CHIPS Act Poised to Boost U.S. Businesses

The Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS Act) was recently passed by Congress as part of the CHIPS and Science Act of 2022. President Biden is expected to sign it into law shortly. Among other things, the $52 billion package provides generous tax incentives to increase domestic production of semiconductors, also known as chips. While the incentives themselves are narrowly targeted, the expansion of semiconductor production should benefit a wide range of industries.

In particular, it could reduce the risks of future supply chain issues for the many goods and devices that rely on semiconductor chips, from cell phones and vehicles to children’s toys. The law also is intended to address national security concerns related to the reliance on foreign production of semiconductors.

The impetus

Although the United States developed and pioneered chip technology, many legislators have determined that the country has become too reliant on foreign producers. According to the government, American companies still account for almost half of all revenues in the global semiconductor industry, but the U.S. share of global chip production has fallen from 37% in 1990 to only 12% today. Seventy-five percent of semiconductor production occurs in East Asia. This situation poses a national and economic security threat, according to Congress.

Government subsidies are responsible for up to 70% of the cost difference in producing semiconductors overseas, giving foreign producers a 25% to 40% cost advantage over U.S. producers. The grants in the CHIPS Act, combined with a new tax credit, are intended to fully make up for this cost differential and thereby incentivize the “re-shoring” of semiconductor production.

The new tax credit

The CHIPS Act creates a temporary “advanced manufacturing investment credit” for investments in semiconductor manufacturing property, to be codified in Section 48D of the Internal Revenue Code. The Sec. 48D 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.

Qualified property is tangible property that:

Qualifies for depreciation or amortization,
Is constructed, reconstructed or erected by the taxpayer or acquired by the taxpayer if the original use of the property begins with the taxpayer, and
Is integral to the operation of the advanced manufacturing facility.

It also can include a building, a portion of a building (other than a portion used for functions unrelated to manufacturing, such as administrative services) and certain structural components of a building.

The credit is available for qualified property placed in service after December 31, 2022, if construction begins before January 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.

Taxpayers generally are eligible for the credit if they aren’t designated as a “foreign entity of concern.” That term generally refers to certain entities that have been deemed foreign security threats under previous defense authorization legislation or those with conduct that has been ruled detrimental to U.S. national security or foreign policy.

The CHIPS Act additionally excludes taxpayers that have made an “applicable transaction” (for example, the early disposition of investment credit property under Sec. 50(a)). Applicable transactions also include any “material expansion” of the taxpayer’s semiconductor manufacturing capacity in China or other designated “foreign countries of concern.” The law provides for recapture of the credit if a taxpayer enters such a transaction within 10 years of claiming the credit.

Notably, eligible taxpayers can claim the credit as a payment against tax — what’s known as “direct pay.” 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.

Additional provisions

The CHIPS Act also provides:

$39 billion in subsidies to build, expand or modernize domestic facilities and equipment for semiconductor fabrication, assembly, testing, advanced packaging or research, and development,
$200 million for workforce development and training, and
$1.5 billion to spur wireless supply chain innovation.

It includes almost $170 billion for governmental research and development, as well.

Stay tuned

If your business 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.

Auditors commonly use confirmations to verify such items as cash, accounts receivable, accounts payable, employee benefit plans and pending litigation. Under U.S. Generally Accepted Auditing Standards, an external confirmation is “a direct response to the auditor from a third party either in paper form or by electronic other means, such as through the auditor’s direct access to information held by a third party.”

Some companies may be put off when auditors reach out to customers, lenders and other third parties — and sometimes confirmation recipients fail to respond in a timely, complete manner. But confirmations are an important part of the auditing process that you’ll better appreciate if you learn more about them.

Three formats

The types of confirmations your auditor uses will vary depending on your situation and the nature of your organization’s operations. Confirmations generally come in the following three formats:

1. Positive. Recipients are requested to reply directly to the auditor and make a positive statement about whether they agree or disagree with the information included.

2. Negative. Recipients are requested to reply directly to the auditor only if they disagree with the information presented on the confirmation.

3. Blank. The amount (or other information) isn’t stated on this type of request. Instead, it requests recipients to complete a blank confirmation form.

Confirmation procedures may be performed as of a date that’s on, before or after the balance sheet date. If the procedures aren’t performed as of the balance sheet date, the account balance will need to be rolled forward (or backward) to the balance sheet date.

Mailed vs. electronic forms

In the past, auditors sent out confirmation letters through the U.S. Postal Service. Then, they waited to receive written responses from their audit clients’ customers, suppliers, banks, benefits plan administrators, attorneys and others. This was a cumbersome process. If an auditor failed to receive an adequate level of response, follow-up confirmation letters could be sent, which could lead to delays in the audit process. Alternatively, the auditor could contact nonresponding recipients by phone or in person. Otherwise, the auditor would need to perform alternative procedures.

Although written confirmations are still permitted, auditors routinely use electronic confirmations today. These may be in the form of an email submitted directly to the respondent by the auditor or a request submitted through a designated third-party provider.

Electronic confirmations can be considered reliable audit evidence. Plus, they overcome some of the shortcomings of written confirmations. That is, they’re sent and received instantaneously at no cost, and the electronic confirmation process is generally secure, minimizing the risks of interception or alteration. As a result, some financial institutions no longer respond to paper confirmation requests and will respond only to electronic confirmation requests.

Let’s work together

External confirmations can be a simple and effective audit tool. Contact us if you have questions about how we plan to use confirmations during your next audit or if you have concerns about the efficacy or security of the confirmation process.

Defined-benefit retirement plans, commonly referred to as pensions, aren’t as popular as they used to be — and for good reason. Many such plans are underfunded and in danger of failure.

The Pension Benefit Guaranty Corporation (PBGC), a federal agency, recently published a final rule that sets forth requirements for special financial assistance applications, as well as related restrictions and conditions. These requirements come under the PBGC’s Special Financial Assistance (SFA) Program.

Program background

The SFA Program was enacted as part of the American Rescue Plan Act (ARPA) of 2021. The program provides funding to severely underfunded multiemployer pension plans.

To qualify for the SFA Program, plans must demonstrate eligibility for assistance and calculate an assistance amount pursuant to ARPA and PBGC regulations. SFA and earnings must then be segregated from other plan assets. Plans aren’t obligated to repay SFA to the PBGC.

Pensions receiving SFA are also subject to certain terms, conditions and reporting requirements. This includes a requirement to provide an annual statement documenting compliance with those terms and conditions. The PBGC is authorized to conduct periodic audits of multiemployer plans that receive SFA.

Interim and final rule

On July 9, 2021, the PBGC issued an interim final rule setting forth the requirements for special financial assistance applications, as well as related restrictions and conditions, pursuant to the ARPA. In response to public comments received, the PBGC revised the interim final rule, which it has now released in final form. Significant revisions include changes to:

The SFA measurement date,
The methodology used to calculate SFA,
Permissible investments of SFA funds,
The application of conditions on a plan that merges with a plan that receives SFA, and
The withdrawal liability conditions that apply to a plan that receives SFA.

The final rule is effective August 8, 2022. Generally, the final rule’s provisions apply to new applications and are available to plans that previously submitted SFA applications under the interim rule if the plan submits a revised or supplemented application under the final rule.

Plans not approved for SFA under the interim final rule can withdraw and revise their applications under the final rule’s terms. If denied, plans may also revise their applications. The final rule describes how plans that filed applications under the interim final rule may supplement or revise their applications.

Additional comment period

The PBGC has included a 30-day public comment period solely on the change to the withdrawal liability condition requiring a phased-in recognition of SFA assets for purposes of calculating employer withdrawal liability. Contact us for more information on the final rule, as well as for any assistance you might need in managing the financial challenges of your organization’s pension.

Let’s assume you have a legally valid will but you’ve decided that it should be revised because of a change in your family’s circumstances. Perhaps all you want to do is add a newborn grandchild to the list of beneficiaries or remove your adult child’s spouse after a divorce. These are both common reasons to revise your will. However, resist the temptation to revise your will yourself.

Reasons against self amendments

State laws control the validity of your will, and the laws in each state vary, so simply following an online template for revisions isn’t certain to suffice.

In addition, the amended will generally must be witnessed and notarized. A notary isn’t a replacement for an attorney who knows his or her way around applicable state laws. To ensure the validity of the will, rely on the appropriate professional.

Furthermore, in many states, a will that has provisions crossed out and changed in handwriting won’t stand up to legal scrutiny. The same is true for a will with a typed paragraph attached to the original. If someone is then “cut out” of the will or not added as promised, it could lead to challenges in court and possibly create discontent that causes a rift in the family.

Start from scratch

Minor changes to a will can be made through a codicil or an addendum. However, it may make more sense to create a brand-new will — especially if changes are substantial or state law requires the same legal formalities for codicils and addendums as it does for a will. Contact your estate planning attorney if you need to make amendments to your will.

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 20 of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by Kelly Brown, a tax manager in our Saginaw office.

Listen in as David and Kelly discuss tax nexus and exposure, such as income taxes, franchise taxes and gross receipts taxes.

Nexus and warehouse inventory and why businesses need to be vigilant of where they are leaving a footprint (2:10)
Do businesses have nexus if they don’t have “stuff” in a state? (2:55)
Is there a certain dollar amount of sales that it would need to have before this economic nexus is met? (5:50)
How do state laws spell out their vague laws for economic nexus? (7:00)
Taxes that business owners are often subject to and surprised by (7:55)
What is voluntary disclosure and the alternative? (8:43)
What can a business do if they aren’t sure whether they need to file in additional jurisdictions? (10:00)

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.

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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.

Within a relatively short period, corporate environmental, social and governance (ESG) initiatives evolved from a disjointed and confusing set of goals to a more unified business imperative. This is largely because investors, employees, customers and other stakeholders have demanded it. But as companies ramp up ESG spending and require executives to meet ESG objectives, the likelihood of fraud also increases.

Although the SEC has created a Climate and ESG Task Force, there’s currently little regulatory guidance related to ESG and fraud. Therefore, your business needs to be proactive.

Broad range of goals

When designed and managed strategically, ESG initiatives target a broad range of goals — for example, they reduce environmental impact, increase workforce diversity and require transparent accounting methods. Yet, despite your organization’s best intentions, fraud can occur if you don’t have adequate internal controls and proper oversight to ensure controls are followed.

In general, linking compensation with ESG goals and the use of carbon offsets represent the greatest risks. But there have also been cases of companies falsifying health and safety records, exaggerating the sustainability of products, and burying embarrassing ethical mishaps. Even when actions aren’t technically illegal, they have the potential to damage a company’s reputation with investors and the public.

Role of a risk assessment

A fraud risk assessment that includes ESG initiatives is recommended. It can help you identify vulnerable functions, potential perpetrators and methods they might use, and can tell you whether current controls leave gaps fraudsters can squeeze through. If gaps exist, your business should address them as soon as possible.

Some people in your organization may not believe fraud to be a potential threat to your ESG program. Making ESG a normal part of your company’s fraud risk assessment can help reduce resistance to adding a new budget item. Also, ensure your board of directors lends its support to efforts to contain ESG fraud.

Information you need

Because ESG covers different areas, you’ll need to gather input from many stakeholders for a risk assessment, including managers from accounting, human resources and media relations. You may also need to engage third-party advisors to evaluate your company’s risk of specific forms of fraud. For example, professionals can look for possible executive “greenwashing,” which occurs when a company misrepresents its environmental record.

In some cases, a company’s corporate strategy of maximizing shareholder value may run contrary to the goals of its ESG program (which could involve greater costs). So while conducting your fraud risk assessment, be sure to evaluate your corporate strategy and executive compensation practices relative to ESG.

What might happen, for instance, if your board ties executive compensation to environmental goals yet also requires executives to minimize costs? Executives might feel pressure to source materials from suppliers with better climate records — yet those supplies often cost more. To achieve their ESG goal and keep costs down, executives could falsify your business’s use of products from existing, cheaper and less environmentally friendly vendors.

Positive results

ESG initiatives can generate many positive results for companies, yet fraud is an ever-present threat that can reduce the impact of your organization’s efforts. Regulators are working on catching up. In the meantime, your business needs to conduct risk assessments and possibly revisit compensation guidelines. Contact us for help.

These days, most businesses have websites. But surprisingly, the IRS hasn’t issued formal guidance on when website costs can be deducted.

Fortunately, established rules that generally apply to the deductibility of business costs provide business taxpayers launching a website with some guidance as to the proper treatment of the costs. Plus, businesses can turn to IRS guidance that applies to software costs.

Hardware versus software

Let’s start with the hardware you may need to operate a website. The costs fall under the standard rules for depreciable equipment. Specifically, once these assets are operating, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break. Note: The bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2022, the maximum Sec. 179 deduction is $1.08 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount ($2.7 million for 2022) of qualified property is placed in service during the year.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Software developed internally

If, instead of being purchased, the website is designed in-house by the taxpayer launching the website (or designed by a contractor who isn’t at risk if the software doesn’t perform), for tax years beginning before calendar year 2022, bonus depreciation applies to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either:

Deduct the development costs in the year paid or incurred, or
Choose one of several alternative amortization periods over which to deduct the costs.

For tax years beginning after calendar year 2021, generally the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

If your website is primarily for advertising, you can currently deduct internal website software development costs as ordinary and necessary business expenses.

Paying a third party

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

Before business begins

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

We can help

We can determine the appropriate treatment of website costs. Contact us if you want more information.

Under U.S. Generally Accepted Accounting Principles (GAAP), financial statements are normally prepared based on the assumption that the company will continue normal business operations into the future. When liquidation is imminent, the liquidation basis of accounting may be used instead.

It’s up to the company’s management to decide whether there’s a so-called “going concern” issue and to provide related footnote disclosures. But auditors still must evaluate the appropriateness of management’s assessment. Here are the factors that go into a going concern assessment.

Substantial doubt and potential for mitigation

The responsibility for making a final determination about a company’s continued viability shifted from external auditors to the company’s management under Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The updated guidance requires management to decide whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued, to prevent auditors from holding financial statements for several months after year end to see if the company survives).

Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it’s probable that the company won’t be able to meet its current obligations as they become due. Examples of adverse conditions or events that might cause management to doubt the going concern assumption include:

Recurring operating losses,
Working capital deficiencies,
Loan defaults,
Asset disposals, and
Loss of a key franchise, customer or supplier.

After management identifies that a going concern issue exists, it should consider whether any mitigating plans will alleviate the substantial doubt. Examples of corrective actions include plans to raise equity, borrow money, restructure debt, cut costs, or dispose of an asset or business line.

Aligning the guidance

After the FASB updated its guidance on the going concern assessment, the Auditing Standards Board (ASB) unanimously voted to issue a final going concern standard. The ASB’s Statement on Auditing Standards (SAS) No. 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, was designed to promote consistency between the auditing standards and accounting guidance under U.S. GAAP.

The updated guidance requires auditors to obtain sufficient appropriate audit evidence regarding management’s use of the going concern basis of accounting in the preparation of the financial statements. It also addresses uncertainties auditors face when the going concern basis of accounting isn’t applied or may not be relevant.

For example, SAS No. 132 doesn’t apply to audits of single financial statements, such as balance sheets and specific elements, accounts, or items of a financial statement. Some auditors contend that the evaluation of whether there’s substantial doubt about a company’s ability to continue as a going concern can be performed only on a complete set of financial statements at an enterprise level.

Prepare for your next audit

With increased market volatility, rising inflation, supply chain disruptions, labor shortages and skyrocketing interest rates, the going concern assumption can’t be taken for granted. Management must take current and expected market conditions into account when making this call — and be prepared to provide auditors with the appropriate documentation. Contact us before year end if you have concerns about your company’s going concern assessment. We can provide objective market data to help evaluate your situation.

Competition among employers for many types of employees remains fierce. For hard-to-fill positions, you might need to expand the search beyond your organization’s local geographic area. You may even have to offer financial incentives to lure applicants.

Although signing bonuses are an obvious choice, a strong relocation package could give you an edge in reeling in the best job candidates.

Costs to consider

The purpose of a relocation package is to ease the financial and logistical strain of moving on a new hire. This benefit can range from a simple cash reimbursement to a lavish array of perks most often reserved for top execs.

When creating a package, it’s critical to establish a firm budget for the costs you’re willing and able to cover. Generally, relocation packages include coverage for moving services and transportation (such as airfare). But there are many other perks you could add, including:

Packing and unpacking services,
Storage expenses,
Short-term housing, and
Spousal employment assistance.

The size and shape of a relocation package tends to depend on an employer’s industry. The benefit you offer must be competitive with those of similar organizations in your area or it probably won’t give you the hiring edge you’re looking for.

Tax impact

Relocation expenses are currently deductible for the employer and taxable to the employee, similar to how bonuses are treated.

Before the Tax Cuts and Jobs Act (TCJA) of 2017, the way that moving expenses were reported — and the tax impact — depended on the type of plan that an employer used. “Accountable” plans, which followed certain IRS rules, allowed employers to fully deduct payments while employees weren’t subject to taxation, including payroll tax. This made such plans highly favorable from a tax perspective, though they required more administrative effort.

Under a “nonaccountable plan,” pre-TCJA relocation payments were treated similarly to how a bonus would be reported and much like how the payments are now treated. That is, they were taxable compensation subject to both income tax and payroll tax. Employees could, however, deduct moving expenses — which substantially mitigated the tax impact.

The TCJA eliminated the moving expense deduction for all employees other than active-duty military members. Keep in mind, though, that this TCJA provision is scheduled to sunset after 2025.

Going the extra mile

Nowadays, employers often have to go the extra mile to win over optimal job candidates — many of whom could live hundreds or even thousands of miles away. Our firm can help you decide whether a relocation package is a good benefits choice for your organization.

In 2022, for most people, it may seem like planning for gift and estate taxes is unnecessary because of the $12.06 million federal gift and estate tax exemption. But even if your net worth is only a fraction of the current exemption amount, there are good reasons to adopt strategies — such as making regular annual exclusion gifts — to reduce the size of your taxable estate.

The annual exclusion allows you to make yearly tax-free gifts up to $16,000 (in 2022) per person to any number of recipients. If you’re married, you and your spouse can give up to $32,000 per recipient tax-free. And you can make these gifts without using up any of your lifetime exemption amount.

Why make annual gifts?

That’s all well and good, you may be thinking, but what’s the point? If there’s little chance that your estate’s worth will even approach the lifetime exemption amount, is there any advantage to making tax-free annual exclusion gifts? The answer, for many people, is yes.

The most important reason for annual gifting is to protect yourself against the possibility that the exemption amount will be drastically reduced in the near future, potentially exposing a portion of your wealth to gift and estate taxes overnight. A “sunset” provision in the Tax Cuts and Jobs Act, which doubled the exemption amount to its current level, calls for it to return to its previous level in 2026. Without action by lawmakers, the exemption will drop to an inflation-adjusted $5 million after 2025.

A program of annual exclusion gifts offers nontax benefits as well. These include the chance to watch your loved ones enjoy sharing your wealth and the opportunity to help shape your heirs’ behavior (by conditioning gifts on staying in school, for example).

Should you consider larger gifts?

The current lifetime exemption amount creates a window of opportunity for affluent families to transfer significant amounts of wealth tax-free. So, if you’re willing and able to do so, it may be advantageous to make very large gifts now, before that window closes.

Keep in mind, however, that if you own assets that have appreciated significantly in value, or that you expect to appreciate in the future, gifting them to your heirs may have income tax consequences. Assets transferred by gift retain your tax basis, which means your heirs would trigger an immediate income tax bill by selling them. Assets transferred at death, however, receive a “stepped-up basis” equal to their date-of-death market value, eliminating any taxable gain as of that date.

If you’re not able to make large gifts now, consider implementing a program of regular annual exclusion gifts. This strategy will allow you to transfer substantial amounts of wealth tax-free over time to loved ones, while minimizing the impact of future reductions of the lifetime exemption. Contact us for more information.

Sometimes, bigger isn’t better: Your small- or medium-sized business may be eligible for some tax breaks that aren’t available to larger businesses. Here are some examples.

1. QBI deduction

For 2018 through 2025, the qualified business income (QBI) deduction is available to eligible individuals, trusts and estates. But it’s not available to C corporations or their shareholders.

The QBI deduction can be up to 20% of:

QBI earned from a sole proprietorship or single-member limited liability company (LLC) that’s treated as a sole proprietorship for federal income tax purposes, plus
QBI passed through from a pass-through business entity, meaning a partnership, LLC classified as a partnership for federal income tax purposes or S corporation.

Pass-through business entities report tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction rules are complicated, and the deduction can be phased out at higher income levels.

2. Eligibility for cash-method accounting

Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. This is accomplished by timing the year in which you recognize taxable income and claim deductions.

Under the cash method, you generally don’t have to recognize taxable income until you’re paid in cash. And you can generally write off deductible expenses when you pay them in cash or with a credit card.

Only “small” businesses are potentially eligible for the cash method. For this purpose under current law, a small business includes one that has no more than $25 million of average annual gross receipts, based on the preceding three tax years. This limit is adjusted annually for inflation. For tax years beginning in 2022, the limit is $27 million.

3. Section 179 deduction

The Sec. 179 first-year depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions in the first year they’re placed in service. It’s available for both new and used property.

For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable than under prior law. Enhancements include:

Higher deduction. The Sec. 179 deduction has been permanently increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum is $1.08 million.

Liberalized phase-out. The threshold above which the maximum Sec. 179 deduction begins to be phased out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.

The phase-out rule kicks in only if your additions of assets that are eligible for the deduction for the year exceed the threshold for that year. If they exceed the threshold, your maximum deduction is reduced dollar-for-dollar by the excess. Sec. 179 deductions are also subject to other limitations.

Bonus depreciation

While Sec. 179 deductions may be limited, those limitations don’t apply to first-year bonus depreciation deductions. For qualified assets placed in service in 2022, 100% first-year bonus depreciation is available. After this year, the first-year bonus depreciation percentages are scheduled to start going down to 80% for qualified assets placed in service in 2023. They will continue to be reduced until they reach 0% for 2028 and later years.

Contact us to determine if you’re taking advantage of all available tax breaks, including those that are available to small and large businesses alike.

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

Create a dialogue

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

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

Make specific bequests when possible

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

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

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

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

Prepare a memorandum

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

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

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

Tell me about your career path.

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

How has the firm supported your work-life presence?

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

What makes being an accountant fun?

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

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

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

Bonus depreciation in a nutshell

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

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

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

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

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

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

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

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

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

Bonus depreciation vs. Section 179 expensing

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

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

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

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

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

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

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

Some caveats

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

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

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

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

Buy now, decide later

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

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

What is nexus?

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

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

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

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

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

What is market-based sourcing?

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

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

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

Is it time for a nexus study?

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

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

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

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

Tell me about your career path.

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

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

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

What makes being an accountant fun?

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

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

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

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

Here’s how the tax rules work

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

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

Here’s an example

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

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

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

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

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

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

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

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

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

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

What’s new?

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

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

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

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

Don’t miss the revised deadline

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

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

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

Gaining insights

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

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

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

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

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

Offering cash incentives

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

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

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

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

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

Broaden your perspective

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