Making Sense of Your Statement of Cash Flows

The statement of cash flows essentially tells you about cash entering and leaving a business. It’s arguably the most misunderstood and underappreciated part of a company’s annual report. After all, a business that reports positive net income on its income statements sometimes doesn’t have enough cash in the bank to pay its bills. Reviewing the statement of cash flows can provide significant insight into a company’s financial health and long-term viability.

Under Generally Accepted Accounting Principles (GAAP), the statement of cash flows is typically organized into three sections:

1. Cash flows from operations. This section focuses on cash flows from selling products and services. It customarily starts with accrual-basis net income. Then it’s adjusted for items related to normal business operations, such as:

Gains or losses on asset sales,
Depreciation and amortization,
Income taxes, and
Net changes in working capital accounts (such as accounts receivable, inventory, prepaid assets, accrued expenses and payables).

The end result is cash-basis net income. Companies that report several successive years of negative operating cash flows may be better off closing than continuing to incur losses.

2. Cash flows from investing activities. If a company buys or sells property, equipment or marketable securities, the transaction generally shows up here. This section reveals whether a company is reinvesting in its future operations — or divesting assets for emergency funds.

3. Cash flows from financing activities. This section shows cash flows from raising, borrowing and repaying capital. It highlights the company’s ability to obtain cash from lenders and investors, including:

New loan proceeds,
Principal repayments,
Dividends paid,
Issuances of securities or bonds, and
Additional capital contributions by owners.

Capital leases and noncash transactions are reported in a separate schedule at the bottom of the statement of cash flows or in a narrative footnote disclosure. For example, if a borrower purchases equipment directly using loan proceeds, the transaction would typically appear at the bottom of the statement, rather than as a cash outflow from investing activities and an inflow from financing activities.

In addition, U.S. companies that enter into foreign currency transactions customarily report the effect of exchange rate changes as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents.

For more information

The statement of cash flows provides valuable insight about your company’s financial health. But it may not always be clear how to classify transactions. We can help you get it right.

Nonprofit organizations often receive and solicit donations to supplement their programs and needs. It is important for the organization to have written policies and controls in place for fundraising, resembling policies in effect for the organization’s other transaction cycles.

What should be included in the fundraising policy?

The fundraising policy should specify who in the organization can solicit funds and how. It should also address how donors will be acknowledged with letters, receipts and other recognition.
Unwanted or noncash donations should also be addressed in the policy. The organization should have the right to refuse any donation that isn’t in line with its policy or doesn’t look favorable with its mission or values.
The nonprofit may want to distinguish how it will treat or sell specific noncash donations it receives. Items to consider are publicly traded securities, tangible personal property, life insurance policies, real property, etc.
Finally, the policy should address special events specifically – how they are organized, how volunteers will be utilized and monitored, and how to handle funds received for cancelled events.

Contact your Yeo & Yeo professional if you need assistance.

All can agree it has been an interesting year. The COVID-19 pandemic has had an incredible impact on our personal lives and the way we work and conduct business. Nonprofits have not been immune to these challenges. A year later, we are still talking about the pandemic and it is continuing to affect nonprofit events and fundraisers.

Organizations are getting creative with virtual events or new campaigns. Still, for events that have had to be altered or cancelled, it’s essential to understand how to account for funds received before the event.

Contribution revenue vs. exchange revenue

Two different types of revenue are related to fundraising events – contribution revenue and exchange revenue. The contribution piece is when people are giving but receiving nothing in exchange. The exchange piece is the value of the good or service people receive in exchange. For example, the price of admission that is above and beyond the fair value of the goods and services received is considered a contribution. See Yeo & Yeo’s article, Special Event Accounting and Reporting, for more information about distinguishing fundraising revenue between contribution and exchange.

Establish a policy for cancelled event funds

Now that we understand the types of fundraising revenue, how do we treat each of them when funds have been collected in advance for an event that is cancelled? First, a nonprofit should establish a written policy regarding event funds and what it will do with them if an event is cancelled. If no policy is in place, the default is that the contribution portion is unconditional.

Consider a few different options for the policy:

Policy states the funds should be given back to the donor.
Policy states the organization must contact the donor and ask if they would like a refund or want to contribute the funds.
Policy states the organization retains the funds as a contribution if the event is cancelled.
Policy states the funds will be used for a later event.

Which option the organization chooses dictates how to account for these funds.

Policy states the funds should be given back to the donor. When the nonprofit initially receives the funds, exchange revenue related to the event is recorded as deferred revenue, and contributions related to the event are recorded as a refundable advance. The money is held in these liability accounts until the event takes place. The exchange revenue isn’t considered earned until the event takes place. Also, the contribution revenue is deemed to be conditional on the event taking place. When the organization cancels the event, all the money collected would be paid back to the donors and removed from the deferred revenue and refundable advance liability accounts. No revenue ever hits the organization’s books.

Policy states the organization must contact the donor and ask if they would like a refund or want to contribute the funds. When originally received, exchange revenue related to the event would be recorded as deferred revenue, and contributions related to the event would be recorded as a refundable advance. The money is held in the liability accounts until the event takes place. When the organization cancels the event, the money collected is either paid back to the donor and the liability is reduced, or the funds are considered an unconditional contribution as soon as the donor agrees to forfeit the funds to the organization, making it contribution revenue on that date, including the foregone exchange revenues.

Policy states the organization retains the funds as a contribution, or there is no policy. If this is the organization’s policy, the nonprofit should be making this clear to donors and ticket buyers for their events, such as listing “nonrefundable” on the tickets. When the funds are received initially, the exchange revenue related to the event would be recorded as deferred revenue. However, the event’s contributions would be recorded as revenue at the time of the payment. This is because the revenue is not conditional on the event taking place since funds would not be returned to the donor if the event is cancelled. This can also result in revenue being recognized for a fundraiser in a fiscal year different from when the fundraiser takes place. For example, if funds are collected in December 2020 for a February 2021 event, the contribution portion of those payments is recognized as revenue in December 2020. If the event is cancelled, the exchange piece of the revenue is recognized as unconditional contribution revenue on the date of cancellation. The contribution portion of the revenue is already recorded, so nothing needs to be done with that upon cancellation.

Policy states the funds will be used for a later event. Like many of the other options above, the exchange revenue and contributions are held in liability accounts until the event takes place. Suppose the funds are designated to be used for a later event upon cancellation. In that case, they will remain in the liability accounts until this later event occurs, at which time they would be recognized as revenue.

Tracking is still required

One last item that needs to be addressed regarding cancelled events is when the nonprofit recognizes funds collected for the event as contributions. The nonprofit must track those donors like it would any other regular contribution to the organization. Therefore, donor receipt letters, year-end donor summary reports, and donor tracking must all occur when exchange revenue is converted into contribution revenue.

While cancelling events is not ideal for the nonprofit, it is crucial to understand how to account for it when this does occur due to unforeseen circumstances. Proper accounting all comes down to the nonprofit establishing a policy regarding cancelled events and the related funding collected to ensure revenue is appropriately handled.

The Governmental Accounting Standards Board (GASB) issued a new lease accounting standard back in June 2017, following suit with ASU No. 2016-02 issued by the Financial Accounting Standards Board (FASB) in February 2016.

The initial implementation date of GASB 87 was for reporting periods beginning after December 15, 2019. However, due to COVID-19, GASB issued Statement No. 95 delaying implementation for many standards, including Statement No. 87, which was delayed for 18 months. Now, the new lease accounting standards must be implemented for governments with June 30, 2022 year-ends and later.

This standard will put all governments’ financial reporting on a level playing field, as all governments will use a single model of reporting leases and will be required to report lease liabilities that are not currently being reported. A lessee is required to recognize a lease liability and an intangible right-to-use lease asset for leases that were previously classified as operating leases and had only footnoted the future lease payment obligations.

At the commencement of the lease, the lease liability and assets would be recognized. The liability would be based on the present value of the future lease payments, and the lease asset would be equal to the lease liability, plus any upfront payments or direct lease costs.
The lease liability would be reduced as payments are made throughout the lease term and recognize an outflow of resources for interest expense.
The lease asset will be amortized over the asset’s lease term or useful life, whichever is shorter.

The lease asset and liability will be the same at the start of the lease; however, depending on payment terms and the leased asset’s useful life, they will most likely be different throughout the lease term.

The financial statements’ notes will disclose a description of the leasing arrangement, the amount of leased assets recognized, and the future lease payment schedule.

The standard also includes information on short-term leases, lessor accounting, lease modification, lease terminations, subleases, and sale-leaseback transactions.

See the full text of GASB 87.

Please contact your local Yeo & Yeo Government Services Group member if you have questions or need help implementing lease accounting.

Our clients routinely ask us questions about how to account for the proceeds from various programs that have received new or additional funding due to COVID-19. As you can likely relate, finding the answers has been a bit of a moving target, as new guidance seems to come out just as we thought we had it all figured out.

As you think ahead for your audit preparation, we want to share some information sources that may help you determine which grants will need to be included in your schedule of expenditures of federal awards.

The Governmental Audit Quality Center (GAQC) of the AICPA has a nonauthoritative summary of information about the federal programs established as a result of the COVID-19 pandemic. The GAQC updates this summary as information becomes available. If you have received any of these grants, that federal program will need to be included on your schedule of expenditures of federal awards if the column indicates that uniform guidance applies. Be aware that when determining which major program(s) your auditor will test, all funding included in 84.425 in the Education Stabilization Fund will be considered under one program. For FID reporting and to assist in testing purposes, the information will still need to be tracked separately for each grant and provided to your auditor to determine what level of testing may be required for each program.

Now that you have determined which grants are required to be reported on your schedule of expenditures of federal awards, the question remains as to the amount to report and when the amounts should be reported. The GAQC has issued nonauthoritative guidance on reporting certain COVID-19 awards on an accrual based SEFA. This document provides some background on how amounts should be reported and helpful scenarios to consider.

Be prepared to share with your auditor any new or additional funding source information that was received during the year to ensure the numbers reported on the schedule of expenditures of federal awards are accurate and that the footnote disclosures are informative to the users of your financial statements.

If you have questions as you prepare this year’s schedule of expenditures of federal awards, please reach out to your Yeo & Yeo professional for assistance.

President Biden signed legislation aimed at providing economic and other relief from the COVID-19 pandemic. The 628-page American Rescue Plan Act (ARPA) includes $1.9 trillion in funding for individuals, businesses, and state and local governments.

The ARPA extends and expands some of the CARES Act’s critical provisions and the Consolidated Appropriations Act (CAA). It also includes some new provisions that should come as welcome news to many families and businesses.

Here’s a broad overview of some of the provisions that may affect you:

Recovery rebates

Additional direct payments (or recovery rebates) of $1,400 — plus $1,400 per dependent (including adult dependents) will be made to eligible individuals. To qualify, individuals must have an adjusted gross income (AGI) of up to $75,000 per year ($150,000 for married couples filing jointly and $112,500 for heads of households). The payments phase out and are no longer made when AGI exceeds $80,000 for individuals, $160,000 for married joint filers and $120,000 for heads of household.

Child and dependent care tax credits

The Child Tax Credit (CTC) increases to $3,000 for each child age six to 17 and $3,600 per year for children under age six. To be eligible for the full payment, you must have a modified AGI of under $75,000 for singles, $112,500 for heads-of-households and $150,000 for joint filers and surviving spouses. The credit phases out at a rate of $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold.
Parents will begin receiving advance payments of part of the CTC later this year. Under the ARPA, the IRS must establish a program to make monthly payments equal to 50% of eligible taxpayers’ 2021 CTCs, from July 2021 through December 2021.
Some taxpayers who aren’t eligible to claim an increased CTC in 2021 because their income is too high may be able to claim the regular CTC of up to $2,000, subject to the existing phaseout rules.
The Act makes various changes to the child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.
The Act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Student loan forgiveness

Any student loan debt forgiven between December 31, 2020, and January 1, 2026, will receive tax-free treatment.

Extension of unemployment compensation

An additional $300 per week in unemployment benefits will be paid through September 6, 2021. Also, the first $10,200 in unemployment benefits received beginning in 2020 isn’t included in gross income for taxpayers with AGIs under $150,000. (However, for joint filers below the AGI limit, the $10,200 exclusion applies separately to each spouse.)

Other provisions for individuals

There’s expanded availability of and increased Affordable Care Act (ACA) subsidies for those who obtain insurance in the ACA marketplaces, for 2021 and 2022.
Federal rental assistance is included for families affected by COVID-19, applicable to past due rent, future rent payments, and utility and energy bills.
There’s expanded eligibility for low-income individuals with no qualifying children to claim the Earned Income Tax Credit.
The Act creates a COBRA continuation coverage premium assistance credit.

Businesses and other employers

Family and sick leave credits

The Act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response. The credits are extended to September 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.

The Act increases the limit on the credit for paid family leave to $12,000.
The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.
The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.
The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
The credits are expanded to allow 501(c)(1) governmental organizations to take them.

Other provisions for employers

Pandemic assistance grants will be made to eligible businesses serving food or drinks, including restaurants and food trucks.
There will be additional funding for forgivable loans to eligible businesses under the Paycheck Protection Program (PPP), which is scheduled to expire on March 31, 2021.
Nonprofit organizations and online news services will receive expanded PPP eligibility.
New targeted Economic Injury Disaster Loan grants will be available for eligible small businesses in low-income communities.
The Employee Retention Tax Credit is extended for eligible employers that continue to pay employee wages during COVID-19-related closures or experience reduced revenue through December 31, 2021. This includes “recovery startup businesses” (those launched after February 15, 2020, with average annual gross receipts of $1 million or less).
Tax credits for paid sick and family leave are modified and extended to September 30, 2021.
The excess business loss limitation is extended through December 31, 2026.

The American Rescue Plan is a large piece of legislation that will be the subject of future guidance from the IRS and Treasury regarding implementing these new provisions. Your tax professionals at Yeo & Yeo will continue to keep you up to date on any further changes to the summary above.

The U.S. economy is still a far cry from where it was before the COVID-19 pandemic hit about a year ago. Nonetheless, as vaccination efforts continue to ramp up, many professionals expect stronger jobs growth and more robust economic activity in the months ahead.

No matter what your business does, you don’t want your sales staff hamstrung by overly complicated procedures as they strive to seize opportunities in the presumably brighter near-future. Here are five ways to streamline and energize your sales process:

1. Reassess territories. Business travel isn’t what it used to be, so you may not need to revise the geographic routes that your sale staff used to physically traverse. Nonetheless, you may see real efficiency gains by creating a strategic sales territory plan that aligns salespeople with regions or markets containing the prospects they’re most likely to win.

2. Focus on top-tier customers. If purchases from your most valued customers have slowed recently, find out why and reverse the trend. For your sales staff, this may mean shifting focus from winning new business to tending to these important accounts. See whether you can craft a customized plan aimed at meeting a legacy customer’s long-term needs. It might include discounts, premiums and extended warranties.

3. Cut down on “paperwork.” More than likely, “paperwork” is a figurative term these days, as most businesses have implemented electronic means to track leads, document sales efforts and record closings. Nevertheless, outdated or overly complicated software can slow a salesperson’s momentum.

You might conduct a survey to gather feedback on whether your current customer relationship management or sales management software is helping or hindering their efforts. Based on the data, you can then make sensible choices about whether to upgrade or change your system.

4. Issue a carefully chosen challenge. What allows a business to grow is not only retaining top customers, but also creating organic sales growth from new products or services. Consider creating a sales challenge that will motivate staff to push your company’s latest offerings. One facet of such a challenge may be to replace across-the-board commission rates with higher commissions on new products or “tough sells.”

5. Align commissions with financial objectives. Along with considering commissions tied to new products or difficult-to-sell products, investigate other ways you might revise commissions to incentivize your team. Examples include commissions based on:

Actual customer payments rather than billable orders,
More sales to current customers,
Increased order sizes,
Delivery of items when customers prepay, or
Number of new customers.

Again, these are just ideas to consider. Ultimately, you want to set up a sales compensation plan based on measurable financial goals that allow your sales staff to clearly understand how their efforts contribute to the profitability of your business. Contact us for help evaluating your sales process and targeting helpful changes.

Yeo & Yeo is pleased to announce that Dave Youngstrom is appointed CEO-elect. Effective January 1, 2022, Youngstrom will serve as Yeo & Yeo’s President and CEO, assuming 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.

“I am deeply honored that the principal group selected me as the next CEO,” Youngstrom said. “While I’ve enjoyed the daily contact with our clients I have known for the past 25 years, I believe that I can make a difference in this new role, and I am excited to lead the firm into the future.”

Youngstrom is a principal and shareholder, and he serves on Yeo & Yeo’s board of directors. In his recent role as assurance service line leader, Youngstrom was responsible for directing and strategizing the firm-wide audit practice throughout Yeo & Yeo’s nine offices. During his 25 years at Yeo & Yeo, Youngstrom championed many initiatives for the assurance service line and the firm.

“He has unified the firm-wide audit team, ensuring that our professionals work together to best serve our clients,” said President & CEO Thomas Hollerback. “Under his leadership, our assurance service line revenue increased 45 percent during the past five years. These accomplishments took energy, knowledge, and patience to effectively lead and motivate others.”

Hollerback will retire at the end of 2021 after nine years as CEO and 38 years with the firm. He looks forward to the new ideas Youngstrom will bring to the role during the next year of transition.

“Dave and I have worked together for more than 25 years supporting, mentoring and challenging one another along the way,” Hollerback said. “I know from my long history of working with Dave that he will bring new energy and innovation to Yeo.”

Yeo & Yeo board member Tammy Moncrief added, “Following a comprehensive leadership succession process, the board and our shareholder group are confident that Dave is the right person to strengthen our firm and drive future growth. Dave has made significant contributions towards Yeo & Yeo’s success. He is an inspirational leader with great vision and a strong advocate for our employees and clients.”

Youngstrom plans to continue to put Yeo & Yeo’s core values first by supporting employees, giving back to our communities, and focusing on the firm’s long-term success.

“I am passionate about our culture and making Yeo & Yeo the best place to work for everyone,” he said. “I am committed to ensuring our clients receive the best service in the most efficient ways possible, and I pledge to continue down the path of innovation and growth for our firm.”

April 15 is not only the deadline for filing your 2020 tax return, it’s also the deadline for the first quarterly estimated tax payment for 2021, if you’re required to make one.

You may have to make estimated tax payments if you receive interest, dividends, alimony, self-employment income, capital gains, prize money or other income. If you don’t pay enough tax during the year through withholding and estimated payments, you may be liable for a tax penalty on top of the tax that’s ultimately due.

Four due dates

Individuals must pay 25% of their “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.

The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your previous year’s return was more than $150,000 (more than $75,000 if you’re married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employers from their paychecks. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, they divide that number by four and make four equal payments by the due dates.

The annualized method

But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow isn’t uniform over the year, perhaps because they’re involved in a seasonal business.

If you fail to make the required payments, you may be subject to a penalty. However, the underpayment penalty doesn’t apply to you:

If the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
If you had no tax liability for the preceding year, you were a U.S. citizen or resident for that entire year, and that year was 12 months;
For the fourth (Jan. 15) installment, if you file your return by that January 31 and pay your tax in full; or
If you’re a farmer or fisherman and pay your entire estimated tax by January 15, or pay your entire estimated tax and file your tax return by March 1

In addition, the IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable to impose it. The penalty may also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

Stay on track

Contact us if you have questions about how to calculate estimated tax payments. We can help you stay on track so you aren’t liable for underpayment penalties.

Every good business leader knows that training is essential for a highly productive team. But have you ever considered giving your staff cybersecurity training? You really should.

What is it?

It’s about increasing awareness of how criminals try to break into your IT system and the devastating consequences if they do.

Employees can learn:

How to spot the different types of fake emails and messages, and what to do with them
The risk of social engineering by email, phone, or text message
Why we use basic security tools such as password managers and multi-factor authentication (where you generate a code on another device)

By holding regular cybersecurity training sessions, you can keep everyone up to date. And develop a great culture of security awareness. It’s another layer of protection to help ensure that your business doesn’t become part of a scary statistic (one small business is hacked every 19 seconds).

As the leader, it’s critical for you to do the training, too. You’ll be one of the most targeted people in the business, as you probably have access to all the systems, including the bank account.

If you don’t already have cybersecurity training in place, we’d love to help. Yeo & Yeo Technology’s Security Awareness Training solution showcases best practices for a company’s first line of defense — its employees — and teaches them how to detect and prevent cyberattacks.

Learn more about how Security Awareness Training can help to protect your organization.

While many businesses have been forced to close due to the COVID-19 pandemic, some entrepreneurs have started new small businesses. Many of these people start out operating as sole proprietors. Here are some tax rules and considerations involved in operating with that entity.

The pass-through deduction

To the extent your business generates qualified business income (QBI), you’re eligible to claim the pass-through or QBI deduction, subject to limitations. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. You can take the deduction even if you don’t itemize deductions on your tax return and instead claim the standard deduction.

Reporting responsibilities

As a sole proprietor, you’ll file Schedule C with your Form 1040. Your business expenses are deductible against gross income. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”

If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.

Self-employment taxes

For 2021, you pay Social Security on your net self-employment earnings up to $142,800, and Medicare tax on all earnings. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 on joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

Quarterly estimated payments

As a sole proprietor, you generally have to make estimated tax payments. For 2021, these are due on April 15, June 15, September 15 and January 17, 2022.

Home office deductions

If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home.

Health insurance expenses

You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

Keeping records

Retain complete records of your income and expenses so you can claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.

Saving for retirement

Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re withdrawn. A SEP plan requires less paperwork than many qualified plans. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.

We can help

Contact us if you want additional information about the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements

The Consolidated Appropriations Act (CAA) enacted in December 2020 extends and modifies several key tax provisions originally included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act provided several forms of financial support to individuals and businesses. Not-for-profit organizations should pay particular attention to two extended provisions: a tax break for donors of smaller charitable gifts and one that will be advantageous to big donors. The new law also extends tax breaks for corporate donors.

This is good news for some not-for-profits that have struggled financially over the past year. But you can’t assume that your supporters know about these changes in the law. Educate them about tax benefits as you solicit new donations.

Deduction For Non-Itemizers

Federal tax law allows individual taxpayers who itemize deductions on their tax returns to deduct donations made to qualified charitable organizations. Until the CARES Act came along, non-itemizers who claimed the standard deduction weren’t eligible to deduct donations to charity.

The CARES Act authorized a “universal deduction” for the 2020 tax year. So even people who don’t itemize can write off monetary contributions to qualified charities of up to $300 in 2020. However, note that this “above-the-line” deduction isn’t available for donations to non-operating private foundations, supporting organizations, or donor-advised funds (DAFs).

To be eligible for the new $300 deduction, taxpayers must accept the standard deduction and provide a cash donation of $300 to an eligible charity. Cash donations include those made by check, credit card, or debit card. They do not include securities, household goods, or other property. Under the CARES Act, the maximum amount is applied to each filing unit, not per person, which means that for 2020 tax returns, married couples filing jointly can deduct up to $300 — not $600. Married couples who file separately can deduct up to $300 each in 2020 — or $600 collectively.

The CAA extends the charitable donation deduction for non-itemizers to 2021 and for married couples filing jointly, each spouse is entitled to a deduction of up to $300, for a maximum of $600. You should make sure that all your donors know about this opportunity.

Note: This deduction can’t be claimed for amounts carried over from prior years, nor can any excess amount from the current tax year be carried over to the next. The deduction is a use-it-or-lose-it proposition.

Bigger Breaks For Itemizers

In most cases, taxpayers who itemize their deductions can deduct the full amount of charitable contributions so long as they meet certain strict substantiation requirements. However, several limits apply. For example, taxpayers who donate appreciated property can only deduct up to 30% of their adjusted gross income (AGI). Any excess amount can be carried over for five years.

Before recent legislation, taxpayers who made monetary donations were limited to deductions equal to 50% of their AGI — with a five-year carryover period. The Tax Cuts and Jobs Act (TCJA) bumped up the figure to 60% of AGI for 2018 through 2025. The CARES Act went one step further and increased the percentage to 100% of AGI for 2020. The CAA extends the 100%-provision through 2021.

This is an important opportunity for wealthy individuals to greatly reduce their tax liability. You should encourage major donors to take advantage of this temporary break and make gifts this year.

Corporate Charitable Deductions

Individuals aren’t the only ones subject to charitable deduction limits. Similar rules apply to corporations. Before the CARES Act, corporations could deduct charitable contributions up to 10% of their taxable income. The CARES Act increased this limit to 25% of taxable income for 2020. Now the new law extends the higher limit for 2021.

In addition, some C corporations may benefit from a special tax break. Normally, deductions for donated property are limited to the fair market value of the property, less the amount that would constitute ordinary income if sold. But C corporations that donate food inventory may deduct an amount equal to the basis of property, plus one-half of the property’s unrealized appreciation, up to twice the basis. To qualify, the donation must be made for the care of “infants, the ill or needy.”

This deduction was originally limited to 15% of taxable income. The CARES Act increased the limit to 25% for 2020, and the CAA extends it to 2021. Make your corporate supporters aware of these developments, particularly the C corporations that donate food.

Make Hay

As the saying goes, make hay while the sun shines. Although charitable donors may be motivated to give for other reasons, they usually don’t turn down a tax break. Encourage your marketing and development staff to reach out to supporters who may want to take advantage of what appears to be temporary tax provisions.

Yeo & Yeo’s Education Services Group professionals are pleased to present a live on-demand session and six recorded sessions during the April 21-22 virtual MSBO conference. We invite you to join us to gain new insights into managing your Michigan school.

Federal Procedures Manual and Policy Writing – Kristi Krafft-Bellsky & Jennifer Watkins
The ABCs of Federal Program Compliance and Accounting Along with Preparing for Your Federal Program Audit – Kristi Krafft-Bellsky
SKE with District-Wide Financials – Jennifer Watkins
Understanding and Completing Your SEFA – Kristi Krafft-Bellsky & Kathy Abela from Royal Oak Schools
Essential Cybersecurity Practices for K-12 – Kristi Krafft-Bellsky & Kurt Rheaume from Wayne RESA
IT Vendor Fraud – Brian Dixon

We encourage you to visit our virtual booth for one-on-one conversations with our education professionals. Hope to see you there!

Breakeven analysis can be useful when investing in new equipment, launching a new product or analyzing the effects of a cost reduction plan. During the COVID-19 pandemic, however, many struggling companies are using it to evaluate how much longer they can afford to keep their doors open.

Fixed vs. variable costs

Breakeven can be explained in a few different ways using information from your company’s income statement. It’s the point at which total sales are equal to total expenses. More specifically, it’s where net income is equal to zero and sales are equal to variable costs plus fixed costs.

To calculate your breakeven point, you need to understand a few terms:

Fixed expenses. These are the expenses that remain relatively unchanged with changes in your business volume. Examples include rent, property taxes, salaries and insurance.

Variable/semi-fixed expenses. Your sales volume determines the ebb and flow of these expenses. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Examples are shipping costs, materials, supplies and independent contractor fees.

Breakeven formula

The basic formula for calculating the breakeven point is:

Breakeven = fixed expenses / [1 – (variable expenses / sales)]

Breakeven can be computed on various levels. For example, you can estimate it for your company overall or by product line or division, as long as you have requisite sales and cost data broken down.

To illustrate how this formula works, let’s suppose ABC Company generates $24 million in revenue, has fixed costs of $2 million and variable costs of $21.6 million. Here’s how those numbers fit into the breakeven formula:

Annual breakeven = $2 million / [1 – ($21.6 million / $24 million)] = $20 million

Monthly breakeven = $20 million / 12 = $1,666,667

As long as expenses stay within budget, the breakeven point will be reliable. In the example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $2 million. If either of these variables changes, the breakeven point will change.

Lowering your breakeven

During the COVID-19 pandemic, distressed companies may have taken measures to reduce their breakeven points. One solution is to convert as many fixed costs into variable costs as possible. Another solution involves cost cutting measures, such as carrying less inventory and furloughing workers. You also might consider refinancing debt to take advantage of today’s low interest rates and renegotiating key contracts with lessors, insurance providers and suppliers. Contact us to help you work through the calculations and find a balance between variable and fixed costs that suits your company’s current needs.

When the Small Business Administration (SBA) launched the Paycheck Protection Program (PPP) last year, the program’s stated objective was “to provide a direct incentive for small businesses to keep their workers on the payroll.” However, according to federal officials, the recently issued second round of funding has distributed only a small percentage of the $15 billion set aside for small businesses and low- to moderate-income “first-draw” borrowers.

In late February, the SBA, in cooperation with the Biden Administration, announced adjustments to the PPP aimed at “increasing access and much-needed aid to Main Street businesses that anchor our neighborhoods and help families build wealth,” according to SBA Senior Advisor Michael Roth.

5 primary objectives

The adjustments address five primary objectives:

Move the smallest businesses to the front of the line. The SBA has established a two-week exclusive application period for businesses and nonprofits with fewer than 20 employees. It began on February 24. The agency has reassured larger eligible companies that they’ll still have time to apply for and receive support before the program is set to expire on March 31.
Change the math. The loan calculation formula has been revised to focus on gross profits rather than net profits. The previous formula inadvertently excluded many sole proprietors, independent contractors and self-employed individuals.
Eliminate the non-fraud felony exclusion. Under the original PPP rules, a business was disqualified from funding if it was at least 20% owned by someone with either 1) an arrest or conviction for a felony related to financial assistance fraud in the previous five years, or 2) any other felony in the previous year. The new rules eliminate the one-year lookback for any kind of felony unless the applicant or owner is incarcerated at the time of application.
Eventually remove the student loan exclusion. Current rules prohibit PPP loans to any business that’s at least 20% owned by an individual who’s delinquent or has defaulted on a federal debt, which includes federal student loans, within the previous seven years. The SBA intends to collaborate with the U.S. Departments of Treasury and Education to remove the student loan delinquency restriction to broaden PPP access.
Clarify loan eligibility for noncitizen small business. The CARES Act stipulates that any lawful U.S. resident can apply for a PPP loan. However, holders of Individual Taxpayer Identification Numbers (ITINs), such as Green Card holders and those in the United States on a visa, have been unable to consistently access the program. The SBA has committed to issuing new guidance to address this issue, which, in part, will state that otherwise eligible applicants can’t be denied PPP loans solely because they use ITINs when paying their taxes.

What’s ahead

The PPP could evolve further as the year goes along, potentially as an indirect result of the COVID-19 relief bill currently making its way through Congress. Our firm can keep you updated on all aspects of the program, including the tax impact of loan proceeds.

If you’re approaching retirement, you probably want to ensure the money you’ve saved in retirement plans lasts as long as possible. If so, be aware that a law was recently enacted that makes significant changes to retirement accounts. The SECURE Act, which was signed into law in late 2019, made a number of changes of interest to those nearing retirement.

You can keep making traditional IRA contributions if you’re still working

Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. But now, an individual of any age can make contributions to a traditional IRA, as long as he or she has compensation, which generally means earned income from wages or self-employment. So if you work part time after retiring, or do some work as an independent contractor, you may be able to continue saving in your IRA if you’re otherwise eligible.

The required minimum distribution (RMD) age was raised from 70½ to 72.

Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the early 1960s and, until recently, hadn’t been adjusted to account for increased life expectancies.

For distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plans or IRAs is increased from 70½ to 72.

“Stretch IRAs” have been partially eliminated

If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the life or life expectancy of the beneficiaries. This was sometimes called a “stretch IRA.”

However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. Therefore, the “stretch” strategy is no longer allowed for those beneficiaries.

There are some exceptions to the 10-year rule. For example, it’s still allowed for: the surviving spouse of a plan participant or IRA owner; a child of a plan participant or IRA owner who hasn’t reached the age of majority; a chronically ill individual; and any other individual who isn’t more than 10 years younger than a plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancies.

More changes may be ahead

These are only some of the changes included in the SECURE Act. In addition, there’s bipartisan support in Congress to make even more changes to promote retirement saving. Last year, a law dubbed the SECURE Act 2.0 was introduced in the U.S. House of Representatives. At this time, it’s unclear if or when it could be enacted. We’ll let you know about any new opportunities. In the meantime, if you have questions about your situation, don’t hesitate to contact us.

The Biden administration has announced several reforms to the popular Paycheck Protection Program (PPP) to bring greater relief to the smallest and most vulnerable businesses. Among other things, the administration is imposing a two-week moratorium on loans to companies with 20 or more employees and focusing on smaller businesses. It’s also changing several program rules to expand eligibility for the 100% forgivable PPP loans.

The PPP in a nutshell

The CARES Act, passed in the early days of the COVID-19 pandemic, established the PPP to help employers cover their payrolls during the resulting economic downturn. The program is open to almost every U.S. business with fewer than 500 employees — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by the pandemic.

Generally, the loans are 100% forgivable if the proceeds are allocated on a 60/40 basis between payroll and eligible nonpayroll costs. While the latter initially were limited to mortgage interest, rent, utilities and interest on any other existing debt, the Consolidated Appropriations Act (CAA), enacted in late December 2020, expanded the qualifying nonpayroll costs. They now include, for example, certain operating expenses and worker COVID-19 protection expenses.

The CAA also provided another $284 billion in funding for forgivable loans for both first-time and so-called “second-draw” borrowers. The second-draw loans are restricted to smaller and harder hit businesses.

In addition, the CAA established a simplified, one-page forgiveness application for loans up to $150,000. It clarified that PPP borrowers aren’t required to include any forgiven amounts in their gross income for tax purposes and that borrowers can deduct otherwise deductible expenses paid with forgiven PPP proceeds.

The impetus for the new changes

According to the Small Business Administration (SBA), the new reforms are intended to ensure equity in the program. The SBA says a “critical goal” of the latest round of PPP funding in the CAA was to reach small and low- and moderate-income (LMI) businesses that hadn’t yet received needed relief.

Under current policies, though, the second round has distributed only $2.4 billion of a $15 billion set-aside for small and LMI “first-draw” borrowers. The SBA says this is, in part, because a disproportionate amount of funding in both wealthy and LMI areas is going to businesses with more than 20 employees. The Biden administration hopes to remedy that disparity with the announced revisions.

The changes

The announcement outlined five reforms:

1. A two-week exclusive application period for smaller businesses. The SBA has established, beginning February 24, 2021, a two-week exclusive PPP loan application period for businesses and nonprofits with fewer than 20 employees. The restriction aims to give lenders and community partners more time to work with these applicants, which often struggle to collect the necessary paperwork and secure loans.

Larger PPP-eligible businesses need not worry about missing out. The SBA says that they’ll still have time to apply for and receive support before the program is set to expire on March 31, 2021.

2. A revised loan calculation formula. The current formula is based on net profits. As a result, many of the smallest businesses — sole proprietors, independent contractors and self-employed individuals — were excluded from the PPP.

The administration is revising the formula to focus instead on gross profits. That means solo ventures that don’t show net profits on their federal tax returns nonetheless can receive PPP loans. The administration also will set aside $1 billion for businesses in this category without employees located in LMI areas.

3. The elimination of the non-fraud felony exclusion. The existing rules restrict PPP eligibility based on criminal history. A business is ineligible for PPP funding if it’s at least 20% owned by an individual with either 1) an arrest or conviction for a felony related to financial assistance fraud in the previous five years, or 2) any other felony in the previous year.

To expand access, the administration is adopting some of the proposals in a bipartisan bill in Congress dubbed the Second Chance Act. Specifically, it will eliminate the one-year lookback for any kind of felony unless the applicant or owner is incarcerated at the time of the application.

4. The elimination of the student loan exclusion. Current rules prohibit PPP loans to any business that’s at least 20% owned by an individual who’s delinquent or has defaulted on a federal debt within the previous seven years. Federal student loans fall within the definition of such debt.

The pandemic has only exacerbated the number of Americans who are delinquent on their student loans. The SBA will work with the U.S. Departments of Treasury and Education to remove the student loan delinquency restriction to broaden PPP access.

5. Clarification of noncitizen small business eligibility. The CARES Act is clear that all lawful U.S. residents can apply for PPP loans. Lack of guidance from the SBA, though, has created inconsistent access for lawful U.S. residents who are holders of Individual Taxpayer Identification Numbers (ITIN), such as Green Card holders and those in the United States on a visa.

The SBA will issue new guidance to address this problem. The guidance will state that otherwise eligible applicants can’t be denied access to PPP loans solely because they use ITINs when paying their taxes.

Stay tuned

Congress is currently debating the Biden administration’s proposed $1.9 trillion COVID-19 relief package, known as the American Rescue Plan. That bill doesn’t specifically address the PPP but includes $15 billion in grants to help small businesses, $35 billion in small business financing programs, and unspecified aid to restaurants, bars and other businesses that have suffered disproportionately.

We’ll keep you updated on any additional relevant changes to the PPP, as well as developments regarding the next round of pandemic relief.

The use of audit analytics can help during the planning and review stages of the audit. But analytics can have an even bigger impact when these procedures are used to supplement substantive testing during fieldwork.

Definition of “analytics”

Auditors use analytical procedures to evaluate financial information by assessing relationships among financial and nonfinancial data. Examples of analytical tests include:

Trend analysis,
Ratio analysis,
Reasonableness testing, and
Regression analysis.

Significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values require additional investigation.

4 steps

Auditors generally follow this four-step process when performing analytical procedures:

Form an independent expectation. The auditor develops an expectation of an account balance or financial relationship. Expectations are based on the auditor’s understanding of the company and its industry. Examples of data used to develop expectations include prior-period information (adjusted for expected changes), management’s budgets or forecasts, and ratios published in trade journals.
Identify differences between expected and reported amounts. The auditor must compare his or her expectation with the amount recorded in the company’s accounting system. Then, any difference is compared to the auditor’s threshold for analytical testing. If the difference is less than the threshold, the auditor generally accepts the recorded amount without further investigation and the analytical procedure is complete. If not, the auditor moves to the next step.
Investigate the reason. The auditor brainstorms all possible causes and then determines the most probable cause(s) for the discrepancy. Sometimes, the analytical test or the data itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data. Other times, the discrepancy has a “plausible” explanation, usually related to unusual transactions or events, or accounting or business changes.
Evaluate differences. The auditor evaluates the likelihood of material misstatement and then determines the nature and extent of any additional auditing procedures. Plausible explanations require corroborating audit evidence.

For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the amounts reported and may also necessitate additional audit procedures to determine the scope of a misstatement.

A win-win for everyone

Done right, analytical procedures can help make your audit less time-consuming, less expensive and more effective at detecting errors and omissions. Analytics also may be easier to perform remotely than traditional, manual audit testing procedures — a major upside during the COVID-19 pandemic. To avoid surprises in the coming audit season, notify us about any major changes to your operations, accounting methods or market conditions that occurred during the reporting period.

If your business sponsors a 401(k) plan, you might someday consider adding designated Roth contributions. Here are some factors to explore when deciding whether such a feature would make sense for your company and its employees.

Key differences

Roth contributions differ from other elective deferrals in two key tax respects. First, they’re irrevocably designated to be made on an after-tax basis, rather than pretax. Second, if all applicable requirements are met and the distribution constitutes a “qualified distribution,” the earnings won’t be subject to federal income tax when distributed.

To be qualified, a distribution generally must occur after a five-year waiting period, as well as after the participant reaches age 59½, becomes disabled or dies. Because of the different tax treatment, plans must maintain separate accounts for designated Roth contributions.

Pluses and minuses

The Roth option gives participants an opportunity to hedge against the possibility that their income tax rates will be higher in retirement. However, if tax rates fall or participants are in lower tax brackets during retirement, Roth contributions may provide less after-tax retirement income than comparable pretax contributions. The result could also be worse than that of ordinary elective deferrals if Roth amounts aren’t held long enough to make distributions tax-free.

Nonetheless, if your business employs a substantial number of relatively highly paid employees, a Roth 401(k) component may be well-appreciated. This is because participants can make much larger designated Roth 401(k) contributions than they can for a Roth IRA — in 2020 and 2021, $19,500 for designated Roth 401(k) versus $6,000 for Roth IRA.

Catch-up contributions for individuals 50 or older are also considerably higher for designated Roth 401(k) contributions — in 2020 and 2021, $6,500 for designated Roth 401(k)s versus $1,000 for Roth IRAs. And higher-paid participants who are ineligible to make Roth IRA contributions because of the income cap on eligibility could make designated Roth contributions to your plan.

Yet participants will need to know what they’re getting into. They’ll have to consider:

Current and future tax rates,
Various investment alternatives,
The risk of needing a distribution before they qualify for tax-free treatment of earnings (which would trigger taxation of those earnings), and
Loss of some rollover options.

For plan sponsors, the separate accounting required for Roth contributions may raise plan costs and increase the risk of error. (One common mistake: treating elected contributions as pretax when the participant elected Roth contributions, or vice versa.)

And because Roth contributions are treated as elective deferrals for other purposes — including nondiscrimination requirements, vesting rules and distribution restrictions — plan administration and communication will be more complex.

Not for everyone

Before adding Roth contributions to your 401(k), be sure participants are adequately engaged and savvy, and will derive enough benefit, to make it worth the risks and burdens. We can assist you in deciding whether this would be an appropriate move for your business.

Additional PPP guidance featured below:

PPP Loan Forgiveness and the Enhanced Employee Retention Credit (ERC)
Delays in Second Draw PPP Loan Applications
Forgiveness on First Draw PPP Loan is Not Required for a Second Draw PPP Loan; Funds are Still Available

On Monday, the Biden administration announced changes to the Paycheck Protection Program (PPP) to assist small businesses. For two weeks beginning on Wednesday, February 24, through March 9, only small businesses with fewer than 20 employees may apply for new PPP loans. The goal is to help the smallest businesses collect funds to offset financial instability during the COVID-19 pandemic.

Other changes the Biden administration announced plans for include:

Review the loan calculation formula for sole proprietors, independent contractors and the self-employed, and set aside $1 billion for businesses in this category.
Increase access to PPP loans for applicants with delinquent or defaulted student loan debt, business owners who are not U.S. citizens, and former felons.

Read the Fact Sheet detailing the Biden administration’s recent PPP loan program changes at whitehouse.gov.

Additional PPP Guidance

PPP Loan Forgiveness and the Enhanced Employee Retention Credit (ERC)

Under section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, taxpayers who did not get their Paycheck Protection Program (PPP) loan forgiven can claim the employee retention credit (ERC) when they file their employment tax return. However, the IRS guidance addresses only the situation in which the employer was denied PPP forgiveness. It does not address how the reporting of wages on a previously filed PPP loan forgiveness application will affect an employer’s ability to claim the ERC for wages included on a loan forgiveness application but did not affect the amount of loan forgiveness. It also does not address the reporting of wages for taxpayers who have not yet applied for loan forgiveness.

Consult with your CPA, and if you have not applied for loan forgiveness on your First Draw PPP Loan, we advise that you wait until further guidance is issued.

Delays in Second Draw PPP Loan Applications

Measures implemented by the U.S. Small Business Administration (SBA) to screen for potential fraud in Paycheck Protection Program (PPP) applications are holding up a large percentage of applications, with some delayed a month or more. It is recommended not to re-apply and to continue to work with your lender.

Forgiveness on First Draw PPP Loan is Not Required for a Second Draw PPP Loan; Funds are Still Available

It appears that some lenders require PPP borrowers to apply for forgiveness on their First Draw PPP Loan before they file to seek a Second Draw PPP loan. The SBA and the Department of Treasury do not require this.

Second Draw PPP loan funding is still available. Under the latest reform, only small businesses with fewer than 20 employees may apply through March 9. Currently, the last day for all eligible businesses to apply for a Second Draw PPP loan is March 31, 2021.

Visit the Second Draw PPP Loans web page at sba.gov for additional loan and application information.