Tax-exempt Organizations that Paper Filed Form 990 During COVID-19 can Expect Delays

The IRS acknowledges delays in processing and posting certain content to the IRS Tax Exempt Organization Search tool due to COVID-19:

IRS determination letters issued March 2020 and later
Paper-filed 990-series returns received April 2020 and later

From March 26 through all of April, the IRS stopped handling their mail due to COVID-19 safety concerns causing a backlog of processing all mailed correspondence, including mailed Form 990 returns as well as mailed tax payments.

Waiting for important paperwork for your organization can be difficult, creating the urge to want to ask the IRS for answers. The IRS requested filers not to contact them about the status of their returns during this time. Applications for tax exemption and filed Form 990 series returns are being worked on; however, there will be a delay in posting on the Tax Exempt Organization Search tool on IRS.gov.

If your 990 return was paper filed, the answer is not to resubmit electronically as this would cause a doubling up on filings. It is best to be patient and allow time for the IRS to catch-up.

Recently, the IRS mandated that tax-exempt organizations file Form 990 electronically. Mandatory online tax filing will be kicking in for most organizations in 2021 and will be in full effect for all organizations by 2022.

For more information on IRS COVID-19 mission-critical functions and delays, please visit the IRS website at: https://www.irs.gov/newsroom/irs-operations-during-covid-19-mission-critical-functions-continue.

Numerous taxpayers who made tax payments well in advance of the July 15 deadline are finding that their checks have not yet cleared and many have received notices indicating a balance is still due.

The IRS recently acknowledged that the agency is behind in processing items mailed and that includes certain tax payments that could be in the backlog of unopened mail at IRS service centers. The IRS has updated guidance on its website to provide relief for taxpayers with uncashed checks and possibly checks that result in being dishonored by their bank:

Pending Check Payments and Payment Notices: If a taxpayer mailed a check (either with or without a tax return), it may still be unopened in the backlog of mail the IRS is processing due to COVID-19. Any payments will be posted as the date we received them rather than the date the agency processed them. To avoid penalties and interest, taxpayers should not cancel their checks and should ensure funds continue to be available so the IRS can process them.

To provide fair and equitable treatment, the IRS is providing relief from bad check penalties for dishonored checks the agency received between March 1 and July 15 due to delays in this IRS processing. However, interest and penalties may still apply.

Due to high call volumes, the IRS suggests waiting to contact the agency about any unprocessed paper payments still pending. See www.irs.gov/payments for options to make payments other than by mail.

If you made your payment on or before July 15 and received a notice, or your check has still not cleared, do not cancel your original check or send a second check to pay the balance due with the notice. The agency is working to catch up on the backlog and is ensuring payments will be posted the date received with no penalties applied provided payment was filed on time (by July 15) and payment was made in full. The IRS asks for patience and to refrain from contacting the agency at this time.

In the future, you can help the IRS process payments more efficiently by making your payments one of the following ways:

Make your payments electronically through IRS Direct Pay for Individuals or the Electronic Federal Tax Payment System (EFTPS) for other taxpayers.
Have your balance due and estimated tax payments initiated electronically through ACH debit when you file your return.

If you must pay by check:

Make sure to include your SSN (or EIN) on the check, the tax year, and the form number.
Send check payments certified mail with return receipt requested to document timely payment.

For more information on this and IRS operations during COVID-19, please visit the IRS website at: https://www.irs.gov/newsroom/irs-operations-during-covid-19-mission-critical-functions-continue

You’d be hard-pressed to find a business that doesn’t value its customers, but tough times put many things into perspective. As companies have adjusted to operating during the COVID-19 pandemic and the resulting economic fallout, prioritizing customer service has become more important than ever.

Without a strong base of loyal buyers, and a concerted effort to win over more market share, your business could very well see diminished profit margins and an escalated risk of being surpassed by competitors. Here are some foundational ways to strengthen customer service during these difficult and uncertain times.

Get management involved

As is the case for many things in business, success starts at the top. Encourage your management team and fellow owners (if any) to regularly interact with customers. Doing so cements customer relationships and communicates to employees that cultivating these contacts is part of your company culture and a foundation of its profitability.

Moving down the organizational chart, cultivate customer-service heroes. Post articles about the latest customer service achievements on your internal website or distribute companywide emails celebrating successes. Champion these heroes in meetings. Public praise turns ordinary employees into stars and encourages future service excellence.

Just be sure to empower employees to make timely decisions. Don’t just talk about catering to customers unless your staff can really take the initiative to act accordingly.

Systemize your responsiveness

Like everyone in today’s data-driven world, customers want immediate information. So, strive to provide instant or at least timely feedback to customers with a highly visible, technologically advanced response system. This will let customers know that their input matters and you’ll reward them for speaking up.

The specifics of this system will depend on the size, shape and specialty of the business itself. It should encompass the right combination of instant, electronic responses to customer inquiries along with phone calls and, where appropriate, face-to-face (or direct virtual) interactions that reinforce how much you value their business.

Continue to adjust

By now, you’ve likely implemented a few adjustments to serving your customers during the COVID-19 pandemic. Many businesses have done so, with common measures including:

Explaining what you’re doing to cope with the crisis,
Being more flexible with payment plans and deadlines, and
Exercising greater patience and empathy.

As the months go on, don’t rest on your laurels. Continually reassess your approach to customer service and make adjustments that suit the changing circumstances of not only the pandemic, but also your industry and local economy. Seize opportunities to help customers and watch out for mistakes that could hurt your company’s reputation and revenue.

Don’t give up

This year has put everyone under unforeseen amounts of stress and, in turn, providing world-class customer services has become even more difficult. Keep at it — your extra efforts now could lay the groundwork for a much stronger customer base in the future. Our firm can help you assess your customer service and calculate its impact on revenue and profitability.

The IRS has provided guidance to employers regarding the recent presidential action to allow employers to defer the withholding, deposit and payment of certain payroll tax obligations.

The three-page guidance in Notice 2020-65 was issued to implement President Trump’s executive memorandum signed on August 8.

Private employers still have questions and concerns about whether, and how, to implement the optional deferral. The President’s action only defers the employee’s share of Social Security taxes; it doesn’t forgive them, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability. (The payroll services provider for federal employers announced that federal employees will have their taxes deferred.)

Deferral basics

President Trump issued the memorandum in light of the COVID-19 crisis. He directed the U.S. Secretary of the Treasury to use his authority under the tax code to defer the withholding, deposit and payment of certain payroll tax obligations.

For purposes of the Notice, “applicable wages” means wages or compensation paid to an employee on a pay date beginning September 1, 2020, and ending December 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000, or the equivalent amount with respect to other pay periods.

The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

“If necessary,” the guidance states, an employer “may make arrangements to collect the total applicable taxes” from an employee. But it doesn’t specify how.

Be aware that under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

Many employers opting out

Several business groups have stated that their members won’t participate in the deferral. For example, the U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral “unworkable.”

The Chamber is concerned that employees will get a temporary increase in their paychecks this year, followed by a decrease in take-home pay in early 2021. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group explained.

Businesses are also worried about having to collect the taxes from employees who may quit or be terminated before April 30, 2021. And since some employees are asking questions about the deferral, many employers are also putting together communications to inform their staff members about whether they’re going to participate. If so, they’re informing employees what it will mean for next year’s paychecks.

How to proceed

Wouldn’t it be great if your employees worked as if they owned the company? An employee stock ownership plan (ESOP) could make this a reality.

Under an ESOP, employee participants take part ownership of the business through a retirement savings arrangement. Meanwhile, the business and its existing owner(s) can benefit from some tax breaks, an extra-motivated workforce and a clearer path to a smooth succession.

How they work

To implement an ESOP, you establish a trust fund and either:

Contribute shares of stock or money to buy the stock (an “unleveraged” ESOP), or
Borrow funds to initially buy the stock, and then contribute cash to the plan to enable it to repay the loan (a “leveraged” ESOP).

The shares in the trust are allocated to individual employees’ accounts, often using a formula based on their respective compensation. The business must formally adopt the plan and submit plan documents to the IRS, along with certain forms.

Tax impact

Among the biggest benefits of an ESOP is that contributions to qualified retirement plans (including ESOPs) are typically tax-deductible for employers. However, employer contributions to all defined contribution plans, including ESOPs, are generally limited to 25% of covered payroll. But C corporations with leveraged ESOPs can deduct contributions used to pay interest on the loans. That is, the interest isn’t counted toward the 25% limit.

Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C corporations, so long as they’re reasonable. Dividends voluntarily reinvested by employees in company stock in the ESOP also are usually deductible by the business. (Employees, however, should review the tax implications of dividends.)

In another potential benefit, shareholders in some closely held C corporations can sell stock to the ESOP and defer federal income taxes on any gains from the sales, with several stipulations. One is that the ESOP must own at least 30% of the company’s stock immediately after the sale. In addition, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic operation corporations within a set period.

Finally, when a business owner is ready to retire or otherwise depart the company, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares or have the ESOP borrow money to buy the shares.

Risks to consider

An ESOP’s tax impact for entity types other than C corporations varies somewhat from what we’ve discussed here. And while these plans do offer many potential benefits, they also present risks such as complexity of setup and administration and a strain on cash flow in some situations. Please contact us to discuss further. We can help you determine whether an ESOP would make sense for your business.

Best & Brightest in Wellness

For the seventh consecutive year, Yeo & Yeo has been selected as one of Michigan’s Best and Brightest in Wellness. The program highlights companies, schools, and organizations that promote a culture of wellness, as well as those that plan, implement and evaluate efforts in employee wellness to make their business and their community a healthier place to live and work.

“Investing in the overall health of our employees is something we take pride in,” said Thomas E. Hollerback, President & CEO of Yeo & Yeo. “This award is an exciting achievement for Yeo & Yeo, especially in this challenging year. Our continued commitment to the health of our employees goes hand in hand with their results and accomplishments.”

Yeo & Yeo supports wellness for its employees by paying a large portion of health care premiums, helping to keep costs low for employees. The firm has a high percentage of participation in its wellness plan and health care premium reduction incentive. The firm facilitates convenient onsite health screenings for health care participants at each of its office locations, offers onsite flu shots at no cost, and provides an Employee Assistance Program that offers confidential guidance and resources designed to support work‐life balance. Yeo & Yeo also offers an Ergonomic Standing Desk option for employees for a healthier work environment.

Criteria for selection included wellness programs and policies, culture and awareness, leadership, participation and incentives, communication and measurement, among others.

Yeo & Yeo will be honored at a virtual awards celebration on October 27.

The COVID-19 crisis is causing private companies to re-evaluate the type of financial statements they should generate for 2020. Some are considering downgrading to a lower level of assurance to reduce financial reporting costs — but a downgrade may compromise financial reporting quality and reliability. Others recognize the additional risks that work-from-home and COVID-19-related financial distress are causing, leading them to upgrade their assurance level to help prevent and detect potential fraud and financial misstatement schemes.

When deciding what’s appropriate for your company, it’s important to factor in the needs of creditors or investors, as well as the size, complexity and risk level of the organization. Some companies also worry that significant changes to U.S. Generally Accepted Accounting Principles (GAAP) and federal tax laws in recent years may be overwhelming internal accounting personnel — and additional guidance from external accountants is a welcome resource for them to rely on while implementing the changes.

In plain English, the term “assurance” refers to how confident (or assured) you are that your financial reports are reliable, timely and relevant. In order of increasing level of rigor, accountants generally offer various types of assurance services:

1. Compilations. These engagements provide no assurance that financial statements are free from material misstatement and conform with Generally Accepted Accounting Principles (GAAP). Instead, the CPA puts financial information that management generates in-house into a GAAP financial statement format. Footnote disclosures and cash flow information are optional and often omitted.

2. Reviews. Reviewed financial statements provide limited assurance that the statements are free from material misstatement and conform with GAAP. Here, the accountant applies analytical procedures to identify unusual items or trends in the financial statements. We inquire about these anomalies, as well as the company’s accounting policies and procedures.

Reviewed statements always include footnote disclosures and a statement of cash flows. But the accountant isn’t required to evaluate internal controls, verify information with third parties or physically inspect assets.

3. Audits. The most rigorous level of assurance is provided by an audit. It offers a reasonable level of assurance that the financial statements are free from material misstatement and conform with GAAP.

Yeo & Yeo can offer other services as alternatives or in conjunction with the above items:

1. Agreed Upon Procedures. Provide assurance of predetermined procedures designed by you and customized based on individual selective criteria centered on the company’s needs. It does not provide financial statement assurance and the report will be limited to the procedures identified in the engagement letter. Sample procedures could include verification of expenses, deposits, or other processes.

2. Internal Control System Study. Perform inquiries of management and related personnel to gain an understanding of the current components of internal control and the overall system of internal control. The study is customizable for your needs and may include:

- Perform inquiries of management and related personnel of each activity listed below to determine the financial process, accounting, financial reporting and internal controls currently in place. We will summarize our findings and give recommendations for improvements and/or further analysis where necessary.
  - Receipts
  - Disbursements
  - Payroll
  - Credit cards
- Review examples of cash receipts, disbursements, payroll, credit cards and supporting documentation to gain an understanding of policies and procedures and to determine whether policies are being followed.
- Review internal control policies and procedures and make suggestions or recommendations for improvement.
- Provide a report that summarizes our observations and provides suggestions for improvements.

The Securities and Exchange Commission requires public companies to have an annual audit. Larger private companies also may opt for this service to satisfy outside lenders and investors. Audited financial statements are the only type of report to include an express opinion about whether the financial statements are fairly presented and conform with GAAP.

Beyond the analytical and inquiry steps taken in a review, auditors perform “search and verification” procedures. They also review internal control systems, tailor audit programs for potential risks of material misstatement and report on control weaknesses when they deliver the audit report.

Time for a change?

Not every business needs audited financial statements, and audits don’t guarantee against fraud or financial misstatement. But the higher the level of assurance you choose, the more confidence you’ll have that the financial statements fairly present the company’s performance.

The IRS issued guidance that provides some explanation of how employers can defer withholding and remitting an employee’s share of Social Security tax when wages are below a certain amount. The guidance in Notice 2020-65 was issued to implement President Trump’s executive action signed in early August.

Employers can defer withholding, deposit and payment of an eligible employee’s share of Social Security taxes on wages paid from September 1, 2020, through December 31, 2020.
Employers must pay the deferred taxes during the period between January 1, 2021, and April 30, 2021.
Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021.

The guidance is brief, and private employers still have questions about whether, and how, to implement the deferral. This action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability.

Read more about the deferral provisions.

We are sharing the IRS guidance for payroll tax deferral that is available to us at this point. We realize that there are many unanswered questions about implementing it, if your company or organization chooses to do so, and we will keep you updated as more information becomes available.

On August 28, the IRS issued guidance that provides some explanation of how employers can defer withholding and remitting an employee’s share of Social Security tax when wages are below a certain amount. The guidance in Notice 2020-65 was issued to implement President Trump’s executive action signed in early August.

The guidance is brief, and private employers still have questions about whether, and how, to implement the deferral. The President’s action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability.

Tax deferral background

On August 8, President Trump signed a Presidential Memorandum that permits the deferral of the employee portion of Social Security taxes for certain employees due to the COVID-19 pandemic.

The memorandum directed Treasury Secretary Steven Mnuchin to defer withholding, deposit and payment of an eligible employee’s share of Social Security taxes (or the employee’s share of Railroad Retirement taxes) on wages or compensation paid from September 1, 2020, through December 31, 2020. It applies to employees whose wages or compensation, payable during any biweekly pay period, generally are less than $4,000, or the equivalent amount with respect to other pay periods. Amounts can be deferred without penalties, interest or additions to the tax.

Note: Under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New guidance

Issued on August 28, the three-page guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

The guidance states that “if necessary,” the employer “may make arrangements to collect the total applicable taxes” from an employee. This appears to answer one question that employers have about what happens if an employee leaves a job later this year or before the deferred taxes are due. However, no additional details are given on how an employer should make arrangements to collect unpaid tax.

Pushback from business groups

Before the guidance was issued, several business and payroll groups stated that their members would not implement the deferral. The U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral unworkable.

“If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging,” the letter states. “But under a simple deferral, employees would be stuck with a large tax bill in 2021. Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”

The National Payroll Reporting Consortium, a payroll services industry association, stated there are “substantial” computer programming changes that are needed to implement the deferral.

“Payroll systems are designed to apply a single Social Security tax rate for the full year, and to all employees equally,” the consortium explained. “Applying a different tax rate for part of the year, beginning in the middle of a quarter, and applying such a change to some employers but not others, and to some employees but not others, is quite complex. Not all employers and payroll systems will be able to make these complex changes by September 1.”

Going forward

You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide range of qualifying property. Here are five important points to be aware of when it comes to this powerful tax-saving tool.

1. Bonus depreciation is scheduled to phase out

Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless:

The taxpayer previously used the property and
The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:

Land improvements other than buildings, for example fencing and parking lots, and
“Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you&rsqu;ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.

The novel coronavirus (COVID-19) pandemic has caused some people to contemplate their own mortality or that of a family member. For those whose life expectancies are short — because of COVID-19 or for other reasons — estate planning can be difficult. But while money matters may be the last thing you want to think about when time is limited, a little planning can offer you and your family financial peace of mind.

Action steps to take

Here are some (but by no means all) of the steps you should take if you have a short life expectancy. These steps are also helpful if a loved one has been told that time is limited.

Gather documents. Review all estate planning documents, including your:

Will,
Revocable or “living” trust,
Other trusts,
General power of attorney, and
Advance medical directive, such as a “living will” or health care power of attorney.

Make sure these documents are up-to-date and continue to meet your estate planning objectives. Modify them as appropriate.

Take inventory. Catalog all your assets and liabilities, estimate their value, and determine how assets are titled to ensure that they’ll pass to their intended recipients. For example, do you own assets jointly with your ex-spouse? If so, title will pass to your ex-spouse on your death. There may be steps you can take to separate your interest in the property and dispose of it as you see fit.

If you have a safe deposit box, make sure someone is authorized to open it. If you have a personal safe, be sure that someone you trust knows its location and combination.

Review beneficiary designations. Take another look at beneficiary designations in your IRAs, pension plans, 401(k) plans and other retirement accounts, insurance policies, annuities, deferred compensation plans and other assets. Make sure a beneficiary is named and that the designation continues to meet your wishes. For example, a divorced individual may find that an ex-spouse is still named as beneficiary of a life insurance policy.

Review digital assets. Ensure that your family or representatives will have access to digital assets, such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, social media accounts, websites, domain names, and cloud-based documents. You can do this by creating a list of usernames and passwords or by making arrangements with the custodians of these assets to provide access to your authorized representatives.

Gaining peace of mind

Although facing your own mortality can be difficult, great peace of mind can come from ensuring that your estate plan fulfills your wishes and minimizes the tax burden on your family. Contact us with any questions regarding your estate plan.

The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.

If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

The postponement means that you may be able to amend:

Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.

And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:

Capital loss deductions aren’t taken into account in computing the excess business loss and
The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Many businesses now offer, as part of their health care benefits, various types of accounts that reimburse employees for medical expenses on a tax-advantaged basis. These include health Flexible Spending Accounts (FSAs), Health Reimbursement Arrangement (HRAs) and Health Savings Account (HSAs, which are usually offered in conjunction with a high-deductible health plan).

For employees to get the full value out of such accounts, they need to educate themselves on what expenses are eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. Although an employer shouldn’t provide tax advice to employees, you can give them a heads-up that the rules for reimbursements or distributions vary depending on the type of account.

Pub. 502

Unfortunately, no single publication provides an exhaustive list of official, government-approved expenses eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. IRS Publication 502 — “Medical and Dental Expenses” (Pub. 502) comes the closest, but it should be used with caution.

Pub. 502 is written largely to help taxpayers determine what medical expenses can be deducted on their income tax returns; it’s not meant to address the tax-favored health care accounts in question. Although the rules for deductibility overlap in many respects with the rules governing health FSAs, HRAs and HSAs, there are some important differences. Thus, employees shouldn’t use Pub. 502 as the sole determinant for whether an expense is reimbursable by a health FSA or HRA, or eligible for tax-free distribution from an HSA.

Various factors

You might warn health care account participants that various factors affect whether and when a medical expense is reimbursable or a distribution allowable. These include:

Timing rules. Pub. 502 notes that expenses may be deducted only for the year in which they were paid, but it doesn’t explain the different timing rules for the tax-favored accounts. For example, a health FSA can reimburse an expense only for the year in which it was incurred, regardless of when it was paid.

Insurance restrictions. Taxpayers may deduct health insurance premiums on their tax returns if certain requirements are met. However, reimbursement of such premiums by health FSAs, HRAs and HSAs is subject to restrictions that vary according to the type of tax-favored account.

Over-the-counter (OTC) drug documentation. OTC drugs other than insulin aren’t tax-deductible, but they may be reimbursed by health FSAs, HRAs and HSAs if substantiation and other requirements are met.

Greater appreciation

The pandemic has put a renewed emphasis on the importance of employer-provided health care benefits. The federal government has even passed COVID-19-related relief measures for some tax-favored accounts.

As mentioned, the more that employees understand these benefits, the more they’ll be able to effectively use them — and the greater appreciation they’ll have of your business for providing them. Our firm can help you fully understand the tax implications, for both you and employees, of any type of health care benefit.

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 five of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by two members of our Paycheck Protection Program (PPP) Loan Forgiveness team, Rachel Van Slembrouck, Manager in our Saginaw office, and Zaher Basha, Manager in our Auburn Hills office.

Listen in as David, Rachel, and Zaher unpack the PPP by discussing recent updates as of August 13, 2020, requirements, forgivable expenses, and more.

Overview of the PPP program (2:30)
Opportunities for forgiveness (7:20)
Recent updates and the PPP Flexibility Act (9:48)
Forgivable expenses (11:25)
Salary, wages, and FTEs (20:00)
How to apply for forgiveness (24:31)
Open questions regarding forgiveness (29:25)
Possible future updates from Congress (33:13)

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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.

On August 8, President Trump signed four executive actions, including a Presidential Memorandum to defer the employee’s portion of Social Security taxes for some people. These actions were taken in an effort to offer more relief due to the COVID-19 pandemic.

The action only defers the taxes, which means they’ll have to be paid in the future. However, the action directs the U.S. Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Legislative history

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act. A short time later, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act. Both laws contain economic relief provisions for employers and workers affected by the COVID-19 crisis.

The CARES Act allows employers to defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New bill talks fall apart

Discussions of another COVID-19 stimulus bill between Democratic leaders and White House officials broke down in early August. As a result, President Trump signed the memorandum that provides a payroll tax deferral for many — but not all — employees.

The memorandum directs the U.S. Treasury Secretary to defer withholding, deposit and payment of the tax on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020. This means that the employee’s share of Social Security tax will be deferred for that time period.

However, the memorandum contains the following two conditions:

The deferral is available with respect to any employee, the amount of whose wages or compensation, as applicable, payable during any biweekly pay period generally is less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods; and
Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax.

The Treasury Secretary was ordered to provide guidance to implement the memorandum.

Legal authority

The memorandum (and the other executive actions signed on August 8) note that they’ll be implemented consistent with applicable law. However, some are questioning President Trump’s legal ability to implement the employee Social Security tax deferral.

Employer questions

Employers have questions and concerns about the payroll tax deferral. For example, since this is only a deferral, will employers have to withhold more taxes from employees’ paychecks to pay the taxes back, beginning January 1, 2021? Without a law from Congress to actually forgive the taxes, will employers be liable for paying them back? What if employers can’t get their payroll software changed in time for the September 1 start of the deferral? Are employers and employees required to take part in the payroll tax deferral or is it optional?

Contact us if you have questions about how to proceed. And stay tuned for more details about this action and any legislation that may pass soon.

No company can afford to operate without the right accounting software. When considering whether to buy a new product or upgrade their current solutions, however, business owners often fall prey to some common mistakes. Here are five gaffes to avoid:

1. Relying on a generic solution. Some companies rush into buying an accounting system without stopping to consider all their options. Perhaps most important, they may be missing out on specific versions for their industries.

For instance, construction companies can choose from many applications with built-in features specific to how their businesses work. Nonprofit organizations also have industry-specific accounting software. If you haven’t already, check into whether a product addresses your company’s area of focus.

2. Spending too much or too little. When buying or upgrading something as important as an accounting system, it’s easy to overspend. Those bells and whistles can be enticing. Then again, frugal-minded business owners may underspend, picking up a low-end product and letting staff deal with the headaches.

The ideal approach generally lies somewhere in the middle. Perform a thorough review of your accounting needs, transaction volume and required reports, as well as your employees’ proficiency and the availability of tech support. Then calculate a reasonable budgeted amount to spend.

3. Getting stuck in a rut. Assuming you already have an accounting system, one of the keys to managing it is knowing precisely when to upgrade. You don’t want to spend money unnecessarily, but you also shouldn’t risk errors or outdated functionality by waiting too long.

There’s no one-size-fits-all answer. Your financial statements are a potentially helpful source of information. A general rule of thumb says that, when revenues hit certain benchmarks (perhaps $5 million, $10 million or $15 million), a business may want to start thinking “upgrade.” The right tipping point depends on various factors, however.

4. Neglecting the importance of integration and mobile access. Once upon a time, a company’s accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. You should be able to integrate your accounting system with all (or most) of your other software so that data can be shared seamlessly and securely.

Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that users can use on their smartphones or tablets.

5. Going it alone. Which accounting package you choose may seem an entirely internal decision. After all, you and your staff will be the ones using it, right? But you may be forgetting one rather obvious person who could help: your accountant.

We can help you assess and determine your accounting needs, set a feasible budget, choose the right solution (or upgrade) and implement it properly. Going forward, we can even periodically test your system to ensure it’s providing accurate data and generating the proper reports.

Payroll is a key transaction cycle in most organizations. Everyone likes to get paid! However, payroll is commonly an area where fraud can occur if the proper internal controls are not in place. Critical internal controls to help detect and prevent fraud or error within payroll are:

Wage rates are documented and approved by management or human resources.
The person processing the payroll and cutting checks does not have access to enter new employees or change pay rates.
Timesheets are reviewed and approved before wages are paid.
The person reconciling the payroll cash account is not the person processing the payroll.
Procedures are in place to remove terminated employees from the payroll system timely.
New employees entered into the system are reviewed to ensure that no fictitious employees are set up.
Payroll detail or registers are reviewed and approved before payment.

These basic controls will help segregate duties in the payroll cycle and ensure only legitimate employees of the organization are paid, and that they are paid accurately.

Most nonprofits face the struggle of fulfilling their mission with very limited resources. Organizations are always on the hunt for new revenue sources, which are often in the form of contributions and grants. Some nonprofits are lucky enough to have a significant revenue source or donor that consistently provides them with funding. Others have a well-known special event that generates a large amount of its annual contribution revenue. While consistently receiving a substantial chunk of money from a single source or event each year seems ideal, could it be a concern?

Revenue concentration could be considered one of the most significant risks facing nonprofits. When considering sustainability, nonprofits need to determine if they could survive if this key revenue source were suddenly gone. Diversification is critical for a financially sound organization. COVID-19 has shown us that unexpected events can arise at any time and severely affect and quickly reshape our businesses. By not placing high reliance on a small number of revenue sources, an organization increases its chances of an easy recovery should any major changes in funding levels occur from any source.

Some questions to consider when looking at the organization’s revenue:

Is more than 25% of our revenue coming from a single source or event?
How financially stable is the funding source? Are there concerns that funding could decline or be discontinued?
Could we survive if we lost the revenue from one of our large sources?
How can we better plan for a change in significant revenue sources or better diversify our revenue streams?

While having a large revenue source is not a bad thing by any means, it is essential to periodically evaluate that source and its ability to continue funding the organization. By staying informed regarding these sources, the organization can better ensure its ability to carry on if changes in these sources were to occur.

To combat some of the financial burden that has come with operating in a pandemic, many nonprofit organizations have qualified for and received government aid. Paycheck Protection Program (PPP) loans are the most prevalent of the government aid that many have received. However, often nonprofits are uncertain about how to account for these funds. Budgeting and accounting issues for the PPP loans are the significant question marks surrounding the new funding.

To assist with some of the questions that many nonprofits may have, we have outlined some key areas that can help to make these issues clearer.

Documentation

Documentation is one of the most critical factors in determining if an organization will have its PPP loans forgiven. Many nonprofits will be able to account for their full forgiveness amount just with payroll costs now, thanks to the extension from eight to 24 weeks, rather than having to include other forgivable expenses. For this funding to be forgiven, thorough documentation of the payroll costs will still be needed.

Accounting

The AICPA laid out two paths that demonstrate how the PPP funds should appear on the financial statements. The decision of which path to follow is a judgment decision that is entirely in the hands of management.

If a nonprofit has a goal to have their loans forgiven, and are actively pursuing this goal, the funds may be accounted for as either debt or a conditional contribution. However, the nonprofits that do not plan to request forgiveness should account for PPP funds as debt.

“Double-dipping” is not permitted

Nonprofits will not be allowed to use PPP funds for the same expenses that are being paid with other government funds. To ensure that such “double-dipping” does not occur, a great way to account for how the funding is being spent is to separate the expenses in the general ledger software so that expenses being paid with PPP funds are separate from those paid with other government money.

Challenges for June 30, July 31, and Aug. 31 year-ends

Accounting for PPP loans should be straightforward for nonprofits with calendar year-ends because their loan forgiveness will occur in the same year as the covered period.

However, nonprofits with fiscal year-ends of June 30, July 31, or Aug. 31 may have more difficulty with accounting for their loans because the loan forgiveness will most likely occur in the fiscal year following the covered period. Covered periods also have the potential to span over multiple fiscal years. These situations will call for more strategy in the use of the funding and even potential use of attorneys to figure out compliance with the new laws and legal interpretations of such laws.

Scenario planning

Some nonprofits rely on public events and conferences for revenue. Due to governmental restrictions around group gatherings, most have had to conduct these events virtually or reschedule them. Revenue recognition issues may arise as a result of when the events take place and when the funds were received from sponsors or participants.

Prioritize health and virtual capabilities

We encourage nonprofits to continue to look after the physical health of their customers and employees. Mental health should also be included as a focus, particularly as parents may face issues while many schools will be virtual on at least a part-time basis.

If an organization hasn’t taken advantage of online capabilities, such as electronic accounts payable or accepting donations through their website, now is a better time than ever to implement such tools.

Meanwhile, the ability of a nonprofit and its employees to be able to work in a virtual setting is more critical than ever. If there is anything positive that will come as a result of this pandemic, it is that many do not need to be in the office during traditional hours to be able to work effectively. While this may not be the case for some, it is good to have the flexibility and make sure that expectations are appropriately communicated with employees.

Unusual accounting and tax challenges

New strategies may result in new accounting and tax challenges. For example, some performing arts organizations and public charities that have had to cancel events are asking ticket holders to donate the cost of their ticket instead of receiving a refund. This circumstance changes an exchange transaction into a donation that must be documented and validated and requires new treatment for tax purposes.

Contact your Yeo & Yeo professional if you need assistance.

For more than 20 years, we have followed the financial reporting model established by GASB Statement No. 34, which includes the Management’s Discussion and Analysis and major fund reporting. GASB 34 makes it possible to more fully assess a government’s overall financial health with the recording of capital assets and long-term debt in the government-wide financial statements.

In 2013, the Governmental Accounting Standards Advisory Council added the reexamination of the financial reporting model to its slate of pre-agenda research activities. After two years of research, they determined that most of the components of the financial reporting model remain effective; however, the Council highlighted several areas for improvement.

In September 2015, GASB added the financial reporting model project to its agenda. The project focused on areas to enhance the effectiveness of the financial reporting model and reduce the complexity and length of the financial statements.

In September 2018, GASB issued its Preliminary Views with a comment period and held public hearings, which resulted in much discussion and deliberation of the concepts and wording included in the Exposure Draft.

Most recently, on June 30, 2020, GASB provided final edits and approved the issuance of the Exposure Draft of the proposed Statement, Financial Reporting Model Improvements, which included the following significant changes:

Management’s Discussion and Analysis (MD&A) would continue to be Required Supplementary Information (RSI). However, it would be limited to the related topics discussed in five sections: 1) Introduction, 2) Financial Summary, 3) Detailed Analyses, 4) Significant Capital Asset and Long-term Debt Activity, and 5) Currently Known Facts, Decisions, or Conditions. The proposed Statement emphasizes that “boilerplate” discussions should be avoided.
Unusual or infrequent items would be required to be displayed as the last presented flow of resources before the new change in resource flows in the government-wide, governmental fund and proprietary fund statements of resource flows.
Governmental funds would use a short-term financial resources measurement focus and accrual basis of accounting. This means the financial statement would reflect the amount of fund balance at the period-end that is available to spend in the next period. This would eliminate the current 60-day rule. Additionally, all long-term debt issued for short-term purposes would be recognized as a short-term transaction. Interfund balances and transfers would also be recognized as short-term transactions.
The governmental fund balance sheet will now be titled “Short-term Financial Resources Balance Sheet,” and the government fund statement of revenues, expenditures and changes in fund balances will be titled “Statement of Short-term Financial Resource Flows.” The new statement would separately report inflows and outflows of resources related to the purchase and disposal of capital assets and the issuance and payment of long-term debt from other activities in governmental funds. The governmental fund financial statement captions would be assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund balances, inflows of resources from current activities, outflows of resources from current activities, and net flows from noncurrent activities. This means governmental funds would no longer have revenues and expenditures. Also, special revenue funds will be known as special resources funds.
Proprietary funds are required to continue to present separately operating and nonoperating revenues and expenses of the statement of revenues, expenses, and changes in fund net position. Nonoperating revenues and expenses would include 1) subsidies received and provided, 2) revenues and expenses related to financing, 3) resources from the disposal of capital assets and inventory, and 4) investment income and expenses. Operating revenues and expenses would be defined as all other revenues and expenses other than nonoperating revenues and expenses. An additional subtotal for operating income (loss) and noncapital subsidies must be presented before reporting other nonoperating revenues and expenses. Subsidies would be defined as 1) resources received from another party or fund to keep the rates lower than otherwise would be necessary to support the level of goods and services to be provided and 2) resources provided to another party or fund that results in higher rates than otherwise would be established for the level of goods and services to be provided.
Budgetary comparison information would be presented using a single method of communication as Required Supplementary Information (RSI). Governments would also be required to present 1) variances between final budget and actual amounts and 2) variances between original and final budget amounts. An analysis of significant variances would be presented in notes to RSI rather than in the MD&A.

GASB plans for a comment period and public hearings to be held, after which time they will redeliberate the issues based upon all the feedback and plan to issue a final statement in June 2022.

Based on the timeline, GASB has spent many years determining the best approach to improving the financial reporting model and implementation is not planned until June 2025 or 2026, depending on the revenue size of the government.

Please contact your local Yeo & Yeo government auditor if you have questions.

To read the full Exposure Draft, click here and click the Accept button.