Stock Market Investors: Year-end Tax Strategies to Consider

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.

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.

Don’t let the holiday rush keep you from considering some important steps to reduce your 2021 tax liability. You still have time to execute a few strategies.

Purchase assets

Thinking about buying new or used equipment, machinery or office equipment in the new year? Buy them and place them in service by December 31, and you can deduct 100% of the cost as bonus depreciation. Contact us for details on the 100% bonus depreciation break and exactly what types of assets qualify.

Bonus depreciation is also available for certain building improvements. Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property: land improvements other than buildings (for example fencing and parking lots), and “qualified improvement property,” a broad category of internal improvements made to nonresidential buildings after the buildings are placed in service. The TCJA inadvertently eliminated bonus depreciation for qualified improvement property. However, the 2020 CARES Act made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

Keep in mind that 100% bonus depreciation has reduced the importance of Section 179 expensing. If you’re a small business, you’ve probably benefited from Sec. 179. It’s an elective benefit that, subject to dollar limits, allows an immediate deduction of the cost of equipment, machinery, “off-the-shelf” computer software and some building improvements. Sec. 179 expensing was enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and thus has greatly reduced the cases in which Sec. 179 expensing is useful.

Write off a heavy vehicle

The 100% bonus depreciation deal can have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.

Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating above 6,000 pounds. You can verify a vehicle’s weight by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door. If you’re considering buying an eligible vehicle, placing one in service before year end could deliver a significant write-off on this year’s return.

Time deductions and income

If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2021 and deferring income into 2022 (assuming you expect to be taxed at the same or a lower rate next year).

For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2021 even though you don’t pay the credit card bill until 2022. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2021.

As for income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.

Consider all angles

Bear in mind that some of these tactics could adversely impact other factors affecting your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.

In Notice 2021-61, the IRS recently announced 2022 cost-of-living adjustments to dollar limits and thresholds for qualified retirement plans. Here are some highlights:

Elective deferrals. The annual limit on elective deferrals (employee contributions) will increase from $19,500 to $20,500 for 401(k), 403(b) and 457 plans, as well as for Salary Reduction Simplified Employee Pensions (SARSEPs). The annual limit will rise to $14,000, up from $13,500, for Savings Incentive Match Plans for Employees (SIMPLEs) and SIMPLE IRAs.

Catch-up contributions. The annual limit on catch-up contributions for individuals age 50 and over remains at $6,500 for 401(k), 403(b) and 457 plans, as well as for SARSEPs. It also stays at $3,000 for SIMPLEs and SIMPLE IRAs.

Annual additions. The limit on annual additions — that is, employer contributions plus employee contributions — to 401(k)s and other defined contribution plans will increase from $58,000 to $61,000.

Compensation. The annual limit on compensation that can be taken into account for contributions and deductions will increase from $290,000 to $305,000 for 401(k)s and other qualified plans. This includes Simplified Employee Pensions (SEPs) and SARSEPs.

Highly compensated employees (HCEs). The threshold for determining who is an HCE will increase from $130,000 to $135,000.

Key employees. The threshold for determining whether an officer is a “key employee” under the top-heavy rules, as well as the cafeteria plan nondiscrimination rules, will increase from $185,000 to $200,000.

Participation in a SEP or SARSEP. The threshold for determining participation in either type of plan will remain $650.

Business owners, along with their HR and benefits staff or providers, should carefully note when the new limits and thresholds apply. Sometimes the answer isn’t obvious. For example, the 2022 compensation threshold used to identify HCEs will be generally used by 401(k) plans for 2023 nondiscrimination testing, not 2022.

Review your employee communications, plan procedures and administrative forms, updating them as necessary to reflect these changes. Whether your company offers a 401(k) or another type of defined contribution plan, we can provide further information on the applicable tax rules.

Article Updated June 27, 2022

The Payroll Solutions Group would like to make you aware of important payroll updates that will affect you and your employees next year.

Updated Form 1099-NEC
Reporting of FFCRA wages in Box 14 on W-2

The State of Michigan has not issued any statements regarding an increase in the minimum wage; we anticipate it will remain at $9.65 per hour. Watch Yeo & Yeo’s website and future eAlerts for new developments.

Need guidance on closing 2021, preparing for 2022 payroll or meeting payroll deadlines? Contact the payroll professionals at Yeo & Yeo.

Download 2022 Payroll Planning Brief

The U.S. House of Representatives passed a crucial part of President Biden’s agenda by a vote of 220-213 on November 19. The Build Back Better Act (BBBA) includes numerous provisions related to areas ranging from health care, climate change and immigration to education, social programs and, of course, taxes.

Impact on the deficit

The House vote came after the Congressional Budget Office (CBO) released its score on the legislation on Nov. 18. The CBO estimates that the legislation will increase the deficit by $367 billion over a 10-year period.

However, the CBO score doesn’t take into account any additional revenues generated by improved compliance with federal tax laws. The BBBA allocates $80 billion for the IRS to heighten enforcement (which the CBO did include in its calculation), likely to target primarily high-wealth individuals, businesses and overseas transactions. The U.S. Treasury Department “conservatively” estimates increased IRS enforcement will lead to $400 billion in additional revenues over the 10-year period.

Significant tax proposals

Funding for the sweeping package largely comes from tax increases on high-income individuals and businesses, but the law also includes tax breaks for eligible taxpayers. Some of the most notable tax-related provisions include:

State and local taxes (SALT) deduction. The BBBA would amend the Tax Cuts and Jobs Act (TCJA) to raise the cap on the so-called SALT deduction from $10,000 to $80,000 ($40,000 for married taxpayers filing separately) for tax years 2021 through 2031. The limit would return to $10,000 in 2032.

Child tax credit (CTC). The American Rescue Plan Act (ARPA) expanded the CTC from $2,000 per child to $3,000 per child ages six through 17 and $3,600 per child under age six. The BBBA would extend the expansion through 2022.

Premium tax credits (PTCs). The ARPA expanded the availability of PTCs for health insurance purchased through Affordable Care Act exchanges (for example, Healthcare.gov) for 2021 and 2022. The BBBA would extend the expansion through 2025.

High-income surtax. The BBBA would create a 5% surtax on individuals with a modified adjusted gross income (MAGI) that exceeds $10 million ($5 million for married taxpayers filing separately). It adds another 3% surtax on MAGI exceeding $25 million ($12.5 million for married taxpayers filing separately). The surtax would take effect for 2022.

Net investment income tax (NIIT). The BBBA would expand the 3.8% NIIT to apply to the trade or business income of high-income individuals, regardless of whether they’re actively involved in the business. The income thresholds are over $500,000 for joint filers, over $400,000 for single filers and over $250,000 for married couples filing separately. The NIIT currently applies to business income only if the income is passive.

Retirement savings. The BBBA includes several limitations on the ability of high-income taxpayers with large retirement account balances to take advantage of certain tax breaks. For example, beginning in 2029, it would prohibit additional contributions to a Roth IRA or traditional IRA for a tax year if a taxpayer’s income exceeds a certain amount and the contributions would cause the total value of an individual’s IRA and defined contribution accounts as of the end of the prior tax year to exceed $10 million. The bill also would impose new mandatory distribution requirements on such taxpayers. But some retirement-related provisions would go into effect as soon as 2022, such as ones that would restrict and, in some circumstances, eliminate Roth conversions.

Minimum corporate tax rate. The BBBA would impose a 15% minimum tax on the profits of corporations that report more than $1 billion in profits to shareholders (book income vs. tax income), for tax years beginning after 2022.

Excess business losses. The BBBA would make permanent the Tax Cuts and Jobs Act’s limit on the amount of excess business losses that pass-through entities and sole proprietors can use to offset ordinary income. It also would create a new carryforward for unused excess business losses, rather than carrying them forward as net operating losses.

Excise tax on stock buybacks. The BBBA includes a 1% excise tax on the fair market value of stock buybacks by publicly traded U.S. corporations, which would be effective for repurchases after 2021.

Business interest deduction. The BBBA would add a new limit on the amount of net interest expense that certain corporations that are part of an international financial reporting group can deduct, for tax years beginning after 2022.

Moving on to the Senate

Now that the bill has been passed by the House, it still must fight its way through the Senate, where it faces additional debate. A Senate vote isn’t expected to take place until late December. Most likely the Senate will make some changes to the bill, which could include changes to some of the tax provisions. We’ll keep you apprised of the important developments.

The Employee Retention Credit (ERC) was a valuable tax credit that helped employers survive the COVID-19 pandemic. A new law has retroactively terminated it before it was scheduled to end. It now only applies through September 30, 2021 (rather than through December 31, 2021) — unless the employer is a “recovery startup business.”

The Infrastructure Investment and Jobs Act, which was signed by President Biden on November 15, doesn’t have many tax provisions but this one is important for some businesses.

If you anticipated receiving the ERC based on payroll taxes after September 30 and retained payroll taxes, consult with us to determine how and when to repay those taxes and address any other compliance issues.

The American Institute of Certified Public Accountants (AICPA) is asking Congress to direct the IRS to waive payroll tax penalties imposed as a result of the ERC sunsetting. Some employers may face penalties because they retained payroll taxes believing they would receive the credit. Affected businesses will need to pay back the payroll taxes they retained for wages paid after September 30, the AICPA explained. Those employers may also be subject to a 10% penalty for failure to deposit payroll taxes withheld from employees unless the IRS waives the penalties.

The IRS is expected to issue guidance to assist employers in handling any compliance issues.

Credit basics

The ERC was originally enacted in March of 2020 as part of the CARES Act. The goal was to encourage employers to retain employees during the pandemic. Later, Congress passed other laws to extend and modify the credit and make it apply to wages paid before January 1, 2022.

An eligible employer could claim the refundable credit against its share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.

For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERC. Under previous law, a recovery startup business was defined as a business that:

Began operating after February 15, 2020,
Had average annual gross receipts of less than $1 million, and
Didn’t meet the eligibility requirement, applicable to other employers, of having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order.

However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.

Retroactive termination

The ERC was retroactively terminated by the new law to apply only to wages paid before October 1, 2021, unless the employer is a recovery startup business. Therefore, for wages paid in the fourth quarter of 2021, other employers can’t claim the credit.

In terms of the availability of the ERC for recovery startup businesses in the fourth quarter, the new law also modifies the recovery startup business definition. Now, a recovery startup business is one that began operating after February 15, 2020, and has average annual gross receipts of less than $1 million. Other changes to recovery startup businesses may also apply.

What to do now?

If you have questions about how to proceed now to minimize penalties, contact us. We can explain the options.

As year-end approaches, now is a good time to think about planning moves that may help lower your tax bill for this year and possibly next.

Business and personal year-end tax planning for 2021 are widely affected by the COVID-19 pandemic. This year’s planning is made even more challenging as Congress debates proposed legislation.

Yeo & Yeo’s Year-end 2021 Tax Guide provides action items that may help you save tax dollars if you act before year-end. These are just some of the steps that can be taken to save taxes. Not all actions may apply in your particular situation, but you or a family member can likely benefit from many of them.

Next steps

After reviewing this year’s Year-end Tax Guide, reach out to your Yeo & Yeo tax advisor who can help narrow down the specific actions you can take and tailor a tax plan unique to your current personal and business situation.

Together we can:

Identify tax strategies and advise you on which tax-saving moves to make.
Evaluate tax planning scenarios.
Determine how we can help.

We will continue to monitor tax changes and share information as it becomes available.

If your not-for-profit managed to keep staffers employed throughout the COVID-19 pandemic, there could be a tax reward. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers may be entitled to claim an Employee Retention Credit (ERC) for wages paid between March 13, 2020, and December 31, 2020. In December of 2020, the Consolidated Appropriations Act (CAA) enhanced and extended the credit through June 30, 2021. And on March 11, 2021, the American Rescue Plan Act (ARPA) extended the ERC until December 31, 2021,

In addition, the IRS recently issued guidance (Notice 2021-20) for employers — including nonprofits — that may claim the ERC.

CARES Act Provisions

Last year, the CARES Act provided a dose of tax relief to struggling nonprofit employers. Under this law, organizations could claim the ERC for up to 50% of qualified wages paid after March 12, 2020, and before January 1, 2021. Eligible employers were able to benefit immediately from the credit because it reduced the Social Security component of tax deposits. If an employer’s current payroll tax deposits weren’t enough to cover the credit, the nonprofit could obtain an advance payment from the IRS.

To qualify for the ERC under the CARES Act, an employer had to meet one of two requirements during any calendar quarter:

1. It was forced to suspend operations because government authorities limited commerce, travel or group meetings due fully or partially to pandemic concerns, or

2. It must have experienced a significant decline in gross receipts. For this purpose, a “significant decline” occurred when gross receipts were less than 50% of gross receipts in the same calendar quarter of 2019.

The first $10,000 of wages paid to an employee during the designated time frame qualified for the credit. Therefore, employers could claim a maximum credit of $5,000 per employee.

The number of employees eligible for the credit depends on the size of the employer. Specifically, if your nonprofit averages more than 100 full-time employees, only wages for those who aren’t working due to operations suspension or a shutdown may be claimed. If you have 100 or fewer full-time workers, you may claim wages for all employees, regardless of whether they’re working. For this purpose, a full-time employee is defined as someone who worked at least 30 hours per week in a calendar quarter in 2019 or 130 hours in a month (for example, the monthly equivalent of 30 hours per week) and meets requirements of the employer shared responsibility provision of the Affordable Care Act (ACA).

Prohibitions to Claiming the Credit

The CARES Act also prohibits employers from claiming the credit if the wages for which the credit being claimed are the:

Same wages for which a tax credit for paid sick and family leaves was claimed under the Family First Coronavirus Response Act,

Same wages for which a tax credit was claimed for paid family and medical leaves under the Section 45S initially authorized by the Tax Cuts and Jobs Act,

Wages are payments to certain related individuals, or

Wages are paid to an employee for which the employer claims a Work Opportunity Tax Credit.

CAA Changes

In addition to extending the credit, the CAA increased it from 50% to 70% of the first $10,000 of qualified wages for two quarters, for a maximum credit per worker of $14,000 (70% x $10,000 of qualified wages x two quarters). The ARPA extends it for the last two quarters of 2021. Thus, the maximum ERC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.

Other important changes were made by the CAA. For example, employers that receive Paycheck Protection Program (PPP) loans may still qualify for the ERC for wages that aren’t paid with forgivable PPP loan proceeds.

For More Information

Contact your tax advisor to learn more about the ETC. We can help you understand how it applies to your nonprofit.

November 24, 2021

Potential Tax Rate Increase Due to Missing Report(s) (Form UIA 1761) were mailed November 9th. Employers have 15 days to submit all missing report(s) to avoid a three percent non-reporting penalty added to your 2022 tax rate.

November 13, 2021 – January 3, 2022

UIA will begin assigning 2022 tax rates for employers beginning in December; there will be no tax rate modifications during this time.

Any request to change the 2022 tax rate must be posted to your online account by 5:00 p.m. Friday, December 10, 2021.
The existing tax rate cannot be changed.
Financial adjustments during this period will not result in any tax rate changes for you.
No new tax rates or tax rate redeterminations will be generated during this time period.
All late missing or amended reports submitted during this period will be held until January 3, 2022. Thereafter, the reports will automatically be posted to the employer’s account.
New employer account numbers will be assigned but no tax rate will be assigned until after January 3, 2022.

December 30, 2021

The annual Form UIA 1771, Tax Rate Determination for Calendar Year 2022 will be mailed.
The 2022 taxable wage base will remain at $9,500.

Source: the Michigan Unemployment Insurance Agency