Yeo & Yeo Promotes Three Professionals

Yeo & Yeo is pleased to announce the promotion of three associates.

Jordan Hale, CPA, has been promoted to Manager. Hale holds a Master of Science in Accounting from Michigan State University. He specializes in audits for nonprofits and real estate entities. Hale serves on the Yeo & Yeo Foundation board as the Grants/Giving Chair. In the community, he is involved in the Boys and Girls Club of Lansing, the Greater Lansing Food Bank, the Capital Area Humane Society and Meals on Wheels. He joined Yeo & Yeo in 2013 and is based in the firm’s Lansing office.

Randy Howard, CPA, has been promoted to Manager. His areas of expertise include partnership tax, trust, gift and estate taxation, and Form 5500 preparation for welfare and retirement plans. He is a member of the firm’s Tax Services Group and holds a Bachelor of Business Administration in Accounting from Northwood University. He is a member of the Northeastern Michigan Estate Planning Council and the Central Michigan University Research Corporation Entrepreneur Incubator. In the community, he serves as treasurer for the Saginaw Township Business Association and secretary for the Saginaw County Animal Care & Control Advisory Council. He joined Yeo & Yeo in 2017 and is based in the firm’s Saginaw office.

Megan Taylor, CPA, has been promoted to Manager. Taylor is a member of the Client Accounting Software Team. She holds a Master of Science in Accountancy from Western Michigan University. Her areas of expertise include business consulting and advisory services, complex individual tax returns and managerial accounting solutions with an emphasis on QuickBooks. In the community, she serves as treasurer, finance committee member and executive committee member for Gryphon Place. She joined Yeo & Yeo in 2016 and is based in the firm’s Kalamazoo office.

If you’re in business for yourself as a sole proprietor, or you’re planning to start a business, you need to know about the tax aspects of your venture. Here are eight important issues to consider:

1. You report income and expenses on Schedule C of Form 1040. The net income is taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have any losses, they’re generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”

2. You may be eligible for the pass-through deduction. To the extent your business generates qualified business income, you’re eligible to take the 20% pass-through deduction, subject to various limitations. The deduction is taken “below the line,” so it reduces taxable income, rather than being taken “above the line” against gross income. You can take the deduction even if you don’t itemize and instead take the standard deduction.

3. You might be able to deduct home office expenses. If you work from home, perform management or administrative tasks from a home office or store product samples or inventory at home, you may be entitled to deduct an allocable portion of certain costs. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.

4. You must pay self-employment taxes. For 2022, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your self-employment net earnings of up to $147,000 and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

5. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits your medical expense deduction to amounts in excess of 7.5% of your adjusted gross income.

6. You must make quarterly estimated tax payments. For 2022, these are due April 18, June 15, September 15 and January 17, 2023.

7. You should keep complete records of your income and expenses. Carefully record expenses in order to claim all of the deductions to which you are entitled. Certain expenses, such as automobile, travel, meals and home office expenses, require special attention because they’re subject to special recordkeeping requirements or limits on deductibility.

8. If you hire employees, you need a taxpayer identification number and you must withhold and pay over employment taxes.

We can help

What’s the best thing I can do to protect my business from a cyber-attack?

Typically, it’s your people who are your weakest link. Criminals spend a lot of time trying to fool them. Invest in good cybersecurity training to identify risks and promote best practices.

Do we really need to backup our business data?

Yes! Imagine the worst-case scenario, where all your data is deleted or stolen. Your client information, your projects, everything. How long would your business survive without it? No more than a few weeks. A good backup is a business basic.

I know we need to encrypt our data, but what does that actually mean?

When you encrypt data, it goes from a ‘plain text’ version that anyone can read to a coded version of the text that you need a unique key to unlock. It means if your data falls into the wrong hands, the information can’t be read or decoded.

Information used in this article was provided by our partners at MSP Marketing Edge.

Footnotes appear at the end of a company’s audited financial statements. These disclosures provide insight into account balances, accounting practices and potential risk factors — knowledge that’s vital to making well-informed lending and investing decisions. Here are examples of key risk factors that you might unearth by reading between the lines in a company’s footnotes.

Contingent (or unreported) liabilities

A company’s balance sheet might not reflect all future obligations. Auditors may find out the details about potential obligations by examining original source documents, such as bank statements, sales contracts and warranty documents. They also send letters to the company’s attorney(s), requesting information about pending lawsuits and other contingent claims.

Detailed footnotes may reveal, for example, an IRS inquiry, a wrongful termination lawsuit or an environmental claim. Footnotes may also spell out the details of loan terms, warranties, contingent liabilities and leases. Liabilities may be downplayed to avoid violating loan agreements or admitting financial problems to stakeholders.

Related-party transactions

Companies may give preferential treatment to, or receive it from, related parties. It’s important that footnotes disclose all related parties with whom the company — and its management team — conducts business.

For example, say a retailer rents space from its owner’s grandparents at below-market rents, saving roughly $240,000 each year. If you’re unaware that this favorable related-party deal exists, you might believe that the business is more profitable than it really is. When the owner’s grandparents unexpectedly die and the rent increases, the company’s stakeholders could be blindsided by the undisclosed related-party risk.

Accounting changes

Footnotes disclose the nature and justification for a change in accounting principle, as well as that change’s effect on the financial statements. Valid reasons exist to change an accounting method, such as a regulatory mandate. But dishonest managers can use accounting changes in, say, depreciation or inventory reporting methods to manipulate financial results.

Significant events

Footnotes may even forewarn of a recent event — including something that’s happened after the end of the reporting period but before the financial statements were issued — that could materially impact future earnings or impair business value. Examples might include the loss of a major customer, a natural disaster or the death of a key manager.

Critical piece of the financial reporting puzzle

Footnotes offer the clues to financial stability that the numbers alone might not. But drafting footnote disclosures requires a delicate balance. While most companies want to be transparent when reporting their results, indiscriminate disclosures and the use of boilerplate language may detract from the information that’s most meaningful to your company’s stakeholders. Contact us to discuss what’s right for your situation.

If you run a business and accept payments through third-party networks such as Zelle, Venmo, Square or PayPal, you could be affected by new tax reporting requirements that take effect for 2022. They don’t alter your tax liability, but they could add to your recordkeeping burden, as well as the number of tax-related documents you receive every January in anticipation of tax-filing season.

Form 1099-K primer

Form 1099-K, “Payment Card and Third-Party Network Transactions,” is an information return that reports certain payment transactions to the IRS and the taxpayer who receives the payments. Since it was first introduced in 2012, the form has been used to report payments:

From payment card transactions (for example, debit, credit or stored-value cards), and
In settlement of third-party network transactions, when above a certain minimum threshold amount.

For 2021 and prior years, the threshold was defined as gross payments that exceeded $20,000 and more than 200 such transactions. Note that no minimum threshold applies to payment card transactions — all such payments must be reported.

Taxpayers should receive a Form 1099-K from each “payment settlement entity” (PSE) from which they received payments in settlement of reportable payment transactions (that is, a payment card or third-party network transaction) during the tax year. Form 1099-K reports the gross amount of all reportable transactions for the year and by month. The dollar amount of each transaction is determined on the transaction date.

In the case of third-party network payments, the gross amount of a reportable payment doesn’t include any adjustments for credits, cash equivalents, discounts, fees, refunds or other amounts. In other words, the full amount reported might not represent the taxable amount.

Businesses (including independent contractors) should consider the amounts reported when calculating their gross receipts for income tax purposes. Depending on filing status, the amounts generally should be reported on Schedule C (Form 1040), “Profit or Loss From Business, Sole Proprietorship;” Schedule E (Form 1040), “Supplemental Income and Loss;” Schedule F (Form 1040), “Profit or Loss From Farming;” or the appropriate return for partnerships or corporations.

Understanding the new rules

The American Rescue Plan Act (ARPA), which was signed into law in March of 2021, brought significant changes to the requirements regarding Form 1099-K. The changes are intended to improve voluntary tax compliance.

Beginning in 2022, the number of transactions component of the threshold for reporting third-party network transactions is eliminated, and the gross payments threshold drops to only $600. The change is expected to boost the number of Forms 1099-K many businesses receive in January 2023 for the 2022 tax year and going forward.

The ARPA also includes an important clarification. Since Form 1099-K was introduced, stakeholders have been uncertain about which types of third-party network transactions should be included. The ARPA makes clear that these transactions are reportable only if they’re for goods and services. Payments for royalties, rent and other transactions settled through a third-party network are reported on Form 1099-MISC, “Miscellaneous Information.”

The ARPA changes heighten only the reporting obligations of third-party payment networks; they don’t affect individual taxpayer requirements. They might, however, reduce your odds of inadvertently underreporting income and paying the price down the road.

Taking steps toward accurate reporting

While the increased reporting doesn’t require any specific changes of affected taxpayers, you’d be wise to institute some measures to ensure the reporting is accurate. For example, consider monitoring your payments and the amounts so you know whether you should receive a Form 1099-K from a particular PSE. Notably, you’re required to report the associated income regardless of whether you receive the form.

You’ll also want to step up your recordkeeping to allow you to reconcile any Forms 1099-K with the actual amounts received. If you have multiple sources of income, track and report each separately even if you receive a single Form 1099-K with gross payments for all of the businesses. For example, if you process both retail sales and rent payments on the same card terminal, your tax preparer would report the retail sales on Schedule C and the rent on Schedule E.

If you permit customers to get cash back when using debit cards for purchases, the cash back amounts will be included on Form 1099-K. Those amounts generally aren’t included in your gross receipts or businesses expenses, though, making it critical that you track cash-back activity to prevent inclusion.

Amounts reported could be inaccurate if you share a credit card terminal with another person or business. Where required, consider filing and furnishing the appropriate information return (for example, Form 1099-K or Form 1099-MISC) for each party with whom you shared a card terminal. In addition, keep records of payments issued to every party sharing your terminal, including shared terminal written agreements and cancelled checks.

Other potential landmines include:

Incorrect amounts due to mid-tax year changes in entity type (for example, from a sole proprietorship to a partnership),
Forms issued to you as an individual, with your Social Security number, rather than to your C corporation, S corporation or partnership, with its taxpayer identification number,
Incorrect amounts due to a mid-tax year sale or purchase of a business, and
Duplicate payments that appear on both a Form 1099-K and either a Form 1099-MISC or a Form 1099-NEC, “Nonemployee Compensation.”

If you receive a form with errors in your taxpayer identification number or payment amount, request a corrected form from the PSE and maintain records of all related correspondence.

Don’t dawdle

It may seem tempting to put off the steps necessary to establish solid recordkeeping procedures for payments from third-party networks, but that would be a mistake. We can help you set up the necessary processes and procedures now so you’re in compliance and not scrambling at tax time.

Yeo & Yeo is pleased to announce the promotion of Rachel Van Slembrouck, CPA, to Senior Manager.

“We are proud to recognize Rachel for her leadership and expertise,” said Suzanne Lozano, Consulting Service Line leader. “Rachel demonstrates great leadership and outstanding client service. She truly listens to her clients and develops solutions that meet their unique needs.”

Van Slembrouck is a member of the Healthcare Services Group and the Small Business Software Group as a certified QuickBooks ProAdvisor. Her areas of expertise include business consulting and advisory services, strategic planning, tax planning and preparation, and QuickBooks consulting. She also leads the Paycheck Protection Program (PPP) Loans team and is highly knowledgeable on PPP loans and the Employee Retention Credit program. Rachel is a recipient of the firm’s Spirit of Yeo award, which recognizes an individual within the firm who exemplifies the attributes of the organization’s mission and core values.

She has been instrumental in expanding the firm’s outsourced accounting solutions and is an excellent trainer and mentor to staff. In addition to over nine years of accounting experience with Yeo & Yeo, Van Slembrouck earned her bachelor’s degree in accounting from Saginaw Valley State University. She joined Yeo & Yeo in 2013 and serves clients from the firm’s Saginaw office.

In the community, Van Slembrouck is a board member for the Saginaw County Animal Control Advisory Council, and was treasurer for the Saginaw County Animal Control millage campaign in 2018. She serves as the treasurer for the Saginaw Valley State University College of Business and Management’s Young Alumni board and volunteers as a volleyball coach at Bethlehem Lutheran School.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 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 16 of Everyday Business, host Thomas O’Sullivan, managing principal and member of Yeo & Yeo’s Cannabis Services Group, is joined by Alex Wilson, senior manager and leader of the Cannabis Services Group.

Listen in as Tom and Alex discuss the cannabis industry in Michigan in the first of our two-part podcast series focusing on cannabusiness.

How did we get here? The legalization of cannabis in Michigan (1:30)
Cannabis industry regulations (3:35)
Medical and recreational legalization in Michigan (4:57)
Insight on the cannabusiness licensing and vetting process (7:25)
The different types of licenses (8:37)
Michigan cannabis restrictions (13:30)
Federal regulations and how they affect Michigan cannabusiness (16:45)
Banking rules (18:15)
Important notes for those looking to start a cannabusiness (20:16)
Takeaways from part one (23:20)

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

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

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

Ever since the Affordable Care Act was signed into law, business owners have had to keep a close eye on how many employees they’ve had on the payroll. This is because a company with 50 or more full-time employees or full-time equivalents on average during the previous year is considered an applicable large employer (ALE) for the current calendar year. And being an ALE carries added responsibilities under the law.

What must be done

First and foremost, ALEs are subject to Internal Revenue Code Section 4980H — more commonly known as “employer shared responsibility.” That is, if an ALE doesn’t offer minimum essential health care coverage that’s affordable and provides at least “minimum value” to its full-time employees and their dependents, the employer may be subject to a penalty.

However, the penalty is triggered only when at least one of its full-time employees receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).

ALEs must do something else as well. They need to report:

Whether they offered full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan,
Whether the offered coverage was affordable and provided at least minimum value, and
Certain other information the IRS uses to administer employer shared responsibility.

The IRS has designated Forms 1094-C and 1095-C to satisfy these reporting requirements. Each full-time employee, and each enrolled part-time employee, must receive a Form 1095-C. These forms also need to be filed with the IRS. Form 1094-C is used as a transmittal for the purpose of filing Forms 1095-C with the IRS.

3 key deadlines

If your business was indeed an ALE for calendar year 2021, put the following three key deadlines on your calendar:

February 28, 2022. This is the deadline for filing the Form 1094-C transmittal, as well as copies of related Forms 1095-C, with the IRS if the filing is made on paper.

March 2, 2022. This is the deadline for furnishing the written statement, Form 1095-C, to full-time employees and to enrolled part-time employees. Although the statutory deadline is January 31, the IRS has issued proposed regulations with a blanket 30-day extension. ALEs can rely on the proposed regulations for the 2021 tax year (in other words, forms due in 2022).

In previous years, the IRS adopted a similar extension year-by-year. The extension in the proposed regulations will be permanent if the regulations are finalized. No other extensions are available for this deadline.

March 31, 2022. This is the deadline for filing the Form 1094-C transmittal and copies of related Forms 1095-C with the IRS if the filing is made electronically. Electronic filing is mandatory for ALEs filing 250 or more Forms 1095-C for the 2021 calendar year. Otherwise, electronic filing is encouraged but not required.

Whether you’re a paper or electronic filer, you can apply for an automatic 30-day extension of the deadlines to file with the IRS. However, the extension is available only if you file Form 8809, “Application for Extension of Time to File Information Returns,” before the applicable due date.

Alternative method

If your company offers a self-insured health care plan, you may be interested in an alternative method of furnishing Form 1095-C to enrolled employees who weren’t full-time for any month in 2021.

Rather than automatically furnishing the written statement to those employees, you can make the statement available to them by posting a conspicuous plain-English notice on your website that’s reasonably accessible to everyone. The notice must state that they may receive a copy of their statement upon request. It needs to also include:

An email address for requests,
A physical address to which a request for a statement may be sent, and
A contact telephone number for questions.

In addition, the notice must be written in a font size large enough, including any visual clues or graphical figures, to highlight that the information pertains to tax statements reporting that individuals had health care coverage. You need to retain the notice in the same location on your website through October 17, 2022. If someone requests a statement, you must fulfill the request within 30 days of receiving it.

Identify your obligations

Although the term “applicable large employer” might seem to apply only to big companies, even a relatively small business with far fewer than 100 employees could be subject to the employer shared responsibility and information reporting rules. We can help you identify your obligations under the Affordable Care Act and assess the costs associated with the health care coverage that you offer.

Traditional IRAs and Roth IRAs have been around for decades and the rules surrounding them have changed many times. What hasn’t changed is that they can help you save for retirement on a tax-favored basis. Here’s an overview.

Traditional IRAs

You can make an annual deductible contribution to a traditional IRA if:

You (and your spouse) aren’t active participants in employer-sponsored retirement plans, or
You (or your spouse) are active participants in an employer plan, and your modified adjusted gross income (MAGI) doesn’t exceed certain levels that vary annually by filing status.

For example, in 2022, if you’re a joint return filer covered by an employer plan, your deductible IRA contribution phases out over $109,000 to $129,000 of MAGI ($68,000 to $78,000 for singles).

Deductible IRA contributions reduce your current tax bill, and earnings are tax-deferred. However, withdrawals are taxed in full (and subject to a 10% penalty if taken before age 59½, unless one of several exceptions apply). You must begin making minimum withdrawals by April 1 of the year following the year you turn age 72.

You can make an annual nondeductible IRA contribution without regard to employer plan coverage and your MAGI. The earnings in a nondeductible IRA are tax-deferred but taxed when distributed (and subject to a 10% penalty if taken early, unless an exception applies).

You must begin making minimum withdrawals by April 1 of the year after the year you reach age 72. Nondeductible contributions aren’t taxed when withdrawn. If you’ve made deductible and nondeductible IRA contributions, a portion of each distribution is treated as coming from nontaxable IRA contributions (and the rest is taxed).

Contribution amounts

The maximum annual IRA contribution (deductible or nondeductible, or a combination) is $6,000 for 2022 and 2021 ($7,000 if age 50 or over). Additionally, your contribution can’t exceed the amount of your compensation includible in income for that year. There’s no age limit for making contributions, as long as you have compensation income (before 2021, traditional IRA contributions weren’t allowed after age 70½).

Roth IRAs

You can make an annual contribution to a Roth IRA if your income doesn’t exceed certain levels based on filing status. For example, in 2022, if you’re a joint return filer, the maximum annual Roth IRA contribution phases out between $204,000 and $214,000 of MAGI ($129,000 to $144,000 for singles). Annual Roth contributions can be made up to the amount allowed as a contribution to a traditional IRA, reduced by the amount you contribute for the year to non-Roth IRAs, but not reduced by contributions to a SEP or SIMPLE plan.

Roth IRA contributions aren’t deductible. However, earnings are tax-deferred and (unlike a traditional IRA) withdrawals are tax-free if paid out:

After a five-year period that begins with the first year for which you made a contribution to a Roth, and
Once you reach age 59½, or upon death or disability, or for first-time home-buyer expenses of you, your spouse, child, grandchild, or ancestor (up to $10,000 lifetime).

You can make Roth IRA contributions even after reaching age 72 (if you have compensation income), and you don’t have to take required minimum distributions from a Roth. You can “roll over” (or convert) a traditional IRA to a Roth regardless of your income. The amount taken out of the traditional IRA and rolled into the Roth is treated for tax purposes as a regular withdrawal (but not subject to the 10% early withdrawal penalty).

If you operate a business, or you’re starting a new one, you know you need to keep records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS.

Be aware that there’s no one way to keep business records. But there are strict rules when it comes to keeping records and proving expenses are legitimate for tax purposes. Certain types of expenses, such as automobile, travel, meals and home office costs, require special attention because they’re subject to special recordkeeping requirements or limitations.

Here are two recent court cases to illustrate some of the issues.

Case 1: To claim deductions, an activity must be engaged in for profit

A business expense can be deducted if a taxpayer can establish that the primary objective of the activity is making a profit. The expense must also be substantiated and be an ordinary and necessary business expense. In one case, a taxpayer claimed deductions that created a loss, which she used to shelter other income from tax.

She engaged in various activities including acting in the entertainment industry and selling jewelry. The IRS found her activities weren’t engaged in for profit and it disallowed her deductions.

The taxpayer took her case to the U.S. Tax Court, where she found some success. The court found that she was engaged in the business of acting during the years in issue. However, she didn’t prove that all claimed expenses were ordinary and necessary business expenses. The court did allow deductions for expenses including headshots, casting agency fees, lessons to enhance the taxpayer’s acting skills and part of the compensation for a personal assistant. But the court disallowed other deductions because it found insufficient evidence “to firmly establish a connection” between the expenses and the business.

In addition, the court found that the taxpayer didn’t prove that she engaged in her jewelry sales activity for profit. She didn’t operate it in a businesslike manner, spend sufficient time on it or seek out expertise in the jewelry industry. Therefore, all deductions related to that activity were disallowed. (TC Memo 2021-107)

Case 2: A business must substantiate claimed deductions with records

A taxpayer worked as a contract emergency room doctor at a medical center. He also started a business to provide emergency room physicians overseas. On Schedule C of his tax return, he deducted expenses related to his home office, travel, driving, continuing education, cost of goods sold and interest. The IRS disallowed most of the deductions.

As evidence in Tax Court, the doctor showed charts listing his expenses but didn’t provide receipts or other substantiation showing the expenses were actually paid. He also failed to account for the portion of expenses attributable to personal activity.

The court disallowed the deductions stating that his charts weren’t enough and didn’t substantiate that the expenses were ordinary and necessary in his business. It noted that “even an otherwise deductible expense may be denied without sufficient substantiation.” The doctor also didn’t qualify to take home office deductions because he didn’t prove it was his principal place of business. (TC Memo 2022-1)

We can help

Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach can protect your deductions and help make an audit much less difficult.

Revenue and expenses, as reported on your company’s income statement, have limited usefulness to people inside the organization. Managers often need information presented in a different format in order to make operational and strategic decisions. That’s where activity-based costing comes into play. This costing system is commonly used in the manufacturing and construction sectors to determine which products and customers are profitable, to identify and eliminate waste, and to more accurately price products or bid jobs going forward.

4 steps

With activity-based costing, you assign cost codes (think of them as price tags) to each activity completed based on the resources consumed. These cost codes define the activity; the equipment, materials and labor used to complete it; and how long it takes to finish the task.

Here are four basic steps used to create a cost code in activity-based costing:

1. Identify activities. Create a list of tasks your company performs to complete a job. Define each activity in such a way that there’s no overlap between them.

2. Allocate resources. For each activity, list resources used. These include material, equipment, labor hours and, if applicable, subcontracting costs.

3. Calculate the per-unit cost of each resource. Choose a standard, measurable unit of each resource and calculate the cost per unit. Sometimes, you’ll have to calculate an average cost based on purchase receipts for a specific period. For example, if a box of screw anchors holds 100 and costs $30, the per-unit cost of screw anchors would be 30 cents if you consider one “unit” to be a single screw anchor. For labor hours, the measurable unit would be the wage paid per hour.

4. Determine how much of each resource is used for each activity. Multiply the per-unit cost of each resource by the number of units consumed. Add indirect costs to determine the total cost. These may include rents, machinery payments, salaries and other expenses that don’t directly contribute to completing an activity.

Potential benefits

Companies can use activity-based costing to learn what’s working — and what’s not. For example, let’s say a job is costing more than it should, or is taking too long to complete. Activity-based costing will quantify for each task: 1) the materials consumed, 2) which pieces of equipment were deployed, and 3) how many labor hours were spent to complete it. This process allows you to track the progress of jobs in real time, so you can correct mistakes and inefficiencies before losing money to them.

You also may be able to uncover excessive spending trends, so you can better control purchasing. For strategic planning purposes, the process can provide a clearer picture of what types of activities and jobs will likely boost the bottom line and enable you to grow your business. Likewise, it can help assess whether your current product mix needs to be modified to boost profits.

Furthermore, with price tags attached to everything, estimators can “cut up” a prospective job into well-defined activities and then calculate estimates for each of those tasks, resulting in a more accurate overall project estimate. If the scope changes, thereby increasing or decreasing the number of activities, it’s much easier to recalculate the estimate. Activities essentially become line items that can be added or deleted.

One size doesn’t fit all companies

Activity-based costing can be used to supplement, but not replace, your company’s traditional cost accounting system. Although this process may seem confusing, software solutions can help shorten the learning curve. Contact us to learn how your business can benefit from activity-based costing and how to effectively implement this process based on the nature of your operations.

Now that 2022 is up and running, business owners can expect to face a few challenges and tough choices as the year rolls along. No matter how busy things get, don’t forget about an easily accessible and highly informative resource that’s probably just a few clicks away: your financial statements.

Assuming you follow U.S. Generally Accepted Accounting Principles (GAAP) or similar reporting standards, your financial statements will comprise three major components: an income statement, a balance sheet and a statement of cash flows. Each one contains different, but equally important, information about your company’s financial performance. Together, they can help you and your leadership team make optimal business decisions.

Revenue and expenses

The first component of your financial statements is the income statement. It shows revenue and expenses over a given accounting period. A commonly used term when discussing income statements is “net income.” This is the income remaining after you’ve paid all expenses, including taxes.

It’s also important to check out “gross profit.” This is the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of direct labor and materials, as well as any manufacturing overhead costs required to make a product.

The income statement also lists sales, general and administrative (SG&A) expenses. They reflect functions, such as marketing and payroll, that support a company’s production of products or services. Often, SG&A costs are relatively fixed, no matter how well your business is doing. Calculate the ratio of SG&A costs to revenue: If the percentage increases over time, business may be slowing down.

Assets, liabilities and net worth

The second component is the balance sheet. It tallies your assets, liabilities and net worth to create a snapshot of the company’s financial health on the financial statement date. Assets are customarily listed in order of liquidity. Current assets (such as accounts receivable) are expected to be converted into cash within a year. Long-term assets (such as plant and equipment) will be used to generate revenue beyond the next 12 months.

Similarly, liabilities are listed in order of maturity. Current liabilities (such as accounts payable) come due within a year. Long-term liabilities are payment obligations that extend beyond the current year.

True to its name, the balance sheet must balance — that is, assets must equal liabilities plus net worth. So, net worth is the extent to which assets exceed liabilities. It may signal financial distress if your net worth is negative.

Other red flags include current assets that grow faster than sales and a deteriorating ratio of current assets to current liabilities. These trends could indicate that management is managing working capital less efficiently than in previous periods.

Inflows and outflows of cash

The statement of cash flows shows all the cash flowing in and out of your business during the accounting period.

Cash inflows typically come from selling products or services, borrowing and selling stock. Outflows generally result from paying expenses, investing in capital equipment and repaying debt. The statement of cash flows is organized into three sections, cash flows from activities related to:

Operating,
Financing, and
Investing.

Ideally, a company will generate enough cash from operations to cover its expenses. If not, it might need to borrow money or sell stock to survive.

The good and the bad

Sometimes business owners get into the habit of thinking of their financial statements as a regularly occurring formality performed to satisfy outside parties such as investors and lenders. On the contrary, your financial statements contain a wealth of data that can allow you to calculate ratios and identify trends — both good and bad — affecting the business. For help generating accurate financial statements, as well as analyzing the information therein, please contact us.

Yeo & Yeo congratulates Christopher M. Sheridan, CPA, CVA, for being recognized by the National Association of Certified Valuators and Analysts^® (NACVA) and Consultants Training Institute^® (CTI) as a 2021 40 Under Forty award honoree. The program recognizes individuals under age 40 who have made extraordinary advances in, and contributions to, the business valuation and forensic accounting professions and their local communities.

Sheridan is a senior manager and co-leader of the firm’s Business Valuation and Litigation Support Group. His areas of expertise include business valuation and litigation support, business consulting, and fraud investigation and prevention. As a Certified Valuation Analyst (CVA), Sheridan provides defensible, objective business valuation services for attorneys and business owners. He is based in the firm’s Saginaw office.

Yeo & Yeo’s Business Valuation and Litigation Support Group brings expertise to a broad spectrum of valuation and litigation support situations. The specialists use their professional training, experience and third-party objectivity to conduct valuations effectively and help business owners make sound decisions.

“Chris’s inclusion in the 40 Under Forty is a tribute to his superior client service and dedication to the business valuation and litigation support industry,” said John W. Haag Sr., CPA/ABV, CVA, CFF. “He earned his CVA credential in quick order, spent countless hours helping to update our processes, and is already making a big impact with clients by providing them with excellent valuation services.”

Sheridan is a member of the National Association of Certified Valuators and Analysts, the Michigan Association of Certified Public Accountants’ Manufacturing Task Force, and the Michigan Manufacturers Association. In the community, he serves as a board member for the Great Lakes Bay Economic Club, the Delta College Accounting Advisory Committee, and Bay Future.

The IRS began accepting 2021 individual tax returns on January 24. If you haven’t prepared yet for tax season, here are three quick tips to help speed processing and avoid hassles.

Tip 1. Contact us soon for an appointment to prepare your tax return.

Tip 2. Gather all documents needed to prepare an accurate return. This includes W-2 and 1099 forms. In addition, you may have received statements or letters in connection with Economic Impact Payments (EIPs) or advance Child Tax Credit (CTC) payments.

Letter 6419, 2021 Total Advance Child Tax Credit Payments, tells taxpayers who received CTC payments how much they received. Since the advance payments represented about one-half of the total credit, taxpayers who received CTC payments need to file a return to collect the rest of the credit. Letter 6475, Your Third Economic Impact Payment, tells taxpayers who received an EIP in 2021 the amount of that payment. Taxpayers need to know the amount to determine if they can claim an additional amount on their tax returns.

Taxpayers who received an EIP or CTC payments must include that information on their returns. Failure to include this information, according to the IRS, means a return is incomplete and will require additional processing, which may delay any refund owed to the taxpayer.

Tip 3. Check certain information on your prepared return. Each Social Security number on your tax return should appear exactly as printed on the Social Security card(s). Likewise, make sure that names aren’t misspelled. If you’re receiving your refund by direct deposit, check the bank account number.

Failure to file or pay on time

What if you don’t file on time or can’t pay your tax bill? Separate penalties apply for failing to pay and failing to file. The penalties imposed are a percentage of the taxes you didn’t pay or didn’t pay on time. If you obtain an extension for the filing due date (until October 17), you aren’t filing late unless you miss the extended due date. However, a filing extension doesn’t apply to your responsibility for payment. If you obtain an extension, you’re required to pay an estimate of any owed taxes by the regular deadline to avoid possible penalties.

The penalties for failing to file and failing to pay can be quite severe. (They may be excused by the IRS if your lateness is due to “reasonable cause,” such as illness or a death in the family.) Contact us for questions or concerns about how to proceed in your situation.

While some businesses have closed since the start of the COVID-19 crisis, many new ventures have launched. Entrepreneurs have cited a number of reasons why they decided to start a business in the midst of a pandemic. For example, they had more time, wanted to take advantage of new opportunities or they needed money due to being laid off. Whatever the reason, if you’ve recently started a new business, or you’re contemplating starting one, be aware of the tax implications.

As you know, before you even open the doors in a start-up business, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. Keep in mind that the way you handle some of your initial expenses can make a large difference in your tax bill.

Essential tax points

When starting or planning a new enterprise, keep these factors in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the venture begins. Of course, $5,000 doesn’t go far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Types of expenses

Start-up expenses generally include all expenses that are incurred to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct for this year. You need to decide whether to take the election described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.

For employees, withholding is the amount of federal income tax withheld from your paycheck. The amount of income tax your employer withholds from your regular pay depends on two things:

The amount you earn.
The information you give your employer on Form W–4.

For help with your withholding, you may use the Tax Withholding Estimator. The Tax Withholding Estimator compares your income tax estimate to your current tax withholding and can help you decide if you need to change your withholding with your employer.

More details can be found on the IRS’s Frequently Asked Question pages.

Source: https://www.irs.gov/.

The IRS announced it is opening the 2021 individual income tax return filing season on January 24. (Business returns are already being accepted.) Even if you typically don’t file until much closer to the April deadline (or you file for an extension until October), consider filing earlier this year. Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

How tax identity theft occurs

In a tax identity theft scheme, a thief uses another individual’s personal information to file a bogus tax return early in the filing season and claim a fraudulent refund.

The actual taxpayer discovers the fraud when he or she files a return and is told by the IRS that it is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Note: You can still get your individual tax return prepared by us before January 24 if you have all the required documents. But processing of the return will begin after IRS systems open on that date.

Your W-2s and 1099s

To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2021 W-2 forms to employees and, generally, for businesses to issue Form 1099s to recipients for any 2021 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

Other benefits of filing early

In addition to protecting yourself from tax identity theft, another advantage of early filing is that, if you’re getting a refund, you’ll get it sooner. The IRS expects most refunds to be issued within 21 days. However, the IRS has been experiencing delays during the pandemic in processing some returns. Keep in mind that the time to receive a refund is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

If you were eligible for an Economic Impact Payment (EIP) or advance Child Tax Credit (CTC) payments, and you didn’t receive them or you didn’t receive the full amount due, filing early will help you to receive the money sooner. In 2021, the third round of EIPs were paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Advance CTC payments were made monthly in 2021 to eligible families from July through December. EIP and CTC payments due that weren’t made to eligible taxpayers can be claimed on your 2021 return.

We can help

Contact us If you have questions or would like an appointment to prepare your tax return. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

Forecasting key business metrics — such as sales demand, receivables, payables and working capital — can help you reduce excess inventory and other overhead, offer competitive prices, and keep your business on solid financial footing. Although historical financial statements are often the starting point for forecasts, you’ll need to do more than just multiply last year’s numbers by a projected growth rate, especially in today’s uncertain marketplace.

To help determine the right forecasting methods for your business, ask yourself these five questions.

1. How far into the future do you plan to forecast?

Forecasting is generally more accurate in the short term — the longer the time period, the more likely it is that customer demand or market trends will change. While quantitative methods, which rely on historical data, are typically the most accurate forecasting methods, they don’t work well for long-term predictions. If you’re planning to forecast over several years, try qualitative forecasting methods, which rely on expert opinions instead of company-specific data.

2. How steady is your demand?

Weather, sales promotions, safety concerns and other factors can cause sales to fluctuate. For example, if you sell ski supplies and apparel, chances are good your sales will dip in the summer.

If demand for your products varies, consider forecasting with a quantitative method, such as time-series decomposition, which examines historical data and allows you to adjust for market trends, seasonal trends and business cycles. You also may want to adopt forecasting software, which allows you to plug other variables into the equation, such as individual customers’ short-term buying plans.

3. How much data do you have?

Quantitative forecasting techniques require varying amounts of historical information. For instance, you’ll need about three years of data to use exponential smoothing, a simple yet fairly accurate method that compares historical averages with current demand.

If you want to forecast for something you don’t have data for, such as a new product, you might use qualitative forecasting. Alternatively, you could base your forecast on historical data for a similar product in your lineup.

4. Do you carry inventory?

If you stock standard inventory items for customers to purchase, rather than working on custom orders, forecasting is particularly critical for establishing accurate inventory levels and improving cash flow. For peak accuracy, take the average of multiple forecasting methods. To optimize inventory levels, consider forecasting demand by individual products as well as by geographic location.

5. How many products do you sell?

If you’re forecasting demand for a wide variety of products, consider a relatively simple technique, such as exponential smoothing. If you offer only one or two key products, it’s probably worth your time and effort to perform a more complex forecasting method for each one, such as a statistical regression model.

What’s right for your business?

Although these questions focus primarily on retailers, manufacturers and other businesses that sell products, service providers can ask similar questions to determine the optimal forecasting approach. Contact us to discuss the forecasting practices that make sense for your business.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Jamie Rivette, CPA, CGFM, will lead the firm’s Assurance Service Line, Taylor Diener, CPA, will lead the Education Services Group and Jennifer Tobias, CPA, will lead the Construction Services Group.

“We are excited that these talented professionals will lead our firm’s service line and teams,” said Dave Youngstrom, President & CEO. “They are all experienced professionals with tremendous leadership qualities who have shown a strong dedication to serving our clients.”

Jamie Rivette brings over 20 years of audit expertise to Yeo & Yeo. She is a Principal based in Yeo & Yeo’s Saginaw office and also leads the firm’s Government Services Group. Holding the Certified Government Financial Manager accreditation, Rivette is highly knowledgeable in governmental accounting, auditing, financial reporting, internal controls and budgeting. As assurance service line leader, Rivette will be responsible for the quality management and growth of Yeo & Yeo’s firm-wide audit and assurance practice.

Rivette serves on the Accounting and Auditing Standards Committee for the Michigan Government Finance Officers Association. In the community, she is treasurer of the Hemlock School Board of Education and a member of the Junior League Community Advisory Board.

Taylor Diener is a Senior Manager specializing in audits for school districts, nonprofits and for-profit businesses. She is a member of Michigan School Business Officials (MSBO) and has presented at MSBO annual conferences. She is based in the firm’s Saginaw office. Diener is also a frequent contributor to the Yeo & Yeo blog, providing audit and compliance insights for school districts and nonprofit organizations. In the community, she serves as treasurer of the PartnerShift Network.

Jennifer Tobias is a Principal in the Kalamazoo office. Her areas of expertise include tax planning and preparation, state and local tax research, agribusiness taxation and credits, and preparation of Prepaid Cemetery and Funeral Home Sales Act annual reports. She is a member of the HBA of West Michigan, the Construction Financial Management Association, the Michigan Funeral Directors Association’s Suppliers Sales Club and the Farm Financial Standards Council. In the community, Tobias serves as the 4-H Advisory Council co-treasurer and the Small Animal Sale clerk and committee treasurer for Barry County. She also volunteers for the Western Michigan Home Builders’ Charity Truck Pull and Home Expo.

Having the right technology is critical for any small business. You operate lean and focus on growth, so your investment in tech must be at the right time and for the right reasons. VoIP (voice over IP) adoption can deliver many advantages for you. The VoIP benefits for small businesses are substantial.

When will you know you’re ready to transition to VoIP?

1. You have remote workers

On the other hand, VoIP provides your team the ability to use their phones from anywhere. They can use a desktop or mobile app. As long as you have an internet connection, there’s no disturbance in availability. Accessibility without the literal cord is one of the most important benefits of VoIP for small businesses. It will enable you to grow and scale without being beholden to your office constraints.

2. You’re in hyper-growth mode

For companies thriving and hiring, you don’t want a phone system that can’t scale with ease. On-premises phones require a call to your provider, new hardware, and other hoops to jump through to add users.

When you’re in rapid growth mode, that slows down your new employee onboarding process. You need those employees to get up to speed fast, and VoIP lets you do that. The admin only needs to add the new person to the account. It takes a few minutes, and that’s it.

3. Your call volume is growing

If your company is witnessing substantial growth in call volume from customers, prospects, or partners, it’s time to consider the switch. Old systems don’t have the sophistication that VoIP has, which can use IVR (Interactive Voice Response).

IVR delivers the messages that play when anyone calls your main number. It provides callers with options on where to direct the call. It can also include standard information like your address, hours of operations, and more. By using IVR, you can manage your queue better.

4. Your call quality is worsening

If you’re constantly hearing static or finding calls drop, your service isn’t reliable. In addition, any downtime to your phone system likely translates to lost revenue.

VoIP phones are clear, no matter where you are. Further, they typically have a much higher uptime than other products. VoIP has high-definition audio so that you can expect high-quality sound from this type of solution.

5. Your call costs are increasing

On-premises phones are expensive to maintain and scale. You’re paying for on-site hardware and technician time. With VoIP, you’ll save tremendously on your phone costs. There’s no hardware to maintain, and technicians aren’t necessary to make changes or add new lines.

6. You’re adding a new location

As your business expands, your technology stack must be able to meet the needs of multiple locations. Continuing with traditional phones will require a significant investment to get things up and running. However, there are better ways to spend that money.

VoIP is a flexible technology that can encompass your entire organization, no matter the location. All you need to do is add the new lines. Managing more than one facility is already challenging; your phone system shouldn’t make things harder.

7. You want to integrate communications into one platform

VoIP is one part of a unified communications (UC) solution. If you want to consolidate voice, chat, video conferencing, and file sharing, you’ll need to adopt VoIP for phones. Integrating with a legacy phone system isn’t possible.

8. You have concerns about business continuity.

If a disaster strikes, old phone systems are dead. As a result, you may not be able to serve customers or communicate internally. One essential element to surviving such an ordeal is to maintain a working communication system.

With VoIP, you can still make and get calls on mobile phones. By accessing the app, you remain available to all stakeholders, suffering as little interruption as possible.

The Benefits of VoIP for Small Business Are Substantial

If any of these scenarios sound familiar, then it’s time to get serious about making the switch to VoIP. Doing so provides flexibility, cost savings, scalability, and more. Learn more about Yeo & Yeo Technology’s cloud-based VoIP phone system and collaboration platform, YeoVoice, powered by Elevate.

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