When Little Things Mean a Lot: Estate Planning for Personal Property

Personal items — which may have modest monetary value but significant sentimental value — may be more difficult to address in an estate plan than big-ticket items. Squabbling over these items may lead to emotionally charged disputes and even litigation. In some cases, the legal fees and court costs can eclipse the monetary value of the property itself.

Create a dialogue

There’s no reason to guess which personal items mean the most to your children and other family members. Create a dialogue to find out who wants what and to express your feelings about how you’d like to share your prized possessions.

Having these conversations can help you identify potential conflicts. After learning of any ongoing issues, work out acceptable compromises during your lifetime so that your loved ones don’t end up fighting over your property after your death.

Make specific bequests when possible

Some people have their beneficiaries choose the items they want or authorize their executors to distribute personal property as they see fit. For some families, this approach may work. But more often than not, it invites conflict.

Generally, the most effective strategy for avoiding costly disputes and litigation over personal property is to make specific bequests — in your will or revocable trust — to specific beneficiaries. For example, you might leave your art collection to your son and your jewelry to your daughter.

Specific bequests are particularly important if you wish to leave personal property to a nonfamily member, such as a caregiver. The best way to avoid a challenge from family members on grounds of undue influence or lack of testamentary capacity is to express your wishes in a valid will executed when you’re “of sound mind.”

If you use a revocable trust (sometimes referred to as a “living” trust), you must transfer ownership of personal property to the trust to ensure that the property is distributed according to the trust’s terms. The trust controls only the property you put into it. It’s also a good idea to have a “pour-over” will, which provides that any property you own at your death is transferred to your trust. Keep in mind, however, that property that passes through your will and pours into your trust generally must go through probate.

Prepare a memorandum

A more convenient solution than listing every gift of personal property in a will or trust is to write a personal property memorandum. In many states, a personal property memorandum is legally binding, provided it’s specifically referred to in your will and meets certain other requirements. You can change it or add to it at any time without the need to formally amend your will. Even if it’s not legally binding in your state, however, a personal property memorandum can be an effective tool for expressing your wishes and explaining the reasons for your gifts, which can go a long way toward avoiding disputes.

Steven Treece, CPA, was recently promoted to senior manager. Steven said about his promotion, “I’m excited and honored to receive this promotion. It means so much to me to be an integral part of a wonderful firm that continues to grow. I see a lot of potential for growth here with my career, and I am excited to see where the future takes me.”

Let’s learn about Steven and how his career has progressed since joining Yeo & Yeo.

Tell me about your career path.

I joined Yeo & Yeo in 2013. I had just received my bachelor’s degree in accounting from U of M, and I still had a couple more classes to take before sitting for my CPA exam. Everyone in the firm was very supportive, and I got a lot of hands-on experience with clients before taking the exam. Shortly after I passed, I received my first promotion, and I’ve been learning and gaining valuable expertise ever since. I’ve found that I really enjoy solving the tax problems that clients present. There is a great sense of accomplishment and pride when I can help a client who has questions or needs advice.

How has the firm supported your work-life presence?

The firm has been amazing in its support of my work-life balance. This is hands-down my favorite thing about our firm. My supervisors have never questioned any time off or sudden absences due to family events or emergencies. They always say, “Do what you need to do for your family, and let us know if there’s anything we can do to help.”

What makes being an accountant fun?

I really like the people I work with and everything we do together as an office and a firm. We go to golf outings, dinners, picnics, sporting events and holiday parties – there are a lot of opportunities to get to know your coworkers and have fun outside of work. I especially like that the firm allows our families to be involved and attend events as well. I think this makes our personal and working relationships even stronger.

Steven is a member of the firm’s Agribusiness Services Group. His areas of expertise include tax planning and preparation, payroll tax consulting and business advisory services. He holds a Bachelor of Business Administration in accounting from the University of Michigan. In the community, he serves on the board of the Rotary Club of Burton and is a committee chairperson for the Old Newsboys of Flint. He is based in the firm’s Flint office.

The Tax Cuts and Jobs Act (TCJA) significantly boosted the potential value of bonus depreciation for taxpayers — but only for a limited duration. The amount of first-year depreciation available as a so-called bonus will begin to drop from 100% after 2022, and businesses should plan accordingly.

Bonus depreciation in a nutshell

Bonus depreciation has been available in varying amounts for some time. Immediately prior to the passage of the TCJA, for example, taxpayers generally could claim a depreciation deduction for 50% of the purchase price of qualified property in the first year — as opposed to deducting smaller amounts over the useful life of the property under the modified accelerated cost recovery system (MACRS).

The TCJA expanded the deduction to 100% in the year qualified property is placed in service through 2022, with the amount dropping each subsequent year by 20%, until bonus depreciation sunsets in 2027, unless Congress acts to extend it. Special rules apply to property with longer recovery periods.

Businesses can take advantage of the deduction by purchasing, among other things, property with a useful life of 20 years or less. That includes computer systems, software, certain vehicles, machinery, equipment and office furniture.

Both new and used property can qualify. Used property generally qualifies if it wasn’t:

Used by the taxpayer or a predecessor before acquiring it,
Acquired from a related party, and
Acquired as part of a tax-free transaction.

Qualified improvement property (generally, interior improvements to nonresidential property, excluding elevators, escalators, interior structural framework and building expansion) also qualify for bonus depreciation. A drafting error in the TCJA indicated otherwise, but the CARES Act, enacted in 2020, retroactively made such property eligible for bonus depreciation. Taxpayers that placed qualified improvement property in service in 2018, 2019 or 2020 may, generally, now claim any related deductions not claimed then — subject to certain restrictions.

Buildings themselves aren’t eligible for bonus depreciation, with their useful life of 27.5 (residential) or 39 (commercial) years — but cost segregation studies can help businesses identify components that might be. These studies identify parts of real property that are actually tangible personal property. Such property has shorter depreciation recovery periods and therefore qualifies for bonus depreciation in the year placed in service.

The placed-in-service requirement is particularly critical for those wishing to claim 100% bonus depreciation before the maximum deduction amount falls to 80% in 2023. With the continuing shipping delays and shortages in labor, materials and supplies, taxpayers should place their orders promptly to increase the odds of being able to deploy qualifying property in their businesses before year-end.

Note, too, that bonus depreciation is automatically applied by the IRS unless a taxpayer opts out. Elections apply to all qualified property in the same class of property that is placed in service in the same tax year (for example, all five-year MACRS property).

Bonus depreciation vs. Section 179 expensing

Taxpayers sometimes confuse bonus depreciation with Sec. 179 expensing. The two tax breaks are similar, but distinct.

Like bonus deprecation, Sec. 179 allows a taxpayer to deduct 100% of the purchase price of new and used eligible assets. Eligible assets include software, computer and office equipment, certain vehicles and machinery, as well as qualified improvement property.

But Sec. 179 is subject to some limits that don’t apply to bonus depreciation. For example, the maximum allowable deduction for 2022 is $1.08 million.

In addition, the deduction is intended to benefit small- and medium-sized businesses so it begins phasing out on a dollar-for-dollar basis when qualifying property purchases exceed $2.7 million. In other words, the deduction isn’t available if the cost of Sec. 179 property placed in service this year is $3.78 million or more.

The Sec. 179 deduction also is limited by the amount of a business’s taxable income; applying the deduction can’t create a loss for the business. Any cost not deductible in the first year can be carried over to the next year for an unlimited number of years. Such carried-over costs must be deducted according to age — for example, costs carried over from 2019 must be deducted before those carried over from 2020.

Alternatively, the business can claim the excess as bonus depreciation in the first year. For example, say you purchase machinery that costs $20,000 but, exclusive of that amount, have only $15,000 in income for the year it’s placed in service. Presuming you’re otherwise eligible, you can deduct $15,000 under Sec. 179 and the remaining $5,000 as bonus depreciation.

Also in contrast to bonus depreciation, the Sec. 179 deduction isn’t automatic. You must claim it on a property-by-property basis.

Some caveats

At first glance, bonus depreciation can seem like a no-brainer. However, it’s not necessarily advisable in every situation.

For example, taxpayers who claim the qualified business income (QBI) deduction for pass-through businesses could find that bonus depreciation backfires. The amount of your QBI deduction is limited by your taxable income, and bonus depreciation will reduce this income. Like bonus depreciation, the QBI deduction is scheduled to expire in 2026, so you might want to maximize it before then.

The QBI deduction isn’t the only tax break that depends on taxable income. Increasing your depreciation deduction also could affect the value of expiring net operating losses and charitable contribution and credit carryforwards.

And deduction acceleration strategies always should take into account tax bracket expectations going forward. The value of any deduction is higher when you’re subject to higher tax rates. Newer businesses that currently have relatively low incomes might prefer to spread out depreciation, for example. With bonus depreciation, though, you’ll also need to account for the coming declines in the maximum deduction amounts.

Buy now, decide later

If you plan on purchasing bonus depreciation qualifying property, it may be wise to do so and place it in service before year end to maximize your options. We can help you chart the most advantageous course of action based on your specific circumstances and the upcoming changes in tax law.

Nothing is certain but death and taxes. While this may apply to federal taxes, state taxes are a bit more uncertain. Manufacturers operating in more than one state may be subject to taxation in multiple states. But with proper planning, you can potentially lower your company’s state tax liability.

What is nexus?

The first question manufacturers should ask when it comes to facing taxation in another state is: Do we have nexus? Essentially, this term indicates a business presence in a state that’s substantial enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus depends on that state’s chosen criteria. Common triggers include:

Employing local workers,
Using a local telephone number,
Owning property in the state, and
Marketing products or services in the state.

Depending on state tax laws, nexus could also result from installing equipment, performing services, and providing training or warranty work in a state, either with your own workforce or by hiring others to perform the work on your behalf.

A minimal amount of business activity in a state probably won’t create tax liability there. For example, an original equipment manufacturer (OEM) that makes two tech calls a year across state lines probably won’t be taxed in that state. As with many tax issues, the totality of facts and circumstances will determine whether you have nexus in a state.

What is market-based sourcing?

If your manufacturing company licenses intangibles or provides after-market services to customers, you may need to consider market-based sourcing to determine state tax liabilities. Not all states have adopted this model, and states that have adopted it may have subtly different rules.

Here’s how it generally works: If the benefits of a service occur and will be used in another state, that state will tax the revenue gained from the service. “Service revenue” generally is defined as revenue from intangible assets — not the sales of tangible personal property. Thus, in market-based sourcing states, the destination of a service is the relevant taxation factor rather than the state in which the income-producing activity is performed (also known as the “cost-of-performance” method).

Essentially, these states are looking to claim a percentage of any service revenue arising from residents (customers) within their borders. But there’s a trade-off because market-based sourcing states sacrifice some in-state tax revenue because of lower apportionment figures. (Apportionment is a formula-based approach to allocating companies’ taxable revenue.) But these states feel that, even with the loss of some in-state tax revenue, they’ll see a net gain as their pool of taxable sales increases.

Is it time for a nexus study?

If your manufacturing company is considering operating in another state, you’ll need to look at more than logistics and market viability. A nexus study can provide insight into potential out-of-state taxes to which your business activities may expose you. Once all applicable income, sales and use, franchise, and property taxes are factored into your analysis, the effect on profits could be significant.

Bear in mind that the results of a nexus study may not be negative. If you operate primarily in a state with higher taxes, you may find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state by, say, setting up a small office there. We can help you understand state tax issues and provide a clearer picture of the potential tax impact of your manufacturing business crossing state lines.

James Edwards III, CPA, was recently promoted to senior manager. James said about his promotion, “I am proud of the accomplishment and grateful for my mentors in the firm who helped me along the way. I am excited to continue building my expertise, and I look forward to the next chapter of my career at Yeo & Yeo.”

Let’s learn about James and what makes his career meaningful and enjoyable.

Tell me about your career path.

Yeo & Yeo was my first professional job out of college. As I gained experience, the assignments became more challenging. Looking back, I realize that each new responsibility helped build my skill set to further assist others in the firm and advance my career. I had to learn a lot at first, and I worked hard to become effective at bookkeeping and tax preparation. Once I had enough knowledge, I could help train new staff accountants and began reviewing work, billing clients and developing a book of business of my own. I’ve enjoyed taking on new responsibilities and challenges throughout my time at Yeo & Yeo.

What advice would you give to an aspiring accountant progressing in their career?

All aspiring accountants should develop their communication skills. Working with clients, we interact with many individuals in various contexts every day. We need to provide understandable answers to complex client questions, update team members on project statuses, give feedback on staff performance and much more. If you can communicate effectively with clients and colleagues, it will open many doors as you progress in your career.

What makes being an accountant fun?

Working on different clients and assignments every day makes accounting fun. No two days are alike from a work standpoint. One day, I could be preparing a tax return, and the next, I could be helping a client with a new business endeavor. I really enjoy the work variety, interacting with clients and helping them maintain and grow their businesses.

James leads the firm’s Client Accounting Software Team and is a member of the Manufacturing Services Group. His areas of expertise include tax planning and preparation, and business advisory services with an emphasis on the manufacturing sector and for-profit entities. Edwards holds a Master of Science in accounting from Grand Valley State University. He is a 2021 Leadership A2Y graduate. In the community, he serves as treasurer of the Ann Arbor Track Club and is a member of the Ann Arbor Area Community Foundation Network of Professional Advisors. He is based in the firm’s Ann Arbor office.

A business or individual might be able to dispose of appreciated real property without being taxed on the gain by exchanging it rather than selling it. You can defer tax on your gain through a “like-kind” or Section 1031 exchange.

A like-kind exchange is a swap of real property held for investment or for productive use in your trade or business for like-kind investment real property or business real property. For these purposes, “like-kind” is very broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale. If you’re unsure whether the property involved in your exchange is eligible for a like-kind exchange, contact us to discuss the matter.

Here’s how the tax rules work

If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still have to report the exchange on a form that is attached to your tax return.

However, the properties often aren’t equal in value, so some cash or other (non-like-kind) property is thrown into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.

Here’s an example

Let’s say you exchange land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain: the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000, which is your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note: No matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.

If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to him or her giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Like-kind exchanges can be complex but they’re a good tax-deferred way to dispose of investment or trade or business assets. We can answer any additional questions you have or assist with the transaction.

What happens if two or more individuals in your organization collude to commit fraud? According to the Association of Certified Fraud Examiners’ (ACFE’s) 2022 Report to the Nations, fraud losses rise precipitously. The median loss for a scheme involving just one perpetrator is $57,000, but when two or more perpetrators are involved, the median loss skyrockets to $145,000. When three or more thieves work together, it soars to $219,000.

Unfortunately, collusion schemes are common — they make up approximately 58% of all fraud incidents. So these five steps are recommended:

Enforce internal controls. Colluding thieves usually either ignore internal controls or take steps to hide noncompliance. For example, a colluding manager might override controls to allow another employee to commit expense reimbursement or payroll fraud. To prevent such scenarios, ensure controls function as they were designed. If an employee fails to comply with a control, does it raise a red flag? Are controls regularly reviewed for compliance and efficacy?
Conduct surprise audits. When employees know unexpected audits are a possibility, they’re generally less likely to attempt fraud. Surprise audits focusing on your company’s vulnerabilities (such as inventory or cash-on-hand) should be conducted by outside fraud professionals. Keep the time and place confidential to only those who need to be in the loop. That way, a colluding manager is less likely to be able to warn fellow thieves or falsify an audit’s results.
Pay attention to relationships. Obviously, you want employees to get along and even be friends. But do any workplace relationships seem suspicious — for example, does a nonaccounting worker spend an unusual amount of time in an accounting staffer’s office with the door closed? Also scrutinize any employee relationship with a vendor that seems too chummy. When vetting vendors, ensure their personal information, such as addresses, don’t match those of any employees.
Monitor electronic communications. In partnership with your legal counsel, ensure you have the right to monitor employee communications, such as email or instant messages shared on your network. Investigate employees if their communications lapse into unintelligible code, appear unrelated to their primary roles or appear to violate your company’s policies and procedures.
Implement a job rotation program. When employees rotate positions, it’s harder for fraud perpetrators to hide criminal activity. If someone is resistant to participating in a job rotation plan, you might want to look closer at that employee’s work for red flags. Along the same lines, require everyone to take vacations. Employees who continually avoid time off or only want certain individuals to cover their work while they’re out generally deserve attention.

You can further impede criminally minded employees from working together by making all workers sign a code of conduct and by modeling ethical conduct. If you need help strengthening controls or suspect employees are colluding in fraud, contact us.

Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death. To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return (Form 706). The return is due nine months after death, with a six-month extension option.

Unfortunately, estates that aren’t otherwise required to file a return (typically because they don’t meet the filing threshold) often miss this deadline. The IRS recently revised its rules for obtaining an extension to elect portability beyond the original nine-months after death (plus six-month extension) timeframe.

What’s new?

In 2017, the IRS issued Revenue Procedure 2017-34, making it easier (and cheaper) for estates to obtain an extension of time to file a portability election. The procedure grants an automatic extension, provided:

The deceased was a U.S. citizen or resident,
The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline, and
The executor files a complete and properly prepared estate tax return within two years of the date of death.

Since the 2017 ruling, the IRS has had to issue numerous private letter rulings granting an extension of time to elect portability in situations where the deceased’s estate wasn’t required to file an estate tax return and the time for obtaining relief under the simplified method (two years of the date of death) had expired. According to the IRS, these requests placed a significant burden on the agency’s resources.

The IRS has now issued Revenue Procedure 2022-32. Under the new procedure, an extension request must be made on or before the fifth anniversary of the deceased’s death (an increase of three years). This method, which doesn’t require a user fee, should be used in lieu of the private letter ruling process. (The fee for requesting a private letter ruling from the IRS can cost hundreds or thousands of dollars.)

Don’t miss the revised deadline

If your spouse predeceases you and you’d benefit from portability, be sure that his or her estate files a portability election by the fifth anniversary of the date of death. Contact us with any questions you have regarding portability.

Your organization’s leadership team no doubt contains a wealth of experience, knowledge and bright ideas. But it might not have all the answers — and, more important, you and your fellow leaders could be unaware of one or more growing problems.

The good news is your employees may very well hold the operational improvement solutions you’re looking for — or don’t even realize you need. However, you might have to offer an incentive to get them to speak up.

Gaining insights

Here’s a fictitious example that illustrates the kinds of insights you could gain. Let’s say, in March, Employer X lost two major accounts. The sales manager blamed it on poor quality control. The production manager blamed it on an executive decision to switch to a cheaper supplier. Meanwhile, the marketing manager thought the company’s prices were too high compared with what competitors were charging.

Tired of the blame game, ownership decided to survey frontline workers and customer service reps about ways to improve customer retention. Sure enough, these employees had some practical suggestions based on their daily observations and interactions.

After carefully choosing, crafting and implementing several of the ideas, things got better. First, Employer X was able to eliminate multiple bottlenecks in production, streamlining its workflow without compromising quality control.

Also, after one employee mentioned having a good rapport with a vendor while at a previous job, the business contacted the supplier and ended up negotiating a long-term contract. The new deal involved receiving raw materials on a just-in-time basis, which lowered inventory costs and improved Employer X’s gross margin.

Perhaps most important, leadership received a fraud tip: A salesperson noted that a disgruntled former colleague had more than likely stolen customer lists on the way out and taken them to an unethical competitor. So, ownership contacted an attorney about investigating the breach and implemented stronger controls to better protect valuable proprietary data.

Offering cash incentives

How can you motivate your employees to speak up? Some employers have implemented cash reward programs to incentivize workers to come up with value-added suggestions. When putting together such an initiative, consider these guidelines:

State your strategic goals. You don’t want to be inundated with complaints. Clarify that you’re looking for ideas for meeting achievable objectives that add long-term value.

Establish measurable benchmarks. Tie rewards to financial results, such as cost savings or revenue growth. For example, if a suggestion saves the company $40,000, a 2% reward is $800.

Say thanks and recognize winners. Openly express your gratitude to everyone who contributes ideas. Emphasize that, even if you decided not to act on a suggestion, you gave it due consideration.

Announce the winners at a companywide meeting or awards ceremony. In addition, publish the names of winners and descriptions of their suggestions on your internal website or via a widely distributed email. Doing so demonstrates that the program is authentic and important to your organization.

Broaden your perspective

Whether a high-ranking executive or newly hired entry-level worker, everyone wants to have a voice and be heard. By encouraging employees to contribute improvement solutions, you’ll broaden your leadership team’s perspective, empower workers and better guard against unforeseen risks. Contact us for help assessing the cost-effectiveness of an operational improvement program.

Kyle Richardson, CPA, was recently promoted to manager. Kyle said about his promotion, “I am humbled at the opportunity for this next chapter of my career. I could not be where I am today without the team surrounding me. I appreciate my colleagues and the clients I get to serve. I am excited to continue being the best teammate and resource for our clients that I can be.”

Let’s learn about Kyle and the path that shaped his rewarding career.

Tell me about your career path.

I started at Yeo & Yeo in January 2018. I had a slightly different career path than most. Out of high school, I joined the active-duty Army. After serving four years, I went to college and entered public accounting here. During my time at Yeo, I have continued to use my life experiences to learn and grow as a public accountant.

You have been a key member of the firm’s Young Professionals group. How has that experience shaped your career?

I have been very fortunate to serve on the Yeo Young Professionals (YPs) since early in my career. It has allowed me to appreciate the hard work young professionals go through to progress. I feel young professionals are the workhorses of the business world, and I hope to be able to advocate for them well beyond my time as a young professional.

Our Young Professionals team is planning a firm-wide service project to support the ACS Making Strides this year. It’s great that the firm encourages and supports these types of efforts, and it’s a lot of fun for our YPs to work on something beyond their daily scope of work that is so impactful.

What advice would you give to an aspiring accountant progressing in their career?

The same advice I was given from someone I look up to – be a sponge. Absorb all the information and expertise from those around you. If you remain open-minded, you will continue learning new things daily.

What makes being an accountant fun?

I enjoy being able to problem-solve. As you progress through your career, you are faced with more challenging circumstances that require creative thinking to solve. It is truly enjoyable to look at a client’s needs and find multiple solutions to serve them.

Kyle is a member of the firm’s Yeo Young Professionals group and serves as the Yeo Young Professionals service chair for the Yeo & Yeo Foundation. He graduated from Walsh College, where he earned a Bachelor of Accountancy. His areas of specialization include business advisory services, and tax planning and preparation with an emphasis on trusts and estates. In the community, he volunteers for the American Cancer Society. He is based in the firm’s Auburn Hills office.

Like a slowly gathering storm, inflation has gone from dark clouds on the horizon to a noticeable downpour on both the U.S. and global economies. Is it time for business owners to panic?

Not at all. As of this writing, a full-blown recession is possible but not an absolute certainty. And the impact of inflation itself will vary depending on your industry and the financial strength of your company. Here are some important points to keep in mind during this difficult time.

Government response

For starters, don’t expect any dramatic moves by the federal government. Some smaller steps, however, have been taken.

For instance, the Federal Reserve has raised interest rates to “pump the brakes” on the U.S. economy. And the IRS recently announced an increase in the optional standard mileage rate tax deduction for the last six months of 2022 (July 1 through December 31). The rate for business travel is now 62.5 cents per mile — up from 58.5 cents per mile for the first half of 2022.

This is notable because the IRS usually adjusts mileage rates only once annually at year-end. The tax agency explained: “in recognition of recent gasoline price increases, [we’ve] made this special adjustment for the final months of 2022.”

Otherwise, major tax relief this year is highly unlikely. Some tax breaks are inflation-adjusted — for example, the Section 179 depreciation deduction. However, these amounts were calculated at the end of 2021, so they probably won’t keep up with 2022 inflation. What’s more, many other parts of the tax code aren’t indexed for inflation.

Strategic moves

So, what can you do? First, approach price increases thoughtfully. When inflation strikes, raising your prices might seem unavoidable. After all, if suppliers are charging you more, your profit margin narrows — and the risk of a cash flow crisis goes way up. Just be sure to adjust prices carefully with a close eye on the competition.

Second, take a hard look at your budget and see whether you can reduce or eliminate nonessential expenses. Inflationary times lead many business owners to try to run their companies as leanly as possible. In fact, if you can cut enough costs, you might not need to raise prices much, if at all — a competitive advantage in today’s environment.

Last, consider the bold strategy of taking a growth-oriented approach in response to inflation. That’s right; if you’re in a strong enough cash position, your business could increase its investments in marketing and production to generate more revenue and outpace price escalations. This is a “high risk, high reward” move, however.

Optimal moves

Again, the optimal moves for your company will depend on a multitude of factors related to your industry, size, mission and market. One thing’s for sure: Inflation to some degree is inevitable. Let’s hope it doesn’t get out of control. We can help you generate, organize and analyze the financial information you need to make sound business decisions.

Marc Roedel, CPA, was recently promoted to manager. Marc said about his promotion, “I’m very excited. I feel like I’ve found a home here at Yeo & Yeo. I love how our company provides quality service to our clients, and I look forward to continuing that in my new role.”

Let’s learn about Marc and his insights on a career in accounting.

Tell me about your career path.

I previously worked at another CPA firm as an auditor and bounced around from job to job with no rhyme or reason as to what industry my clients were in. While it gave me experience in many different areas, I wanted the opportunity to specialize more. I was at the point where I wanted to have a family and be home more rather than traveling. Accepting a position at Yeo & Yeo was one of the best decisions I’ve ever made. Here, I can work on projects I enjoy at an office only 15 minutes from home. I also can work from home and am given opportunities to specialize in industries I am interested in. This flexibility allows me to spend valuable time with my family while also working with clients on projects that I am passionate about.

How has the firm supported your work-life presence?

I’ve felt support at Yeo & Yeo from day one with work-life balance. People here really want you to take time off. It isn’t just words. My wife and I just had our second child, and I was able to take extended time off, something I didn’t think would be possible. Multiple people chipped in to help pick up some of my work so I could spend that time with my family. It is a great team atmosphere where we genuinely care about each other and the things happening in our lives outside of work.

What advice would you give to an aspiring accountant progressing in their career?

Soak up as much information as possible, go to client meetings with your superiors, and see how the partners talk with clients and approach different questions and situations. Also, be ready to learn as our profession is constantly changing.

Roedel

What makes being an accountant fun?

Accounting isn’t just looking at numbers. It is fun helping our clients with their needs and being their trusted, go-to advisors. Our consulting department also does a lot of fun activities throughout the year like outings and team-building events. We have a lot of fun together.

Marc holds a Master of Business Administration from the DeVos Graduate School of Management. His areas of expertise include business consulting, financial reporting and tax planning with an emphasis on the manufacturing and construction sectors. He is a member of the Home Builders Association of Saginaw. In the community, Marc serves as treasurer of the Great Lakes Bay Manufacturers Association and is a committee member for Messiah Lutheran Church. He is based in the firm’s Saginaw office.

The updated lease accounting standard is currently in effect for private companies. After several postponements during the pandemic, the Financial Accounting Standards Board (FASB) voted unanimously to move forward with the changes. That means private companies and private not-for-profit entities that follow U.S. Generally Accepted Accounting Principles (GAAP) must adopt the new standard for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Surprisingly, some organizations still haven’t completed the implementation process, however. (Note: The updated accounting rules for long-term leases took effect for public companies in 2019.)

In a nutshell

Under the updated guidance, organizations must report both operating and finance leases on their balance sheets (with the exception of short-term leases with terms of 12 months or less). Previously, operating leases didn’t have to be recorded on the balance sheet.

This means lessees must now record a “right-to-use” asset and a corresponding liability for lease payments over the expected term. Generally, the asset and liability are based on the present value of minimum payments expected to be made under the lease, with certain adjustments. The updated guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows related to leases.

How will these changes affect your organization’s financial statements? The effects vary, but if you have significant operating leases for buildings, equipment, vehicles, technology and other assets, adopting the updated standard will immediately increase your company’s assets and liabilities, making it appear to be more leveraged than before. This can cause technical violations of loan covenants that limit your debt or require you to maintain certain debt ratios. You might want to forewarn your lenders if you expect major changes to your year-end financial results under the updated guidance.

A major undertaking

Based on our experiences with organizations that have already implemented the updated lease standard, the biggest challenge will be to locate all of your leases and extract the data necessary. Leases generally aren’t standardized, so reviewing them and gathering the required data — including lease terms, payment schedules, end-of-term options and incentives — can be a time-consuming, manual task.

Another challenge will be identifying leasing arrangements that must be accounted for under the updated standard but aren’t found in traditional lease agreements. If an agreement gives you the right to control an identified asset for a period of time in exchange for payment, then it may be considered a lease under the updated guidance. For example, leases may be “embedded” in service, supply, transportation or information technology agreements. With embedded leases, you’ll need to separate the contract’s lease and nonlease components for reporting purposes.

Leverage external resources

Organizations with significant leasing arrangements might want to consider purchasing lease accounting software to automate the process of managing and tracking their leases and calculating their lease-related assets and liabilities. If you haven’t yet started the implementation process, we can help you evaluate software options and get your accounting records and systems up to speed. Contact us for more information.

If you’re approaching retirement or have already retired, one of the biggest challenges is balancing the need to maintain your standard of living with your desire to preserve as much wealth as possible for your loved ones. This balance can be difficult to achieve, especially when retirement can last decades. One strategy to consider is the split annuity, which creates a current income stream while preserving wealth for the future.

ABCs of an annuity

An annuity is a tax-advantaged investment contract, usually with an insurance company or other financial services provider. You pay either a lump sum or annual premiums, and in exchange, the provider makes periodic payments to you for a term of years or for life.

For purposes of the split annuity strategy discussed below, we’ll focus on “fixed” annuities, which generally provide a guaranteed minimum rate of return. Other types of annuities include “variable” and “equity-indexed,” which may offer greater upside potential but also involve greater risk.

Annuities can be immediate or deferred. As the names suggest, with an immediate annuity, payouts begin right away, while a deferred annuity is designed to begin payouts at a specified date in the future.

From a tax perspective, annuity earnings are tax-deferred — that is, they grow tax-free until they’re paid out or withdrawn. A portion of each payment is subject to ordinary income tax, and a portion is treated as a tax-free return of principal (premiums). The ability to accumulate earnings on a tax-deferred basis allows deferred annuities to grow more quickly than comparable taxable accounts, which helps make up for their usually modest interest rates.

Annuities offer some flexibility to withdraw or reallocate the funds should your circumstances change. But keep in mind that — depending on how much you withdraw and when — you may be subject to surrender or early withdrawal charges.

Split annuity strategy

A split annuity may sound like a single product, but in fact it simply refers to two (or more) annuities, usually funded with a single investment. In a typical split annuity strategy, you use a portion of the funds to purchase an immediate annuity that makes fixed payments to you for a specified term (10 years, for example). The remaining funds are applied to a deferred annuity that begins paying out at the end of the initial annuity period.

Ideally, at the end of the immediate annuity term, the deferred annuity will have accumulated enough earnings so that its value is equal to your original investment. In other words, if the split annuity is designed properly, you’ll enjoy a fixed income stream for a term of years while preserving your principal.

At the end of the term, you can reevaluate your options. For example, you might start receiving payments from the deferred annuity, withdraw some or all its cash value, or reinvest the funds in another split annuity or another investment vehicle.

If you’re interested in learning more about a split annuity, please contact us. We’d be pleased to help you determine if this strategy is right for your situation.

Under IRS regulations regarding electronic consents and elections, if a signature must be witnessed by a retirement plan representative or notary public, it must be witnessed “in the physical presence” of the representative or notary — unless guidance has provided an alternative procedure.

Recently, in Notice 2022-27, the IRS extended, through the end of 2022, its temporary relief from the physical presence requirement. This is good news for businesses that sponsor a qualified retirement plan.

Requirements for relief

The physical presence requirement is imposed under IRS regulations regarding electronic consents and elections for certain retirement plans — including 401(k) plans. Originally granted in the early days of the COVID-19 pandemic, the relief initially applied for 2020 and has been extended twice since then, most recently through June 30, 2022.

As set forth in the IRS notice granting the original relief, the physical presence requirement is deemed satisfied for signatures witnessed by a notary public if the electronic system for remote notarization:

Uses live audio-video technology, and
Is consistent with state law requirements for a notary public.

For signatures witnessed remotely by a plan representative, the physical presence requirement is deemed satisfied if the electronic system uses live audio-video technology and meets four requirements:

Live presentation of photo ID,
Direct interaction,
Same-day transmission, and
A signed acknowledgement by the representative.

The relief has now been extended through December 31, 2022, subject to the same conditions. According to the IRS, a further extension of the relief beyond the end of 2022 isn’t expected to be necessary. The tax agency is currently reviewing comments received in connection with the initial relief and subsequent extensions to determine whether to retain or permanently modify the physical presence requirement. Any modification would be proposed through the regulatory process, which would include the opportunity for further comment.

An appreciable move

Given that the return to in-person business interactions has happened in fits and starts, this extension is likely to be appreciated by employers that sponsor retirement plans and their participants. Although many 401(k) plans are designed to limit or eliminate the need for spousal consents, those that offer annuity forms of distribution are subject to the spousal consent rules. And some 401(k) plans must require spousal consent if a married participant wants to name a non-spouse as primary beneficiary. Contact us for more information.

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of four professionals.

James Edwards III, CPA, has been promoted to Senior Manager. Edwards leads the firm’s Client Accounting Software Team and is a member of the Manufacturing Services Group. His areas of expertise include tax planning and preparation and business advisory services with an emphasis on the manufacturing sector and for-profit entities. Edwards holds a Master of Science in Accounting from Grand Valley State University. He is a 2021 Leadership A2Y graduate. In the community, he serves as treasurer of the Ann Arbor Track Club and is a member of the Ann Arbor Area Community Foundation Network of Professional Advisors. He is based in the firm’s Ann Arbor office.

Steven Treece, CPA, has been promoted to Senior Manager. He is a member of the firm’s Agribusiness Services Group. His areas of expertise include tax planning and preparation, payroll tax consulting and business advisory services. Treece holds a Bachelor of Business Administration in Accounting from the University of Michigan. In the community, he serves on the board of the Rotary Club of Burton and is a committee chairperson for the Old Newsboys of Flint. He is based in the firm’s Flint office.

Kyle Richardson, CPA, has been promoted to Manager. He is a member of the firm’s Yeo Young Professionals Group and serves as the Yeo Young Professionals Service Chair for the Yeo & Yeo Foundation. He graduated from Walsh College, where he earned a Bachelor of Accountancy. His areas of specialization include business advisory services, and tax planning and preparation with an emphasis on trusts and estates. In the community, he volunteers for the American Cancer Society. He is based in the firm’s Auburn Hills office.

Marc Roedel, CPA, has been promoted to Manager. He holds a Master of Business Administration from the DeVos Graduate School of Management. His areas of expertise include business consulting, financial reporting and tax planning with an emphasis on the manufacturing and construction sectors. He is a member of the Home Builders Association of Saginaw. In the community, Roedel serves as treasurer of the Great Lakes Bay Manufacturers Association and as a committee member for Messiah Lutheran Church. He is based in the firm’s Saginaw office.

Although merger and acquisition activity has been down in 2022, according to various reports, there are still companies being bought and sold. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. assets

From a tax standpoint, 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. Reasons: The corporation will pay less tax and generate more after-tax income than it would have years ago. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

Under current law, individual federal tax rates are reduced from years ago and may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.

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.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask your tax advisor for details.

What buyers and sellers want

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective 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 the deal closes.

A buyer can step up (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.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main 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 business 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).

Keep in mind that other issues, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Get professional advice

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed in your situation.

Fraud risk assessments have been shown to prevent occupational fraud and limit losses for victimized organizations. These tools have become more prevalent in recent years, according to “Occupational Fraud 2022: A Report to the Nations” published by the Association of Certified Fraud Examiners (ACFE). But although almost 50% of businesses perform fraud assessments, many owners and managers may be unaware of the value of these procedures and how the assessment process works.

When and why?

Fraud risk assessments generally are conducted by internal auditors, either on a standalone basis or as part of a comprehensive enterprise risk management program. You may want to conduct assessments annually or whenever there have been major organizational changes or disruptions.

The COVID-19 pandemic, when many businesses closed temporarily and many employees started working from home, may provide the impetus to conduct a fresh fraud risk assessment. For example, workers could have used unsecured Wi-Fi connections to log in to your network while working from home, your accounting department may have temporarily stopped rotating duties or employees tasked with overseeing certain antifraud activities may have left your organization.

Getting started

Typically, a fraud risk assessment starts in the areas where fraud is most likely to happen — such as accounts payable, purchasing and IT. But it’s important not to stop there. If you close a door in only one department, those bent on fraud will find openings elsewhere.

You must review your organization’s internal controls in the same way a dishonest employee would — as opportunities that pose relatively little risk of exposure. Employees might exploit weak internal controls via:

Fraudulent financial reporting, such as improper revenue recognition and overstatement of assets,
Misappropriation of assets, including embezzlement or theft,
Improper expenditures, such as bribes, and
Fraudulently obtained revenue and assets, including tax fraud.

Some schemes, such as payroll or purchasing fraud, can involve external people in addition to employees. Fraud may be limited or widespread and affect everything from individual accounts to entity-wide processes. So your business’s controls should address all levels — including owners and executives — every department and all types of fraud.

Digging in

Interviewing key executives and managers is critical. They’ll provide you with a first glimpse of potential risk areas. Perhaps more important, these conversations will help you judge whether company leaders are setting the ethical “tone at the top” that’s integral to fraud prevention.

Next, identify the number and names of employees who handle or review accounting functions. How many, for example, reconcile bank statements or are authorized to make bank deposits? Spreading accounting and banking duties across multiple employees — or shouldering some of the review processes yourself — provides segregation and oversight that are essential to deterring fraud. If segregation of accounting duties was suspended during the COVID-19 lockdown and never reinstated, make sure you activate it immediately. A combination of job rotation and mandatory vacation has been shown to reduce fraud losses in victimized organizations by 54%, making it the most effective antifraud control.

Also consider your company’s key performance indicators. Fraud risks, for example, can show up in the performance of sales goals or in inventory management. And review antifraud spending. Compliance training, internal controls monitoring and ongoing risk reviews should be included in your business’s budget.

Too important

The final step is to adjust your controls (and, possibly, introduce new ones) to address any fraud risks you’ve discovered. What if your small business doesn’t have the internal resources to conduct a fraud risk assessment? (Only 17% of businesses with fewer than 100 employees perform risk assessments.) If so, engage a professional fraud expert to do the job. It’s too important a tool to leave in the box.

The labor shortage in the manufacturing sector has been well documented. As of October 2021, the number of workers in the industry had declined by almost 400,000 from pre-pandemic levels. According to the National Association of Manufacturers, nearly 2.1 million manufacturing jobs could be open by 2030.

Will this worker shortage adversely affect your manufacturing company, or has it already done so? You don’t have to sit idly by while the labor gap continues to grow. One way to entice more workers is by offering an impressive slate of employee benefits. Doing so can help you attract and retain top talent.

Enhance your employee benefits package

Compensation has always been vital to virtually any job offer, and that hasn’t changed. But increasingly, job candidates are focusing on employee benefits that may be available to them.

Notably, certain employee benefits are tax-exempt to participating employees, making them particularly attractive. This includes, but isn’t limited to, the following benefits that could convince an applicant to come on board:

Health insurance. The premiums paid by an employer under a health insurance plan are tax-free to employees — and deductible by the employer — if the plan is open to all eligible workers. Similarly, employer reimbursements for medical expenses generally are tax-free to employees as are contributions to Health Savings Accounts.

Qualified retirement plans. Like health insurance, this is a major employee benefit that often makes or breaks a job offer. Generally, the benefits provided under qualified plans, like a 401(k) plan, are currently exempt from tax and can grow without any tax erosion until withdrawals are made. Contributions are subject to generous annual limits, including potential matching contributions to a 401(k) plan by an employer. But strict nondiscrimination requirements must be met.

Group-term life insurance. This is a prized perk for workers in the manufacturing field even though there’s a tax price attached to “excess” coverage. Only the first $50,000 of coverage under a group-term life insurance plan is tax-free. For instance, if a worker earning $80,000 is covered at three times his or her annual pay, the employee owes tax on $190,000 of coverage ($240,000 − $50,000). The tax, which is computed using an IRS table based on the insured’s age, is generally relatively small.

Dependent care assistance plans. The first $5,000 of dependent care assistance paid by an employer under a written plan is tax-free to employees. To qualify, the dependent must be under age 13, physically or mentally unable to care for him- or herself, or a spouse who’s physically or mentally incapable of self-care. The amount of the exclusion can’t exceed the earned income of a single employee or the earned income of the lower-paid spouse if the employee is married.

Educational assistance plans. A company can provide tax-free payments of up to $5,250 annually for college or grad school tuition, books, fees, and supplies under an educational assistance plan. The courses covered under the plan don’t have to be related to the job.

Employee discounts. A manufacturing company can provide tax-free discounts to employees on its products. Note that the discount percentage can’t exceed the gross profit percentage of the price at which the product is offered to regular customers.

Build a positive corporate culture

Last, but not least, strive to create a work environment that makes a favorable first (and lasting) impression. Employees spend a lot of time on the job and you want them to feel at ease among coworkers and supervisors alike. Project a positive attitude that will carry over to others. Conversely, a toxic workplace could lead to even more turnover and early retirements.

If your manufacturing company is currently hiring, take the time to review your employee benefits package. We can help explain the tax consequences of various options if you’d like to expand your offerings.

Here’s a not-so-fun fact: The generation-skipping transfer (GST) tax is among the harshest and most complex in the tax code. So, if you’re planning to share some of your wealth with your grandchildren or great grandchildren — or if your estate plan is likely to benefit these generations — it’s critical to consider and plan for the GST tax.

GST tax explained

The GST tax is a flat, 40% tax on transfers to “skip persons,” including grandchildren, family members more than a generation below you, nonfamily members more than 37½ years younger than you and certain trusts (if all of their beneficiaries are skip persons). GST tax applies to gifts or bequests directly to a skip person (a “direct skip”) and to certain transfers by trusts to skip persons. Gifts that fall within the annual gift tax exclusion (currently, $16,000 per recipient; $32,000 for gifts split by married couples), either outright or to qualifying “direct skip trusts,” are shielded from GST tax.

Why GST tax can be confusing

Even though the GST tax enjoys an annual inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption (currently, $12.06 million), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

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

Nonetheless, the automatic allocation rules generally work well, ensuring that your exemption is allocated in the most tax-advantageous manner. But, as mentioned, in some cases, they can lead to undesirable results. For example, suppose you establish a trust for your children, with the remainder passing to your grandchildren. You assume the automatic allocation rules will shield the trust from GST tax. But the trust gives one of your children a general power of appointment over 50% of the trust assets, disqualifying it from GST trust status. Unless you affirmatively allocate your exemption to the trust, distributions or other transfers to your grandchildren will be subject to GST tax.

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