SALT Cap Workaround Bill for Flow-Through Entities

On December 20, Governor Whitmer signed Michigan House Bill 5376 into law. The “SALT Cap Workaround” will allow Michigan income tax to be calculated and paid at the entity level for flow-through entities (i.e., partnerships and S corporations), if an election is made. The flow-through entity tax rate will be the same as the Michigan individual income tax rate, 4.25%. Business owners of a flow-through entity who make this election will be able to claim a tax credit equal to their allocated share of the tax paid by the flow-through entity.

The Tax Cuts & Jobs Act of 2017 capped the deduction for state and local taxes at $10,000. This bill is a response to help Michigan business owners impacted by that limitation. Business owners would benefit on the federal level by being able to deduct state tax paid in full on the entity’s federal return, thereby realizing that full deduction instead of being subject to the 10% cap if they paid at the individual level.

For tax years beginning January 1, 2021, flow-through entities will have until April 15, 2022, to make the election. Once selected, the election will be irrevocable for the next two tax years.

The Michigan Department of Treasury will administer the flow-through entity tax. Forms to make the election and remit the tax are not yet available.

Businesses should evaluate their tax situations when electing a flow-through entity tax for any SALT (State And Local Tax) cap workaround. Michigan is now one of several states that have enacted legislation in response to the SALT cap. If you have questions about the Michigan House Bill 5376 or flow-through entity tax elections for other states, please contact your Yeo & Yeo tax professional.

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 17 (The usual deadline of January 15 is a Saturday)

Pay the final installment of 2021 estimated tax.
Farmers and fishermen: Pay estimated tax for 2021.

January 31

File 2021 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
Provide copies of 2021 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
File 2021 Forms 1099-NEC, “Nonemployee Compensation” with the IRS and provide copes to recipients.
File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2021. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2021. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2021 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

File 2021 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2021 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2021 contributions to pension and profit-sharing plans.

As the year winds down, business owners have many calendar months to look back on to determine how successfully their products or services have sold. While reviewing the numbers, think about your people, too.

To achieve success in 2022, you’ll need a strong sales team in place. However, it’s a difficult time to hire skilled salespeople. So, you don’t want to be too quick with the walking papers for anyone who’s currently struggling. Rather, take a moment to consider whether each member of your staff has the fundamentals of a solid salesperson and, if not, how you can help them build those skills.

The right personality and skill set

One point to think about is whether someone is a natural to the role or needs additional or specialized training to become better at it. People who struggle to form relationships, have no tolerance for rejection or failure, and desire a routine workday may not belong in sales. Or maybe they can grow into it.

Using a sales aptitude test both during the hiring process and as a performance management tool can help you identify those most likely to struggle. Training and coaching of employees who lack a natural aptitude for sales could help them develop into adequate or even strong performers. However, in some cases, you might need to choose between moving a salesperson into another area of the business or letting the person go.

A successful approach

There are a multitude of sales tactics — such as the hard sell, the soft sell, upselling, storytelling and problem solving. At the end of the day, customers buy from people whom they like and trust and who can deliver what they promise.

Doing the little things separates those at the top of the sales profession from everyone else. It helps them build lasting and fruitful relationships with customers. Identify the most valuable tactics of your top sellers and share those approaches with the rest of the staff through ongoing training and upskilling.

Meaningful metrics

Some may say you shouldn’t judge salespeople only on their numbers, but sales metrics are nonetheless a significant factor. After all, it’s a results-oriented profession. If someone isn’t putting up the numbers, you need to decide whether that salesperson shows enough promise to bring those results up, or, once again, if you should consider changing their role or even terminating their employment.

The question and challenge for you as a business owner, and your sales managers if you have them, is how to measure results accurately and fairly — and ultimately define success. There are many sales metrics to consider. Which ones you should track and use to evaluate the performance of your salespeople depends on your strategic priorities.

For example, if you’re looking to speed up the sales cycle, you could look at average days to close. Or, if you’re concerned that your sales department just isn’t bringing in enough revenue, you could calculate average deal size.

Barrel ahead

As your business barrels ahead into 2022, make sure your sales staff is up to the challenge of fulfilling the strategic objectives you have set for yourself. We can help you establish reasonable goals, choose the right metrics for measuring progress, and regularly track and assess the numbers.

If you’re paying back college loans for yourself or your children, you may wonder if you can deduct the interest you pay on the loans. The answer is yes, subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. Unfortunately, the deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, and as explained below, the levels aren’t very high.

The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain postgraduate programs also qualify. Therefore, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital or health care facility offering postgraduate training can qualify.

It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.

Phase-out amounts

For 2021, the deduction is phased out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 ($70,000 and $85,000 for single filers). Thus, the deduction is unavailable for taxpayers with AGI of $170,000 ($85,000 for single filers) or more.

For 2022, the deduction will be phased out for taxpayers who are married filing jointly with AGI between $145,000 and $175,000 ($70,000 and $85,000 for single filers). That means the deduction is unavailable for taxpayers with AGI of $175,000 ($85,000 for single filers) or more.

Married taxpayers must file jointly to claim this deduction.

No deduction is allowed to a taxpayer who can be claimed as a dependent on another’s return. For example, let’s say parents are paying for the college education of a child whom the parents are claiming as a dependent on their tax return. The interest deduction is only available for interest the parent pays on a qualifying loan, not for any interest the child-student may pay on a loan he or she may have taken out. The child will be able to deduct interest that is paid in a later year when he or she is no longer a dependent.

The deduction is taken “above the line.” In other words, it’s subtracted from gross income to determine AGI. Thus, it’s available even to taxpayers who don’t itemize deductions.

Other requirements

The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his or her spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.

Taxpayers should keep records to verify qualifying expenditures. Documenting a tuition expense isn’t likely to pose a problem. However, care should be taken to document other qualifying education-related expenditures such as for books, equipment, fees and transportation.

Documenting room and board expenses should be straightforward for students living and dining on campus. Students who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.

We can help determine whether you qualify for this deduction or answer any questions you may have about it.

While digitalization continues to take hold of the business world, the billing and collections functions for many organizations remain largely paper based. Businesses that automate the accounts receivable process may accomplish several operational and financial goals. Here are five key benefits that organizations can unlock when they “go digital.”

1. Manual processing is minimized; efficiency is maximized

Generating a paper invoice is a laborious process, especially when there’s a digital alternative. Instead of creating, printing and mailing an invoice, organizations can autogenerate electronic invoices and e-reminders for overdue payments.

This reduces the administrative burden considerably. Plus, e-billing saves on office supplies such as paper, envelopes and stamps.

2. The payment process is faster

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

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

3. Customers can use their preferred payment method

Instead of forcing customers to issue paper checks, they can make payments using digital payment options, including credit cards, ACH or wire transfers. Businesses that sell directly to consumers may also accept payment via PayPal, Venmo or other digital payment apps. These alternatives may incur lower fees than those charged by credit card companies.

4. Customer loyalty may grow

Organizations that facilitate digital payment are easier to do business with. Reducing customers’ administrative burdens can, in turn, increase customer loyalty. It can also remove the potential for conflict that may result when payments go missing or arrive late.

5. The potential for fraud decreases

Paper checks may be susceptible to fraud. Digitalization removes the need to store and mail paper checks, mitigating the potential for employee fraud. And because there’s no longer a need to mail checks, it prevents the interception of checks by a third party.

We can help

Contact us for help in looking at internal controls and areas that you can gain efficiencies throughout your accounts receivable process.

Once a revolutionary breakthrough in communications technology, email is now an afterthought for many people. But that can cause problems for businesses: Servers get filled up, messages get lost, and employees’ productivity isn’t quite what it could be.

Although doing so may seem superfluous or antiquated, providing employees with some retraining or upskilling on proper email usage can improve efficiency and morale. Obviously, you don’t want to spend a lot of time or money on this, but a “lunch-and-learn” seminar or a series of quick meetings could prove effective and affordable.

Here are some email management tips that you might want to consider:

Set up project-specific folders. Too many users still store emails in one of three places: the in-box, the “Sent” folder or the “Deleted Items” folder. Creating job-specific folders allows employees to more easily find what they need and to periodically purge unneeded emails once a project or period ends.

Regularly check junk mail folders and adjust filters as necessary. Like many companies, yours has probably set up junk mail folders to cut down on the number of useless and potentially dangerous emails launched at your staff.

Bear in mind that you may need to periodically adjust the filter settings to ensure employees aren’t inadvertently blocking legitimate messages. Ask staffers to check their junk folders and see whether anything important is in them. Once an acceptable sensitivity level is set, establish an automatic archiving process to systematically purge junk emails.

Encourage employees to hit the unsubscribe button. They’re technically not spam but eventually end up that way. The e-newsletters, bulletins and other regular messages that employees signed up for years ago, but no longer use, can clutter up in-boxes and distract workers from their current job duties. Ask every employee to review their subscriptions and get rid of any they’re no longer using.

Refine distribution lists. Most businesses long ago established companywide and departmental email distribution lists. But, again, project-specific lists can greatly benefit the work groups that spring up in the normal course of operations. Remind users how to create their own distribution lists and, equally important, establish a policy for deleting these lists and the emails associated with them at the appropriate time.

Set daily times to check email. In the old days, employees might have hovered over their in-boxes, anxiously awaiting new messages and replying to nearly everything that came in. Now the problem may be the opposite.

With the popularity of texting and instant messaging, not to mention video calls and meetings, staff members may ignore their email for long periods. Recommend that they check their in-boxes at several specified times during the workday. This way, email won’t be a distraction, but it also won’t be a source of missed communications.

Discuss timely email responsiveness. How quickly one should respond to an email depends on various factors. However, if employees are too lax in their response times, it can have a negative impact on the company.

Customers, of course, won’t appreciate a business that takes too long to answer questions or address issues. Employees may also grow frustrated with each other when internal emails are left unread or not replied to.

If necessary, set company policies regarding responsiveness. Generally, business-related emails should be replied to within 24 to 48 hours, but you may want to tighten up that time frame for customer-facing staff.

An external audit is less stressful and less intrusive if you anticipate your auditor’s document requests. Auditors typically ask clients to provide similar documents year after year. They’ll accept copies or client-prepared schedules for certain items, such as bank reconciliations and fixed asset ledgers. To verify other items, such as leases, invoices and bank statements, they’ll want to see original source documents.

What does change annually is the sample of transactions that auditors randomly select to test your account balances. The element of surprise is important because it keeps bookkeepers honest.

Anticipate questions

Accounting personnel can also prepare for audit inquiries by comparing last year’s financial statements to the current ones. Auditors generally ask about any line items that have changed materially. A “materiality” rule of thumb for small businesses might be an inquiry about items that change by more than, say, 10% or $10,000.

For example, if advertising fees (or sales commissions) increased by 20% in 2021, it may raise a red flag, especially if it didn’t correlate with an increase in revenue. Be ready to explain why the cost went up and provide invoices (or payroll records) for auditors to review.

In addition, auditors may start asking unexpected questions when a new accounting rule is scheduled to go into effect. For example, private companies and nonprofits must implement new rules for reporting long-term lease contracts starting in 2022. So companies that provide comparative financial statements should start gathering additional information about their leases in 2021 to meet the disclosure requirements for next year.

Minimize audit adjustments

Ideally, management should learn from the adjusting journal entries auditors make at the end of audit fieldwork each year. These adjustments correct for accounting errors, unrealistic estimates and omissions. Often internally prepared financial statements need similar adjustments, year after year, to comply with U.S. Generally Accepted Accounting Principles (GAAP).

For example, auditors may need to prompt clients to write off bad debts, evaluate repair and supply accounts for capitalizable items, and record depreciation expense and accruals. Making routine adjustments before the auditor arrives may save time and reduce discrepancies between the preliminary and final financial statements.

You can also reduce audit adjustments by asking your auditor about any major transactions or complicated accounting rules before the start of fieldwork. For instance, you might be uncertain how to account for a recent acquisition or classify a shareholder advance.

Plan ahead

An external audit doesn’t have to be time-consuming or disruptive. The key is to prepare, so that audit fieldwork will run smoothly. Contact us to discuss any concerns as you prepare your preliminary year-end statements.

Year-end is a good time to plan to save taxes by carefully structuring your capital gains and losses.

Consider some possibilities if you have losses on certain investments to date. For example, suppose you lost money this year on some stock and have other stock that has appreciated. Consider selling appreciated assets before December 31 (if you think their value has peaked) and offsetting gains with losses.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. You may use up to $3,000 ($1,500 for married filing separately) of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income (AGI).

Individuals are subject to federal tax at a rate as high as 37% on short-term capital gains and ordinary income. But long-term capital gains on most investments receive favorable treatment. They’re taxed at rates ranging from zero to 20% depending on your taxable income (inclusive of the gains). High-income taxpayers pay an additional 3.8% net investment income tax on their net gain and certain other investment income.

This means you should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they’re used to offset short-term capital gains or up to $3,000 per year of ordinary income. This requires making sure that the long-term capital losses aren’t taken in the same year as the long-term capital gains.

However, this isn’t just a tax issue. Investment factors must also be considered. You don’t want to defer recognizing gain until next year if there’s too much risk that the investment’s value will decline before it can be sold. Similarly, you wouldn’t want to risk increasing a loss on investments you expect to decline in value by deferring a sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, take steps to prevent those losses from offsetting those gains.

If you’ve yet to realize net capital losses for 2021 but expect to realize net capital losses next year well in excess of the $3,000 ceiling, consider accelerating some excess losses into this year. The losses can offset current gains and up to $3,000 of any excess loss will become deductible against ordinary income this year.

For the reasons outlined above, paper losses or gains on stocks may be worth recognizing this year. But suppose the stock is also an investment worth holding for the long term. You can’t sell stock to establish a tax loss and buy it back the next day. The “wash sale” rule precludes recognition of a loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale).

However, you may be able to realize a tax loss by:

Selling the original holding and then buying the same securities at least 31 days later. The risk is interim upward price movement.
Buying more of the same stock, then selling the original holding at least 31 days later. The risk is interim downward price movement.
Selling the original holding and buying similar securities in different companies in the same line of business. This trades on the prospects of the industry, rather than the particular stock.
Selling an original holding of mutual fund shares and buying shares in another fund with a similar investment strategy.

Careful handling of capital gains and losses can save tax. Contact us if you have questions about these strategies.

Yeo & Yeo proudly recognized 18 professionals across the firm’s companies for milestone anniversaries at the firm’s virtual Christmas celebration.

“I am proud to acknowledge so many employees for their longstanding commitment to the firm,” said President & CEO Thomas Hollerback. “They are all valuable members of our team dedicated to helping our clients, communities, and companies succeed. We are thankful they chose Yeo & Yeo as the place to grow and excel in their careers.”

Honored for 35 years of service:

Steven Witt, CPA, Principal, Yeo & Yeo CPAs – Saginaw. Witt is a member of the firm’s Compilation and Review team. In the community, he serves as chairman of the Thomas Township Board of Appeals and vice president of the Kiwanis of Michigan Foundation.
Mark Perry, CPA, Principal, Yeo & Yeo CPAs – Lansing. Perry leads the firm’s Real Estate Services Group and is a member of the firm’s Quality Assurance Committee. In the community, he serves as board president of Holt Public Schools.

Honored for 25 years of service:

Jeff McCulloch, President, Yeo & Yeo Technology – Saginaw
Lyle Behmlander, Senior Systems Engineer, Firm Administration – Saginaw
Dan Schluckbier, Training Specialist, Yeo & Yeo Technology – Saginaw

Honored for 20 years of service:

Beth Silvernail, Medical Biller, Yeo & Yeo Medical Billing & Consulting – Saginaw

Honored for 15 years of service:

Amy Buben, CPA, CFE, Principal, Yeo & Yeo CPAs – Saginaw
Jennifer Tobias, CPA, Senior Manager, Yeo & Yeo CPAs – Kalamazoo
Wendy Thompson, CPA, Training Manager, Yeo & Yeo CPAs – Saginaw
Tara Stensrud, CPA, NSSA®, Principal, Yeo & Yeo CPAs – Midland
Ali Barnes, CPA, CGFM, Managing Principal, Yeo & Yeo CPAs – Alma

Honored for 10 years of service:

Kayla Stevens, Medial Biller – Account Manager, Yeo & Yeo Medical Billing & Consulting – Saginaw
David Sweterlitsch, Systems Engineer, Yeo & Yeo Technology – Saginaw
Joe Malott, Account Executive, Yeo & Yeo Technology – Saginaw
James Edwards III, CPA, Manager, Yeo & Yeo CPAs – Ann Arbor
Laura Capen, Administrative Assistant, Yeo & Yeo CPAs – Alma
Andrew Matuzak, CPA, PFS, Senior Manager, Yeo & Yeo CPAs – Saginaw
Mike Rolka, CPA, CGFM, Senior Manager, Yeo & Yeo CPAs – Auburn Hills

Also recognized during the virtual program were 10 professionals celebrating their five-year anniversary with Yeo & Yeo. We are honored that more than 50 percent of our professionals have been with the firm for 5 years or more.

A nonprofit may want to change its year-end for many reasons. Once the decision is made, how does a nonprofit actually change its year-end, and what consequences does that have? There are three potential areas of concern for the change: legal documents, tax implications, and financial statement implications.

Legal document considerations

Legal documents should be the easiest ones to change. Review the organization’s bylaws and other organizing documents to see if there is a reference to a particular year-end. If there is a reference to year-end, work with your lawyer and the board of directors to amend those documents to change the year-end. Also consider, do the terms for members of the board of directors match the fiscal year-end, and does the organization want them to. There is no requirement for the terms to match the year-end, but from a tax reporting standpoint, all board members at any point during the year must be listed on the Form 990, so there could be two years’ worth reported on each 990 if the terms and the year-end are different.

Income tax considerations

The income tax returns have more stringent rules on changing fiscal year-ends. Nonprofits may be able to change their fiscal year-end with a timely filed return. Generally, suppose a nonprofit has not changed its fiscal year-end in the prior 10 years. In that case, it can simply change its fiscal year-end by filing a short-year return timely and indicating a change in the accounting period (simplified procedure). However, farmers’ cooperatives, shipowners’ protection and indemnity associations, political organizations and homeowners’ associations cannot use this simplified procedure to change year-ends. If a nonprofit does not qualify for the simplified procedure, it will have to file Form 1128 to request a ruling from the IRS to allow the change in year-end. This request involves a substantial user fee ($5,000 or more) and should not be entered into lightly.

A nonprofit must do a short-year return to switch the year-end. This means the return will be for less than 12 months. Some of the schedules in the Form 990 may seem odd in the short year. For example, you may report the same board of directors calendar year salaries on the last full year of the old year-end and the short-year return; you can always add an explanatory note to Schedule O to let users understand that this information is duplicated. Similarly, the Schedule A tests will look odd as there will be four full years and one short year of information in the five-year schedule, but this is correct. The Form 990 instructions must still be followed, but Schedule O is a free-form schedule, and you can add any additional descriptions explaining the situations that will be relevant to users of the Form 990.

For a short-year income tax return using the simplified procedure, the return cannot be e-filed, even though there is an e-file requirement. This means an attempt at e-filing will be required, knowing that it will be unsuccessful; the e-file rejection must be documented. Then it must be paper-filed. It is imperative to ensure that it is paper-filed on time with a certified return receipt so that the entity has documentation of timely filing. An IRS notice is likely to generate either from paper filing or from not timely filing (due to the IRS being backlogged). This notice will likely indicate penalties, and they could be a significant amount. It will need to be responded to promptly with information showing that a short-year return was filed timely and could not be e-filed. The penalties should be abated once the IRS notice is responded to and it is proven that the return was in fact timely filed and could not be e-filed. In addition to e-filing rejections for the return, extensions will also likely not e-file properly and will therefore need to be paper-filed; procedures similar to those for the return will need to be done.

Consider other filings that are tax returns (state) or charitable solicitation registrations. Those will likely also need to be done on a short-year basis. Charitable solicitation registrations may also require other attachments, which may be based on different thresholds. For example, the State of Michigan requires audited or reviewed financial statements based on different thresholds. However, in a short year, normally met thresholds may or may not be met, so careful planning is necessary to ensure that the required attachments based on the short year are provided.

Financial statement considerations

Financial statements are the last area to consider. There is not a one-size-fits-all when it comes to financial statements and changing year-ends. Some entities choose to do a long-year (>12 months) and others a short-year. The users of the financial statements will dictate whether a short-year must be done or a long-year can be done. From an audit, review, and compilation standard perspective, your accountant can do either a short-year or a long-year. However, if there is a need for a Single Audit or other annual audit requirements, the users may require a short-year. Also, keep in mind that often financial statements accompany the charitable solicitation registrations, so it is important to determine what will be necessary for the short-year charitable solicitation.

Whether a short-year or a long-year financial statement is chosen, it will generally be noncomparative for that year. It would not be useful to show comparative financial statements for a three-month short-year and a 12-month regular year. Typically, additional administrative costs will result from changing presentation from comparative to single year. In addition, all descriptions of “for the year ended” must be modified to match the correct period. If assurance is provided on the financial statements, typically it is no less work to do a short-year than a regular year.

Also consider what other entities relate to this nonprofit that may want to be on the same year-end as the nonprofit. If there are subsidiaries, generally those subsidiaries would want to be on the same year-end, if possible. If there is a defined benefit pension plan, typically numbers from the year-end of the plan flow into the nonprofit, and therefore a similar year-end may be desired.

There are lots of valid business reasons to change a nonprofit’s year-end. Generally, it is not difficult to do. However, it needs to be planned out ahead of time to ensure that all the requirements are thought through, filings are made, and users of financial statements have clarified expectations.

Contact a member of Yeo & Yeo’s Nonprofit Services Group if you need assistance with changing your nonprofit organization’s year-end.

The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefit of getting a company car.) Plus, current tax law and IRS rules make the benefit even better than it was in the past.

The rules in action

Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new $55,000 luxury sedan.

Your cost for personal use of the vehicle is equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.

Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).

In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.

And finally, the purchase of the car by your corporation will have no effect on your credit rating.

Necessary paperwork

Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.

Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.

Among the biggest long-term concerns of many business owners is succession planning — how to smoothly and safely transfer ownership and control of the company to the next generation.

From a tax perspective, the optimal time to start this process is long before the owner is ready to give up control. A family limited partnership (FLP) can help you enjoy the tax benefits of gradually transferring ownership while you continue to run the business.

How it works

To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children or other beneficiaries.

You retain the general partnership interest, which may be as little as 1% of the assets. However, as general partner, you still run day-to-day operations and make business decisions.

Tax benefits

As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.

Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.

The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, let’s say the discount is 25%. That means, in 2022, you could gift an FLP interest equal to as much as $21,333 (on a controlling basis) tax-free because the discounted value wouldn’t exceed the $16,000 annual gift tax exclusion.

There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.

Some risks

Perhaps the biggest downside is that the IRS tends to scrutinize how FLPs are structured. If it determines that discounts are excessive or that your FLP has no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.

The IRS also pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for instance, can indicate that an FLP was set up solely as a tax-avoidance strategy.

Not for everyone

An FLP can be an effective succession and estate planning tool but, as noted, it’s far from risk free. We can help you determine whether one is right for you and advise you on other ways to develop a sound succession plan.

Yeo & Yeo is pleased to announce that Kellen Riker, CPA, was recently honored with the most prestigious award bestowed by the firm, the Spirit of Yeo award. The Spirit of Yeo award recognizes an individual within the firm who exemplifies the organization’s mission and core values.

“What makes our professionals’ relationships with their clients so strong is the effective and open communications they share every day. Kellen has repeatedly been recognized for how professional – yet down to earth – he is with his clients. His communications skills are outstanding, and our clients enjoy working with him,” says Thomas Hollerback, President & CEO.

Kellen provides audit and assurance services for clients across Michigan, specializing in school districts and nonprofit organizations. He is a senior accountant with more than five years of experience in audit, accounting, and budgeting. He is based in the firm’s Flint office.

Kellen received multiple nominations for the Spirit of Yeo award. One of his nominators said, “Kellen provides excellent client service. He communicates well with clients and he can talk to anyone. He makes our clients feel important.”

Besides supporting the firm’s clients, Kellen also realizes the importance of assisting newer staff. Another nominator said, “Kellen is a leader of his peer group and will be a future leader of the firm. He provides exceptional support to new team members. He is easy to talk to and becomes a go-to for new staff for questions.” Another said, “Kellen is always kind, in a great mood and ready to help. Every time I work with Kellen, he teaches me something new. He never makes me feel like I am bothering him, but rather like he really cares that I learn.”

Kellen performs his audit work accurately and completes projects before their due date. One nominator continues, “Kellen is always willing to help out and step up. He consistently works additional hours when needed to get jobs done. He works at several offices and easily works with multiple managers and partners. He is an absolute pleasure and a strong link in the chain for our successful team.”

Recently, Kellen took on more responsibility by joining the firm’s Yeo Young Professionals (YYP) group, which shapes the future of Yeo & Yeo by providing a voice for the young professionals in the firm. One of the YYP’s initiatives is the Summer Leadership Program, which allows college students to explore a career in accounting. Kellen was a presenter and assisted with the Q&A session for this year’s two-day event, which were integral to the program’s success.

Kellen holds a Bachelor of Arts in accounting and a Master of Business Administration in finance from the University of Michigan-Flint. He is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants.

Kellen exemplifies one of the firm’s core values – giving back to the community – by serving on the Yeo & Yeo Foundation Grants Committee, representing the Flint office. He enjoys the grant review process and especially the opportunities to meet individuals at the nonprofit organizations that the Foundation approves for funding.

2021 marked the eighth year of the award.

Yeo & Yeo is proud to recognize Kellen’s role in the firm and his professional commitment to serving our valued clients.

Forecasting how your company is likely to perform over the next year can be challenging, especially when it’s unclear where the markets are heading. But accurate forecasts are critical when managing a business. For example, they may be used to order inventory, hire additional workers, apply for loans and credit lines, and evaluate investment alternatives.

As the COVID-19 pandemic persists, many companies have responded to these challenges by switching from static forecasts to rolling ones. Here’s how the transition can make the forecasting process more efficient and accurate.

Static vs. rolling forecasts

Traditional static (or fixed) forecasts are created at the start of the fiscal year — often based on the company’s historical financial statements — and then used as a guide for the following year. This approach works well for established organizations that experience relatively minor changes year to year. But for most businesses, static forecasts quickly become outdated, because they don’t allow adjustments throughout the year for variances that inevitably take place. The traditional approach is based on inflexible assumptions that must be completely recast if conditions change.

Managers who use static forecasts typically see the forecasting process as a once-a-year exercise. Many fail to compare expected to actual performance until year end. And those who notice when actual results fall short may fail to revise their annual goals — instead hoping to make up for the shortcoming before year end, leading to counterproductive behaviors.

For example, to make up for missed sales goals through the year, salespeople may resort to aggressive discounting at year end, which can erode profits. In other situations, after a particularly successful month, workers may decide to slack off in the subsequent month, because they’re ahead of schedule.

Conversely, rolling forecasts require regular updates based on what’s actually happening in your business and marketplace. This approach makes the forecasting process more adaptable, accurate and meaningful.

How it works

Rather than leaving a budget in place for the year, companies with rolling budgets set times throughout the year to readjust the numbers. For example, you might budget four quarters ahead. At the end of each quarter, you would update the budgets for the next three quarters and add a new fourth quarter.

The rolling approach encourages management to take an agile, forward-looking perspective. It facilitates timely responses to emerging trends, whether on the revenue side, the expense side or both. It also calls for regular budget monitoring and real-time review. These steps can help management catch significant variances and make appropriate adjustments.

On a roll

Uncertainty abounds today. Some businesses have seen a major decline in revenue during the pandemic but are hopeful that conditions will improve. Others have revised their strategies to take advantage of emerging opportunities. Many are struggling to manage supply chain issues, labor shortages and rising costs that could outlast the pandemic. Regardless of which challenges you’re facing, rolling forecasts can be a helpful management tool. Contact us for help implementing a more agile approach to forecasting for 2022.

Yeo & Yeo, a leading Michigan-based accounting and advisory firm, announces that Dave Youngstrom, CPA, will begin his term as the firm’s eighth President and CEO on January 1, 2022. Youngstrom will take over executive leadership of the firm’s nine offices and all Yeo & Yeo companies – Yeo & Yeo CPAs & Business Consultants, Yeo & Yeo Medical Billing & Consulting, Yeo & Yeo Technology and Yeo & Yeo Wealth Management.

Youngstrom succeeds Thomas Hollerback, who will retire on December 31, 2021, after 38 years with Yeo & Yeo and serving the past nine years as President and CEO. Under Hollerback’s leadership, Yeo & Yeo has continually been recognized as a top performer. Accolades during Hollerback’s tenure include being named an INSIDE Public Accounting Top 200 Accounting Firm, one of Michigan’s Best and Brightest in Wellness for eight consecutive years, among Crain’s Detroit Business 25 largest Michigan accounting firms and awarded Corp! magazine’s Best in Michigan Business.

“The highlight of my career has been directing growth and innovation in all aspects of our companies, including modernizing our facilities. It has been a pleasure working with our clients and our people,” Hollerback said. “I am thrilled to have Dave as my successor. He brings a firm-wide perspective with a strong track record of driving initiatives that create great results.”

Youngstrom, 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.

“I see a bright future for Yeo & Yeo as we look to celebrate our 100th anniversary in 2023,” Youngstrom said. “I am truly honored to lead the firm and look forward to challenging myself and others to find new ways to learn, grow, and support our clients while embracing our core values that include a commitment to taking care of our people, supporting our communities and finding innovative ways to lead Yeo & Yeo into the future.”

Tammy Moncrief, Yeo & Yeo board member and managing principal of the firm’s Auburn Hills office, added, “Dave was chosen to lead our firm for many reasons, but above all, for his immense passion for our people and commitment to delivering high quality, meaningful results for our clients. I am excited to see the firm continue to evolve and grow under his leadership.”

Youngstrom earned a Bachelor of Business Administration in accounting from Saginaw Valley State University. In 1995, he joined Yeo & Yeo, was named principal in 2007, and has been instrumental in driving several key firm initiatives since. In addition to presenting for various professional organizations throughout Michigan, he is a firm supporter of his community. Youngstrom served as President of the Saginaw Valley State University Alumni Association, Board Treasurer of the Freeland Community School District for over 10 years, Treasurer and Board Chair of the United Way of Saginaw County for over 14 years, past President of Saginaw Area Jaycees twice, Treasurer of the Michigan Jaycees for 3 different Presidents, and Treasurer of the Michigan Jaycees Foundation.

On November 17, the Financial Accounting Standards Board (FASB) issued a new accounting standard on disclosing certain types of government incentives that businesses receive to set up shop in a locality. The standard comes at a time when investors have been clamoring for more detailed information around incentives businesses get — some to the tune of billions of dollars in tax breaks. Plus, given the increase in government assistance related to the COVID-19 pandemic, the number of companies that have adopted accounting policies on government assistance has increased.

Long-awaited standard

Government incentives are offered by policymakers to lure big companies — like Amazon, Tesla and Walmart — to establish a business in their state. The goals are to drive economic growth and create jobs for residents. It’s typically a win-win for both parties.

The FASB first proposed issuing a rule on disclosures in 2015. But the topic proved to be somewhat controversial, generating some pushback from companies over concerns that too much competitive information would be divulged. Ultimately the FASB decided on a slimmed down version of the proposal after considering operational matters and comparing the costs and benefits.

A more consistent approach

Accounting Standards Update (ASU) No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance, is the FASB’s first step to provide rules on the topic as there are no explicit rules in U.S. Generally Accepted Accounting Principles (GAAP). Without prescriptive guidance, accounting differences have bubbled up among companies, hampering the ability of investors to make informed decisions.

The disclosure requirements are designed to help investors understand:

The terms and conditions of the agreements,
Contingencies and longevity of the assistance,
The risks associated with the agreements, and
How the agreements would affect financial results.

For example, companies would disclose forgivable loans from the government or a receipt of cash or other assets but base them on the accounting method they used to record the transaction.

Required disclosures

The standard requires companies to disclose:

Information about the nature of the transactions and the related accounting policy used to account for the transactions,
Line items on the balance sheet and income statement that are affected by the transactions,
The amounts applicable to each financial statement line item, and
Significant terms and conditions of the transactions, including commitments and contingencies.

Businesses will be required to provide annual disclosures about transactions for the government that are accounted for by applying a grant or a contribution accounting model by analogy to guidance such as Topic 958, Not-for-Profit Entities, or International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.

Already, some market watchers have said they want more to be included in the standard. For instance, it doesn’t require disclosure of the biggest tax breaks companies get, such as property tax. Especially important to analysts is how much of a company’s profits stem from its own business acumen versus a reliance on incentives baked into their business models.

Ready, set, disclose

ASU 2021-10 is effective for fiscal periods after December 15, 2021, for both public and private companies. Early application is permitted. If your business receives government assistance, we can help you disclose the details of the transaction in a transparent, reliable manner.

Michigan’s minimum wage rate will increase to $9.87 on January 1, 2022, an increase from the current $9.65. Michigan’s Improved Workforce Opportunity Wage Act establishes the annual schedule and increases.

The Michigan Wage & Hour Division announced that while the law prohibits scheduled increases when the state’s average unemployment rate for the preceding year is above 8.5%, it is highly unlikely Michigan will exceed this threshold, causing another delay as occurred in 2021.

Effective January 1, 2022:

Michigan’s minimum wage will increase to $9.87 an hour.
The 85% rate for minors aged 16 and 17 increases to $8.39 an hour.
Tipped employees rates of pay increases to $3.75 an hour.
The training wage of $4.25 an hour for newly hired employees ages 16 to 19 for their first 90 days of employment remains unchanged.

A copy of the Improved Workforce Opportunity Wage Act and related resources, including the required poster, may be obtained for free by visiting Michigan.gov/wagehour.

Businesses have had to grapple with unprecedented changes over the last couple years. Think of all the steps you’ve had to take to safeguard your employees from COVID-19, comply with government mandates and adjust to the economic impact of the pandemic. Now look ahead to the future — what further changes lie in store in 2022 and beyond?

One hopes the transformations your company undergoes in the months ahead are positive and proactive, rather than reactive. Regardless, the process probably won’t be easy. This is where change management comes in. It involves creating a customized plan for ensuring that you communicate effectively and provide employees with the leadership, training and coaching needed to change successfully.

Prepare for resistance

Employees resist change in the workplace for many reasons. Some may see it as a disruption that will lead to loss of job security or status (whether real or perceived). Other staff members, particularly long-tenured ones, can have a hard time breaking out of the mindset that “the old way is better.”

Still others, in perhaps the most dangerous of perspectives, distrust their employer’s motives for change. They may be listening to — or spreading — gossip or misinformation about the state or strategic direction of the company.

It doesn’t help the situation when certain initial changes appear to make employees’ jobs more difficult. For example, moving to a new location might enhance the image of the business or provide more productive facilities. But a move also may increase some employees’ commuting times or put them in a drastically different working environment. When their daily lives are affected in such ways, employees tend to question the decision and experience high levels of anxiety.

Make your case

Often, when employees resist change, a company’s leadership can’t understand how ideas they’ve spent weeks, months or years carefully deliberating could be so quickly rejected. They overlook the fact that employees haven’t had this time to contemplate and get used to the new concepts and processes. Instead of helping to ease employee fears, leadership may double down on the change, more strictly enforcing new rules and showing little patience for disagreements or concerns.

It’s here that the implementation effort can break down and start costing the business real dollars and cents. Employees resist change in many counterproductive ways, from intentionally lengthening learning curves to calling in sick when they aren’t to filing formal complaints or lawsuits. Some might even quit — an increasingly common occurrence as of late.

By engaging in change management, you may be able to lessen the negative impact on productivity, morale and employee retention.

Craft your future

The content of a change-management plan will, of course, depend on the nature of the change in question as well as the size and mission of your company. For major changes, you may want to invest in a business consultant who can help you craft and execute the plan. Getting the details right matters — the future of your business may depend on it.

Yeo & Yeo CPAs & Business Consultants is pleased to welcome Senior Manager Andrew Kramer, CPA to the firm’s tax and consulting practice groups. Andrew is based in Yeo & Yeo’s Ann Arbor office.

“We are excited to welcome Andrew to Yeo & Yeo,” said Tom O’Sullivan, Managing Principal of the Ann Arbor office. “His expertise in the planning and preparation of complex partnership and corporate income tax returns, and his market relationships, make him an excellent addition to our firm.”

Prior to joining Yeo & Yeo, Andrew served as Tax Senior Manager at one of the nation’s largest accounting, tax and advisory firms. He specializes in tax planning and compliance for operating partnerships and real estate partnerships. He has more than 14 years of tax advisory experience, with an emphasis on federal tax advising.

A graduate of Michigan State University with a master of science in accounting degree, Andrew is a Certified Public Accountant, and is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants. In the community, he serves as the Cub Scout Pack 760 Pinewood Derby Chair and is a cantor at Our Lady of Good Counsel Parish in Plymouth, MI.

If you’re starting to worry about your 2021 tax bill, there’s good news — you may still have time to reduce your liability. Here are three quick strategies that may help you trim your taxes before year-end.

1. Accelerate deductions/defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2022 payment in December, you can deduct the interest portion on your 2021 tax return (assuming you itemize).

Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2022.

You shouldn’t pursue this approach if you expect to be in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.

2. Maximize your retirement contributions. What could be better than paying yourself? Federal tax law encourages individual taxpayers to make the maximum allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.

For 2021, you generally can contribute as much as $19,500 to 401(k)s and $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of your net income (but no more than $58,000) to a SEP IRA.

3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.

If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.

There’s still time

The ideas described above are only a few of the strategies that still may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2021.