Does Your Trust Provide for the Removal of a Trustee?

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

Defining “cause”

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

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

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

Adding successor trustees

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

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

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

Broad relief for late taxpayers

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

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

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

Potentially eligible forms include:

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

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

Exceptions to the rule

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

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

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

No action required

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

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

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

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

Funding initiatives

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

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

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

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

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

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

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

Manufacturing tax credit

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

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

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

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

Guidance incoming

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

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

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

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

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

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

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

A payroll tax credit for research

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

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

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

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

Extension of the limit on excess business losses of noncorporate taxpayers

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

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

We can help

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

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

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

What is a POA?

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

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

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

Who should you name as POA?

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

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

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

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

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

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

Final thoughts

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

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

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

Not a buyout

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

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

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

Mandatory valuations

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

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

Costs and entity choice

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

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

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

A popular choice

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BetaNews has the full story.

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

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

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

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

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

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

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

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

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

Simplicity and clarity

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

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

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

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

Carefully chosen providers

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

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

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

Return on investment

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

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

Stock sale vs. asset sale

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

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

Entity type

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

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

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

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

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

Allocation of the purchase price

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

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

Knowledge is power

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

Many financial companies search for negative news, also known as “adverse media,” as part of their due diligence process for potential customers. But this type of screening isn’t only effective for banks. Any company can use adverse media to scrutinize customers, vendors and business partners. Screening these subjects can help uncover issues — such as accusations of fraud or litigation for nonpayment — that could negatively affect a business relationship.

4 steps

Given the vast amount of data available online, conducting adverse media screening requires a methodical approach. Consider taking these steps:

Develop a policy. To ensure that your organization’s use of adverse media screening meets your needs without creating legal risk, draft a policy governing its usage. Make sure that your legal team reviews the policy, including the sources you plan to access and how you plan to use any negative information in business decisions.
Create categories. Adverse media can cover a broad range of activities. So classify items using consistent categories, such as civil proceedings, criminal misconduct, environmental violations, regulatory scrutiny and financial crime. This will help your organization focus its due diligence efforts and will make it easier to quickly analyze news stories.
Exercise caution. To generate traffic, some news outlets do little to verify the accuracy of their stories. So it’s important to rely on media outlets with high ethical standards. If in doubt about the accuracy of a story on social media, for example, look for verification in reputable, professional publications.
Automate the process. Technology can minimize the administrative burden placed on individuals or teams conducting adverse media screening. Instead of relying on manual labor to gather relevant news, apps can scan and categorize news coverage for analysts to review. Automation can also make it easier to conduct ongoing due diligence.

Mitigating risks

To mitigate risks to your business’s reputation, prevent potential fraud and avoid other forms of misconduct and controversy, you should scrutinize the background of all prospective business partners. Adverse media screening is, of course, only one element of the due diligence process. You may also need to review such documents as credit reports, references and court filings to assess a potential business partner. Contact us for more tips for preventing fraud.

Update: On August 16, 2022, President Biden signed the Inflation Reduction Act into law.

The U.S. Senate and House of Representatives have passed the Inflation Reduction Act (IRA). President Biden is expected to sign the bill into law shortly. The IRA includes significant provisions related to climate change, health care, and, of course, taxes. The IRA also addresses the federal budget deficit. According to the Congressional Budget Office (CBO), the IRA is projected to reduce the deficit by around $90 billion over the next 10 years.

Although the IRA falls far short of Biden’s originally proposed $2 trillion Build Back Better Act, the $430 billion package nonetheless is a sprawling piece of legislation bound to affect most Americans over time. Here’s an overview of some of what the bill includes.

Significant tax provisions

For starters, how is the federal government going to pay for all of it? Not surprisingly, new taxes are part of the equation (along with savings from, for example, lower drug prices). But the bill is designed to not raise taxes on small businesses or taxpayers earning less than $400,000 per year. Rather, wealthier targets are in the crosshairs.

The first target is U.S. corporations (other than S corporations) that have more than $1 billion in annual earnings over the previous three years. While the current corporate tax rate is 21%, it’s been well documented that many such companies pay little to no federal income tax, due in part to deductions and credits. The IRA imposes a corporate alternative minimum tax of 15% of financial statement income (also known as book income, as opposed to tax income) reduced by, among other things, depreciation and net operating losses. The new minimum tax is effective for tax years beginning after December 31, 2022.

As a result of last-minute negotiations, private equity firms and hedge funds are exempt from the minimum tax. They could have been covered by a provision that generally includes subsidiaries when determining annual earnings. The tradeoff is that the IRA now will extend the excess business loss limitation for certain businesses for two years.

Although the initial bill language also closed the so-called “carried interest” loophole that permits these interests to be taxed as long-term capital gains rather than ordinary income, the loophole ultimately survived. Democrats agreed to remove the provision closing it to secure the vote of Sen. Kyrsten Sinema (D-AZ) — but they added another tax to make up for the lost revenue. The IRA will now impose a 1% excise tax on the fair market value when corporations buy back their stock.

In a statement, Sinema said she would work with Sen. Mark Warner (D-VA) on separate legislation to enact carried interest tax reform. To do so outside of the budget reconciliation process, however, would require 60 votes in the Senate in addition to a majority of the House. With midterm elections in the fall, and control of both houses of Congress hanging in the balance, imminent action on that front seems unlikely.

The IRA also provides about $80 billion over 10 years to fund the IRS and improve its “tax enforcement activities” and technology. Notably, the IRS budget has been dramatically slashed in recent years, dropping by 20% in 2020, compared to 2010. The CBO estimates that the infusion of funds will allow the IRS to collect $203 billion over the next decade from corporations and wealthy individuals.

Climate and energy provisions

The IRA dedicates about $370 billion to combating climate change and boosting domestic energy production. It aims to reduce the country’s carbon emissions by 40% by 2030.

The legislation includes new, extended and increased tax credits intended to incentivize both businesses and individuals to boost their use of renewable energy. For example, the bill provides tax credits to private companies and public utilities to produce renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers that pay a prevailing wage also may qualify for tax credits.

Clean vehicle credit

The current tax credit for qualified plug-in electric vehicles has been significantly revised in the IRA. Currently, a taxpayer can claim a credit for each new qualified plug-in electric drive motor vehicle placed in service during the tax year. The maximum credit amount is $7,500. Certain vehicle requirements must be met.

The credit phases out beginning in the second calendar quarter after a manufacturer sells more than 200,000 plug-in electric drive motor vehicles for use in the U.S. after 2009. Under the IRA, the plug-in vehicle credit has been renamed the clean vehicle credit and the manufacturer limitation on the number of vehicles eligible for the credit has been eliminated after December 31, 2022.

The bill changes how the clean vehicle credit is calculated. Specifically, a vehicle must meet critical mineral and battery component requirements. There are also price and income limitations. The clean vehicle credit isn’t allowed for a vehicle with a manufacturer’s suggested retail price above $80,000 for vans, sport utility vehicles and pickups, and above $55,000 for other vehicles.

The clean vehicle credit isn’t allowed if a taxpayer’s modified adjusted gross income (MAGI) for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for heads of household.

The IRA also contains a tax credit for a used plug-in electric drive vehicle purchased after 2022. The tax credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. There are also price and income limitations.

Home energy improvements

Individual taxpayers can also receive tax breaks for home energy efficiency improvements, such as installing solar panels, energy-efficient water heaters, heat pumps and HVAC systems. And a “Clean Energy and Sustainability Accelerator” will use public and private funds to invest in clean energy technologies and infrastructure.

Health care provisions

The IRA allows Medicare to negotiate the price of prescription drugs and prohibits future administrations from refusing to negotiate. It also caps Medicare enrollees’ annual out-of-pocket drug costs at $2,000 and monthly insulin costs at $35 and provides them free vaccines. Additional provisions to rein in drug costs include a requirement that pharmaceutical companies that raise the prices on drugs purchased by Medicare faster than the rate of inflation rebate the difference back to the program.

The IRA also should reduce health care costs for Americans of all ages who obtain health insurance coverage from the federal Health Insurance Marketplace. It extends the expansion of subsidies — in the form of refundable premium tax credits — under the America Rescue Plan Act through 2025. These subsidies had been scheduled to expire at the end of 2022.

Much more to come

The IRA is a sweeping piece of legislation that affects many sectors of U.S. business, as well as most citizens. Additional information, guidance and regulations related to its numerous, far-reaching provisions are inevitable. We’ll keep you up to date on the developments that could affect your finances and federal tax liability.

As businesses and not-for-profit entities increasingly rely on technology, cyberthreats are becoming more sophisticated and aggressive. Auditors must factor these threats into their risk assessments. They can also help you draft cybersecurity disclosures and brainstorm ways to mitigate your risk of an attack.

Increasing risks

How much does a data breach cost? The average has reached an all-time high of $4.35 million, according to the newly released “Cost of a Data Breach Report 2022.” The report, published by independent research group Ponemon Institute, also found that 83% of respondents have experienced more than one data breach.

Another key finding is that the average cost of a data breach increased by roughly 13% during the pandemic. Why? One reason is the increase in remote working arrangements. Many organizations now have sensitive data stored in more places than ever before — including laptops, cloud-based storage, email, portals, mobile devices and flash drives — providing many potential areas for unauthorized access.

Ransomware attacks are also on the rise, in part due to geopolitical instability. According to the study, ransomware attacks were up 41% in 2022 compared to the previous year. These attacks cost organizations an average of $4.54 million per incident in 2022, excluding any ransom paid to the perpetrator. Ransomware attacks generally take longer to detect and contain than other types of data breaches.

Targeted data

Hackers may try to steal valuable information about your organization’s employees and customers. Examples include payment card data, protected health data and personal identifiable information, such as phone numbers, addresses and Social Security numbers.

Another target may be valuable intellectual property, such as customer lists, proprietary software, formulas, strategic business plans and financial data. These intangible assets may be sold or used by competitors to gain market share or competitive advantage.

Risk assessment

As the frequency and severity of cyberattacks have increased, data security has become a critical part of the audit risk assessment. In recent years, the Public Company Accounting Oversight Board (PCAOB) has interviewed auditors of companies that have experienced a cybersecurity breach.

These interviews reveal that audit firms provide varying levels of guidance, both when assessing risk at the start of the engagement and when uncovering a cybersecurity incident that occurred during the period under audit or during audit fieldwork. For example, auditors usually ask management what’s being done to understand, detect and prevent computer system breaches.

Another key finding of the PCAOB research is that the costs associated with cybersecurity breaches may not always be apparent. A major cybersecurity breach can cause more than lost profits; it may also result in a loss of customers, reputational damage and even bankruptcy.

We can help

Though PCAOB’s research focuses on public companies, any organization can be the victim of a cyberattack. And the effects may be even more devastating for those with fewer resources to absorb the losses and assign dedicated staff to respond to breaches. Our firm is atop the latest cybersecurity trends. Our auditors can help your organization assess its cyber risks and improve the effectiveness of internal controls over sensitive data. Contact us for more information.

Financial literacy is a passion of mine. From an early age, my parents taught me the value of saving and smart money management. Even though I got great advice, I wish I had listened a little closer. On National Financial Awareness Day, I want to share some tips on financial planning and what I’ve learned along the way.

You’re Never Too Young to Think About Retirement.

Many people, including myself, regret not saving for the future soon enough. Sometimes it is hard to set money aside when you are in a day-to-day grind. But if you save for the future today, that money will make your life better in the long run. If you start saving in your 20s, when you are in your 40s or 50s, you will have more freedom to live the life you want. Starting now makes a huge difference, even if it is just a little bit.

Have a Plan to Follow.

It’s important to ask yourself, “What is my financial plan? How does buying a house or starting a family impact my plan? When do I want to retire? How much should I have saved for emergencies?” Really consider these questions and have conversations with your spouse and family about your goals. Then, once you have a plan in place, stick to it.

Find a Trustworthy Advisor.

Even if you think you don’t have enough money or your situation isn’t complex enough, an advisor can be valuable when planning for retirement. A good advisor can help you find creative and effective ways to save money. The world is constantly changing, and tax rules are constantly evolving. Having an advisor who understands these changes and how they impact your goals can be a game changer.

Share Your Knowledge With Others.

As a parent, I tried to teach my kids as much as I could about finances. It can be through simple methods like teaching them to save money for things they want to buy. Or it can be more complex, like explaining budgets and showing them how to allocate their paycheck so that they are saving and setting aside money for important things. Remember, you can never start too early, and it is never too late.

Take the First Steps.

Taking the first steps in your financial planning journey is half the battle. Once you have a plan in place that aligns with your goals, you need to be disciplined to follow it and save money accordingly. It’s not always easy, but starting now will make the future brighter and better for you and your loved ones. There are many financial planning resources available to help get you started. Watch webinars, listen to podcasts, or read financial planners’ articles to learn best practices. Do what works best for you!

No one likes to contemplate his or her own mortality. But ignoring the need for an estate plan or procrastinating in the creation of one is asking for trouble. If you haven’t started the process, don’t delay any longer. For your estate plan to achieve your goals, avoid these four pitfalls:

Pitfall #1: Failing to update beneficiary forms. Your will spells out who gets what, where, when and how, but it’s often superseded by other documents such as beneficiary forms for retirement plans, annuities, life insurance policies and other accounts. Therefore, like your will, you must also keep these forms up to date. For example, despite your intentions, retirement plan assets could go to a sibling or parent — or even worse, an ex-spouse — instead of your children or grandchildren. Review beneficiary forms periodically and make any necessary adjustments.

Pitfall #2: Not properly funding trusts. Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets transferred to the trust don’t have to be probated and exposed to public inspection. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.

However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets must be probated.

Pitfall #3: Mistitling assets. Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.

Not only is titling assets critical, you should review these designations periodically, just as you should your beneficiary designations. Major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.

Pitfall #4: Not coordinating different plan aspects. Typically, there are several moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them components that should be coordinated within your overall plan. For instance, you may want to arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth.

To help ensure that your estate plan succeeds at reaching your goals and avoids these pitfalls, turn to us. We can provide you with the peace of mind that you’ve covered all the estate planning bases.

This year, to foster a culture of community service among all Yeo & Yeo employees, the firm’s Yeo Young Professionals (YYP) group will sponsor a firm-wide service project to benefit the American Cancer Society (ACS) Making Strides.

“Participating in Making Strides walks has always been an important event for our employees,” said Kyle Richardson, CPA, the Yeo & Yeo Foundation YYP service chair, “I was invited to the walks from the first year I joined the firm. Seeing the passion from our employees and hearing about their personal connections to the organization inspired me to make it our main fundraising event this year.”

The Making Strides movement raises life-saving funds for breast cancer patients, survivors, thrivers, and caregivers. To show our support of the movement, all Yeo & Yeo employees have been encouraged to bring their friends and families to Making Strides walks across Michigan. Yeo & Yeo teams will be at six walks – Making Strides of the Great Lakes Bay, Ann Arbor, Lansing, Oakland and Macomb Counties and West Michigan.

We will also be hosting fundraising events throughout our offices leading up to the walks, and our staff will be volunteering and cheering on walkers. We are proud to be participating in Making Strides Against Breast Cancer and thrilled about the difference our associates and their families are making to save lives and support survivors.

With electronic payments and in-app purchases becoming so much the norm, many midsize to large companies have grown accustomed to software-driven accounts receivable. But there are some smaller businesses that continue to soldier on with only partially automated payment systems.

If your company is still using paper-based processes, and suffering the consequences, it might be time to fully digitize your accounts receivable system. There are many benefits to consider.

Efficiency is everything

Generating a paper invoice is a laborious process — especially when there’s a digital alternative. Instead of creating, printing and mailing an invoice, organizations can autogenerate electronic invoices and e-reminders for overdue payments. This reduces the administrative burden considerably. Plus, e-billing saves on office supplies such as paper, envelopes and stamps.

Digitalization streamlines the cash conversion cycle. The accounting department doesn’t need to spend time mailing paper invoices and late notices. Instead, you might be able to reassign some staff members from administrative tasks to value-added ones, such as budgeting, forecasting and cash management.

Customers like it, too

On the flipside, customers that pay electronically — or set up an autopay option — don’t need to waste time sending a check. Plus, recipients of e-invoices could be more likely to pay quickly to capture discounts or merely remove the payment from their to-do lists.

Most customers, whether consumers or other businesses, have gotten comfortable paying via digital options, such as credit cards, ACH or wire transfers. Companies that sell directly to consumers may also accept payment via PayPal, Venmo or other digital payment apps. These alternatives might offer lower fees than those charged by credit cards.

At the end of the day, businesses that facilitate easy digital payments are easier to work with. Reducing customers’ administrative burdens can, in turn, increase their loyalty to your company. It can also reduce the potential for the conflicts that often arise when payments go missing or arrive late.

An added “bonus”

One added “bonus” of an optimized, automated accounts receivable system: Assuming it’s secure and users follow protocols, the right software can help you prevent fraud.

Paper checks are, after all, notoriously easy to fabricate or falsify. And because you won’t need to mail checks, you’ll no longer be at risk of check thievery by a third party. Beyond all that, the more visible and accessible data is to authorized personnel, the more likely they are to spot abnormalities and troubling trendlines.

Shop carefully

If the time is right, fully digitizing your accounts receivable system could save money and help you grow the business. Just be sure to shop carefully, set a feasible budget and invest only in a solution that truly suits your well-specified needs. Let us assist you in weighing the costs, risks and advantages of this IT investment and any others you’re considering.

As you’re aware, certain employers are required to report information related to their employees’ health coverage. Does your business have to comply, and if so, what must be done?

Basic rules

Certain employers with 50 or more full-time employees (called “applicable large employers” or ALEs) must use Forms 1094-C and 1095-C to report the information about offers of health coverage and enrollment in health coverage for their employees. Specifically, an ALE uses Form 1094-C to report summary information for each employee and to transmit Forms 1095-C to the IRS. A separate Form 1095-C is used to report information about each employee. In addition, Forms 1094-C and 1095-C are used to determine whether an employer owes payments under the employer shared responsibility provisions (sometimes referred to as the “employer mandate”).

Under the mandate, an employer can be subject to a penalty if it doesn’t offer affordable minimum essential coverage that provides minimum value to substantially all full-time employees and their dependents. Form 1095-C is also used in determining eligibility of employees for premium tax credits.

Information reported

On Form 1095-C, ALEs must report the following for each employee who was a full-time employee for any month of the calendar year:

The employee’s name, Social Security number and address,
The Employer Identification Number,
An employer contact person’s name and phone number,
A description of the offer of coverage (using a code provided in the instructions) and the months of coverage,
Each full-time employee’s share of the coverage cost under the lowest-cost, minimum-value plan offered by the employer, by calendar month, and
The applicable safe harbor (using one of the codes provided in the instructions) under the employer shared responsibility or employer mandate penalty.

If an ALE offers health coverage through an employer’s self-insured plan, the ALE also must report more information on Form 1095-C. For this purpose, a self-insured plan also includes one that offers some enrollment options as insured arrangements and other options as self-insured.

If an employer provides health coverage in another manner, such as through an insured health plan or a multiemployer health plan, the insurance issuer or the plan sponsor making the coverage available will provide the information about health coverage to enrolled employees. An employer that provides employer-sponsored self-insured health coverage but isn’t subject to the employer mandate, isn’t required to file Forms 1094-C and 1095-C and reports instead on Forms 1094-B and 1095-B for employees who enrolled in the employer-sponsored self-insured health coverage.

On Form 1094-C, an employer can also indicate whether any certifications of eligibility for relief from the employer mandate apply.

Be aware that these reporting requirements may be more complex if your business is a member of an aggregated ALE group or if the coverage is provided through a multiemployer plan.

W-2 reporting

Note: Employers also report certain information about health coverage on employees’ W-2 forms. But it’s not the same information as what’s reported on 1095-C. The information on either form doesn’t cause excludable employer-provided coverage to become taxable to employees. It’s for informational purposes only.

The above is a simplified explanation of the reporting requirements. Contact us with questions or for assistance in complying with the requirements.