Cyber Risks: A Critical Part of your Auditor’s Risk Assessment

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.

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.

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.

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.

Cyber Risks: A Critical Part of your Auditor’s Risk Assessment

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