Unusual Year Steers Year-end Tax Strategies

Like so many things this year, the recommended practices for your annual end-of-the-year tax planning reflect the COVID-19 pandemic and its far-flung effects. The economic impact, as well as federal relief packages like the CARES Act, may render some tried-and-true strategies for reducing your income tax liability less advisable for 2020.

Adding to the uncertainty is the outcome of the presidential election. It could result in new federal tax legislation that trims or even repeals the Tax Cuts and Jobs Act (TCJA). Regardless of the election results, here are some year-end tax planning issues and actions to consider.

Income acceleration

One common tactic to reduce taxable income has been to defer income into the next year. But this practice is advisable only when you don’t expect to land in a higher income tax bracket in the following year. Current tax rates are at their lowest in some time, but they may not stay there for high-income individuals.

It might be wise to accelerate income to take advantage of the current low rates while they remain applicable. That’s especially the case if you’re among the millions of Americans who expect to have less income this year — for example, because of a job loss or because the CARES Act excused you from taking required minimum distributions (RMDs) from retirement accounts for 2020.

Several routes to accelerate income may be available. You can, for example, realize deferred compensation, exercise stock options, recognize capital gains or convert a traditional IRA into a Roth IRA (see below for more information on conversions).

This approach also could help taxpayers who are eligible for the qualified business income (QBI) deduction to maximize their deductions. The QBI deduction is scheduled to end after 2025 and may not survive that long depending on the results of the election, so eligible taxpayers may want to enjoy it while they can.

Roth IRA conversions

If you’ve been thinking about converting a pre-tax traditional IRA to an after-tax Roth IRA, this may be the time to do so. Roth IRAs don’t have RMDs, which translates to longer tax-free growth and distributions generally will be tax-free.

The drawback for most people is that you have to pay income tax on the fair market value of the converted assets. But if your IRA contains securities that have declined in value or you’re in a lower tax bracket this year, your tax bill on the conversion probably will be smaller than it would otherwise. And, if the stocks bounce back, the increase in value would be tax-free.

Charitable giving

The CARES Act temporarily raises the limit on charitable deductions for cash contributions to public charities from 60% of your adjusted gross income (AGI) to 100%. If you’re charitably inclined, you could leverage this provision to cut or completely offset your taxable income for 2020.

Note, too, that you can reap the full benefit by “stacking” cash contributions with gifts that are subject to unchanged limits. For example, donations of appreciated securities are subject to limits of 20% or 30% of AGI, depending on various factors. You could donate securities you’ve held for more than one year (that is, long-term capital gain assets) in an amount equal to 30% of your AGI to avoid any capital gains tax on the securities. And then, you could donate 70% of your AGI in cash to public charities.

Bear in mind, though, that accelerating charitable donations to take advantage of this opportunity could be less lucrative if you’re in a lower tax bracket than normal this year. The resulting deductions would be worth more in future years when you’re in a higher tax bracket (or if you’re in the same bracket, but the rates have gone up under a new tax law).

If you’re just looking to maximize the value of your usual charitable deductions, and you itemize deductions on your tax return, think about “bunching” your contributions, especially if your income is lower. If you normally make your donations in December, you can push the contributions into January to bunch them with your donations next December and ensure you exceed the standard deduction for 2021. This will allow you to claim the full amount as a charitable deduction. The deduction will be worth more if you’re subject to higher tax rates for 2021.

Taxpayers age 70½ or older can make tax-free qualified charitable distributions (QCDs) of up to $100,000 per year from their IRAs to public charities (donor-advised funds are excluded). While QCDs aren’t deductible like other charitable contributions, they nonetheless have the potential to reduce your tax liability. The QCD amount is excluded from AGI, which may, in turn, increase the benefit of certain itemized deductions and, consequently, lower your tax.

There’s a “but,” though, due to the CARES Act’s waiver of annual RMDs for 2020. If you opt to skip your 2020 RMD, it may make more sense to hold off on a QCD until 2021, when it can reduce your taxable RMD and, in turn, your 2021 taxable income.

Loss harvesting

Loss harvesting gives you a way to offset any taxable gains. Selling poorly performing investments before year-end lets you reduce realized gains on a dollar-for-dollar basis. Should you end up with excess losses, you generally can apply up to $3,000 against your ordinary income and carry forward the balance to future tax years.

You could benefit even more if you donate the proceeds from your sale of a depreciated investment to charity. Not only can you offset realized gains, you also can claim a charitable contribution deduction for the cash donation (assuming you itemize). Take care, though, to avoid triggering the “wash sale” rule, which disallows a capital loss if you purchase the same or “substantially identical” security 30 days before or after the sale.

Tread carefully

Each of these strategies comes with both pros and cons that require careful analysis and balancing. We can help you determine which approaches will work best to minimize your income tax liability for the short and long term.

The due date to file a 2019 Report of Foreign Bank & Account Report (FBAR) has been extended from October 15, 2020, to October 31, 2020.

On October 14, the Financial Crimes Enforcement Network (FinCEN) issued a notice advising taxpayers that the FBAR deadline was extended to December 31, 2020, for filers affected by recent natural disasters (the California and Oregon wildfires, Hurricanes Laura and Sally, and the Iowa Derecho). The agency then posted a message on its Bank Secrecy Act e-filing website that incorrectly stated the December 31 deadline was for all filers.

Because some FBAR filers may have missed the October 15 deadline by relying on this message, the agency extended the deadline.

Please contact Yeo & Yeo if you need assistance with your FBAR filing.

As year-end draws near, many businesses will be not only be generating their fourth quarter financial statements, but also looking back on the entire year’s financials. And what a year it’s been. The COVID-19 pandemic and resulting economic fallout have likely affected your sales and expenses, and you’ve probably noticed the impact on both. However, don’t overlook the importance of inventory management and its impact on your financial statements.

Cut back as necessary

Carrying too much inventory can reflect poorly on a business as the value of surplus items drops throughout the year. In turn, your financial statements won’t look as good as they could if they report a substantial amount of unsold goods.

Taking stock and perhaps cutting back on excess inventory reduces interest and storage costs. Doing so also improves your ability to detect fraud and theft. Yet another benefit is that, if you conduct inventory checks regularly, your processes should evolve over time — increasing your capacity to track what’s in stock, what’s selling and what’s not.

One improvement to perhaps budget for here: upgraded inventory tracking and ordering software. Newer applications can help you better forecast demand, minimize overstocking, and share data with suppliers to improve accuracy and efficiency.

Make tough decisions

If yours is a more service-oriented business, you can apply a similar approach. Check into whether you’re “overstocking” on services that just aren’t adding enough revenue to the bottom line anymore. Keeping infrastructure and, yes, even employees in place that aren’t contributing to profitability is much like leaving items on the shelves that aren’t selling.

Making improvements may require some tough calls. Sadly, this probably wouldn’t be the first time you’ve had to make difficult decisions in recent months. Many business owners have had to lay off or furlough employees and substantively alter how they deliver their products or services during the COVID-19 crisis.

You might have long-time customers to whom you provide certain services that just aren’t profitable anymore. If your company might start losing money on these customers, you may have to discontinue the services and sacrifice their business.

You can ease difficult transitions like this by referring customers to another, reputable service provider. Meanwhile, your business should be looking to either find new service areas to generate revenue or expand existing services to more robust market segments.

Take a hard look

As of this writing, the economy appears to be slowly recovering for most (though not all) industries. An environment like this means every dollar is precious and any type of waste or redundancy is even more dangerous.

Take a hard look at your approach to inventory management, or how you’re managing the services you provide, to ensure you’re in step with the times. We can help your business implement cost-effective inventory tracking processes, as well as assist you in gaining key insights from your financial statements.

If you invest in mutual funds, be aware of some potential pitfalls involved in buying and selling shares.

Surprise sales

You may already have made taxable “sales” of part of your mutual fund investment without knowing it.

One way this can happen is if your mutual fund allows you to write checks against your fund investment. Every time you write a check against your mutual fund account, you’ve made a partial sale of your interest in the fund. Thus, except for funds such as money market funds, for which share value remains constant, you may have taxable gain (or a deductible loss) when you write a check. And each such sale is a separate transaction that must be reported on your tax return.

Here’s another way you may unexpectedly make a taxable sale. If your mutual fund sponsor allows you to make changes in the way your money is invested — for instance, lets you switch from one fund to another fund — making that switch is treated as a taxable sale of your shares in the first fund.

Recordkeeping

Carefully save all the statements that the fund sends you — not only official tax statements, such as Forms 1099-DIV, but the confirmations the fund sends you when you buy or sell shares or when dividends are reinvested in new shares. Unless you keep these records, it may be difficult to prove how much you paid for the shares, and thus, you won’t be able to establish the amount of gain that’s subject to tax (or the amount of loss you can deduct) when you sell.

You also need to keep these records to prove how long you’ve held your shares if you want to take advantage of favorable long-term capital gain tax rates. (If you get a year-end statement that lists all your transactions for the year, you can just keep that and discard quarterly or other interim statements. But save anything that specifically says it contains tax information.)

Recordkeeping is simplified by rules that require funds to report the customer’s basis in shares sold and whether any gain or loss is short-term or long-term. This is mandatory for mutual fund shares acquired after 2011, and some funds will provide this to shareholders for shares they acquired earlier, if the fund has the information.

Timing purchases and sales

If you’re planning to invest in a mutual fund, there are some important tax consequences to take into account in timing the investment. For instance, an investment shortly before payment of a dividend is something you should generally try to avoid. Your receipt of the dividend (even if reinvested in additional shares) will be treated as income and increase your tax liability. If you’re planning a sale of any of your mutual fund shares near year-end, you should weigh the tax and the non-tax consequences in the current year versus a sale in the next year.

Identify shares you sell

If you sell fewer than all of the shares that you hold in the same mutual fund, there are complicated rules for identifying which shares you’ve sold. The proper application of these rules can reduce the amount of your taxable gain or qualify the gain for favorable long-term capital gain treatment.

If your small business is planning for payroll next year, be aware that the “Social Security wage base” is increasing.

The Social Security Administration recently announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021.

For 2021, the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare).

For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. The tax rate for Medicare is 1.45% each for the employee and employer (2.9% total). There’s no wage base limit for Medicare tax so all covered wages are subject to Medicare tax.

In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year.

Employees working more than one job

You may have employees who work for your business and who also have a second job. They may ask if you can stop withholding Social Security taxes at a certain point in the year because they’ve already reached the Social Security wage base amount. Unfortunately, you generally can’t stop the withholding, but the employees will get a credit on their tax returns for any excess withheld.

Older employees

If your business has older employees, they may have to deal with the “retirement earnings test.” It remains in effect for individuals below normal retirement age (age 65 to 67 depending on the year of birth) who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020).

For working individuals collecting benefits who reach normal retirement age in 2021, $1 in benefits will be withheld for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the month that the individual reaches normal retirement age. After that month, there’s no limit on earnings.

Contact us if you have questions. We can assist you with the details of payroll taxes and keep you in compliance with payroll laws and regulations.

A conflict of interest could impair your auditor’s objectivity and integrity and potentially compromise you company’s financial statements. That’s why it’s important to identify and manage potential conflicts of interest.

What is a conflict of interest?

According to the America Institute of Certified Public Accountants (AICPA), “A conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity.” Companies should be on the lookout for potential conflicts when:

Hiring an external auditor,
Upgrading the level of assurance from a compilation or review to an audit, and
Using the auditor for a non-audit purposes, such as investment advisory services and human resource consulting.

Determining whether a conflict of interest exists requires an analysis of facts. Some conflicts may be obvious, while others may require in-depth scrutiny.

For example, if an auditor recommends an accounting software to an audit client and receives a commission from the software provider, a conflict of interest likely exists. Why? While the software may suit the company’s needs, the payment of a commission calls into question the auditor’s motivation in making the recommendation. That’s why the AICPA prohibits an audit firm from accepting commissions from a third party when it involves a company the firm audits.

Now consider a situation in which a company approaches an audit firm to provide assistance in a legal dispute with another company that’s an existing audit client. Here, given the inside knowledge the audit firm possesses of the company it audits, a conflict of interest likely exists. The audit firm can’t serve both parties to the lawsuit and comply with the AICPA’s ethical and professional standards.

How can auditors prevent potential conflicts?

AICPA standards require audit firms to be vigilant about avoiding potential conflicts. If a potential conflict is unearthed, audit firms have the following options:

Seek guidance from legal counsel or a professional body on the best path forward,
Disclose the conflict and secure consent from all parties to proceed,
Segregate responsibilities within the firm to avoid the potential for conflict, and/or
Decline or withdraw from the engagement that’s the source of the conflict.

Ask your auditors about the mechanisms the firm has put in place to identify and manage potential conflicts of interest before and during an engagement. For example, partners and staff members are usually required to complete annual compliance-related questionnaires and participate in education programs that cover conflicts of interest. Firms should monitor conflicts regularly, because circumstances may change over time, for example, due to employee turnover or M&A activity.

For more information

Conflicts of interest are one of the gray areas in auditing. But it’s an issue our firm takes seriously and proactively safeguards against. If you suspect that a conflict exists, contact us to discuss the matter and determine the most appropriate way to handle it.

The U.S. Small Business Administration released a new, simplified loan forgiveness application for businesses that took Paycheck Protection Program loans of $50,000 or less.

Borrowers are exempt from reductions in loan forgiveness amounts based on reductions in full-time equivalent employees or reductions in employee salaries or wages. Most of the form involves certifications that the borrower must initial. The form does not require reporting amounts; however, borrowers still must submit documentation to their lenders.

Access the instructions for completing the PPP Loan Forgiveness Application Form 3508S.

Is your PPP loan between $50,000 and $150,000?

Congress may pass the PPP Small Business Forgiveness Act, which would forgive all loans under $150,000 with a one-page attestation form from the borrower. While we wait for Congress, we recommend that businesses with loans between $50,000 and $150,000 should wait to apply for loan forgiveness.

Reach out to your Yeo & Yeo professional about your situation. Visit Yeo & Yeo’s COVID-19 Resource Center for ongoing updates and resources available to assist you further.

During the COVID-19 pandemic, the legal community has recognized that a physical presence may not necessarily be required in various legal situations, such as signing documents and testifying in court. This change has generally reduced travel costs and professional fees, while improving efficiency. Instead of paying for plane tickets and lodging and transferring boxes of documents, financial professionals may appear on a computer screen and look through documents with file-sharing tools.

This trend could potentially continue even after COVID-19 is contained. But transitioning from in-person to remote work arrangements may require professionals to hone new technology and communication skills. Here’s how to help prepare for the new normal.

Going Virtual

The U.S. Tax Court closed its building in March, though judges have continued to issue opinions throughout the first half of the year. In May, the Tax Court adopted procedures for conducting remote proceedings amid the pandemic. Trial sessions are expected to go remote this fall using Zoom for Government.

In accordance with recently issued Tax Court procedures, the parties will receive a court order that provides instructions on how to access the remote proceeding, including dial-in information, the meeting ID and a password. The court recommends that the parties log on and test their connections at least 30 minutes before the proceeding’s scheduled time. Like most court sessions, remote proceedings will be open to the public in real-time.

Across the country, many other courts have announced similar plans through year end. In fact, the U.S. court system now has funding specifically for instating video conferencing technology under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Key Difference

Remote trials are part of a larger trend toward virtual work arrangements. But the transition from in-person to virtual testimony hasn’t been as seamless as for virtual meetings or e-signatures.

We’ve all witnessed unexpected disruptions during virtual business meetings, such as rustling papers, crosstalk and faltering Internet connections. However, people tend to be more forgiving in informal settings. Trials and depositions are more formal. There’s only one chance to make a good impression during a hearing, and distractions can quickly discredit an expert witness’s professionalism and credibility.

An expert’s conclusions also may be muddied if technology malfunctions. For example, a judge may lose interest or patience if there are delays due to buffering during an expert’s testimony.

Supplement Remote Testimony with Written Reports

The move to virtual testimony underscores the importance of having a comprehensive written report that explains how the expert arrived at his or her conclusions. In U.S. Tax Court, written reports are typically used in lieu of direct testimony, but cross examination testimony may be done remotely using Zoom for Government videoconferencing technology.Other courts may give expert witnesses the option to submit written reports. In these situations, some may be accustomed to relying on only oral testimony to save costs and introduce an element of surprise into court proceedings. However, this strategy often backfires.A comprehensive written report gives the trier of fact a resource to refer to during deliberations — which, in larger cases, may occur days or weeks after the expert testifies. The report typically explains:

What the financial expert was hired to evaluate,

Internal and external data sources that the expert analyzed,

The analyses that the expert performed,

All relevant conclusions, and

Any restrictions or limiting conditions that may apply.

In some cases, the expert may choose to highlight potential weaknesses and subjective assumptions used in his or her analysis. This can help diffuse arguments made by opposing counsel during cross examination. It can also bolster the expert’s perceived objectivity by showing that he or she considered contrary viewpoints.

Best Practices

To avoid potential pitfalls, consider conducting test runs and using remote technology and collaboration tools during the pretrial phase to work out any kinks before the hearing begins. Attorneys and their professionals may need to troubleshoot existing software and audio quality, install updates, and/or invest in new software and equipment, such as cameras, microphones and remote headsets.

When preparing for a remote trial, consider these tips:

Remote sharing of demonstrative exhibits, if allowed, should be practiced before trial to avoid unnecessary delays.

Be sure that the platforms you’re using sync with courtroom technology.

Silence all sounds on your devices — like email and instant messaging alerts — during the hearing. Even buzzing from a cellphone can cause the expert to lose his or her train of thought.

Pause before starting to speak to accommodate any lags in remote audio technology. You don’t want to talk over other participants, especially the judge.

Always use the mute button when you’re not speaking.

A general rule of thumb when using technology is: Expect the unexpected. Anticipate possible glitches and develop a backup plan. For example, you and your expert should have a secondary source of Internet service (like a hot spot on your cell phone), a backup battery (in case of power outages) and alternate hardware devices (such as laptops, tablets, smart phones, microphones and cameras) that can be powered up in a pinch.

Audio vs. Video Testimony

Though some judges prefer telephone or audioconferences, the use of up-to-date videoconferencing technology can help retain the intangible aspects of in-person testimony. For example, high-definition video-conferencing equipment can detect slight physical changes, such as smirks, eyerolls, wrinkled brows and even beads of sweat. These nonverbal cues may be critical to assessing an expert’s honesty and reliability, especially during cross examination.

When preparing for a video presentation, encourage your expert to maintain “eye-contact” with the camera, rather than reading entirely from his or her notes. This means looking directly into the camera — not the computer screen — which can take some getting used to.

It’s also important to evaluate the background that will appear behind your expert as he or she testifies. The background should look professional, even if the expert works from a home office. Be sure it’s free from distractions, such as family pets, doorbells, clutter and personal items. Heavy backlighting and windows can become distracting, too.

Changing Times

It’s unclear how long the pandemic will last. But, in legal proceedings, the show must go on. Though the legal industry has close ties to tradition and legacy processes, the pandemic may prompt courts to consider the benefits — to health, safety and efficiency — that remote technology offers. After the dust settles, remote legal processes and expert relationships may become commonplace.

It’s the fourth quarter of 2020, and the COVID-19 pandemic continues to affect the construction industry. Project delays, work stoppages, supply chain disruption and lost productivity remain a reality for many contractors. All of this makes planning difficult, particularly when drafting project contracts. To protect your business from liability in these uncertain times, be sure to include the following clauses in project contracts.

Force Majeure for Infectious Disease

A force majeure clause is a contract provision that excuses nonperformance or extends timelines when a natural or unavoidable catastrophe beyond the contractor’s control (an “act of God”) delays a project. Whenever possible, include a force majeure clause in contracts that specifically names COVID-19 and other key words such as “infectious disease outbreak,” “quarantine,” “epidemic” and “pandemic.”

It’s important to note that some legal professionals worry that a COVID-19-related claim, on its own, won’t satisfy the standard force majeure test of unforeseeability. For this reason, the force majeure definition in your contracts should be amended to include situations where a COVID-19 outbreak’s impact on your workforce and supply chains reaches a threshold that’s considered “unforeseeable.”

Also keep in mind that two of the most widely used contract forms — the American Institute of Architects (AIA) A201-2017 and ConsensusDocs 200 — don’t contain force majeure clauses. Instead, they have delay clauses listing occurrences in which a contractor may be entitled to a time extension. The ConsensusDocs 200 agreement does list epidemics as a justifiable delay.

Price Acceleration

Now more than ever, you need to anticipate how supply chain disruption can result in bottlenecked pipelines and unpredictable price hikes. Contracts should include a price acceleration provision that enables you to adjust the contract price to reflect actual costs if market prices increase over the course of the project.

When bidding and negotiating a contract, include a backup plan of two or more alternative supply sources and information on acceptable replacement items. Because pandemic-related border restrictions could impact supply chains, also determine alternative shipping and delivery routes (as well as any associated additional expenses) and specify which party would be responsible for absorbing those costs. Consider asking for a deposit to buy and store materials before the project begins.

Change-in-Law

In some circumstances, a change-in-law provision can be more useful than a force majeure clause. But be sure to define “law” to include not just local, state and federal laws and regulations, but also acts of government officials such as stay-at-home orders. It’s also a good idea to add governmental recommendations and guidance under the definition.

Health, Safety and Environmental Obligations

Costs are likely to rise as more pandemic-related requirements — including social distancing of work crews, temperature checks, additional personal protective equipment and installation of sanitizing stations — are included in project contracts.

When calculating costs, make sure you’re doing everything to comply with Centers for Disease Control guidelines and those of other agencies, such as your state’s or county’s health department. They may require you to have onsite safety officers and follow other protocols. Your contract should specify who pays for pandemic-related safety equipment or, if both parties are partly responsible, how the costs are to be allocated.

Assurances of Financing

Depending on how hard their city or region has been hit by COVID-19 shutdowns, project owners and developers may have difficulty qualifying for financing. Most form contracts require owners to provide documentation proving they have enough funds to complete the project. Most contracts also include a provision allowing contractors to request financing documentation. Be sure to exercise this right if you suspect a project owner’s financing is in jeopardy.

Insurance Requirements

In addition to fortifying your contracts, ensure that you and your subcontractors, suppliers and consultants are covered for possible COVID-19-related lawsuits and claims. Carefully review current insurance policies (including business interruption coverage), bonds, guarantees and security agreements to confirm liability coverage related to outbreaks and infectious disease.

Long-term impact

The COVID-19 pandemic is expected to have a long-term impact on most businesses, including construction companies. Therefore, you need to continually anticipate how the ongoing crisis will affect the language of your contractual arrangements. Engage a qualified attorney to review your contracts or create new ones, and work with a CPA to assess the cost impact of any changes.

As COVID-19 forces businesses to rely on online systems to operate, ransomware attacks are on the rise. On October 1, the U.S. Department of Treasury issued an advisory statement to victims who attempt to make ransomware payments.

According to the Treasury, paying cybercriminals encourages future attacks and does not guarantee that the victim will regain access to stolen data. Therefore, victims who pay the ransom to get their data back could face significant fines from the Treasury’s Office of Foreign Assets Control (OFAC).

OFAC warned that consultants and insurers who assist organizations as intermediaries to help pay a ransom could also be fined. Under the authority of the International Emergency Economic Powers Act (IEEPA) or the Trading with the Enemy Act (TWEA), U.S. persons are prohibited from engaging in transactions, directly or indirectly, with individuals or entities on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List).

What to Do If You’re Attacked

OFAC encourages organizations to evaluate their compliance programs and policies to decrease the chance of sanctions-related violations. If a company is attacked, OFAC considers their self-initiated, timely, and complete report of the attack to law enforcement to be a significant mitigating factor when determining appropriate fines and enforcement. Victims are asked to contact OFAC immediately following a ransomware attack.

U.S. Department of the Treasury’s Office of Foreign Assets Control
- Sanctions Compliance and Evaluation Division: ofac_feedback@treasury.gov; (202) 622-2490 / (800) 540-6322
- Licensing Division: https://licensing.ofac.treas.gov/; (202) 622-2480

How Can I Protect My Business?

Typically, ransomware takes over a victim’s machine and demands money in exchange for access to stolen information. The best way to prevent ransomware attacks is to create offline data copies, known as air gap backups.

Yeo & Yeo Technology (YYTECH) can help develop and implement cybersecurity solutions for your organization. Their team of industry-certified engineers and technicians can optimize your IT infrastructure, creating layers of protection against hackers.

Learn more about how YYTECH network management can keep your data safe.

It’s been a year like no other. The sudden impact of the COVID-19 pandemic in March forced every business owner — ready or not — to execute his or her disaster response plan.

So, how did yours do? Although it may still be a little early to do a complete assessment of what went right and wrong during the crisis, you can take a quick look back right now while the experience is still fresh in your mind.

Get specific

When devising a disaster response plan, brainstorm as many scenarios as possible that could affect your company. What weather-related, environmental and socio-political threats do you face? Obviously, you can now add “pandemic” to the list.

The operative word, however, is “your.” Every company faces distinctive threats related to its industry, size, location(s), and products or services. Identify these as specifically as possible, based on what you’ve learned.

There are some constants for nearly every plan. Seek out alternative suppliers who could fill in for your current ones if necessary. Fortify your IT assets and functionality with enhanced recovery and security capabilities.

Communicate optimally

Another critical factor during and after a crisis is communication, both internal and external. Review whether and how your business was able to communicate in the initial months of the pandemic.

You and most of your management team probably needed to concentrate on maintaining or restoring operations. Who communicated with employees and other stakeholders to keep them abreast of your response and recovery progress? Typically, these parties include:

Staff members and their families,
Customers,
Suppliers,
Banks and other financial stakeholders, and
Local authorities, first responders and community leaders (as appropriate).

Look into the communication channels that were used — such as voicemail, text messaging, email, website postings and social media. Which were most and least effective? Would some type of new technology enable your business to communicate better?

Revisit and update

If the events of this past spring illustrate anything, it’s that companies can’t create a disaster response plan and toss it on a shelf. Revisit the plan at least annually, looking for adjustments and new risk factors.

You’ll also want to keep the plan clear in the minds of your employees. Be sure that everyone — including new hires — knows exactly what to do by spelling out the communication channels, contacts and procedures you’ll use in the event of a disaster. Everyone should sign a written confirmation that they’ve read the plan’s details, either when hired or when the plan is substantially updated.

In addition, go over disaster response measures during company meetings once or twice a year. You might even want to hold live drills to give staff members a chance to practice their roles and responsibilities.

Heed the lessons

For years, advisors urged business owners to prepare for disasters or else. This year we got the “or else.” Despite the hardships and continuing challenges, however, the lessons being learned are invaluable. Please contact us to discuss ways to manage costs and maintain profitability during these difficult times.

October 15 is the deadline for individual taxpayers who extended their 2019 tax returns. (The original April 15 filing deadline was extended this year to July 15 due to the COVID-19 pandemic.) If you’re finally done filing last year’s return, you might wonder: Which tax records can you toss once you’re done? Now is a good time to go through old tax records and see what you can discard.

The general rules

At minimum, you should keep tax records for as long as the IRS has the ability to audit your tax return or assess additional taxes, which generally is three years after you file your return. This means you potentially can get rid of most records related to tax returns for 2016 and earlier years.

However, the statute of limitations extends to six years for taxpayers who understate their adjusted gross income (AGI) by more than 25%. What constitutes an understatement may go beyond simply not reporting items of income. So a general rule of thumb is to save tax records for six years from filing, just to be safe.

Keep some records longer

You need to hang on to some tax-related records beyond the statute of limitations. For example:

Keep the tax returns themselves indefinitely, so you can prove to the IRS that you actually filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or if you filed a fraudulent one.)
Retain W-2 forms until you begin receiving Social Security benefits. Questions might arise regarding your work record or earnings for a particular year, and your W-2 helps provide the documentation needed.
Keep records related to real estate or investments for as long as you own the assets, plus at least three years after you sell them and report the sales on your tax return (or six years if you want extra protection).
Keep records associated with retirement accounts until you’ve depleted the accounts and reported the last withdrawal on your tax return, plus three (or six) years.

Other reasons to retain records

Keep in mind that these are the federal tax record retention guidelines. Your state and local tax record requirements may differ. In addition, lenders, co-op boards and other private parties may require you to produce copies of your tax returns as a condition to lending money, approving a purchase or otherwise doing business with you.

If your nonprofit organization receives any federal funds, you are probably familiar with the requirements that come with them concerning the acquisition, maintenance, tracking, and disposition of any property and equipment purchased with those funds. It is a good idea for organizations to follow similar requirements, regardless of the type of funding used to purchase them.

A best practice is to have a property/equipment tracking document that is updated for these purchases, with information such as serial number, cost, location, condition, funding source used for the purchase, and tag number. A simple inventory can be done annually to ensure these items remain in the custody of the nonprofit.

Most nonprofit organizations are aware that written promises to give need to be evaluated for recognition on the organization’s financial statements. However, did you know that verbal pledges need to be considered as well?

Verbal promises to give are more common than one might think. Development staff, the CEO, board members, and others undoubtedly have many connections in the community, and some of the most important ones are with the nonprofit’s donor base. The nonprofit might have close relationships with major donors who are invested in the organization’s mission and are an integral part of current programming and plans alike. It is not uncommon to secure verbal funding commitments with these donors while out for dinner, at a special fundraising event, or on the golf course. One of the more common examples is when the nonprofit seeks to obtain commitments from a small group of private donors for a substantial part of the overall target of a capital campaign when assessing the viability of the target. It is essential to evaluate these pledges for inclusion in the financial statements.

Accounting standards specifically mention oral agreements as an acceptable form of a promise to give. However, the agreement must meet the criteria to record the contribution and have sufficient evidence in verifiable documentation that a promise was made and received. Documentation might include tape recordings or written registers, or a subsequent award letter, email, or pledge card that would permit verification.

It is important to keep in mind that the verbal pledge would follow the same criteria for recording written promises to give. Special consideration should be given when evaluating verbal promises, such as the donor’s giving history with the organization, current relationship, and collectability of the contribution, in addition to ensuring it is free of conditions before recording on the financial statements. It is also important to distinguish between an unconditional promise to give and an intention to give – the latter of which generally implies there are conditions upon making the contribution that would prohibit the nonprofit from recognizing the revenue until those conditions have been met. According to current standards, if the communication has any ambiguity of the intention, it is to be “considered an unconditional promise to give if it indicates an unconditional intention to give that is legally enforceable.”

Nonprofit organizations should ensure their promises to give are accurate at year-end by reflecting not only on written promises, but verbal ones as well. A best practice is to follow up on any verbal commitments and try to secure subsequent written confirmation, which your auditor will undoubtedly want to see. Obtaining written confirmation will help you meet the ‘verifiable documentation’ requirement. Auditors might learn about these commitments through inquiry, reading of board minutes, or other means and will seek to follow up on possible unrecognized pledges at year-end. By ensuring your contributions receivable are complete and accurate, you will avoid potential audit findings and ensure your financial statements are fairly presented.

Are you wondering if the passive activity loss rules affect business ventures you’re engaged in — or might engage in?

If the ventures are passive activities, the passive activity loss rules prevent you from deducting expenses that are generated by them in excess of their income. You can’t deduct the excess expenses (losses) against earned income or against other nonpassive income. Nonpassive income for this purpose includes interest, dividends, annuities, royalties, gains and losses from most property dispositions, and income from certain oil and gas property interests. So you can’t deduct passive losses against those income items either.

Any losses that you can’t use aren’t lost. Instead, they’re carried forward, indefinitely, to tax years in which your passive activities generate enough income to absorb the losses. To the extent your passive losses from an activity aren’t used up in this way, you’ll be allowed to use them in the tax year in which you dispose of your interest in the activity in a fully taxable transaction, or in the tax year you die.

Passive vs. material

Passive activities are trades, businesses or income-producing activities in which you don’t “materially participate.” The passive activity loss rules also apply to any items passed through to you by partnerships in which you’re a partner, or by S corporations in which you’re a shareholder. This means that any losses passed through to you by partnerships or S corporations will be treated as passive, unless the activities aren’t passive for you.

For example, let’s say that in addition to your regular professional job, you’re a limited partner in a partnership that cleans offices. Or perhaps you’re a shareholder in an S corp that operates a manufacturing business (but you don’t participate in the operations).

If you don’t materially participate in the partnership or S corporation, those activities are passive. On the other hand, if you “materially participate,” the activities aren’t passive (except for rental activities, discussed below), and the passive activity rules won’t apply to the losses. To materially participate, you must be involved in the operations on a regular, continuous and substantial basis.

The IRS uses several tests to establish material participation. Under the most frequently used test, you’re treated as materially participating in an activity if you participate in it for more than 500 hours in the tax year. While other tests require fewer hours, all the tests require you to establish how you participated and the amount of time spent. You can establish this by any reasonable means such as contemporaneous appointment books, calendars, time reports or logs.

Rental activities

Rental activities are automatically treated as passive, regardless of your participation. This means that, even if you materially participate in them, you can’t deduct the losses against your earned income, interest, dividends, etc. There are two important exceptions:

You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
If you qualify as a “real estate professional” (which requires performing substantial services in real property trades or businesses), your rental real estate activities aren’t automatically treated as passive. So losses from those activities can be deducted against earned income, interest, dividends, etc., if you materially participate.

On September 30, the Financial Accounting Standards Board (FASB) finalized a rule to defer the effective date of the updated long-term insurance standard for a second time. The deferral will give insurers more time to properly implement the changes amid the COVID-19 pandemic.

Need for change

After 12 years of work, the FASB issued Accounting Standards Update (ASU) No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, in August 2018 to improve and simplify the highly complex, nuanced reporting requirements for long-term insurance policies. The rules were designed to simplify targeted areas in reporting life insurance, disability income, long-term care and annuity payouts.

Specifically, the update requires insurers to:

Review annually the assumptions they make about their policyholders, and
Update the liabilities on their balance sheets if the assumptions change.

Under the updated guidance, insurance companies must measure updated liabilities using a standardized, market-observable discount interest rate based on the yield from an upper-medium-grade, fixed-income instrument. The method required by ASU No. 2018-12 is a more conservative approach than one used for insurance policies under existing guidance.

Requests for deferral

When the updated standard was issued, the original effective dates were fiscal years beginning after December 15, 2020, for public companies and a year later for private companies. In November 2019, the FASB postponed the standard’s effective dates from 2021 to 2022 for public companies and from 2022 to 2024 for smaller reporting companies (SRCs), private companies and not-for-profit organizations. This delay was designed to give insurance companies more time to update their software and methodology, train their staff, and conduct educational outreach to investors.

In March, the American Council of Life Insurers (ACLI), the trade organization that represents the sector, requested an additional delay, citing unprecedented challenges stemming from the COVID-19 crisis. The ACLI told the FASB that the impacts of the pandemic continue to escalate, with little clarity about how long the capital markets may persist within their current turbulent state.

During a recent meeting, the FASB voted 6-to-1 to postpone the effective date from 2022 to 2023 for large public companies and from 2024 to 2025 for other organizations.

We can help

The FASB has been sympathetic to companies that have been trying to navigate major accounting rule changes during these uncertain times. In addition to deferring the updated rules for long-term insurance contracts, the FASB in May postponed the effective dates for the updated revenue recognition and lease rules for certain entities. Contact us for more information about impending deadlines or for help implementing accounting rule changes that affect your organization.

Yeo & Yeo CPAs & Business Consultants is proud to announce that Tammy Moncrief, CPA, has received the Outstanding Task Force Award from the Michigan Association of Certified Public Accountants (MICPA).

The Outstanding Task Force Award recognizes those who go above and beyond in lending their time and knowledge to CPAs across the country.

As a member of the Special Tax Task Force, Moncrief helped CPAs navigate the Tax Reform Act. She developed communications and programming to interpret the Act and explain legislation. Materials created include the Tax Reform Toolkit, SECURE Act webinars and on-demand programs. In addition to serving on the Special Tax Task Force, Moncrief also acted as Committee Chair for the MICPA Federal Tax Task Force.

Moncrief is a principal in the Auburn Hills office. Her areas of expertise include tax planning and consulting for closely-held businesses, high net worth individual tax services, trust and estate planning, charitable gift planning, multi-state taxation and succession and legacy planning. She is a member of the Firm’s Tax Advisory Group and the Estate & Trust Services Group. She also serves on the Yeo & Yeo board of directors.

In the community, Moncrief is an active volunteer at the University of Detroit Jesuit High School. She also served as President of the MSU Detroit Area Development Council.

Awards were presented on the evening of October 8, 2020, during a virtual awards presentation.

Most salespeople would tell you that there are few better feelings in life than closing a deal. This is because guiding a customer through the sales process and coming out the other side with dollars committed isn’t a matter of blind luck. It’s a craft — based on equal parts data mining, psychology, intuition and other skills.

Many sales staffs have been under unprecedented pressure this year. The COVID-19 pandemic triggered changes to the economy that made many buyers cut back on spending. Now that the economy is slowly recovering, sales opportunities may be improving. Here are four steps your salespeople can follow to improve the odds that those chances will come to fruition:

1. Qualify prospects. Time is an asset. Successful salespeople focus most or all their time on prospects who are most likely to buy. Viable prospects typically have certain things in common:

A clear need for the products or services in question,
Sufficient knowledge of the products or services,
An identifiable decision-maker who can approve the sale,
Adequate financial standing, and
A need to buy right away or soon.

If any of these factors is missing, and certainly if several are, the salesperson will likely end up wasting his or her time trying to make a sale.

2. Ask the right questions. A salesperson must deeply understand a prospect’s motivation for needing your company’s products or services. To do so, inquiries are key. Salespeople who make great presentations but don’t ask effective questions tend to come up short.

An old rule of thumb says: The most effective salespeople spend 80% of their time listening and 20% talking. Actual percentages may vary, but the point is that a substantial portion of a salesperson’s “talk time” should be spent asking intelligent, insightful questions that arise from pre-call research and specific points mentioned by the buyer.

3. Identify and overcome objections. A nightmare scenario for any salesperson is spending a huge amount of time on an opportunity, only to have an unknown issue come out of left field at closing and kill the entire deal. To guard against this, successful salespeople identify and address objections during their calls with prospects, thereby minimizing or eliminating unpleasant surprises at closing. They view objections as requests for information that, if handled correctly, will educate the prospect and strengthen the relationship.

4. Present a solution. The most eloquent sales presentation may be entertaining, but it will probably be unsuccessful if it doesn’t satisfy a buyer’s needs. Your product or service must fix a problem or help accomplish a goal. Without that, what motivation does a prospect have to spend money? Your salespeople must be not only careful researchers and charming conversationalists, but also problem-solvers.

When you alleviate customers’ concerns and allow them to meet strategic objectives, you’ll increase the likelihood of making today’s sales and setting yourself up for tomorrow’s. Our firm can help you identify optimal sales strategies and measure the results.

If you file a joint tax return with your spouse, you should be aware of your individual liability. And if you’re getting divorced, you should know that there may be relief available if the IRS comes after you for certain past-due taxes.

What’s “joint and several” liability?

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full tax amount on the couple’s combined income. That means the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. Liability includes any tax deficiency that the IRS assesses after an audit, as well as penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)

When are spouses “innocent?”

In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who didn’t know about a tax understatement that was attributable to the other spouse.

To be eligible, you must show that you were unaware of the understatement and there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief may be available even if you’re still married and living with your spouse.

In addition, spouses may be able to limit liability for a tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.

How can liability be limited?

In some cases, a spouse can elect to limit liability for a deficiency on a joint return to just his or her allocable portion of the deficiency. If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns.

The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the tax return — unless you can show that you signed it under duress. Also, liability will be increased by the value of any assets that your spouse transferred to you in order to avoid the tax.

What is an “injured” spouse?

In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint tax refund to one spouse. In these cases, one spouse has all or part of a refund from a joint return applied against certain past-due taxes, child or spousal support, or federal nontax debts (such as student loans) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your refund share.

Whether, and to what extent, you can take advantage of the above relief depends on your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.

Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may want to file a separate return if you want to be responsible only for your own tax.

One of the biggest financial challenges that business owners face is supervision of cash flow. Managing cash flow is of the utmost importance, and incorrect management of cash flow could result in significant gaps that can put a healthy company out of business.

A cash flow gap transpires when your business expenses (cash outflows) are due before revenue is received (cash inflows). This does not mean that you cannot afford the expenditures; it is simply a timing difference in which the cash is not yet available to pay the bills. Cash flow gaps can affect small business owners in several ways. Following are a few tips to help you avoid deficiencies in cash flow.

Have a broad frame of mind. Always ask how this purchase will affect your cash flow. Analyze the costs and benefits of each transaction. Do you have enough cash on hand or access to credit? Do not follow through with the transaction unless you have favorable terms.
Create a budget forecast and compare it to costs incurred. Create these on a weekly or monthly basis, while accumulating into an annual budget. This budget will show where the cash is flowing and prompt opportunities to shrink cash outflows. Including a variance in the budget (the difference between actual and forecast) will show you over- or under-budgeted revenues and expenses. From there, adjust the budget to focus on areas of improvement.
Stay conservative with timing. Do you expect to be paid in 5 days? Budget it as 10. Issue an invoice for 20 days? Expect to receive that money in 30 days. By establishing that buffer, you will have the ability to better manage your expectations, as to avoid a cash flow gap.
Maximize cash inflows and shrink cash outflows. This is especially important if the company has a project that is unusually large or complex. At that point, consider requesting a security deposit of half the amount owed and always pursue opportunities to bill additional amounts if products/services need modification, or are not specified in the original contract. Pursue ways to make payment simple for a customer through automated bill pay or payment schedules. Offer options to receive upfront cash for future costs to secure future sales and aid with inventory replenish scheduling. Finally, decide whether or not to offer layaway programs or pre-payment plans as an alternative to sale and payment plans.

Business owners need to stay on top of bills owed and ensure payments are accurate and timely. Set up automated payments, but ensure the proper amount is being deducted. Other cost-saving approaches include: repairing equipment rather than replacing it, buying used instead of new, delaying upgrades, and negotiating goods and services.
Build a cash reserve. Determine what you can reserve in a week, divide it by five business days and pay yourself that amount per day. Having this cash reserve could be used as a way to face cash flow gaps if they occur.
Make conscious decisions when it comes to administrative costs. There are two options for accounting: in-house or outsourced. Is your in-house accounting work shorting quality? Would it be more beneficial to rely on the professionals? Outsourced accounting does not necessarily imply it is more expensive, but it does point toward quality, timely and accurate work. If the decision is made to outsource, the only heavy lifting would be to obtain the financial information for the accountant to process.

Cash flow is the lifeblood of any business and those who can efficiently manage their cash flow will find that it can improve other aspects of their organization. Use Yeo & Yeo’s Cash Management Checklist to create a plan.

Contact me or your Yeo & Yeo advisor if you want to discuss cash management strategies and how they relate to your cash flow preservation plan.