Why Auditors Prefer In-person Interviews to Assess Fraud Risks

Auditing standards require financial statement auditors to identify and assess the risks of material misstatement due to fraud — and to determine overall and specific responses to those risks. Here’s why face-to-face meetings are essential when assessing these risks.

Audit inquiries

Fraud-related questions are a critical part of the audit process. The AICPA requires auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit.

Specific areas of inquiry under AU-C Sec. 240 include:

Whether management has knowledge of any actual, suspected or alleged fraud,
Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
Any specific fraud risks that management has identified or that have been brought to its attention,
The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist, and
Management’s communications, if any, to those charged with governance about its process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.

Interviews must be conducted for every audit — auditors can’t just assume that fraud risks are the same as those that existed in the previous accounting period.

Beyond words

Although many audit procedures have been done remotely during the pandemic, auditors are now resuming face-to-face meetings with managers and others to discuss fraud risks. Why? Psychologists estimate that 7% of communication happens through spoken word, 38% through tone of voice and 55% through body language. So, when evaluating fraud risks during an audit, a face-to-face interview is critical to help pick up on nonverbal clues.

Nuances such as an interviewee’s tone and inflection, the speed at which he or she responds, and body language provide important context to the words being spoken. The auditor will also watch for signs of stress on the part of the interviewee in responding to questions, including long pauses before answering, starting answers over, profuse sweating or tapping feet.

In addition, in-person interviews provide opportunities for immediate follow-up questions. When it isn’t possible to have a face-to-face interview, a videoconference or phone call is the next best option because it provides the auditor many of the same advantages as meeting in person.

Let’s work together

External audits don’t provide an absolute guarantee that dishonest behaviors will be detected, but they can be an effective antifraud control. According to Occupational Fraud 2022: A Report to the Nations, companies that were audited lost one-third less from fraud than those that weren’t audited — and audited companies were able to detect fraud 33% faster than those without audited financial statements.

You can facilitate our efforts to assess your company’s fraud risks by anticipating the types of questions we’ll ask and the source documents we’ll need. Forthcoming, prompt responses help ensure that your audit stays on schedule and minimizes any unnecessary delays.

Generally, when a qualified retirement plan terminates with surplus funds, Internal Revenue Code Section 4980 imposes an excise tax on any plan funds and property that revert to the employer sponsoring the plan. This is referred to as “employer reversion.”

In Revenue Procedure 2022-28, the IRS recently notified qualified plan sponsors and employers that it won’t issue letter rulings on whether an employer reversion from a qualified defined benefit plan (commonly called a pension) has occurred in connection with a spinoff/termination transaction involving excess assets.

According to the IRS guidance, a “spinoff/termination transaction involving excess assets” is one in which:

The plan sponsor/employer spins off less than 100% of the assets of a defined benefit plan to another defined benefit plan that’s sponsored or maintained by the same employer — including members of the employer’s single-employer group,
The defined benefit plan receiving the spinoff assets is terminated within a short time after receiving those assets, and
Assets remain in the terminated defined benefit plan’s trust after all benefits are distributed to or on behalf of participants and their beneficiaries.

The base excise tax in question is 20% of the amount of any employer reversion from the plan. The excise tax increases to 50% of any employer reversion unless:

The employer establishes or maintains a “qualified replacement plan,” or
The terminating plan provides certain additional benefits that take effect on the termination date.

This two-tier excise rate structure has two primary purposes. First, it’s designed to recapture to the employer the tax benefits of tax-deferred earnings during the life of the plan. Second, it’s intended to encourage the plan sponsor to either maintain a qualified plan after terminating the defined benefit plan or to provide benefit increases before terminating the plan.

For all practical purposes, defined contribution plans — such as 401(k)s — generally aren’t subject to the excise tax. This is because defined contribution plans involve individual accounts. Thus, assets typically don’t revert to the employer upon plan termination. Rather, they’re distributed to the respective accounts of participants and beneficiaries.

If your organization sponsors a pension that could soon or eventually be subject to a spinoff/termination transaction involving excess assets, the recent Revenue Procedure brings important news. We can answer any questions you may have about the tax implications of your qualified retirement plan.

If you have a family member who’s disabled, financial and estate planning can be tricky. You don’t want to jeopardize his or her eligibility for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI). A special needs trust (SNT) is one option to consider. Another is to open a Section 529A account, also referred to as an ABLE account, because it was created by the Achieving a Better Life Experience (ABLE) Act.

ABLE account details

The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount ($16,000 for 2022). To qualify, a beneficiary must have become blind or disabled before age 26.

The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.

An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to just $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.

ABLE account vs. SNT

Here’s a quick overview of the relative advantages and disadvantages of ABLE accounts and SNTs:

Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age limit for SNTs.

Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.

Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.

Contribution limits. Annual contributions to ABLE accounts currently are limited to $16,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions that exceed $16,000 per year may be subject to gift tax.

Investments. Contributions to ABLE accounts are limited to cash, and the beneficiary (or his or her representative) may direct the investment of the account funds twice a year. With an SNT, you can contribute a variety of assets, including cash, stock or real estate. And the trustee — preferably an experienced professional fiduciary — has complete flexibility to direct the trust’s investments.

Medicaid reimbursement. If an ABLE account beneficiary dies before the account assets have been depleted, the balance must be used to reimburse the government for any Medicaid benefits the beneficiary received after the account was established. There’s also a reimbursement requirement for SNTs. With either an ABLE account or an SNT, any remaining assets are distributed according to the terms of the account or the SNT.

Examine the differences

When considering which option is best for your family, remember the key differences: An ABLE account may offer greater tax advantages, while an SNT may offer greater flexibility. We can help your family decide how to proceed to best provide for your loved one.

Yeo & Yeo, a leading Michigan-based accounting and advisory firm, has been named an INSIDE Public Accounting (IPA) Top 200 Accounting Firm for the fourteenth consecutive year.

IPA 200 “Every day, we strive to provide outstanding business solutions and exceed expectations,” said President & CEO Dave Youngstrom. “We work as a team to achieve our clients’ goals and support a culture that ensures work-life balance and attracts exceptional talent. Ranking among the top 200 firms in the nation is a testament to our commitment to our team members, clients and community.”

This is INSIDE Public Accounting’s 32^nd annual ranking of the largest accounting firms in the nation. Firms are ranked according to U.S. net revenues and are further analyzed according to responses received for IPA’s Survey and Analysis of Firms.

View the list of top-ranked IPA firms in its entirety.

INSIDE Public Accounting, founded in 1987, is published by The Platt Group. Dedicated to helping firm leaders, and their firms, achieve their ultimate potential, IPA reports and analyzes the news, trends, strategies and politics that affect the nation’s public accounting firms, providing them with the information and resources they need to compete and operate more profitably.

Now that Labor Day has passed, it’s a good time to think about making moves that may help lower your small business taxes for this year and next. The standard year-end approach of deferring income and accelerating deductions to minimize taxes will likely produce the best results for most businesses, as will bunching deductible expenses into this year or next to maximize their tax value.

If you expect to be in a higher tax bracket next year, opposite strategies may produce better results. For example, you could pull income into 2022 to be taxed at lower rates, and defer deductible expenses until 2023, when they can be claimed to offset higher-taxed income.

Here are some other ideas that may help you save tax dollars if you act before year-end.

QBI deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2022, if taxable income exceeds $340,100 for married couples filing jointly (half that amount for others), the deduction may be limited based on: whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all of the QBI deduction by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout). You also may be able increase the deduction by increasing W-2 wages before year-end. The rules are complex, so consult us before acting.

Cash vs. accrual accounting

More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2022, it’s satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $27 million. Not that long ago, it was only $5 million. Cash method taxpayers may find it easier to defer income by holding off billings until next year, paying bills early or making certain prepayments.

Section 179 deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2022, the expensing limit is $1.08 million, and the investment ceiling limit is $2.7 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.

The high dollar ceilings mean that many small- and medium-sized businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Just place eligible property in service by the last days of 2022 and you can claim a full deduction for the year.

Bonus depreciation

Businesses also can generally claim a 100% bonus first year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. Again, the full write-off is available even if qualifying assets are in service for only a few days in 2022.

Consult with us for more ideas

These are just some year-end strategies that may help you save taxes. Contact us to tailor a plan that works for you.

In 2020, amidst the pandemic, I found myself in a slump. Instead of spending my time in lockdown watching TV or playing on my phone, I decided that I wanted to make a positive impact in the community. My father was heavily involved in Big Brothers Big Sisters. He had a Big when he was growing up and later became a Big. Mentoring a child in need and working with them one-on-one to achieve their personal, emotional, and educational goals seemed like it would be very rewarding.

Taylor - Big Brothers Big Sisters Little did I know the full extent of what I would learn as a Big.

I’ve learned to talk less and listen more. I’ve learned to be patient and let things come naturally. And most importantly, I’ve learned never to take things for granted.

My husband and I spend as much time as possible with our Little. We go to all his basketball games and have even taken him for trips up north to my parents’ lake house. It is fun introducing him to new things and watching him learn and grow with each new experience. He is truly growing into a respectable young man, and I am proud to say that I had a hand in helping him get there.

I give back because I want to help children discover that their potential is limitless.

In today’s volatile market conditions, it’s important to review your accounts receivable ledger and consider writing off stale, uncollectible accounts. The methods that you’ve used in the past to evaluate bad debts may no longer make sense. Here’s how to keep your allowance up to date.

Know the rules

Under the accrual method of accounting, your company will report accounts receivable on its balance sheet if it extends credit to customers. This asset represents invoices that have been sent to customers but are yet unpaid. Receivables are classified under current assets if a company expects to collect them within a year or the operating cycle, whichever is longer.

Realistically, however, some customers won’t pay their invoices. Companies report bad debts using one of these two methods:

1. Direct write-off method. Companies that don’t follow U.S. Generally Accepted Accounting Principles (GAAP) record write-offs only when a specific account has been deemed uncollectible. This method is prescribed by the federal tax code, plus it’s relatively easy and convenient. However, it fails to match bad debt expense to the period’s sales. It may also overstate the value of accounts receivable on the balance sheet.

2. Allowance method. Companies turn to the allowance method to properly report revenues and the related expenses in the periods that they were earned and incurred. This method conforms to the matching principle under GAAP. The allowance shows up as a contra-asset to offset receivables on the balance sheet and as bad debt expense to offset sales on the income statement.

Review your estimate

Under the allowance method, a company usually estimates uncollectible accounts as a percentage of sales or total outstanding receivables. Some companies also include allowances for returns, unearned discounts and finance charges.

Companies typically base the allowance on such factors as the age of receivables and bad debt write-offs in prior periods. But it’s also critical to consider general economic conditions. Given the current economic stress you may be experiencing, your business might have to update its historical strategies for assessing the collectability of its receivables.

Monitoring changes in your customers’ credit risk can help prevent your business from being blindsided by economic distress in your supply chain. If a customer’s credit rating falls to an unacceptable level, you might decide to stop extending credit and accept only cash payments. This can help minimize write-offs from a particular customer before they spiral out of control.

Think like an auditor

Bad debt allowances are subjective and can be difficult to audit, especially during economic downturns. Auditors use several techniques to assess whether the allowance for doubtful accounts appears reasonable. Management can use similar techniques to self-audit the company’s allowance.

An obvious place to begin is the company’s aging schedule. The older a receivable is, the harder it is to collect. In general, once a receivable is four months overdue, collectability is doubtful. However, that benchmark varies based on the industry, the economy, the company’s credit policy and other risk factors.

If your customers have requested extended payment terms, it could cause an increase in older receivables on your company’s aging schedule. In this situation, if your company’s allowance is based on aging, you may need to consider adjusting your assumptions based on current conditions.

Consider outside assistance

Businesses are facing unprecedented uncertainty as the end of the calendar year approaches. In fact, a recent survey of audit partners published by the Center for Audit Quality, an affiliate of the AICPA, found that 40% were uncertain about the outlook for their primary industries.

Contact us if you’re unsure whether your bad debts allowance is sufficient in today’s uncertain marketplace. We can help evaluate your estimate and, if necessary, adjust it based on your company’s current circumstances. We’ll also explain the tax implications.

In the ever-evolving landscape of the cannabis industry, finding the right path to growth and success can be a challenging endeavor. In this article, we engage in a thought-provoking Q&A session with Alex Wilson, a trusted advisor in cannabis advisory, tax, and accounting solutions. Through his valuable insights and experiences, he sheds light on various aspects of the cannabis business. Join us as we explore the intricate world of cannabis through the eyes of an industry advisor.

1. WHO SHOULD BE ON MY TEAM OF ADVISORS TO HELP ME RUN A SUCCESSFUL CANNABIS BUSINESS?

Building a strong team of advisors is important for running a successful operation and growing and protecting your business. The team that I would put together would include a banker, accountant, business consultant, attorney, and others specific to your needs such as a technology and security specialist, insurance broker, and marketing expert. Preferably, you would seek professionals who have experience and knowledge in the cannabis industry, as they will be better equipped to understand the unique challenges and opportunities it presents.

2. WHAT DO OWNERS NEED TO CONSIDER WHEN LOOKING AT GROWTH AND THE DRIVERS OF SUCCESS?

Owners who experience the most success embrace big-picture thinking as the driver of growth.
In this respect, there are five steps to drive growth:
1. Know the value of your business and identify the drivers that affect the value.
2. Know the KPIs (or key performance indicators) that enable you to operate your business more efficiently and effectively.
3. Have a handle on your plan and prepare yourself for setbacks.
4. Understand how your business and personal wealth support each other.
5. Have a clear vision for your business with specific, measurable objectives.

3. WHAT FACTORS SHOULD I CONSIDER WHEN CHOOSING THE RIGHT POINT OF SALE AND ACCOUNTING SOFTWARE?

When you’re choosing point-of-sale and accounting software, several considerations can play into your decision. First, prioritize compliance by selecting a software specifically designed for the cannabis industry and compliant with relevant state and federal regulations. Second, seek integration capabilities, ensuring the software systems can seamlessly work together. This integration enables a comprehensive view of your financial performance. Third, assess scalability, ensuring the software can accommodate your business’s growth without becoming obsolete. Finally, prioritize user-friendliness, as it greatly impacts your employees’ ability to effectively use the software. Look for intuitive interfaces that facilitate easy adoption and utilization by your staff.

4. WHAT STRATEGIES CAN I IMPLEMENT TO OPTIMIZE MY CASH FLOW AND MANAGE EXPENSES EFFECTIVELY?

To optimize cash flow and manage expenses effectively, it is important to establish clear procedures and document them thoroughly, while also considering the impact of income tax. Train your staff to execute these procedures, and regularly analyze inventory with the help of an accountant to identify and resolve any issues promptly. Additionally, monitor and control expenses, negotiate with suppliers, and prioritize payments strategically. Maintaining accurate records and seeking professional advice will help you navigate complex tax laws and ensure compliance, ultimately optimizing your financial operations. Developing a robust cash flow forecasting system will also help you anticipate gaps and take proactive measures.

5. WHAT APPROACH DOES YEO & YEO TAKE TO ADVISING CANNABIS CLIENTS?

First and foremost, we are our clients’ partners in success. We work with them to build customized, right-sized relationships that help our clients remain compliant, organized, and growing. Our clients’ goals vary, but whatever their goals are — vertical integration, preparing for mergers and acquisitions, adding licenses, or opening a new location — we ensure they have the information they need to make data-driven decisions, and we are there to support them every step of the way.

To ensure that a trust operates as intended, it’s critical to appoint a trustee that you can count on to carry out your wishes. But to avoid protracted court battles in the event that the trustee isn’t doing a good job, consider giving your beneficiaries the right to remove and replace a trustee. Without this option, your beneficiaries’ only recourse would be to petition a court to remove the trustee for cause.

Defining “cause”

The definition of “cause” varies from state to state, but common grounds for removal include:

Fraud, mismanagement or other misconduct,
A conflict of interest with one or more beneficiaries,
Legal incapacity,
Poor health, or
Bankruptcy or insolvency if it would affect the trustee’s ability to manage the trust.

Not only is it time-consuming and expensive to go to court, but most courts are hesitant to remove a trustee that was chosen by the trust’s creator. That’s why including a provision in the trust document that allows your beneficiaries to remove a trustee without cause if they’re dissatisfied with his or her performance can be a good idea. Alternatively, you could authorize your beneficiaries to remove a trustee under specific circumstances outlined in the trust document.

Adding successor trustees

If you’re concerned about giving your beneficiaries too much power, you can include a list of successor trustees in the trust document. That way, if the beneficiaries end up removing a trustee, the next person on the list takes over automatically, rather than the beneficiaries choosing a successor.

Alternatively, or, in addition, you could appoint a “trust protector” with the power to remove and replace trustees and to make certain other decisions regarding management of the trust. Contact us for additional information on the role of a trustee.

While the recently announced student loan debt relief has captured numerous headlines, it’s estimated that another federal relief program announced on the same day will provide more than $1.2 billion in tax refunds or credits. Specifically, IRS Notice 2022-36 extends penalty relief to both individuals and businesses who missed the filing deadlines for certain 2019 and/or 2020 tax and information returns. The relief covers many of the most commonly filed forms.

Broad relief for late taxpayers

The intent behind the penalty relief is two-fold: 1) to help taxpayers negatively affected by the COVID-19 pandemic, and 2) to allow the IRS to focus on processing backlogged tax returns and taxpayer correspondence. As recently as late May 2022, the IRS had a backlog of more than 21 million unprocessed paper returns. The goal is for the IRS to return to normal operations for the 2023 filing season.

To that end, the notice provides relief from the failure-to-file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. To qualify for the relief, an income tax return must be filed on or before Sept. 30, 2022.

Banks, employers and other businesses that are required to file various information returns (for example, the Form 1099 series) also may qualify for relief. Eligible 2019 returns must have been filed by Aug. 3, 2020, and eligible 2020 returns must have been filed by Aug. 2, 2021.

Potentially eligible forms include:

Form 1040, U.S. Individual Income Tax Return and other forms in the Form 1040 series
Form 1041, U.S. Income Tax Return for Estates and Trusts and other forms in the Form 1041 series
Form 1065, U.S. Return of Partnership Income
Returns filed in the Form 1120 series including:
- Form 1120, U.S. Corporation Income Tax Return
- Form 1120-C, U.S. Income Tax Return for Cooperative Associations
- Form 1120-F, U.S. Income Tax Return of a Foreign Corporation
- Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation
- Form 1120-H, U.S. Income Tax Return for Homeowners Associations
- Form 1120-L, U.S. Life Insurance Company Income Tax Return
- Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons
- Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return
- Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations
- Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts
- Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies
- Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B)
- Form 1120-S, U.S. Income Tax Return for an S Corporation
Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return
Forms concerning exempt organizations
- Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation
- Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e)).
Certain international information returns

Notably, the relief doesn’t extend to failure-to-file penalties for Form 8938, Statement of Specified Foreign Financial Assets, or FinCEN Report 114, Report of Foreign Bank and Financial Accounts.

Exceptions to the rule

Some other exceptions apply. Penalty relief isn’t available if:

A fraudulent return was filed,
The penalty was part of an accepted offer-in-compromise or a closing agreement with the IRS, or
The penalty was finally determined by a court.

In addition, the IRS isn’t providing relief for the failure-to-pay penalty or other penalties. Such ineligible penalties may, however, qualify for previously existing penalty relief procedures, including the reasonable cause defense or the IRS’s First Time Abatement Program.

No action required

The penalty relief is automatic. If you qualify, you need not apply for it or reach out to the IRS in any way. Penalties that have already been assessed will be abated. If you’ve already paid a covered penalty, the IRS says, you should receive a refund or credit by Sept. 30, 2022.

To determine whether this Notice applies to your particular situation, please consult your Yeo & Yeo tax professional.

The Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS Act) recently became law as part of the CHIPS and Science Act of 2022. Among other things, the new law provides more than $52 billion in funding for manufacturers to produce semiconductors, also known as chips. It also includes a temporary 25% tax credit for investments in chip manufacturing.

While the incentives themselves are narrowly targeted, the expansion of semiconductor production should benefit a wide range of manufacturers. Here’s a summary of the two main components of the CHIPS Act: the funding initiatives and the new manufacturing tax credit.

Funding initiatives

The CHIPS Act authorizes appropriation of $52.7 billion in funds for an initiative by the U.S. Commerce Department facilitating the use of semiconductors. The program, to be conducted over five years, is designed to develop domestic manufacturing capability and bolster research efforts previously approved as part of a 2021 national defense plan.

For starters, $39 billion of the total amount is to be allocated over five years toward providing financial support for building, expanding or modernizing domestic manufacturing capabilities. A maximum of $6 billion of these funds may be used for loans or their guarantees. The CHIPS Act appropriates $11 billion, again over five years, in support of research and development and workforce programs.

Furthermore, the law sets aside $2 billion to be used by Microelectronics Commons. This is a network within the United States dedicated to workforce training in the semiconductor industry and features the latest technology in this manufacturing niche.

Another $500 million is authorized for creating future partnerships with foreign governments to support efforts crossing international boundaries. These will focus primarily on supply chain links and technology-related security issues. As with other programs, the rollout period is five years. Specifically, $200 million is earmarked for the National Science Foundation to strengthen relationships within the semiconductor workforce.

Finally, the CHIPS Act allocates $1.5 billion for a Public Wireless Supply Chain Innovation Fund. This fund promotes and implements new technology, including software, hardware and microprocessing units.

Be aware that the new law has some geopolitical overtones. Notably, it prohibits entities from building or expanding new manufacturing capacity for advanced semiconductors in China or certain other countries when it presents a national security threat to the United States. To ensure that these restrictions remain up to date, the appropriate authorities are required to review technologies that fall within this realm.

In another restriction, the new law includes language prohibiting the use of the funding initiatives discussed above for repurchasing stocks and paying dividends. Manufacturers should be forewarned of this critical issue.

Manufacturing tax credit

The CHIPS Act provides temporary relief for the manufacturing sector in the form of a new, albeit temporary, tax credit for producing semiconductors. The “advanced manufacturing investment credit” for investments in semiconductor manufacturing property will be codified in Section 48D of the Internal Revenue Code.

The credit amounts to 25% of qualified investment related to an advanced manufacturing facility — that is, a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. Manufacturers may claim the credit for producing semiconductors or building specialized tooling equipment required in the semiconductor manufacturing process. Note that the tax credit — as opposed to a deduction — results in a dollar-for-dollar reduction of tax liability.

Significantly, qualified manufacturers can elect to treat the credit as a payment against tax under the “direct pay” method providing refundability. In other words, taxpayers can receive a tax refund if they don’t have sufficient tax liability to use the credit. Without this option, eligible taxpayers could struggle to monetize their credits.

The credit is available for qualified property placed in service after Dec. 31, 2022, if construction begins before Jan. 1, 2027. If construction began before the CHIPS Act was enacted, though, only the portion of the basis attributable to construction begun after enactment is eligible.

Guidance incoming

If your manufacturing company might qualify for the new tax credit, keep an eye out for additional IRS guidance on just how it will work, including the direct pay provision. We can help you make the most of this and other tax credits.

Living in Flint and its surrounding areas all my life, I have grown very attached to the city. Before my job at Yeo & Yeo, I worked downtown serving and bartending, and my husband grew up playing music at many local venues.

Ashley This past January, I was drawn to join the board of Friends of the Alley (FOTA), a nonprofit in Flint, to help beautify the main two alleys in which many businesses are located. The board meets monthly to coordinate three events per year. Our largest event, Alley Fest, is an all-day festival that invites 15 artists to play on two stages in one of the alleys. In previous years, the event brought the Flint community together with food and entertainment.

Along with planning events, FOTA organizes at least two cleanups throughout the year, where we clear the alleys from litter and broken glass and make them safer for people to walk down and enjoy.
We also hung string lights down the entirety of Buckham and Brush Alleys to make them more inviting and safer at night. The work we do helps unify the community and draws attention to the great features Flint has to offer. I am proud to be part of this organization and to work to help revitalize my hometown.

I give back because I want to help revitalize Flint and showcase the great things the city offers.

The Inflation Reduction Act (IRA), signed into law by President Biden on August 16, contains many provisions related to climate, energy and taxes. Extensive media coverage has focused on the law’s impact on large corporations. For example, the IRA contains a new 15% alternative minimum tax on large, profitable corporations. And the law adds a 1% excise tax on stock buybacks of more than $1 million by publicly traded U.S. corporations.

But there are also provisions that provide tax relief for small businesses. Here are two:

A payroll tax credit for research

Under current law, qualified small businesses can elect to claim a portion of their research credit as a payroll tax credit against their employer Social Security tax liability, rather than against their income tax liability. This became effective for tax years that begin after December 31, 2015.

Qualified small businesses that elect to claim the research credit as a payroll tax credit do so on IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” Currently, a qualified small business can claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.

The IRA makes changes to the credit, beginning next year. It allows for qualified small businesses to apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This provision will take effect for tax years beginning after December 31, 2022.

A qualified small business must meet certain requirements, including having gross receipts under a certain amount.

Extension of the limit on excess business losses of noncorporate taxpayers

Another provision in the new law extends the limit on excess business losses for noncorporate taxpayers. Under prior law, there was a cap set on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses from sole proprietorships, partnerships and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules.

Although another law (the CARES Act) suspended the limit for the 2018, 2019 and 2020 tax years, it’s now back in force and has been extended through 2028 by the IRA. Businesses with significant losses should consult with us to discuss the impact of this change on their tax planning strategies.

We can help

These are only two of the many provisions in the IRA. There may be other tax benefits to your small business if you’re buying electric vehicles or green energy products. Contact us if you have questions about the new law and your situation.

As you create your estate plan, your main objectives likely revolve around your family, both current and future generations. Your goals may include reducing estate tax liability so that you can pass as much wealth as possible to your loved ones.

But it’s also critical to think about yourself. What if you’re unable to make financial and medical decisions? To address this risk, powers of attorney (POA) for property and health care are crucial components to include in your estate plan.

What is a POA?

A POA is defined as a legal document authorizing another person to act on your behalf. This person is referred to as the “attorney-in-fact” or “agent” — or sometimes by the same name as the document, “power of attorney.” Generally, there are separate POAs for property and health care.

Be aware that a POA is no longer valid if you become incapacitated. For many people, this is actually when the authorization is needed the most. Therefore, to thwart dire circumstances, you can adopt a “durable” POA.

A durable POA remains in effect if you become incapacitated and terminates only on your death. Thus, it’s generally preferable to a regular POA. The document must include specific language required under state law to qualify as a durable POA.

Who should you name as POA?

Despite the name, your POA doesn’t necessarily have to be an attorney, although that’s an option. Typically, in the case of POAs for property, the designated agent is either a professional, such as an attorney, CPA or financial planner, or a family member or close friend. In any event, the person should be someone you trust implicitly and who is adept at financial matters. In the case of health care POAs, a family member or close friend is the most common choice.

Regardless of whom you choose, it’s important to name a successor agent in case your top choice is unable to fulfill the duties or predeceases you.

Usually, the POA will simply continue until death. However, you may revoke a POA — whether it’s durable or not — at any time and for any reason. If you’ve had a change of heart, notify the agent in writing about the revocation. In addition, notify other parties who may be affected.

How does a health care POA differ from a living will?

A durable POA for health care can, for instance, establish the terms for determining whether you’re incapacitated. It’s important that you discuss these matters in detail with your agent to give more direction on your wishes.

Don’t confuse a health care POA with a living will. A durable POA gives another person the power to make health care decisions in your best interests. In contrast, a living will provides specific directions concerning end-of-life decisions.

Final thoughts

To ensure that your health care and financial wishes are carried out, consider preparing and signing POAs as soon as possible. Also, don’t forget to let your family know how to gain access to the POAs in case of emergency. Finally, health care providers and financial institutions may be reluctant to honor a POA that was executed years or decades earlier. So, it’s a good idea to sign new documents periodically. Contact us with questions.

If you’ve been in business for a while, you’ve probably considered many different employee benefits. One option that might have crossed your desk is an employee stock ownership plan (ESOP).

Strictly defined, an ESOP is considered a retirement plan for employees. But it can also play a role in succession planning by facilitating the transfer of a business to the owner’s children or employees over a period of years in a tax-advantaged way.

Not a buyout

Although an ESOP is a retirement plan, it invests mainly in your own company’s stock. ESOPs are considered qualified plans and, thus, subject to the same IRS and U.S. Department of Labor (DOL) rules as 401(k)s and the like. This includes minimum coverage requirements and contribution limits.

Generally, ESOP distributions to eligible employees are made in stock or cash. For closely held companies, employees who receive stock have the right to sell it back to the company — exercising “put” options or an “option to sell” — at fair market value during certain time windows.

While an ESOP involves transferring ownership to employees, it’s different from a management or employee buyout. Unlike a buyout, an ESOP allows owners to cash out and transfer control gradually. During the transfer period, owners’ shares are held in an ESOP trust and voting rights on most issues other than mergers, dissolutions and other major transactions are exercised by the trustees, who may be officers or other company insiders.

Mandatory valuations

One big difference between ESOPs and other qualified retirement plans is mandated valuations. The Employee Retirement Income Security Act requires trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. Specifically, an appraisal is needed when the ESOP initially acquires shares from the company’s owners and every year thereafter that the business contributes to the plan.

The fair market value of the sponsoring company’s stock is important, because the DOL specifically prohibits ESOPs from paying more than “adequate consideration” when investing in employer securities. In addition, because employees who receive ESOP shares typically have the right to sell them back to the company at fair market value, the ESOP essentially provides a limited market for its shares.

Costs and entity choice

Although ESOPs can be an important part of a succession plan, they have their drawbacks. You’ll incur costs and considerable responsibilities related to plan administration and compliance. Plus, there are costs associated with annual stock valuations and the need to repurchase stock from employees who exercise put options.

Another disadvantage is that ESOPs are available only to corporations of either the C or S variety. Limited liability companies, partnerships and sole proprietorships must convert to the corporate form to establish one of these plans. This raises a variety of financial and tax issues.

It’s also important to consider the potential negative impact of ESOP debt and other expenses on your financial statements and ability to qualify for loans.

A popular choice

There are about 6,500 ESOPs and equivalent plans in the United States today, with roughly 14 million participants, according to the National Center for Employee Ownership. So, if you decide to launch one, you won’t be alone. However, careful planning and expert advice is critical. We can help you evaluate whether an ESOP would be a good fit for your business and succession plan.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 99 years, and we want to share our knowledge with you.

Covering tax, accounting, technology, financial and advisory topics relevant to you and your business, Yeo & Yeo’s podcast is hosted by industry and subject matter professionals, where we go beyond the beans.

On episode 21 of Everyday Business, host Peter Bender, leader of Yeo & Yeo Wealth Management, is joined by Kevin Dement, Principal, Client Development, Avantax Retirement Plan Services^SM and Matthew Cash, financial planning consultant for Avantax Planning Partners^SM.

Listen in as Pete, Kevin and Matt discuss retirement plans, the benefits and challenges that come with them and the many rules and regulations to consider in the third episode in our series focusing on wealth management.

What are the main benefits of sponsoring an employee retirement plan? (1:55)
What is a fiduciary and the responsibilities of employers (3:04)
Rules for employers to follow when it comes to contributions and distributions (5:30)
Steps sponsors can take to ensure retirement plans are running smoothly (7:40)
Is an investment company or group that oversees the retirement plan recommended for a company? (9:40)
How often should a retirement plan be reviewed? (11:30)
What does the retirement plan review look like and picking a partner (13:15)
How Yeo & Yeo and Avantax work together and the benefits (16:20)

Thank you for tuning in to Yeo & Yeo’s Everyday Business podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

DISCLAIMER
The information provided in this podcast is believed to be valid and accurate on the date it was first published. The views, information, or opinions expressed during the podcast reflect the views of the speakers. This podcast does not constitute tax, accounting, legal or other business advice or an advisor-client relationship. Before making any decision or taking action, consult with a professional regarding your specific circumstances.

Investment advisory services are offered through Avantax Planning Partners^SM. Commission-based securities products are offered through Avantax Investment Services^SM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax entities are independent of and unrelated to Yeo & Yeo Wealth Management. Peter Bender is an Avantax registered representative. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses. Avantax affiliated advisors may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state.

This material is for informational purposes only. It is not intended as investment, tax or other advice or an offer or solicitation for the purchase or sale of any financial instrument. Indices are unmanaged, represent past performance, do not incur fees or expenses, and cannot be invested into directly. Past performance is no guarantee of future results. Consult with your financial, tax or other appropriate advisors on all matters pertaining to financial, accounting or tax obligations and requirements.

Check the background of Pete Bender on FINRA’s BrokerCheck.

A recent report from FortiGuard Labs saw ransomware strains double from 5,400 to 10,666 in total compared to 2021, and the year is not over yet.

In a statement from FortiGuard Lab’s Chief Strategist, “Cyber adversaries are advancing their playbooks to thwart defense and scale their criminal affiliate networks. They are using aggressive execution strategies such as extortion or wiping data as well as focusing on reconnaissance tactics pre-attack to ensure a better return on threat investment.”

With the recent insights that one-third of organizations get weekly ransomware attacks and the Cisco hack that started with an Initial Access Broker, ransomware is not going away. Bad actors will continue to utilize ransomware as their most robust method of infiltrating your organization’s database.

But how can you defend against these types of attacks in the future? In short, new-school security awareness training is the answer. Your organization needs to gain a deeper understanding of the goals and tactics used by threat actors and stay up-to-date on the latest attacks. And as the number of threats continues to increase, your human firewall can grow too.

BetaNews has the full story.

Information used in this article was provided by our partners at KnowBe4.

Music has always been a big part of my family’s life. I sing in choirs, my sister writes her own music and plays the double bass, and my other sister played in her school’s jazz band – which is why I wanted to give back and donate to the Midland Community Orchestra (MCO).

MCO has hosted free concerts for the Midland community for more than 30 years. In 2015, my mom became the group’s conductor, and I’ve attended the concerts ever since.

Zoey Provenzano and Her Mom These free performances allow families in our local community to enjoy the arts together. Many parents bring their young kids, who may not otherwise have a chance to hear live classical music.

The orchestra also goes beyond providing free concerts. At each performance, they sponsor a local charity and collect donations on its behalf. They also showcase pieces that aren’t likely to be played by other groups, such as music composed by women. The MCO is a great organization that provides an outlet for musicians to perform while hosting fun events for the community and supporting those in need.

I give back because I want to show my appreciation for the arts.

Wellness programs have found a place in many companies’ health care benefits packages, but it hasn’t been easy. Because these programs take many different shapes and sizes, they can be challenging to design, implement and maintain.

There’s also the not-so-small matter of compliance: The federal government regulates wellness programs in various ways, including through the Health Insurance Portability and Accountability Act and the Americans with Disabilities Act.

Whether your business is just embarking on the process of creating one or simply looking for improvement tips, here are some key aspects of the most successful wellness programs.

Simplicity and clarity

“Welcome to our new wellness program,” began the company’s memo. “Attached is a 200-page guide, featuring a complex point system that will determine whether you qualify for incentives, and a lengthy glossary of medical terminology.”

See the problem here? The surest way to get a program off to a bad start is by frontloading it with all sorts of complexities and time-consuming instructions. Granted, there will be an inevitable learning curve to any type of wellness program. But the simpler the design, the easier it will be to explain and implement. Remember that you can update and increase a program’s complexity as it becomes more ingrained in your company’s culture.

Clarity of communication is also paramount. Materials should be well-organized and written clearly and concisely. Ideally, they should also have an element of creativity to them — to draw in participants. However, the content needs to be sensitive to the fact that these are inherently personal health issues.

If you don’t have anyone in-house who can handle these criteria, consider engaging a consultant. In addition, have your attorney review all materials related to the program for compliance purposes.

Carefully chosen providers

At most companies, outside vendors provide the bulk of wellness program services and activities. These may include:

Seminars on healthy life and work habits,
Smoking cessation workshops,
Fitness coaching,
Healthful food options in the break room and cafeteria, and
Runs, walks or other friendly competitive or charitable events.

It’s critical to thoroughly vet providers and engage only those that are skilled and qualified. Neglecting to do so could mean that, even if you create and communicate a solid program, the initiative will likely fail once employees show up to participate and are disappointed in the experience.

Return on investment

Of course, there will be upfront and ongoing costs related to a wellness program. Contact us for help assessing these costs while designing or revising a program and tracking them over time. The ultimate sought-after return on investment of every wellness program is a healthier, more productive workforce and more affordable health care benefits.

If you’re contemplating selling your manufacturing business, be sure you understand the tax implications. The way that your business (as well as the transaction) is structured can impact your tax bill and, therefore, your net proceeds from the sale. Here are some issues to consider.

Stock sale vs. asset sale

If your business is a corporation (either an S corporation or a C corporation), deciding whether to structure the transaction as a stock sale or an asset sale may have a significant impact on its tax treatment. Generally, a stock sale is preferable from the seller’s perspective. That’s because when shareholders sell their stock, the profits generally are taxed at favorable long-term capital gain rates — currently a top rate of 20%, compared to a current top rate of 37% on ordinary income. In contrast, asset sales usually generate a combination of ordinary income and capital gains, depending on how the purchase price is allocated among the business’s various assets.

From the buyer’s perspective, on the other hand, an asset sale is usually the structure of choice. A buyer of stock generally inherits the corporation’s basis in its assets. If the corporation has already taken significant depreciation deductions on those assets, there may be little or no basis for the buyer to write off. But a buyer of assets generally receives a basis equal to the portion of the purchase price allocated to each asset, generating valuable tax write-offs.

Entity type

The seller’s form of business is another important consideration. If the seller is a C corporation, for example, a potential drawback of an asset sale is double taxation.

First, the business pays corporate tax on any gains from the sale. Then the shareholders are subject to a second tax when the sale proceeds are distributed to them as dividends. (Note: It may be possible to defer the second tax by having the corporation hold and invest the sale proceeds.) Double taxation isn’t an issue for stock sales. The buyer acquires the stock directly from the shareholders, so there’s no entity-level tax.

Double taxation usually isn’t a concern for S corporations. As pass-through entities, their income is taxed directly to shareholders at their individual tax rates. So, there’s no entity-level tax, even if the transaction is structured as an asset sale.

There’s a possible exception for a business that had previously been taxed as a C corporation but later elected S corporation status. Depending on how much time has passed, asset appreciation during the business’s time as a C corporation may be subject to two levels of tax.

Partnerships (including limited liability companies taxed as partnerships) don’t have stock, but it’s possible for the owners to sell their partnership or LLC membership interests to a buyer. It’s important for the sellers to understand, however, that this isn’t the same as selling stock for tax purposes. A sale of partnership or LLC interests is treated essentially as a sale of the underlying assets, typically resulting in a mix of ordinary income and capital gain to the sellers.

Allocation of the purchase price

When a transaction is structured as an asset sale, the allocation of the purchase price among various assets has significant tax implications for both buyer and seller. Often, the parties have conflicting interests, which can lead to intense negotiations on this issue. Keep in mind that the parties’ allocation of the purchase price isn’t binding on the IRS, though the IRS generally will respect the parties’ agreement so long as it bears a reasonable relationship to asset values.

Sellers generally prefer to allocate as much of the purchase price as possible to goodwill and other intangible assets that generate lower-taxed long-term capital gains. And they prefer to allocate as little as possible to equipment and other depreciable assets. Why? Because previous depreciation deductions taken on these assets are subject to “recapture” at ordinary income tax rates. Buyers, on the other hand, prefer to allocate as much of the price as possible to these assets because they can depreciate them quickly or in some cases claim 100% bonus depreciation in the first year.

Knowledge is power

To successfully negotiate the sale of your manufacturing business, it’s critical to understand all of the tax implications. Armed with this knowledge, you can assess the impact of various transaction structures and purchase price allocations on your net proceeds from the sale and potentially adjust the purchase price accordingly. We can help guide you through the sale of your business.