Liabilities for Unused Time off Mount as Pandemic Lingers

During the pandemic, many employees have postponed using their allotted paid time off until COVID-related restrictions are lifted and safety concerns subside. This situation has caused an increase in accruals for certain employers. Here’s some guidance to help evaluate whether your company is required to report a liability for so-called “compensated absences” and, if so, how to estimate the proper amount.

Balance sheet effects

Compensated absences include:

Paid vacation,
Paid holidays,
Paid sick leave, and
Other forms of time off earned by employment.

Accruals for compensated absences are classified as other liabilities on companies’ balance sheets. The liability also creates a deferred tax asset equal to the accrual times the effective tax rate, because companies can’t deduct paid time off until it’s actually paid under U.S. tax law.

When to book an accrual

Before quantifying the compensated absences liability, review your company’s policies and procedures related to paid time off. Does your company allow employees to accumulate unused paid time off, beyond year end, for use in future years? Does the company provide vesting rights to accumulated paid time off balances that require payout after employment is terminated? If you answered “yes” to either question, you may be required to record a compensated absences accrual.

Specifically, under U.S. Generally Accepted Accounting Principles (GAAP), employers should accrue a liability for an employee’s right to receive compensation for a future absence if these four conditions are met:

The employee has earned the right to time off, but they’ve not taken that time off.
The employee’s rights accumulate or vest.
It’s probable that employees will exercise their rights to paid time off, triggering payment.
The employer can reasonably estimate the amount of benefits the employee will receive.

You also must consider applicable laws in the states and countries where your employees live. In some cases, these laws may supersede your company’s policies and practices.

Calculating the accrual

For an employee who’s paid hourly, the compensated absences liability equals the hourly pay rate times the number of hours per day times accumulated days off. The hourly rate includes benefits and employer taxes your company will incur while the employee isn’t at work.

The calculation for a salaried employee involves dividing annual compensation (including benefits and employer taxes) by the number of days worked per year to arrive at the employee’s daily pay rate. This amount is then multiplied by the accumulated days off.

You must also adjust the accrual for the probability that employees will fail to exercise their rights to accumulated time off. Often employers support this adjustment with historical data on how employees have behaved in the past.

Hidden costs

Mounting paid time off accruals have brought accounting issues related to compensated absences to the forefront. While companies don’t want to report higher liabilities, there’s also an intangible cost to consider: When employees forego time off, their well-being often suffers, which can lead to lower productivity and increased turnover. We can help you comply with the financial reporting requirements under GAAP, as well as brainstorm ways to remind employees about the importance of maintaining a healthy work-life balance.

Many businesses provide education fringe benefits so their employees can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer for educational assistance under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a business, medical, law or other advanced academic or professional degree.

Additional requirements

The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals who (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.

Job-related education

If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying, the $5,250 exclusion, an employer can satisfy an employee’s educational expenses, on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:

Maintain or improve skills required for the employee’s then-current job, or
Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.

Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.

Student loans

In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Recent COVID-19 relief laws may provide your employees with tax-free benefits. Contact us to learn more about setting up an education assistance or student loan repayment plan at your business.

President Biden’s proposals for individual taxpayers were outlined in an April 28 address to Congress and in an 18-page fact sheet released by the White House. The “American Families Plan” contains tax breaks for low- and middle-income taxpayers and tax increases on those “making over $400,000 per year.”

Here’s a summary of some of the proposals.

Extended tax breaks

Extend the Child Tax Credit (CTC) increases in the American Rescue Plan Act (ARPA) through 2025 and make the credit permanently fully refundable. The ARPA made several changes to the CTC for 2021. For example, it expanded the credit for eligible taxpayers from $2,000 to $3,000 per child ages six and above, and $3,600 per child under age six. It also made 17-year-olds eligible to be qualifying children for the first time and made the credit fully refundable. It also provides for monthly advance payments of the credit that will be paid from July through December 2021.

The American Families Plan would make permanent the full refundability of the CTC, while extending the other expansions of it through 2025. “The credit would also be delivered regularly,” the fact sheet states, meaning that monthly payments would continue to families rather than waiting until tax season to claim the credit.

Permanently increase the Child and Dependent Care Credit. The ARPA increased the amount of the credit for many taxpayers and made it refundable. The American Families Plan would make these changes permanent.

Extend expanded Affordable Care Act tax credits for premiums. The ARPA expanded the premium credit that’s available to many people enrolled in an exchange-purchased qualified health plan, which in effect, lowers plan premiums for them. This expansion applies to 2021 and 2022. The American Families Plan would make the premium reductions permanent.

Make the Earned Income Tax Credit (EITC) expansion for childless workers permanent. The ARPA made changes that roughly tripled the EITC for childless workers for 2021. The American Families Plan would make the changes permanent.

Tax increases

Increase the top tax rate to 39.6%. The proposed plan would restore the top tax bracket to what it was before the 2017 Tax Cuts and Jobs Act, returning it to 39.6% from 37%. This would apply to taxpayers in the top 1%.

Increase the capital gains tax for “households making over $1 million.” They would pay the same 39.6% rate on all income, rather than the current maximum 20% tax rate on long-term capital gains. (Short-term capital gains from investments held less than one year currently are taxed at the top individual tax rate of 37%.)

Reduce the “step-up in basis” at death for some taxpayers. The proposed plan would end the practice of stepping up the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) at death and would tax the gains if the property isn’t donated to charity. The fact sheet states that this “will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.”

Revise the taxation of carried interest. The proposed plan would close the carried interest loophole so that hedge fund partners will pay ordinary income rates on their income.

Cut back the rule for like-kind exchanges. President Biden would like to eliminate the Section 1031 like-kind exchange rule with respect to gains greater than $500,000 on real estate exchanges.

Make the excess business loss rules permanent. Under the tax code, for noncorporate taxpayers in tax years beginning after December 31, 2020, and before January 1, 2026, any “excess business loss” of a taxpayer for the tax year is disallowed. The American Families Plan would make this rule permanent.

Close loopholes in the 3.8% net investment income tax. Certain unearned income of high-income individuals, estates and trusts is subject to a surtax of 3.8%. The fact sheet states that the application of this provision is “inconsistent across taxpayers due to holes in the law” and proposes to “apply the taxes consistently to those making over $400,000.”

A challenging road ahead

These are only some of the proposals in the American Families Plan. Keep in mind that for any of these proposals to become reality, President Biden’s plan would have to be approved by Congress and that will be challenging. No matter what lies ahead, we can help you implement planning strategies to keep your tax bill as low as possible.

In a society increasingly conscious of well-being, with the costs of health care benefits remaining high, many businesses have established or are considering employee wellness programs. The Centers for Disease Control and Prevention (CDC) has defined these programs as “a health promotion activity or organization-wide policy designed to support healthy behaviors and improve health outcomes while at work.”

Yet there’s a wide variety of ways to design and operate a wellness program. How can you ensure yours fulfills objectives such as reducing absenteeism and controlling benefits costs? Build it on a solid foundation.

Pandemic changes

Clearly, many business owners believe in wellness programs. Well before the COVID-19 pandemic, a 2017 study of 3,000 worksites by the CDC and researchers at the University of North Carolina found that almost 50% of those employers offered some type of health promotion or wellness program.

Since the pandemic hit, the focus of many wellness programs has begun to shift away from physical health to overall well-being. This means helping employees with improving their mental health, managing their finances and adjusting to remote work. (Some research has found that wellness programs don’t significantly improve short-term physical health or medical outcomes.)

Total leadership commitment

Whether it’s an existing wellness program or one you’re just starting, ask yourself a fundamental question: Who will champion our program? The answer should be: leaders at every level.

If a business takes a “top down” approach to wellness — that is, it’s essentially mandated for everyone by ownership — the program will likely struggle. Likewise, if a single middle manager or ambitious employee tries to lead the effort alone, while the rest of management looks on lackadaisically, the effort probably won’t meet its objectives.

Successful wellness programs are driven by total management buy-in — from the C-suite to middle management to leaders in every department.

Cultural alignment

A wellness program needs to be a natural and appropriate extension of your company’s existing culture. If it feels forced or “tone deaf,” employees may ignore the program or reflexively push back against it rather than approach it enthusiastically or simply with an open mind.

For example, if your business culture tends to be low-key and you engage a wellness vendor (such as a speaker) who shows up with a loud, flamboyant presentation, your staff may not appreciate what you’re trying to accomplish. Your wellness program’s materials and content should match the tenor and feel of your existing internal communications.

Ultimately, look to establish a “culture of wellness” at your company. For businesses that have never emphasized (or perhaps even discussed) healthy habits and lifestyles, doing so can present a great challenge. Be patient and persistent, bearing in mind that a cultural shift of this nature takes time.

Risks vs. benefits

These are just some of the foundational elements of an employee wellness program to bear in mind. We can help you estimate the costs and assess the risks vs. benefits of establishing or revising such a program.

The May 17 deadline for filing your 2020 individual tax return is coming up soon. It’s important to file and pay your tax return on time to avoid penalties imposed by the IRS. Here are the basic rules.

Failure to pay

Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty is 1/2% for each month (or partial month) the payment is late. For example, if payment is due May 17 and is made June 22, the penalty is 1% (1/2% times 2 months or partial months). The maximum penalty is 25%.

The failure-to-pay penalty is based on the amount shown as due on the return (less credits for amounts paid through withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be lower, the penalty is based on the lower amount.

For example, if your payment is two months late and your return shows that you owe $5,000, the penalty is 1%, which equals $50. If you’re audited and your tax bill increases by another $1,000, the failure-to-pay penalty isn’t increased because it’s based on the amount shown on the return as due.

Failure to file

The failure-to-file penalty runs at a more severe rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you obtain an extension to file (until October 15), you’re not filing late unless you miss the extended due date. However, a filing extension doesn’t apply to your responsibility for payment.

If the 1/2% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part) so the total combined penalty is 5%. The maximum combined penalty for the first five months is 25%. After that, the failure-to-pay penalty can continue at 1/2% per month for 45 more months (an additional 22.5%). Thus, the combined penalties could reach 47.5% over time.

The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid via withholding or estimated payments. So if no amount is owed, there’s no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual tax liability is later determined to be an additional $1,000, the failure to file penalty (4.5% × 3 = 13.5%) would also apply for an additional $135 in penalties.

A minimum failure to file penalty will also apply if you file your return more than 60 days late. This minimum penalty is the lesser of $210 or the tax amount required to be shown on the return.

Reasonable cause

Both penalties may be excused by IRS if lateness is due to “reasonable cause.” Typical qualifying excuses include death or serious illness in the immediate family and postal irregularities.

As you can see, filing and paying late can get expensive. Furthermore, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can reach 15% per month, with a 75% maximum. Contact us if you have questions or need an appointment to prepare your return.

Are you wondering whether alternative energy technologies can help you manage energy costs in your business? If so, there’s a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.

The credit is intended primarily for business users of alternative energy (other energy tax breaks apply if you use alternative energy in your home or produce energy for sale).

Eligible property

The business energy credit equals 30% of the basis of the following:

Equipment, the construction of which begins before 2024, that uses solar energy to generate electricity for heating and cooling structures, for hot water, or heat used in industrial or commercial processes (except for swimming pools). If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in calendar year 2023; and, unless the property is placed in service before 2026, the credit rate is 10%.
Equipment, the construction of which begins before 2024, using solar energy to illuminate a structure’s inside using fiber-optic distributed sunlight. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
Certain fuel-cell property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
Certain small wind energy property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
Certain waste energy property, the construction of which begins before January 1, 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
Certain offshore wind facilities with construction beginning before 2026. There’s no phase-out of this property.

The credit equals 10% of the basis of the following:

Certain equipment used to produce, distribute, or use energy derived from a geothermal deposit.
Certain cogeneration property with construction beginning before 2024.
Certain microturbine property with construction beginning before 2024.
Certain equipment, with construction beginning before 2024, that uses the ground or ground water to heat or cool a structure.

Pluses and minuses

However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.

On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.

There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.

As you can see, there are many issues to consider. We can help you address these alternative energy considerations.

Yesterday, Governor Whitmer formally extended the city income tax filing and payment deadline to May 17, 2021, to align with state and federal filing deadlines.

Like the state and federal filings, taxpayers who have yet to file their city returns will not be subject to interest and penalties during the extension period.

The extended filing and payment due date is automatic. Taxpayers do not need to file any additional forms or contact their city to qualify.

Visit Yeo & Yeo’s Tax Resource Center for useful links, tax guides, tax articles on our blog, webinars, podcasts and more. Please contact your Yeo & Yeo tax professional with questions or concerns.

If your company is planning to merge with or buy another business, your attention is probably on conducting due diligence and negotiating deal terms. But you also should address the post-closing financial reporting requirements for the transaction. If not, it may lead to disappointing financial results, restatements and potential lawsuits after the dust settles.

Here’s guidance on how to correctly account for M&A transactions under U.S. Generally Accepted Accounting Principles (GAAP).

Identify assets and liabilities

A seller’s GAAP balance sheet may exclude certain intangible assets and contingencies, such as internally developed brands, patents, customer lists, environmental claims and pending lawsuits. Overlooking identifiable assets and liabilities often results in inaccurate reporting of goodwill from the sale.

Private companies can elect to combine noncompete agreements and customer-related intangibles with goodwill. If this alternative is used, it specifically excludes customer-related intangibles that can be licensed or sold separately from the business.

It’s also important to determine whether the deal terms include arrangements to compensate the seller or existing employees for future services. These payments, along with payments for pre-existing arrangements, aren’t part of a business combination. In addition, acquisition-related costs, such as finder’s fees or professional fees, shouldn’t be capitalized as part of the business combination. Instead, they’re generally accounted for separately and expensed as incurred.

Determine the price

When the buyer pays the seller in cash, the purchase price (also called the “fair value of consideration transferred”) is obvious. But other types of consideration muddy the waters. Consideration exchanged may include stock, stock options, replacement awards and contingent payments.

For example, it can be challenging to assign fair value to contingent consideration, such as earnouts payable only if the acquired entity achieves predetermined financial benchmarks. Contingent consideration may be reported as a liability or equity (if the buyer will be required to pay more if it achieves the benchmark) or as an asset (if the buyer will be reimbursed for consideration already paid). Contingent consideration that’s reported as an asset or liability may need to be remeasured each period if new facts are obtained during the measurement period or for events that occur after the acquisition date.

Allocate fair value

Next, you’ll need to split up the purchase price among the assets acquired and liabilities assumed. This requires you to estimate the fair value of each item. Any leftover amount is assigned to goodwill. Essentially, goodwill is the premium the buyer is willing to pay above the fair value of the net assets acquired for expected synergies and growth opportunities related to the business combination.

In rare instances, a buyer negotiates a “bargain” purchase. Here, the fair value of the net assets exceeds the purchase price. Rather than book negative goodwill, the buyer reports a gain on the purchase.

Make accounting a forethought, not an afterthought

M&A transactions and the accompanying financial reporting requirements are uncharted territory for many buyers. Don’t wait until after a deal closes to figure out how to report it. We can help you understand the accounting rules and the fair value of the acquired assets and liabilities before closing.

Equity incentives can be a valuable form of compensation for limited liability companies (LLCs). Corporations are more familiar with equity incentives; possibly in the form of restricted stock, stock options, or stock appreciation rights (SARs). However, “profit interest awards” are fairly new and gaining in popularity. The coronavirus pandemic has further spiked their appeal due to tight cash flow for many organizations.

What is a “profit interest?”

An LLC with more than a single member is classified as a partnership for US federal tax purposes unless it elects to be classified as a corporation. There are two types of equity in an LLC taxed as a partnership – “capital interests” and “profits interests.”

A capital interest is a financial interest in a company (i.e. a share of stock). It represents a piece of existing company value and only has value upon the occurrence of a triggering capital event (typically a sale or liquidation).
A profits interest represents only a right to share in the future growth of the entity; that is, income and/or appreciation that is generated after the date of grant.

Types of awards and how to account for them

U.S. Generally Accepted Accounting Principles (GAAP) includes four primary profits interest awards. They, along with their summarized accounting guidance, are listed below:

Share-based payments
Profit-sharing
Bonus arrangements
Deferred compensation.

Accounting for each type is dependent on the features of the profit interest award and will fall under either Accounting Standards Codification (ASC) 710, Compensation – General or ASC 718, Compensation-Stock Compensation. ASC 710 includes guidance for profit-sharing, performance bonuses, and deferred compensation plans. However, share-based payments are excluded and specifically addressed under ASC 718.

The key differences between the two accounting models include:

Recognition – Under ASC 710, the awards are recognized when payment is both probably and reasonably estimable. Under ASC 718, the awards are generally recognized as employee services are rendered.
Measurement – Under ASC 710, the awards are measured at present value and then remeasured at each reporting date. In contrast, ASC 718 calls for awards to be measured at fair value based on either the grant or settlement date.
Classification – Both sections provide guidance on classifying the awards as a liability. However, share-based payments should be evaluated to determine if they are truly an equity transaction.
Presentation – ASC 710 calls distributions to holders compensation cost. ASC 718 are typically treated as capital transactions (i.e. dividends)

U.S. GAAP does not provide explicit guidance on how to account for profit interests. Business entities must evaluate all terms, conditions, and characteristics of such awards to determine the best treatment. This often involves “looking through” the legal form of the instruments to determine the true intent. Based on this, there is often diversity in how entities account for-profit interests. The Financial Accounting Standards Board (FASB) has acknowledged the awards as a potential area where clarification and simplification may be needed.

Regardless of the intricacy in the accounting for the awards, they may prove to be a valuable tool for organizations looking for a way to reward employees during these periods of low-level cash flow.

The American Rescue Plan Act of 2021 (ARPA) allows small and midsize employers, and certain governmental employers, to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

The ARPA tax credits are available to eligible employers that pay sick and family leave for leave from April 1, 2021, through September 30, 2021.

The credits have been extended through September 20, 2021.
Employers are encouraged to offer paid leave to employees to receive or recover from vaccinations, but it is not mandated.
The Paid Health Emergency Leave has been increased from a maximum of $10,000 to a maximum of $12,000 per employee.
ARPA expands the qualifying reasons for which leave can be taken (and tax credit claimed) under the Emergency Paid Sick Leave (EPSL) and/or the Emergency Family Medical Leave (EFML), to include leave:
- to obtain COVID-19 immunization;
- to recover from an injury, disability, illness or condition related to the COVID-19 immunization; and
- to seek or await the results of a test for medical diagnosis of COVID-19, where the employee has been exposed to COVID-19 or the employer has requested such a test from the employee.
ARPA strikes the provision in the FFCRA requiring the first two weeks of paid Extended FMLA (Paid Health Emergency Leave) to be unpaid. That is why the maximum allotment per employee has been adjusted from $10,000 to $12,000.
The reasons for which the expanded family and medical leave may be taken have also been broadened. Under the FFCRA, the qualifying reasons for leave were limited to instances where an employee needed to care for their child because the child’s school was closed or the childcare provider was unavailable due to COVID-19. Under ARPA, all of the reasons for which emergency paid sick leave may be provided are qualifying reasons for the expanded family and medical leave.
ARPA resets the 10-day (or 80-hour) allotment limit on Emergency Paid Sick Leave (EPSL) effective April 1, 2021.
School districts can now receive credits.

Please read the IRS Fact Sheet to learn more about which employers are eligible for the tax credits and how employers may claim the credit.

With so many employees working remotely these days, engaging in competitive intelligence has never been easier. The Internet as a whole, and social media specifically, create a data-rich environment in which you can uncover a wide variety of information on what your competitors are up to. All you or an employee need do is open a browser tab and start looking.

But should you? Well, competitive intelligence — formally defined as the gathering and analysis of publicly available information about one or more competitors for strategic planning purposes — has been around for decades. One could say that a business owner would be imprudent not to keep tabs on his or her fiercest competition.

The key is to engage in competitive intelligence legally and ethically. Here are some best practices to keep in mind:

Know the rules and legal risks. Naturally, the very first rule of competitive intelligence is to avoid inadvertently breaking the law or otherwise exposing yourself or your company to a legal challenge. The technicalities of intellectual property law are complex; it can be easy to run afoul of the rules unintentionally.

When accessing or studying another company’s products or services, proceed carefully and consult your attorney if you fear you’re on unsteady ground and particularly before putting any lessons learned into practice.

Vet your sources carefully. While gathering information, you or your employees may establish sources within the industry or even with a specific competitor. Be sure you don’t encourage these sources, even accidentally, to violate any standing confidentiality or noncompete agreements.

Don’t hide behind secret identities. As easy as it might be to create a “puppet account” on social media to follow and even comment on a competitor’s posts, the negative fallout of such an account being exposed can be devastating. Also, if you sign up to receive marketing e-mails from a competitor, use an official company address and, if asked, state “product or service evaluation” as the reason you’re subscribing.

Train employees and keep an eye on consultants. Some business owners might assume their employees would never engage in unethical or even illegal activities when gathering information about a competitor. Yet it happens. One glaring example occurred in 2015, when the Federal Bureau of Investigations and U.S. Department of Justice investigated a Major League Baseball team because one of its employees allegedly hacked into a competing team’s computer systems. The investigation concluded in 2017 with a lengthy prison term for the perpetrator and industry fines and other penalties for his employer.

Discourage employees from doing competitive intelligence on their own. Establish a formal policy, reviewed by an attorney, that includes ethics training and strict management oversight. If you engage consultants or independent contractors, be sure they know and abide by the policy as well. Our firm can help you identify the costs and measure the financial benefits of competitive intelligence.

In recent months, there have been a number of tax changes that may affect your individual tax bill. Many of these changes were enacted to help mitigate the financial damage caused by COVID-19.

Here are two changes that may result in tax savings for you on your 2020 or 2021 tax returns. The 2020 return is due on May 17, 2021 (because the IRS extended many due dates from the usual April 15 this year). If you can’t file by that date, you can request an extra five months to file your 2020 tax return by October 15, 2021. Your 2021 return will be due in April of 2022.

1. Some unemployment compensation from last year is tax free.

Many people lost their jobs last year due to pandemic shutdowns. Generally, unemployment compensation is included in gross income for federal tax purposes. But thanks to the American Rescue Plan Act (ARPA), enacted on March 11, 2021, up to $10,200 of unemployment compensation can be excluded from federal gross income on 2020 federal returns for taxpayers with an adjusted gross income (AGI) under $150,000. In the case of a joint return, the first $10,200 per spouse isn’t included in gross income. That means if both spouses lost their jobs and collected unemployment last year, they’re eligible for up to a $20,400 exclusion.

However, keep in mind that some states tax unemployment compensation that is exempt from federal income tax under the ARPA.

The IRS has announced that taxpayers who already filed their 2020 individual tax returns without taking advantage of the 2020 unemployment benefit exclusion, don’t need to file an amended return to take advantage of it. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.

The IRS will take steps in the spring and summer to make the appropriate change to the returns, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.

2. More taxpayers may qualify for a tax credit for buying health insurance.

The premium tax credit (PTC) is a refundable credit that assists individuals and families in paying for health insurance obtained through a Marketplace established under the Affordable Care Act. The ARPA made several significant enhancements to this credit.

For example, under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) weren’t eligible for the PTC. But under the new law, for 2021 and 2022, the premium tax credit is available to taxpayers with household incomes that exceed 400% of the FPL. This change increases the number of people who are eligible for the credit.

Let’s say a 45-year-old unmarried man has income of $58,000 (450% of FPL) in 2021. He wouldn’t have been eligible for the PTC before ARPA was enacted. But under the ARPA, he’s eligible for a premium tax credit of about $1,250.

Other favorable changes were also made to the premium tax credit.

Many more changes

The 2020 unemployment benefit exclusion and the enhanced premium tax credit are just two of the many recent tax changes that may be beneficial to you. Contact us if you have questions about your situation.

Yeo & Yeo CPAs & Business Consultants, a leading Michigan accounting firm, has been named one of West Michigan’s Best and Brightest Companies to Work For for the seventeenth consecutive year. Yeo & Yeo and the other winning companies will be honored at a digital conference and awards celebration on July 20.

“We are honored to receive this award alongside so many other prominent West Michigan companies,” said Carol Patridge, managing principal of Yeo & Yeo’s Kalamazoo office. “We credit the excellent work environment we’ve created to our dedicated employees. They are engaged in the work they do for our clients and committed to teamwork and community service. We wouldn’t be where we are today without them.”

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

Ali Barnes, CPA, managing principal of Yeo & Yeo’s Alma office, said, “This is an exciting achievement that recognizes Yeo & Yeo’s commitment to the development and well-being of our employees. We are proud to support and encourage employees who are working both at home and in the workplace.”

The annual competition provides the business community with the opportunity to gain recognition, showcase their best practices, and demonstrate why they are an ideal place for employees to work. An independent research firm evaluates organizations on a list of key metrics.

Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.

However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.

Determining reasonable compensation

There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:

Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
In the minutes of your corporation’s board of directors, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts.
Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.

In December 2020, Richard Jones stepped up as chairman of the Financial Accounting Standards Board (FASB). After meeting with stakeholders in early 2021, Jones identified a list of high-priority projects that he plans to tackle under his leadership.

Big picture

The FASB is responsible for creating and updating U.S. Generally Accepted Accounting Principles (GAAP), the rules that many domestic businesses use to report their financial results externally. In a recent interview, Jones said he wants the FASB to be “very transparent” when making and reviewing accounting rules.

He also encouraged stakeholders — including investors, CPAs, not-for-profits and businesses — to actively engage with the FASB. “Engagement is a critical part of our mission; we need that external feedback to function and set standards,” said Jones. His goal is to understand the environment in which stakeholders are operating and consider their input when prioritizing projects and setting comment periods.

In the coming year, Jones expects to face many challenges, because his tenure began amid a global pandemic that has had significant economic impacts. Moreover, he indicated that technological changes and a shift to one-party control of Congress and the White House may affect the future direction of the FASB.

Hot topics

Jones’ recent interview also sheds light on the FASB’s current agenda, which includes the following high-priority projects:

Non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA),
Environmental, social, and governance (ESG) disclosure rules,
Presentation of the statement of cash flows,
Classification of debt,
Goodwill,
Government assistance, and
Segment reporting.

When asked about the status of global convergence projects, Jones said the FASB has “great communication” with the International Accounting Standards Board (IASB). He plans to continue working with the IASB on “projects of common interest.”

Post-implementation reviews

During the interview, Jones stressed that FASB standards are subject to “continuous improvement.” Accordingly, he plans to conduct a post-implementation review of the updated standards for revenue, leases and credit losses that have been implemented in recent years. These types of large projects typically require fine-tuning after they’re adopted by public companies to make the standards more effective and to make it easier for smaller entities to comply with the changes. The review process usually takes multiple years, and the FASB is just in the initial stages of reviewing these standards.

Looking ahead

Finally, Jones shared his thoughts on the impact that technology — such as artificial intelligence and software developments — will have on the way the FASB sets standards. He noted that technology has helped investors access and process large volumes of data, which has led to a demand for additional, more-disaggregated reporting.

The FASB has been fairly quiet in the last few years, as companies worked to adopt the updates to the revenue, leases and credit losses standards. Now, with a new chairman at the helm, the FASB is positioned to resume rulemaking activities in key areas. Contact us to learn about the latest developments under GAAP.

The premium tax credit (PTC) is a refundable credit that helps individuals and families pay for insurance obtained from a Health Insurance Marketplace (commonly known as an “Exchange”). A provision of the Affordable Care Act (ACA) created the credit.

The American Rescue Plan Act (ARPA), signed into law in March 2021, made several significant enhancements to the PTC. Although these changes expand access to the credit for individuals and families, they could increase the risk of some businesses incurring an ACA penalty.

More eligible people

Under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) were ineligible for the PTC. Under ARPA, for 2021 and 2022, the PTC is available to taxpayers with household incomes that exceed 400% of the FPL. This change will increase the number of PTC-eligible people.

For example, a 45-year-old single person earning $58,000 in 2021 (450% of FPL) would have been ineligible for the PTC under pre-ARPA law. Under ARPA, that individual is eligible for a PTC of about $1,250.

Lower income cap

The PTC is calculated on a sliding scale based on household income, expressed as a percentage of the FPL. The amount of the credit is limited to the excess of the premiums for the applicable benchmark plan over the taxpayer’s required share of those premiums. The required share comes from a table divided into income tiers.

Because the required share is less under the new tables for 2021 and 2022 than it otherwise would have been, the PTC will be greater. Under pre-ARPA law, a taxpayer might have had to spend as much as 9.83% of household income in 2021 on health insurance premiums. Under ARPA, that amount is capped at 8.5% for 2021 and 2022.

More penalty exposure

As mentioned, the expanded PTC will help individuals and families obtain coverage through a Health Insurance Marketplace. However, because applicable large employers (ALEs) potentially face shared responsibility penalties if full-time employees receive PTCs, expanded eligibility could increase penalty exposure for ALEs that don’t offer affordable, minimum-value coverage to all full-time employees as mandated under the ACA.

An employer’s size, for ACA purposes, is determined in any given year by its number of employees in the previous year. Generally, if your company had 50 or more full-time or full-time equivalent employees on average during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is someone employed on average at least 30 hours of service per week.

Assess your risk

If your business is an ALE, be sure you’re aware of this development when designing or revising your employer-provided health care benefits. Should you decide to add staff this year, keep an eye on the tipping point of when you could become an ALE. Our firm can further explain the ARPA’s premium tax credit provisions and help you determine whether you qualify as an ALE — or may soon will.

Encryption can be a confusing subject for most people.

Is it a good thing or a bad thing?

We understand the confusion. After all, if your data is encrypted, how on earth will it be usable?

However, when you encrypt your data, you’re adding a level of protection to it. It means that should it be stolen, it’ll be unusable to anyone else.

But less than 50 percent of companies have standardized end-to-end encryption set up. While they have some level of encryption, they don’t have a documented standard that covers every area of their business.

And it’s not only hackers and other cybercriminals that could benefit from a business’ lack of data encryption. Lost or stolen devices put data at risk too. When you consider that a laptop is stolen every 53 seconds, it’s leaving businesses more vulnerable than they should be.

Microsoft 365 automatically encrypts business data by default. But your endpoints (laptops, phones, desktop computers, tablets, etc.) might still be vulnerable in the hands of an adept cybercriminal.

In today’s environment, roughly 70 percent of successful data breaches originate at the endpoint. Because endpoints represent every device connected to your network, an attack can become unmanageable quickly if endpoints are not properly managed and secured.

Yeo & Yeo Technology’s endpoint protection software protects your network from malicious attacks by using encryption and application control to secure end-user devices. Using static and behavioral AI, we can detect and prevent fileless, zero-day, and nation-grade attacks in real-time. Contact us to learn how endpoint security can protect your business.

Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing.

Uncomplicated paperwork

If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE Plans

Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.

Voided transactions are sometimes necessary in the ordinary course of business. However, in some cases, these transactions could allow fraud to go unnoticed. Management should investigate voided transactions periodically to ensure no wrongdoing is taking place.

Voided transactions on the revenue side, possibly with a point of sale system or admissions tracker, should be investigated – what was the reason for the void and was it adequately documented. Pay special attention to patterns such as an excessive number of voids with the same employee or at the same time.

Voided transactions on the expense side should be similarly investigated, including tracing the transaction entirely through the process within the accounting system, original check, and bank statement.

In all cases, documentation and follow-up are essential – setting the tone that management will regularly examine these transactions should discourage fraud or abuse of this override.

Nonprofit budgeting has always been challenging. However, as we cross the one-year threshold into the coronavirus pandemic, you might notice the process is even more difficult than in the past. Many uncertainties exist, while many nonprofit organizations’ services are in demand more than ever. Here are some helpful tips and points to consider when budgeting for the future:

Realize there is not a one-size-fits-all when it comes to budgeting. Every nonprofit is unique in the services they offer and the funding that allows this to happen. What works for one organization will likely not work for another. Recognizing the uniqueness of your organization is essential to the budgeting process.
Remember that expenses are inherently more controllable than contributions. Possibly the most crucial factor in the budget is identifying a realistic estimate for revenues. Many organizations have seen an influx of special government funding to help meet the demand for services or stay afloat. However, not all nonprofits have been so lucky – particularly those that are mainly driven by contributions. Working closely with development staff and major donors is a critical exercise in having a good pulse on expected contributions.
Identify acceptable levels of funding shortfalls. Every organization has a different level of net assets and reserve funding. Work closely with the board of directors to identify the maximum amount of these that you are comfortable using in the future.
Develop a plan for potential cutbacks. If contributions fall short of historical levels and you find yourself at an unacceptable level of deficit, cutbacks may need to be made to protect the organization’s future. Having a ‘worst-case scenario’ plan in place can identify potential cuts in services you offer or specific non-critical expenses that could be eliminated, so you are prepared in advance.
Be realistic. Don’t fill holes in funding with phantom contributions that are unlikely to roll in. If you expect a net loss during the year and have accepted that fact, let the budget reflect that.
Get creative with new fundraising ideas. Virtual fundraisers have been successful for many nonprofits over the past year. Although in some cases, these events have yielded lower gross revenues than events that have been held in person in the past, expenses are typically much lower as well. This may be the year to depart from the annual gala and consider an event or other fundraising tactic you haven’t before!
Monitor, revise, analyze. Make budget-to-actual comparisons often and understand why areas are over or under budget. When it is clear that the budget is no longer realistic, you might wish to amend the budget to account for this and make adjustments in other areas to compensate.

Contact Yeo & Yeo’s Nonprofit Services Group if you would like assistance in the budgeting process or have specific questions about your organization.