t automatically assume that you’ll both be on the same page when it comes to making estate planning decisions.

A worst-case scenario is when one spouse moves forward with his or her estate plan without the knowledge or approval of the other, to the eventual detriment of the family. Thus, it’s critical for both spouses to clearly communicate their estate planning goals to each other.

Where to begin?

Start with the basic premise that state law generally governs estate matters. Therefore, state law determines if your property is community property, separate property or tenancy by the entirety. For instance, California is a community property state. That means half of what a resident owns is his or her spouse’s property and vice versa. There’s no circumventing this law when planning for a joint estate.

Next, consider your family’s dynamics. Emotions can run high and tensions may result, for example, if a family includes children from a prior marriage. If these issues aren’t addressed beforehand, it could lead to legal squabbles.

Don’t forget about the tax implications. Currently, married couples can take advantage of a record-high federal gift and estate tax exemption that shelters most estates from tax. However, if you and your spouse are high earners (or otherwise have large estates) ensure that you incorporate estate tax minimization techniques into your coordinated plans.

Finally, decide together on distributions of assets to designated beneficiaries. You may intend, for example, for expensive jewelry to go to one child, but your spouse might have other ideas.

Keep lines of communication open

Indeed, clear communication is essential for married couples when developing estate plans. We can help ensure that you and your spouse both have plans that work in harmony.

Working capital — the funds your company has tied up in accounts receivable, accounts payable and inventory — is a critical performance metric. During times of rising inflation and interest rates, managers search for ways to free up cash and eliminate waste. However, determining the optimal amount of working capital can sometimes be challenging.

Balancing act

The amount of working capital your company needs depends on the costs of your sales cycle, upcoming operating expenses and current repayments of debts. Essentially, you need enough working capital to finance the gap between payments to suppliers and creditors (cash outflows) and payments from customers (cash inflows).

Having too much working capital on the balance sheet can drain cash reserves, requiring a company to tap into credit lines to make ends meet. In addition, money tied up in working capital can detract from growth opportunities and other spending options, such as expanding to new markets, buying equipment, hiring additional workers and paying down debt.

But having too little working capital to act as a buffer can also create problems — as many companies learned from supply chain shortages during the pandemic. Ongoing geopolitical uncertainty has caused some companies to scale back on just-in-time inventory practices, causing working capital balances to increase.

3 keys to reducing working capital

Working capital best practices vary from industry to industry. Here are three effective ways to manage working capital more efficiently:

1. Expedite collections. Possible solutions for converting accounts receivable into cash include the following: tighter credit policies, early bird discounts, collection-based sales compensation and in-house collection personnel. Companies also can evaluate administrative processes — including invoice preparation, dispute resolution and deposits — to eliminate inefficiencies in the collection cycle.

2. Trim inventory. This account carries many hidden costs, including storage, obsolescence, insurance and security. Consider using computerized inventory systems to help predict demand, enable data-sharing up and down the supply chain and more quickly reveal variability from theft.

It’s important to note that, in an inflationary economy, rising product and raw material prices may bloat inventory balances. Plus, higher labor and energy costs can affect the value of work-in-progress and finished goods inventories for companies that build or manufacturer goods for sale. So rising inventory might not necessarily equate to having more units on hand.

3. Postpone payables. By deferring vendor payments, when possible, your company can increase cash on hand. But be careful: Delaying payments for too long can compromise a firm’s credit standing or result in forgone early bird discounts. Many companies have already pushed their suppliers to extend their payment terms, so there may be limits on using this strategy further.

For more information

There’s no magic formula for reducing your company’s working capital requirements, but continuous improvement is essential. Contact us for help evaluating working capital accounts and brainstorming solutions to minimize working capital without compromising supply chain relationships.

If you’ve received, or will soon receive, a significant inheritance, it may be tempting to view it as “found money” that can be spent freely. But unless your current financial plan ensures that you’ll comfortably reach all your goals, it’s a good idea to have a plan of action for managing your newfound wealth.

Take time to reflect

Generally, when you receive an inheritance, there’s no need to act quickly. Take some time to reflect on the significance of the inheritance for your financial situation; consult with a team of trusted advisors (including an attorney, accountant, and financial advisor); and carefully review your options.

While you’re planning, park any cash or investments in a bank or brokerage account. If you’re married, consider holding the assets in an account in your name only. An inheritance is usually considered your separate property in the event of a divorce, but it may lose that status if it’s commingled with marital property in a joint account.

Avoid making quick financial commitments

If your loved one’s estate is still being administered, don’t start spending — or make any financial commitments based on your inheritance — until you understand what your net proceeds from the estate will be. Once all fees and taxes are accounted for, the final settlement may be less than you expect.

If you’re receiving your inheritance through a trust, talk with the trustee, familiarize yourself with the trust’s terms, and be sure you understand the timing and amount of distributions and any conditions that must be satisfied to receive them.

Beware of income and estate tax consequences

An inheritance generally isn’t subject to income tax, but depending on the types of assets you inherit, they may have an impact on your tax situation going forward. For example, certain income-producing assets — such as those from real estate, an investment portfolio or a retirement plan — may substantially increase your taxable income or even push you into a higher tax bracket.

Depending on the size of the inheritance, it may also have an impact on your estate plan. If it increases the value of your estate to a point where estate tax becomes a concern, talk with your advisor about strategies for reducing those taxes and preserving as much wealth as possible for your heirs.

Review and revise your financial plan

Treating an inheritance separately from your other assets may encourage impulsive, unplanned spending. A better approach is to integrate inherited assets into your overall financial plan.

Consider using some of the inheritance to pay down credit card or other high-interest debt (if you have it) or to build an emergency fund. The rest should be available, along with your other assets, for funding your retirement, college expenses for your children, travel or other financial goals.

Have a plan

If you receive a sizable inheritance, there’s nothing wrong with taking a small portion of it and splurging a bit. But for the most part, you should treat inherited assets as you’d treat the assets you’ve earned over the years and incorporate them into a comprehensive financial plan. You’ll also want to address any inherited assets in your estate plan. Contact us for more information.

Businesses today are under increased pressure to fully understand and thoroughly respond to the issue of pay equity. And neither of these two broad undertakings is particularly easy.

First, fully understanding what pay equity is and whether and how it’s played out at your company calls for research, analysis and perhaps some difficult discussions. The second part, responding to it in practical and effective ways, can entail changing long-standing employment processes and investing in additional training and communications initiatives.

Philosophy and practice

Simply defined, pay equity is the philosophy and practice of “equal pay for equal work.” That doesn’t mean everyone receives the same amount of pay. It means compensation is free of unjust biases historically related to demographic factors such as age, race, gender, disability, national origin and sexual orientation. Employees’ pay, both upon hire and as adjusted through raises, should be determined on the basis of objective, relevant factors such as education and training, experience, skills, performance, and tenure.

As mentioned, determining whether pay inequities exist within your business will entail a careful and honest assessment. Many companies conduct a formal pay equity audit. This is a thorough statistical analysis of compensation history, policies and structure. The audit’s objective is to identify any inconsistencies, gaps and incongruities that can’t be rationally explained.

Best prevention practices

To prevent instances of inequitable pay at your company, here are some best practices to consider:

Use only initials or random ID numbers during early screenings of job candidates. Minimizing the ability to distinguish candidates by ethnicity or gender can reduce the likelihood of biases in hiring and initial compensation decisions.

Refrain from asking candidates their pay histories. Women and people of color are more likely to have been paid less in their previous positions. Using historical compensation to set their current salaries only compounds pay disparities.

Generate objective criteria for recruiting, hiring, compensating, evaluating and promoting employees. Implement standard pay ranges that reflect each position’s value to the business.

Limit the ability of managers or supervisors to singlehandedly adjust pay for specific individuals. Such one-off decisions can lead to pay inequities.

Help managers and supervisors understand pay equity. Training will help them recognize how to best develop a culture that embraces pay equity and discuss the issue with their employees.

Communicate openly and regularly with staff. Let employees know how you set compensation and reassure them that they can discuss pay with their supervisors without fear of retaliation. More transparency tends to foster greater pay equity.

Tough questions

Make no mistake, pay equity is a tricky issue that can raise a lot of tough questions. Dealing with it won’t be a “one and done” activity. However, establishing your business as one that pays equitably will bolster your “employer brand” in today’s competitive labor market. Our firm can help you conduct a pay equity audit as well as better understand all aspects of your compensation structure.

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.

Qualifying for a deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
Casualty and theft losses from a federally declared disaster, or
Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:

Capital losses that exceed capital gains,
The exclusion for gains from the sale or exchange of qualified small business stock,
Nonbusiness deductions that exceed nonbusiness income,
The NOL deduction itself, and
The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.

Limitations

The Tax Cuts and Jobs Act (TCJA) made significant changes to the NOL rules. Previously, taxpayers could carry back NOLs for two years, and carry forward the losses 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits the NOL deduction to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.

A COVID-19 relief law temporarily loosened the TCJA restrictions. It allowed NOLs arising in 2018, 2019 or 2020 to be carried back five years and removed the taxable income limitation for years beginning before 2021. As a result, NOLs could completely offset income. However, these provisions have expired.

If your NOL carryforward is more than your taxable income for the year to which you carry it, you may have an NOL carryover. The carryover will be the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

Excess business losses

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships or S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000 ($578,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Planning ahead

The tax rules regarding business losses are complex, especially when accounting for how NOLs can interact with other potential tax breaks. We can help you chart the best course forward.

When it comes to estate planning, there’s no shortage of techniques and strategies available to reduce your taxable estate and ensure your wishes are carried out after your death. Indeed, the two specific strategies discussed below should be used in many estate plans.

1. Take advantage of the annual gift tax exclusion

Don’t underestimate the tax-saving power of making annual exclusion gifts. For 2023, the exclusion increased by $1,000 to $17,000 per recipient ($34,000 if you split gifts with your spouse).

For example, let’s say Jim and Joan combine their $17,000 annual exclusions for 2023 so that their three children and their children’s spouses, along with their six grandchildren, each receive $34,000. The result is that $408,000 is removed tax-free from the couple’s estates this year ($34,000 x 12).

What if the same amounts were transferred to the recipients upon Jim’s or Joan’s death instead? Their estate would be taxed on the excess over the current federal gift and estate tax exemption ($12.92 million in 2023). If no gift and estate tax exemption or generation skipping transfer (GST) tax exemption was available, the tax hit would be at the current 40% rate. So making annual exclusion gifts could potentially save the family a significant amount in taxes.

2. Use an ILIT to hold life insurance

If you own an insurance policy on your life, be aware that a substantial portion of the proceeds could be lost to estate tax if your estate is over a certain size. The exact amount will depend on the gift and estate tax exemption amount available at your death as well as the applicable estate tax rate.

However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. An effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT).

An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed so that it can make a loan to your estate for liquidity needs, such as paying estate tax.

The right strategies for you?

Bear in mind that these two popular strategies might not be right for your specific estate plan. We can provide you additional details on each and help you determine if they’re right for you.

Businesses that operate in the retail or restaurant spheres have it relatively easy when it comes to collections. They generally take payments right at a point-of-sale terminal and customers go on their merry ways. (These enterprises face many other challenges, of course.)

For other types of companies, it’s not so easy. Collections can be particularly challenging for business-to-business (B2B) operations, which often find themselves in complex relationships with key customers that aren’t quite as simple as “pay up or hit the road.”

If your company is dealing with slow-paying customers, which is hardly uncommon in today’s inflationary environment where everyone is trying to preserve cash flow, sometimes it helps to review the basics. Here are six tried-and-true strategies for increasing your chances of getting paid one way or another:

1. Request payment up front. For new customers or those with a documented history of collections issues, you could start asking for a deposit on each order. This would generally be a small but noticeable percentage of the contract or order price. You could also explore the concept of asking for a service retainer fee. Although these are typically associated with law firms, other types of businesses may use them to cover all or part of the expected costs of services.

2. Charge fees. Most customers are likely familiar with the concept of late-payment fees from dealing with their credit card companies. Applying this same concept to your collections can pay off. Implement fees or finance charges for past due amounts. Place extremely delinquent accounts on credit hold or adjust their payment terms to cash on delivery.

3. Reward timely payments. An effective collections strategy isn’t only about “penalizing” slow-paying customers. It’s also about incentivizing those who pay on time or who represent a potentially lucrative long-term relationship. Crunch the numbers to determine the feasibility of giving discounts to customers with strong payment histories or to those who have improved the timeliness of payments over a given period.

4. Communicate proactively. Set up regular e-mail reminders and place live phone calls to customers who haven’t settled their accounts. If the employee who works directly with the customer can’t resolve payment issues, elevate the matter to a manager or even you, the business owner. In B2B relationships, it’s often helpful for the manager or business owner to contact someone higher up in the customer’s organization. If necessary, consider executing a promissory note to prevent the customer from disputing the charges in the future.

5. Get external help. If, after repeated tries, your collections efforts appear unlikely to bear fruit, you should start looking into getting help from someone outside your company. This typically means engaging either an attorney who specializes in debt collection or a collections agency. View this as a last resort, however, because third-party fees may consume much of the collected amount and you’re unlikely to continue doing business with the customer.

6. Claim a tax break. One last important point about collections: If an outstanding debt is uncollectible, you may be able to write it off as an ordinary business expense. Be sure to document each customer’s promises to pay, your collection efforts and why you believe the debt is worthless. Consult with us about claiming such tax deductions. We can also offer assistance in improving your overall accounts receivable processes.

One popular fringe benefit is an education assistance program that allows employees to continue learning and perhaps earn a degree with financial assistance from their employers. One way to attract, retain and motivate employees is to provide education fringe benefits so that team members can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by individuals pursuing programs leading to a business, medical, law or other advanced academic or professional degrees.

More requirements

The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.

Job-related education

If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying the $5,250 exclusion, an employer can satisfy an employee’s educational expenses on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:

Maintain or improve skills required for the employee’s then-current job, or
Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.

Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.

Assistance with student loans

In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Starting next year, employers can help more. Under the SECURE 2.0 law, an employer will be able to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.” The result of this provision is that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers. This will take effect in 2024.

Yeo & Yeo, a leading accounting, technology, medical billing, wealth management, and advisory firm, is excited to celebrate its 100th anniversary in 2023. The company was founded in 1923 by James J. Yeo and his son, W.L. Yeo, and later joined by a third generation, Lloyd Yeo. The Yeo family shaped the firm’s reputation for integrity and personalized service, steadily growing from a small accounting partnership to a family of companies with more than 225 employees in nine locations across Michigan.

Yeo & Yeo has established itself as a trusted partner for organizations and individuals seeking to achieve their specific goals on their unique paths. Driven by a vibrant, people-first culture, the firm is dedicated to solving challenges through its four distinct but connected businesses: Yeo & Yeo CPAs & Advisors, Yeo & Yeo Technology, Yeo & Yeo Medical Billing & Consulting, and Yeo & Yeo Wealth Management.

Yeo & Yeo’s lasting success is driven by a team of welcoming, empathetic, and knowledgeable advisors acting as powerful extensions of the businesses they serve. As Dave Youngstrom, the CEO of Yeo & Yeo, explains, “We don’t just provide a service; we provide a relationship. Our clients are truly our friends. We’re in it together.”

Youngstrom is marking the centennial celebration as a moment to reflect, but is mainly focused on the years ahead. “Milestones are a wonderful time to assess and move forward with renewed energy and enthusiasm. We’re at a time of business disruption and opportunity, and it’s our mission to prepare our clients so they can thrive in their own ways. We’re so grateful for their trust in us.”

Yeo & Yeo’s commitment to relationships and connections has been a key to its success. Through the Yeo & Yeo Foundation, team members have given their time and talent and have donated more than $340,000 to over 170 nonprofit organizations across Michigan.

Looking ahead, Yeo & Yeo is well positioned to continue its legacy of business success partnerships for the next 100 years. The company is committed to investing in technology and innovation to stay ahead of the curve and provide the best possible service to its clients. As Youngstrom notes, “Our goal is to always be at the forefront, providing our clients with the resources they need to succeed in a rapidly changing world. Walking alongside them every step of the way.”

For more information about Yeo & Yeo’s 100th celebration and to see a full timeline, video tributes, and more, visit yeoandyeo.com/about-us.

Yeo & Yeo CPAs & Advisors, a leading Michigan-based accounting and advisory firm, has been named one of West Michigan’s Best and Brightest Companies to Work For – making this the nineteenth consecutive year. Yeo & Yeo takes pride in creating an environment that challenges, supports and rewards its people.

The Best and Brightest programs identify, recognize and celebrate organizations that exemplify Better Business. Richer Lives. Stronger Communities. An independent research firm evaluates Best and Brightest nominees based on key measures in categories such as communication, work-life balance, employee education, diversity, recognition, retention and more.

Yeo & Yeo’s culture is one of learning, growth and purpose. The firm offers an award-winning CPA certification bonus program, an award-winning wellness program, gold-standard benefits, and hybrid and remote work capabilities. Yeo & Yeo is also dedicated to giving back to the community through the Yeo & Yeo Foundation, an employee-sponsored organization that is a channel for giving time, talent and financial support to charitable causes throughout Michigan.

“It’s an honor to be recognized for the hard work and dedication that we put into creating a positive and productive work environment,” said David Jewell, managing principal of Yeo & Yeo’s Kalamazoo office. “It’s a testament to the commitment of our team members, who bring their skills, passion and enthusiasm to their work every day. We take pride in fostering a culture that values innovation, collaboration and personal growth, and this award confirms that we’re on the right track.”

With concerns about inflation in the news for months now, most business owners are keeping a close eye on costs. Although it can be difficult to control costs related to mission-critical functions such as overhead and materials, you might find some budge room in employee benefits.

Many companies have lowered their benefits costs by offering a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). Of course, some employees might not react positively to a health plan that starts with the phrase “high-deductible.” So, if you decide to offer an HSA, you’ll want to devise a strategy for championing the plan’s advantages.

The basics

An HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. As mentioned, to provide these benefits, an HSA must be coupled with an HDHP. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage).

In 2023, the annual contribution limit for HSAs is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the business and the participant can make contributions. However, the limit is a combined one, not per-payer. Thus, if your company contributed $4,000 to an employee’s family-coverage account, that participant could contribute only $3,750.

Another requirement for HSA contributions is that an account holder can’t be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). Once someone enrolls in Medicare, the person becomes ineligible to contribute to an HSA — though the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.

3 major advantages

There are three major advantages to an HSA to clearly communicate to employees:

1. Lower premiums. Some employees might scowl at having a high deductible, but you may be able to turn that frown upside down by informing them that HDHP premiums — that is, the monthly cost to retain coverage — tend to be substantially lower than those of other plan types.

2. Tax advantages times three. An HSA presents a “triple threat” to an account holder’s tax liability. First, contributions are made pretax, which lowers one’s taxable income. Second, funds in the account grow tax-free. And third, distributions are tax-free as long as the withdrawals are used for eligible expenses.

3. Retirement and estate planning pluses. There’s no “use it or lose it” clause with an HSA; participants own their accounts. Thus, funds may be carried over year to year — continuing to grow tax-deferred indefinitely. Upon turning age 65, account holders can withdraw funds penalty-free for any purpose, though funds that aren’t used for qualified medical expenses are taxable.

An HSA can even be included in an account holder’s estate plan. However, the tax implications of inheriting an HSA differ significantly depending on the recipient, so it’s important to carefully consider beneficiary designation.

Explain the upsides

Indeed, an HDHP+HSA pairing can be a win-win for your business and its employees. While participants are enjoying the advantages noted above, you’ll appreciate lower payroll costs, a federal tax deduction and reduced administrative burden. Just be prepared to explain the upsides. Contact us for help evaluating the concept and assessing the costs of health care benefits.