DEA Agrees to Reclassify Marijuana: What It Means for Cannabis Businesses

On April 30, 2024, the Drug Enforcement Administration (DEA) announced a groundbreaking decision to reschedule marijuana from Schedule I to Schedule III under the Controlled Substances Act. This move follows a recommendation from the U.S. Department of Health and Human Services. The proposal is not yet finalized, and it must first clear the White House Office of Management and undergo a public comment period.

Implications for Cannabis Businesses

If rescheduled, it would carry significant implications for state-legal cannabis businesses:

Tax and financial implications

Cannabis would no longer be subject to Section 280E of the Internal Revenue Code, which currently limits the tax deductions available to cannabis businesses.
Rescheduling could make it easier for cannabis businesses to access banking services, investment, and other financial resources that are currently limited due to the Schedule I classification.

Regulatory changes

Rescheduling could lead to changes in federal regulations surrounding the production, distribution, and sale of marijuana products.
The change in classification could facilitate more medical research into the potential therapeutic benefits of cannabis and its compounds.

What to Do Now

At this time, there is nothing for clients to do, as the rescheduling process is ongoing and no immediate changes have taken effect. However, it is crucial to stay informed and be prepared for potential future developments.

Staying Informed and Prepared

We are closely monitoring this development and its implications for our clients. We will keep you informed of any updates or changes that may impact your business operations and compliance requirements.

If you have questions or concerns about how the DEA’s rescheduling decision may affect your company, please contact your Yeo & Yeo advisor. Our team is here to provide guidance and support during this evolving regulatory landscape.

For more information, see the MICIA’s article: DEA Agrees To Reschedule Marijuana Under Federal Law In Historic Move Following Biden-Directed Health Agency’s Recommendation

If your company operates in the business-to-business (B2B) marketplace, you’ve probably experienced some collections challenges.

Every company, whether buyer or seller, is trying to manage cash flow. That means customers will often push off payments as long as possible to retain those dollars. Meanwhile, your business, as the seller, needs the money to meet its revenue and cash flow goals.

There’s no easy solution, of course. But you can “grease the wheels,” so to speak, by strategically devising and continuously improving a methodical collections process.

Payment terms

Getting paid promptly depends, at least in part, on the terms you set forth and customers agree to. Be sure payment terms for your company’s products or services are written in unambiguous language that includes specific due dates, payment methods and late-payment penalties. To the extent feasible, use contracts or signed payment agreements to ensure both parties understand their obligations.

If your business operates on a project basis, try to negotiate installment payments for completion of specific stages of the work. This approach may not be necessary for shorter jobs but, for longer ones, it helps assure you’ll at least receive some revenue if the customer runs into financial trouble or a dispute arises before completion.

Effective invoicing

Invoice promptly and accurately. This may seem obvious, but invoicing procedures can break down gradually over time, or even suddenly, when a company gets very busy or goes through staffing changes. Monitor relevant metrics such as days sales outstanding, revenue leakage and average days delinquent. Act immediately when collections fall below acceptable levels.

Also, don’t let the essential details of invoicing fall by the wayside. Ensure that you’re sending invoices to the right people at the right addresses. If a customer requires a purchase order number to issue payment, be sure that this requirement is built into your invoicing process.

In today’s world of high-tech money transfers, offering multiple payment options on invoices is critical as well. Customers may pay more quickly when they can use their optimal method.

Reminders and follow-ups

Once you’ve sent an invoice, your company should have a step-by-step process for reminders and follow-ups. A simple “Thank you for your business!” email sent before payment is due can reiterate the due date with customers. From there, automated reminders sent via accounts receivable (AR) or customer relationship management (CRM) software can be helpful.

If you notice that a payment is late, contact the customer right away. Again, you can now automate this to begin with texts or emails or even prerecorded phone calls. Should the problem persist, the next logical step would be a call from someone on your staff. If that person is unable to get a satisfactory response, elevate the matter to a manager.

These steps should all occur according to an established timeline. What’s more, each step should be documented in your AR or CRM software so you can measure and improve your company’s late-payment collections efforts.

Typically, the absolute last step is to send an outstanding invoice to a collection agency or a law firm that handles debt collection. However, doing so will usually lower the amount you’re able to collect and typically ends the business relationship. So, it’s best viewed as a last resort.

What works for you

If your B2B company has been operational for a while, you no doubt know that collections aren’t always as simple as “send invoice, receive payment.” It often involves interpersonal relationships with customers and being able to exercise flexibility at times and assertiveness at others. For help analyzing your collections process, identifying key metrics and measuring all the costs involved, contact us.

In observance of Financial Literacy Month, we’ve provided helpful articles throughout the month to guide individuals along their wealth-building journey. It’s also a great month for business owners and entrepreneurs to check in on the financial best practices for the business. Whether you’re a seasoned professional or just starting to understand the importance of financial literacy to your business, here are some valuable tips to help ensure a thriving business.

1. Establish a Strong Financial Foundation

Creating a robust financial base is crucial for business success. Here are some steps to get started:

Keep Detailed Records: Implement a reliable accounting system and meticulously record all financial transactions, including inventory, payroll, accounts payable, and receivables. Accurate records simplify tax filing and provide a realistic view of your financial health.
Prepare Timely Financial Statements: Regularly generate income statements, balance sheets, and cash flow statements. These also provide insights into your business’s financial health.
Determine Cash Flow Needs: Understand your cash flow requirements to maintain day-to-day operations and plan for growth.
Develop a Realistic Budget: Set achievable budgeting goals to avoid overspending and ensure financial stability.

2. Track Income and Expenses

Keep a close eye on your business’s financial inflows and outflows. Regularly review your income sources and monitor expenses. This practice helps identify areas where you can cut costs or allocate resources more efficiently.

3. Pay Bills on Time

Late payments can harm your credit score and strain relationships with suppliers. Prioritize paying bills promptly to maintain a positive financial reputation.

4. Plan for the Unexpected

Businesses inevitably face unforeseen challenges. Having an emergency fund or contingency plan ensures you can weather unexpected financial storms without jeopardizing your operations.

5. Reinvest in Your Business

Allocate a portion of your profits back into the business. Whether it’s upgrading technologies or equipment, enhancing employee morale, investing in research & development, or expanding marketing efforts, strategic investments can allow for growth, innovation, and long-term sustainability.

6. In-house vs. Outsourcing

Consider the roles in your company that are best kept in-house versus those that may be more advantageous and cost-effective to outsource. Some of the roles to carefully evaluate include accounting, payroll, HR, technology management, marketing, and facilities maintenance.

7. Separate Business and Personal Finances

Avoid mixing personal and business funds. Even if your business is self-funded, resist the temptation to use business money for personal expenses. Clear separation ensures better financial management, avoids complications, and prevents potential pitfalls.

8. Pay Yourself

As a business owner, don’t neglect your own compensation. Pay yourself appropriately, balancing the needs of the business with your personal financial well-being. Remember, you’re an integral part of the company.

9. Seek Professional Guidance

Establish your professional network. Consult with your financial advisors, accountants, legal professionals, insurance agents, and mentors. Their expertise can provide valuable insights and help you make informed decisions.

10. Stay Informed

Stay updated on industry trends, tax regulations, and financial best practices. Again, seek professional help to ensure compliance, optimize tax strategies, and make sound business decisions.

Remember, sound financial practices contribute to the longevity and success of your business. By mastering these principles, you’ll be better equipped to navigate the financial landscape and achieve your entrepreneurial goals.

In many workplaces, the human resources (HR) department is the de facto face of the employer. HR departments are, after all, generally responsible for communicating new employment policies and enforcing existing ones. Even if leadership is making the rules, HR is the one primarily interacting with job candidates when hiring, new hires when onboarding and established employees thereafter.

For employers, the end result is that it’s imperative to have an HR department that your workforce trusts to address their needs efficiently, competently and pleasantly. But this can be a challenge. A recent study by Secure Data Recovery found that more than a third of the 1,005 U.S. workers surveyed said they don’t trust their employers’ HR departments. (Note: All survey respondents worked for companies with less than 50 employees.)

Exercise transparency and clarity

It may not take much to compromise the trust of your employees in your HR department if you aren’t proactively building and maintaining that trust. A pattern of miscommunications or even one big negative incident could cause a breakdown that leads to costly drops in morale, productivity and employee retention.

The roots of mistrust often lie in confusion. If employees aren’t provided with clear information about policies, procedures and rules, they may misinterpret those in place or make up their own. In either case, discord and distrust are likely to develop when supervisors start calling them out on infractions and HR must move in as enforcement.

Be sure your organization is spelling everything out clearly. A good place to begin is with a comprehensive, well-written, legally compliant and regularly updated employee manual. When new hires are onboarded, ask them to read it and sign an acknowledgment. But don’t stop there. Have someone — whether a supervisor, mentor or HR staffer — review the manual with them and be available to answer questions.

In addition, when new policies, procedures or rules are rolled out, communicate them strategically. That is, leadership and HR should collaborate to identify the optimal way to explain both the change itself and the rationale for it. Focus on clarity and choosing the best medium (or media) for communicating.

Establish and maintain visibility

HR departments that largely hide in the shadows, emerging only during open enrollment for benefits, risk being cast by default in a negative light. This often occurs when employees don’t hear from or interact with HR unless something bad has happened — say, a disciplinary action, termination, conflict between two staff members, or when someone levels a harassment or discrimination charge.

HR staff tend to be viewed from a much more trustworthy perspective when employees know them — literally. Make sure that new hires are formally introduced to HR staff members. Employees should be able to attach faces to names and know who their respective HR contacts are without having to ask their supervisors, or leaf or scroll through the employee manual.

From there, HR should continue to communicate regularly with employees as individuals and the organization as a whole. There are many ways to go about maintaining visibility and strengthening HR engagement. Conduct annual surveys to get a sense of how employees are feeling about the department. Offer “lunch and learn” seminars either hosted or led by HR to educate employees about topics such as benefits and wellness. Send out an e-newsletter with the latest HR-related news, profiles of HR staffers and other fun content.

Promote the brand

What will work best for your organization depends on its size, mission and culture. Just make sure that you’re not taking your HR department’s reputation among employees for granted. Promote its brand just as you do your own.

On April 23, 2024, the U.S. Department of Labor announced a final rule for defining the exemptions from minimum wage and overtime pay requirements for Executive, Administrative, and Professional (EAP) employees, which will take effect on July 1, 2024.

Final rule

The final rule takes effect July 1, 2024, and increases the standard salary level for the EAP exemption and adjusts the highly compensated employee total annual compensation threshold. The Department of Labor estimates that during the first year, four million workers will become newly entitled to overtime under the final rule.

Standard salary level for EAP exemption

Under the final rule, the standard salary level for the EAP exemption increases from $684 per week to:

$844 per week, effective July 1, 2024, and
$1,128 per week, effective January 1, 2025

For more information, refer to the U.S. Department of Labor’s website page, Final Rule: Restoring and Extending Overtime Protections.

Webinar planned

Yeo & Yeo’s HR Advisory Solutions Group is committed to providing our clients with guidance in implementing the final rule. Stay tuned for information about a webinar that will discuss restoring and extending overtime protections (the new salary amounts) and review the Fair Labor Standards Act executive, administrative and professional exemptions. Contact your Yeo & Yeo advisor for assistance.

Building wealth is often associated with having substantial financial resources or a privileged background. According to recent surveys, most Americans have less than $1,000 in savings and another third have less than $500 in savings. So, how do you build wealth when you don’t have it to begin with? It’s essential to recognize that anyone, regardless of their financial situation, can create wealth. In this article, we’ll explore five practical ways to build wealth when you don’t have much to start with or come from money.

1. Shift Your Mindset

Wealth-building begins with your mindset. Let go of limiting beliefs that may hold you back. Understand that wealth is not reserved for a select few; it’s attainable for anyone willing to put in the effort. Cultivate a positive attitude toward money and abundance.

Action Steps:

Practice daily positive affirmations related to wealth and abundance. Start by telling yourself that you are in control of your financial wellness.
Read books and listen to podcasts that inspire a growth mindset.

2. Educate Yourself

Financial literacy is crucial for wealth-building. Take the time to learn about personal finance, investing, and money management. Understand concepts like compound interest, budgeting, and asset allocation.

Action Steps:

Attend financial literacy workshops or webinars.
Read books on personal finance. Here are a few top-rated books to start with:
- “Rich Dad Poor Dad” by Robert Kiyosaki
- “Total Money Makeover” and “Baby Step Millionaires” by Dave Ramsey
- “The Motley Fool. You Have More Than You Think” by David Gardner and Tom Gardner

3. Live Below Your Means

Living frugally doesn’t mean sacrificing your quality of life. It means being intentional about your spending. Avoid unnecessary expenses and focus on saving and investing. Allocate a portion of your income to savings and investments before covering other expenses.

Action Steps:

Create a budget and track your spending.
Prioritize saving over non-essential purchases.

4. Invest Wisely

Investing is a powerful tool for wealth creation. Start early, even if it’s with small amounts. Diversify your investments to manage risk effectively.

Action Steps:

Learn about different investment vehicles and their pros and cons.
Open a brokerage account and start investing.

5. Leverage Your Skills and Network

Your skills and connections can be valuable assets. Leverage them to create opportunities for income growth. Educate yourself, network with like-minded individuals, attend industry events, set career goals, and explore side hustles or freelance work.

Action Steps:

Identify your unique skills and find ways to monetize them.
Attend networking events or join professional associations.

Building wealth is a journey that requires discipline, education, and persistence. Regardless of your background, these five strategies can set you on the path toward financial independence. Remember that wealth-building is about making consistent progress over time, no matter where you start. With patience and dedication, you can achieve financial freedom and peace of mind, and truly enjoy life.

Ready to get started? Read our article, 10 Ways to Build Wealth, offering practical and actionable steps toward securing your financial future.

For the third consecutive year, the IRS has published guidance that offers some relief to taxpayers covered by the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. But the IRS also indicated in Notice 2024-35 that forthcoming final regulations for the rule will apply for the purposes of determining RMDs from such accounts in 2025.

Beneficiaries face RMD rule changes

The need for the latest guidance traces back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among other changes, the law eliminated so-called “stretch IRAs.”

Pre-SECURE Act, all beneficiaries of inherited IRAs were allowed to stretch the RMDs on the accounts over their entire life expectancies. For younger heirs, this meant they could take smaller distributions for decades, deferring taxes while the accounts grew. They also had the option to pass on the IRAs to later generations, which deferred the taxes for even longer.

To avoid this extended tax deferral, the SECURE Act imposed limitations on which heirs can stretch IRAs. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) may stretch payments over their life expectancies. The following heirs are EDBs:

Surviving spouses,
Children younger than the “age of majority,”
Individuals with disabilities,
Chronically ill individuals, and
Individuals who are no more than 10 years younger than the account owner.

All other heirs (“designated beneficiaries”) must take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) for RMDs. (In 2023, the age at which account owners must start taking RMDs rose from age 72 to age 73, pushing the RBD date to April 1 of the year after account owners turn 73.)

In February 2022, the IRS issued proposed regs that came with an unwelcome surprise for many affected heirs. They provide that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. In other words, they aren’t permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement gives beneficiaries much less tax planning flexibility and could push them into higher tax brackets during those years.

Confusion reigns

It didn’t take long for the IRS to receive feedback from confused taxpayers who had recently inherited IRAs or defined contribution plans and were unclear about when they were required to start taking RMDs on the accounts. The uncertainty put both beneficiaries and defined contribution plans at risk. How? Beneficiaries could have been dinged with excise tax equal to 25% of the amounts that should have been distributed but weren’t (reduced to 10% if the RMD failure is corrected in a timely manner). The plans could have been disqualified for failure to make RMDs.

In response to the concerns, only six months after the proposed regs were published, the IRS waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. It also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD.

The waiver guidance indicated that the IRS would issue final regs that would apply no earlier than 2023. But then 2023 rolled around — and the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the RBD.

Now the IRS has again extended the relief, this time for RMDs in 2024 from an IRA or defined contribution plan when the deceased passed away during the years 2020 through 2023 on or after the RBD. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs, and plans won’t be disqualified based solely on such missed RMDs.

Delayed distributions aren’t always best

In a nutshell, the succession of IRS waivers means that designated beneficiaries who inherited IRAs or defined contributions plans after 2019 aren’t required to take annual RMDs until at least 2025. But some individuals may be better off beginning to take withdrawals now, rather than deferring them. The reason? Tax rates could be higher beginning in 2026 and beyond. Indeed, many provisions of the Tax Cuts and Jobs Act, including reduced individual income tax rates, are scheduled to sunset after 2025. The highest rate will increase from 37% to 39.6%, absent congressional action.

What if the IRS reverses course on the 10-year rule, allowing a lump sum distribution in the tenth year rather than requiring annual RMDs? Even then, it could prove worthwhile to take distributions throughout the 10-year period to avoid a hefty one-time tax bill at the end.

On the other hand, beneficiaries nearing retirement likely will benefit by delaying distributions. If they wait until they’re no longer working, they may be in a lower tax bracket.

Stay tuned

The IRS stated in its recent guidance that final regs “are anticipated” to apply for determining RMDs for 2025. However, based on the tax agency’s actions in the past few years, skepticism about that is understandable. We’ll continue to monitor future IRS guidance and keep you informed of any new developments.

As we celebrate Financial Literacy Month, let’s explore practical strategies to build wealth. Whether you’re just starting your financial journey or looking to enhance your existing wealth-building techniques, these ten tips will empower you to create a solid foundation for your financial well-being.

1. Start by Making a Plan

Building wealth begins with a vision and a plan. Take the time to identify your financial goals and map out how to achieve them. Consider hiring a certified financial planner to help you along your journey.

2. Make a Budget and Stick to It

Budgeting is essential, but don’t be overwhelmed by complexity. Begin with the fundamentals—create a budget, track expenses, and understand your debts. Create a budget that aligns with your goals and helps you know where your money goes each month. Sticking to your budget and regularly reviewing your budget increases your chances of achieving your financial objectives.

3. Build Your Emergency Fund

An emergency fund acts as a safety net. Set aside funds to cover unexpected expenses like car repairs or medical bills. Aim for at least three to six months’ worth of living expenses. Having an emergency fund prevents reliance on credit cards and provides peace of mind.

4. Manage Your Debt

Prioritize paying off your debts. Financial expert Dave Ramsey recommends the fastest way to pay off debt is the Snowball Method, which is where you pay off debt in order of smallest balance to largest, regardless of interest rate. The Avalanche Method prioritizes paying off higher-interest debt first. Regardless of the method you choose, reduce your debt to free up more resources for saving and investing.

5. Automate Your Financial Life

Automating your savings, investments, bills, and debt payments helps you go from manually managing your money to having your finances manage themselves. Consistent contributions to retirement accounts and other investments ensure steady progress toward your wealth-building goals. When things change, such as an increase in income, review your automation and make changes as needed. This could afford you the opportunity to invest more toward your financial goals.

6. Max Out Your Retirement Savings

Start early and contribute the maximum allowed to retirement accounts like 401(k)s or IRAs. Take advantage of employer matches—it’s essentially free money for your future.

7. Stay Diversified

Diversification reduces risk. Spread your investments across different asset classes—stocks, bonds, real estate. Regularly review and adjust your portfolio.

8. Up Your Earnings

Invest in yourself. Enhance your skills, pursue education, and set career growth goals. Higher earnings provide more resources for wealth-building.

9. Think Long-Term

Wealth-building is a marathon, not a sprint. Avoid market timing and focus on long-term growth. Consistency and patience pay off over time.

10. Stay Curious

Financial literacy is an ongoing journey. Read, attend seminars, and seek professional advice.

Remember, financial literacy isn’t just about knowing these tips—it’s about applying them consistently. Use this month as a catalyst to take actionable steps toward securing your financial future.

Businesses usually want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why would you want to?

One reason might be tax law changes that raise tax rates. The Biden administration has proposed raising the corporate federal income tax rate from its current flat 21% to 28%. Another reason may be because you expect your noncorporate pass-through entity business to pay taxes at higher rates in the future and the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates.

If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher and the deductions will be more beneficial.

To fast-track income

Consider these options if you want to accelerate revenue recognition into the current tax year:

Sell appreciated assets that have capital gains in the current year, rather than waiting until a later year.
Review the company’s list of depreciable assets to determine if any fully depreciated assets are in need of replacement. If fully depreciated assets are sold, taxable gains will be triggered in the year of sale.
For installment sales of appreciated assets, elect out of installment sale treatment to recognize gain in the year of sale.
Instead of using a tax-deferred like-kind Section 1031 exchange, sell real property in a taxable transaction.
Consider converting your S corporation into a partnership or LLC treated as a partnership for tax purposes. That will trigger gains from the company’s appreciated assets because the conversion is treated as a taxable liquidation of the S corp. The partnership will have an increased tax basis in the assets.
For construction companies with long-term construction contracts previously exempt from the percentage-of-completion method of accounting for long-term contracts: Consider using the percentage-of-completion method to recognize income sooner as compared to the completed contract method, which defers recognition of income until the long-term construction is completed.

To postpone deductions

Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value:

Delay purchasing capital equipment and fixed assets, which would give rise to depreciation deductions.
Forego claiming big first-year Section 179 deductions or bonus depreciation deductions on new depreciable assets and instead depreciate the assets over a number of years.
Determine whether professional fees and employee salaries associated with a long-term project could be capitalized, which would spread out the costs over time.
Buy bonds at a discount this year to increase interest income in future years.
If allowed, put off inventory shrinkage or other write-downs until a year with a higher tax rate.
Delay charitable contributions into a year with a higher tax rate.
If allowed, delay accounts receivable charge-offs to a year with a higher tax rate.
Delay payment of liabilities where the related deduction is based on when the amount is paid.

When employees commit fraud, they generally try to keep the schemes going as long as possible by concealing their activities from others. How successful thieves are at concealment depends largely on their identities, their roles within their organizations and the type of fraud they commit. To uncover potential fraud in your organization and prevent financial losses, it helps to familiarize yourself with common perpetrator characteristics and the methods occupational thieves use to conceal their crimes.

Identity and fraud

Every two years, the Association of Certified Fraud Examiners (ACFE) releases a comprehensive study on occupational fraud based on real-life incidents. The most recent report, Occupational Fraud 2024: A Report to the Nations finds that while most fraud is committed by employees and managers, schemes involving company leaders are the most costly. Employees are responsible for median losses of $60,000, managers for median losses of $184,000, and owners and executives for $500,000 in median losses. Gender, tenure, education level and age also matter. Men, long-tenured employees, workers with a college degree or higher, and individuals over age 50 are all associated with more costly fraud schemes.

It’s important to stress that employees who match characteristics of the typical or most costly fraud perpetrators aren’t necessarily going to commit and conceal fraud. However, keeping fraud statistics in mind can help your organization implement safeguards and monitor workers for illicit activities.

Physical documents

The ACFE report found that 89% of fraud incidents involve some form of concealment. In 41% of cases, fraudsters create or change physical documents. Since many internal controls require paperwork, it’s easy to see why perpetrators would need to alter or create physical documents to cover their tracks. Some employees, such as executives, are in a better position to alter documents and then prevent rank-and-file employees from asking questions.

But if employees encounter unusual or suspicious documents, they can’t simply dismiss them. Typos, font differences and calculation errors are all red flags that merit a closer look. Be sure workers know they can come to you. Or offer them a tipline or web portal to anonymously report fraud suspicions.

Occupational fraudsters also destroy or withhold physical documents (23% of cases) to conceal theft. To help combat such concealment, establish checklists that stipulate documents that must be present to support or approve every financial transaction. Missing documents should be flagged and transactions should be denied until they materialize. Be sure to track every incidence of missing documents to spot patterns and help uncover potential fraud.

Electronic files

Thieves often create or alter electronic documents (31% and 28% of cases, respectively), too. Employees tasked with reviewing transactions and supporting digital documents should receive training on how to examine an electronic document’s properties for nonauthorized use. Depending on the software package, such investigations can help reveal a document’s author, creation date and number of revisions.

Obviously, if you find an accounting document authored or updated by a nonaccounting employee or member of management, you should ask questions. However, don’t try to recover any deleted files. If you suspect fraud, contact a forensic accountant to perform computer forensic tasks.

Arrange for an investigation

Understanding possible fraud concealment methods can help you interrupt schemes before your business suffers debilitating losses from them. If you suspect an employee of hiding something that looks like fraud, contact us to investigate.

As you’re no doubt aware, employers are responsible for withholding and paying payroll taxes. If you don’t use a third-party provider, it’s critical to stay focused on payroll tax compliance. Given the potential penalties involved, you can’t get complacent about proper administration. Let’s review the six major payroll taxes to keep an eye on:

1. Federal. Employers must withhold federal income tax from employees’ paychecks. The amount of income tax withheld from each employee’s pay depends on two factors: 1) the amount of the wages, and 2) information provided on the employee’s Form W-4, “Employee’s Withholding Certificate.” Additional withholding rules may apply to commissions and other forms of compensation.

2. State and local. Be sure to stay apprised of your non-federal payroll tax obligations. State income tax withholding rules, for example, apply to many employers. However, eight states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming) don’t impose an income tax. New Hampshire and Tennessee don’t tax wages. Certain localities also impose income taxes. And in some places, withholding is required to cover short-term disability, paid family leave or unemployment benefits.

3. FICA. Payroll taxes authorized under the Federal Insurance Contributions Act (FICA) comprise two components. The first is a Social Security tax of 6.2% on an amount up to an annual “wage base.” In 2024, that wage base is $168,600. The second FICA component is a Medicare tax of 1.45% on all wages. Both employers and employees must pay FICA tax; employers must withhold the employees’ share.

4. FUTA. The Federal Unemployment Tax Act (FUTA) created a special tax that applies to the first $7,000 of wages of every employee. The purpose of this tax is to help states pay employees who have been involuntarily terminated from their jobs. The basic FUTA rate is 6%, but employers can benefit from a credit for state unemployment tax of up to 5.4%, resulting in an effective tax of 0.6%. However, the credit is reduced if a state borrows from the federal government to cover its unemployment benefits liability and doesn’t repay the funds.

5. State unemployment. Every state also runs its own unemployment insurance program to provide benefits to eligible workers who are involuntarily terminated. Generally, the rate employers must pay is based on their claims experience. The more claims made by former employees, the higher the tax rate. States update these rates annually.

6. Additional Medicare tax. This payroll tax often flies under the radar. Under a provision of the Affordable Care Act, the additional Medicare tax of 0.9% applies to employee wages above $200,000 for single filers, $250,000 for joint married filers and $125,000 for separate married filers. Note that this tax is paid by employees only. However, employers are responsible for withholding it, when applicable.

If your organization has been operational for a while, you’re likely well aware of the additional Medicare tax, as well as the other five common payroll taxes discussed above. Nevertheless, most employers can benefit from taking a continuous-improvement approach to payroll taxes, always looking for ways to improve efficiency and better ensure compliance. We can help you assess the costs and efficacy of your payroll processes.

The Inflation Reduction Act (IRA) established and expanded numerous incentives to encourage taxpayers to increase their use of renewable energy and adoption of a range of energy efficient improvements. In particular, the law includes funding for nearly $9 billion in home energy rebates.

While the rebates aren’t yet available, many states are expected to launch their programs in 2024. And the IRS recently released some critical guidance (Announcement 2024–19) on how it’ll treat the rebates for tax purposes.

The rebate programs

The home energy rebates are available for two types of improvements. Home Efficiency Rebates apply to whole-house projects that are predicted to reduce energy usage by at least 20%. These rebates are applicable to consumers who reduce their household energy use through efficiency projects. Examples include the installation of energy efficient air conditioners, windows and doors.

The maximum rebate amount is $8,000 for eligible taxpayers with projects with at least 35% predicted energy savings. All households are eligible for these rebates, with the largest rebates directed to those with lower incomes. States can choose to provide a way for homeowners or occupants to receive the rebates as an upfront discount, but they aren’t required to do so.

Home Electrification and Appliance Rebates are available for low- or moderate-income households that upgrade to energy efficient equipment and appliances. They’re also available to individuals or entities that own multifamily buildings where low- or moderate-income households represent at least 50% of the residents. These rebates cover up to 100% of costs for lower-income families (those making less than 80% of the area median income) and up to 50% of costs for moderate-income families (those making 80% to 150% of the area median income). According to the Census Bureau, the national median income in 2022 was about $74,500 — meaning some taxpayers who assume they won’t qualify may indeed be eligible.

Depending on your state of residence, you could save up to:

$8,000 on an ENERGY STAR-certified electric heat pump for space heating and cooling,
$4,000 on an electrical panel,
$2,500 on electrical wiring,
$1,750 on an ENERGY STAR-certified electric heat pump water heater, and
$840 on an ENERGY STAR-certified electric heat pump clothes dryer and/or an electric stove, cooktop, range or oven.

The maximum Home Electrification and Appliance Rebate is $14,000. The rebate amount will be deducted upfront from the total cost of your payment at the “point of sale” in participating stores if you’re purchasing directly or through your project contractors.

The tax treatment

In the wake of the IRA’s enactment, questions arose about whether home energy rebates would be considered taxable income by the IRS. The agency has now put the uncertainty to rest, with guidance stating that rebate amounts won’t be treated as income for tax purposes. However, rebate recipients must reduce the basis of the applicable property by the rebate amount.

If a rebate is provided at the time of sale of eligible upgrades and projects, the amount is excluded from a purchaser’s cost basis. For example, if an energy-efficient equipment seller applies a $500 rebate against a $600 sales price, your cost basis in the property will be $100, rather than $600.

If the rebate is provided at a later time, after purchase, the buyer must adjust the cost basis similarly. For example, if you spent $600 to purchase eligible equipment and later receive a $500 rebate, your cost basis in the equipment drops from $600 to $100 upon receipt of the rebate.

Interplay with the Energy Efficient Home Improvement Credit

The IRS guidance also addresses how the home energy rebates affect the Energy Efficient Home Improvement Credit. As of 2023, taxpayers can receive a federal tax credit of up to 30% of certain qualified expenses, including:

Qualified energy efficiency improvements installed during the year,
Residential energy property expenses, and
Home energy audits.

The maximum credit each year is:

$1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150), and
$2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.

Taxpayers who receive home energy rebates and are also eligible for the Energy Efficient Home Improvement Credit must reduce the amount of qualified expenses used to calculate their credit by the amount of the rebate. For example, if you purchase an eligible product for $400 and receive a $100 rebate, you can claim the 30% credit on only the remaining $300 of the cost.

Act now?

While the IRA provides that the rebates are available for projects begun on or after August 16, 2022, projects must fulfill all federal and state program requirements. The federal government, however, has indicated that it’ll be difficult for states to offer rebates for projects completed before their programs are up and running. In the meantime, though, projects might qualify for other federal tax breaks. Contact us to determine the most tax-efficient approach to energy efficiency.

When you encounter the word “pivot,” you may think of a politician changing course on a certain issue or perhaps a group of friends trying to move a couch down a steep flight of stairs. But businesses sometimes choose to pivot, too.

Under a formal pivot strategy, a company consciously changes its strategic focus in a series of carefully considered and executed moves. Obviously, this is an endeavor that should never be undertaken lightly or suddenly. But there’s no harm in keeping it in mind and even exploring the feasibility of a pivot strategy under certain circumstances.

5 common situations

For many businesses, five common situations often prompt a pivot:

1. Financial distress. When revenue streams dwindle and cash flow slows, it’s critical to pinpoint the cause(s) as soon as possible. In some cases, you may be able to blame temporary market conditions or a seasonal decline. But, in others, you may be looking at the irrevocable loss of a “unique selling proposition.”

In the latter case, a pivot strategy may be in order. This is one reason why companies are well-advised to regularly generate proper financial statements and projections. Only with the right data in hand can you make a sound decision on whether to pivot.

2. Lack of identity. Does your business offer a wide variety of products or services but have only one that clearly stands out? If so, you may want to pivot to focus primarily on that product or service — or even make it your sole offering.

Doing so typically involves cost-cutting and streamlining of processes to boost efficiency. In a best-case scenario, you might end up having to invest less in the business and get more out of it.

3. Weak demand. Sometimes the market tells you to pivot. If demand for your products or services has been steadily declining, it may be time to reimagine your strategic goals and pivot to something that will generate more dependable revenue.

Pivoting doesn’t always mean going all the way back to square one and completely rewriting your business plan. More often, it calls for targeted changes to production, pricing and marketing. For example, you might redefine your target audience and position your products or services as no hassle, budget-friendly alternatives. Or you could take the opposite approach and position yourself as a high-end “boutique” option.

4. Tougher competition. Many industries have seen “disrupters” emerge that upend the playing field. There’s also the age-old threat of a large company rolling in and simply being too big to beat.

A pivot can help set you apart from the dominant forces in your market. For example, you might seek to compete in a completely different niche. Or you may be able to pivot to exploit the weaknesses of your competitors — perhaps providing more personalized service or quicker delivery or response times.

5. Change of heart. In some cases, a pivot strategy may originate inside you. Maybe you’ve experienced a shift in your values or perspective. Or perhaps you have a new vision for your business that you feel passionate about and simply must pursue.

This type of pivot tends to involve considerable risk — especially if your company has been profitable. You should also think about the contributions and well-being of your employees. Nevertheless, one benefit of owning your own business is the freedom to call the shots.

Never a whim

Again, a pivot strategy should never be a whim. It must be carefully researched, discussed and implemented. For help applying thorough financial analyses to any strategic planning move you’re considering, contact us.

Yeo & Yeo CPAs & Advisors is proud to announce that Christina LaVielle and Kyle Richardson, CPA, have received the Tomorrow’s 20 Award presented by the Auburn Hills Chamber of Commerce. This award recognizes emerging leaders who demonstrate outstanding leadership, innovation, and commitment to community service.

Christina LaVielle is a manager and member of the firm’s Government Services Group and Audit Services Group. Her areas of expertise include audits for governmental entities, including cities, townships, counties, villages, libraries, and water districts. LaVielle’s dedication to community is evident through her involvement with the Yeo & Yeo Young Professionals Group, the Auburn Hills Chamber of Commerce, and the Michigan Government Finance Officers Association.

“Christina approaches each day with a sense of purpose, aiming to make a meaningful impact both within the accounting profession and the Auburn Hills community. This recognition is a testament to the positive impact she has already made and the contributions that she will continue to inspire in the future.” said Alan Panter, CPA, CGFM, Principal at Yeo & Yeo.

Get to Know Christina:

Kyle Richardson, CPA is a manager and member of Yeo & Yeo’s Trust and Estate Services Group. His areas of expertise include tax planning and business advisory services. Passionate about supporting the community, Richardson is active in the Troy Chamber of Commerce and the Auburn Hills Chamber of Commerce, along with professional organizations including the Michigan Association of CPAs and the American Institute of CPAs. Richardson is also the past leader of Yeo & Yeo’s Young Professionals Group, and remains actively involved in supporting the firm’s firm-wide annual service project.

“Kyle’s selfless dedication to service in our community and profession is commendable. He is deserving of this honor, and I am proud to work alongside him.” said Zaher Basha, CPA, Senior Manager at Yeo & Yeo.

Get to Know Kyle:

“Christina and Kyle are driven by empathy, agility, enthusiasm, and possibility. Their unwavering commitment to these principles is reflected in every aspect of their work, from their dedication to client service to their involvement in community initiatives,” added Tammy Moncrief, CPA, Board Member, and Managing Principal of Yeo & Yeo’s Auburn Hills office. “I am confident they will continue and lead with these values at the forefront.”

The Tomorrow’s 20 award recipients were honored at a gala hosted by the Auburn Hills Chamber on May 16 in Pontiac, Michigan.

If your business doesn’t already have a retirement plan, it might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $69,000 for 2024 (up from $66,000 for 2023). If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $69,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2024 by a whopping $22,080 (32% × $69,000).

Other possibilities

There are more small business retirement plan options, including:

401(k) plans, which can even be set up for just one person (also called solo 401(k)s),
Defined benefit pension plans, and
SIMPLE-IRAs.

Depending on your situation, these plans may allow bigger or smaller deductible contributions than a SEP-IRA. For example, for 2024, a participant can contribute $23,000 to a 401(k) plan, plus a $7,500 “catch-up” contribution for those age 50 or older.

Watch the calendar

Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.

Important: This provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.

For example, the deadline for the 2023 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 15, 2024, if you extend your 2023 tax return. The deadline for making a contribution for the 2023 tax year is also October 15, 2024. For the 2024 tax year, the deadline for setting up a SEP and making a contribution is October 15, 2025, if you extend your 2024 tax return. However, to make a SIMPLE-IRA contribution for the 2023 tax year, you must have set up the plan by October 1, 2023. So, it’s too late to set up a plan for last year.

While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan options. Be aware that, if your business has employees, you may have to make contributions for them, too.

Tax-advantaged accounts or reimbursement arrangements for health care have become popular employer-sponsored benefits. And for good reason — these accounts or arrangements ease the burden of high costs on organizations while giving employees a tax-friendly way to manage medical expenses.

The IRS, however, has concerns. The tax agency recently issued a news release (IR-2024-65) warning plan administrators that only qualified medical expenses are eligible for deductions or reimbursements under these accounts or arrangements. Personal expenses for “general health and wellness” aren’t.

4 common vehicles

The IRS news release specifically addresses four commonly used vehicles for helping employees manage medical expenses:

1. Health Flexible Spending Accounts (FSAs). Participants can channel up to $3,200 in 2024 (up from $3,050 in 2023) of pretax income into these standalone, employer-owned accounts. The account then reimburses the participant for qualified medical expenses.

2. Health Savings Accounts (HSAs). These participant-owned accounts must be offered in conjunction with a high-deductible health plan. In 2024, participants can contribute pretax income of up to $4,150 for self-only coverage (up from $3,850 in 2023) and $8,300 for family coverage (up from $7,750 in 2023).

3. Health Reimbursement Arrangements (HRAs). Rather than being individual participant accounts, HRAs are employer-sponsored plans that reimburse participants for eligible medical expenses. There are several different versions. Generally, employers may claim a tax deduction for reimbursements, which are typically tax-free for participants.

4. Medical Savings Accounts (MSAs). These participant-owned accounts, sometimes referred to as “Archer MSAs,” are a precursor to HSAs intended for self-employed people and very small businesses. Congress discontinued the creation of new MSAs in 2007, but some employers still sponsor accounts created before then.

Aggressive marketing

The IRS’s concerns spring largely from what it calls “aggressive marketing.” That is, according to the news release, “… some companies are misrepresenting circumstances under which food and wellness expenses can be paid or reimbursed under FSAs and other health spending plans.”

The tax agency says certain businesses are telling customers that, if they can get a doctor’s note supporting purchases of nonmedical food, wellness or exercise products or services, the associated costs can be converted to tax-qualified medical expenses. But this generally isn’t true. The news release even includes an example in which a company offers to provide a doctor’s note to a customer, for a fee, that would allow the individual to claim an FSA reimbursement for low-carb food products targeted at people with diabetes.

Under Internal Revenue Code Section 213, qualifying medical expenses are defined as amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting a structure or function of the body. They don’t include expenses related to products or services that are merely beneficial to health and wellness.

Friendly reminder

If your organization sponsors one of the accounts or arrangements mentioned above, you may want to pass along the IRS’s friendly reminder to participants. The tax agency warns in the news release that if a health FSA, HSA, HRA or MSA is used to pay or reimburse nonmedical expenses, all payments from the account or arrangement — including valid reimbursements — may be includible in the participant’s income. Contact us for more information.

If your company has been in business for a while, you may not pay much attention to your payroll system so long as it’s running smoothly. But don’t get too complacent. Major payroll errors can pop up unexpectedly — creating huge disruptions costing time and money to fix, and, perhaps worst of all, compromising the trust of your employees.

For these reasons, businesses are well-advised to conduct payroll audits at least once annually to guard against the many risks inherent to payroll management. Here are seven such risks to be aware of:

1. Inaccurate recordkeeping. If you don’t keep detailed and accurate records, it will probably come back to haunt you. For example, the Fair Labor Standards Act (FLSA) requires businesses to maintain records of employees’ earnings for at least three years. Violations of the FLSA can trigger severe penalties. Be sure you and your staff know what records to keep and have sound policies and procedures in place for keeping them.

2. Employee misclassification. Given the widespread use of “gig workers” in today’s economy, companies are at high risk for employee misclassification. This occurs when a business engages independent contractors but, in the view of federal authorities, the company treats them like employees. Violating the applicable rules can leave you owing back taxes and penalties, plus you may have to restore expensive fringe benefits.

3. Manual processes. More than likely, if your business prepares its own payroll, it uses some form of payroll software. That’s good. Today’s products are widely available, relatively inexpensive and generally easy to use. However, some companies — particularly small ones — may still rely on manual processes to record or input critical data. Be careful about this, as it’s a major source of errors. To the extent feasible, automate as much as you can.

4. Privacy violations. You generally can’t manage payroll without data such as Social Security numbers, home addresses, birth dates and bank account numbers. Unfortunately, possessing such information puts you squarely in the sights of hackers and those pernicious purveyors of ransomware. Invest thoroughly in proper cybersecurity measures and regularly update these safeguards.

5. Internal fraud. Occupational (or internal) fraud remains a major threat to businesses. Schemes can range from “cheating” on timesheets by rank-and-file workers to embezzlement by those higher on the organizational chart. Among the most fundamental ways to protect your payroll function from fraud is to require segregation of duties. In other words, one employee, no matter how trusted, should never completely control the process. If you don’t have enough employees to segregate duties, consider outsourcing.

6. Legal compliance. As a business owner, you’re probably not an expert on the latest regulatory payroll developments affecting your industry. That’s OK; laws and regulations are constantly evolving. However, failing to comply with the current rules could cost you money and hurt your company’s reputation. So, be sure to have a trustworthy attorney on speed dial that you can turn to for assistance when necessary.

7. Tax compliance. Employers are responsible for calculating tax withholding on employee wages. In addition to deducting federal payroll tax from paychecks, your organization must contribute its own share of payroll tax. If you get it wrong, the IRS could investigate and potentially assess additional tax liability and penalties. That’s where we come in. For help conducting a payroll audit, reviewing your payroll costs and, of course, managing your tax obligations, contact us.

Estate planning has a language all its own. While you may be familiar with common terms such as a will, a trust or an executor, you may not be as certain about others. For quick reference, here’s a glossary of key terms you may come across when planning your estate:

Administrator. An individual or fiduciary appointed by a court to manage an estate if no executor or personal representative has been appointed or the appointee is unable or unwilling to serve.

Ascertainable standard. The legal standard, typically relating to an individual’s health, education, maintenance and support, which is used to determine what distributions are permitted from a trust.

Attorney-in-fact. The individual named under a power of attorney as the agent to handle the financial and/or health affairs of another person.

Codicil. A legally binding document that makes minor modifications to an existing will without requiring a complete rewrite of the document.

Community property. A form of ownership in certain states in which property acquired during a marriage is presumed to be jointly owned regardless of who paid for it.

Credit shelter trust. A trust established to bypass the surviving spouse’s estate to take full advantage of each spouse’s federal estate tax exemption. It’s also known as a bypass trust or A-B trust.

Fiduciary. An individual or entity, such as an executor or trustee, designated to manage assets or funds for beneficiaries and legally required to exercise an established standard of care.

Grantor trust. A trust in which the grantor retains certain control so that it’s disregarded for income tax purposes and the trust’s assets are included in the grantor’s taxable estate.

Inter vivos. The legal phrase used to describe various actions (such as transfers to a trust) made by an individual during his or her lifetime.

Intestacy. When a person dies without a legally valid will, the deceased’s estate is distributed in accordance with the applicable state’s intestacy laws.

Joint tenancy. An ownership right in which two or more individuals (such as a married couple) own assets, often with rights of survivorship.

No-contest clause. A provision in a will or trust that ensures that an individual who pursues a legal challenge to assets will forfeit his or her inheritance or interest.

Pour-over will. A will used upon death to pass ownership of assets that weren’t transferred to a revocable trust.

Power of appointment. The power granted to an individual under a trust that authorizes him or her to distribute assets on the termination of his or her interest in the trust or on certain other circumstances.

Power of attorney (POA). A legal document authorizing someone to act as attorney-in-fact for another person, relating to financial and/or health matters. A “durable” POA continues if the person is incapacitated.

Probate. The legal process of settling an estate in which the validity of the will is proven, the deceased’s assets are identified and distributed, and debts and taxes are paid.

Qualified disclaimer. The formal refusal by a beneficiary to accept an inheritance or gift or to allow the inheritance or gift to pass to the successor beneficiary.

Qualified terminable interest property (QTIP). Property in a trust or life estate that qualifies for the marital deduction because the surviving spouse is the sole beneficiary during his or her lifetime. The assets of the QTIP trust are therefore included in the estate of the surviving spouse, that is, the spouse who is the beneficiary of the trust, not the estate of the spouse who created the trust.

Spendthrift clause. A clause in a will or trust restricting the ability of a beneficiary (such as a child under a specified age) to transfer or distribute assets.

Tenancy by the entirety. An ownership right between two spouses in which property automatically passes to the surviving spouse on the death of the first spouse.

Tenancy in common. An ownership right in which each person possesses rights and ownership of an undivided interest in the property.

Keep in mind that this is just a brief roundup of some estate planning terms. If you have questions about their meanings or others, contact us. We’d be pleased to provide context to any estate planning terms that you’re unfamiliar with.

April brings more than just spring showers and vibrant blooms. It marks a significant occasion: National Financial Literacy Month. Financial literacy is not just a buzzword. It’s a critical life skill that impacts our financial well-being. Life changes can have an impact on your financial journey – it’s also critical to maintain your knowledge.

In this month’s series of practical financial management tips, let’s first dive into why understanding personal finance matters and the impact it can have on the overall quality of life.

Why is Financial Literacy Important?

Empowerment and Confidence: Financially literate individuals feel more confident in managing their money. They understand concepts like budgeting, investing, and debt management, which empowers them to make informed decisions.
Avoid Costly Mistakes: Lack of financial knowledge can lead to costly mistakes. From overspending to falling victim to scams, being financially savvy helps prevent these pitfalls.
Long-term Planning: Over 60% of Americans don’t have enough savings to cover a $500 emergency. Financial literacy encourages long-term thinking. It enables individuals to plan for retirement, emergencies, and major life events.
Economic Resilience & Stability: In a world brimming with uncertainties—rising inflation rates, geopolitical tensions, and fluctuating energy prices—financial literacy acts as a shield. It empowers us to weather economic storms and adapt to changing circumstances. At the macro level, financial literacy can result in stronger family balance sheets, which lead to a stronger overall economy.
Generational Impact: Less than 50% of adults worldwide understand basic financial concepts. By promoting financial literacy, we break the cycle of generational financial struggles. When parents pass down money management skills to their children, they create a legacy of financial well-being.
Improved Relationships: Financial discussions can strain relationships. Literate individuals communicate openly about money matters, leading to healthier relationships. They collaborate on financial goals, budgeting, and investment decisions.
Freedom and Flexibility: Financial literacy enables better career choices, entrepreneurship, and side hustles. Debt-free living provides freedom to pursue passions, travel, or take sabbaticals.
Reduced Stress and Anxiety: Financially literate people understand their financial situation, which reduces uncertainty and anxiety. They have emergency funds, manage debt effectively, and plan for the future, leading to peace of mind.

Financial literacy isn’t a destination; it’s a lifelong journey. Let this April be the month you embark on that journey, armed with knowledge and determination.

If you operate a business, or you’re starting a new one, you know records of income and expenses need to be kept. Specifically, you should carefully record expenses to claim all the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS.

Be aware that there’s no one way to keep business records. On its website, the IRS states: “You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.” But there are strict rules when it comes to deducting legitimate expenses for tax purposes. And certain types of expenses, such as automobile, travel, meal and home office costs, require extra attention because they’re subject to special recordkeeping requirements or limitations on deductibility.

Ordinary and necessary

A business expense can be deducted if a taxpayer establishes that the primary objective of the activity is making a profit. To be deductible, a business expense must be “ordinary and necessary.” In one recent case, a married couple claimed business deductions that the IRS and the U.S. Tax Court mostly disallowed. The reasons: The expenses were found to be personal in nature and the taxpayers didn’t have adequate records for them.

In the case, the husband was a salaried executive. With his wife, he started a separate business as an S corporation. His sideline business identified new markets for chemical producers and connected them with potential customers. The couple’s two sons began working for the business when they were in high school.

The couple then formed a separate C corporation that engaged in marketing. For some of the years in question, the taxpayers reported the income and expenses of the businesses on their joint tax returns. The businesses conducted meetings at properties the family owned (and resided in) and paid the couple rent for the meetings.

The IRS selected the couple’s returns for audit. Among the deductions the IRS and the Tax Court disallowed:

Travel expenses. The couple submitted reconstructed travel logs to the court, rather than records kept contemporaneously. The court noted that the couple didn’t provide “any documentary evidence or other direct or circumstantial evidence of the time, location, and business purpose of each reported travel expense.”
Marketing fees paid by the S corporation to the C corporation. The court found that no marketing or promotion was done. Instead, the funds were used to pay several personal family expenses.
Rent paid to the couple for the business use of their homes. The court stated the amounts “were unreasonable and something other than rent.”

Retirement plan deductions allowed

The couple did prevail on deductions for contributions to 401(k) accounts for their sons. The IRS contended that the sons weren’t employees during one year in which contributions were made for them. However, the court found that 401(k) plan documents did mention the sons working in the business and the father “credibly recounted assigning them research tasks and overseeing their work while they were in school.” Thus, the court ruled the taxpayers were entitled to the retirement plan deductions. (TC Memo 2023-140)

Lessons learned

As this case illustrates, a business can’t deduct personal expenses, and scrupulous records are critical. Make sure to use your business bank account for business purposes only. In addition, maintain meticulous records to help prepare your tax returns and prove deductible business expenses in the event of an IRS audit.