Year-end SWOT Analysis Can Uncover Risks

As your company plans for the coming year, management should assess your strengths, weaknesses, opportunities and threats. A SWOT analysis identifies what you’re doing right (and wrong) and what outside forces could impact performance in a positive (or negative) manner. A current assessment may be particularly insightful, because market conditions have changed significantly during the year — and some changes may be permanent.

Inventorying strengths and weaknesses

Start your analysis by identifying internal strengths and weaknesses keeping in mind the customer’s perspective. Strengths represent potential areas for boosting revenues and building value, including core competencies and competitive advantages. Examples might include a strong brand or an exceptional sales team.

It’s important to unearth the source of each strength. When strengths are largely tied to people, rather than the business itself, consider what might happen if a key person suddenly left the business. To offset key person risks, consider purchasing life insurance policies on key people, initiating noncompete agreements and implementing a formal succession plan.

Alternatively, weaknesses represent potential risks and should be minimized or eliminated. They might include low employee morale, weak internal controls, unreliable quality or a location with poor accessibility. Often weaknesses are evaluated relative to the company’s competitors.

Anticipating opportunities and threats 

The next part of a SWOT analysis looks externally at what’s happening in the industry, economy and regulatory environment. Opportunities are favorable external conditions that could increase revenues and value if the company acts on them before its competitors do.

Threats are unfavorable conditions that might prevent your company from achieving its goals. They might come from the economy, technological changes, competition and government regulations, including COVID-19-related operating restrictions. The idea is to watch for and minimize existing and potential threats.

Think like an auditor 

During a financial statement audit, your accountant conducts a risk assessment. That assessment can provide a meaningful starting point for your SWOT analysis. Contact us for more information.

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On November 20, the Michigan Department of Education (MDE) issued a memo to clarify the documentation they will require school districts (including public school academies) to maintain for Coronavirus Relief Fund (CRF) grants and the allowable uses of the funds. 

Specifically, the memo states that unless a school district receives and spends more than $500 of CRF funding per pupil, MDE will not require supporting documentation to be submitted or maintained.  However, be aware that the Compliance Supplement related to the CRF grants’ audit requirements has not been released yet and may include other requirements. 

For documentation related to the allowability of costs, we recommend at a minimum that school districts record CRF expenditures in the proper general ledger expenditure account as to function, object and grant code. We also recommend maintaining support as to specific purchases (for example, computers, iPads, hot spots or protective equipment) and a memo to support the school district’s reason for charging other expenditures, including how the expenditures were related to COVID-19.

In its memo, the MDE provided examples of allowable costs, which include:

• expanding broadband capacity
• hiring new teachers
• developing an online curriculum
• acquiring computers and similar digital devices
• acquiring and installing additional ventilation or other air filtering equipment
• incurring additional transportation costs
• incurring additional costs of providing meals

For more information, including CRF guidance and CRF Frequently Asked Questions, refer to MDE’s memo #COVID-19-139.

Remember, all costs need to be spent by December 31, 2020. If your school district has questions about the CRF or other items related to coronavirus funding, please reach out to a member of Yeo & Yeo’s Education Services Group.

1. New Form 1099-NEC 
2. Reporting of FFCRA wages in Box 14 on W-2

The U.S. Department of Agriculture (USDA) Farm Service Agency reminds farmers and ranchers to apply for the Coronavirus Food Assistance Program 2 (CFAP 2) by December 11, 2020. This program provides financial assistance to agricultural producers who continue to face market disruptions and associated costs because of COVID-19.

CFAP 2 is a separate program from the first iteration of CFAP. Producers who applied for CFAP 1 are not automatically signed up for CFAP 2 and must complete a new application to be eligible for assistance.

To be eligible for payments, a person or legal entity must either:

• have an average adjusted gross income of less than $900,000 for tax years 2016, 2017, and 2018; or
• derive at least 75 percent of their adjusted gross income from farming, ranching or forestry-related activities.

Eligible commodities for CFAP 2 include, but are not limited to:

• Row crops
• Wool
• Livestock
• Specialty livestock
• Dairy
• Specialty crops
• Floriculture and nursery crops
• Aquaculture
• Broilers and eggs
• Tobacco

Producers can find more eligibility requirements, and a full list of eligible commodities, payment rates and options to apply on the USDA’s website.

Visit the following USDA resources for additional information about CFAP 2:

• Eligible Commodities Finder
• CFAP 2 Fact Sheet
• Video, “How to Apply for CFAP 2”
• Blog, “Myths Debunked: Coronavirus Food Assistance Program 2” 

Who to Call for Help

Farm Service Agency staff at your local USDA Service Center will work with producers to file applications. A call center is available for producers who would like one-on-one support with the CFAP 2 application process. Please call 877-508-8364 to speak directly with a USDA employee who can help.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

Covering tax, accounting, technology, financial and advisory topics relevant to you and your business, Yeo & Yeo’s podcast is hosted by industry and subject matter professionals, where we go beyond the beans.

On episode eight of Everyday Business, host Rebecca Millsap, managing principal of the Flint office, is joined by Andrew Matuzak, manager in Saginaw.

Listen in as Rebecca and Andrew discuss the benefits of trusts as part of your estate plan and when you should consider setting up your own trust.

• What is a trust? (1:20)
• When should you set up a trust? (2:50)
• What are the benefits of trusts? (3:41)
• Can a trust help minimize taxes? (6:28)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

DISCLAIMER
The information provided in this podcast is believed to be valid and accurate on the date it was first published. The views, information, or opinions expressed during the podcast reflect the views of the speakers. This podcast does not constitute tax, accounting, legal or other business advice, or an advisor-client relationship. Before making any decision or taking action, consult with a professional regarding your specific circumstances.

It’s been estimated that there are roughly 5 million family-owned businesses in the United States. Annually, these companies make substantial contributions to both employment figures and the gross domestic product. If you own a family business, one important issue to address is how to best weave together your succession plan with your estate plan.

Rise to the challenge

Transferring ownership of a family business is often difficult because of the distinction between ownership and management succession. From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing any estate taxes. However, you may not be ready to hand over control of your business or you may feel that your children aren’t yet ready to run the company.

There are various ways to address this quandary. You could set up a family limited partnership, transfer nonvoting stock to heirs or establish an employee stock ownership plan.

Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the business. Providing such heirs with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth with them while allowing those who work in the business to take over management.

Consider an installment sale

An additional challenge to family businesses is that older and younger generations may have conflicting financial needs. Fortunately, strategies are available to generate cash flow for the owner while minimizing the burden on the next generation.

For example, consider an installment sale. These transactions provide liquidity for the owner while improving the chances that the younger generation’s purchase can be funded by cash flows from the business. Plus, so long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes.

Explore trust types

Or, you might want to create a trust. By transferring business interests to a grantor retained annuity trust (GRAT), for instance, the owner obtains a variety of gift and estate tax benefits (provided he or she survives the trust term) while enjoying a fixed income stream for a period of years. At the end of the term, the business is transferred to the owner’s children or other beneficiaries. GRATs are typically designed to be gift-tax-free.

There are other options as well, such as an installment sale to an intentionally defective grantor trust (IDGT). Essentially a properly structured IDGT allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once the installment payments are complete, the business passes to the owner’s beneficiaries free of gift taxes.

Protect your legacy

Family-owned businesses play an important role in the U.S. economy. We can help you integrate your succession plan with your estate plan to protect both the company itself and your financial legacy.

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Apply for Grants to Meet Capital Needs Beginning December 15, 2020

The Michigan Economic Development Corporation (MEDC) will offer $10 million in grants for Michigan small businesses adversely affected by COVID-19 to meet urgent capital needs such as rent and utilities.

Eligible businesses are limited to the following:

• Restaurants, bars and other food and beverage service providers
• Travel and tourism destinations including lodging providers
• Live event venues and movie theaters
• Conference and meeting facilities
• Ice skating rinks, indoor water parks and bowling centers
• Gyms and fitness centers

Each business can qualify for up to $15,000 in funding if they meet the eligibility criteria, which includes but is not limited to :

• Having fewer than 50 employees
• Complying with all State and local COVID-19 orders
• Identifying a need for payroll, rent or mortgage payments and/or utility expenses.

The grant application opens on Tuesday, December 15. Grants will be awarded on a first-come, first-served basis, and funding will be split among each of Michigan’s ten prosperity regions. 

Visit the MEDC website to learn more about the application process, review complete eligibility requirements and submit an application.

Are you thinking about selling stock shares at a loss to offset gains that you’ve realized during 2020? If so, it’s important not to run afoul of the “wash sale” rule.

IRS may disallow the loss

Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, it’s possible the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)

The rule even applies if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of in the future (other than in a wash sale).

An example to illustrate

Let’s say you bought 500 shares of ABC Inc. for $10,000 and sold them on November 5 for $3,000. On November 30, you buy 500 shares of ABC again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.

If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you’d be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that’s disallowed under the wash sale rule would be added to your cost of the 300 shares.

If you’ve cashed in some big gains in 2020, you may be looking for unrealized losses in your portfolio so you can sell those investments before year end. By doing so, you can offset your gains with your losses and reduce your 2020 tax liability. But be careful of the wash sale rule. We can answer any questions you may have.

© 2020

The changing landscape of the new federal funding for school districts during the COVID-19 pandemic requires an advanced understanding of the requirements set forth by funding agencies. Historically, school districts have received federal funding from the same sources for the same programs each year and are now receiving it through new sources for new programs with complex grant requirements. Understanding the requirements set forth by grantors and properly managing the flow of federal dollars is crucial to maintaining compliance.

The following are a few areas to consider when managing federal awards.

1. Understand the Requirements of the Specific Award

While there are overarching guidelines to follow when using federal funding, each award may have unique requirements. Read the grant award documents to ensure an understanding of the conditions. If requirements are unclear, obtain a better understanding from the grantor as soon as possible to ensure the grant is being administered in the manner intended.

Sometimes the grantor itself will be unsure of how to interpret the application of a law or regulation that relates to the grant. Should the grantor be unable to provide further guidance, make sure the school district documents the assumptions used when interpreting a requirement and how it was applied. When possible, obtain in writing from the grantor its agreement, or at least acknowledgment, of the assumptions used.

2. Advance Funding vs. Reimbursement Basis

Some grants allow for the payment of funds to a grantee before expenditures are incurred. Other grants are on the reimbursement basis, which requires grantees to incur expenditures and then subsequently request reimbursement from the grantor. Understanding which method is allowed is necessary to ensure compliance with the grant, properly account for grant receipts, and manage cash flow.

If funds are received before incurring allowable expenditures, the receipt should be recorded as a liability until the time allowable expenditures are incurred.

3. Allowable Expenditures

The purpose of grant awards can vary significantly. Expenditures can mean anything from wages and related benefits to goods or services purchased from vendors to recouping indirect expenses. 2 CFR 200 defines expenditures as charges made by a nonfederal entity to a project or program for which a federal award was received. The costs may be reported on a cash or accrual basis as long as the methodology is disclosed and consistently applied.

Grants may consider indirect costs to be allowable expenditures. The de minimus indirect cost rate is 10%; however, not all grants allow this rate to be used. Consult the award documents or budget to aid in determining what is allowable for your entity.

Grant award documents, the related federal compliance supplement, and approved grant budgets typically outline the definition of allowable expenditures. Consulting with the grantor is often the best first step when the allowability of an expenditure is unclear.

4. Reporting Requirements

Most federal grants have reporting requirements. The conditions can vary depending on whether the award is a direct award or if the recipient is a sub-recipient. Reports may be required monthly, quarterly or annually. Some grants only require reporting when cash reimbursement is requested. Grants may have specific forms that need to be used or require information to be submitted via an online platform. Review the grant award requirements to ensure information is being reported timely and in the manner requested.

Managing federal awards can be complex. Obtaining an understanding of the requirements of each award up front, as well as throughout the life of the award, will aid school districts in meeting the applicable compliance requirements.

No matter where your school district is in the consideration of, application for, or use of federal awards, reach out to a member of Yeo & Yeo’s Education Services Group if you have questions or need further insight.

As we approach the end of the year, it’s a good time to think about whether your business needs to buy business equipment and other depreciable property. If so, you may benefit from the Section 179 depreciation tax deduction for business property. The election provides a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time.

Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2020 can be written off this year.

But to benefit for this tax year, you need to buy and place qualifying assets in service by December 31.

What qualifies?

The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.

The annual deduction limit is $1.04 million for tax years beginning in 2020, subject to a phaseout rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.59 million for tax years beginning in 2020. (Note: Different rules apply to heavy SUVs.)

There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).

In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.

The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.

What about bonus depreciation?

With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the Tax Cuts and Jobs Act, you could deduct only 50% of the cost of qualified new property.)

This tax break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).

Bonus depreciation is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.

Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it.

Need assistance?

These favorable depreciation deductions may deliver tax-saving benefits to your business on your 2020 return. Contact us if you have questions, or you want more information about how your business can maximize the deductions.

© 2020

The year 2020 has taught businesses many lessons. The sudden onset of the COVID-19 pandemic followed by drastic changes to the economy have forced companies to alter the size of their workforces, restructure work environments and revise sales models — just to name a few challenges. And what this has all meant for employees is change.

Even before this year’s public health crisis, many businesses were looking into and setting forth policies regarding change management. In short, this is a formalized approach to providing employees the information, training and ongoing coaching needed to successfully adapt to any modification to their day-to-day jobs.

There’s little doubt that one of the enduring lessons of 2020 is that businesses must be able to shepherd employees through difficult transitions, even (or especially) when the company itself didn’t bring about the change in question.

Why change is hard

Most employees resist change for many reasons. There’s often a perceived loss of, or threat to, job security or status. Inconvenience and unfamiliarity provoke apprehension. In some cases, perhaps because of misinformation, employees may distrust their employers’ motives for a change. And some workers will always simply believe the “old way is better.”

What’s worse, some changes might make employees’ jobs more difficult. For example, moving to a new location might enhance an organization’s image or provide safer or more productive facilities. But doing so also may increase some employees’ commuting times or put employees in a drastically different working environment. When their daily lives are affected in such ways, employees tend to question the decision and experience high levels of anxiety.

What you shouldn’t do

Often, when employees resist change, a company’s decision-makers can’t understand how ideas they’ve spent weeks, months or years deliberating could be so quickly rejected. (Of course, in the case of the COVID-19 pandemic, tough choices had to be made in a matter of days.) Some leadership teams forget that employees haven’t had time to adjust to a new idea. Instead of working to ease employee fears, executives or supervisors may double down on the change, more strictly enforcing new rules and showing little patience for disagreements or concerns.

And it’s here the implementation effort can break down and start costing the business real dollars and cents. Employees may resist change in many destructive ways, from taking very slow learning curves to calling in sick to filing formal complaints or lawsuits. Some might even quit.

The bottom line: by not engaging in some form of change management, you’re more likely to experience reduced productivity, bad morale and increased turnover.

How to cope

“Life comes at ya fast,” goes the popular saying. Given the events of this year, it’s safe to say that most business owners would agree. Identify ways you’ve been able to help employees deal with this year’s changes and document them so they can be of use to your company in the future. Contact us for help cost-effectively managing your business.

© 2020

Many businesses are closed or are limiting third-party access as COVID-19 surges across the United States. These restrictions could still be in place at year end — a time when external auditors traditionally observe physical inventory counts for calendar-year entities. Here’s how you can identify and overcome the challenges associated with inventory counts during the pandemic.

What’s expected to change?

Companies conduct manual counts at the end of the accounting period to ensure that the inventory balance reflected on their balance sheet matches what’s held on-site in raw materials, work-in-progress and finished goods. The extent to which your counting procedures will need to change during the COVID-19 crisis depends on your circumstances.

For example, you may need to make only minimal changes to protect employees and third parties, if your inventory is stored in one warehouse and requires only a small team to conduct the count. Possible safety measures might include:

• Requiring employees to wear personal protective equipment,
• Providing hand sanitizer and disinfectant spray, and
• Setting up counting stations and other procedures to facilitate social distancing and capacity restrictions.

In some extreme situations (for example, if local stay-at-home mandates have been issued), your management team may decide to delay or even forgo an inventory count. If you face this situation, document the reasoning for your decision and share it with your auditors, board of directors and audit committee.

Be prepared for these groups to suggest alternative ways to conduct an inventory count. They might also request that your team identify an alternate date to conduct the count. If the count date is significantly later than the financial statement date, the audit team will pay close attention to how the count differed from what’s recorded in your inventory records.

What if your auditor can’t attend a physical count?

There are several reasons your auditor might be unable to observe your physical count in person, including government restrictions and company or audit firm policies designed to mitigate the spread of COVID-19. If this happens, you and your audit team will need to devise alternate ways to gather audit evidence pertaining to your company’s inventory.

The options available depend on the accuracy and integrity of your company’s inventory records, coupled with the auditor’s previous experience and observations related to your company’s inventory counts. For example, your auditors could use the inventory balance associated with the last count they observed, coupled with subsequent sales and purchases data to roll forward and generate a new inventory balance.

Alternatively, some companies use cycle count procedures. This is a form of sampling that involves counting a small amount of inventory on a regular basis and making corrections to the inventory system. These counting methods can circumvent the need for an annual inventory count.

Technology to the rescue

If you proceed with an inventory count, don’t overlook technology and its ability to document the existence of inventory and its location. For example, those involved in the inventory count could wear body cameras with GPS capabilities, or auditors could use drones, to observe the count in real-time. Additionally, those conducting the count can refer to video footage after the fact to verify the amounts they document during the process. Contact us to discuss the best approach to verify your year-end inventory levels.

© 2020

Many employees take advantage of the opportunity to save taxes by placing funds in their employer’s health or dependent care flexible spending arrangements (FSAs). As the end of 2020 nears, here are some rules and reminders to keep in mind.

Health FSAs 

A pre-tax contribution of $2,750 to a health FSA is permitted in both 2020 and 2021. You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. For example, they wouldn’t be deductible if you don’t itemize deductions on your tax return. Even if you do itemize, medical expenses must exceed a certain percentage of your adjusted gross income in order to be deductible. Additionally, the amounts that you contribute to a health FSA aren’t subject to FICA taxes.

Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for these items.

To avoid any forfeiture of your health FSA funds because of the “use-it-or-lose-it” rule, you must incur qualifying medical expenditures by the last day of the plan year (Dec. 31 for a calendar year plan), unless the plan allows an optional grace period. A grace period can’t extend beyond the 15th day of the third month following the close of the plan year (March 15 for a calendar year plan).

An additional exception to the use-it-or lose-it rule permits health FSAs to allow a carryover of a participant’s unused health FSA funds of up to $550. Amounts carried forward under this rule are added to the up-to-$2,750 amount that you elect to contribute to the health FSA for 2021. An employer may allow a carryover or a grace period for an FSA, but not both features.

Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don’t forget to reflect any changed circumstances in making your calculation.

Dependent care FSAs 

Some employers also allow employees to set aside funds on a pre-tax basis in dependent care FSAs. A $5,000 maximum annual contribution is permitted ($2,500 for a married couple filing separately).

These FSAs are for a dependent-qualifying child under age 13, or a dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than half of the tax year.

Like health FSAs, dependent care FSAs are subject to a use-it-or-lose-it rule, but only the grace period relief applies, not the up-to-$550 forfeiture exception. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year.

Note: Because of COVID-19, the IRS has temporarily allowed employees to take certain actions in 2020 related to their health care and dependent care FSAs. For example, employees may be permitted to make prospective mid-year elections and changes. Ask your HR department if your plan allows these actions if you believe they would be beneficial in your situation. Other rules and exceptions may apply.

Contact us if you’d like to discuss FSAs in greater detail.

© 2020

S corporations can provide tax advantages over C corporations in the right circumstances. This is true if you expect that the business will incur losses in its early years because shareholders in a C corporation generally get no tax benefit from such losses. Conversely, as an S corporation shareholder, you can deduct your percentage share of these losses on your personal tax return to the extent of your basis in the stock and any loans you personally make to the entity.

Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.

Therefore, your ability to use losses that pass through from an S corporation depends on your basis in the corporation’s stock and debt. And, basis is important for other purposes such as determining the amount of gain or loss you recognize if you sell the stock. Your basis in the corporation is adjusted to reflect various events such as distributions from the corporation, contributions you make to the corporation and the corporation’s income or loss.

Adjustments to basis

However, you may not be aware that several elections are available to an S corporation or its shareholders that can affect the basis adjustments caused by distributions and other events. Here is some information about four elections:

1. An S corporation shareholder may elect to reverse the normal order of basis reductions and have the corporation’s deductible losses reduce basis before basis is reduced by nondeductible, noncapital expenses. Making this election may permit the shareholder to deduct more pass-through losses.
2. An election that can help eliminate the corporation’s accumulated earnings and profits from C corporation years is the “deemed dividend election.” This election can be useful if the corporation isn’t able to, or doesn’t want to, make an actual dividend distribution.
3. If a shareholder’s interest in the corporation terminates during the year, the corporation and all affected shareholders can agree to elect to treat the corporation’s tax year as having closed on the date the shareholder’s interest terminated. This election affords flexibility in the allocation of the corporation’s income or loss to the shareholders and it may affect the category of accumulated income out of which a distribution is made.
4. An election to terminate the S corporation’s tax year may also be available if there has been a disposition by a shareholder of 20% or more of the corporation’s stock within a 30-day period. 

Contact us if you would like to go over how these elections, as well as other S corporation planning strategies, can help maximize the tax benefits of operating as an S corporation.

© 2020

As year end approaches, it’s a good idea for calendar-year entities to review the guidelines for recognizing revenue and expenses. There are specific rules regarding accounting cutoffs under U.S. Generally Accepted Accounting Principles (GAAP). Strict observance of these rules is generally the safest game plan.

The basics

Companies that follow GAAP must use the accrual method of accounting, not the cash method. That means revenues and expenses must be matched to the periods in which they were earned or incurred. The end of the period serves as a “cutoff” for recognizing revenue and expenses. For a calendar-year business, the cutoff is December 31.

However, some companies may be tempted to play timing games to lower taxes or boost financial results. The temptation might be especially high in 2020, as many companies struggle during the COVID-19 pandemic.

Now or later

Test your understanding of the cutoff rules with these two hypothetical situations:

1. As of December 31, a calendar-year, accrual-basis auto dealership has verbally negotiated a deal on an SUV. But the customer hasn’t yet signed all the paperwork. Should the sale be reported in 2020 or 2021?
2. On December 30, a calendar-year, accrual-basis retailer pays its rent bill for January. Rent is due on the first day of the month. Can the store deduct the extra month’s rent in 2020 to help lower its tax bill?

In both examples, the transactions should be reported in 2021, not 2020. In the first example, even if the customer takes the car home for the weekend, it doesn’t matter; there’s still the possibility the customer could back out of the deal. The dealership can’t report the transaction in 2020 revenue until the customer has signed the paperwork and paid for the vehicle with cash or financing.

Audit procedures

If your financial statements are audited, your CPA will enforce strict cutoff rules — and likely reverse any items that were reported inaccurately. Audit procedures may include reviewing customer contracts and returns reported near year end. Auditors also may compare expenses as a percentage of revenues from period to period to identify timing errors. And they may vouch expenses to invoices and contracts for accuracy.

It never reflects favorably — in the eyes of investor or lenders — when auditors adjust year-end financial statements for inaccurate observation of cutoffs. Don’t give cause for others to wonder about your operations.

Timing is critical 

Contact us if you need help understanding the rules on when to record revenue or expenses. We can help you comply with the rules and minimize financial statement adjustments during your audit.

© 2020

The CARES Act provides that any forgiven PPP loan amount should be excluded from gross income for federal tax purposes. But the CARES Act did not expressly address the tax treatment of expenses paid with the forgiven funds. Businesses have been left to wonder whether they could not only receive tax-free funding but also potentially deduct the expenses paid with that funding for a double benefit.

New Guidelines Provided

With the recent release of much-anticipated guidance, the IRS confirmed in Rev. Rul. 2020-27 that otherwise deductible business expenses paid with forgiven Paycheck Protection Program (PPP) funds cannot be deducted for federal tax purposes. The non-deductible treatment applies for any payment of eligible PPP expenses to the extent of the loan forgiveness.

• Business with partial loan forgiveness: If a business only has partial forgiveness of its loan, it may still have deductible expenditures attributable to the non-forgiven portion.
• Business with entire loan forgiveness: The net result for a business that has its entire PPP loan forgiven should be tax-neutral for federal tax purposes. The forgiveness is not taxable, and the expenses paid with the forgiven funds are not deductible.

Calendar-Year Taxpayers

In short, for a calendar year taxpayer, the expenses are non-deductible for year-end 2020 if there is a reasonable expectation of forgiveness, regardless of whether the borrower files a forgiveness application in 2020 or 2021 and of when the actual forgiveness occurs.

Fiscal-Year Taxpayers

Because the ruling indicates that the borrower has a reasonable expectation of the loan being forgiven, it follows logically that a fiscal-year taxpayer would look to when the expenses were incurred or paid to qualify for forgiveness.

For example, assume a borrower with a September fiscal year-end applied for and received a PPP loan with an April loan date. Most, if not all, of the expenses were likely incurred between April and September 2020 and, therefore, should be considered as non-deductible within the September 2020 fiscal year-end tax return.

Now, let’s assume a borrower has a September fiscal year-end and the loan proceeds were received in July. The expenses used for loan forgiveness would likely span multiple tax years – fiscal year 2020 and fiscal year 2021. Accordingly, an allocation of the expenses between the two tax years would be acceptable. However, there is no guidance specifically indicating the use of this approach.

Regarding the allocation of expenses used for loan forgiveness, there are still many unknowns. Whether wages, employee benefits, rent, utilities, or interest are reduced may not matter. However, for taxpayers with a research and development tax credit, or those who qualify for a qualified business income deduction, the allocation to wages will matter. We advise our clients to plan for various possibilities and remain patient for future guidance.

Safe harbor

A safe harbor (Rev. Proc. 2020-51) allows for PPP recipients who were denied forgiveness or granted forgiveness of an amount different than expected, and who did not deduct the expenses in 2020, to deduct the expenses by either amending their 2020 tax return or deducting them in 2021.

Legislative changes may be coming

Members of Congress disagree with the conclusion that costs are non-deductible, and yet, Treasury has not reversed its decision. Also, the American Institute of CPAs is still fighting for the expenses to be deductible because they believe that was the original intent. By not allowing the deduction, Treasury is creating double taxation – not allowing the business the expense, but employees are picking up the wages on their personal tax returns. There is hope that this will be changed in a stimulus package from Congress if one is ever agreed upon.

Through the last eight months of the PPP landscape, we’ve learned two truths. The first is that patience is usually the most prudent path forward. The second is not to make an irreversible decision until it is necessary. Consult your Yeo & Yeo professional as you plan for the various outcomes of the PPP program.

Dear Clients, Employees, Communities & Friends,

Thanksgiving and the holiday season are times to reflect on all we are grateful for. For me, the list is very long this year. We have so much to be thankful for here at Yeo & Yeo. We are a strong, responsive, resilient firm. We have learned so much this past year that has made us that much stronger. We have navigated many challenges, and we will continue to persevere together.

As we approach the holiday season, I want to take a moment to thank our clients, professionals, families, everyday heroes, and communities.

To our clients, thank you for placing your trust in us. We are grateful for the opportunity to work with and for you. Your support allows us to continue to pursue our mission of providing outstanding business solutions for incredible clients like you.

To our professionals, thank you for your hard work and commitment to delivering unparalleled service to our clients. Despite extraordinary changes in both your work and personal lives, you rose to the occasion and helped clients navigate their own unique situations. Because of you, we can continue pursuing our passion for serving our clients and communities.

To our families, thank you for remaining flexible throughout the changes this year brought. Thank you for allowing your home to become an office. Thank you for balancing the demands of home and work. And most of all, thank you for supporting your loved ones and keeping each other safe and healthy.

To our everyday heroes, thank you for keeping us safe. We are forever grateful for your courage and selflessness as you work on the front lines. Thank you for everything you do, everything you’ve sacrificed, and for your resilience.

To our communities, thank you for banding together in support of us and one another. You have provided selfless care and unwavering help to those in need, from donating food and hand-sewing PPE to providing businesses with resources and guidance during these unprecedented times. Our community members have done extraordinary things this year to meet new needs.

On behalf of all of us at Yeo & Yeo, thank you for all you have done and continue to do for us and one another. We are grateful for each one of you. I wish you all the comfort, hope, and joy that the season can bring.

Stay safe. Stay healthy.

Warmest regards,

Tom Hollerback
President & CEO

By now, some businesses have completed their 2021 budgets while others are still crunching numbers and scrutinizing line items. As you put the finishing touches on your company’s spending plan for next year, be sure to cover the finer points of the process.

This means not just creating a budget for the sake of doing so but ensuring that it’s a useful and well-understood plan for everyone.

Obtain buy-in

Management teams are often frustrated by the budgeting process. There are so many details and so much uncertainty. All too often, the stated objective is to create a budget with or without everyone’s buy-in for how to get there.

To put a budget in the best position for success, every member of the leadership team needs to agree on common forecasting goals. Ideally, before sitting down to review a budget in process, much less view a presentation on a completed budget, you and your managers should’ve established some basic ground rules and reasonable expectations.

If you’re already down the road in creating a budget, it may not be too late. Call a meeting and get everyone on the same page before you issue the final product.

Account for variances

Many budgets fail because they rely on purely accounting-driven, historically minded budgeting techniques. To increase the likelihood of success, you need to actively anticipate “variances.” These are major risks that could leave your business vulnerable to high-impact financial hits if the threats materialize.

One type of risk to consider is the competition. The COVID-19 pandemic and resulting economic impact has reengineered the competitive landscape in some markets. Unfortunately, many smaller businesses have closed, while larger, more financially stable companies have asserted their dominance. Be sure the budget accounts for your place in this hierarchy.

Another risk is compliance. Although regulatory oversight has diminished in many industries under the current presidential administration, this may change next year. Be it health care benefits, hiring and independent contractor policies, or waste disposal, factor compliance risk into your budget.

A third type of variance to consider is internal. If your business laid off employees this year, will you likely need to rehire some of them in 2021 as, one hopes, the economy rebounds from the pandemic? Also, investigate whether fraud affected this year’s budget and how next year’s edition may need more investment in internal controls to prevent losses.

Eyes on the prize

Above all, stay focused on the objective of creating a feasible, flexible budget. Many companies get caught up in trying to tie business improvement and strategic planning initiatives into the budgeting process. Doing so can lead to confusion and unexpectedly high demands of time and energy.

You’re looking to set a budget — not fix every minute aspect of the company. Our firm can help review your process and recommend improvements that will enable you to avoid common problems and get optimal use out of a well-constructed budget for next year.

© 2020

Now that Joe Biden has been projected as the winner of the presidential election by major news outlets,* you may wonder if your federal taxes will be affected.

President-elect Biden campaigned on a broad agenda, including a pledge to roll back many of President Trump’s tax policies. In response to the Tax Cuts and Jobs Act (TCJA), Biden has promised a progressive approach to taxation, focused primarily on increasing the burden on businesses and high-income individuals.

Of course, his odds of translating his proposals into legislation largely hinges on the outcomes of runoff elections for the two Georgia seats in the U.S. Senate. Biden’s party needs to win both seats to take a majority in the Senate. But the elections aren’t scheduled until January 5, 2021 — too late to implement many traditional strategies to reduce 2020 taxes.

Here are some of the most significant proposals that could affect individuals and business’ tax liability if enacted.

Proposals for individual taxes

Biden’s tax policy includes numerous changes that could make changes to the tax bills of individual taxpayers, particularly those with higher incomes, including the following:

Tax rates. Unlike some of his competitors in the Democratic primary, Biden hasn’t pushed for a wealth tax. He would, however, return the top individual tax rate to 39.6%, the pre-TCJA rate, from 37%. The current rates for all other tax brackets would remain in place.

Social Security taxes. Biden has proposed new payroll taxes on those earning $400,000 or more. Currently, employers and employees pay a combined 12.4% on the first $137,700 (adjusted for inflation) of an employee’s earnings for Social Security tax.

Biden’s approach would create a “donut hole” where income from $137,700 to $400,000 wouldn’t be subject to the tax. The hole would slowly close over time as the lower threshold creeps up closer to the static upper threshold due to inflation.

Capital gains taxes. Taxpayers earning more than $1 million would face higher capital gains taxes. Gains would be taxed at their ordinary income rate, 39.6% — or, effectively, 43.4% when combined with the 3.8% rate for net investment income tax (NIIT). That’s almost twice the current rate of 23.8% (20% capital gains rate plus 3.8% NIIT rate).

Child tax credit. Biden would expand the child tax credit. Currently, the credit is $2,000 for each qualifying child under age 17, with up to $1,400 of it refundable. (A refundable tax credit means you get a refund, even if the credit is more than what you owe.) The child tax credit begins to phase out at $200,000 of modified adjusted gross income for single taxpayers and $400,000 for married couples filing jointly.

Biden would increase the credit at $3,000 per child for children ages 6 to 17 and $3,600 for children under age 6. He also would make it fully refundable. Unlike most of Biden’s tax proposals, this change may have bipartisan support in Congress.

Credits for caregiving. Biden would establish a new tax credit up of to $5,000 for “informal caregivers” of aging family members. In addition, he would expand the child and dependent care credit from a maximum of $3,000 for one qualifying individual or $6,000 per family, to a maximum of $8,000 for one or $16,000 per family. Fifty percent of the credit would be refundable.

Housing tax credits. New refundable housing credits would be available, as well. Biden seeks a credit of up to $15,000 for eligible first-time homebuyers — which would be collected at the time of purchase, rather than requiring taxpayers to wait until they file their tax returns. He also proposes a credit for low-income renters that would keep rent and utility payments to 30% of monthly income.

Limits on itemized deductions. Biden proposes to limit the tax benefit from itemized deductions to 28% for taxpayers whose income exceeds $400,000. In other words, each dollar of allowable itemized deductions could reduce income tax liability by no more than $0.28.

Biden also would restore the “Pease limitation” that the TCJA repealed through 2025. The limitation reduces itemized deductions by 3% for every dollar that a taxpayer’s adjusted gross income (AGI) exceeds a specified income threshold. Biden would adopt a threshold of $400,000.

It’s not all bad news when it comes to itemized deductions. Biden proposes eliminating the TCJA’s $10,000 limit on itemized deductions for state and local taxes, which particularly hurts taxpayers in high-tax states such as California, Illinois and New York.

Retirement saving incentives. Biden favors a refundable tax credit (rather than a deduction) for each dollar contributed to certain retirement accounts, such as 401(k) plans and IRAs. Policy analysts have predicted a credit of around 26%. This reduces the savings benefit for higher-income taxpayers, who now can claim deductions that reduce their AGI for their contributions.

Proposals for business taxes

Businesses have voiced concerns about several aspects of a Biden tax plan, including:

Corporate taxes. Biden’s intention to raise the corporate tax rate probably has garnered the most attention on the business side of the equation. The TCJA reduced the rate from 35% under the Obama administration to 21%. Biden would land on the middle ground, raising it to 28%.

Biden also would impose a 15% alternative minimum tax on reported book income (versus the income reported on corporate tax returns), for corporations with at least $100 million in annual income

Qualified business income (QBI) deduction. Through 2025, taxpayers generally can deduct up to 20% of their QBI from a pass-through entity (sole proprietorship, LLC, partnership or S corporation). Phaseouts begin at higher income thresholds — for 2020, they kick in when taxable income exceeds $163,300 for single taxpayers or $326,600 for married couples) — and other limitations also apply. The QBI deduction reduces the effective top rate for these taxpayers from 37% to 29.6%.

Biden would simplify the deduction by not allowing it for individuals earning more than $400,000. Those taxpayers could see a 10% jump in their tax rate, from 29.6% to the 39.6% top tax rate. He also would eliminate the deduction for rental real estate activities.

Proposals for estate taxes

The TCJA slashed estate taxes, cutting the top rate from 55% to 40% and temporarily doubling the federal gift and estate tax exemption to $10 million (adjusted annually for inflation), through 2025. The 2020 exemption is $11.58 million for individuals and $23.16 million for married couples; for 2021, it’s $11.7 million and $23.4 million, respectively.

Biden has indicated he would like to roll back the exemption to $3.5 million for estate taxes. He would exempt $1 million for the gift tax and impose a top estate tax rate of 45%.

Biden also aims to end the so-called step-up in basis that spares beneficiaries substantial tax liability for capital gains on inherited assets that have appreciated in value, such as stock or a house. Specifically, if a beneficiary sells an inherited asset now, the capital gains tax is based on the asset’s fair market value at the time of the inheritance, rather than the date of the original purchase.

Next steps

Higher-income taxpayers may want to take steps before year end to mitigate the risk that the Georgia run-offs result in a Democrat majority in the Senate and, eventually, hikes in income tax rates. Some strategies higher-income taxpayer may consider if they fear higher rates next year include selling stock this year or accelerating income into 2020 and deferring deductible expenses into 2021.

Conversely, middle-income taxpayers who could benefit from Biden’s proposals may want to consider deferring income and accelerating expenses into 2020. Whether their tax rates drop or remain the same, these measures generally are advantageous.

Roth IRA conversions are another approach that can pay off should tax rates go up in the future. When a traditional IRA is converted, the taxpayer must pay income tax on the fair market value of its assets on the date of transfer. Income tax rates may not be lower than they are now for at least the next four years.

On the estate planning front, this is a good time for high-net-worth individuals to consider intra-family loans, especially in light of the historically low interest rates. The loans don’t affect one’s gift and estate tax exemption and can subsequently be converted to a gift if advisable in a new tax environment. The value of the note on the loan will be frozen in the lender’s estate, and the loan proceeds can grow outside of the estate.

Wealthy individuals also should look into vehicles such as grantor retained annuity trusts and charitable lead annuity trusts. Making trust transfers now, while current exemptions are in effect, can lock in the benefits of those higher exemptions (assuming exemption adjustments aren’t retroactive).

Stay tuned

With the federal budget deficit now over $3 trillion and the need for additional stimulus spending due to the COVID-19 pandemic, new tax laws could face an uphill battle, regardless of Senate control. We’ll keep you up-to-date on the developments that could affect your personal and professional bottom lines.

*The Electoral College will certify the election results by December 14. There also are some ongoing state recounts and legal challenges.

© 2020

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

Business and personal year-end tax planning for 2020 are widely affected by the COVID-19 pandemic. New tax rules have been enacted to mitigate the pandemic’s financial impact, some of which should be considered as part of this year’s planning.

Yeo & Yeo’s Year-end 2020 Tax Guide provides action items that may help you save tax dollars if you act before year-end. These are just some of the steps that can be taken to save taxes. Not all actions may apply in your particular situation, but you or a family member can likely benefit from many of them.

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