Is Your Business Tracking Website Metrics?

In today’s data-driven world, business owners are constantly urged to track everything. And for good reason — having accurate, timely information displayed in an easy-to-understand format can allow you to spot trends, avoid risk and take advantage of opportunities.

This includes your company’s website. Although social media drives so much of the conversation now when it comes to communicating with customers and prospects, many people still visit websites to gather knowledge, build trust and place orders.

So, how do you know whether your site is doing its job — that is, drawing visitors, holding their attention, and satisfying their curiosities and needs? A variety of metrics hold the answers. Here are a few of the most widely tracked:

Page views. This metric is a good place to start, partly because it’s among the oldest ways to track whether a website is widely viewed or largely ignored. A page view occurs when a visitor loads the HTML file that represents a given page on your website. You want to track:

How many pages each visitor views,
How long each “unique visitor” (see below) remains on the page and your website, and
Whether the visitor does anything other than peruse, such as submit a form or buy something.

Unique visitors. You may have encountered this term before. It’s indeed an important one. The unique visitor metric identifies everyone who comes to your website, counting each visitor only once regardless of how many times someone visits.

Think of it like friendly neighbors stopping by your home. If Artie from next door stops by twice and Betty from down the street drops in three times, that’s two unique visitors and five total visits. Tracking your unique visitors over time is important because it lets you know whether your website’s viewing audience is growing, shrinking or staying the same.

Bounce rate. At one time or another, you may have heard someone say, “All right, I’m going to bounce.” It means the person is going to depart from their current surroundings and go elsewhere. When a visitor quickly decides to bounce from (that is, leave) your website, typically in a matter of seconds and without performing any meaningful action, your bounce rate rises.

This is not a good thing. A high bounce rate could mean your website is too similar in name or URL to another company’s or organization’s. Although this may drive up page views, it will more than likely aggravate the buying public and reflect poorly on your company. An elevated bounce rate could also mean your site’s design is confusing or aesthetically displeasing.

To quantify bounce rate, unique visitors and page views — as well as many other useful metrics — look to your website’s analytics software. Your website provider should be able to help you set up a dashboard of which ones you want to track. Contact our firm for help using these metrics to determine whether your website is contributing to revenue gains and providing a reasonable return on investment.

Studies have found that more people are engaging in online gambling and sports betting since the pandemic began. And there are still more traditional ways to gamble and play the lottery. If you’re lucky enough to win, be aware that tax consequences go along with your good fortune.

Review the tax rules

Whether you win online, at a casino, a bingo hall, a fantasy sports event or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.

You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. Therefore, you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.

Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.

Hitting a lottery jackpot

The odds of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.

Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.

You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.

If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.

Since the federal tax rate can currently be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

Talk with us

If you’re fortunate enough to win a sizable amount of money, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.

Low interest rates and other factors have caused global merger and acquisition (M&A) activity to reach new highs in 2021, according to Refinitiv, a provider of financial data. It reports that 2021 is set to be the biggest in M&A history, with the United States accounting for $2.14 trillion worth of transactions already this year. If you’re considering buying or selling a business — or you’re in the process of an M&A transaction — it’s important that both parties report it to the IRS and state agencies in the same way. Otherwise, you may increase your chances of being audited.

If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.

Here’s what must be reported

If you buy business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:

Equipment,
Buildings and improvements,
Software,
Furniture, fixtures and
Intangibles (including customer lists, licenses, patents, copyrights and goodwill).

In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.

What the IRS might examine

The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the tax agency finds that different allocations are used, auditors may dig deeper and the examination could expand beyond the transaction. So, it’s best to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.

The tax implications of buying or selling a business are complex. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best results after an acquisition, consult with us before finalizing any transaction.

Timely financial data is key to making informed business decisions. Unfortunately, it’s common for managers to struggle with their companies’ accounting systems to get the information they need, when they need it. Often, it takes multiple, confusing steps to enter and extract data specific to customers and/or projects.

Businesses and accounting software solutions evolve over time. So, what worked for your company years ago may not be the optimal solution today. For example, you might prefer a different solution that’s more user-friendly, more sophisticated or customized for your industry niche. Here are four factors — beyond just cost — to consider when evaluating your current accounting system.

1. Remote access

These days, remote access — from the field or from home to facilitate social distancing — remains a priority. Accessing your accounting system remotely allows team members to see real-time project data from anywhere. It also allows direct, daily reporting of key financial information, such as sales figures, labor hours, equipment usage and cash on hand. Managers can then compare this information against budgeted amounts to catch potential problems and adjust as needed.

2. Integration

Modern accounting software can facilitate seamless information sharing with other platforms and existing applications. For instance, your accounting solution should support timecard entry and project management software. It also should be compatible with customer and supplier networks. Likewise, if you outsource payroll to a third party, you should be able to integrate with the provider’s system so it can automatically import pertinent information in a timely manner with minimal manual input.

3. Vendor support

A quality accounting system comes with top-notch customer support, including training and a help desk to solve problems. To assess your current level of support, ask your vendor representative whether you’re maximizing the functionality of your accounting software. The rep should be able to tell you what’s working and what’s not. If the vendor doesn’t respond or provides minimal feedback, it may be time to switch providers.

4. Team buy-in

Changes in technology affect people throughout your organization, so the entire team (or at least key members thereof) should have input on the decision. Gather feedback from the team on which features are “must haves” and which ones are “just wants.” Then work with IT and financial specialists to narrow down the list of prospective vendors to three to five solutions to research in-depth and test drive.

Once you’ve selected a system, it’s important to overcome any fear or confusion about the prospective software. This involves promptly announcing the plans to upgrade the accounting system, giving a rundown of the company’s objectives for doing so and keeping staff updated on the effort’s progress. Once the new system is in place, training is the final piece to the puzzle. More complex systems generally have a learning curve that can be reduced with formal instruction by the vendor.

We can help

If you’re dissatisfied with your current accounting system, contact us. We can do a complete assessment on the effectiveness of your system and how you’re using it. Then we can help you identify other cost-effective solutions that may better fit your operational needs.

Yeo & Yeo CPAs & Business Consultants, a leading Michigan accounting firm, has been named one of Metropolitan Detroit’s Best and Brightest Companies to Work For for the tenth consecutive year.

“2021 has been another challenging year for many Michigan businesses, and I am proud of Yeo & Yeo and the employees who continue to give back to the community and support one another professionally and personally. It is our employees who make Yeo & Yeo a great place to work,” said Thomas O’Sullivan, managing principal of the Ann Arbor office.

Yeo & Yeo offers more than 200 employees rewarding careers in the accounting industry. Yeo & Yeo develops future leaders through its award-winning CPA certification bonus program, in-house training department, professional development training and formal mentoring while sustaining work-life balance.

“This recognition is a testament to our dedicated employees and the culture we have built. I’m happy to see employees reporting that they are engaged and enriched through their work,” said Tammy Moncrief, managing principal of the Auburn Hills office.

The annual competition recognizes organizations that display a commitment to excellence in their human resource practices and employee enrichment. Companies in counties as far north as Midland, Bay and Saginaw, as far west as Clinton, Ingham and Jackson, and those in the entire Thumb and Metropolitan Detroit regions were eligible to participate.

Yeo & Yeo and the other winning companies will be honored at the Best and Brightest Digital Awards Celebration on November 2.

Given the escalating cost of health care, there may be a more cost-effective way to pay for it. For eligible individuals, a Health Savings Account (HSA) offers a tax-favorable way to set aside funds (or have an employer do so) to meet future medical needs. Here are the main tax benefits:

Contributions made to an HSA are deductible, within limits,
Earnings on the funds in the HSA aren’t taxed,
Contributions your employer makes aren’t taxed to you, and
Distributions from the HSA to cover qualified medical expenses aren’t taxed.

Who’s eligible?

To be eligible for an HSA, you must be covered by a “high deductible health plan.” For 2021, a high deductible health plan is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For self-only coverage, the 2021 limit on deductible contributions is $3,600. For family coverage, the 2021 limit on deductible contributions is $7,200. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits can’t exceed $7,000 for self-only coverage or $14,000 for family coverage.

An individual (and the individual’s covered spouse) who has reached age 55 before the close of the year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2021 of up to $1,000.

HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits

You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2021, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,600. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,200. Thus, deductible contributions aren’t limited by the amount of the annual deductible under the high deductible health plan.

Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if an individual is enrolled in Medicare, he or she is no longer eligible under the HSA rules and contributions to an HSA can no longer be made.

On a once-only basis, taxpayers can withdraw funds from an IRA, and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the transfer time. The amount transferred is excluded from gross income and isn’t subject to the 10% early withdrawal penalty.

Distributions

HSA Distributions to cover an eligible individual’s qualified medical expenses, or those of his spouse or dependents, aren’t taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65 or in the event of death or disability.

As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat complex. Contact us if you have questions.

If you use an automobile in your trade or business, you may wonder how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.

Cents-per-mile vs. actual expenses

First, note that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (56 cents per business mile driven for 2021), a depreciation allowance is built into the rate.

If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.

For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually.

For a passenger auto placed in service in 2021 that cost more than $59,000, the Year 1 depreciation ceiling is $18,200 if you choose to deduct $8,000 of first-year bonus depreciation. The annual ceilings for later years are: Year 2, $16,400; Year 3, $9,800; and for all later years, $5,860 until the vehicle is fully depreciated.
For a passenger auto placed in service in 2021 that cost more than $51,000, the Year 1 depreciation ceiling is $10,200 if you don’t choose to deduct $8,000 of first-year bonus depreciation. The annual ceilings for later years are: Year 2, $16,400; Year 3, $9,800; and for all later years, $5,860 until the vehicle is fully depreciated.
These ceilings are proportionately reduced for any nonbusiness use. And if a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions.

Heavy SUVs, pickups, and vans

Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.

After-tax cost is what counts

What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.

The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information.

Related-party transactions and financial connections are a normal part of operating a business. But these arrangements have gotten a bad rap because dishonest people sometimes use them to disguise poor performance or dishonest activities. So, identifying related parties and evaluating your interactions with them are important parts of the external audit process — especially in today’s volatile market conditions.

Accounting definition

In an accounting context, the term “related parties” refers to “any party that controls or can significantly influence the management or operating policies of the company to the extent that the company may be prevented from fully pursuing its own interests.” Examples of related parties include:

Affiliates and subsidiaries,
Investees accounted for by the equity method,
Trusts for the benefit of employees,
Principal owners, officers, directors and managers, and
Immediate family members of owners, directors or managers.

Focal points

The auditing standards on related parties target three critical areas:

Related-party transactions,
Significant unusual transactions that are outside the company’s normal course of business or that otherwise appear to be unusual due to their timing, size or nature, and
Other financial relationships with the company’s owners, directors, officers and managers.

Auditors strive for an in-depth understanding of every related-party financial relationship and transaction, including their nature, terms and business purpose (or lack thereof). Examples of information that may be gathered during the audit that could reveal undisclosed related parties include information contained on a company’s website, tax filings, corporate life insurance policies, contracts and organizational charts.

Certain types of questionable transactions — such as contracts for below-market goods or services, bill-and-hold arrangements, uncollateralized loans and subsequent repurchase of goods sold — also might signal that a company is engaged in unusual or undisclosed related-party transactions.

Eye on compensation

Executive compensation is a key example of a related-party arrangement that’s subject to heightened scrutiny from auditors. Executives can potentially influence financial reporting and may feel incentives or pressures to meet financial targets. The auditing standards require in-depth inquiry about executive compensation, including performance-based bonuses and stock options.

Auditors also test the accuracy and completeness of management’s reporting for and disclosures of these transactions. But they’re not required to make any recommendations or determinations regarding the reasonableness of compensation arrangements.

Full transparency

Investors, lenders and other stakeholders appreciate companies that present related-party relationships and transactions, openly and completely. You can help facilitate the audit process by being up-front with your auditors about all related-party transactions, even if you don’t think they’re required to be disclosed or consolidated on the company’s financial statements. Contact us for more information about transactions and financial connections that may fall under the related-party accounting rules.

Article Updated September 17, 2021

In Notice 2021-46, the IRS recently issued additional guidance on the COBRA premium assistance provisions of the American Rescue Plan Act (ARPA).

Under the ARPA, a 100% COBRA premium subsidy and additional COBRA enrollment rights are available to certain assistance eligible individuals (AEIs) during the period beginning on April 1, 2021, and ending on September 30, 2021 (the Subsidy Period).

Subsidy Termination. Importantly, the ARPA required employers to notify each “assistance eligible individual” (employees who lost group coverage due to reduced hours or involuntary termination and who elect coverage) no more than 45 days, but no less than 15 days, before his or her subsidy termination date that their subsidized coverage is about to end. For most individuals still receiving subsidized coverage, this means they must be notified of the September 30 termination date no later than September 15, 2021. No notice is required, however, to those individuals whose premium assistance expires due to their eligibility for another group health plan or Medicare.

The expiration notice must specify that (1) premium assistance for the individual is about to expire, (2) the date of the expiration, and (3) that the individual may be eligible for coverage without any premium assistance through COBRA continuation coverage or coverage under a group health plan, Medicaid, or the Health Insurance Marketplace. The U.S. Department of Labor (the “DOL”) published guidance and a model form employers may utilize in providing notice of the expiration of ARPA’s premium subsidy. This model notice form can be obtained or viewed on the DOL’s website, please visit:

https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/laws/cobra/premium-subsidy/notice-of-premium-assistance-expiration-premium.pdf

If your business is required to offer COBRA coverage, it’s important to mind the details of the subsidies and a related tax credit. Here are some highlights of the additional guidance:

Extended coverage periods. An AEI whose original qualifying event was a reduction of hours or involuntary termination is generally eligible for the subsidy to the extent the extended COBRA coverage falls within the Subsidy Period. The AEI must be entitled to the extended coverage because of a:

Disability determination,
Second qualifying event, or
Extension under a state mini-COBRA law.

This is true even if the AEI didn’t notify the plan of the intent to elect extended COBRA coverage before the start of the Subsidy Period — for example, because of the Outbreak Period deadline extensions.

End of Subsidy Period. The subsidy ends when an AEI becomes eligible for coverage under any other disqualifying group health plan coverage or Medicare — even if the other coverage doesn’t include the same benefits provided by the previously elected COBRA coverage.

For example, though Medicare generally doesn’t provide vision or dental coverage, the subsidy for an AEI’s dental-only or vision-only COBRA coverage ends if the AEI becomes eligible for Medicare.

Comparable state continuation coverage. A state program that provides continuation coverage comparable to federal COBRA qualifies AEIs for the subsidy even if the state program covers only a subset of state residents (such as employees of a state or local government unit).

Claiming the credit. Under most circumstances, an AEI’s current or former common-law employer (depending on whether the AEI had a reduction of hours or an involuntary termination) is the entity that’s eligible to claim the tax credit for providing the subsidy. If a plan (other than a multiemployer plan) covers employees of two or more controlled group members, each common-law employer in the group is entitled to claim the credit with respect to its current or former employees.

Guidance on claiming the credit is also provided for Multiple Employer Welfare Arrangements, state employers, entities undergoing business reorganizations, plans that are subject to both federal COBRA and state mini-COBRA, and plans offered through a Small Business Health Options Program.

The ARPA’s COBRA provisions have been in effect for a while now, so your company likely already has procedures in place to provide the subsidy to AEIs and claim the corresponding tax credit. Nevertheless, this guidance offers helpful clarifications. Contact our firm for more information.

Homeowners and businesses across the country have experienced weather-related disasters in recent months. From hurricanes, tornadoes and other severe storms to the wildfires again raging in the West, natural disasters have led to significant losses for a wide swath of taxpayers. If you’re among them, you may qualify for a federal income tax deduction, as well as other relief from the IRS.

Eligibility for the casualty loss deduction

Casualty losses can result from the damage, destruction or loss of property due to any sudden, unexpected or unusual event. Examples include floods, hurricanes, tornadoes, fires, earthquakes and volcanic eruptions. Normal wear and tear or progressive deterioration of property doesn’t constitute a deductible casualty loss. For example, drought generally doesn’t qualify.

The availability of the tax deduction for casualty losses varies depending on whether the losses relate to personal-use or business-use items. Generally, you can deduct casualty losses related to your home, household items and personal vehicles if they’re caused by a federally declared disaster — meaning a disaster that occurred in an area that the U.S. president declares eligible for federal assistance. Casualty losses related to business or income-producing property (for example, rental property) can be deducted regardless of whether they occur in a federally declared disaster area.

Casualty losses are deductible in the year of the loss, usually the year of the casualty event. If your loss stemmed from a federally declared disaster, you can opt to treat it as having occurred in the previous year. You may receive your refund more quickly if you amend the previous year’s return than if you wait until you file your return for the casualty year.

The role of reimbursements

If your casualty loss is covered by insurance, you must reduce the loss by the amount of any reimbursement or expected reimbursement. (You also must reduce the loss by any salvage value). Reimbursement also could lead to capital gains tax liability.

When the amount you receive from insurance or other reimbursements (less any expense you incurred to obtain reimbursement, such as the cost of an appraisal) exceeds the cost or adjusted basis of the property, you have a capital gain. You’ll need to include that gain as income unless you’re eligible to postpone reporting the gain.

You may be able to postpone the reporting obligation if you purchase property that’s similar in service or use to the destroyed property within the specified replacement period. You also can postpone if you buy a controlling interest (at least 80%) in a corporation owning similar property or if you spend the reimbursement to restore the property.

Alternatively, you can offset casualty gains with casualty losses not attributable to a federally declared disaster. This is the only way you can deduct personal-use property casualty losses incurred in areas not declared disaster areas.

The loss amount vs. the deduction

For personal-use property, or business-use or income-producing property that isn’t completely destroyed, your casualty loss is the lesser of:

The adjusted basis of the property immediately before the loss (generally, your original cost, plus improvements and less depreciation), or
The drop in fair market value (FMV) of the property as a result of the casualty (that is, the difference between the FMV immediately before and immediately after the casualty).

For business-use or income-producing property that’s completely destroyed, the amount of the loss is the adjusted basis less any salvage value and reimbursements.

If a single casualty involves more than one piece of property, you must figure the loss on each separately. You then combine these losses to determine the casualty loss.

An exception applies to personal-use real property, such as a home. The entire property (including improvements such as landscaping) is treated as one item. The loss is the smaller of the decline in FMV of the entire property and the entire property’s adjusted basis.

Other limits may apply to the amount of the loss you may deduct, too. For personal-use property, you must reduce each casualty loss by $100 (after you’ve subtracted any salvage value and reimbursement).

If you suffer more than one casualty loss during the tax year, you must reduce each loss by $100 and report each on a separate IRS form. If two or more taxpayers have losses from the same casualty, the $100 rule applies separately to each taxpayer.

But that’s not all. For personal-use property, you also must reduce your total casualty losses by 10% of your adjusted gross income, after you’ve applied the $100 rule. As a result, smaller personal-use casualty losses often provide little or no tax benefit.

The requisite records

Documentation is critical to claim a casualty loss deduction. You’ll need to be able to show:

That you were the owner of the property or, if you leased it, that you were contractually liable to the owner for the damage,
The type of casualty and when it occurred,
That the loss was a direct result of the casualty, and
Whether a claim for reimbursement with a reasonable expectation of recovery exists.

You also must be able to establish your adjusted basis, reimbursements and, for personal-use property, pre- and post-casualty FMVs.

Additional relief

The IRS has granted tax relief this year to victims of numerous natural disasters, including “affected taxpayers” in Alabama, California, Kentucky, Louisiana, Michigan, Mississippi, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee and Texas. The relief typically extends filing and other deadlines. (For detailed information for your state visit: https://bit.ly/3nzF2ui.)

Note that you can be an affected taxpayer even if you don’t live in a federally declared disaster area. You’re considered affected if records you need to meet a filing or payment deadline postponed during the applicable relief period are located in a covered disaster area. For example, if you don’t live in a disaster area, but your tax preparer does and is unable to pay or file on your behalf, you likely qualify for filing and payment relief.

A team effort

If you’ve incurred casualty losses this year, tax relief could mitigate some of the financial pain. We can help you maximize your tax benefits and ensure compliance with any extensions.

Article Updated September 15, 2021

Any healthcare provider that received at least $10,000 from the Provider Relief Fund during the first half of 2020 must report on the use of those funds by September 30, 2021.

However, in response to the challenges providers are facing and given the COVID surges and natural disasters around the country, a 60-day grace period is in place (October 1 – November 30, 2021). This period allows providers to come into compliance with their PRF reporting requirements should they fail to meet the September 30, 2021 deadline.

While you will be out of compliance if you do not submit your report by September 30, 2021, recoupment or other enforcement actions will not be initiated during the 60-day grace period (October 1 – November 30, 2021).
Providers who are able are strongly encouraged to complete their report in the PRF Reporting Portal by September 30, 2021.
Providers should return unused funds as soon as possible after submitting their report. All unused funds must be returned no later than 30 days after the end of the grace period (December 30, 2021).

This grace period only pertains to the Reporting Period 1 report submission deadline. There is no change to the Period of Availability for the use of PRF payments.

Reporting portal

To facilitate these reports, the U.S. Department of Health and Human Services (HHS) opened its reporting portal on July 1.

If a Provider Relief Fund recipient has not yet registered for a portal account, the recipient must do so before reporting. To do this, visit prfreporting.hrsa.gov and click “Register.” Yeo & Yeo encourages anyone who has not yet registered to do so as soon as possible. To assist recipients with registering, HRSA updated its Registration User Guide. In addition, the Reporting Worksheet will help you gather the information before you start the reporting process on the website.

Payment Received Period (For Payments Exceeding $10,000 in Aggregate)	Deadline to Use Funds	Reporting Time Period
Period 1: April 10 to June 30, 2020	June 30, 2021	July 1 to Sept. 30, 2021 (Grace period: Oct. 1 – Nov. 30, 2021)
Period 2: July 1 to Dec. 31, 2020	Dec. 31, 2021	Jan. 1 to March 31, 2022
Period 3: Jan. 1 to June 30, 2021	June 30, 2022	July 1 to Sept. 30, 2022
Period 4: July 1 to Dec. 31, 2021	Dec. 31, 2022	Jan. 1 to March 31, 2023

Returning unused funds

Providers that have remaining Provider Relief Fund money that they did not spend on allowable expenses or losses by the deadline must return the unused funds to HHS within 30 calendar days after the end of the applicable reporting period. For Reporting Period 1, unused funds must be returned no later than 30 days after the grace period (December 30, 2021).

To return any unused funds, use the Return Unused PRF Funds Portal. Instructions for returning unused funds are available here.

Please contact your Yeo & Yeo professional if you need assistance with PRF reporting.

The U.S. economy has been nothing short of a roller-coaster ride for the past year and a half. Some industries have had to overcome seemingly insurmountable challenges, while others have seen remarkable growth opportunities arise.

If your business is doing well enough for you to consider adding a location, both congratulations and caution are in order. “Fortune favors the bold,” goes the old saying. However, strained cash flow and staffing issues can severely disfavor the underprepared.

Ask the right questions

Among the most fundamental questions to ask is: Will we be able to duplicate the success of our current location? If your first location is doing well, it’s likely because you’ve put in place the people and processes that keep the business running smoothly. It’s also because you’ve developed a culture that resonates with your customers. You need to feel confident you can do the same at subsequent locations.

Another important question is: How might expansion affect business at both locations? Opening a second location prompts a consideration that didn’t exist with your first: how the two establishments will interact. Placing the two operations near each other can make it easier to manage both, but it also can lead to one operation cannibalizing the other. Ideally, the two locations will have strong, independent markets.

Run the numbers

You’ll need to consider the financial aspects carefully. Look at how you’re going to fund the expansion. Ideally, the first location will generate enough revenue so that it can both sustain itself and help fund the second. But you may still need to take on debt, and it’s not uncommon for construction costs and timelines to exceed initial projections.

You might want to include some extra dollars in your budget for delays or surprises. If you must starve your first location of capital to fund the second, you’ll risk the success of both.

Account for the tax ramifications as well. If you own the real estate, property taxes on two locations will affect your cash flow and bottom line. You may be able to cut your tax bill with various tax incentives, such as by locating the second location in an Enterprise Zone. But the location will first and foremost need to make sense from a business perspective. There may be other tax issues as well — particularly if you’re crossing state lines.

Assess the risk

For some businesses, expanding to a new location may be the single most impactful way to drive growth and build the bottom line. However, it’s also among the riskiest endeavors any company can take on. We’d be happy to help you assess the feasibility of opening a new location, including creating financial projections that will provide insights into whether the move is a reasonable risk.

Many homeowners across the country have seen their home values increase recently. According to the National Association of Realtors, the median price of homes sold in July of 2021 rose 17.8% over July of 2020. The median home price was $411,200 in the Northeast, $275,300 in the Midwest, $305,200 in the South and $508,300 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2021. You may owe capital gains tax and net investment income tax (NIIT).

Gain exclusion

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

You must have owned the property for at least two years during the five-year period ending on the sale date.
You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Gain above the exclusion amount

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

The NIIT

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

The Government Accounting Standards Board (GASB) issues implementation guides that include questions and answers to clarify, explain, or elaborate on GASB Statements. The Implementation Guide No. 2021-1 includes significant modification to a previously answered question related to the application of a government’s capitalization policy.

Question 5.1 has not changed from the original question; however, the answer has been modified significantly. The amended response could cause significant modification to governments’ capital asset records.

Question 5.1 is as follows: Should a government’s capitalization policy be applied only to individual assets or can it be applied to a group of assets acquired together? Consider a government that has established a capitalization threshold of $5,000 for equipment. If the government purchases 100 computers costing $1,500 each, should the computers be capitalized?

The chart below compares the original and amended answers.

Original Response	Amended Response
It may be appropriate for a government to establish a capitalization policy that would require capitalization of certain types of assets whose individual acquisition costs are less than the threshold for an individual asset. Computers, classroom furniture, and library books are assets that may not meet the capitalization policy on an individual basis yet might be considered material collectively. Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.	A government should capitalize assets whose individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant. Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.

Original Response

Amended Response

It may be appropriate for a government to establish a capitalization policy that would require capitalization of certain types of assets whose individual acquisition costs are less than the threshold for an individual asset.

Computers, classroom furniture, and library books are assets that may not meet the capitalization policy on an individual basis yet might be considered material collectively. Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.

A government should capitalize assets whose individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant.

Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.

Governments will no longer be able to immediately dismiss capitalization for asset purchases under the capitalization policy threshold when those assets could potentially be significant when evaluated collectively.

Governments should begin assessing this change immediately. Purchasing information for certain capital asset-like purchases will need to be reviewed, and management’s interpretation on how to handle aggregated purchases will need to be documented. The amended guidance may require a change to the capitalization policy.

The directive in Question 5.1 is effective for periods beginning after June 15, 2023. If a government determines that changes to their capital assets are required based on the amended guidance, those changes are to be retroactively applied by restating all prior periods presented.

The IRS explicitly indicates that wages used for Payroll Protection Program loan forgiveness, Shuttered Venue Operators Grants, and Restaurant Revitalization Fund grants may not be used for Employee Retention Credit (ERC) purposes (Rev. Proc. 2021-33). Those are separate silos on the expense side based on IRS guidance and there is no leeway to charge the same expense even temporarily to multiple programs. Several questions have come up relating to claiming and accounting for ERC.

What about entities with grants other than those mentioned above?

The answer is not clear-cut. We will focus on federal grants, as they are more common. In subpart E cost principles of 2 CFR 200, credits must be credited to the federal awards for which the costs are related as either a cost reduction or a cash refund. This means if subpart E applies to the federal grant, any ERC accrued or received must be netted into the grant expenses in some manner. However, if subpart E cost principles do not apply to a particular grant, the grant document should be utilized to determine any restrictions that may apply. Many nonfederal reimbursement-driven grants likely operate similarly to subpart E.

Can ERC be used as matching funds?

In reviewing the matching requirements within 2 CFR 200, the ERC cannot be used as a match to a federal grant. However, other nonfederal grants may or may not allow the ERC to be claimed as a match; the grant document would prevail in that assessment.

Should an entity with federal grants claim the ERC on those wages that could be charged to the grant?

It depends. There are several situations to consider:

1. Situations when the entity has more allowable expenses than the grant revenue can cover. In this case, it makes sense to use the ERC to cover some of those additional expenses beyond what the grant can cover.

2. Situations when there is an easy way to utilize a carryover provision or get an extension on the grant period and utilize the grant funds to cover expenses in a future period. In that case, it makes sense to take the ERC to cover current expenses and save those grant funds that can be extended to offset future expenses.

3. Situations when the grant is for a set period or based on milestones and all the expenses were already covered under the grant. In that case, it does not make sense to claim the ERC as you are replacing one federal source with another. In this case, if the amounts spent on this year’s grant will help determine the amount of next year’s grant, it may be detrimental long-term to take the ERC, as the replacement of grant revenue with ERC funds results in fewer grant expenses and a smaller grant (less revenue) the following year.

What other compliance requirements should I consider?

Indirect Costs – The same rules apply to wages and payroll taxes in the indirect cost pool if there is an actual indirect cost rate calculated and used. If instead a de minimus rate of 10% is used, then any indirect wages used for ERC will not impact the allowable indirect costs.

Cash Management – For the current pay period’s ERC, reducing the expenses to the grant will mean drawing down less cash. The cost principles and cash management requirements need to be carefully considered for retroactive changes to the ERC that are accounted for with the IRS by doing a 941-X to amend the payroll tax return. Cost principles indicate that the credit should be accrued in determining allowable expenses. This means, as soon as you are accruing for the credit, the whole amount of credit is now considered a reduction in expenses which then impacts your ability to draw down the cash in the grant. This could cause timing issues between the reduction in expenses, and therefore reduction of cash drawdowns from the grant, and the actual receipt of ERC cash. The 2 CFR 200 rules were not written to contemplate the size of credits that the ERC is considering or the delays in refunds being sent. This could result in a compliance finding that the entity drew down too much cash from the grant.

Budgeting – The ERC could impact other compliance requirements as well. For example, budgets may require approval to move amounts between different line items, and the claiming of the ERC might reduce the payroll taxes or salaries charged to the grants.

Maintenance of Effort – There may be maintenance of effort requirements that require specific dollar amounts of expenses; netting the ERC against the expenses could cause noncompliance with those requirements.

Final Thoughts

If the entity has expense reimbursement types of grants, especially, an evaluation of how the ERC receipt works in those grants needs to be made. Except for a few cases (PPP, SVOG, and RRF), there is no prohibition on using the ERC. However, the compliance requirements may cause a practical limitation on being able to use the ERC. It is best practice to have discussions with your grantor and document the answers in writing as you determine whether grant funds or ERC funds make the most sense in your situation.

If you need assistance with accounting for ERC, please contact your Yeo & Yeo professional.

The week of September 13-17 has been declared National Small Business Week by the Small Business Administration. To commemorate the week, here are three tax breaks to consider.

1. Claim bonus depreciation or a Section 179 deduction for asset additions

Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2021. That means your business might be able to write off the entire cost of some or all asset additions on this year’s return. Consider making acquisitions between now and December 31.

Note: It doesn’t always make sense to claim a 100% bonus depreciation deduction in the first year that qualifying property is placed in service. For example, if you think that tax rates will increase in the future — either due to tax law changes or a change in your income — it might be better to forgo bonus depreciation and instead depreciate your 2021 asset acquisitions over time.

There’s also a Section 179 deduction for eligible asset purchases. The maximum Section 179 deduction is $1.05 million for qualifying property placed in service in 2021. Recent tax laws have enhanced Section 179 and bonus depreciation but most businesses benefit more by claiming bonus depreciation. We can explain the details of these tax breaks and which is right for your business. You don’t have to decide until you file your tax return.

2. Claim bonus depreciation for a heavy vehicle

The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy SUVs, pickups and vans used over 50% for business. For federal tax purposes, heavy vehicles are treated as transportation equipment so they qualify for 100% bonus depreciation.

This option is available only when the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door.

Buying an eligible vehicle and placing it in service before the end of the year can deliver a big write-off on this year’s return. Before signing a sales contract, we can help evaluate what’s right for your business.

3. Maximize the QBI deduction for pass-through businesses

A valuable deduction is the one based on qualified business income (QBI) from pass-through entities. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. This deduction is subject to restrictions that can apply at higher income levels and based on the owner’s taxable income.

For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations. For these taxpayers, the deduction can also be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.

Because of various limitations on the QBI deduction, tax planning moves can unexpectedly increase or decrease it. For example, strategies that reduce this year’s taxable income can have the negative side-effect of reducing your QBI deduction.

Plan ahead

These are only a few of the tax breaks your small business may be able to claim. Contact us to help evaluate your planning options and optimize your tax results.

In the first half of 2021, there was a surge in financial restatements. The reason relates to guidance issued by the Securities and Exchange Commission, requiring special purpose acquisition companies (SPACs) to report warrants as liabilities. SPACs are shell corporations that are listed on a stock exchange with the purpose of acquiring a private company, thereby making it public without going through the traditional IPO process. Historically, SPACs that offer warrants (which allow investors buy shares at a set price in the future) have reported those instruments as equity.

In this situation, most SPAC investors understood that these restatements were related to a financial reporting technicality that applied to the sector at large, rather than problems with a particular company or transaction. But some restatements aren’t so innocuous.

Close-up on restatements

The Financial Accounting Standards Board defines a restatement as a revision of a previously issued financial statement to correct an error. Whether they’re publicly traded or privately held, businesses may reissue their financial statements for several “mundane” reasons. Like the recent situation with SPACs, managers might have misinterpreted the accounting standards, or they simply may have made minor mistakes and need to correct them.

Leading causes for restatements include:

Recognition errors (for example, when accounting for leases or reporting compensation expense from backdated stock options),
Income statement and balance sheet misclassifications (for instance, a company may need to shift cash flows between investing, financing and operating on the statement of cash flows),
Mistakes reporting equity transactions (such as improper accounting for business combinations and convertible securities),
Valuation errors related to common stock issuances,
Preferred stock errors, and
The complex rules related to acquisitions, investments, revenue recognition and tax accounting.

Reasons to restate results

Often, restatements happen when the company’s financial statements are subjected to a higher level of scrutiny. For example, restatements may occur when a private company converts from compiled financial statements to audited financial statements, decides to file for an initial public offering — or merges with a SPAC. Restatements also may be needed when the owner brings in additional internal (or external) accounting expertise, such as a new controller or audit firm.

In some cases, a financial restatement also can be a sign of incompetence, weak internal controls — or even fraud. Such restatements may signal problems that require corrective actions.

We can help

The restatement process can be time consuming and costly. Regular communication with interested parties — including lenders and investors — can help businesses overcome the negative stigma associated with restatements. Management also needs to reassure stakeholders that the company is in sound financial shape to ensure their continued support.

We can help accounting personnel understand the evolving accounting and tax rules to minimize the risk of restatement. Our staff can also help them effectively manage the restatement process and take corrective actions to minimize the risk of restatement going forward.

Commercial loans, particularly small business loans, have been in the news over the past year or so. The federal government’s Paycheck Protection Program has been helpful to many companies, though fraught with administrative challenges.

As your business pushes forward, you may find yourself in need of cash in the months ahead. If so, more traditional commercial loan options are still out there. Before you apply, however, think like a lender to be as prepared as possible and know for sure that the loan is a good idea.

4 basic questions

At the most basic level, a lender has four questions in mind:

How much money do you want?
How do you plan to use it?
When do you need it?
How soon can you repay the loan?

Pose these questions to yourself and your leadership team. Be sure you’re crystal clear on the answers. You’ll need to explain your business objectives in detail and provide a history of previous lender financing as well as other capital contributions.

Lenders will also look at your company’s track record with creditors. This includes business credit reports and your company’s credit score.

Consider the three C’s

Lenders want to minimize risk. So, while you’re role-playing as one, consider the three C’s of your company:

Character. The strength of the management team — its skills, reputation, training and experience — is a key indicator of whether a business loan will be repaid. Strive to work through natural biases that can arise when reviewing your own performance. What areas of your business could be viewed as weaknesses, and how can you assure a lender that you’re improving them?
Capacity. Lenders want to know how you’ll use the loan proceeds to increase cash flow enough to make payments by the maturity date. Work up reasonable cash flow and profitability projections that demonstrate the feasibility of your strategic objectives. Convince yourself before you try to convince the bank!
Collateral. These are the assets pledged if you don’t generate enough incremental cash flow to repay the loan. Collateral is a lender’s backup plan in case your financial projections fall short. Examples include real estate, savings, stock, inventory and equipment.

As part of your effort to think like a lender, use your financial statements to create a thorough inventory of assets that could end up as collateral. Doing so will help you clearly see what’s at stake with the loan. You may need to put personal assets on the line as well.

Gain some insight

Applying for a business loan can be a stressful and even frustrating experience. By taking on the lender’s mindset, you’ll be better prepared for the process. What’s more, you could gain insights into how to better develop strategic initiatives. Contact our firm for help.

A business may be able to claim a federal income tax deduction for a theft loss. But does embezzlement count as theft? In most cases it does but you’ll have to substantiate the loss. A recent U.S. Tax Court decision illustrates how that’s sometimes difficult to do.

Basic rules for theft losses

The tax code allows a deduction for losses sustained during the taxable year and not compensated by insurance or other means. The term “theft” is broadly defined to include larceny, embezzlement and robbery. In general, a loss is regarded as arising from theft only if there’s a criminal element to the appropriation of a taxpayer’s property.

In order to claim a theft loss deduction, a taxpayer must prove:

The amount of the loss,
The date the loss was discovered, and
That a theft occurred under the law of the jurisdiction where the alleged loss occurred.

Facts of the recent court case

Years ago, the taxpayer cofounded an S corporation with another shareholder. At the time of the alleged embezzlement, the other original shareholder was no longer a shareholder, and she wasn’t supposed to be compensated by the business. However, according to court records, she continued to manage the S corporation’s books and records.

The taxpayer suffered an illness that prevented him from working for most of the year in question. During this time, the former shareholder paid herself $166,494. Later, the taxpayer filed a civil suit in a California court alleging that the woman had misappropriated funds from the business.

On an amended tax return, the corporation reported a $166,494 theft loss due to the embezzlement. The IRS denied the deduction. After looking at the embezzlement definition under California state law, the Tax Court agreed with the IRS.

The Tax Court stated that the taxpayer didn’t offer evidence that the former shareholder “acted with the intent to defraud,” and the taxpayer didn’t show that the corporation “experienced a theft meeting the elements of embezzlement under California law.”

The IRS and the court also denied the taxpayer’s alternate argument that the corporation should be allowed to claim a compensation deduction for the amount of money the former shareholder paid herself. The court stated that the taxpayer didn’t provide evidence that the woman was entitled to be paid compensation from the corporation and therefore, the corporation wasn’t entitled to a compensation deduction. (TC Memo 2021-66)

How to proceed if you’re victimized

If your business is victimized by theft, embezzlement or internal fraud, you may be able to claim a tax deduction for the loss. Keep in mind that a deductible loss can only be claimed for the year in which the loss is discovered, and that you must meet other tax-law requirements. Keep records to substantiate the claimed theft loss, including when you discovered the loss. If you receive an insurance payment or other reimbursement for the loss, that amount must be subtracted when computing the deductible loss for tax purposes. Contact us with any questions you may have about theft and casualty loss deductions.

As we approach the holidays and the end of the year, many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2021 is $15,000.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: This discussion isn’t relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.

Gift-splitting by married taxpayers

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).

If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $15,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $30,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $15,000 is being given to a single individual in any year.)

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11.7 million for 2021. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $15,000 as a gift.

Annual gifts help reduce the taxable value of your estate. There have been proposals in Washington to reduce the estate and gift tax exemption amount, as well as make other changes to the estate tax laws. Making large tax-free gifts may be one way to recognize and address this potential threat. It could help insulate you against any later reduction in the unified federal estate and gift tax exemption.