Managing Federal Awards to Maintain Compliance

The changing landscape of the new federal funding for school districts during the COVID-19 pandemic requires an advanced understanding of the requirements set forth by funding agencies. Historically, school districts have received federal funding from the same sources for the same programs each year and are now receiving it through new sources for new programs with complex grant requirements. Understanding the requirements set forth by grantors and properly managing the flow of federal dollars is crucial to maintaining compliance.

The following are a few areas to consider when managing federal awards.

1. Understand the Requirements of the Specific Award

While there are overarching guidelines to follow when using federal funding, each award may have unique requirements. Read the grant award documents to ensure an understanding of the conditions. If requirements are unclear, obtain a better understanding from the grantor as soon as possible to ensure the grant is being administered in the manner intended.

Sometimes the grantor itself will be unsure of how to interpret the application of a law or regulation that relates to the grant. Should the grantor be unable to provide further guidance, make sure the school district documents the assumptions used when interpreting a requirement and how it was applied. When possible, obtain in writing from the grantor its agreement, or at least acknowledgment, of the assumptions used.

2. Advance Funding vs. Reimbursement Basis

Some grants allow for the payment of funds to a grantee before expenditures are incurred. Other grants are on the reimbursement basis, which requires grantees to incur expenditures and then subsequently request reimbursement from the grantor. Understanding which method is allowed is necessary to ensure compliance with the grant, properly account for grant receipts, and manage cash flow.

If funds are received before incurring allowable expenditures, the receipt should be recorded as a liability until the time allowable expenditures are incurred.

3. Allowable Expenditures

The purpose of grant awards can vary significantly. Expenditures can mean anything from wages and related benefits to goods or services purchased from vendors to recouping indirect expenses. 2 CFR 200 defines expenditures as charges made by a nonfederal entity to a project or program for which a federal award was received. The costs may be reported on a cash or accrual basis as long as the methodology is disclosed and consistently applied.

Grants may consider indirect costs to be allowable expenditures. The de minimus indirect cost rate is 10%; however, not all grants allow this rate to be used. Consult the award documents or budget to aid in determining what is allowable for your entity.

Grant award documents, the related federal compliance supplement, and approved grant budgets typically outline the definition of allowable expenditures. Consulting with the grantor is often the best first step when the allowability of an expenditure is unclear.

4. Reporting Requirements

Most federal grants have reporting requirements. The conditions can vary depending on whether the award is a direct award or if the recipient is a sub-recipient. Reports may be required monthly, quarterly or annually. Some grants only require reporting when cash reimbursement is requested. Grants may have specific forms that need to be used or require information to be submitted via an online platform. Review the grant award requirements to ensure information is being reported timely and in the manner requested.

Managing federal awards can be complex. Obtaining an understanding of the requirements of each award up front, as well as throughout the life of the award, will aid school districts in meeting the applicable compliance requirements.

No matter where your school district is in the consideration of, application for, or use of federal awards, reach out to a member of Yeo & Yeo’s Education Services Group if you have questions or need further insight.

As we approach the end of the year, it’s a good time to think about whether your business needs to buy business equipment and other depreciable property. If so, you may benefit from the Section 179 depreciation tax deduction for business property. The election provides a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time.

Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2020 can be written off this year.

But to benefit for this tax year, you need to buy and place qualifying assets in service by December 31.

What qualifies?

The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.

The annual deduction limit is $1.04 million for tax years beginning in 2020, subject to a phaseout rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.59 million for tax years beginning in 2020. (Note: Different rules apply to heavy SUVs.)

There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).

In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.

The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.

What about bonus depreciation?

With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the Tax Cuts and Jobs Act, you could deduct only 50% of the cost of qualified new property.)

This tax break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).

Bonus depreciation is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.

Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it.

Need assistance?

These favorable depreciation deductions may deliver tax-saving benefits to your business on your 2020 return. Contact us if you have questions, or you want more information about how your business can maximize the deductions.

The year 2020 has taught businesses many lessons. The sudden onset of the COVID-19 pandemic followed by drastic changes to the economy have forced companies to alter the size of their workforces, restructure work environments and revise sales models — just to name a few challenges. And what this has all meant for employees is change.

Even before this year’s public health crisis, many businesses were looking into and setting forth policies regarding change management. In short, this is a formalized approach to providing employees the information, training and ongoing coaching needed to successfully adapt to any modification to their day-to-day jobs.

There’s little doubt that one of the enduring lessons of 2020 is that businesses must be able to shepherd employees through difficult transitions, even (or especially) when the company itself didn’t bring about the change in question.

Why change is hard

Most employees resist change for many reasons. There’s often a perceived loss of, or threat to, job security or status. Inconvenience and unfamiliarity provoke apprehension. In some cases, perhaps because of misinformation, employees may distrust their employers’ motives for a change. And some workers will always simply believe the “old way is better.”

What’s worse, some changes might make employees’ jobs more difficult. For example, moving to a new location might enhance an organization’s image or provide safer or more productive facilities. But doing so also may increase some employees’ commuting times or put employees in a drastically different working environment. When their daily lives are affected in such ways, employees tend to question the decision and experience high levels of anxiety.

What you shouldn’t do

Often, when employees resist change, a company’s decision-makers can’t understand how ideas they’ve spent weeks, months or years deliberating could be so quickly rejected. (Of course, in the case of the COVID-19 pandemic, tough choices had to be made in a matter of days.) Some leadership teams forget that employees haven’t had time to adjust to a new idea. Instead of working to ease employee fears, executives or supervisors may double down on the change, more strictly enforcing new rules and showing little patience for disagreements or concerns.

And it’s here the implementation effort can break down and start costing the business real dollars and cents. Employees may resist change in many destructive ways, from taking very slow learning curves to calling in sick to filing formal complaints or lawsuits. Some might even quit.

The bottom line: by not engaging in some form of change management, you’re more likely to experience reduced productivity, bad morale and increased turnover.

How to cope

“Life comes at ya fast,” goes the popular saying. Given the events of this year, it’s safe to say that most business owners would agree. Identify ways you’ve been able to help employees deal with this year’s changes and document them so they can be of use to your company in the future. Contact us for help cost-effectively managing your business.

Many businesses are closed or are limiting third-party access as COVID-19 surges across the United States. These restrictions could still be in place at year end — a time when external auditors traditionally observe physical inventory counts for calendar-year entities. Here’s how you can identify and overcome the challenges associated with inventory counts during the pandemic.

What’s expected to change?

Companies conduct manual counts at the end of the accounting period to ensure that the inventory balance reflected on their balance sheet matches what’s held on-site in raw materials, work-in-progress and finished goods. The extent to which your counting procedures will need to change during the COVID-19 crisis depends on your circumstances.

For example, you may need to make only minimal changes to protect employees and third parties, if your inventory is stored in one warehouse and requires only a small team to conduct the count. Possible safety measures might include:

Requiring employees to wear personal protective equipment,
Providing hand sanitizer and disinfectant spray, and
Setting up counting stations and other procedures to facilitate social distancing and capacity restrictions.

In some extreme situations (for example, if local stay-at-home mandates have been issued), your management team may decide to delay or even forgo an inventory count. If you face this situation, document the reasoning for your decision and share it with your auditors, board of directors and audit committee.

Be prepared for these groups to suggest alternative ways to conduct an inventory count. They might also request that your team identify an alternate date to conduct the count. If the count date is significantly later than the financial statement date, the audit team will pay close attention to how the count differed from what’s recorded in your inventory records.

What if your auditor can’t attend a physical count?

There are several reasons your auditor might be unable to observe your physical count in person, including government restrictions and company or audit firm policies designed to mitigate the spread of COVID-19. If this happens, you and your audit team will need to devise alternate ways to gather audit evidence pertaining to your company’s inventory.

The options available depend on the accuracy and integrity of your company’s inventory records, coupled with the auditor’s previous experience and observations related to your company’s inventory counts. For example, your auditors could use the inventory balance associated with the last count they observed, coupled with subsequent sales and purchases data to roll forward and generate a new inventory balance.

Alternatively, some companies use cycle count procedures. This is a form of sampling that involves counting a small amount of inventory on a regular basis and making corrections to the inventory system. These counting methods can circumvent the need for an annual inventory count.

Technology to the rescue

If you proceed with an inventory count, don’t overlook technology and its ability to document the existence of inventory and its location. For example, those involved in the inventory count could wear body cameras with GPS capabilities, or auditors could use drones, to observe the count in real-time. Additionally, those conducting the count can refer to video footage after the fact to verify the amounts they document during the process. Contact us to discuss the best approach to verify your year-end inventory levels.

Many employees take advantage of the opportunity to save taxes by placing funds in their employer’s health or dependent care flexible spending arrangements (FSAs). As the end of 2020 nears, here are some rules and reminders to keep in mind.

Health FSAs

A pre-tax contribution of $2,750 to a health FSA is permitted in both 2020 and 2021. You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. For example, they wouldn’t be deductible if you don’t itemize deductions on your tax return. Even if you do itemize, medical expenses must exceed a certain percentage of your adjusted gross income in order to be deductible. Additionally, the amounts that you contribute to a health FSA aren’t subject to FICA taxes.

Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for these items.

To avoid any forfeiture of your health FSA funds because of the “use-it-or-lose-it” rule, you must incur qualifying medical expenditures by the last day of the plan year (Dec. 31 for a calendar year plan), unless the plan allows an optional grace period. A grace period can’t extend beyond the 15th day of the third month following the close of the plan year (March 15 for a calendar year plan).

An additional exception to the use-it-or lose-it rule permits health FSAs to allow a carryover of a participant’s unused health FSA funds of up to $550. Amounts carried forward under this rule are added to the up-to-$2,750 amount that you elect to contribute to the health FSA for 2021. An employer may allow a carryover or a grace period for an FSA, but not both features.

Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don’t forget to reflect any changed circumstances in making your calculation.

Dependent care FSAs

Some employers also allow employees to set aside funds on a pre-tax basis in dependent care FSAs. A $5,000 maximum annual contribution is permitted ($2,500 for a married couple filing separately).

These FSAs are for a dependent-qualifying child under age 13, or a dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than half of the tax year.

Like health FSAs, dependent care FSAs are subject to a use-it-or-lose-it rule, but only the grace period relief applies, not the up-to-$550 forfeiture exception. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year.

Note: Because of COVID-19, the IRS has temporarily allowed employees to take certain actions in 2020 related to their health care and dependent care FSAs. For example, employees may be permitted to make prospective mid-year elections and changes. Ask your HR department if your plan allows these actions if you believe they would be beneficial in your situation. Other rules and exceptions may apply.

S corporations can provide tax advantages over C corporations in the right circumstances. This is true if you expect that the business will incur losses in its early years because shareholders in a C corporation generally get no tax benefit from such losses. Conversely, as an S corporation shareholder, you can deduct your percentage share of these losses on your personal tax return to the extent of your basis in the stock and any loans you personally make to the entity.

Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.

Therefore, your ability to use losses that pass through from an S corporation depends on your basis in the corporation’s stock and debt. And, basis is important for other purposes such as determining the amount of gain or loss you recognize if you sell the stock. Your basis in the corporation is adjusted to reflect various events such as distributions from the corporation, contributions you make to the corporation and the corporation’s income or loss.

Adjustments to basis

However, you may not be aware that several elections are available to an S corporation or its shareholders that can affect the basis adjustments caused by distributions and other events. Here is some information about four elections:

An S corporation shareholder may elect to reverse the normal order of basis reductions and have the corporation’s deductible losses reduce basis before basis is reduced by nondeductible, noncapital expenses. Making this election may permit the shareholder to deduct more pass-through losses.
An election that can help eliminate the corporation’s accumulated earnings and profits from C corporation years is the “deemed dividend election.” This election can be useful if the corporation isn’t able to, or doesn’t want to, make an actual dividend distribution.
If a shareholder’s interest in the corporation terminates during the year, the corporation and all affected shareholders can agree to elect to treat the corporation’s tax year as having closed on the date the shareholder’s interest terminated. This election affords flexibility in the allocation of the corporation’s income or loss to the shareholders and it may affect the category of accumulated income out of which a distribution is made.
An election to terminate the S corporation’s tax year may also be available if there has been a disposition by a shareholder of 20% or more of the corporation’s stock within a 30-day period.

Contact us if you would like to go over how these elections, as well as other S corporation planning strategies, can help maximize the tax benefits of operating as an S corporation.

As year end approaches, it’s a good idea for calendar-year entities to review the guidelines for recognizing revenue and expenses. There are specific rules regarding accounting cutoffs under U.S. Generally Accepted Accounting Principles (GAAP). Strict observance of these rules is generally the safest game plan.

The basics

Companies that follow GAAP must use the accrual method of accounting, not the cash method. That means revenues and expenses must be matched to the periods in which they were earned or incurred. The end of the period serves as a “cutoff” for recognizing revenue and expenses. For a calendar-year business, the cutoff is December 31.

However, some companies may be tempted to play timing games to lower taxes or boost financial results. The temptation might be especially high in 2020, as many companies struggle during the COVID-19 pandemic.

Now or later

Test your understanding of the cutoff rules with these two hypothetical situations:

As of December 31, a calendar-year, accrual-basis auto dealership has verbally negotiated a deal on an SUV. But the customer hasn’t yet signed all the paperwork. Should the sale be reported in 2020 or 2021?
On December 30, a calendar-year, accrual-basis retailer pays its rent bill for January. Rent is due on the first day of the month. Can the store deduct the extra month’s rent in 2020 to help lower its tax bill?

In both examples, the transactions should be reported in 2021, not 2020. In the first example, even if the customer takes the car home for the weekend, it doesn’t matter; there’s still the possibility the customer could back out of the deal. The dealership can’t report the transaction in 2020 revenue until the customer has signed the paperwork and paid for the vehicle with cash or financing.

Audit procedures

If your financial statements are audited, your CPA will enforce strict cutoff rules — and likely reverse any items that were reported inaccurately. Audit procedures may include reviewing customer contracts and returns reported near year end. Auditors also may compare expenses as a percentage of revenues from period to period to identify timing errors. And they may vouch expenses to invoices and contracts for accuracy.

It never reflects favorably — in the eyes of investor or lenders — when auditors adjust year-end financial statements for inaccurate observation of cutoffs. Don’t give cause for others to wonder about your operations.

Timing is critical

Contact us if you need help understanding the rules on when to record revenue or expenses. We can help you comply with the rules and minimize financial statement adjustments during your audit.

The CARES Act provides that any forgiven PPP loan amount should be excluded from gross income for federal tax purposes. But the CARES Act did not expressly address the tax treatment of expenses paid with the forgiven funds. Businesses have been left to wonder whether they could not only receive tax-free funding but also potentially deduct the expenses paid with that funding for a double benefit.

New Guidelines Provided

With the recent release of much-anticipated guidance, the IRS confirmed in Rev. Rul. 2020-27 that otherwise deductible business expenses paid with forgiven Paycheck Protection Program (PPP) funds cannot be deducted for federal tax purposes. The non-deductible treatment applies for any payment of eligible PPP expenses to the extent of the loan forgiveness.

Business with partial loan forgiveness: If a business only has partial forgiveness of its loan, it may still have deductible expenditures attributable to the non-forgiven portion.
Business with entire loan forgiveness: The net result for a business that has its entire PPP loan forgiven should be tax-neutral for federal tax purposes. The forgiveness is not taxable, and the expenses paid with the forgiven funds are not deductible.

Calendar-Year Taxpayers

In short, for a calendar year taxpayer, the expenses are non-deductible for year-end 2020 if there is a reasonable expectation of forgiveness, regardless of whether the borrower files a forgiveness application in 2020 or 2021 and of when the actual forgiveness occurs.

Fiscal-Year Taxpayers

Because the ruling indicates that the borrower has a reasonable expectation of the loan being forgiven, it follows logically that a fiscal-year taxpayer would look to when the expenses were incurred or paid to qualify for forgiveness.

For example, assume a borrower with a September fiscal year-end applied for and received a PPP loan with an April loan date. Most, if not all, of the expenses were likely incurred between April and September 2020 and, therefore, should be considered as non-deductible within the September 2020 fiscal year-end tax return.

Now, let’s assume a borrower has a September fiscal year-end and the loan proceeds were received in July. The expenses used for loan forgiveness would likely span multiple tax years – fiscal year 2020 and fiscal year 2021. Accordingly, an allocation of the expenses between the two tax years would be acceptable. However, there is no guidance specifically indicating the use of this approach.

Regarding the allocation of expenses used for loan forgiveness, there are still many unknowns. Whether wages, employee benefits, rent, utilities, or interest are reduced may not matter. However, for taxpayers with a research and development tax credit, or those who qualify for a qualified business income deduction, the allocation to wages will matter. We advise our clients to plan for various possibilities and remain patient for future guidance.

Safe harbor

A safe harbor (Rev. Proc. 2020-51) allows for PPP recipients who were denied forgiveness or granted forgiveness of an amount different than expected, and who did not deduct the expenses in 2020, to deduct the expenses by either amending their 2020 tax return or deducting them in 2021.

Legislative changes may be coming

Members of Congress disagree with the conclusion that costs are non-deductible, and yet, Treasury has not reversed its decision. Also, the American Institute of CPAs is still fighting for the expenses to be deductible because they believe that was the original intent. By not allowing the deduction, Treasury is creating double taxation – not allowing the business the expense, but employees are picking up the wages on their personal tax returns. There is hope that this will be changed in a stimulus package from Congress if one is ever agreed upon.

Through the last eight months of the PPP landscape, we’ve learned two truths. The first is that patience is usually the most prudent path forward. The second is not to make an irreversible decision until it is necessary. Consult your Yeo & Yeo professional as you plan for the various outcomes of the PPP program.

Dear Clients, Employees, Communities & Friends,

Thanksgiving and the holiday season are times to reflect on all we are grateful for. For me, the list is very long this year. We have so much to be thankful for here at Yeo & Yeo. We are a strong, responsive, resilient firm. We have learned so much this past year that has made us that much stronger. We have navigated many challenges, and we will continue to persevere together.

As we approach the holiday season, I want to take a moment to thank our clients, professionals, families, everyday heroes, and communities.

To our clients, thank you for placing your trust in us. We are grateful for the opportunity to work with and for you. Your support allows us to continue to pursue our mission of providing outstanding business solutions for incredible clients like you.

To our professionals, thank you for your hard work and commitment to delivering unparalleled service to our clients. Despite extraordinary changes in both your work and personal lives, you rose to the occasion and helped clients navigate their own unique situations. Because of you, we can continue pursuing our passion for serving our clients and communities.

To our families, thank you for remaining flexible throughout the changes this year brought. Thank you for allowing your home to become an office. Thank you for balancing the demands of home and work. And most of all, thank you for supporting your loved ones and keeping each other safe and healthy.

To our everyday heroes, thank you for keeping us safe. We are forever grateful for your courage and selflessness as you work on the front lines. Thank you for everything you do, everything you’ve sacrificed, and for your resilience.

To our communities, thank you for banding together in support of us and one another. You have provided selfless care and unwavering help to those in need, from donating food and hand-sewing PPE to providing businesses with resources and guidance during these unprecedented times. Our community members have done extraordinary things this year to meet new needs.

On behalf of all of us at Yeo & Yeo, thank you for all you have done and continue to do for us and one another. We are grateful for each one of you. I wish you all the comfort, hope, and joy that the season can bring.

Stay safe. Stay healthy.

Warmest regards,

Tom Hollerback
President & CEO

By now, some businesses have completed their 2021 budgets while others are still crunching numbers and scrutinizing line items. As you put the finishing touches on your company’s spending plan for next year, be sure to cover the finer points of the process.

This means not just creating a budget for the sake of doing so but ensuring that it’s a useful and well-understood plan for everyone.

Obtain buy-in

Management teams are often frustrated by the budgeting process. There are so many details and so much uncertainty. All too often, the stated objective is to create a budget with or without everyone’s buy-in for how to get there.

To put a budget in the best position for success, every member of the leadership team needs to agree on common forecasting goals. Ideally, before sitting down to review a budget in process, much less view a presentation on a completed budget, you and your managers should’ve established some basic ground rules and reasonable expectations.

If you’re already down the road in creating a budget, it may not be too late. Call a meeting and get everyone on the same page before you issue the final product.

Account for variances

Many budgets fail because they rely on purely accounting-driven, historically minded budgeting techniques. To increase the likelihood of success, you need to actively anticipate “variances.” These are major risks that could leave your business vulnerable to high-impact financial hits if the threats materialize.

One type of risk to consider is the competition. The COVID-19 pandemic and resulting economic impact has reengineered the competitive landscape in some markets. Unfortunately, many smaller businesses have closed, while larger, more financially stable companies have asserted their dominance. Be sure the budget accounts for your place in this hierarchy.

Another risk is compliance. Although regulatory oversight has diminished in many industries under the current presidential administration, this may change next year. Be it health care benefits, hiring and independent contractor policies, or waste disposal, factor compliance risk into your budget.

A third type of variance to consider is internal. If your business laid off employees this year, will you likely need to rehire some of them in 2021 as, one hopes, the economy rebounds from the pandemic? Also, investigate whether fraud affected this year’s budget and how next year’s edition may need more investment in internal controls to prevent losses.

Eyes on the prize

Above all, stay focused on the objective of creating a feasible, flexible budget. Many companies get caught up in trying to tie business improvement and strategic planning initiatives into the budgeting process. Doing so can lead to confusion and unexpectedly high demands of time and energy.

You’re looking to set a budget — not fix every minute aspect of the company. Our firm can help review your process and recommend improvements that will enable you to avoid common problems and get optimal use out of a well-constructed budget for next year.

Now that Joe Biden has been projected as the winner of the presidential election by major news outlets,* you may wonder if your federal taxes will be affected.

President-elect Biden campaigned on a broad agenda, including a pledge to roll back many of President Trump’s tax policies. In response to the Tax Cuts and Jobs Act (TCJA), Biden has promised a progressive approach to taxation, focused primarily on increasing the burden on businesses and high-income individuals.

Of course, his odds of translating his proposals into legislation largely hinges on the outcomes of runoff elections for the two Georgia seats in the U.S. Senate. Biden’s party needs to win both seats to take a majority in the Senate. But the elections aren’t scheduled until January 5, 2021 — too late to implement many traditional strategies to reduce 2020 taxes.

Here are some of the most significant proposals that could affect individuals and business’ tax liability if enacted.

Proposals for individual taxes

Biden’s tax policy includes numerous changes that could make changes to the tax bills of individual taxpayers, particularly those with higher incomes, including the following:

Tax rates. Unlike some of his competitors in the Democratic primary, Biden hasn’t pushed for a wealth tax. He would, however, return the top individual tax rate to 39.6%, the pre-TCJA rate, from 37%. The current rates for all other tax brackets would remain in place.

Social Security taxes. Biden has proposed new payroll taxes on those earning $400,000 or more. Currently, employers and employees pay a combined 12.4% on the first $137,700 (adjusted for inflation) of an employee’s earnings for Social Security tax.

Biden’s approach would create a “donut hole” where income from $137,700 to $400,000 wouldn’t be subject to the tax. The hole would slowly close over time as the lower threshold creeps up closer to the static upper threshold due to inflation.

Capital gains taxes. Taxpayers earning more than $1 million would face higher capital gains taxes. Gains would be taxed at their ordinary income rate, 39.6% — or, effectively, 43.4% when combined with the 3.8% rate for net investment income tax (NIIT). That’s almost twice the current rate of 23.8% (20% capital gains rate plus 3.8% NIIT rate).

Child tax credit. Biden would expand the child tax credit. Currently, the credit is $2,000 for each qualifying child under age 17, with up to $1,400 of it refundable. (A refundable tax credit means you get a refund, even if the credit is more than what you owe.) The child tax credit begins to phase out at $200,000 of modified adjusted gross income for single taxpayers and $400,000 for married couples filing jointly.

Biden would increase the credit at $3,000 per child for children ages 6 to 17 and $3,600 for children under age 6. He also would make it fully refundable. Unlike most of Biden’s tax proposals, this change may have bipartisan support in Congress.

Credits for caregiving. Biden would establish a new tax credit up of to $5,000 for “informal caregivers” of aging family members. In addition, he would expand the child and dependent care credit from a maximum of $3,000 for one qualifying individual or $6,000 per family, to a maximum of $8,000 for one or $16,000 per family. Fifty percent of the credit would be refundable.

Housing tax credits. New refundable housing credits would be available, as well. Biden seeks a credit of up to $15,000 for eligible first-time homebuyers — which would be collected at the time of purchase, rather than requiring taxpayers to wait until they file their tax returns. He also proposes a credit for low-income renters that would keep rent and utility payments to 30% of monthly income.

Limits on itemized deductions. Biden proposes to limit the tax benefit from itemized deductions to 28% for taxpayers whose income exceeds $400,000. In other words, each dollar of allowable itemized deductions could reduce income tax liability by no more than $0.28.

Biden also would restore the “Pease limitation” that the TCJA repealed through 2025. The limitation reduces itemized deductions by 3% for every dollar that a taxpayer’s adjusted gross income (AGI) exceeds a specified income threshold. Biden would adopt a threshold of $400,000.

It’s not all bad news when it comes to itemized deductions. Biden proposes eliminating the TCJA’s $10,000 limit on itemized deductions for state and local taxes, which particularly hurts taxpayers in high-tax states such as California, Illinois and New York.

Retirement saving incentives. Biden favors a refundable tax credit (rather than a deduction) for each dollar contributed to certain retirement accounts, such as 401(k) plans and IRAs. Policy analysts have predicted a credit of around 26%. This reduces the savings benefit for higher-income taxpayers, who now can claim deductions that reduce their AGI for their contributions.

Proposals for business taxes

Businesses have voiced concerns about several aspects of a Biden tax plan, including:

Corporate taxes. Biden’s intention to raise the corporate tax rate probably has garnered the most attention on the business side of the equation. The TCJA reduced the rate from 35% under the Obama administration to 21%. Biden would land on the middle ground, raising it to 28%.

Biden also would impose a 15% alternative minimum tax on reported book income (versus the income reported on corporate tax returns), for corporations with at least $100 million in annual income

Qualified business income (QBI) deduction. Through 2025, taxpayers generally can deduct up to 20% of their QBI from a pass-through entity (sole proprietorship, LLC, partnership or S corporation). Phaseouts begin at higher income thresholds — for 2020, they kick in when taxable income exceeds $163,300 for single taxpayers or $326,600 for married couples) — and other limitations also apply. The QBI deduction reduces the effective top rate for these taxpayers from 37% to 29.6%.

Biden would simplify the deduction by not allowing it for individuals earning more than $400,000. Those taxpayers could see a 10% jump in their tax rate, from 29.6% to the 39.6% top tax rate. He also would eliminate the deduction for rental real estate activities.

Proposals for estate taxes

The TCJA slashed estate taxes, cutting the top rate from 55% to 40% and temporarily doubling the federal gift and estate tax exemption to $10 million (adjusted annually for inflation), through 2025. The 2020 exemption is $11.58 million for individuals and $23.16 million for married couples; for 2021, it’s $11.7 million and $23.4 million, respectively.

Biden has indicated he would like to roll back the exemption to $3.5 million for estate taxes. He would exempt $1 million for the gift tax and impose a top estate tax rate of 45%.

Biden also aims to end the so-called step-up in basis that spares beneficiaries substantial tax liability for capital gains on inherited assets that have appreciated in value, such as stock or a house. Specifically, if a beneficiary sells an inherited asset now, the capital gains tax is based on the asset’s fair market value at the time of the inheritance, rather than the date of the original purchase.

Next steps

Higher-income taxpayers may want to take steps before year end to mitigate the risk that the Georgia run-offs result in a Democrat majority in the Senate and, eventually, hikes in income tax rates. Some strategies higher-income taxpayer may consider if they fear higher rates next year include selling stock this year or accelerating income into 2020 and deferring deductible expenses into 2021.

Conversely, middle-income taxpayers who could benefit from Biden’s proposals may want to consider deferring income and accelerating expenses into 2020. Whether their tax rates drop or remain the same, these measures generally are advantageous.

Roth IRA conversions are another approach that can pay off should tax rates go up in the future. When a traditional IRA is converted, the taxpayer must pay income tax on the fair market value of its assets on the date of transfer. Income tax rates may not be lower than they are now for at least the next four years.

On the estate planning front, this is a good time for high-net-worth individuals to consider intra-family loans, especially in light of the historically low interest rates. The loans don’t affect one’s gift and estate tax exemption and can subsequently be converted to a gift if advisable in a new tax environment. The value of the note on the loan will be frozen in the lender’s estate, and the loan proceeds can grow outside of the estate.

Wealthy individuals also should look into vehicles such as grantor retained annuity trusts and charitable lead annuity trusts. Making trust transfers now, while current exemptions are in effect, can lock in the benefits of those higher exemptions (assuming exemption adjustments aren’t retroactive).

Stay tuned

With the federal budget deficit now over $3 trillion and the need for additional stimulus spending due to the COVID-19 pandemic, new tax laws could face an uphill battle, regardless of Senate control. We’ll keep you up-to-date on the developments that could affect your personal and professional bottom lines.

*The Electoral College will certify the election results by December 14. There also are some ongoing state recounts and legal challenges.

As year-end approaches, now is a good time to think about planning moves that may help lower your tax bill for this year and possibly next.

Business and personal year-end tax planning for 2020 are widely affected by the COVID-19 pandemic. New tax rules have been enacted to mitigate the pandemic’s financial impact, some of which should be considered as part of this year’s planning.

Yeo & Yeo’s Year-end 2020 Tax Guide provides action items that may help you save tax dollars if you act before year-end. These are just some of the steps that can be taken to save taxes. Not all actions may apply in your particular situation, but you or a family member can likely benefit from many of them.

Next steps

After reviewing this year’s Year-end Tax Guide, you are urged to discuss your personal and business situations with your Yeo & Yeo tax advisor. Your tax professional can help narrow down the specific actions you can take and tailor a tax plan for your current situation.

Together we can:

Identify tax strategies and advise you on which tax-saving moves to make.
Evaluate tax planning scenarios.
Determine how we can help.

For other helpful tools, visit the Tax Center at yeoandyeo.com.

The Michigan Department of Labor and Economic Opportunity (LEO) will offer roughly $3,000,000 in grants for qualifying organizations to expand their capacity by adding weatherized, temporary outdoor facilities.

Grants will be awarded to Michigan-based businesses, organizations and nonprofits with 50 or fewer full-time employees. Eligible organizations are limited to the following:

Restaurants and/or bars
Banquet centers
Retail stores
Gyms and fitness centers
Local governments that provide common space for businesses
Commercial property owners who provide common space for tenants

The grant application opens on Wednesday, November 18, at noon. Funds will be awarded based on a first-come, first-served basis. At least ten grants will be given to each of Michigan’s prosperity regions.

Projects that would qualify for the grant include:

Temporary structures to cover outdoor seating
Portable heaters
Outdoor furniture and tableware
Outdoor cooking equipment
Fencing; dividers such as planters, hangings, or Plexiglas panels
Sanitizing supplies and equipment
Security devices
Electronic menu access
Upgrades to increase capacity for carryout and delivery service

Visit the SBA website to learn more about the application process, review requirements and submit an application.

Small business owners are well aware of the increasing cost of employee health care benefits. As a result, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). Or perhaps you already have an HSA. It’s a good time to review how these accounts work since the IRS recently announced the relevant inflation-adjusted amounts for 2021.

The basics of HSAs

For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:

Contributions that participants make to an HSA are deductible, within limits.
Contributions that employers make aren’t taxed to participants.
Earnings on the funds within an HSA aren’t taxed, so the money can accumulate year after year tax free.
HSA distributions to cover qualified medical expenses aren’t taxed.
Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Key 2020 and 2021 amounts

To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2020, a “high deductible health plan” is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For 2021, these amounts are staying the same.

For self-only coverage, the 2020 limit on deductible contributions is $3,550. For family coverage, the 2020 limit on deductible contributions is $7,100. For 2021, these amounts are increasing to $3,600 and $7,200, respectively. Additionally, for 2020, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $6,900 for self-only coverage or $13,800 for family coverage. For 2021, these amounts are increasing to $7,000 and $14,000.

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2020 and 2021 of up to $1,000.

Contributing on an employee’s behalf

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can be built up for years. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Paying for eligible expenses

HSA distributions can be made to pay for qualified medical expenses. This generally means those expenses that would qualify for the medical expense itemized deduction. They include expenses such as doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.

If funds are withdrawn from the HSA for any other reason, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.

As you can see, HSAs offer a flexible option for providing health care coverage, but the rules are somewhat complex. Contact us with questions or if you’d like to discuss offering this benefit to your employees.

The demand for qualified accounting and finance personnel has grown, as business owners struggle to manage unpredictable cash flows, increased costs, and new government policies and financial aid packages. Plus, the potential job market for these professionals has expanded, thanks to technological changes that now allow them to transcend geographic boundaries and work from virtually anywhere.

High turnover can lead to major problems: It can lower productivity, delay financial reporting and decision-making, and even trigger a snowball effect among the remaining team members. Plus, recruiting and training replacements can be costly and time-consuming.

Some turnover is natural in every department. But if the voluntary departure rate in your accounting department has become excessive, it may be time to consider these four corrective measures:

1. Strengthen bonds with employees

Happy employees feel valued, challenged and connected to their employer. Owners and executives should take time to connect with the people who work behind the scenes, including members of the accounting team, to find out how they view their role and the company.

Ask internal accounting personnel to share their career aspirations. Then, where possible, provide them with the support to realize those goals. Setting aside the time to connect and listen to employees can go a long way toward improving retention.

2. Work closely with human resources

By partnering with HR, the accounting department can improve its ability to nurture and retain key employees. For example, HR can help create and implement a flexible scheduling program or administer an employee satisfaction survey with the accounting department. Or, if a specific employee is a flight risk, HR can help address the individual’s concerns and re-engage him or her in the team.

3. Remember remote employees

The accounting department is well-suited for remote work, even beyond the COVID-19 crisis. But it’s not right for everyone. Some employees will adapt to it quickly, while others may struggle or need to come into the office occasionally, especially when closing the books at the end of the accounting period.

Keep the lines of communication open with remote accounting personnel. In addition to regular videoconferencing check-in meetings, provide them with office supplies, intranet resources and access to your company’s networks. Without these types of support, it’s easy for remote workers to become disengaged.

4. Uncover the root causes for departures

If you lose your controller, CFO or another key member of your accounting team, make it a teachable moment. Conduct exit interviews to learn why the employee is leaving.

During those discussions, ask open-ended questions that allow the individual to share his or her experiences at your company. Also resist the temptation to challenge his or her statements or entice the individual to stay. The goal is to encourage the individual to share freely without fear of repercussions or being made to feel guilty.

Your accounting team is a critical asset

From financial statements and tax returns to budgets and forecasts, the accounting department provides valuable insight into how your company is performing and what strategic direction makes sense for the future. As fellow accountants, we can be a helpful source of ideas to retain your current staff and recruit new members. Contact us for more information.

How can an employer keep its workforce safe from COVID-19 exposure on the job, while still following medical privacy rules? The Equal Employment Opportunity Commission (EEOC) may be able to help, as it reviews how COVID-19 workplace issues intersect with recommendations from the Centers for Disease Control (CDC) and with various laws.

The relevant laws include the Americans with Disabilities Act (ADA), certain provisions of the U.S. Civil Rights Act and the Equal Employment Opportunity Act. In March 2020, a stream of information in question-and-answer form began flowing that may help you tackle COVID-19 issues in your business. Here are condensed versions of some recent Q&As. The complete set can be found on the EEOC’s website (EEOC.gov).

Q: May an employer administer a COVID-19 test when evaluating an employee’s initial or continued presence in the workplace?

A: The ADA requires that any mandatory medical test of employees be “job related and consistent with business necessity.” Applying this standard to the COVID-19 pandemic, employers may take screening steps to determine if employees entering the workforce have COVID-19 to contain the direct threat posed by individuals with the virus. Therefore, an employer may choose to administer COVID-19 testing to employees before initially permitting them to enter the workplace and/or periodically to determine if their presence in the workplace is a danger to others.

Q: May a manager single out a specific employee for questioning to determine if he or she has COVID-19, or require that this employee alone have a temperature check or undergo other screening or testing?

A: If an employer wishes to ask only an individual employee to answer such questions, or to have a temperature check or undergo other screening or testing, ADA requirements must be met. That is, the employer must have a reasonable belief based on objective evidence that this person might have the disease. So, it’s important for the employer to consider why these actions should be taken for a particular employee, such as a display of COVID-19 symptoms.

Q: What may an employer do under the ADA if an employee refuses to submit to a temperature check or to answer COVID-19-related questions?

A: The ADA allows an employer to bar an employee from physical presence in the workplace if the worker:

Refuses a temperature check,
Refuses to answer questions about whether he or she has COVID-19 symptoms associated with COVID-19, or
Has been tested for the virus.

To gain the cooperation of employees, employers may wish to ask the reasons for the refusal. The employer may be able to provide information or reassurance that they’re taking these steps to ensure the safety of everyone in the workplace and that these steps are consistent with CDC health screening recommendations.

Q: What should a manager do if he or she learns that an employee has COVID-19 or COVID-19 symptoms? Can the manager disclose this information without violating ADA confidentiality?

A: The ADA requires an employer to keep all medical information about employees confidential, even if that information isn’t about a disability. Clearly, the information that an employee has symptoms or a diagnosis of COVID-19 is medical information. But the fact that this is medical information doesn’t prevent the manager from reporting it to appropriate employer officials.

Those officials can then take actions consistent with guidance from the CDC and other public health authorities. The real question is what information to report. Is it the fact that an unnamed employee has symptoms of COVID-19 or a diagnosis, or is it the identity of that employee? Determining who in the organization needs to know the identity of the employee will depend on each workplace and why a specific official needs this information. Employers should make every effort to limit the number of people who know the name of the employee.

Q: Is an employee entitled to an accommodation under the ADA to avoid exposing a family member who’s at higher risk of severe illness from COVID-19 due to an underlying medical condition?

A: No. Although the ADA prohibits discrimination based on association with an individual with a disability, that protection is limited to disparate treatment or harassment. The ADA doesn’t require that an employer accommodate an employee without a disability based on the disability-related needs of a family member or other person with whom he or she is associated. Of course, an employer is free to provide such flexibilities if it chooses to do so. An employer choosing to offer additional flexibilities beyond what the law requires should be careful not to engage in disparate treatment on a protected Equal Employment Opportunity basis.

Q: When an employer that grants telework to employees for the purpose of slowing or stopping the spread of COVID-19 reopens the workplace, what’s the employer’s obligation to continue to offer telework? Is the employer required to grant telework as a reasonable accommodation to every employee with a disability who requests to continue this arrangement as an ADA/Rehabilitation Act accommodation?

A: No. Any time an employee requests a reasonable accommodation, the employer is entitled to understand the disability-related limitation that necessitates an accommodation. If there’s no disability-related limitation that requires teleworking, then the employer doesn’t have to provide telework as an accommodation. Or, if there’s a disability-related limitation but the employer can effectively address the need with another form of reasonable accommodation at the workplace, then the employer can choose that alternative to telework.

Q: Do employees who are 65 and over have protections under the federal employment discrimination laws?

A: Individuals who are 65 and over are at higher risk for a severe case of COVID-19 if they contract the virus. Therefore, employers are encouraged to offer maximum flexibilities to this group.

The Age Discrimination in Employment Act (ADEA) prohibits employment discrimination against individuals who are 40 and older. The ADEA would prohibit a covered employer from involuntarily excluding an individual who is 65 or older from the workplace based on his or her age, even if the employer acted for benevolent reasons, such as protecting the employee due to higher risk of severe illness from COVID-19. Unlike the ADA, the ADEA doesn’t include a right to reasonable accommodation for older workers due to age. However, employers are free to provide flexibility to workers who are 65 and older. The ADEA doesn’t prohibit this, even if it results in younger workers who are 40 to 64 being treated less favorably than those who are 65 and older.

For More Information

The answers to some of these questions have been abridged due to space considerations. Review the EEOC’s full response or get in touch with an employment law specialist if you’re confronting any COVID-19-related concerns in the workplace.

Small business owners still have time to make tax planning moves to lower their 2020 federal income tax bills — and possibly lay the groundwork to save taxes in future years. Here are 10 ideas for small businesses to consider.

1. Claim Bonus Depreciation for 2020 Asset Additions

Thanks to the Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2020. That means your business might be able to write off the entire cost of some or all of your current-year asset additions on this year’s return. Consider making additional acquisitions between now and December 31.

Important: It doesn’t always make sense to claim 100% bonus depreciation in the first year that qualifying business property is placed in service. For example, if you think that tax rates will increase substantially in the future — either due to tax law changes or a change in your income level — it might be better to forgo bonus depreciation and, instead, depreciate your 2020 asset acquisitions over time. If you take advantage of bonus depreciation in 2020 and then federal income tax rates go up in future years, you’ll have effectively traded more valuable future-year depreciation write-offs for less valuable first-year write-offs.

Your tax professional can explain the details of the bonus depreciation program, including what types of assets qualify and whether bonus depreciation is right for your business in 2020. You don’t have to commit to taking 100% bonus depreciation until you file your tax return for the current year. By then, the outcome of the 2020 election — and the direction of future tax rates — will likely be clearer.

2. Claim Bonus Depreciation for 2020 QIP Expenditures

When drafting the TCJA, Congress intended to allow 100% first-year bonus depreciation for real estate qualified improvement property (QIP) placed in service in 2018 through 2022. Congress also intended to give you the option of claiming 15-year straight-line depreciation for QIP placed in service in 2018 and beyond.

QIP is defined as an improvement to an interior portion of a non-residential building that’s placed in service after the date the building was first placed in service. However, QIP doesn’t include expenditures:

To enlarge a building,
For any elevator or escalator, or
For any internal structural framework of a building.

Due to an error in drafting the TCJA, the intended first-year bonus depreciation break for QIP never made it into the statutory language. The CARES Act included a retroactive technical correction to fix that oversight.

The correction causes QIP to be included in the tax code definition of 15-year property. That means QIP can be depreciated over 15 years for federal income tax purposes, which, in turn, gives real estate owners the option to claim 100% first-year bonus depreciation for QIP placed in service in the current tax year.

Again, there may be good reasons to forgo bonus depreciation. Your tax pro can help determine what makes the most sense for your business.

3. Claim Bonus Depreciation for a Heavy SUV, Pickup or Van

The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy vehicles used over 50% for business. For federal tax purposes, heavy SUVs, pickups and vans are treated as transportation equipment, so they qualify for 100% bonus depreciation.

This option is available only when the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

If you’re considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a big write-off on this year’s return. Before signing the sales contract, contact your tax pro to help evaluate what’s right for your business.

4. Cash in on More-Generous Section 179 Deduction Rules

The TCJA increased the maximum Section 179 deduction from only $510,000 for tax years beginning in 2017 to $1.04 million for qualifying property placed in service in tax years beginning in 2020.

Other beneficial TCJA changes to the Sec. 179 rules include:

Property used for lodging. For property placed in service in tax years beginning in 2018 and beyond, you can claim Sec. 179 deductions for personal property used in connection with furnishing lodging. Examples include furniture, kitchen appliances, lawn mowers and other equipment used in the living quarters of a lodging facility or in connection with a lodging facility, such as a hotel, motel, apartment house, or a rental condo or rental single-family home.

Qualifying equipment related to real property. For tax years beginning in 2018 and beyond, the TCJA expanded the definition of real property eligible for the Sec. 179 deduction to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. To qualify, these items must be placed in service after 2017 and after the nonresidential building has been placed in service.

Important: Various limitations can apply to Sec. 179 deductions, especially if you conduct your business as a partnership, limited liability company (LLC) treated as a partnership for tax purposes, or an S corporation.

5. Time Income and Deductions for Tax Savings

If you conduct your business using a so-called “pass-through entity” — meaning a sole proprietorship, S corporation, LLC, or partnership — your shares of the business’s income and deductions are passed through to you and taxed at your personal rates. Unless Congress passes legislation to increase taxes that takes effect next year, the 2021 individual federal income tax rate brackets will be the same as this year’s, with modest bracket bumps for inflation.

So, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Depending on the outcome of the 2020 election, it’s unclear whether that expectation is realistic. In any case, deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2020 until 2021.

On the other hand, if you expect to be in a higher tax bracket in 2021, take the opposite approach: Accelerate income into this year (if possible) and postpone deductible expenditures until 2021. That way, more income will be taxed at this year’s lower rate instead of next year’s expected higher rate.

6. Consider Taking Steps to Defer Taxable Income

Most small businesses are allowed to use cash-method accounting for tax purposes. Assuming your business is eligible, cash-method accounting allows you to manage your 2020 and 2021 business taxable income to minimize taxes over the two-year period. If you expect your business income will be taxed at the same or lower rate next year, here are specific cash-method moves that can defer some taxable income until 2021:

Charge recurring expenses that you would normally pay early next year on credit cards. You can claim 2020 deductions even though you won’t pay the credit card bills until 2021.

Pay expenses with checks and mail them a few days before year end. The tax rules allow you to deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, consider sending checks via registered or certified mail, so you can prove they were mailed before December 31.

Prepay some expenses before year end. Prepaid expenses can be deducted in the year they’re paid as long as the economic benefit from the prepayment doesn’t extend beyond the earlier of 1) 12 months after the first date on which your business realizes the benefit of the expenditure, or 2) the end of the next tax year.

On the income side, the general rule for cash-basis businesses is that you don’t have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, consider waiting until near year end to send out some invoices to customers. That will defer some income until 2021, because you won’t collect the money until early next year. Of course, this should only be done for customers with solid payment histories.

On the other hand, if you expect to pay a significantly higher tax rate on next year’s business income, it probably makes sense to do the opposite of those strategies. In other words, you’ll want to accelerate income into 2020 and defer expenses into 2021. That way, you’ll raise this year’s taxable income and lower next year’s taxable income.

7. Create or Increase an NOL

The economic fallout from the COVID-19 crisis will cause many small businesses to incur net operating losses (NOLs) this year. With the exception of the Sec. 179 deduction, the tax breaks and strategies discussed in this article can be used to create or increase a current-year net operating loss (NOL) if your business’s expenses exceed its income.

If you incur an NOL in 2020, you can choose to carry it back for up to five years in order to recover taxes paid in those earlier years. Or you can choose to carry it forward to future years, if you expect business tax rates to go up.

8. Reap a 0% Tax Rate on Gains from Selling QSBC Stock

For qualified small business corporation (QSBC) stock that was acquired after September 27, 2010, a 100% federal income tax gain exclusion break is potentially available when the stock is eventually sold. That equates to a 0% federal income tax rate if the shares are sold for a gain.

To benefit from this break, you must hold the shares for more than five years. Also, this deal isn’t available to C corporations that own QSBC stock, and many companies don’t meet the definition of a QSBC in the first place.

Important: Depending on the election results, this break could be gone after this year. So, it could be a limited time opportunity.

9. Maximize QBI Deduction for Pass-Through Business Income

The deduction based on qualified business income (QBI) from pass-through entities is a key element of the TCJA. For tax years beginning in 2018 through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. This break is subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.

For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations.

The QBI deduction is available only to noncorporate taxpayers, meaning individuals, trusts and estates. For these taxpayers, the deduction can also be claimed for up to 20% of income from qualified real estate investment trust (REIT) dividends and 20% of qualified income from publicly traded partnerships. So, the deduction can potentially be a big tax saver for this year.

Because of various limitations on the QBI deduction, tax planning moves can unexpectedly increase or decrease your allowable QBI deduction. For example, strategies that reduce this year’s taxable income can have the negative side-effect of reducing your QBI deduction. Work with your tax pro to optimize the overall results for your tax situation.

10. Establish a Tax-Favored Retirement Plan

If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant 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. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your SEP-IRA. The maximum 2020 contribution for these plans is $57,000.

Other small business retirement plan options include:

A 401(k) plan, which can even be set up for just one person (a solo 401(k)),
A defined benefit pension plan, and
A SIMPLE-IRA.

Depending on your circumstances, these plans may allow bigger deductible contributions.

Important: The deadline for setting up a SEP-IRA for a sole proprietorship business and making the initial deductible contribution for the 2020 tax year is October 15, 2021, if you extend your 2020 federal income tax return to that date. Other types of plans generally must be established by December 31, 2020, if you want to make a deductible contribution for the 2020 tax year. But the contribution deadline is the extended due date for your 2020 return. However, to make a SIMPLE-IRA contribution for 2020, you must have set up the plan by October 1, 2020. So, you might have to wait until next year if the SIMPLE-IRA option is appealing.

Ready, Set, Plan

2020 has been a year of unprecedented uncertainty. Though you might not know what’s going to happen after the dust clears from November’s election, this year’s tax rules are a known commodity. Contact your tax advisor before year end to help evaluate your planning options as 2021 looms on the horizon.

When the COVID-19 outbreak became a full-fledged pandemic earlier this year, many already stressed not-for-profit organizations panicked. After all, how could nonprofits meet their charitable goals if supporters were losing their jobs — or, worse, fighting for their own and their family members’ lives? Putting reduced donations aside, it seemed unlikely that even dedicated volunteers would want to risk their health and safety to perform unpaid work.

The good news is that many organizations have weathered the initial storm. Studies conducted by the Center for Responsive Politics and Points of Life, an Atlanta, GA-based organization that mobilizes volunteers, reveal that volunteerism has actually grown during 2020’s pandemic. But even if your volunteer ranks are healthy, your nonprofit must continue to make a concerted effort to engage them.

Evolving Trends

As the Points of Light study found, one of the major motivators for volunteers in 2020 has been the presidential election. Before the pandemic hit the United States, voting in elections topped a list of social engagement activities at 72%, followed by donating to charity (54%), signing petitions (34%) and weighing the social and political positions of companies before purchasing their products or services (41%). Yet only 36% at that time said they participated in volunteer activities.

After COVID-19 became an everyday reality, Americans seemed to have reexamined their social engagement priorities. Voting remains at the top of the list at 78%. But about 75% of respondents recently indicated they would be donating to charities and 73% said they would be volunteering. Also, 83% of respondents agreed that the country requires greater unity and that volunteering can help achieve that objective.

As for nonprofits, 85% of organizations report increased requests to volunteer — more than double the level before the pandemic. Younger people, in particular, are extending a helping hand to charities. So it’s a good time to seek new potential volunteers. This is particularly true if your charity has been directly affected by COVID-19 — for example, if your mission addresses general human welfare, food insecurity and health care issues.

How to Motivate Volunteers

For many organizations, especially those with small paid staffs, volunteers are the core of their operations. Indeed, your nonprofit may not be able to get much done without them. To ensure you’re doing everything possible to attract and retain loyal volunteers, consider these five suggestions:

Find inspiration.To motivate volunteers, you first must understand their reasons for volunteering. Do they volunteer to develop new skills, “make a difference” or meet new people — or all of these? Some may have very personal reasons for volunteering; for example, a volunteer who raises money for a cancer charity because a family member has been afflicted by the disease. Ask volunteers what motivates them and compile the information. This will help you develop a volunteer program that can meet the different needs of volunteers and foster long-term commitments.
Communicate effectively.Provide an orientation to new volunteers so they understand your nonprofit’s mission, goals and ethics. If a volunteer acts in way that’s contrary to these, gently discuss the issue. In most of these cases, the volunteer simply misunderstands your instructions. Also, regularly solicit suggestions and feedback from volunteers. When you show volunteers that their opinions matter, most will work harder to promote your mission.
Demonstrate appreciation.Even though volunteering comes from the heart, most people like to be recognized for what they do. If you don’t show appreciation often, they’re more likely to ditch your organization for another one. Appreciation can range from a verbal “thank you” or a thank-you note to giving volunteers greater responsibility or “promoting” them to positions such as volunteer coordinator.
Acknowledge stakeholders. Your volunteers want to be informed about how the organization is doing and how their contributions are making a difference. Provide periodic updates on programs and projects and highlight the contributions and achievements of volunteers so that they feel like the stakeholders they are.
Use social media. Appreciation and acknowledgement of volunteers’ work extends beyond your office walls. Post photos showing volunteers in action on Facebook, Instagram or other platforms. You might even want to hand temporary “control” of a social media account to a trusted volunteer.

A Return to Normal

When the pandemic ends and the economy begins to recover, you may be tempted to direct all of your nonprofit’s energy into fundraising. But volunteers will continue to be critical, so make sure you don’t neglect them. Now, in fact, is a great time to review and reorganize your volunteer program so you’re ready for American life and your organization’s activities to return to “normal.”

This has been a rough year for many businesses in a broad range of industries — perhaps including your company. As the New Year beckons, you might want to reward employees who rose to 2020’s considerable challenges and outperformed. One approach is to reward loyal workers with year-end bonuses.

Bonuses remind employees that you value their services and that your company’s success and survival are inextricably linked. According to staffing agency Robert Half, the benefits of bonuses are evident to most executives. A recent survey showed that more than three-quarters of managers intend to offer year-end bonuses this year. Almost half plan on keeping bonuses the same this year — or even boosting them.

But there’s more to giving out year-end bonuses than putting a little something extra in a pay envelope or adding to a direct deposit. Consider these four tips for rewarding employees, including one for employers that aren’t planning to pay bonuses this year:

1. Review the Tax Ramifications

Year-end bonuses are taxable to employees, just like any other form of compensation. But the amounts paid out are deductible by the employer. In this case, timing is everything. Generally, employees are taxed on bonuses in the year in which they’re received. Therefore, if you defer payment to January, the income isn’t taxable until 2021. Conversely, if you pay year-end bonuses to employees in December, you can deduct them on your 2020 return.

Note on special rule: An accrual-basis company can currently deduct bonuses paid as late as 2 1/2 months after the end of its tax year. In other words, a qualified calendar-year company has until March 15, 2021, to pay bonuses and still deduct them on its 2020 return.

2. Explain Your Rationale

There’s a lot of decision-making surrounding year-end bonuses. Employers must determine who gets how much and when. To prevent rumors and resentment from employees who don’t receive as much as they may think they’re due, explain the “whys” behind your bonus awards. For example, if bonuses are based on performance, provide the formula used to arrive at the actual amount and several hypothetical examples.

Alternatively, you might offer bonuses for meeting certain team goals or as rewards for completing special projects. In these cases, accentuate the metrics met by the entire team rather than single out one employee for his or her performance.

Finally, you could offer general year-end bonuses that aren’t based on meeting specific goals or metrics. Such bonuses typically are intended to reward loyalty and to foster a long-term commitment to a company.

3. Communicate the Good News

Traditionally, many employers paid bonuses without offering much rhyme or reason to who received them and why. These days, employers are more likely to trumpet their generosity.

However, you need to be careful, particularly if bonuses are going to just a select few or if several employees are being excluded. If, for example, you’re rewarding an entire team, gather the group (virtually, if necessary) to make your announcement. If you’re giving a year-end performance bonus to only a couple employees, inform them in one-on-one sessions.

In both types of meetings, explain how the bonus amount was determined. If recipients or employees who aren’t receiving bonuses have questions, address them promptly and candidly. Take constructive employee feedback into account and perhaps apply it to next year’s bonus program.

4. Weigh Alternatives

Despite your best intentions, your business may not be able to afford to pay year-end bonuses in 2020. This doesn’t mean you should throw up your hands and do nothing. Depending on your circumstances, you might be able to offer other incentives, such as extra vacation or sick days or more flexible hours. Workers frequently value these perks. A Robert Half survey indicates that most employees consider flexible work scheduling to be the best company fringe benefit.

In this current environment of social distancing, morale-building activities such as holiday parties and other in-person events may not be possible. Be innovative about the ways you can reward employees for a relatively low cost. One idea is to “host” a virtual holiday party where food and beverages are delivered to employee homes or to organize a Secret Santa exchange through the mail.

In any event, keep your employees in the loop. If you can’t pay out traditional bonuses this year, be upfront about it. And whether you pay bonuses or not, sincerely express your appreciation for your employee’s work this year. It’s not just about money.

Is it in Your Budget?

Year-end bonuses have long been a staple of employee benefit programs. We can help you determine whether your business’s budget allows you to reward employees with bonuses this year.

In the current COVID-19 environment, some governmental entities that have not historically been required to have a Single Audit are finding themselves in the situation where one is needed this year due to the many federal assistance programs that have been put in place to deal with the pandemic. Some of these governments may not have fully addressed the grant management changes required when the Uniform Guidance became effective for periods beginning after December 26, 2014. As a refresher, in 2013, the U.S. Office of Management and Budget (OMB) issued “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” also known as the Uniform Guidance (UG), published in the Federal Register as 2 CFR 200. UG is essentially a government-wide framework for grants management that superseded and synthesized the guidance from earlier OMB Circulars such as A-87 and A-133.

Uniform Guidance requires (generally, there are exceptions) non-federal entities with over $750,000 in federal award expenditures in a fiscal year to have a Single Audit done for the period in which those awards were expended. The term “Single Audit” refers to the federal program compliance audit, which is performed concurrently with the financial statement audit.

Most of the changes that UG required were centered around documentation, in the form of formally adopted policies and written procedures, for various areas of grant management. This article is intended to give an overview of what those policy and procedure requirements are so they can be addressed before audit time.

The list of policies and procedures that follows below is not a comprehensive checklist of what UG requires but is intended to highlight those most important. Citations to the specific UG sections are provided, but please reach out to your Yeo & Yeo Government Services Group member for more detailed information or examples.

Formally Adopted Policy Requirements:

Conflict of Interest (§200.138(c)) – maintaining written standards of conduct governing the actions of employees engaged in the selection, award, and administration of contracts.
Procurement (§200.318(c)) – defines five types of procurement: micro-purchases, small purchases, sealed bids, competitive proposals, and sole source.
Travel Reimbursement (§200.474(b)) – addresses reimbursement for costs incurred by employees or officials related to travel, lodging, subsistence while traveling, and incidental expenses.
Fringe Benefits and Leave (§200.431(a) and (b)) – determining the allowability of costs charged to a federal award in the form of fringe benefits and leave time.

Written Procedure Requirements:

Allowability of costs (§200.302(b)(7)) – determining the allowability of costs charged to a federal award. The procedures should be used to determine whether a cost is allowable under Subpart E (Cost Principles) of the Uniform Guidance.
Allocation of compensation (§200.430) – includes the documentation of time charged to federal awards.
Cash Management (§200.305) – minimizing the amount of time between the transfer of funds to the non-federal entity and the disbursement of funds. The procedure should also address how program income, if any, is handled before requesting federal funds.
Equipment (§200.313(d)) – defines how equipment is titled, used, managed, and disposed of.
Budget to Actual (§200.302(b)(5)) – documents the process for comparing actual expenditures to grant budget amounts.
Safeguarding of Personally Identifiable Information (§200.303(3))
Subrecipient Monitoring (§200.331) – pass-through entities should document their procedures for monitoring whether subrecipients performed in accordance with an award of federal funds.