An Estate Planning “Road Map” Can Act as a Catchall for Your Final Thoughts

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

What to address

Among other things, your road map may include:

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

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

Communicate your motives

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

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

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

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

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

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

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

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

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

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

Identify major risks

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

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

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

Meet with your team

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

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

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

Focus on continuous improvement

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

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

Cash flow projections

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

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

Customers

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

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

Receivables

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

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

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

Vendors and suppliers

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

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

Inventory

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

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

Overall efficiency

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

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

An ongoing priority

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

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

What are deferred taxes?

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

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

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

How are deferred taxes reported on the financials?

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

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

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

Now or later?

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

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

Termination details

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

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

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

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

Addresses and methods

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

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

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

Compliance is critical

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

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

Revocable trust vs. irrevocable trust

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

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

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

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

Identifying the risks

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

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

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

Making the right move

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

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

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

The magic number

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

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

Next year’s penalties

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

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

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

Questions and ideas

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

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

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

What is a SBITA?

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

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

What to Do Now

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

- Calculate journal entries.
- Work with the auditor.

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

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

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

April 18

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

May 1

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

May 10

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

June 15

Corporations pay the second installment of 2023 estimated income taxes.

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

Cost-cutting measures

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

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

Examples of other green business practices include:

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

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

Opportunities to add value

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

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

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

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

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

IRS policy

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

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

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

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

Exceptions to consider

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

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

Cash and cash equivalents

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

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

Specific circumstances

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

If you want to share some of your wealth with your grandchildren or great grandchildren — or if your estate plan is likely to benefit these generations — it’s critical to consider and plan for the generation-skipping transfer (GST) tax. Designed to ensure that wealth is taxed at each generational level, the GST tax is among the harshest and most complex in the tax code. It’s also among the most misunderstood.

ABCs of the GST tax

To ensure that wealth is taxed at each generational level, the GST tax applies at a flat, 40% rate — in addition to otherwise applicable gift and estate taxes — to transfers that skip a generation. The tax applies to transfers to “skip persons,” including your grandchildren, other relatives who are more than one generation below you and unrelated people who are more than 37½ years younger than you.

There’s an exception, however, for a grandchild whose parent (your child) predeceases you. In that case, the grandchild moves up a generation and is no longer considered a skip person.

Allocation rules

Even though the GST tax enjoys an inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption ($12.92 million for 2023), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

The tax code contains automatic allocation rules designed to prevent you from inadvertently losing the exemption, but it can be dangerous to rely solely on these rules. In some cases, the exemption isn’t automatically allocated to transfers that may trigger costly GST taxes. And in others, the exemption is automatically allocated to transfers that are unlikely to need its protection, wasting those exemption amounts.

3 types of GST tax triggers

Three types of transfers may trigger GST taxes:

“Direct skips” — transfers directly to a skip person that are subject to federal gift and estate tax,
Taxable distributions — distributions from a trust to a skip person, or
Taxable terminations — for example, if you establish a trust for your children, a taxable termination occurs when the last child beneficiary dies and the trust assets pass to your grandchildren.

As noted above, the GST tax doesn’t apply to transfers to which you allocate your GST tax exemption. In addition, the GST tax annual exclusion — which is similar to the gift tax annual exclusion — currently allows you to transfer up to $17,000 per year to any number of skip persons without triggering GST tax or using up any of your GST tax exemption. Note, however, that transfers in trust qualify for the exclusion only if certain requirements are met.

Plan carefully

If your estate plan calls for making substantial gifts, either outright or in trust, to your grandchildren or other skip persons, be sure to allocate your GST tax exemption carefully. We can help you devise a strategy that leverages the exemption and minimizes your GST tax liability.

President Biden has released his proposed budget for the federal government for the 2024 fiscal year. The budget, which aims to cut the deficit by nearly $3 trillion over 10 years, includes numerous provisions that would affect the tax bills of both individuals and businesses. While most of these proposals stand little chance of enactment with a Republican majority in the U.S. House of Representatives, they shed light on the Democrats’ priorities as they prepare for the 2024 election season.

Individual tax provisions

The proposed budget includes tax provisions that would affect taxpayers of various income levels. In particular, it would make the following changes:

Tax rates. The proposal would reinstate the top individual tax rate of 39.6% for single filers earning more than $400,000 ($450,000 for married couples).

Net investment income tax (NIIT). The NIIT on income over $400,000 would include all pass-through business income not otherwise covered by the NIIT or self-employment taxes. The budget also would increase both the additional Medicare tax rate and the NIIT rate by 1.2 percentage points. Thus, the Medicare tax rate would be 5% for earnings above $400,000, and the NIIT rate would be 5% for investment income above $400,000.

Capital gains tax. The highest capital gains rate now is 20% (or 23.8% if the NIIT applies). For individuals with taxable income of more than $1 million, the budget proposes that capital gains be taxed at ordinary rates, with 37% (or 40.8% with the NIIT) generally being the highest rate — or 39.6% (or 43.4% with the NIIT) if the top tax rate is raised.

Child tax credit (CTC). This proposal would expand the CTC and make it fully refundable and payable in advance on a monthly basis. For eligible parents, the credit would increase from $2,000 to $3,000 for children age six and older and $3,600 for children under age six.

The proposal also would establish a “presumptive eligibility” for determining when a taxpayer is eligible to claim a monthly specified child allowance or receive a monthly advance child payment. After a taxpayer establishes presumptive eligibility for a child, that child would be treated as a specified child of the taxpayer for each month during the period of the taxpayer’s presumptive eligibility.

Premium tax credits (PTCs). The American Rescue Plan Act expanded eligibility for healthcare insurance subsidies to taxpayers with household incomes above 400% of the federal poverty line for 2021 and 2022. It also reduced the applicable contribution percentage (the percentage of household income a taxpayer must contribute toward a healthcare insurance premium). The Inflation Reduction Act (IRA) extended the expansion through 2025. The proposed budget would make this expansion permanent.

Cryptocurrency taxation. The proposal would amend the “wash-sale” rule to cover digital assets. The rule prohibits the deduction of a loss when the taxpayer acquires “substantially identical” investments within 30 days before or after the sale date.

Minimum wealth tax. The proposal would impose a minimum 25% tax on total income, generally inclusive of unrealized capital gains, for all taxpayers whose assets exceed liabilities by more than $100 million. According to the White House, the tax would apply to only the top 0.01% of taxpayers.

Gift and estate taxes. The proposal would close loopholes related to certain trust arrangements. Specifically, the changes would affect grantor-retained annuity trusts and charitable lead annuity trusts.

Business tax provisions

The proposed budget’s tax provisions target numerous issues of interest to businesses, including:

Corporate tax rates. The proposal would trim back the large cut made to the corporate tax rate in the Tax Cuts and Jobs Act (TCJA). It would hike the tax rate for C corporations from 21% to 28% — still significantly less than the pre-TCJA rate of 35%. In addition, the effective global intangible low-taxed income (GILTI) rate would increase to 14%. Overall, with other proposed changes, the effective GILTI rate would rise to 21%.

Global minimum tax. The proposal would repeal Base Erosion and Anti-Abuse Tax (BEAT) liability, replacing it with an “undertaxed profits rule.” In conjunction with the GILTI regime, the rule would ensure that income earned by a multinational company, whether parented in the United States or elsewhere, is subject to a minimum rate of taxation regardless of where the income is earned.

Stock buyback excise tax. The IRA created a 1% excise tax on the fair market value when corporations buy back their stock, with the goal of reducing the difference in the tax treatment of buybacks and dividends. The proposal would quadruple the tax to 4%.

Carried interest loophole. A “carried interest” is a hedge fund manager’s contractual right to a share of a partnership’s profits. Currently, it’s taxable at the capital gains rate if certain conditions are satisfied. The budget proposes to close this loophole.

Like-kind exchanges. Owners of certain appreciated real property can defer the taxable gain on the exchange of the property for real property of a “like-kind.” The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million for married couples filing a joint return) each year for like-kind exchanges. Under this proposal, any like-kind gains in excess of $500,000 (or $1 million for married couples) in a year would be recognized in the year the taxpayer transfers the real property.

Low-income housing tax credit. The budget proposes to expand and enhance the largest federal incentive for affordable housing construction and rehabilitation.

The elephant in the room

The budget proposal doesn’t address many of the temporary tax provisions of the TCJA that have expired or are set to expire in the next few years. The increased standard deduction, reduced individual tax rates, qualified business income deduction for pass-through businesses, and limit on the state and local tax deduction are among the numerous provisions scheduled to expire at the end of 2025 — potentially affecting the tax liability of a wide swath of taxpayers. We’ll keep you informed if there’s significant movement on this front.

It’s been years since the Tax Cuts and Jobs Act (TCJA) of 2017 was signed into law, but it’s still having an impact. Several provisions in the law have expired or will expire in the next few years. One provision that took effect last year was the end of current deductibility for research and experimental (R&E) expenses.

R&E expenses

The TCJA has affected many businesses, including manufacturers, that have significant R&E costs. Starting in 2022, Internal Revenue Code Section 174 R&E expenditures must be capitalized and amortized over five years (15 years for research conducted outside the United States). Previously, businesses had the option of deducting these costs immediately as current expenses.

The TCJA also expanded the types of activities that are considered R&E for purposes of IRC Sec. 174. For example, software development costs are now considered R&E expenses subject to the amortization requirement.

Potential strategies

Businesses should consider the following strategies for minimizing the impact of these changes:

Analyze costs carefully to identify those that constitute R&E expenses and those that are properly characterized as other types of expenses (such as general business expenses under IRC Sec. 162) that continue to qualify for immediate deduction.
If cost-effective, move foreign research activities to the United States to take advantage of shorter amortization periods.
If cost-effective, purchase software that’s immediately deductible, rather than developing it in-house, which is now considered an amortizable R&E expense.
Revisit the R&E credit if you haven’t been taking advantage of it.

Recent IRS guidance

For 2022 tax returns, the IRS recently released guidance for taxpayers to change the treatment of R&E expenses (Revenue Procedure 2023-11). The guidance provides a way to obtain automatic consent under the tax code to change methods of accounting for specified research or experimental expenditures under Sec. 174, as amended by the TCJA. This is important because unless there’s an exception provided under tax law, a taxpayer must secure the consent of the IRS before changing a method of accounting for federal income tax purposes.

The recent revenue procedure also provides a transition rule for taxpayers who filed a tax return on or before January 17, 2023.

Planning ahead

We can advise you how to proceed. There have also been proposals in Congress that would eliminate the amortization requirements. However, so far, they’ve been unsuccessful. We’re monitoring legislative developments and can help adjust your tax strategies if there’s a change in the law.

The “investment opportunity” someone just pitched could be a legitimate way to get in on the ground floor of a soon-to-be profitable business. However, it could also be a pyramid, Ponzi or similar fraudulent multi-level marketing scheme. How can you tell the difference between a real investment and a scam?

Don’t get scammed

Pyramid schemes can be relatively straightforward, such as recruiting people to sell vitamins or cleaning supplies and recruiting family and friends to also sell the products. Or they can take the form of extremely complicated swindles that offer no actual product or service. But in general, both simple and complex schemes are sustained by constantly recruiting new participants.

One lucrative scam involved a Florida lawyer who sold fake legal settlement agreements to investors (including hedge fund managers and other sophisticated buyers). In classic pyramid scheme fashion, the fraudster used the money from new investors to pay off earlier investors, make political and charitable donations and, of course, fund his own expensive lifestyle.

Sometimes, such schemes are couched as “clubs” or “gift programs” and promoted through social networks, including by social media “friends.” Increasingly, they involve “sales opportunities” for online marketplaces. Whatever they’re called, they usually end the same way: When the pyramid collapses, only the founder walks away with any money. The previously mentioned Florida lawyer stole at least $1.2 billion before getting caught.

Ask for disclosures and details

To assist potential investors, the Federal Trade Commission (FTC) has established a Business Opportunity Rule. Among other things, the rule requires sellers to produce a disclosure document in the language in which the buyer and seller discuss the opportunity. Sellers also must:

Detail any earnings claims in a separate statement,
Disclose prior civil or criminal litigation involving claims of misrepresentation, fraud, securities law violations, or unfair or deceptive business practices,
Outline any cancellation or refund policy, and
Provide references nearest to the potential buyer’s location.

For more about the rule, visit ftc.gov and search for “Business Opportunity Rule.”

Complete a checklist

You can protect yourself by studying the disclosure document, earnings claim statement and proposed contract. Look for potential loopholes to close. For example, are start-up costs reasonable? Is the seller required to buy back inventory you’re unable to sell?

Also research the seller’s history and reputation online and check for complaints with the Better Business Bureau (although an absence of complaints doesn’t necessarily mean the seller is honest). And as with any business proposal, research the market for the business’s goods or services. Talk to current investors or participants and have legal and financial advisors review any documents you don’t understand — particularly the contract.

When a friend isn’t a friend

If anything doesn’t check out or if your advisors are wary of the opportunity, decline it — even if the person pitching it is a friend. After all, perpetrators of many of history’s biggest pyramid schemes targeted their family members, friends and business associates. Contact us for information and help evaluating investments.

The U.S. Supreme Court recently weighed in on an issue regarding a provision of the Bank Secrecy Act (BSA) that has split two federal courts of appeal. Its 5-4 ruling in Bittner v. U.S. is welcome news for U.S. residents who “non-willfully” violate the law’s requirements for the reporting of certain foreign bank and financial accounts on what’s generally known as an FBAR. The full name of an FBAR is the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts.

Reporting requirement

The BSA requires “U.S. persons” to annually file an FBAR to report all financial interests in, or signature or other authority over, financial accounts located outside the country (with certain exceptions) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The term “U.S. person” includes a citizen, resident, corporation, partnership, limited liability company, trust or estate.

According to related regulations, individuals with fewer than 25 accounts in a given year must provide details about each. Filers with 25 or more accounts aren’t required to list each or provide specific details; they need only provide the number of accounts and certain other basic information. FBARs generally are due on April 15, with an automatic extension to Oct. 15 if the April deadline isn’t met.

Under the BSA, a willful violation of the requirement is subject to a civil penalty up to the greater of $100,000 or 50% of the balance of the account at issue. A provision prescribes a penalty of up to $10,000 for a non-willful violation of the filing requirement (with an exception for reasonable cause). Criminal penalties also may be imposed.

Violations at issue

The case before the Supreme Court was brought by Alexandru Bittner, a dual citizen of Romania and the United States. He testified that he learned of the reporting obligations after returning to the United States in 2011. Bittner subsequently submitted the required annual reports for 2007 through 2011.

The IRS deemed his FBARs deficient because they didn’t include all of the relevant accounts. Bittner then filed corrected reports with information for each of his accounts. Although the IRS didn’t contest the accuracy of the new filings or find that his previous errors were willful, it determined the penalty was $2.72 million — $10,000 for each of 272 accounts reported in five FBARs.

Bittner went to court to contest the penalty, arguing that it applies on a per-report basis, not per account — so he owed only $50,000 in penalties for his non-willful violations. The district court agreed, but the Fifth Circuit Court of Appeals reversed the ruling, siding with the IRS. By contrast, the Ninth Circuit, in U.S. v. Boyd, found in 2021 that the BSA authorized “only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” That meant it was up to the Supreme Court to settle the issue.

High court’s ruling

The Supreme Court agreed with Bittner’s interpretation of the BSA’s penalty provision for FBAR violations. It cited multiple sources that supported this conclusion.

For example, the Court noted that Congress had explicitly authorized per-account penalties for some willful violations. When Congress includes particular language in one section of a statute but omits that language from another, it explained, the Court normally understands the difference in language as conveying a difference in meaning. In other words, Congress obviously knew how to tie penalties to account-level information if that was its intent.

The Court also highlighted various public guidance from the IRS, including instructions for earlier versions of the FBAR and an IRS fact sheet. These references, the Court said, suggested to the public that the failure to file a report represents a single violation that exposes a non-willful violator to a single $10,000 penalty. (Note: The Supreme Court emphasized that such guidance wasn’t “controlling” or decisive, but only informed its analysis.)

Implications for taxpayers

The Supreme Court’s ruling significantly reduces taxpayers’ potential financial exposure for non-willful violations of the FBAR reporting requirements. The reports typically list multiple accounts, meaning the IRS’s interpretation could have led to tens of thousands of dollars in penalties for a single violation.

As the Court also pointed out, an individual with only three accounts who made non-willful errors when providing account-specific details would face a potential penalty of $30,000, regardless of how slight the errors or the value of the accounts. But a person with 300 bank accounts would shoulder far less risk because he or she is required to disclose only the correct number of accounts, with no details. Similarly, a person with a $10 million balance in a single account who fails to report the account would be subject to a penalty of $10,000 — while someone who fails to report a dozen accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.

It’s important to note that the Supreme Court’s ruling applies only to non-willful failures to file. The penalties for violations that are knowing, intentional, reckless or due to willful blindness aren’t subject to the per-report limit and may be assessed on a per-account basis, with costly ramifications.

Questions remain

The Supreme Court’s ruling in Bittner should bring relief to taxpayers who’ve non-willfully violated the BSA’s filing requirement, but it didn’t clear all uncertainty around FBAR penalties. For example, the Court didn’t address the mens rea (level of intent) on the part of the taxpayer that the IRS must establish to impose a non-willful penalty or whether penalties for violations of the BSA’s recordkeeping requirements are determined on a per-account basis. We can help you avoid these thorny questions by ensuring you properly comply with your FBAR obligations.

Are you concerned that some of your beneficiaries might squander their inheritances or simply aren’t equipped to handle the financial responsibilities that come with large sums of money? You don’t have to hold on to your assets until the day you die with the hope that your heirs will change their ways by that time. Instead, consider using a spendthrift trust that can provide protection, regardless of how long you live.

As with other trusts, a spendthrift trust may incorporate various tax benefits, but that’s not its primary focus. Indeed, this trust type can help you provide for an heir while protecting assets from his or her potentially imprudent actions.

Spendthrift trust in action

Generally, a spendthrift trust’s assets will consist of securities such as stocks, bonds and mutual funds, and possibly real estate and cash. The appointed trustee manages the assets.

The terms of the trust restrict the beneficiary’s ability to access funds in the account. Therefore, the beneficiary can’t invade the trust to indulge in a wild spending spree or sink money into a foolhardy business venture. Similarly, the trust assets can’t be reached by any of the beneficiary’s creditors.

Instead of having direct access to funds, the beneficiary usually receives payments from the trust on a regular basis or “as needed” based on the determination of the trustee. The trustee is guided by the terms of the trust and must adhere to fiduciary standards.

Be aware that the protection isn’t absolute. Once the beneficiary receives a cash payment, he or she has full control over that amount. The money can be spent without restriction.

Role of the trustee

Depending on the trust terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, and how much and when. Designating the trustee is an important consideration, especially in situations where he or she will have broad control.

Although it’s not illegal to name yourself as trustee, this is generally not recommended. More often than not, the trustee will be an attorney, financial planner, investment advisor or someone else with the requisite experience and financial acumen. You should also name a successor trustee in the event the designated trustee dies before the end of the term or otherwise becomes incapable of handling the duties.

Other key considerations

There are several other critical aspects relating to crafting a spendthrift trust. For example, will the trustee be compensated and if so, how much? You must also establish how and when the trust should terminate. The trust could be set up for a term of years or termination may occur upon a specific event (such as a child reaching the age of majority).

Finally, try to anticipate other possibilities, such as enactment of tax law changes, that could affect a spendthrift trust. A word to the wise: This isn’t a do-it-yourself proposition. We’d be pleased to assist you when considering a spendthrift trust.

International Women’s Day (IWD) is, first and foremost, a day to celebrate the social, economic, cultural, and political achievements of women. It is also an important day to raise awareness, forge progress, educate and inspire communities, and highlight the significance of gender equity.

Here are some ways to mark the day – whether with friends, families, colleagues, or the global community.

Donate to female-focused charities: Donations can make a huge and long-lasting difference to the advancement of women and girls worldwide.
Reach out to a friend: Send a text, email, or hand-written note to each of your female friends to let them know what you admire about them and how much you appreciate them.
Spread the news: Share posts about IWD on social. Here are some ready-to-post resources direct from the IWD website.
Wear purple: Show your support by wearing purple, one of this year’s campaign colors, signifying justice and dignity.

Yeo & Yeo is incredibly proud of our family-friendly culture and ability to attract and retain women. Our workforce is more than 54% female, and the number of women in leadership positions exceeds 50%, well above the industry average in professional service firms. Today and every day, we thank our women for providing valuable insights that uplift our clients and communities.

We encourage you to take time to reflect on the achievements of the women in your life, and let’s continue to push for women’s leadership. Follow us on social as we celebrate our women that lead throughout the year, sharing their insights and stories.

Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.

However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.

According to the IRS, here are some advertising expenses that are usually deductible:

Reasonable advertising expenses that are directly related to the business activities.
An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Facts of the recent case

An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.

The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.

When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer’s car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located and he never actually got any legal business from his car-racing activity.

The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)

Keep meticulous records

There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.