Small Employers: Don’t Forget About the New and Improved Pension Credit

At the very end of 2022, President Biden signed into law the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Now that the year is well underway, small employers would be well-advised not to forget about a key feature of the law: marked improvements to the small employer pension plan start-up cost tax credit.

If your organization is a smaller one, and it’s reached a point where launching a qualified retirement plan for employees is feasible, this tax break may very well sweeten the deal.

Increased percentage for start-up costs

SECURE 2.0 increases the credit from 50% to 100% of eligible plan start-up costs for employers with up to 50 employees. Employers with 51 to 100 employees continue to be eligible for a credit of 50% of qualified plan start-up costs.

In either case, an existing annual cap based on the number of employees, with a maximum of $5,000, still applies. This portion of the credit is available for the first three tax years of the plan’s existence.

New credit for employer contributions

SECURE 2.0 also provides a credit amount for all or a portion of employer contributions to qualified plans for the first five employer tax years beginning with the one that includes the plan’s start date.

Specifically, the amount of the small employer pension plan start-up cost tax credit is increased by the “applicable percentage” of employer contributions on behalf of employees, up to a per-employee cap of $1,000. The applicable percentage is:

100% in the first and second tax years,
75% in the third year,
50% in the fourth year, and
25% in the fifth year.

No credit is available in the sixth and subsequent years.

It’s important to note that the applicable percentage is based on the date the plan was established, not when employees begin to participate in the plan. Also, the amount of the credit allowed for employer contributions is reduced for employers with 51 to 100 employees. The reduction is equal to 2% multiplied by the number of employees exceeding 50 multiplied by the amount of the credit.

No credit is allowed for contributions if the employer has more than 100 employees. In addition, no credit is allowed for employer contributions on behalf of an employee who makes more than $100,000. The $100,000 figure will be adjusted for inflation in multiples of $5,000 in tax years beginning after 2023. Other limitations under the Internal Revenue Code may apply.

Now may be the time

Essentially, SECURE 2.0 divides the small employer pension plan start-up cost tax credit into two separately calculated portions: 1) a qualified start-up cost portion available for the first three years of the plan’s existence, and 2) an employer-contribution portion available for its first five years. The revised rules apply to tax years beginning after December 31, 2022. If you’re interested in establishing a qualified retirement plan for employees, please contact us for further details on the credit and help choosing the right plan.

Once upon a time, life insurance played a much larger part in an estate plan than it does now. Why? Families would use life insurance payouts to pay estate taxes. But with the federal gift and estate tax exemption at $12.92 million for 2023, far fewer families currently are affected by estate tax.

However, life insurance remains a powerful tool for providing for your loved ones in the event of your untimely death. The amount of life insurance that’s right for you depends on your personal circumstances, so it’s critical to review your life insurance needs regularly in light of changing circumstances.

Reasons to reevaluate

Consider reevaluating your insurance coverage if you’re:

Getting married,
Getting divorced,
Having children,
Approaching retirement, or
Facing health issues.

The right amount of insurance depends on your family’s current and expected future income and expenses, as well as the amount of income your family would lose should you pass away.

The events listed above can change the equation, so it’s a good idea to revisit your life insurance needs as you reach these milestones. For example, if you get married and have kids, your current and future obligations are likely to increase significantly for expenses related to childcare, mortgage, car payments and college tuition.

As you get older, your expenses may go up or down, depending on your circumstances. For example, as your children become financially independent, they’ll no longer rely on you for financial support.

On the other hand, health care expenses for you and your spouse may increase. When you retire, you’ll no longer have a salary, but you may have new sources of income, such as retirement plans and Social Security. You may or may not have paid off your mortgage, student loans or other debts. And you may or may not have accumulated sufficient wealth to provide for your family.

Periodic reassessment a must

There are many factors that affect your need for life insurance, and these factors change over time. To make sure you’re not over- or underinsured, reassess your insurance needs periodically and especially when your life circumstances change. We can help you determine whether you have an adequate amount of life insurance coverage.

If you were told someone earns more than $200,000 annually, you might assume the person is a salaried employee who’s ineligible for overtime pay. However, as demonstrated in the recent U.S. Supreme Court case of Helix Energy Solutions Group, Inc. v. Hewitt, this isn’t always a safe assumption.

The FLSA rules

Under the Fair Labor Standards Act (FLSA), hourly “nonexempt” wage earners generally must receive overtime pay for hours worked beyond 40 hours per workweek. A workweek doesn’t need to be a calendar week — for example, a Wednesday to Tuesday workweek would qualify.

To be exempt from overtime (and minimum wage) regulations, most employees need to be paid at least $684 per week or $35,568 annually. This is known as the salary level test. An exempt employee must also pass the job duties test, the conditions for which vary by position. For instance, to qualify for the executive exemption, the job duties test stipulates that:

The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise,
The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalents, and
The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other employment status change must be given particular weight.

Case details

In the aforementioned Supreme Court case, the employee involved was a “tool-pusher” whose duties included supervising other offshore oil rig workers. He was paid a daily rate ranging from $963 to $1,341 per day, resulting in earnings of more than $200,000 annually. Under the compensation scheme, the daily rate increased each consecutive day worked.

The employee filed suit claiming his employer violated the FLSA’s overtime provisions. In response, the company argued that he was exempt from overtime pay as a “bona fide executive.”

To qualify for such an exemption, an employee must meet the salary level and job duties tests as mentioned above. But the employee also needs to satisfy the salary basis test. Under FLSA regulations, a bona fide executive may satisfy the salary basis test if the person is a highly compensated employee (HCE) — that is, one who earns at least $107,432 or more per year (or $100,000 per year before January 1, 2020).

The Court’s decision

The Supreme Court held in a 6-3 ruling that an HCE who’s paid at a daily rate is not considered to be paid a salary. Therefore, the employee in question wasn’t exempt from receiving overtime pay.

In its majority opinion, the Court reasoned that the HCE rule isn’t only a “simple income level” test for the purposes of exemption. It noted that the employer could have satisfied the exemption if the daily rate was a weekly guarantee that satisfied applicable regulations, or if compensation had been a straight weekly salary.

The Court wasn’t swayed by the company’s objection that paying a weekly guaranteed daily rate or straight weekly salary would have resulted in the employee receiving compensation for days he didn’t work. According to the Court, this only further showed that the employee wasn’t paid a salary and, thus, didn’t meet the requirements for the exemption from overtime pay.

Current and compliant

The business in this case joined many others that have been tripped up by the FLSA’s rules. If your company pays employees overtime, our firm can help you stay current and compliant with the latest applicable regulations.

Helix Energy Solutions Group, Inc. v. Hewitt, No. 21-984, February 22, 2023 (U.S. Supreme Court)

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 an SBITA?

An SBITA is a contract that conveys control of the right to use another party’s (an 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 recommended 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 School Districts brief provides more detailed information and guidance on Statement No. 96.

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

Graphs, charts, tables and other data visualizations can be inserted in your financial statement disclosures to improve transparency and draw attention to key accomplishments. As your organization prepares its year-end or quarterly financials, consider presenting some information in a more user-friendly, visual format.

Reimagine data presentation

In business, the use of so-called “infographics” started with product marketing. By combining images with written text, these data visualizations can draw readers in and evoke emotion. They can breathe life into content that could otherwise be considered boring or dry.

Annual reports are traditionally lengthy and heavy with numbers and text. Some organizations are now using visual aids to disclose critical financial information to investors and other stakeholders. In this context, infographics help stakeholders digest complex information and retain key points.

Show, don’t just tell

Examples of formats that might be appropriate in financial reporting include:

Line graphs. These graphics can be used to show financial metrics, such as revenue and expenses over time. They can help identify trends, like seasonality and rates of growth (or decline), which can be used to interpret historical performance and project it into the future.

Bar graphs. Here, data is grouped into rectangular bars in lengths proportionate to the values they represent so data can be compared and contrasted. A company might use this type of graph to show revenue by product line or geographic region to determine what (or who) is selling the most.

Pie charts. These circular models show parts of a whole, dividing data into slices like a pizza. They might be used in financial reporting to show the composition of a company’s operating expenses to use in budgeting or cost-cutting projects.

Tables. This simple format presents key figures in a table with rows and columns. A table can be an effective way to summarize complex time-series data, for example. It can provide a quick reference for information that investors may want to refer to in the future, such as gross margin or EBITDA over the last five years.

Effective visualizations avoid “chart junk.” That is, unnecessary elements — such as excessive use of color, icons or text — that detract from the value of the data presentation. Ideally, each graphic should present one or two ideas, simply and concisely. The information also should be timely and relevant. Too many pictures can become just as overwhelming to a reader as too much text.

Other uses of visual aids

In addition to using infographics in financial statements, management may decide to create data visualizations for other financial purposes. For example, they could be given to lenders when applying for loans or to prospective buyers in M&A discussions. An infographic could also be used in-house to help the management team make strategic decisions.

Additionally, nonprofits often use infographics to create an emotional connection with donors. If effective, this outreach may encourage additional contributions for the nonprofit’s cause.

Bringing the numbers to life

By supplementing text and numeric presentations with visual elements, your organization can communicate more effectively with investors, lenders, donors and other stakeholders. Contact us to decide how visual aids can help you drive home key points and clarify complex matters.

With unemployment hitting record lows, many employers are struggling to fill key positions in their organizations. If you’re dealing with just such a problem, remember that hiring isn’t the only way to find skilled workers — there’s also outsourcing. And if it’s jobs in human resources (HR) that you’re having trouble filling, engaging a professional employer organization (PEO) could be a feasible solution.

Not a provider, a co-employer

Most PEOs market themselves as “co-employers.” That is, they partner with an employer to provide a broad slate of HR services rather than simply offering help with staffing or payroll.

By signing a contract with one, you won’t need to hire HR staff. The PEO will handle tasks such as recruiting and training, payroll management, benefits administration, and regulatory compliance. You may even be able to reduce the size of your HR department or redeploy those employees to more strategically focused duties.

PEOs offer other advantages as well. Overworked HR staffers might struggle to keep up with the ever-changing trends and regulations related to employment. The built-in expertise of a PEO can help ensure compliance and help prevent costly penalties.

Further, because PEOs typically work with multiple clients, the cost to engage one can be lower than hiring more HR employees. Partnering with a PEO enables an organization to focus on its core mission while it gains access to HR know-how, technology and administrative services.

For example, many PEOs can recommend best practices for functions such as onboarding new employees. And some provide an HR information system that allows your organization to use the latest technology to track recruiting, payroll and benefits data.

Finally, long-standing PEOs often have established relationships with multiple health insurers. This enables you to shop for a greater number of policies at more competitive rates than you might be able to obtain on your own. A good PEO can also educate employees about the benefits available to them, which tends to boost participation, morale and retention.

Not always the right move

To be clear, a PEO isn’t right for every employer. You’ll incur a substantial cost in engaging one and you’ll need to be prepared to manage the relationship. From a benefits perspective, some PEOs work with a limited number of health insurers whose policies might be no better than coverage you can find on your own.

It’s also possible that your in-house expertise isn’t that far off from a PEO’s. A little more training or continuing education could get your HR staff up to speed and negate the need for investing in outside help.

The contract is key

When you partner with a PEO, your organization and the PEO enter into a legal co-employment agreement. Typically, the employer remains responsible for strategic planning and business operations, while the PEO takes on specific HR-related services outlined in the contract.

It’s important to thoroughly understand the co-employment agreement. Often, the employer engaging the PEO continues to pay employment taxes and file tax returns. Under some agreements, however, these responsibilities shift to the PEO. Assess the contract carefully with your leadership team and ask an attorney to review it.

Far from easy

Partnering with a PEO may be a way to sidestep today’s tight job market. But deciding whether to do so is far from easy. Our firm can help you assess the feasibility of such an arrangement, including forecasting the costs involved.

If you made gifts last year you may be wondering if you need to file a gift tax return. The short answer: There are many situations when it’s necessary (or desirable) to file Form 709 — “United States Gift (and Generation-Skipping Transfer) Tax Return” — even if you’re not liable for any gift tax. Let’s take a closer look at the reasons why.

What gifts are considered nontaxable?

The federal gift tax regime begins with the assumption that all transfers of property by gifts (including below-market sales or loans) are taxable. It then sets forth several exceptions. Nontaxable transfers that need not be reported on Form 709 include:

Gifts of present interests within the annual exclusion amount ($17,000 per donee in 2023, up from $16,000 in 2022),
Direct payments of qualifying medical or educational expenses on behalf of an individual,
Gifts to political organizations and certain tax-exempt organizations,
Deductible charitable gifts,
Gifts to one’s U.S.-citizen spouse, either outright or to a trust that meets certain requirements, and
Gifts to one’s noncitizen spouse within a special annual exclusion amount ($175,000 in 2023, up from $164,000 in 2022).

If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable — and must be reported on Form 709 — even if they’re shielded from tax by the federal gift and estate tax exemption ($12.92 million in 2023, up from $12.06 million in 2022).

Are there tax traps to be aware of?

If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:

Future interests. The $17,000 annual exclusion applies only to present interests, such as outright gifts. Gifts of future interests, such as transfers to a trust for a donee’s benefit, aren’t covered, so you’re required to report them on Form 709 even if they’re less than $17,000 in 2023 ($16,000 in 2022).

Spousal gifts. As previously noted, gifts to a U.S.-citizen spouse need not be reported on Form 709. However, if you make a gift to a trust for your spouse’s benefit, the trust must 1) provide that your spouse is entitled to all the trust’s income for life, payable at least annually, 2) give your spouse a general power of appointment over its assets and 3) not be subject to any other person’s power of appointment. Otherwise, the gift must be reported.

Gift splitting. Spouses may elect to split a gift to a child or other donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse wrote the check. This allows married couples to combine their annual exclusions and give up to $34,000 for 2023 (up from $32,000 for 2022) to each donee. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return. Keep in mind that, once you make this election, you and your spouse must split all gifts to third parties during the year.

The deadline to file Form 709 for 2022 is April 18. Please contact us if you’re unsure of whether you need to file a gift tax return this year.

Many people began working from home during the COVID-19 pandemic — and many still work from their home offices either all the time or on a hybrid basis. If you’re self-employed and run your business from home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expense method and the simplified method.

How to qualify

In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if:

You physically meet with patients, clients or customers on your premises, or
You use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.

Expenses you can deduct

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
Depreciation.

But keeping track of actual expenses can take time and it requires organized recordkeeping.

The simpler method

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum of $1,500.

The cap can make the simplified method less valuable for larger home office spaces. Even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.

Changing methods

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2022 return, use the simplified method when you file your 2023 return next year and then switch back to the actual expense method for 2024. The choice is yours.

What if I sell the home?

If you sell — at a profit — a home on which you claimed home office deductions, there may be tax implications. We can explain them to you.

Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.

Different rules for employees

Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive paychecks or Form W-2s aren’t eligible for deductions, even if they’re currently working from home because their employers closed their offices due to COVID-19.

We can help you determine if you’re eligible for home office deductions and how to proceed in your situation.

Yeo & Yeo CPAs & Advisors is pleased to announce that Christopher M. Sheridan, CPA, CVA, will lead the firm’s Business Valuation and Litigation Support Services Group.

Yeo & Yeo’s Business Valuation and Litigation Support Group offers business valuation and forensic accounting, including complex litigation assignments, to businesses, law firms, receivers, trustees, financial institutions, and individuals.

“Chris is a trusted leader in the business valuation and litigation support industry. He has big-picture thinking and years of advisory experience,” said John W. Haag Sr., CPA/ABV, CVA, CFF, Managing Principal of the firm’s Midland office. “He has made a big impact by continually improving our processes and providing our clients with excellent valuation services.”

Sheridan is a senior manager and a member of the Consulting Service Line and Manufacturing Services Group. His areas of expertise include business valuation and litigation support, expert witness testimony, business consulting, and fraud investigation and prevention. As a Certified Valuation Analyst (CVA), Sheridan provides defensible, objective business valuation services for attorneys and business owners. He is a National Association of Certified Valuators and Analysts / Consultants Training Institute “40 Under Forty” honoree.

Sheridan is a member of the National Association of Certified Valuators and Analysts, the American Institute of Certified Public Accountants, the Michigan Association of Certified Public Accountants’ Manufacturing Task Force, and the Michigan Manufacturers Association. In the community, he serves as a board member for the Great Lakes Bay Economic Club and Bay Future.

“My goal is to continue to expand and build upon the services the group offers and continue to build the trust and confidence of our expertise in the industry,” Sheridan said. “John Haag has provided great mentorship and remains a crucial part of our continued growth. He will continue to serve our clients and communities with his specialized expertise.”

After your manufacturing company’s 2022 tax return has been filed, you can focus your efforts on reducing its 2023 tax liability. What are the top tax-saving opportunities available to manufacturers this year? Here are seven prime candidates available for many companies:

1. Section 179 deduction. The Sec. 179 “expensing” deduction continues to be a mainstay for manufacturers. Under the deduction, a manufacturer can expense, or currently deduct, the cost of qualified new or used business property placed in service during the year, up to an annual inflation-adjusted limit.

Qualified property includes business property with a cost recovery period of 20 years or less. For 2023, the limit is $1.16 million (up from $1.08 million for 2022).

However, the deduction can’t exceed the amount of business income for the year. Furthermore, the deduction is phased out dollar-for-dollar for amounts above an annual threshold. The threshold for 2023 is $2.89 million (up from $2.7 million for 2022).

2. First-year bonus depreciation. If the Sec. 179 deduction doesn’t cover all business property acquired in 2023, first-year bonus depreciation can be a valuable supplement. For 2023, the Tax Cuts and Jobs Act (TCJA) authorizes an 80% first-year bonus depreciation (down from 100% for 2022) for qualified property placed in service during the year. The property can be new or used. The percentage will drop to 60% for 2024 and another 20 percentage points per year through 2026. After 2026, no bonus depreciation will be allowed unless Congress revisits this issue. Accordingly, a manufacturer may want to accelerate property acquisitions into 2023 to take maximum advantage of the bonus depreciation deduction. Keep in mind that, for you to claim the deduction, the property also must be placed in service during the tax year.

Bonus depreciation generally is applied after the Sec. 179 deduction is claimed. If any amount remains, it’s subject to the regular cost recovery rules.

3. Research credit. Often referred to as the research and development or research and experimentation credit, your manufacturing company may be eligible to claim it for qualified expenses. Generally, the credit equals 20% of qualified research expenses for the year over a base amount.

For these purposes, the base amount is a fixed-base percentage (not to exceed 16%) of average annual receipts for the prior four years. It can’t be less than 50% of the annual qualified research expenses. Alternatively, a company can use a simplified 14% credit.

4. Retirement plans. The SECURE 2.0 Act, enacted at the tail end of 2022, makes sweeping changes for retirement accounts, with varying effective dates. For instance, the law:

Increases the age to begin taking required minimum distributions (RMDs) to 73 beginning January 1, 2023, and boosts it to 75 on January 1, 2033,
Eases the penalties for failing to take full RMDs, reducing the 50% excise (or penalty) tax to 25%,
Increases the annual limit for catch-up contributions,
Requires 401(k) plan catch-up contributions to be made to Roth accounts,
Provides for automatic enrollment in new plans, except for certain small companies,
Expands the eligibility for part-time workers,
Creates emergency savings accounts linked to retirement plans,
Allows penalty-free withdrawals for certain emergencies,
Enhances the tax credit for starting up a retirement plan, and
Replaces the retirement saver’s credit with a matching government contribution.

Again, the effective dates for these provisions vary. Contact us for more details.

5. Qualified business income deduction. A manufacturer operating as a pass-through entity — such as a partnership, S corporation or limited liability company — or as a sole proprietorship can benefit from the qualified business income (QBI) deduction.

The maximum deduction is equal to 20% of QBI (essentially, your net profit from the business). Notably, the QBI deduction is subject to a phase-out, based on your income. For 2023, the threshold is $182,100 for single filers and $364,200 for joint filers, up from $170,050 and $341,000, respectively, for 2022.

6. Form of business ownership. Depending on several variables, a switch in your company’s form of business entity may be warranted. For instance:

A C corporation can change to S corporation status to avoid double taxation and benefit from the QBI deduction (see above).
A sole proprietor can use a pass-through entity to save on self-employment tax.
An S corporation may revoke its status so that it can pay tax at the lower C corporation rate of 21%.

Note that changing your business’s entity may be treated as a taxable event.

7. Accounting methods. Manufacturers can save tax through astute choices relating to accounting methods. For example, it may make sense for your company to switch to the last in, first out (LIFO) method of accounting for inventory. Switching to LIFO can be beneficial when costs are rising due to inflation. LIFO may result in bigger deductions for the company as inventory prices increase.

Similarly, under the TCJA, your company may use the simplified cash method of accounting if receipts don’t exceed $25 million, indexed for inflation, for the past three tax years. The threshold is $29 million for the three years ending prior to 2023. This method may provide greater flexibility at the end of the year.

These are just seven tax-saving opportunities available to manufacturers in 2023. Contact us to discuss which strategies are right for your company.

Even though it may not be top of mind when you’re developing or revising your estate plan, it’s important to consider how bequeathing assets to your family might affect them. Why? Because when your heirs receive their inheritance, it becomes part of their own taxable estates. Giving a loved one permission to create an inheritor’s trust can help avoid this outcome.

The trust in action

In a nutshell, an inheritor’s trust allows your loved one to receive the inheritance in trust, rather than as an outright gift or bequest. Thus, the assets are kept out of his or her own taxable estate. Having assets pass directly to a trust benefiting an heir not only protects the assets from being included in the heir’s taxable estate, but also shields them from other creditor claims, such as those arising from a lawsuit or a divorce.

Because the trust, rather than your family member, legally owns the inheritance, and because the trust isn’t funded by the heir, the inheritance is protected. The reason is because everything you gift or bequeath to the trust (including growth and income from the trust) is owned by the trust, and therefore can’t be treated as community property. An inheritor’s trust can’t replace a prenuptial or postnuptial agreement, but it can provide a significant level of asset protection in the event of divorce.

With an inheritor’s trust, your heir can also realize wealth building opportunities. If you fund an inheritor’s trust before you die, your loved one can use a portion of the money to, for example, start a new business. A prefunded inheritor’s trust can also own the general partnership interest in a limited partnership or the voting interest in a limited liability company or corporation. If you decide to fund the trust now, your initial gift to the trust can be as little or as much as you like.

Talk to your heirs first

As you draft or revise your estate plan and consider who to pass your assets to, it’s a good idea to talk to family members first. Determine if they would accept the bequests and then inform them of their option of creating an inheritor’s trust. Turn to us to help determine whether an inheritor’s trust is right for your situation.

The 2022 mid-term election has shifted the scales in Washington, D.C., with the Democrats no longer controlling both houses of Congress. While it remains to be seen if — and when — any tax-related legislation can muster the requisite bipartisan support, a review of certain provisions in existing laws may provide an indication of the many areas ripe for action in the next two years.

Retirement catch-ups at risk

The SECURE 2.0 Act, enacted at the tail end of 2022, reportedly includes a technical drafting error that jeopardizes the abilities of taxpayers to make catch-up contributions to their pre-tax or Roth retirement accounts. According to the American Association of Pension Professionals and Actuaries, under the existing statutory language, no participants will be able to make such contributions beginning in 2024.

The American Retirement Association has brought the issue to the attention of the U.S. Department of Treasury and the Joint Committee on Taxation (JCT), a nonpartisan congressional committee that assists with federal tax legislation. While the JCT has apparently acknowledged that the language does appear to be a drafting error, a timely correction is far from guaranteed.

Indeed, such “technical corrections” legislation once passed Congress routinely. However, it has proven more challenging in the political climate of the last decade or so. For example, it took three years for Congress to pass minor corrections to the first SECURE Act. And a glitch in the Tax Cuts and Jobs Act of 2017 (TCJA) affecting eligibility for bonus depreciation wasn’t corrected until the CARES Act became law in 2020.

Expiring tax provisions

Tax-related legislation often includes so-called “sunset” dates — the dates tax provisions will expire, absent congressional action. For example, the Consolidated Appropriations Act, enacted in 2021, boosted the allowable deduction for business meals from 50% to 100% for 2021 and 2022. In 2023, the deduction limit returned to 50%.

A JCT report released in January 2023 highlights numerous significant provisions that are scheduled to expire in coming years without congressional action to extend them. For example, several tax credits related to renewable and alternative energy will expire at the end of 2024.

But 2026 is the year when some of the most wide-reaching and particularly valuable provisions — many of them created or modified by the TCJA — are set to disappear. They include:

Lower individual tax rates,
Enhancements to the Child Tax Credit (CTC),
Health insurance premium tax credit enhancements,
The New Markets Tax Credit,
The employer credit for paid family and medical leave,
The Work Opportunity Tax Credit,
The increase in the exemption amount and phaseout threshold for the alternative minimum tax,
The increase in the standard deduction,
The suspension of the miscellaneous itemized deduction,
The suspension of the limit on itemized deductions,
The income exclusion for employer payments of student loans,
The suspension of the deduction for personal exemptions,
The limit on the deduction for qualified residence interest,
The suspension of the deduction for home equity interest,
The limit on the deduction for state and local taxes,
The qualified business income deduction,
The deduction percentages for foreign-derived intangible income and global intangible low-taxed income,
Empowerment zone tax incentives, and
The increase in the federal gift and estate tax exemption.

At the end of 2026, bonus depreciation also is slated for elimination. In fact, the allowable deduction already has dropped from 100% to 80% of the cost of qualified assets in 2023. The limit will drop by 20% each year until vanishing in 2027.

Expired tax provisions

Several notable provisions expired or changed at the end of 2021, despite chatter in Washington about the possibility of extensions. For example, as of 2022, taxpayers can no longer deduct Section 174 research and experimentation expenses, including software development costs, in the year incurred. Rather, they must amortize these expenses over five years (or 15 years if incurred outside of the United States). In addition, the calculation of adjusted taxable income for purposes of the limit on the business interest deduction has changed, potentially reducing the allowable deduction for some taxpayers.

Individuals also saw the end of several tax provisions at the end of 2021, including the:

CTC expansions created by the American Rescue Plan for some taxpayers,
Expanded child and dependent care credit,
Increased income exclusion for employer-provided dependent care assistance,
Treatment of mortgage insurance premiums as deductible mortgage interest,
Charitable contribution deduction for non-itemizers, and
Increased percentage limits for charitable contributions of cash.

It’s possible that some of these could be included in any “extender” legislation Congress might consider this year or next.

The FairTax Act

Unlikely to see much progress, however, is the proposed FairTax Act. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation.

The bill would eliminate most federal taxes — including individual and corporate income, capital gains, payroll and estate taxes — as well as the IRS. It would replace the taxes with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits. The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate.

Ear to the ground

Congress may not feel a sense of urgency to address tax provisions that aren’t set to expire for three years, but the catch-up contribution error would have substantial repercussions for many taxpayers in less than a year. We’ll let you know if lawmakers take action on this or any other important tax matters that could affect you.

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

1. Targeted improvements for long-term insurance contracts

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

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

2. Expanded disclosures for supplier finance programs

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

3. Changes to M&A accounting

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

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

4. New model for reporting credit losses

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

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

5. Hedge accounting changes

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

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

Are you ready?

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

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

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

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

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

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

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

Two approaches

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

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

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

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

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

What buyers want

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

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

What sellers want

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

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

Seek advice before a transaction

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

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

Overt and subtle signs

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

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

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

Nipping it in the bud

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

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

Maintain controls

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

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

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

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

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

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

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

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

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

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

Less talk, more listening

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

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

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

Ways to raise your profile

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

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

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

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

Good faith effort

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

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

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

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

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

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

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

2 types of joint ownership for spouses

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

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

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

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

Joint ownership plusses and minuses

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

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

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

Lessons to be learned

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

Small Employers: Don’t Forget About the New and Improved Pension Credit

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

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