How Will Revised Tax Limits Affect Your 2022 Taxes?

While Congress didn’t pass the Build Back Better Act in 2021, there are still tax changes that may affect your tax situation for this year. That’s because some tax figures are adjusted annually for inflation.

If you’re like most people, you’re probably more concerned about your 2021 tax bill right now than you are about your 2022 tax situation. That’s understandable because your 2021 individual tax return is generally due to be filed by April 18 (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2022. Below are some Q&As about tax amounts for this year.

I have a 401(k) plan through my job. How much can I contribute to it?

For 2022, you can contribute up to $20,500 (up from $19,500 in 2021) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

How much can I contribute to an IRA for 2022?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, or up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch-up” contribution. (These amounts were the same for 2021.)

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2022, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,400 (up from $2,300 in 2021).

How much do I have to earn in 2022 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $147,000 for this year (up from $142,800 in 2021). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2022?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2022, the standard deduction amount is $25,900 for married couples filing jointly (up from $25,100). For single filers, the amount is $12,950 (up from $12,550) and for heads of households, it’s $19,400 (up from $18,800). If your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize.

If I don’t itemize, can I claim charitable deductions on my 2022 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to two COVID-19-relief laws, non-itemizers could claim a limited charitable contribution deduction for the past two years (for 2021, this deduction is $300 for single taxpayers and $600 for married couples filing jointly). Unfortunately, unless Congress acts to extend this tax break, it has expired for 2022.

How much can I give to one person without triggering a gift tax return in 2022?

The annual gift exclusion for 2022 is $16,000 (up from $15,000 in 2021). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

More to your tax picture

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions.

According to the Tax Policy Center, the federal estate tax impacts very few people. As the law currently stands, the lifetime exemption from federal gift or estate taxes for 2021 is $11.7 million per individual ($23.4 million for a married couple). For 2022, the amount will increase to $12.06 million per individual ($24.12 million for a married couple). What does this mean? Your estate is not taxable until the value exceeds these thresholds. However, that doesn’t mean you shouldn’t file an estate tax return.

What is portability, and how may it affect your estate?

Portability is a provision in federal estate tax law that allows a surviving spouse to use any of the unused estate and gift tax exemption after the deceased spouse’s death. This is called the deceased spousal unused exclusion (DSUE). In general, electing portability protects the surviving spouse from having to pay hefty estate tax bills should the surviving spouse’s estate exceed exemption thresholds. It is important to note that as the law currently stands, the current higher lifetime exemption amounts are slated to “sunset,” meaning it will go back to around $5 million effective January 1, 2026.

An example of the benefits of portability

Consider this example: John and Jill are a married couple. John dies in 2022 with an estate worth $2.06 million. This means that John has a $10 million unused lifetime exemption ($12.06 million – $2.06 million). If Jill elects portability, in 2022, she now has a lifetime exemption individually worth $22.06 million ($12.06 million + $10 million). Let’s say Jill makes it to the “sunset” date mentioned above; Jill still has a lifetime exemption amount of $15 million ($10 million carried over from John’s estate + $5 million of her own exemption). As you can see, the DSUE is preserved regardless of the current exemption (as the law currently stands). If Jill does not elect portability, she loses the unused amount of John’s exemption, and her estate becomes taxable at her lower threshold.

How can you make the portability election?

Make the election on Form 706, the same form you would use to file an estate tax return. To make the election, the estate tax return must be filed timely, that is, within nine months after the date of the decedent’s death. You are also allowed a six-month extension, so that is a maximum 15-month window. However, suppose there was no filing requirement for the decedent’s estate, and you were not aware of the portability election. In that case, you are still eligible to make the portability election under Rev. Proc 2017-34, which allows relief to elect portability up to the second anniversary of the decedent’s death.

Please contact our Yeo & Yeo professionals to discuss how portability may apply to your situation. Our professionals can help you navigate the election, especially in a tax environment with volatile tax law changes.

On January 6, 2022, the U.S. Department of Treasury issued the final rule for the State and Local Fiscal Recovery Funds (SLFRF) Program. The final rule created additional clarification, flexibility, and simplification of the program. The final rule takes effect on April 1, 2022. Until that date, the interim final rule is in effect; however, the final rule’s flexibility and simplification may be used even ahead of the effective date.

The final rule includes the following significant changes or clarifications from the interim final rule:

Calculation of revenue loss – recipients may elect an allowance of up to $10 million without performing a revenue loss calculation. For many government entities, the entire SLFRF award can be covered by this election. Governments may use the revenue loss allowance on any services the government traditionally provides, unless specifically prohibited by Treasury, allowing for maximum flexibility.
Clarifies what capital expenditures are allowable under the public health and economic impact provision.
Broadens the share of workers eligible for premium pay without written justification.
Expands the water, sewer, and infrastructure eligible uses.

Read the Treasury’s Overview of the Final Rule and the complete Final Rule.

Please contact a member of Yeo & Yeo’s Government Services Group if you need assistance.

Ineffective inventory management and reporting can result in bloated working capital and impaired business profits. In industries that rely on overseas suppliers, best practices for managing inventory may have recently changed. In today’s uncertain marketplace, it’s clearly a good idea to review your current approach and make adjustments as needed.

What’s the right reporting method?

Accurate recordkeeping is fundamental to effective inventory management. Generally, there are two primary inventory accounting methods for tax and financial accounting:

1. Last in, first out (LIFO). If you tend to retain inventory items (such as repair parts or durable goods) for long periods, LIFO may be your best choice. It allows you to allocate the most recent (and, therefore, higher) costs first, ideally maximizing your cost of goods sold and minimizing your taxable income.

2. First in, first out (FIFO). This refers to selling the oldest stock first. Generally, FIFO works best with dated goods, perishable items and collectibles. In an inflationary market, this approach usually results in higher income as older purchases with lower costs are included in cost of sales. (In a deflationary market, the opposite generally holds true.)

Of the two, FIFO is used more often. That’s because it more genuinely reflects the typical normal flow of goods and is easier to account for than LIFO, which can be highly complex and deals with inventory costs (not the actual inventory) that may be many years old.

Should your company change its approach?

If you’re dissatisfied with your company’s method, you may be able to change it. But doing so generally isn’t simple. Should a business wish to change its inventory accounting method for tax purposes, it needs to request permission from the IRS. And if it wishes to change for financial accounting purposes, it needs a valid reason. This is why changes in accounting for inventory aren’t routine.

Are you managing inventory efficiently?

For many companies — including retailers, manufacturers and contractors — inventory represents a significant item on the balance sheet. Excessive amounts of inventory can drain working capital (current assets minus current liabilities). This can prevent your company from pursuing value-added business endeavors, such as launching new products, purchasing machines or hiring new salespeople to generate additional revenue.

Conversely, lean (or just-in-time) inventory practices may reduce storage and security costs, freeing up cash, while allowing you to keep a closer, more analytical eye on what’s in stock. In some cases, you may need to upgrade your company’s existing inventory tracking and ordering systems. Newer ones can enable you to forecast demand and keep overstocking to a minimum. In appropriate cases, you can even share data with customers and suppliers to make supply and demand estimates more accurate.

However, there’s a limit to how “lean” a company can operate. During the pandemic, many companies have learned that carrying a reasonable amount of “safety stock” can help avert a supply chain crisis. Previous assumptions about optimal inventory levels and reorder points may need to be adjusted to reflect current supply chain risks.

We can help

The first step when reviewing your company’s inventory practices is to identify sources of inefficiencies. From there, you can figure out the best solutions. Contact us for guidance on inventory reporting methods and best practices in your industry.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Erin Flannery, CPA, CFE, has been accredited as a Certified Fraud Examiner (CFE). A CFE is a specialist educated and trained in preventing, detecting, and investigating fraud.

“The CFE credential is considered the mark of excellence for anti-fraud professionals,” said John Haag Sr., CPA/ABV, CVA, CFF, managing principal and Business Valuation and Litigation Support Services Group co-leader. “Erin’s achievement demonstrates our professionals’ commitment to expanding our level of expertise in providing fraud prevention, litigation support and consulting services for Michigan businesses.”

CFEs have a unique set of skills that combine knowledge of complex financial transactions with an understanding of methods, law and how to resolve allegations of fraud. To become a CFE, an individual must pass a rigorous test on the four major disciplines that comprise the fraud examination body of knowledge.

Certified Fraud Examiners can improve an organization’s financial health. These professionals often collaborate with law enforcement and may provide legal testimony. According to the Association of Certified Fraud Examiners, “Organizations employing CFEs uncover fraud 50% sooner than organizations without CFEs on staff.”

Flannery, a graduate of the University of Charleston, holds a Master of Forensic Accounting. She is a manager based in the Auburn Hills office and a member of the firm’s Business Valuation Services Group and the Trust & Estate Services Group. Her areas of expertise include forensic accounting, management advisory services, and tax planning and preparation services for the firm’s business, nonprofit and individual clients. In the community, she volunteers for the Grosse Pointe Animal Adoption Society.

They say we live in an on-demand world. Right now, many business owners are demanding one thing: more workers. Unfortunately, the labor market is somewhat less than forthcoming.

In the so-called “Great Resignation” of 2021, droves of people voluntarily left their jobs, and many aren’t rushing back to work. Neither are many of those who lost their jobs because of the pandemic. This is putting pressure on companies to do everything in their power to retain current employees and look as appealing as possible to the relatively few job seekers out there.

One element of a business that can make or break its employer brand is communications. When workers feel disconnected from ownership, it’s easy for them to listen to rumors and misinformation — and that can motivate them to walk out the door. Here are some ways you can step up your communications game in 2022.

Just ask

When business owners get caught off guard by workforce issues, the problem often is that they’re doing all the talking and little of the listening. The easiest way to find out what your employees are thinking is to just ask.

Putting a suggestion box in the break room, though it may sound old-fashioned, can pay off. Also consider using an online tool that allows employees to provide feedback anonymously.

Let employees vent their concerns and ask questions. Ownership or executive management could reply to queries with the broadest implications, while managers could handle questions specific to a given department or position. Share answers through companywide emails or make them a feature of an internal newsletter or blog.

At least once a year, hold a town hall with staff members to answer questions and discuss issues face to face. Even if the meeting must be held virtually, let employees see and hear the straight truth from you.

Manage your internal profile

Owners of large companies often engage PR consultants to help them manage not only their public images, but also the personas they convey to employees. If you own a small to midsize business, this expense may be unnecessary, but you should think about your internal profile and manage it like the critical asset that it is.

Be sure photographs and personal information used in internal communications are up to date. A profile pic of you from a decade or two ago says, “I don’t care enough to share who I am today.”

Although you should avoid getting up in employees’ business too often and disrupting operations, don’t let too much time go by between communications. Regularly tour each company department or facility, giving both managers and employees a chance to speak with you candidly. Sit in on meetings periodically; ask and answer questions. Employees will likely get a morale boost from seeing you take an active interest in their corner of the business.

In fact, for a potentially fun and insightful change of pace, set aside a day to learn about a specific company position. Shadow selected employees and let them explain what really goes into their jobs. Pose questions but stay out of the way. Clarify upfront that you’re not playing “gotcha” but trying to better understand how things get done and what improvements, if any, could be made.

Challenges ahead

Business owners face formidable challenges in the year ahead. One could say the power balance has shifted a bit from owners offering jobs to workers offering services. Being a strong, authentic and transparent communicator can give you a competitive advantage.

You may pay out a bundle in out-of-pocket medical costs each year. But can you deduct them on your tax return? It’s possible but not easy. Medical expenses can be claimed as a deduction only to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income. Plus, medical expenses are deductible only if you itemize, which means that your itemized deductions must exceed your standard deduction.

Qualifying costs include many items other than hospital and doctor bills. Here are some items to take into account in determining a possible deduction:

Insurance premiums. The cost of health insurance is a medical expense that can total thousands of dollars a year. Even if your employer provides you with coverage, you can deduct the portion of the premiums you pay. Long-term care insurance premiums also qualify, subject to dollar limits based on age.

Transportation. The cost of getting to and from medical treatment is an eligible expense. This includes taxi fares, public transportation or using your own car. Car costs can be calculated at 18 cents a mile for miles driven in 2022 (up from 16 cents in 2021), plus tolls and parking. Alternatively, you can deduct your actual costs, including gas and oil, but not general costs such as insurance, depreciation or maintenance.

Therapists and nurses. Services provided by individuals other than physicians can qualify if they relate to a medical condition and aren’t for general health. For example, the cost of physical therapy after knee surgery would qualify, but the costs of a personal trainer to tone you up wouldn’t. Also qualifying are amounts paid to a psychologist for medical care and certain long-term care services required by chronically ill individuals.

Eyeglasses, hearing aids, dental work and prescriptions. Deductible expenses include the cost of glasses, contacts, hearing aids and most dental work. Purely cosmetic expenses (such as tooth whitening) don’t qualify, but certain medically necessary cosmetic surgery is deductible. Prescription drugs qualify, but nonprescription drugs such as aspirin don’t even if a physician recommends them. Neither do amounts paid for treatments that are illegal under federal law (such as marijuana), even if permitted under state law.

Smoking-cessation programs. Amounts paid to participate in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible expenses. However, nonprescription gum and certain nicotine patches aren’t.

Weight-loss programs. A weight-loss program is a deductible expense if undertaken as treatment for a disease diagnosed by a physician. This can be obesity or another disease, such as hypertension, for which a doctor directs you to lose weight. It’s a good idea to get a written diagnosis. Deductible expenses include fees paid to join a program and attend meetings. However, the cost of low-calorie food that you eat in place of a regular diet isn’t deductible.

Dependents and others. You can deduct the medical expenses you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as a parent or grandparent, who would qualify as your dependent except that he or she has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them.

In summation, medical costs are fairly broadly defined for deduction purposes. We can assess if you qualify for a deduction or answer any questions you have.

We’ve all become a lot more flexible in business over the past couple of years. We’ve had no choice, right?

But while you and your team have become used to different working arrangements, has that flexibility moved over to your budget?

Here’s a great quote: “Budgets tell us what we can’t afford, but they don’t keep us from buying it.”

As you create your IT budget for 2022 – if that’s something you do in your business at this time of year – you may fall into the trap of trying to keep your expenses low.

But the sad fact is that, whether budgeted for or not, a ransomware attack or another critical incident will cost you a lot of money. As you may know, cyberattacks are rising at a rapid rate. And this year, we’ve seen some of the most significant incidents ever.

It’s crucial for you to do whatever you can to avoid an attack on your business and plan for what happens if you are attacked—having a solid plan in place can reduce the financial and reputational impact of a breach.

If you’re working with an IT support partner, getting them involved in your IT budgeting is a good idea. They’ll be able to give you an expert view on the right things to consider and include in your budget.

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

I’ve heard I can voice type on websites. Is that true?

Yes, if you’re using Microsoft Edge in Windows 10 or 11. Turn it on by pressing the Windows logo key + H.

How do I schedule appointments by email?

In Outlook, you can select Reply with Meeting in the Ribbon. This creates a new meeting request, with your email in the body of the meeting request.

I deal with clients in different countries. Is there an easy way to deal with time zones?

You can add multiple time zones in your Outlook calendar. Go to File > Options, click the Calendar tab and Time zones, tick ‘Show a different time zone’ and give it a name. Repeat as necessary.

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

Many employees — from retail workers to sales staffers involved in complex business-to-business transactions — receive part of their compensation from sales-related commissions. To attract and retain top talent, some companies even allow employees to earn unlimited commissions.

Unfortunately, some commission-compensated employees may be tempted to abuse this system by falsifying sales or rates. Fraud methods vary depending on an unethical salesperson’s employer and role. But companies need to be aware of the possibility of commission fraud and take steps to prevent it.

3 forms

Generally, commission fraud takes one of three forms:

Invention of sales. A retail employee enters a fake purchase at the point of sale (POS) to generate a commission. Or an employee involved in selling business services creates a fraudulent sales contract.
Overstatement of sales. Here, a worker alters internal sales reports or invoices or inflates sales captured via the company’s POS.
Inflation of commission rates. An employee changes a company’s commission records to reflect a higher pay rate. Employees who don’t have access to such records might collude with someone who does (such as an accounting staffer) to alter compensation rates.

More sophisticated schemes can involve collusion with customers and other outside parties.

Data-driven approach to detection

Regardless of the method used to commit commission fraud, these schemes create data and a document trail your business can use to detect abuse. For example, to uncover commission fraud in progress, you should regularly analyze commission expenses relative to your company’s sales. After accounting for timing differences, the volume of commission payments should correlate to sales revenue.

Also pay close attention to the total commission paid to each employee. Focus on outliers whose commission levels are significantly higher and analyze sales activity and the associated commission rates to ensure consistency. By creating benchmarks — based on commission sales by employee type, location and seniority — you can more easily detect fraud in subsequent periods. Randomly sampling sales associated with commissions and ensuring relevant documentation exists for each payment can be effective, too. You can contact individual customers to verify sales transactions by disguising your calls as customer satisfaction checks.

Commission schemes sometimes require cooperation with other employees and customers, which usually leaves an email trail. Consistent with your company’s policies and procedures, monitor employee email communications for evidence of wrongdoing.

Prevention processes

There are other processes your business can follow to prevent fraud from occurring in the first place. For example:

Formalize policies prohibiting it. State the consequences (for instance, termination and criminal charges) of committing commission fraud in your employee handbook. Also routinely stress your company’s commitment to detecting commission fraud and explain that management will regularly scrutinize individual payments for signs of malfeasance.

Minimize the potential for record tampering. To help prevent salespeople from accessing accounting records, rotate accounting staff assigned to recording commission payments. Segregation of all accounting duties is important to help prevent other fraud schemes from flourishing in your organization.

Set realistic sales goals. Although some employees commit fraud for personal enrichment, others cheat to meet their employer’s overly aggressive sales targets. Periodically solicit feedback from sales staff about their ability to meet objectives and pay close attention when salespeople complain or leave your company. If you encounter excessive frustration in meeting targets, make them more achievable.

Making manipulation difficult

When structured and managed correctly, a commission program can boost employee compensation and morale — and add to your company’s bottom line. But schemes to manipulate a company’s compensation structure often are all too simple for shady salespeople to commit. To make fraud much harder to perpetrate, you may need to step up data analysis and revamp your internal controls.

Many companies don’t have the internal resources to conduct this type of analysis and don’t know how to fix controls that aren’t working. That’s where a CPA or forensic accounting specialist can help. Contact us.

Do you want to sell commercial or investment real estate that has appreciated significantly? One way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange where you exchange the property rather than sell it. With real estate prices up in some markets (and higher resulting tax bills), the like-kind exchange strategy may be attractive.

A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).

For these purposes, like-kind is broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.

Important change

Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.

If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, please contact us to discuss the matter.

Assuming the exchange qualifies, here’s how the tax rules work. If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”

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

An example to illustrate

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

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

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

Great tax-deferral vehicle

Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade or business real property. Contact us if you have questions or would like to discuss the strategy further.

Management needs timely, accurate feedback to guide operating decisions, anticipate problems and take advantage of emerging opportunities. Unfortunately, comprehensive financial statements take a long time to generate. Reporting key performance indicators (KPIs) on a monthly or weekly basis is a simplified alternative to gauge performance in real time.

Popular financial metrics

KPIs measure an organization’s progress toward its objectives. However, with so many metrics to choose from, data overload can easily happen. That’s why your KPI report should be customized and streamlined to cover the metrics that are the most critical to your success.

KPIs differ from one company to the next based on the industry and the company’s objectives. Common examples include:

Operating cash flow. This helps management evaluate how much cash is available for immediate spending needs. Poor cash flow, not slow sales or lagging profits, is one of the leading causes of business bankruptcy.

Return on assets. This metric equals net income divided by total assets. It measures how effectively your company is managing its assets to generate earnings.

Inventory turnover. The number of times inventory is converted into sales is usually computed by dividing cost of goods sold by the average inventory balance. This tells you how efficiently you’re “selling through” inventory. Many companies waste valuable cash by allowing slow-moving inventory to sit idle on their shelves for too long.

KPIs can also be industry specific. To illustrate, auto dealers might compare new vehicle sales to used vehicle sales; contractors might focus on the bid-hit ratio; and hospitals might want to know the average wait time in the emergency room or the bed occupancy rate in the intensive care unit.

Beyond the numbers

Many companies also include nonfinancial metrics in the areas of customer service, sales, marketing and manufacturing. However, nonfinancial KPIs must be both specific and measurable.

For instance, just saying that your company wants to “provide better customer service” doesn’t produce a sound KPI. Instead, if your goal is to improve response time to customer complaints, a relevant KPI might be to provide an initial response to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction.

Benchmarking results

A basis of comparison is important when reviewing KPIs. Benchmarks will provide a standard against which you can compare to see how your KPIs stack up. You can benchmark your current KPIs against historical results or averages published in trade publications.

This will help you spot trends and identify potential problems, allowing you to deal with them before they worsen. For example, if your accounts receivable days are lengthening, it might indicate that your collections are lagging and a cash flow crunch is looming.

Unlocking the keys to success

During the pandemic and the ensuing economic turmoil, tracking relevant performance metrics is more important than ever. Threats and opportunities abound — and new ones seem to arise quickly. We can help you tailor your KPI report to meet your business needs, as well as find meaningful benchmarks based on current market conditions.

Business owners, year end is officially here. It may even be over by the time you read this. (If so, Happy New Year!) In any case, the end of one year and the beginning of another is always an optimal time to look back on the preceding 12 calendar months and ask a deceptively simple question: How’d we do?

Large companies tend to have thoroughly documented strategic plans in place, some stretching years into the future, that include various metrics for measuring whether they’ve achieved the growth intended. For them, reviewing a calendar year’s success in terms of strategic planning is relatively easy. They mostly just crunch the numbers.

For small to midsize businesses, the strategic planning process may be a little more informal and less precise. Yet even if your strategic plan isn’t a detailed document replete with spreadsheets and pie charts, you can still review actual performance against it and use this assessment to look ahead to 2022.

Areas that inform

Generally, there are three areas of most businesses that inform the success of a strategic plan. They are:

HR. Your people are your most valuable asset. So, how does your employee turnover rate for 2021 compare with previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.

Much has been written this year about “the Great Resignation,” the trend of employees leaving their jobs for various reasons. How has it affected your company? Has it stymied your efforts to meet strategic goals? You may need to make hiring and retention efforts a focal point of your 2022 strategic plan.

Sales and marketing. Did you meet your monthly goals for new sales, in terms of both revenue and number of new customers? Did you generate an adequate return on investment (ROI) for your marketing dollars?

If you can’t clearly answer the latter question, enhance your tracking of existing marketing efforts so you can better gauge ROI going forward. And set reasonable but growth-oriented sales goals for 2022 that will make or keep your business a competitive force to be reckoned with.

Production. If you manufacture products, what was your unit reject rate over the past year? Or, if yours is a service business, how satisfied were your customers with the level of service provided?

Again, if you’re not sure, you may need to establish or enhance your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals. Many companies now use customer satisfaction scores or a customer satisfaction index to establish objectives and benchmark their success.

Flexibility and the right adjustments

By now, you should probably have at least the framework of a 2022 strategic plan in place. However, if you’re not that far along, don’t worry. Strategic plans are best when they’re flexible and open to adjustment as economic conditions and buying trends change.

This is particularly true when the year ahead looks as uncertain as this one, given the continuing impact of the pandemic. We can help you review your 2021 financials and use the right metrics to develop a cohesive, realistic strategic plan for the next 12 months.

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 15 of Everyday Business, host Taylor Bartosiewicz, marketing associate, is joined by Dave Youngstrom, Yeo & Yeo’s new President & CEO. Listen in as Taylor talks to Dave about his career and his vision for the future of Yeo & Yeo. Dave, a principal and shareholder, serves on Yeo & Yeo’s board of directors, is a member of the firm’s strategic planning team and has led Yeo & Yeo’s Assurance Service Line since 2015. He has very successfully directed the firm-wide audit practice, streamlining and growing the firm’s assurance solutions.

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.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Marisa Ahrens, CPA, Michael Evrard, CPA, Jessica Rolfe, CPA, and Jennifer Tobias, CPA, have been promoted to principal.

Dave Youngstrom, President & CEO, says, Our four new principals are talented individuals who are committed to helping Yeo & Yeo’s clients and young professionals succeed. They are strong leaders, serving clients in their respective industries with energy and enthusiasm. We are proud to welcome Marisa, Michael, Jessica and Jennifer to the principal group.”

Marisa Ahrens leads the firm’s Employee Benefit Plan Audit Services Group. She specializes in employee benefit plan audits and advisory services, including 401(k) and 403(b) plan audits, defined benefit plan audits, employee stock ownership plan (ESOP) audits, internal controls, and efficiency consulting. She is based in the firm’s Saginaw office. Ahrens has more than 13 years of experience providing audits for nonprofits, healthcare organizations and for-profit companies. In the community, she serves as treasurer of the Mid-Michigan Children’s Museum and as board secretary for the Yeo & Yeo Foundation.

Michael Evrard is a member of the firm’s Nonprofit Services Group, the Audit Services Group and the Education Services Group. He joined Yeo & Yeo in 2010 and is based in the firm’s Kalamazoo office. He assisted in the development of the firm’s award-winning YeoLEAN audit process and provides audit services for school districts, construction companies and nonprofit organizations. Evrard is a frequent contributor to Yeo & Yeo’s blog and the firm’s Nonprofit Advisor eNewsletter. He holds the AICPA Advanced Single Audit Certification and is a Leadership Genesee graduate.

Jessica Rolfe leads the firm’s Nonprofit Services Group and is a member of the Audit Services Group and Education Services Group. She specializes in audits for government entities, school districts, nonprofit organizations and healthcare organizations. She joined the firm in 2009 and is based in the firm’s Saginaw office. In the community, Rolfe serves as treasurer of the Tri-County Community Adjudication Program and volunteers as an allocation panel member for United Way of Midland County. She is a frequent contributor to Yeo & Yeo’s blog and is a presenter for Yeo & Yeo’s nonprofit board trainings.

Jennifer Tobias leads the firm’s Construction Services Group, is co-leader of the Death Care Services Group and is a member of the Agribusiness Services Group. She joined Yeo & Yeo in 2006 and is based in the firm’s Kalamazoo office. Her areas of expertise include agribusiness taxation and credits, and examination and preparation of Prepaid Funeral and Cemetery Sales Act annual reports. In the community, Tobias serves as the Barry County Small Animal Sale Committee treasurer and 4-H Advisory Council co-treasurer. She is a graduate of the Upstream Academy’s three-year leadership development program, the Emerging Leaders Academy.

The number of people engaged in the “gig” or sharing economy has grown in recent years. In an August 2021 survey, the Pew Research Center found that 16% of Americans have earned money at some time through online gig platforms. This includes providing car rides, shopping for groceries, walking dogs, performing household tasks, running errands and making deliveries from a restaurant or store.

There are tax consequences for the people who perform these jobs. Basically, if you receive income from an online platform offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made.

Traits of gig workers

Gig workers are those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb, Angi, Instacart and DoorDash.

Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other protections of federal laws, aren’t part of states’ unemployment insurance systems, and are on their own when it comes to training, retirement savings and taxes.

Tax obligations

If you’re part of the gig or sharing economy, here are some considerations.

You may need to make quarterly estimated tax payments because your income isn’t subject to withholding. These payments are generally due on April 15, June 15, September 15 and January 15 of the following year. (If a deadline falls on a Saturday or Sunday, the deadline is extended to the next business day.)
You should receive a Form 1099-NEC, Nonemployee Compensation, a Form 1099-K or other income statement from the online platform.
Some or all of your business expenses may be deductible on your tax return, subject to the normal tax limitations and rules. For example, if you provide rides with your own car, you may be able to deduct depreciation for wear and tear and deterioration of the vehicle. Be aware that if you rent a room in your main home or vacation home, the rules for deducting expenses can be complex.

Diligent recordkeeping

It’s critical to keep good records tracking income and expenses in case you are audited by the IRS or a state/local tax authority. Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an expensive surprise when you file your tax return next year.

Yeo & Yeo, a leading Michigan CPA and advisory firm, announces the election of Jacob Sopczynski, CPA, and re-election of Michael Georges, CPA, to Yeo & Yeo’s Board of Directors, and the appointment of Brian Dixon and David Jewell to Managing Principals effective January 1, 2022.

“It’s a privilege to have such talented and accomplished leaders who are committed to our firm’s people, clients and communities,” says Dave Youngstrom, CPA, CEO-elect. “I thank our outgoing board members and managing principals who have been instrumental to our firm’s success.”

Jacob Sopczynski, CPA, principal , is a member of the firm’s Manufacturing Services Group. He provides audit services for businesses, nonprofits and governments, as well as tax planning and consulting services. In the community, he serves on the Board of Trustees as Treasurer for the International Academy of Flint and is Treasurer of Pinconning Plays, Inc. He is based in the firm’s Flint office.

Michael Georges, CPA, principal, will serve his third two-year term. He is a member of the firm’s Nonprofit Services Group. His areas of expertise include audit services for nonprofits, government entities and school districts, and tax planning and preparation. He has 35 years of public accounting experience and is based in the firm’s Ann Arbor office. In the community, he serves as a board member for the Grosse Ile Education Foundation.

David Jewell, CPA, managing principal in Yeo & Yeo’s Kalamazoo office, and Tammy Moncrief, CPA, managing principal in the Auburn Hills office, will continue to serve year two of their two-year term on the board.

Brian Dixon, CPA, assumes the role as managing principal of Yeo & Yeo’s Saginaw office, succeeding Peter Bender, CPA, who will focus on expanding the firm’s Wealth Management services. Dixon joined Yeo & Yeo in 1998 and was named principal in 2012. He leads the firm’s Education Services Group and is a member of the firm’s Health Care Services Group. He specializes in audit services for school districts, healthcare organizations, government entities and small businesses. In the community, he serves as board treasurer for the Frankenmuth Credit Union, Carrollton Education Foundation, United Way of Saginaw County and Saginaw Area Jaycees Foundation.

Jewell will serve as managing principal of Yeo & Yeo’s Kalamazoo office, succeeding Carol Patridge, who will begin transitioning toward retirement after 33 years with the firm. Jewell leads the firm’s Tax Service Line overseeing the firm’s tax processes, technologies, staff expertise and service innovation across the firm’s eight offices. He joined Yeo & Yeo in 2008 and has more than 19 years of experience in public accounting. In the community, he serves as Treasurer and Finance Committee Chair for the Boys and Girls Club of Greater Kalamazoo.

Yeo & Yeo’s Managing principals handle the day-to-day office operations, deliver on client experience at the office level, support staff development, and promote visibility and involvement in the community.

After two years of no increases, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2022 by 2.5 cents per mile. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 58.5 cents (up from 56 cents for 2021).

The increased tax deduction partly reflects the price of gasoline. On December 21, 2021, the national average price of a gallon of regular gas was $3.29, compared with $2.22 a year earlier, according to AAA Gas Prices.

Don’t want to keep track of actual expenses?

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

How is the rate calculated?

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.

When can the cents-per-mile method not be used?

There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2022 — or claiming 2021 expenses on your 2021 income tax return.

Last-minute changes to contracts can be frustrating. But, if managed properly, they can sometimes provide an opportunity to boost profits. Here are ways construction companies, engineering firms, software developers and other businesses that enter into long-term contracts with customers can better track change orders, account for them properly on their financial statements and use them to enhance the bottom line.

Common mistakes

Customers can sometimes change their minds after signing a contract, but before work is completed. To keep projects on schedule, it’s not unusual for contractors to begin out-of-scope work before a change order is approved. But failure to properly track and account for the costs and revenue associated with this work can have a negative impact on a business’s financial statements.

Suppose, for example, that a contractor records costs attributable to a change order in total incurred job costs to date, without making a corresponding adjustment to the total contract price and total estimated contract costs. To a lender or surety, this may indicate excessive underbillings.

On the other hand, profit fade can occur if contractors are overly optimistic about their chances of receiving change order revenue. If a contractor increases the total contract price based on out-of-scope work but is unable to secure change order approval, profits may fade as the job progresses. This can also shake the confidence of financial statement users.

3 categories

Without proper tracking procedures, contractors may inadvertently forget to charge customers for change orders in accordance with the terms of agreement. Change orders generally fall into these three categories:

1. Approved. For this category, it’s appropriate to adjust incurred costs, total estimated costs and the total contract price. Depending on the contract’s change-order provisions, this may increase the business’s estimated gross profits.

2. Unpriced. If the parties agree on the scope of work but leave negotiations on price for later, the accounting treatment depends on the probability that the contractor will recover its costs. If it’s not probable, change order costs are treated as costs of contract performance in the period during which they’re incurred, and the contract price is not adjusted. As a result, the contractor’s estimated gross profit decreases.

If it’s probable that the costs will be recovered through a contract price adjustment, the contractor can either:

Defer the costs until the parties have agreed on the change in contract price, or
Treat them as costs of contract performance in the period incurred and increase the contract price to the extent of the costs incurred (resulting in no change in estimated gross profit).

To determine whether recovery is probable, a contractor should consider its past experience in negotiating change orders and other factors. If it’s probable that the contract price will be increased by an amount that exceeds the costs incurred (increasing estimated gross profit), the contractor may recognize increased revenue — provided realization of that revenue is “assured beyond a reasonable doubt.”

3. Unapproved. These should be treated as claims. It’s appropriate to recognize additional contract revenue only if, under guidance provided in the accounting rules, it’s probable that a claim will generate such revenue and the amount can be reliably estimated.

We can help

Accounting for change orders under the percentage-of-completion method of accounting can sometimes be confusing. Contact us for help managing your company’s change order procedures and improving the accuracy and transparency of your financial statements.

As the new year approaches, the future of the Build Back Better Act (BBBA) — and the strength of the economic recovery — remains uncertain. One thing that’s not uncertain when it comes to your business is the impending deadline to apply for COVID-19 Economic Injury Disaster Loan (EIDL) funding, some of which needn’t be repaid.

The U.S. Small Business Administration (SBA) expanded eligibility in September 2021. While you may not have qualified or considered EIDL funding necessary previously, you might want to reconsider in light of yet another wave of COVID infections. But you’ll have to do so quickly, as the application deadline is December 31, 2021.

Shaky economic ground ahead?

Sen. Joe Manchin (D-WV) released a statement on December 19 announcing that he “cannot vote to move forward” on the BBBA. The $2.1 billion bill that passed in the U.S. House of Representatives includes numerous provisions related to healthcare, energy initiatives, immigration, education, social programs and taxes.

The Democrats lack the votes to pass the proposed legislation in the Senate without Manchin’s support. Yet Senate Majority Leader Chuck Schumer (D-NY) indicated on December 20 that he nonetheless intends to hold a vote on the bill in early 2022. Schumer’s announcement came hours after Goldman Sachs reduced its predictions for U.S. economic growth in 2022 based on Manchin’s statement.

Types of EIDL relief available

The COVID-19 EIDL program was created to make low-interest fixed-rate long-term loans to provide small businesses (including sole proprietorships and independent contractors) the working capital they need to withstand the effects of the pandemic. Three types of funding are available:

Loans. This funding type features a 30-year term and fixed interest rate of 3.75%. The proceeds can be used for any normal operating expense, including payroll, rent or mortgage, utilities, and other ordinary businesses expenses. Since the recent program expansion (see below), funds also can be used to pay or pre-pay business debt incurred at any time, including after submitting the application, and regularly scheduled payments of federal debt.

Targeted advances. Businesses located in low-income communities, have no more than 300 employees and have suffered more than a 30% reduction in revenue may qualify for a targeted advance up to $10,000. These advances don’t have to be repaid.

Supplemental targeted advances. Businesses in low-income communities that have no more than 10 employees and saw revenue declines of more than 50% may be eligible for an additional $5,000. Supplemental advances also don’t require repayment.

The recent expansion

The SBA has implemented several changes to make it easier for small businesses to access the COVID-19 EIDL loans. Among other things, the SBA:

Expanded eligibility from organizations with no more than 500 employees (including affiliates) to encompass businesses in the hardest hit industries with no more than 500 employees per physical location, as long as the business (with affiliates) has no more than 20 locations,
Increased the maximum loan amount from $500,000 to $2 million,
Extended the payment deferment period to two years after the loan origination date for all loans (interest will accrue during that period, and principal and interest payments must be made over the remaining 28 years of the loan term), and
Simplified the affiliation requirements.

The SBA has also limited entities that are part of a single corporate group to a combined total of no more than $10 million in COVID-19 EIDL loans.

Additional eligibility requirements

Applicants must be physically located in the United States or a designated territory and have suffered working capital losses due to the COVID-19 pandemic. In addition, the businesses must have been in operation on or before January 31, 2020.

Businesses (other than sole proprietorships) must have a valid tax identification number. Each owner, member, partner or shareholder of 20% or more must be a U.S. citizen, non-citizen national or qualified alien with a valid Social Security number.

For loans of $500,000 or less, you must have a credit score of at least 570. For larger loans, the credit score must be at least 625. Personal guaranty and collateral requirements may apply, too, depending on the amount of the loan.

The looming deadline

The SBA will accept applications for loans and targeted advances until December 31, 2021. It will continue to process applications after that date, until the funds are exhausted. While the SBA earlier advised businesses seeking supplemental targeted advances to submit applications by December 10, 2021, it later announced it will accept applications until year end. It can’t process applications after the deadline, though, so applications submitted near the deadline might not be processed.

Note that borrowers can request increases, up to their maximum loan eligibility amount, for up to two years after loan origination or until the program funds are exhausted. In addition, the SBA will accept reconsideration and appeal requests received before December 31, 2021, if received on a timely basis. For reconsiderations, that means within six months from the date the application was declined. Appeals must be received within 30 days from the date the reconsideration was declined.

Don’t dawdle

You can apply online for COVID-19 EIDL relief, but the clock is ticking. We can help you determine if you should go this route and help you collect the necessary documentation.