Estimated Tax Payments: The Deadline for the First 2021 Installment is Coming Up

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

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

Four due dates

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

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

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

The annualized method

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

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

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

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

Stay on track

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

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

What is it?

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

Employees can learn:

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

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

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

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

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

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

The pass-through deduction

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

Reporting responsibilities

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

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

Self-employment taxes

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

Quarterly estimated payments

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

Home office deductions

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

Health insurance expenses

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

Keeping records

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

Saving for retirement

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

We can help

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

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

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

Deduction For Non-Itemizers

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

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

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

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

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

Bigger Breaks For Itemizers

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

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

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

Corporate Charitable Deductions

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

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

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

Make Hay

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

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

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

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

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

Fixed vs. variable costs

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

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

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

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

Breakeven formula

The basic formula for calculating the breakeven point is:

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

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

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

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

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

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

Lowering your breakeven

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

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

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

5 primary objectives

The adjustments address five primary objectives:

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

What’s ahead

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

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

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

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

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

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

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

“Stretch IRAs” have been partially eliminated

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

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

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

More changes may be ahead

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

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

The PPP in a nutshell

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

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

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

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

The impetus for the new changes

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

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

The changes

The announcement outlined five reforms:

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

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

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

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

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

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

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

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

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

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

Stay tuned

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

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

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

Definition of “analytics”

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

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

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

4 steps

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

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

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

A win-win for everyone

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

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

Key differences

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

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

Pluses and minuses

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

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

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

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

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

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

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

Not for everyone

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

Additional PPP guidance featured below:

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

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

Other changes the Biden administration announced plans for include:

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

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

Additional PPP Guidance

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

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

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

Delays in Second Draw PPP Loan Applications

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

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

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

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

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

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

Who is eligible?

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

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

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

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

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

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

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

What’s the contribution limit?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Who qualifies?

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

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

What can you deduct?

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

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

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

How does the simpler method work?

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

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

Can I switch?

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

What if I sell the home?

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

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

Do employees qualify?

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

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

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

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

Segregate Duties

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

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

Monitor Vendors

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

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

Perform a Cybersecurity Assessment

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

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

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

Use Other Tools

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

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

Pay Attention

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

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

The basics

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

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

Balance sheet

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

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

Statement of cash flows

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

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

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

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

Get it right

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

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

Starting Out

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

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

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

Middle Age

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

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

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

Senior Years

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

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

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

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

Gain peace of mind

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

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

1. Clean Up the Financials

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

Underperforming segments,
Nonoperating assets, and
Shareholder loans.

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

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

2. Highlight Strengths and Opportunities

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

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

3. Downplay (or Eliminate) Risks

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

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

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

4. Prepare a Comprehensive Offer Package

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

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

5. Review Deal Terms

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

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

6. Hire a Valuator

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

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

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

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

Planning for a Sale

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