GASB 84

The Governmental Accounting Standards Board (GASB) issued Statement No. 95 in May 2020. The main objective of the Statement, Postponement of the Effective Dates of Certain Authoritative Guidance, was to provide temporary relief to governments and other stakeholders due to the COVID-19 pandemic. GASB postponed the effective dates of specific provisions that first became effective or were scheduled to become effective for periods beginning after June 15, 2018.

Specifically, the effective date of Statement No. 84, Fiduciary Activities, was postponed by one year. This Statement’s requirements are now effective for reporting periods beginning after December 15, 2020, and therefore for school districts’ fiscal year 2021, if the district did not opt for early implementation. GASB 84 defines and clarifies fiduciary activities and establishes criteria for identifying those activities, focusing on whether a government controls the assets and the beneficiaries with whom the relationship exists.

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

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

What the Law Says

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

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

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

Case in Point

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

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

No Questions Asked

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

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

Simple Steps

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

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

Prevent It From Happening

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

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

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

Two ways to arrange a deal

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

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

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

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

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

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

Preferences of buyers

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

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

Preferences of sellers

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

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

Obtain professional advice

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

Download our whitepaper, GASB 84: Understanding the Four Types of Fiduciary Funds in School Districts to learn about the standard and the technical accounting changes. The white paper focuses on:

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

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

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

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

Identify yourself

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

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

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

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

Add trust elements

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

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

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

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

Abide by the fundamentals

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

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

What is required

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

“Contemporaneous” means the earlier of:

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

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

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

New deduction for non-itemizers

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

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

2020 and 2021 deductions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The initial implementation date of GASB 87 was for reporting periods beginning after December 15, 2019, which for Michigan school districts would have been implemented for June 30, 2021, fiscal year-ends. However, due to COVID-19, GASB issued Statement No. 95 delaying implementation for many standards, including Statement No. 87, which was delayed for 18 months. Now, the new lease accounting standards must be implemented for Michigan school districts with June 30, 2022 year-ends.

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

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

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

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

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

See the full text of GASB 87.

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

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

Restructuring vs. Chapter 11

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

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

Types of restructuring

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

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

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

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

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

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

Thinking about debt restructuring?

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

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

Performance factors

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

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

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

External conditions

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

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

Various applications

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

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

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

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

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

Tried and true

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

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

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

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

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

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

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

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

Growth triggers often sound like:

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

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

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

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

Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions

A number of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2021. Some stayed the same due to low inflation. And the deduction for business meals has doubled for this year after a new law was enacted at the end of 2020. Here’s a rundown of those that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2021 at $142,800 (up from $137,700 for 2020).

Deductions

Section 179 expensing:
- Limit: $1.05 million (up from $1.04 million for 2020)
- Phaseout: $2.62 million (up from $2.59 million)
Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
- Married filing jointly: $329,800 (up from $326,600)
- Married filing separately: $164,925 (up from $163,300)
- Other filers: $164,900 (up from $163,300)

Business meals

Deduction for eligible business-related food and beverage expenses provided by a restaurant: 100% (up from 50%)

Retirement plans

Employee contributions to 401(k) plans: $19,500 (unchanged from 2020)
Catch-up contributions to 401(k) plans: $6,500 (unchanged)
Employee contributions to SIMPLEs: $13,500 (unchanged)
Catch-up contributions to SIMPLEs: $3,000 (unchanged)
Combined employer/employee contributions to defined contribution plans: $58,000 (up from $57,000)
Maximum compensation used to determine contributions: $290,000 (up from $285,000)
Annual benefit for defined benefit plans: $230,000 (up from $225,000)
Compensation defining a highly compensated employee: $130,000 (unchanged)
Compensation defining a “key” employee: $185,000 (unchanged)

Other employee benefits

Qualified transportation fringe-benefits employee income exclusion: $270 per month (unchanged)
Health Savings Account contributions:
- Individual coverage: $3,600 (up from $3,550)
- Family coverage: $7,200 (up from $7,100)
- Catch-up contribution: $1,000 (unchanged)
Flexible Spending Account contributions:
- Health care: $2,750 (unchanged)
- Dependent care: $5,000 (unchanged)

These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.

Does your business need a loan? Before contacting your bank, it’s important to gather all relevant financial information to prove your business is creditworthy. By anticipating information requests, you can expedite the application process and improve your chances of approval.

Lenders love GAAP

U.S. Generally Accepted Accounting Principles (GAAP) is a collection of specific accounting rules and principles that’s regularly updated by the Financial Accounting Standards Board. Lenders generally prefer GAAP financial statements over those prepared under special purpose frameworks, such as cash- or tax-basis financial statements, because GAAP financials tend to be more transparent and consistent from one business (or reporting period) to the next.

Businesses that follow GAAP use accrual-basis reporting. That is, they record sales as earned and expenses when incurred. Under GAAP, the balance sheet also includes receivables, payables, prepaid assets and accrued expenses. These accounts generally are created only when a business uses accrual accounting.

Dig deeper with financial benchmarks

During the loan application process, lenders may also compute various financial ratios and then compare them over time or against competitors. Common benchmarks used in the underwriting process include:

Profit margin,
Average days in inventory,
Average days in receivables,
Average days in payables,
Current assets to current liabilities,
Debt-to-equity ratio, and
Interest coverage.

Beyond the numbers

Your lenders also may want to evaluate the operations of your business. This meeting provides opportunities to perform the following due diligence procedures:

Touring the facilities,
Meeting with members of your management team,
Collecting additional information, such as copies of marketing materials, pricing lists and key contracts, and
Discussing benchmarking anomalies and major discrepancies between the company’s GAAP financial statements and tax returns.

Also be prepared to explain how you intend to use the loan proceeds for future business operations. For example, you might want to expand your facilities, hire more employees or buy equipment. Or maybe you want a cushion to fund occasional working capital shortfalls.

Ready, set, apply

Need help securing a commercial loan for your business? We can be a valuable resource during the application process.

Over the past year, the importance of leadership at every level of a business has been emphasized. When a crisis such as a pandemic hits, it creates a sort of stress test for not only business owners and executives, but also supervisors of departments and work groups.

Among the most important skill sets of any leader is communication. Can your company’s supervisors communicate both the big and little picture messages that will keep employees reassured, focused and motivated during good times and bad? One factor in their ability to do so is the age of the employees with whom they’re interacting.

Encourage a flexible management style

Right now, there may be four different generations in your workplace: 1) Baby Boomers, born following World War II through the mid-1960s, 2) Generation X, born from the mid-1960s through the late 1970s, 3) Millennials, born from the late 1970s through the mid-1990s, and 4) Generation Z, born in the mid-1990s and beyond. (Birth dates for each generation may vary depending on the source.)

Supervisors need to develop a flexible style when dealing with multiple generations. Millennial and Generation Z employees tend to have different needs and expectations than Baby Boomers and those in Generation X.

For example, Millennials and Gen Z employees generally like to receive more regular feedback about their performances, as well as more frequent public recognition when they’ve done well. Baby Boomers and Gen Xers also enjoy positive performance feedback, but they may expect praise less often and derive personal satisfaction from a job well done without needing to share it with co-workers quite as often.

Employees from different generations also tend to have differing views on company loyalty. Many younger employees harbor greater allegiance to their principles and co-workers than their employers, while many older employees feel a greater sense of fidelity to the business itself. Train your supervisors to keep these and other differences in mind when managing employees across generations.

Recognize the impact of benefits

While financial security is highly valued by every generation, younger employees (Millennials and Gen Z) may prioritize salary less than older workers. What’s often more important to recent generations is a robust, well-rounded benefits package.

Of particular importance is mental health care. Whereas older generations may have historically approached mental health issues with hesitancy, and some still do, younger generations generally prioritize psychological well-being quite openly. Business owners should keep this in mind when designing and adjusting their benefits plans, and supervisors (and HR departments) need to encourage and guide employees to optimally use their benefits.

Promote workplace harmony

To be clear, a person’s generation doesn’t necessarily define him or her, nor is it a perfect predictor of how someone thinks or behaves. Nevertheless, supervisors who are aware of generational differences can develop more flexible, dynamic management styles. Doing so can lead to a more harmonious, productive workplace — and a more profitable business. We can assist you in developing cost-effective strategies for upskilling supervisors and maximizing productivity.

Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one, you may be eligible for a federal tax break.

The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

The EV definition

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.

The IRS provides a list of qualifying vehicles on its website and it recently added a number of models that are eligible. You can access the list here: https://bit.ly/2Yrhg5Z.

Here are some additional points about the plug-in electric vehicle tax credit:

It’s allowed in the year you place the vehicle in service.
The vehicle must be new.
An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

Electric motorcycles

There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.

These are only the basic rules. There may be additional incentives provided by your state. Contact us if you’d like to receive more information about the federal plug-in electric vehicle tax break.

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-and-one-half cents, to 56 cents per mile. As a result, you might claim a lower deduction for vehicle-related expenses for 2021 than you could for 2020 or 2019. This is the second year in a row that the cents-per-mile rate has decreased.

Deducting actual expenses vs. cents-per-mile

In general, businesses can deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is useful if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes. Why? Under current law, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

The 2021 rate

Beginning on January 1, 2021, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 56 cents per mile. It was 57.5 cents for 2020 and 58 cents for 2019.

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. The rate partly reflects the current price of gas, which is down from a year ago. According to AAA Gas Prices, the average nationwide price of a gallon of unleaded regular gas was $2.42 recently, compared with $2.49 a year ago. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.

When this method can’t be used

There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2021 — or claiming them on your 2020 income tax return.

The footnotes to your company’s financial statements give investors and lenders insight into account balances, accounting practices and potential risk factors — knowledge that’s vital to making well-informed business and investment decisions. Here are four important issues that you should cover in your footnote disclosures.

1. Unreported or contingent liabilities

A company’s balance sheet might not reflect all future obligations. Detailed footnotes may reveal, for example, a potentially damaging lawsuit, an IRS inquiry or an environmental claim.

Footnotes also spell out the details of loan terms, warranties, contingent liabilities and leases. Unscrupulous managers may attempt to downplay liabilities to avoid violating loan agreements or admitting financial problems to stakeholders.

2. Related-party transactions

Companies may employ friends and relatives — or give preferential treatment to, or receive it from, related parties. It’s important that footnotes disclose all related parties with whom the company and its management team conduct business.

For example, say, a dress boutique rents retail space from the owner’s uncle at below-market rents, saving roughly $120,000 each year. If the retailer doesn’t disclose that this favorable related-party deal exists, its lenders may mistakenly believe that the business is more profitable than it really is. When the owner’s uncle unexpectedly dies — and the owner’s cousin, who inherits the real estate, raises the rent — the retailer could fall on hard times and the stakeholders could be blindsided by the undisclosed related-party risk.

3. Accounting changes

Footnotes disclose the nature and justification for a change in accounting principle, as well as how that change affects the financial statements. Valid reasons exist to change an accounting method, such as a regulatory mandate. But dishonest managers also can use accounting changes in, say, depreciation or inventory reporting methods to manipulate financial results.

4. Significant events

Disclosures may forewarn stakeholders that a company recently lost a major customer or will be subject to stricter regulatory oversight in the coming year. Footnotes disclose significant events that could materially impact future earnings or impair business value. But dishonest managers may overlook or downplay significant events to preserve the company’s credit standing.

Too much, too little or just right?

In recent years, the Financial Accounting Standards Board has been eliminating and simplifying footnote disclosures. While disclosure “overload” can be burdensome, it’s important that companies don’t cut back too much. Transparency is key to effective corporate governance.

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 11 of Everyday Business, host Jacob Sopczynski, principal in the Flint office, is joined by Randy Howard, CPA, and Zaher Basha, CPA, CM&AA, from the Auburn Hills office.

Listen in as Jacob, Randy, and Zaher discuss the tax effects of cryptocurrency in the second of our two-part series on blockchain.

When do cryptocurrencies become taxable (1:11)
Transferring cryptocurrency and its effects (3:00)
Being compensated through cryptocurrency (4:42)
Nontaxable cryptocurrency transactions (5:50)
Is buying and trading in cryptocurrency taxable? (7:04)
Reporting (8:27)
Cost to cost tracking (10:10)
Penalties for not reporting cryptocurrency (14:40)
Foreign reporting (15:14)
How TCJA changed the taxation of cryptocurrency (16:20)
Tax considerations with forking (17:00)
Credit cards that give cash back via bitcoin (17:48)
Reporting and what records should be maintained when paying employees? (18:23)

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.

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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.