Didn’t Contribute to an IRA Last Year? There Still May be Time

If you’re getting ready to file your 2020 tax return, and your tax bill is higher than you’d like, there might still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the April 15, 2021 filing date and benefit from the tax savings on your 2020 return.

Who is eligible?

You can make a deductible contribution to a traditional IRA if:

• You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or
• You (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.

For 2020, if you’re a joint tax return filer and you are covered by an employer plan, your deductible IRA contribution phases out over $104,000 to $124,000 of modified AGI. If you’re single or a head of household, the phaseout range is $65,000 to $75,000 for 2020. For married filing separately, the phaseout range is $0 to $10,000. For 2020, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $196,000 and $206,000.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).

IRAs often are referred to as “traditional IRAs” to differentiate them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older. (There are also income limits to contribute to a Roth IRA.)

Here are two other IRA strategies that may help you save tax.

1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2020? That may help you in the future when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn a Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.
2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you are a homemaker. In this case, you may be able to take advantage of a spousal IRA.

What’s the contribution limit?

For 2020 if you’re eligible, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).

In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2020, the maximum contribution you can make to a SEP is $57,000.

If you want more information about IRAs or SEPs, contact us or ask about it when we’re preparing your return. We can help you save the maximum tax-advantaged amount for retirement.

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Michigan’s Department of Labor and Economic Opportunity recently announced that all employers covered under the Michigan Employment Security (MES) Act will be assessed an unemployment tax on a wage base of $9,500 for 2021.

In 2020, the standard unemployment-taxable wage base was $9,000 and a modified taxable wage base of $9,500 applied for delinquent employers. Michigan has halted the two-tiered unemployment-taxable wage base system for 2021.  

What does this mean for your business? Contributing employers must pay unemployment insurance taxes on the first $9,500 of each employee’s wages in the 2021 calendar year.

Learn more about the taxable wage base on the Michigan.gov website. 

The Michigan Employment Security Act, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the Continued Assistance Act (CAA) require individuals collecting unemployment insurance benefits to be available for suitable work and to accept an offer of suitable work.

In situations where an employer makes a bona fide offer of work to an employee or asks them to return to their customary employment, the employee may lose unemployment benefits if they refuse to return to suitable work without good cause.

Both employers and employees have an obligation to report offers and refusals of suitable work to the Michigan Unemployment Agency (UIA). Employees should notify UIA during their biweekly certification if they have refused an offer of work. If an employee refuses an offer of suitable work, the employer can notify the UIA in one of the following ways:

1. A new “Return to Work” link will be available in MiWAM to report a claimant’s “Refusal to Return to Work.” Visit www.michigan.gov/uia and log into your MiWAM account.
2. A new “Report Refusal of Offer to Work/Return to Work” link will also be available on the UIA Home Page at www.michigan.gov/uia.

The UIA requests that employers submit correspondence online due to high call volume. For more information, please refer to the following UIA Fact Sheets:

• How to report, or submit a protest of, an employee’s refusal to work: Fact Sheet # 144C COVID-19 Unemployment Compensation Benefits Returning to Work and Refusal to Work – Information for Employers
• What is suitable work and good cause to refuse work situations: Fact Sheet #145C COVID-19 Unemployment Benefits – What is Suitable Work

If you have questions, visit www.michigan.gov/uia for tools, resources and UIA contact information.

During the COVID-19 pandemic, many people are working from home. If you’re self-employed and run your business from your home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expenses method and the simplified method.

Who qualifies?

In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.

What can you deduct?

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

• Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
• A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
• Depreciation.

But keeping track of actual expenses can take time and require organization.

How does the simpler method work?

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

The cap can make the simplified method less valuable for larger home office spaces. But even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.

Can I switch? 

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2020 return, use the simplified method when you file your 2021 return next year and then switch back to the actual expense method for 2022. The choice is yours.

What if I sell the home?

If you sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.

Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.

Do employees qualify?

Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive a paycheck or a W-2 exclusively from their employers aren’t eligible for deductions, even if they’re currently working from home.

We can help you determine if you’re eligible for home office deductions and how to proceed in your situation.

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From equipment theft to padded time to cyberattacks, contractors are vulnerable to a variety of fraud schemes. According to the Association of Certified Fraud Examiners, the median loss due to internal fraud is $200,000 for construction companies — significantly higher than the $125,000 for all industries.

Many factors make businesses in the sector rife for fraud — and owners may not be able to control all of them. For example, no one person can physically monitor multiple job sites, particularly if they’re geographically distant. What you can do is establish and enforce antifraud policies and procedures that make theft difficult, if not impossible. Your internal controls should address the following issues.

Segregate Duties

Some of your business’s greatest vulnerabilities lurk in your accounting department. It’s important that you segregate duties so that no one employee — no matter how long-serving and trusted — assumes responsible for everything. Even good people can be tempted to steal when given free rein to your accounts. So, the person who writes checks shouldn’t also reconcile bank statements. It’s also good policy to require dual signatures on checks and to limit wire transfer authorizations to a select few managers.

If you rely on performance bonds or use a line of credit, annual financial audits should be standard practice. Consider adding monthly financial reviews. They can help uncover anomalies sooner before fraud losses pile up. Schedule time each month to review bank statements, canceled checks, credit card statements and payroll reports. Reconcile billings with general ledgers. Keep an eye out for unusual numbers of customer or vendor adjustments, or extra employees.

Monitor Vendors

Protect your business from unscrupulous vendors (or employees colluding with vendors) by periodically reviewing supplier lists and spot checking their federal Employer Identification Number, physical addresses, phone numbers and websites. If you come across suspicious names, compare their addresses to employee addresses. If they match, a worker could be stealing from you.

To ensure you get what you pay for, request receipts from subcontractors for all materials or equipment delivered to job sites. Confirm quantity and quality or brand directly from the supplier. Conduct onsite inspections to make sure the correct materials and equipment are being used. Also, to mitigate false claims or misrepresentations by subcontractors, include a right-to-audit clause in contracts and exercise that right to request written documents confirming all claims and representations subcontractors promise you.

Perform a Cybersecurity Assessment

Automation, electronic banking and mobile access to systems are now commonplace, making cybersecurity a clear and present danger. Isolating IT vulnerabilities and implementing and maintaining a robust security protocol is no longer optional — it’s mandatory.

Identify the critical data — particularly personally identifiable worker and customer financial information — stored on your network. Then perform an audit of your data controls, including financial procedures, insurance, firewalls, antivirus software and backup procedures to confirm they’re effective at protecting information. You might, for instance, perform daily backups of critical data and regularly test reset processes. If you find weaknesses, remediate them immediately. 

In addition, carefully vet subcontractors and suppliers before granting them access to any of your systems. Keep in mind: Retail giant Target’s infamous 2013 data breach was perpetrated by tricking an HVAC contractor to download malware.

Use Other Tools

Fraud rarely occurs in a vacuum. In many cases, the thief’s coworkers or an outside party have some information — even if it’s only a suspicion. To encourage tips, make a confidential hotline or web portal available to employees, vendors and customers. Publicize the hotline and make sure you follow up on tips you receive. Communicate outcomes such as termination or prosecution to send the message that you take fraud seriously.

Background checks can help you head off problems before they start. Conduct them on every new employee, subcontractor and supplier. For subs and vendors, include a review of financial statements, credit history and solvency. Although it’s best to use a licensed investigator, you can start informally with an online search. Look for red flags such as tax liens, lawsuits, legal judgments and violations. Another red flag is subsidiary companies that mask the identity of their principals.

Pay Attention

Fraud can happen when contractors aren’t paying attention to the many theft opportunities the average construction business offers dishonest workers and others. For help establishing strong internal controls that address your company’s specific risks, contact us.

Your company’s financial statements should be transparent about any restrictions on cash. Are your reporting practices in compliance with the current accounting guidance?

The basics

Restricted cash is a separate category of “cash and cash equivalents” that isn’t available for general business operations or investments. There are many types of restricted cash.

For example, companies sometimes set aside money for a specific business purpose, such as a loan repayment, a legal retainer or a plant expansion. Similarly, if a major purchase is financed with a loan, the lender may require the borrower to maintain a minimum cash balance or a balance in a separate account as collateral against the loan. Or a business may be restricted from accessing a customer’s deposit until the terms of the contract are complete.

Balance sheet

The balance sheet must differentiate restricted cash and cash equivalents from unrestricted amounts. The footnotes also must disclose the nature of any restrictions on cash.

Restricted cash may be classified as either a current or noncurrent asset. If it’s expected to be used within one year of the balance sheet date, the cash should be classified as a current asset. However, if it will be unavailable for use for more than a year, it should be classified as a noncurrent asset.

Statement of cash flows

Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, provides guidance for reporting restricted cash on the statement of cash flows. Under the guidance, transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents aren’t part of the entity’s operating, investing, and financing activities. So, details of those transfers shouldn’t be reported as cash flow activities in the statement of cash flows.

Instead, if the cash flow statement includes a reconciliation of the total cash balances for the beginning and end of the period, the amounts for restricted cash and restricted cash equivalents should be included with cash and cash equivalents. The updated guidance requires cash flow statements to report separate amounts for the changes during a reporting period of the totals for:

• Cash,
• Cash equivalents,
• Restricted cash, and
• Restricted cash equivalents.

These amounts are typically found just before the reconciliation of net income to net cash provided by operating activities in the statement of cash flows.

Get it right

Restrictions on cash are common, but the accounting rules can sometimes be confusing. We can help you report these amounts in an accurate and transparent manner.

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A lot can change over a lifetime — including with your wealth, family composition and priorities. That’s why you need to revise your estate plan as you progress through life. Milestones such as becoming a parent and retiring can require everything from estate plan edits to estate plan overhauls. Here are some of the issues you should be considering at each life stage.

Starting Out

If you’ve recently embarked on a career, gotten married, or both, now is the time to build the foundation for your estate plan. And, if you’ve started a family, estate planning is even more critical.

Your will is at the forefront. Essentially, this document divides up your accumulated wealth upon death by deciding who gets what, where, when and how. With a basic will, you may, for instance, leave all your possessions to your spouse. If you have children, you might bequeath some assets to them through a trust managed by a designated party.

A will also designates the guardian of your children if you and your spouse should die prematurely. Make sure to include a successor in case your first choice is unable to meet the responsibilities. If you don’t have a will, state law governs the disposition of assets and a court will appoint a guardian for your minor children. During your early years, your will may be supplemented by other documents, including trusts, if it makes sense personally. In addition, you may have a durable power of attorney that authorizes someone to manage your financial affairs if you’re incapacitated.

Middle Age

If you’re a middle-aged parent, your main financial goals might be to acquire a larger home, set aside enough money to cover retirement goals and put your children through college. So you should modify your existing estate planning documents to meet your changing needs.

For instance, if you have a will in place, you should periodically review and revise it to reflect your current circumstances. For example, if your children are older, you may not have to worry about a guardian. But you may want to ensure your children’s college and graduate school education will be covered. A trust could enable you to address these issues — especially if you’re concerned about a child squandering his or her inheritance. And if you haven’t already created a power of attorney, the need is often more pronounced during the middle years. Furthermore, health care directives can complement a power of attorney.

As you approach late middle age, your children may have graduated from college and moved out of the house. This usually changes the dynamic for “empty nesters.” Significantly, you may start shifting your emphasis from college savings to asset preservation, with appropriate revisions to estate planning documents.

Senior Years

Once you’ve reached retirement, you can usually relax somewhat, assuming you’re in good financial shape. But that doesn’t mean estate planning ends. It’s just time for the next chapter.

For instance, you may be inclined to change bequests in your will, perhaps by adding provisions to include grandchildren. Or, if there’s been a family conflict, you may wish to “disinherit” family members by removing them from your will. Depending on the situation, a codicil may suffice. Proceed cautiously, with the help of your attorney, to ensure that you minimize or eliminate any potential future challenges by the party or parties being excluded.

The same principles apply to a power of attorney. It may be advisable to designate a different agent or name a new successor. A divorce can also precipitate amendments to your estate plan. And if you haven’t already done so, have your attorney draft a living will to complement a health care power of attorney. This document provides guidance in life-ending situations and can ease the stress for loved ones.

Finally, create or fine-tune, if you already have one written, a letter of instructions. Although not legally binding, it can provide an inventory of assets and offer other directions concerning your financial affairs.

Gain peace of mind

Each person’s life and goals are unique. Make sure you work with an estate planning advisor who will help you explore your many options and keep your estate plan current.

The COVID-19 pandemic has put unprecedented stress on private business owners. Some are now considering selling their businesses before Congress has a chance to increase the rates on long-term capital gains. Before putting your business on the market, it’s important to prepare it for sale. Here are six steps to consider.

1. Clean Up the Financials

Buyers are most interested in an acquisition target’s core competencies, and they usually prefer a clean, simple transaction. Consider buying out minority investors who could object to a deal and removing nonessential items from your balance sheet items. Examples of items that could complicate a sale include:

• Underperforming segments,
• Nonoperating assets, and
• Shareholder loans.

Sales are often based on multiples of earnings or earnings before interest, taxes, depreciation and amortization (EBITDA). Do what you can to maximize your bottom line. That includes cutting extraneous expenses and operating as lean as possible.

Buyers also want an income statement that requires minimal adjustments. For example, they tend to be leery of businesses that count as expenses personal items (such as country club dues or vacations) or engage in above-or below-market related party transactions (such as leases with family members and relatives on the payroll).

2. Highlight Strengths and Opportunities

Private business owners nearing retirement may lose the drive to grow the business and, instead, operate the company like a “cash cow.” But buyers are interested in a company’s future potential.

Achieving top dollar requires a tack-sharp sales team, a pipeline of research and development projects and well-maintained equipment. It’s also helpful to have a marketing department that’s strategically positioning the company to take advantage of market changes and opportunities, particularly in today’s volatile market conditions.

3. Downplay (or Eliminate) Risks

It’s no surprise that businesses with higher risks tend to sell for lower prices. No company is perfect, but industry leaders identify internal weaknesses (such as gaps in managerial expertise and internal control deficiencies) and external threats (such as increased government regulation and pending lawsuits).

Honestly disclose shortcomings to potential buyers and then discuss steps you have taken to mitigate risks. Proactive businesses are worth more than reactive ones.

Potential buyers will want more than just financial statements and tax returns to conduct their due diligence. Depending on the industry and level of sophistication, they may ask for such items as:

4. Prepare a Comprehensive Offer Package

• Marketing collateral,
• Business plans and financial projections,
• Fixed asset registers and inventory listings,
• Lease documents,
• Insurance policies,
• Franchise contracts,
• Employee noncompete agreements, and
• Loan documents.

Before you give out any information or allow potential buyers to tour your facilities, enter into a confidentiality agreement to protect your proprietary information from being leaked to a competitor.

5. Review Deal Terms

Evaluate different ways to structure your sale to minimize taxes and maximize selling price. For example, one popular element is an earnout, where part of the selling price is contingent on the business achieving agreed-upon financial benchmarks over a specified time. Earnouts allow buyers to mitigate performance risks and give sellers an incentive to provide post-sale assistance.

Some buyers also may ask owners to stay on the payroll for three to five years to help smooth the transition to new management. Seller financing and installment sales also are common in management buyouts and purchases by joint venture partners.

6. Hire a Valuator

A fundamental question buyers and sellers both ask is what the company is worth in the current market. To find the answer, business valuation professionals look beyond net book value and industry rules of thumb.

For instance, a business valuation professional can access private transaction databases that provide details on thousands of comparable business sales. These “comparables” can be filtered and analyzed to develop pricing multiples to value your business.

Alternatively, a valuation expert might project the company’s future earnings and then calculate their net present value using discounted cash flow analyses. These calculations help buyers set asking prices that are based on real market data, rather than gut instinct. However, final sale prices are influenced by many factors and can be lower than a company’s appraised value.

They can also estimate the value of buyer-specific synergies that result from cost-saving or revenue-boosting opportunities created by a deal. Synergistic expectations entice buyers to pay a premium above fair market value.

Planning for a Sale

Operating in a sale-ready condition is prudent, even if you’re not planning on selling your business anytime soon. Our experiences in 2020 have taught us to expect the unexpected: You never know when you’ll receive a purchase offer, and some transfers are involuntary. Contact a business valuation professional to help you prepare for a sale whether in 2021 or beyond.

A donor makes a cash contribution to a nonprofit community health organization. The donor itemizes income tax deductions and meets the IRS’s substantiation requirements. So he’s entitled to take a deduction for the donation. The not-for-profit is happy to accept his gift and uses the money to further its charitable mission. Everyone wins — that is, until the donor asks for his money back.

Can a donor do this? Is your nonprofit required to return cash or property if a donor requests it? One thing is certain: Return requests raise all kinds of issues. Let’s look at them.

What the Law Says

There are several common reasons donors ask for their gifts back. For example, a donor may:

• Believe the charitable organization is misusing or “wasting” donated funds,
• Think that the nonprofit is no longer fulfilling its charitable mission. This could involve philosophical differences or a recent trend that the donor dislikes.
• Argue that the organization is ignoring his or her wishes or that the funds aren’t being used for their earmarked purpose. The donor may have stated such terms in a written memorandum when the gift was made.
• Have had a change of heart.

There’s no federal law that requires nonprofits to return donations. But individual states have enacted various laws relating to the operation of not-for-profits that could come into play. Generally, such laws are vague about returning contributions. But they usually assume that a gift is no longer the property of a donor once a charity accepts it. What’s more, organizations are expected to act in the public interest. Thus, state regulators may rule that returning a donation harms the public good or that a return is unreasonable for other reasons.

Case in Point

Consider this example. Say a donor gives $500,000 to a nonprofit’s building renovation fund. But a few months later, the donor requests a refund. This puts the organization in a difficult spot. It may have spent the funds already on construction and lack the cash available to refund the donor. Or it may still have the funds, but returning the money would jeopardize its financial standing. For instance, the nonprofit may have qualified for a construction loan that assumes it has the $500,000 available. In such a situation, the state may say that the nonprofit is under no obligation to return the money.

If, on the other hand, a small donation is involved — for example, $25 — state regulators aren’t likely to get involved. And the size of the gift is unlikely to affect the nonprofit’s plans or programs either way. In such cases, it generally makes sense to return a donation.

No Questions Asked

When are returns mandatory? One circumstance is when the terms of a donation agreement are substantially violated. If a donor stipulates that money must go directly to hurricane relief and the funds are instead spent on iPads for staffers, the charity is legally obligated to return the donation.   

Another circumstance is when a nonprofit’s employee embezzles the donated money or otherwise uses the funds illegally. And, if a donor pays for a ticket to a fundraising event and the event is cancelled, the money must be returned — no questions asked.

Simple Steps

But you shouldn’t wait for disputes to arise. You can head off unwanted return requests by clearly communicating your organization’s policies:

• Adopt a written donation refund policy. State that most donations aren’t eligible for return and explicitly describe the circumstances under which a donation is eligible for return.
• Document large gifts using a standard agreement form that includes your return policy. Make sure the donor receives a copy.
• Consider including a “gift-over clause” in any agreement. This permits a donor to request that a gift is transferred to another organization if the donor believes it has been misused.
• Observe best fundraising practices. By adhering to the highest ethical standards, you may be able to avoid misunderstandings and conflict that could result in a refund request.

Prevent It From Happening

Return requests are unfortunate, but they happen. It’s probably wise to return small donations without argument. Although, make sure you understand why the request is being made so you can prevent similar requests in the future. After all, many small returns add up.

With large donations, go over the potential ramifications of returning or not returning them with your legal and financial advisors. You may also need to involve your state’s nonprofit agency.

Merger and acquisition activity in many industries slowed during 2020 due to COVID-19. But analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling another business, it’s important to understand the tax implications.

Two ways to arrange a deal

Under current tax law, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier.

Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Preferences of buyers 

For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Preferences of sellers

In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling assets

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Obtain professional advice

Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed. 

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• The four types of fiduciary funds
• Two questions to ask when determining if a fund is a fiduciary activity
• How to identify Type 2 and Type 4 assets
• Changes in basic financial statements for fiduciary funds
• GASB 84 FAQs

The events of the past year have taught business owners many important lessons. One of them is that, when a crisis hits, customers turn on their computers and look to their phones. According to one analysis of U.S. Department of Commerce data, consumers spent $347.26 billion online with U.S. retailers in the first half of 2020 — that’s a 30.1% increase from the same period in 2019.

Although online spending moderated a bit as the year went on, the fact remains that people’s expectations of most companies’ websites have soared. In fact, a June 2020 report by software giant Adobe indicated that the pandemic has markedly accelerated the growth of e-commerce — quite possibly by years, not just months.

Whether you sell directly to the buying public or engage primarily in B2B transactions, building customers’ trust in your website is more important than ever.

Identify yourself

Among the simplest ways to establish trust with customers and prospects is to convey to them that you’re a bona fide business staffed by actual human beings.

Include an “About Us” page with the names, photos and short bios of the owner(s), executives and key staff members. Doing so will help make the site friendlier and more relatable. You don’t want to look anonymous — it makes customers suspicious and less likely to buy.

Beyond that, be sure to clearly provide contact info. This includes a phone number and email address, hours of operation (including time zone), and your mailing address. If you’re a small business, use a street address if possible. Some companies won’t deliver to a P.O. box, and some customers won’t buy if you use one.

Keep contact links easy to find. No one wants to search all over a site looking for a way to get in touch with someone at the business. Include at least one contact link on every page.

Add trust elements

Another increasingly critical feature of business websites is “trust elements.” Examples include:

• Icons of widely used payment security providers such as PayPal, Verisign and Visa,
• A variety of payment alternatives, as well as free shipping or lower shipping costs for certain orders, and
• Professionally coded, aesthetically pleasing and up-to-date layout and graphics.

Check and double-check the spelling and grammar used on your site. Remember, one of the hallmarks of many Internet scams is sloppy or nonsensical use of language.

Also, regularly check all links. Nothing sends a customer off to a competitor more quickly than the frustration of encountering nonfunctioning links. Such problems may also lead visitors to think they’ve been hacked.

Abide by the fundamentals

Of course, the cybersecurity of any business website begins (and some would say ends) with fundamental elements such as a responsible provider, firewalls, encryption software and proper password use. Nonetheless, how you design, maintain and update your site will likely have a substantial effect on your company’s profitability. Contact us for help measuring and assessing the impact of e-commerce on your business.

© 2021

If you’re like many Americans, letters from your favorite charities may be appearing in your mailbox acknowledging your 2020 donations. But what happens if you haven’t received such a letter — can you still claim a deduction for the gift on your 2020 income tax return? It depends.

What is required

To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation and the value of any such goods or services.

“Contemporaneous” means the earlier of:

• The date you file your tax return, or
• The extended due date of your return.

So if you made a donation in 2020 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2020 return. Contact the charity and request a written acknowledgment.

Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.

New deduction for non-itemizers

In general, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. Under the CARES Act, individuals who don’t itemize deductions can claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities for the 2020 tax year. The same $300 limit applies to both unmarried taxpayers and married joint-filing couples.

Even better, this tax break was extended to cover $300 of cash contributions made in 2021 under the Consolidated Appropriations Act. The new law doubles the deduction limit to $600 for married joint-filing couples for cash contributions made in 2021.

2020 and 2021 deductions

Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2020 income tax return — and guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2021 return.

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Does your nonprofit organization receive donations first gathered through a third-party site or software, such as PayPal? If so, ensure you have proper internal controls over these funds, which should include frequent monitoring of the account by someone other than the person charged with custody and transfer of the funds.

It is essential that more than one person has access to the account and regularly monitors it; otherwise, it is possible for an employee to transfer funds into a personal account instead of the organization.

Review the transaction data at least monthly. Remember to document the review with a name and date and ensure an appropriate person performs it.

On November 24, 2020, the Michigan Department of Treasury released the final version of the Michigan Uniform Chart of Accounts (“UCA,” or the “Chart”), which represents the culmination of a multi-year effort to revise the Chart that had been in place since 2002. Public Act 2 of 1968 placed a requirement on the Michigan Department of Treasury (“Treasury”) to prescribe a uniform chart of accounts to be utilized by local units of government in Michigan to establish a uniform reporting format and promote comparability across multiple entities. This final Chart of Accounts supersedes and replaces all previous versions, including the expanded Chart issued in 2017, and establishes a final timeline for implementing the changes.

Going forward, Treasury intends to issue improvements and modifications to the Chart, but their current guidance indicates these will not be significant updates that should cause hesitation or delays in implementation. As a result, Yeo & Yeo recommends that all governmental clients start taking steps to implement the changes.

The 2002 version of the UCA was mainly a response to the Governmental Accounting Standards Board (GASB) issuance of Statement No. 34, which was the most significant change in governmental financial reporting history. Since GASB 34 was issued, many significant governmental accounting changes needed to be reflected in the UCA, which was why the revised final Chart was issued.

The new Uniform Chart of Accounts is available on Treasury’s Bulletins, Manuals and Forms website page. Also included for your reference is a Release Memo, some Frequently Asked Questions, and the implementation date schedule.

Local units must implement the UCA starting with their first fiscal or calendar year-end of October 31, 2022, or later. This is the minimum for local units to comply, but there may be reasons (such as general ledger budgetary integration or software limitations) to implement the Chart as of the beginning of the fiscal or calendar year, which is the approach Treasury recommends.  For example, a government with a December 31 year-end would need to adopt the changes by January 1, 2022 – which is only months away from when this article was written. Local units with September 30 fiscal year-ends will be last on the schedule, with October 1, 2022 being the target date for beginning-of-year implementations. Early implementation is allowed and encouraged.

The UCA requires that a basic account structure of three sets of three digits be used. These three sets of digits are assigned for Fund, Activity, and Account. Many of the old numbers remain unchanged (for example, the General Fund is still 101), but new numbers have been added, and there are instances where past numbers have changed, so care should be taken when mapping out the changes that need to be made. Most common Funds, Activities, and Accounts are specified by the UCA, but each section also contains “OPEN” numbers which can be used where a certain fund/activity/account may not be specifically identified. There are also fund/activity/account numbers that are “RESERVED” by Treasury for future use and should not be used.

Some of the more significant changes from the old to the new Chart of Accounts include:

• New fund numbers added for Fiduciary funds under GASB Statement No. 84.
• The Judicial function has been separated from General Government where it was previously included. This will apply to funding units that operate District, Circuit, and Probate courts.
• New fund balance accounts under GASB Statement No. 54 – non-spendable, restricted, committed, assigned, unassigned.
• New accounts for deferred inflows of resources, deferred outflows of resources, and net position as introduced by GASB Statement No. 63.

Additionally, UCA has specified accounting practices such as the requirement to allocate all costs to the function that was benefited. This means that the prior practice employed by many governmental units to budget and pay for certain employee benefits and payroll taxes using an “Other” function code will need to be changed to allocate these costs to the same department where the other employment costs are charged for similar employees. This may cause changes to the way payroll systems are charging these costs and changes in how these costs are budgeted.

Treasury expects local units that use QuickBooks to comply with the UCA, even though that software does not require the use of account numbers. QuickBooks has the capacity to use account numbers, but the option must be selected for that feature to work. Account numbers in QuickBooks are limited to seven digits, which would not allow the full nine-digit UCA account number to be used. In this case, since most governments have separate QuickBooks companies for each fund, the Fund number can be omitted. As a reminder, Yeo & Yeo does not recommend the use of QuickBooks for local governments in general due to factors such as the chart of accounts, lack of ability to integrate multiple funds in the accounting system, the ability to change historical transactions, and the lack of a formalized annual closing process.

Compliance with the UCA (among other things) is reported by the independent auditors when we complete the Auditing Procedures Report and submit the annual financial statements to Treasury on our clients’ behalf.   

Many other changes are required by the Uniform Chart of Accounts, and how these changes affect your local unit may vary widely. Please do not hesitate to reach out to your Yeo & Yeo Government Services Group for assistance with anything related to the UCA.  We are here to help.

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, which for Michigan school districts would have been implemented for June 30, 2021, fiscal year-ends. 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 Michigan school districts with June 30, 2022 year-ends.

This standard will put all financial reporting of Michigan school districts on a level playing field, as all districts 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 Education Services Group member if you have questions or need help implementing lease accounting.

Many businesses have experienced severe cash flow problems during the COVID-19 pandemic. As a result, some may have delayed or missed loan payments. Instead of filing for bankruptcy in court, delinquent debtors may reach out to lenders about restructuring their loans.

Restructuring vs. Chapter 11

Out-of-court debt restructuring is a process by which a public or private company informally renegotiates outstanding debt obligations with its creditors. The resulting agreement is legally binding, and can enable the distressed company to reduce its debt, extend maturities, alter payment terms or consolidate loans.

Debt restructuring is a far less extreme and burdensome (not to mention less expensive) alternative to filing for Chapter 11 (reorganization) bankruptcy protection. And lenders often are more receptive to a restructuring than they are with taking their chances in bankruptcy court.

Types of restructuring

There are two basic types of out-of-court debt restructuring:

1. General. This type of negotiation buys the distressed company the time needed to regain its financial footing by extending loan maturities, lowering interest rates and consolidating debt. Creditors typically prefer a general restructuring because it means they’ll receive the full amount owed, even if it’s over a longer time period.

General restructuring suits companies facing a temporary crisis — such as the sudden loss of a large customer or the departure of a key management team member — but have overall financials that are still strong. Debt structure changes can be permanent or temporary. If they’re permanent, creditors are likely to push for higher equity stakes or increased loan payments as compensation.

2. Troubled. A troubled debt restructuring requires creditors to write off a portion of the distressed company’s outstanding debt and permanently accept those losses. Typically, the creditor and debtor reach a settlement in lieu of bankruptcy.

This solution is appropriate when a company simply can’t pay its current debts at current interest rates and the only alternative is bankruptcy. Creditors may receive some compensation, however, with increased equity shares in the business or, if it’s acquired, in the merged company.

During the COVID-19 pandemic, the Financial Accounting Standards Board has received many questions about how to apply the accounting guidance on debt restructurings. So, it recently published an educational staff paper to help financially distressed borrowers work through the details.

Thinking about debt restructuring?

We are on top of the latest developments in this nuanced accounting topic. Contact us to help report restructured loans in your company’s financial statements.

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Using a strengths, weaknesses, opportunities and threats (SWOT) analysis to frame an important business decision is a long-standing recommended practice. But don’t overlook other, broader uses that could serve your company well.

Performance factors

A SWOT analysis starts by spotlighting internal strengths and weaknesses that affect business performance. Strengths are competitive advantages or core competencies that generate value (and revenue), such as a strong sales force or exceptional quality.

Conversely, weaknesses are factors that limit a company’s performance. These are often revealed in a comparison with competitors. Examples might include a negative brand image because of a recent controversy or an inferior reputation for customer service.

Generally, the strengths and weaknesses of a business relate directly to customers’ needs and expectations. Each identified characteristic affects cash flow — and, therefore, business success — if customers perceive it as either a strength or weakness. A characteristic doesn’t really affect the company if customers don’t care about it.

External conditions

The next SWOT step is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit business performance.

When differentiating strengths from opportunities, or weaknesses from threats, the question is whether the issue would exist without the business. If the answer is yes, the issue is external to the company and, therefore, an opportunity or a threat. Examples include changes in demographics or government regulations.

Various applications

As mentioned, business owners can use SWOT to do more than just make an important decision. Other applications include:

Valuation. A SWOT analysis is a logical way to frame a discussion of business operations in a written valuation report. The analysis can serve as a powerful appendix to the report or a courtroom exhibit, providing tangible support for seemingly ambiguous, subjective assessments regarding risk and return.

In a valuation context, strengths and opportunities generate returns, which translate into increased cash flow projections. Strengths and opportunities can lower risk via higher pricing multiples or reduced cost of capital. Threats and weaknesses have the opposite effect.

Strategic planning. Businesses can repurpose the SWOT analysis section of a valuation report to spearhead strategic planning. They can build value by identifying ways to capitalize on opportunities with strengths or brainstorming ways to convert weaknesses into strengths or threats into opportunities. You can also conduct a SWOT analysis outside of a valuation context to accomplish these objectives.

Legal defense. Should you find yourself embroiled in a legal dispute, an attorney may want to frame trial or deposition questions in terms of a SWOT analysis. Attorneys sometimes use this approach to demonstrate that an expert witness truly understands the business — or, conversely, that the opposing expert doesn’t understand the subject company.

Tried and true

A SWOT analysis remains a useful way to break down and organize the many complexities surrounding a business. Our firm can help you with the tax, accounting and financial aspects of this approach.

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Economic credits and incentives deliver tremendous value to growing companies. When the Amazon HQ2 project made national headlines, everyone became aware of the breadth of credits and incentives. It seems that these valuable tax savings are reserved for only large-scale projects; however, that is not the case. Everyday businesses in manufacturing, technology, logistics and even commercial or multi-family developments can benefit from credits and incentives if they meet the necessary thresholds. The driving factor involves planning for economic credits and incentives in advance of a growth project.

The question business owners and their advisors must ask themselves is: How can we realize these valuable outcomes? More specifically, when should the process start, and what are the key steps?

Timing is the most crucial element for businesses seeking economic credits and incentives. Correct timing can deliver tens of thousands of dollars in savings. As business owners make plans for the new year and future years to come, economic credits and incentives should be a part of the strategic planning discussion.

The majority of incentives are discretionary and often require a “but-for” clause; in other words, were it not for the offered incentives, the company would not invest or would limit its investment in a new growth project. Therefore, businesses must apply for economic incentives before final growth decisions take place. By discussing growth options with your CPA early in the decision-making process, your trusted advisors will evaluate and determine the best programs or tax savings tools.

A few “key triggers” signify incentive opportunities for business owners. Key triggers include plans to:

• Add jobs
• Add investment (tangible property or real property)
• Make a business acquisition
• Change a company location

When a company states it is considering new growth in these areas, advisors should see potential incentive value.

Growth triggers often sound like:

• “I need to add another shift to keep up with demand!”
• “My equipment is running 24/7 – I need to add more capacity and am looking at capital options to purchase additional machinery and equipment.”
• “We are busting at the seams! We have been looking at the space next door, and I’ve started talking with a real estate broker about finding a bigger location.”
• “One of our competitors did not make it through the pandemic; I’m starting to talk with my attorney about acquiring their assets and book of business.”

Future growth and vision are essential starting points for economic credits and incentives discussions. CPAs and economic credits and incentives professionals can help vet these opportunities and determine which options are best for the business. By starting these conversations early in the decision-making process, the business owner can increase their opportunity to maximize their tax savings. 

Do you have a growth project planned soon? Will you add more jobs or increase investment into your business this year? If so, reach out to your CPA advisor, and let’s discuss credits and incentives that may be available to you!

Contributor: Ben Worrell, Economic Credits & Incentives Consultant at McGuire Sponsel