Deducting a Trust’s Charitable Donations

If you’re charitably inclined, it may be desirable to donate assets held in a trust. Why? Perhaps you’re not ready to let go of assets you hold individually. Or maybe the tax benefits of donating trust property would be more attractive than making an individual donation.

Before moving forward, it’s important to understand the differences, for tax purposes, between individual and trust donations and the circumstances under which donations by a trust are deductible.

Tax treatment of individual donations

Generally, you’re permitted to deduct charitable donations for income tax purposes only if you itemize. Itemized charitable deductions for cash gifts to public charities generally are limited to 50% of adjusted gross income (AGI), while cash gifts to private foundations are limited to 30% of AGI. Note that through 2025, the Tax Cuts and Jobs Act increased the limit for certain cash gifts to public charities to 60% of AGI.

Noncash donations to public charities generally are limited to 30% of AGI and 20% for donations to private foundations. If you donate appreciated long-term capital gain property to a public charity, you’re generally entitled to deduct its full fair market value. But with the exception of publicly traded stock, deductions for similar donations to private foundations are limited to your cost basis in the property.

Deductions for ordinary income property (including short-term capital gain property) are limited to your cost basis, regardless of the recipient.

Tax treatment of trust donations

The discussion that follows focuses on nongrantor trusts. Because grantor trusts are essentially ignored for income tax purposes, charitable donations by such trusts are treated as if they were made directly by the grantor, subject to the rules applicable to individual donations. Also, this article doesn’t discuss trusts that are specifically designed for charitable purposes, such as charitable remainder trusts or charitable lead trusts.

Making charitable donations from a nongrantor trust may have several advantages over individual donations, including the ability to claim a charitable deduction even if you don’t itemize deductions on your individual income tax return. And a trust can deduct up to 100% of its gross taxable income, free of the AGI-based percentage limitations previously discussed.

In addition, trust deductions can be more valuable than individual deductions because the highest tax rates for trust income kick in at much lower income levels. If you’re contemplating a charitable donation from a trust, there are a few caveats to keep in mind:

The trust instrument must authorize charitable donations.
The donation must be made from (that is, traceable to) the trust’s gross taxable income. This includes donations of property acquired with such income, but not property that was contributed to the trust.
Unlike certain individual charitable donations, deductions for noncash donations by a trust generally are limited to the asset’s cost basis.

Special rules apply to trusts that own interests in partnerships or S corporations, as well as to certain older trusts (generally, those created on or before Oct. 9, 1969).

Make the most of charitable deductions

If income limits or restrictions on itemized deductions have hampered your ability to deduct charitable donations, consider making donations from a trust. We can help you determine if this is a tax-wise option for your situation.

Every business owner should establish strong policies, procedures and internal controls to prevent fraud. But don’t stop there. Also be prepared to act if indications arise that, despite your best efforts, wrongdoing has taken place at your company.

How you handle the evidence obtained could determine whether you’ll be able to prove the charges brought against the alleged perpetrator and win the case in court.

Protect the chain

Handling paper documents is relatively easy as long as you approach the task with care. Place any hard copies related to the possible fraud in a secure location. The fewer people who touch them, the better.

Don’t make notes on the relevant paper documents. Instead, write notations about when and where they were found, and how you preserved them, in a separate log. You can copy anything you need to continue operations and turn the originals over to your professional advisors or law enforcement for fingerprinting, handwriting analysis or other forensic testing.

Remember, a court case can be derailed if you don’t preserve the chain of evidence and can’t prove to a judge’s satisfaction that documents haven’t been tampered with.

Train IT staff

Digital evidence generally presents more challenges — especially if your IT staff isn’t trained to react to fraud incidents. Even if these employees are highly skilled at setting up and troubleshooting hardware and software, they’re unlikely to be fully aware of the legal ramifications of dealing with a computer or mobile device used to commit fraud.

To avoid the inadvertent destruction or alteration of evidence, arrange for specialized training that teaches IT employees to respond appropriately when fraud is suspected. They should be instructed to stop any routine data destruction immediately. If your system periodically deletes certain information, including emails, IT staff should suspend the process upon notification that something is amiss.

In many cases, it’s wise for businesses to engage a qualified computer forensics expert to assist in the investigation. These professionals can identify and restore:

Deleted and altered records,
Digital forgeries, and
Intentionally corrupted files.

They also can access many password-protected files and pinpoint unauthorized system access.

Act immediately

According to the Association of Certified Fraud Examiners’ “Occupational Fraud 2022: A Report to the Nations,” a typical scam goes on for 12 months before detection, and the median loss amounts to $112,000.

The message is clear: Fraud can have a severe financial impact on your business and take a long time to recover from. Be sure you’re ready to act immediately if evidence arises. Let us help you set up defenses against fraud and assist you in any investigations that come up.

My wife and I moved from Freeland to Alma in 2018, and we are both very passionate about childcare and supporting youth. We have three children, and my wife was an elementary school teacher before becoming a stay-at-home mom. After moving to Alma, we saw there was a need for more childcare and learning facilities. I also wanted to help give back to my new community, as I had been heavily involved, volunteering for many organizations in Saginaw.

Wilson at the Alma Office - Children Discovery Academy So, I decided to join the board of the Children’s Discovery Academy (CDA) and help further the organization. I was able to lend my financial background and expertise to the board. We navigated through the pandemic, partnered with some local businesses, and finally began accepting students. Today, class sizes at the center range from 15 to 25 kids per day.

It has been really special to be a part of the CDA. They provide a valuable service to our community, offering play-based learning and quality childcare in an area that really needed it.

I give back because I want to help offer affordable, quality childcare to members of my community.

For the ninth consecutive year, Yeo & Yeo has been selected as one of Michigan’s Best and Brightest in Wellness. The program highlights companies and organizations that promote a culture of wellness, as well as those that plan, implement and evaluate efforts in employee wellness.

“Investing in the overall health of our employees is something we take pride in,” said Dave Youngstrom, President & CEO of Yeo & Yeo. “We are honored to receive recognition for our longstanding commitment to enabling our staff to live a healthier lifestyle at home and in the workplace.”

Yeo & Yeo supports wellness for its employees by paying a large portion of health care premiums, helping to keep costs low for employees. The firm has a high percentage of participation in its wellness plan and health care premium reduction incentive. The firm offers free health screenings for health care participants and flu shots at no cost. An Employee Assistance Program provides confidential guidance and resources designed to support work‐life balance. Yeo & Yeo also offers an Ergonomic Standing Desk option for employees for a healthier work environment.

Criteria for selection included wellness programs and policies, culture and awareness, leadership, participation and incentives, communication and measurement, among others.

Yeo & Yeo and the other winning companies will be honored at the Best and Brightest Virtual Award Celebration on November 9.

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.

Monday, October 3

The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Monday, October 17

If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2021 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2021 to certain employer-sponsored retirement plans.

Monday, October 31

Report income tax withholding and FICA taxes for third quarter 2022 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Thursday, November 10

Report income tax withholding and FICA taxes for third quarter 2022 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Thursday, December 15

If a calendar-year C corporation, pay the fourth installment of 2022 estimated income taxes.

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

Your CPA offers a wide menu of services. One flexible offering, known as an “agreed-upon procedures” engagement, provides limited assurance on a specific aspect of an organization’s financial or nonfinancial information.

What’s covered?

Agreed-upon procedures can cover various items. For example, a CPA could perform procedures related to the reliability of a company’s accounts receivable, the validity of the sales team’s credit card payments, the effectiveness of the controls for the security of a system and even greenhouse gas emissions.

Lenders may request these types of engagements before they’ll approve a new loan application or an extension of credit for an existing customer — or they might want one if a borrower defaults on its loan covenants or payments. These engagements can also be useful in M&A due diligence, by franchisors or when a business owner suspects an employee of misrepresenting financial results.

Stakeholders don’t necessarily like waiting until year end to see how an organization is faring in today’s uncertain markets. Agreed-upon procedures can be done at any time, so they can provide much-needed peace of mind throughout the year.

What’s reported?

These engagements are based on procedures similar to an audit, but on a limited scale. When performing agreed-on procedures, CPAs issue no formal opinions; they simply act as fact finders. The report lists:

The procedures performed, and
The CPA’s findings.

Agreed-upon procedures can be relied on by third parties. But it’s the user’s responsibility to draw conclusions based on the findings.

What’s new?

Agreed-upon procedures are usually a one-time engagement, so you might not know much about them — or how the rules that apply to them changed a few years ago. A revised standard was published in 2019, bringing several key changes. Most notably, an accountant is now allowed to report on a subject matter without obtaining a written assertion from the responsible party that the responsible party complies with an underlying criterion, such as laws or regulations. This gives CPAs more flexibility when examining or reviewing certain documents if the engaging party can’t appropriately measure or evaluate them.

The revised standard also:

Enables CPAs to develop procedures over the course of the engagement,
Allows CPAs to develop or assist in developing the procedures,
Removes the requirement for intended users to take responsibility for the sufficiency of the procedures and, instead, requires the engaging party to simply acknowledge the appropriateness of the procedures before the issuance of the practitioner’s report, and
Permits the CPA to issue a general-use report.

The new guidance went into effect for reports dated on or after July 15, 2021, although early implementation was permitted.

Contact us

In today’s uncertain marketplace, agreed-upon procedures can provide much-needed peace of mind throughout the year. We can help you customize procedures that fit the needs of your organization and its stakeholders.

The term “probate” is one you’ve probably heard and might associate with negative connotations. But you may not fully understand what it is. For some people, the term conjures images of lengthy delays waiting for wealth to be transferred as well as bitter disputes among family members. Others, because the probate process is open to the public, worry about their “dirty laundry” being aired out. The good news is that there are strategies you can employ to keep much or all of your estate out of probate.

Probate primer

Probate is predicated on state law, so the exact process varies from state to state. This has led to misconceptions about the length of probate. On average, the process takes six to nine months, but it can run longer for complex situations in certain states. Also, some states exempt small estates or provide a simplified process for surviving spouses.

In basic terms, probate is the process of settling an estate and passing legal title of ownership of assets to heirs. If the deceased person has a valid will, probate begins when the executor named in the will presents the document to the county courthouse. If there’s no will — in legal parlance, the deceased has died “intestate”— the court will appoint someone to administer the estate. Thereafter, this person becomes the estate’s legal representative.

The process

With that in mind, here’s how the process generally works. First, a petition is filed with the probate court, providing notice to the beneficiaries named in the deceased’s will. Typically, such notice is published in a local newspaper for the general public’s benefit. If someone wants to object to the petition, they can do so in court.

The executor takes an inventory of the deceased’s property, including securities, real estate and business interests. In some states, an appraisal of value may be required. Then the executor must provide notice to all known creditors. Generally, a creditor must stake a claim within a limited time specified under state law. The executor also determines which creditor claims are legitimate and then meets those obligations. He or she also pays any taxes and other debts that are owed by the estate.

Ownership of assets is then transferred to beneficiaries named in the will, following the waiting period allowed for creditors to file claims. If the deceased died intestate, state law governs the disposition of those assets. However, before any transfers take place, the executor must petition the court to distribute the assets as provided by will or state intestacy law.

Ways to avoid probate

Certain assets, such as an account held jointly or an IRA or bank account for which you’ve designated a beneficiary, are exempt from probate. But you also may be able to avoid the process with additional planning. The easiest way to do this is through the initial form of ownership or the use of a living trust.

In the case of joint ownership with rights of survivorship, you acquire the property with another party, such as your spouse. The property then automatically passes to the surviving joint tenant upon the death of the deceased joint tenant. This form of ownership typically is used when a married couple buys a home or other real estate.

A revocable living trust may be used to avoid probate and protect privacy. The assets are typically transferred to the trust during your lifetime and managed by a trustee that you designate.

Protect your privacy

The reason many people dread the word probate is the fact that it’s a public process. But by using the right strategies, you can protect your privacy while saving your family time, money and hardship. We can help you implement the right techniques.

At Yeo & Yeo, we take pride in creating an environment that challenges, supports and rewards our employees. We are family-focused, community-driven and relationship-oriented. And we love to see our employees grow and succeed.

We are honored to have been named one of the 2022 Metro Detroit’s Best and Brightest Companies to Work For for the eleventh consecutive year. The Best and Brightest programs identify, recognize and celebrate organizations that exemplify Better Business. Richer Lives. Stronger Communities.

Yeo & Yeo is proud of the environment we have created for our employees. We offer an award-winning CPA certification bonus program, gold standard benefits, and hybrid and remote work capabilities. Our Metro Detroit staff shared four reasons why our firm is such a great place to work:

Empowerment: “Everyone at Yeo & Yeo is given opportunities to pursue things they are passionate about. Whether it is receiving a new certification or specializing in a certain industry, firm leadership empowers us to gain experience in areas we are interested in.” – Zaher Basha, CPA, CM&AA, Senior Manager
Flexibility: “One of the things I appreciate about Yeo & Yeo is that the company recognizes that each employee is different and is willing to be flexible to accommodate each employee’s needs. We have opportunities to work from home or enjoy flexible schedules outside of the regular 9 to 5. We are encouraged to find a path within the company that works for us and what we want to accomplish.” – Erin Flannery, CPA, CFE, Manager
Fun: “Everyone is having fun while they work. It’s not just about getting the work done, it’s about building friendships and connections, and everyone genuinely enjoys what they do.” – Nicholas McFadden, Senior Accountant
People first: “The way we treat our people is what makes us different. We are a people-first firm. Everyone is very close-knit. We are like a family, and we really help each other on an individual level. – Tammy Moncrief, CPA, Managing Principal

What will your story be? Apply today to write the next chapter in your career.

Yeo & Yeo, a leading Michigan advisory firm, is pleased to announce that Kellen Riker, CPA, and Steven Treece, CPA, were recently named recipients of the 2022 Flint & Genesee Group’s 40 Under 40 award. The program recognizes individuals under age 40 who are exceptional leaders in their companies and communities.

“40 Under 40 recognizes rising professionals, entrepreneurs and influencers who are helping to shape the future of Genesee County,” said Flint & Genesee Group CEO Tim Herman. “The honorees represent a new generation of talented professionals who are working diligently to help make Flint & Genesee a great place to live, work and play.”

Kellen Riker is a senior accountant and a member of the firm’s Government Services Group. His areas of expertise include audits for governments, school districts, nonprofits and for-profit organizations. He serves as the Yeo & Yeo Foundation grant committee representative for the firm’s Flint office. Riker holds a Master of Business Administration in finance from the University of Michigan-Flint.

“Kellen has shown tremendous growth and leadership throughout his career at Yeo & Yeo,” said Jennifer Watkins, CPA, principal. “He is dedicated to the community. Serving as a member of the firm’s Foundation office grant committee, he has helped members of the Flint office give back to Voices for Children, Quality Living Systems, the YMCA of Greater Flint and other organizations. He is well deserving of the 40 Under 40 recognition and should be proud of all he has accomplished as a young professional.”

Steven Treece is a senior manager and 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. As a mentor, Treece hosts the firm’s internal monthly podcast, where he helps staff build their client service skills. Treece holds a Bachelor of Business Administration in accounting from the University of Michigan. Passionate about supporting the community, Treece serves on the board of the Rotary Club of Burton and volunteers for the Food Bank of Eastern Michigan and the Genesee County Habitat for Humanity.

“Steven’s inclusion in the 40 Under 40 is a tribute to his dedication to client service,” said Becky Millsap, CPA, managing principal of the Flint office. “He enjoys working with clients to help them solve complex issues, and he has been a great leader and mentor. He was recently promoted to senior manager, and I am excited to see how he will continue to grow and support the firm and the community.”

Read the Flint & Genesee Group’s AND magazine featuring all the 40 Under 40 honorees.

The Give-A-Kid Projects have always been a large part of our community in Holt and the surrounding communities. When people here donate items, instead of taking them to Goodwill or the Volunteers of America, they take things to Give-A-Kid. The organization does a lot to help kids in our area, and they have different projects for different needs, like give-a-kid a coat, a backpack, and a Christmas.

Amy J Give-A-Kid Last year, the Lansing office sponsored a family with three children for Give-A-Kid a Christmas who asked for beds to sleep on as their gift. Seeing that request broke all our hearts. We thought, “These are our kids – kids in our school district – and all they asked for was a bed.” That hit home for all of us.

So, we decided to pull out all the stops. As an office, we raised funds to purchase beds for each kid. Then, we bought items to go with their bedrooms like bedding, pillows, and toys. It felt good to come together to support these kids and their families, and we plan to continue to sponsor more kids for future Christmases.

I give because I want to support kids in our community.

Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability and estate planning advantages of separating real estate ownership from the business.

Tax implications

Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.

However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.

Protecting assets

Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.

The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.

Estate planning options

Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.

Handling the transaction

The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.

Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.

An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.

An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.

Proceed cautiously

Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.

According to Family Enterprise USA, 87% of U.S. companies are family businesses, which are responsible for 54% of gross domestic product or $7.7 trillion. Although family businesses are an economic pillar of strength, several studies have found that they’re more vulnerable to occupational fraud than other companies. Here’s what you need to know if you run a family business.

Loyalty can hamper prevention

Why might family businesses be more vulnerable to fraud than other companies? For one thing, prevention efforts can be hampered by loyalty and affection. One of the biggest obstacles to fraud prevention is simply not being able to acknowledge that someone in the family would be capable of initiating or overlooking unethical or illegal activities.

Like any other business, family enterprises must include a system of internal controls that make fraud difficult to perpetrate. It may be awkward to exercise authority over members of one’s own family, but someone needs to take charge if issues arise.

Outside advice is essential

Of course, the person in charge potentially could be the one defrauding the company. That’s why independent auditors and legal advisors are critical. Your family business should look outside its immediate circles of relatives and friends to retain professional advisors who can be objective when assessing the company. Audited financial statements from independent accountants, in particular, protect the business and its stakeholders.

If your company is large enough to have a board of directors, it should include at least one outsider who’s strong enough to tell you things you might not want to hear. In some extreme cases, members of all-family boards have been known to work together to bilk their companies. This becomes much more difficult to do if collusion requires an outsider to participate in illegal activities.

Action may be necessary

Another factor that makes preventing fraud in family businesses difficult is how they tend to handle fraud incidents. Even when legal action is an option, families rarely can bring themselves to pursue action against one of their own. Sometimes families choose to save the perpetrator from public scandal or punishment rather than maintain ethical professional standards. Most fraud perpetrators know that — and, indeed, count on it.

If you discover a family member is committing fraud within your business, ask a trusted attorney or CPA to explain to the perpetrator the illegality and possible consequences of the fraudulent actions. If such interventions don’t work, however, you may have no choice but to seek prosecution.

Remember your stakeholders

Not only can fraud be expensive and harm your family’s security, but there are also employees and other stakeholders to consider. To help prevent fraud and financial losses, set a strong example of high ethical standards and consult with professional advisors capable of casting an objective eye over your business’s operations.

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.