Yeo & Yeo Selected Among Greatest of the Great Lakes Bay 2020

Yeo & Yeo CPAs & Business Consultants was selected by the readers of Great Lakes Bay Magazine as Greatest of the Great Lakes Bay in Accounting for the second consecutive year.

Each year, Great Lakes Bay Magazine invites its readers to select the best of the best in the Great Lakes Bay Region. Readers can vote for their favorite business in categories including restaurants, home improvement, shopping, health, and services. 2019 is the first year that readers could vote for local businesses in the accounting category.

“We are always humbled by the recognition we receive for being passionate about giving exceptional client service and helping our clients to thrive, ”said Tom Hollerback, President & CEO. “All of the credit goes to our employees who share a common culture of exceeding client expectations.”

For 97 years, individuals in the Great Lakes Bay Region have trusted Yeo & Yeo with their business. It is the community’s continued support that allows the firm to provide outstanding business solutions. In addition to accounting services, Yeo & Yeo and its companies have created a strong network of professionals who are a complete resource for their clients.

Many business owners — particularly those who own smaller companies — spend so much time trying to eliminate weaknesses that they never fully capitalize on their strengths. One way to do so is to identify and explicate your unique selling proposition (USP).

Give it some thought

In a nutshell, a USP states why customers should buy your product or service rather than a similar one offered by a competitor. A USP might be rather obvious if you offer a type of state-of-the-art technology or specialize in a certain kind of service that’s not widely available. Many businesses, however, will need to dedicate some serious thought and discussion to identifying their USP — and they may need to do so every year or two to adapt to market changes.

Ask the right questions

Involve employees from every level of your company in brainstorming sessions to develop your USP. During these meetings, consider the answers to questions such as:

What makes our products or services distinctive?
What aspect of our business is most important to its growth?
Which elements of what we do are the most difficult for competitors to copy?
Why should customers buy from us instead of the competition?

As you might have noticed, knowledge of your competitors is critical to developing a strong USP. You can’t differentiate your business from theirs unless you’re familiar with what competitors are selling, how they sell their products or services, and how they support those sales in terms of customer service. To this end, you may need to undertake some “competitive intelligence” efforts to gather needed information.

Integrate it into the sales process

Your USP should be a powerful, concise statement that customers and prospects will immediately understand and recognize as fulfilling their wants or needs. Among the most commonly cited examples is package delivery giant FedEx’s “When it absolutely, positively has to be there overnight.” Although the company doesn’t use this slogan anymore, it remains a perfect example of a USP that’s clear and memorable.

Of course, your USP must be more than just words. Once established, it should serve as a sort of “mantra” for your sales team. That is, after identifying your customers’ needs during the sales process, they should use the USP (or an iteration of it) to explain to customers why your product or service is the right choice. Just be careful not to overuse your USP in sales and marketing materials, including on your website.

Now may be the time

Given the monumental changes that have occurred in the U.S. economy and in many industries because of the COVID-19 pandemic, now may be an imperative time to reconsider and relaunch your USP. We can help you evaluate your sales numbers, as well as return on investment in marketing efforts, to carefully craft the right approach.

There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.

Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.

Why the new form?

Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.

What businesses will file?

Payers of nonemployee compensation will now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

Can a business get an extension?

Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.

Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:

The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.
A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.
The operation of the filer was affected by fire, casualty or natural disaster.
The filer was “in the first year of establishment.”
The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.

Need help?

If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of three associates.

Daniel Beard, CPA, has been promoted to Manager. Beard, a graduate of Eastern Michigan University, holds a Master of Science in Accounting and a Bachelor of Business Administration. He joined Yeo & Yeo in 2014 and specializes in audit and assurance services, with an emphasis on government, education, and nonprofit clients. He is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants. In the community, Beard is enrolled in the Leadership A2Y program.

Brian Essenmacher, CPA, has been promoted to Manager. Essenmacher joined Yeo & Yeo in 2017 and specializes in audit and assurance services with an emphasis on government, education, and nonprofit clients. He holds a Bachelor of Professional Accountancy from Northwood University and is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants. In the community, Essenmacher serves on the finance committee at St. Mark Church and volunteers with several nonprofits across Genesee County.

Mike Rolka, CPA, CGFM, has been promoted to Senior Manager and transferred to the firm’s Auburn Hills office effective July 1. Rolka brings experience in audit services for government and education clients to southeast Michigan. He is a Certified Government Financial Manager and a member of the firm’s Government Services Group. He holds a Bachelor of Professional Accountancy from Saginaw Valley State University and is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants. In the community, Rolka is a member of the Saginaw Valley Young Professionals Network.

The tax filing deadline for 2019 tax returns has been extended until July 15 this year, due to the COVID-19 pandemic. After your 2019 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are three considerations.

1. Some tax records can now be thrown away

You should keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2016 and earlier years. (If you filed an extension for your 2016 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

2. You can check up on your refund

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.

3. You can file an amended return if you forgot to report something

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2019 tax return that you file on July 15, 2020, you can generally file an amended return until July 15, 2023.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We can help

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re not just available at tax filing time — we’re here all year!

If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.

Far-reaching penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here are some answers to questions about the penalty so you can safely stay clear of it.

Which actions are penalized? The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally excepted from responsibility, can be subject to this penalty under certain circumstances. In addition, in some cases, responsibility has been extended to family members close to the business, and to attorneys and accountants.

IRS says responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. Although a taxpayer held liable can sue other responsible people for contribution, this is an action he or she must take entirely on his or her own after he or she pays the penalty. It isn’t part of the IRS collection process.

Here’s how broadly the net can be cast: You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.

What’s considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to take care of the job yourself can be treated as the willful element.

Avoiding the penalty

You should never allow any failure to withhold and any “borrowing” from withheld amounts — regardless of the circumstances. All funds withheld must also be paid over to the government. Contact us for information about the penalty and making tax payments.

The COVID-19 crisis is affecting not only the way many businesses operate, but also how they assess productivity. How can you tell whether you’re getting enough done when so much has changed? There’s no easy, one-size-fits-all answer, but business owners should ask the question so you can adjust expectations and objectives accordingly.

Impact of remote work

Heading into the crisis, concerns about productivity were certainly on the minds of many in leadership positions. In March, research firm Gartner conducted a snap poll that found 76% of HR leaders reported their organizations’ managers were concerned about “productivity or engagement of their teams when remote.”

Many of these fears may well have been alleviated after a month or two. News provider USA Today collaborated with researchers YouGov and social media platform LinkedIn to conduct a poll in April that found 54% of respondents (professionals ages 18-74) said that working remotely has positively affected their productivity. They cited factors such as time saved by not having to commute and fewer distractions from co-workers.

The bottom line is that allowing — or, in recent months, requiring — employees to work remotely shouldn’t drastically alter your expectations of their productivity. Every employee must continue to fulfill his or her job duties and meet annual performance management objectives (as perhaps adjusted in light of the pandemic and altered economy).

However, it’s unrealistic to expect anyone to accomplish markedly more just because he or she is no longer subject to a long commute and regular office hours. In fact, when assessing productivity, business owners should bear in mind the dual challenge of work-life balance while working remotely (childcare obligations, etc.) and the mental health component of living through a pandemic.

Solid metrics

If remote work isn’t a major concern for your company — either because your employees were already doing it, adapted to it readily or simply cannot work from home — there remain some tried-and-true ways to evaluate productivity. Metrics can be useful.

For example, one broad measurement of productivity is revenue per employee. To calculate it, you’ll need to check your financial statements to see how much revenue your business brought in during a defined period. Then, you divide that dollar figure by your total number of employees. The idea is that every worker should generally bring in enough revenue to rationalize his or her paycheck.

It’s not a “be all, end all” metric by any means, but revenue per employee can help accurately shape your understanding of productivity and cash flow. And, as mentioned, you’ll need to think about how this year’s economic conditions have altered your productivity needs and what employees can reasonably accomplish.

Careful calibration

When the subject of productivity arises, many business owners’ instinctive answer is “more, more, more!” Carefully calibrating your expectations and goals, however, can lead to more sustainable results. We can help you choose and calculate the right metrics and set realistic productivity objectives.

The CARES Act was enacted in an attempt to mitigate the economic effects of the COVID-19 pandemic. Among other things, it extends favorable tax treatment to qualified individuals who take so-called “coronavirus-related distributions” (CRDs) from IRAs, 401(k) plans and certain other retirement plans.

Specifically, the CARES Act waives the 10% early distribution penalty for CRDs taken between January 1, 2020, and December 31, 2020. Under the law, the waiver applies to CRDs made to an individual:

Who’s diagnosed with COVID-19,
Whose spouse or dependent is diagnosed with COVID-19, or
Who experiences adverse financial consequences as a result of COVID-19. These include being quarantined, furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; closing (or reducing the hours of) a business owned by the individual; or other factors determined by the Treasury Secretary.

IRS Notice 2020-50 expands the definition of qualified individuals for purposes of CRDs and plan loans to take into account additional factors, such as a reduction in pay or self-employment income, the rescission of a job offer and the delay of a start date for a job. In addition, the definition now also considers adverse financial consequences arising for the impact of COVID-19 suffered by an individual’s spouse or household member.

Eligible individuals can withdraw up to $100,000. They can repay withdrawn funds within three years of the day after the CRD without regard to the applicable cap on annual contributions. To the extent such early distributions aren’t repaid within three years or eligible for tax-free rollover treatment, the related income tax can be prorated over three years.

The CARES Act also allows plans to implement certain relaxed rules for qualified individuals on plan loan amounts and repayment terms. For example, plans can suspend loan repayments due from March 27, 2020, through December 31, 2020 (delaying each payment up to one year), and the limit on loans made on or after March 27, 2020, and before September 23, 2020, is increased from $50,000 to $100,000. The limit on the aggregate amount of loans in that period is increased from 50% of the employee’s vested accrued benefit to 100%.

Notice 2020-50 makes clear, too, that the $100,000 limit on CRDs applies to a qualified individual’s aggregate CRDs from all eligible retirement plans — the limit doesn’t apply on a per-plan basis. It explains that CRDs can be used for purposes not related to COVID-19 and that repayments to an IRA don’t count against the one-rollover-per-12 months limit on IRA rollovers. And it warns that qualified individuals who elect to include the entire amount of a CRD in their 2020 income, rather than prorating it over three years, will be held to that choice after they file their 2020 income tax returns; they can’t subsequently revoke the election.

As for loans, the notice provides a safe harbor to help employers avoid complicated calculations related to the stacking of individually reamortized payments on top of regularly scheduled payments due after December 31, 2020. The safe harbor permits reamortized payments to begin after the period of payment suspension and continue for up to one year after the loan was originally scheduled to be repaid. The guidance notes, though, that other reasonable methods of administering the loan relief exist.

Notice 2020-50 further clarifies that it’s up to employers to decide whether — and to what extent — their plans will provide the CRD and loan relief allowed by the CARES Act. (Qualified individuals can claim the tax benefits even if plan provisions aren’t changed.) We can help you determine which aspects of the relief to offer and how best to implement them.

Rollover of RMDs

The CARES Act waives the RMD rules for certain defined contribution plans and IRAs for calendar year 2020. The waiver applies to both 2019 RMDs required to be taken by April 1, 2020, and RMDs required for 2020. It applies for calendar years beginning after December 31, 2019.

But, because the law wasn’t enacted until late March 2020, some individuals had already taken RMDs for the year. If they wanted to roll over those now non-RMD distributions to an eligible retirement account, they needed to satisfy the rule that generally requires tax-free rollovers to be made within 60 days of distribution. Moreover, IRAs generally are subject to a “one-rollover-per-12 month” restriction.

The IRS previously extended the 60-day rollover period to the later of 60 days after receipt or July 15, 2020, for 2020 RMDs taken as early as February 1, 2020, but that left out individuals who took their 2020 RMDs in January. Notice 2020-51 extends that period to the later of 60 days after receipt or August 31, 2020, for all distributions that, but for the CARES Act, would have been RMDs (even if the distribution normally would be treated as part of a series of substantially equal periodic payments).

Notice 2020-51 also permits an IRA owner or beneficiary who has already received a distribution that would’ve been an RMD for 2020 to repay it to the IRA by the later of 60 days after receipt or August 31, 2020 (non-spouse beneficiaries generally are prohibited from doing rollovers of distributions). The repayment is exempt from the one-rollover-per-12 month limit on IRAs.

The notice includes a sample plan amendment employers can adopt to give plan participants and beneficiaries whose RMDs are waived the option to receive the waived RMD. The sample will have no effect on other distribution provisions.

Stay tuned

As the number the COVID-19 cases continues to spike across the country, it’s possible that Congress, the Department of Treasury and the IRS may provide additional tax and financial relief. We’ll let you know about the latest developments that could affect your finances.

The extended federal income tax deadline is coming up fast. As you know, the IRS postponed until July 15 the payment and filing deadlines that otherwise would have fallen on or after April 1, 2020, and before July 15.

Retroactive COVID-19 business relief

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which passed earlier in 2020, includes some retroactive tax relief for business taxpayers. The following four provisions may affect a still-unfiled tax return — or you may be able to take advantage of them on an amended return if you already filed.

Liberalized net operating losses (NOLs). The CARES Act allows a five-year carryback for a business NOL that arises in a tax year beginning in 2018 through 2020. Claiming 100% first-year bonus depreciation on an affected year’s return can potentially create or increase an NOL for that year. If so, the NOL can be carried back, and you can recover some or all of the income tax paid for the carryback year. This factor could cause you to favor claiming 100% first-year bonus depreciation on an unfiled return.

Since NOLs that arise in tax years beginning in 2018 through 2020 can be carried back five years, an NOL that’s reported on a still-unfiled return can be carried back to an earlier tax year and allow you to recover income tax paid in the carry-back year. Because federal income tax rates were generally higher in years before the Tax Cuts and Jobs Act (TCJA) took effect, NOLs carried back to those years can be especially beneficial.

Qualified improvement property (QIP) technical corrections. QIP is generally defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. The CARES Act includes a retroactive correction to the TCJA. The correction allows much faster depreciation for real estate QIP that’s placed in service after the TCJA became law.

Specifically, the correction allows 100% first-year bonus depreciation for QIP that’s placed in service in 2018 through 2022. Alternatively, you can depreciate QIP placed in service in 2018 and beyond over 15 years using the straight-line method.

Suspension of excess business loss disallowance. An “excess business loss” is a loss that exceeds $250,000 or $500,000 for a married couple filing a joint tax return. An unfavorable TCJA provision disallowed current deductions for excess business losses incurred by individuals in tax years beginning in 2018 through 2025. The CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018 through 2020.

Liberalized business interest deductions. Another unfavorable TCJA provision generally limited a taxpayer’s deduction for business interest expense to 30% of adjusted taxable income (ATI) for tax years beginning in 2018 and later. Business interest expense that’s disallowed under this limitation is carried over to the following tax year.

In general, the CARES Act temporarily and retroactively increases the limitation from 30% to 50% of ATI for tax years beginning in 2019 and 2020. (Special rules apply to partnerships and LLCs that are treated as partnerships for tax purposes.)

Assessing the opportunities

These are just some of the possible tax opportunities that may be available if you haven’t yet filed your 2019 tax return. Other rules and limitations may apply. Contact us for help determining how to proceed in your situation.

Just last week, the Small Business Administration (SBA) announced that it has reopened the Economic Injury Disaster Loan (EIDL) and EIDL Advance program to eligible applicants still struggling with the economic impact of the COVID-19 pandemic.

The EIDL program offers long-term, low-interest loans to small businesses and nonprofits. If your company hasn’t been able to procure financing through the Paycheck Protection Program (PPP) — or even if it has — an EIDL may provide another avenue to relief.

Program overview

Applicants must be businesses with 500 or fewer employees, sole proprietors, independent contractors or certain other small entities. EIDL funds come directly from the SBA and provide working capital up to certain limits.

The loans have terms of up to 30 years and interest rates of 3.75% for businesses and 2.75% for nonprofits. The first payment is deferred for one year. Plus, the Coronavirus Aid, Relief and Economic Security (CARES) Act has temporarily waived requirements that applicants must have been in business for one year before the crisis and be unable to obtain credit elsewhere. A borrower of $200,000 or less doesn’t need to provide a personal guarantee.

Recipients must use EIDL proceeds for working capital necessary to carry a business until resumption of normal operations and for expenditures needed to alleviate specific economic hardships related to the pandemic. These may include fixed debts (such as rent or mortgage), payroll, accounts payable and other bills that could’ve been paid had the disaster not occurred and aren’t already covered by a PPP loan.

EIDL proceeds may not be used to refinance indebtedness incurred before the COVID-19 crisis or to pay down loans owned by the SBA or other federal agencies. Loan funds also cannot be used to pay federal, state or local tax penalties, or any criminal or civil fine or penalty. (Other limitations apply.)

Emergency grants

Under the CARES Act, EIDL applicants may request an Emergency Economic Injury Grant, also referred to as an “EIDL advance,” of up to $10,000. The grant is to be paid within three days and must be used to:

Provide paid sick leave to employees unable to work because of COVID-19,
Retain employees during business disruptions or substantial shutdowns,
Meet increased costs to obtain materials unavailable because of supply chain disruptions,
Make rent or mortgage payments, or
Repay other obligations that cannot be met because of revenue losses.

Recipients of an emergency grant don’t have to repay it — even if the business is eventually denied an EIDL. However, in April, the SBA announced that it has implemented a $1,000 cap per employee on EIDL advances up to the $10,000 maximum. Thus, an applicant with three employees would receive an advance of only $3,000.

Equally valuable

The EIDL program may not have received as much attention as the PPP, but it’s equally valuable to small businesses and nonprofits striving to remain operational during the ongoing public health and economic crisis. We can help you determine whether you’re eligible and, if so, complete the application process.

Family businesses make up the vast majority of companies in the United States and produce 62% of the country’s gross domestic product, according to the Conway Center for Family Business. Generally defined as companies that are majority owned by a single family with two or more members involved in their management, family businesses can be a significant source of wealth. But they also potentially face higher fraud risk.

Recent research published in the Journal of Business Ethics found that auditors assess the risk of fraud as higher for family than for nonfamily businesses. Here’s why, and how you can reduce that risk.

Major obstacles involved

Why might family businesses be more vulnerable to fraud than other companies? For one thing, prevention efforts can be hampered by loyalty and affection. One of the biggest obstacles to fraud prevention is simply acknowledging that someone in the family would be capable of initiating or overlooking unethical or illegal activities.

But like any other business, family enterprises must include a system of internal controls that make fraud difficult to perpetrate. It may be awkward to exercise authority over members of one’s own family, but someone needs to take charge if or when issues arise.

Advantage of independent advice

Of course, the person in charge potentially could be the one defrauding the company. That’s why independent auditors and legal advisors are critical. Your family business should look outside its immediate circles of relatives and friends to retain professional advisors who can be objective when assessing the company. Audited financial statements from independent accountants, in particular, protect the business and its stakeholders.

If your company is large enough to have a board of directors, it should include at least one outsider who’s strong enough to tell you things you may not want to hear. In some extreme cases, members of all-family boards have been known to work together to bilk their companies. This becomes much more difficult to do when collusion requires the assistance of an outsider.

Punishing the perpetrator

Another factor that makes preventing fraud in family businesses hard is how they tend to handle fraud incidents. Even when legal action is an option, families rarely can bring themselves to pursue action against one of their own. Sometimes families choose to save the fraudster from public scandal or punishment rather than maintain ethical professional standards. Most fraud perpetrators know that.

If you discover a family member is committing fraud, ask a trusted attorney or accountant to explain to the perpetrator the illegality and possible consequences of the fraudulent actions. If such interventions don’t work, however, you and other family members may have no choice but to seek prosecution.

Avoid blind trust

There are plenty of advantages to working with family members, but you also need to watch for pitfalls. To maintain high ethical standards and prevent fraud, rely on professional advisors and nonfamily officers to provide perspective and objective advice. Contact us for help with internal controls.

As a COVID-19 relief measure, the IRS has postponed many of the usual federal tax filing and payment deadlines, along with the deadlines for taking certain other tax-related actions. Generally, deadlines for federal income tax return filing and payments that would otherwise fall on or after April 1 and before July 15 have been postponed to July 15. The postponement applies to certain other deadlines as well. This relief, while welcome, has created confusion. Here’s what individuals and business owners should know to manage their tax calendars through July 15.

Deadlines for Individual Taxpayers

Assuming you use the calendar year for tax purposes (as most individual taxpayers do), July 15 is the revised deadline for the following five actions:

Filing your 2019 personal federal income tax return (Form 1040),
Paying what you owe with your 2019 personal federal income tax return,
Paying your first and second quarterly estimated federal income tax installments for the 2020 tax year,
Making a traditional IRA or Roth IRA contribution for your 2019 tax year, and
Making a Health Savings Account (HSA) contribution for your 2019 tax year.

If you don’t pay what you owe by July 15, the government will start charging interest on the shortfall at a current annual rate of 3%. (Note, this rate can change every quarter.) Plus, if you fail to pay your remaining 2019 personal tax obligation, you’ll be charged a failure-to-pay penalty of 0.5% per month on the shortfall (up to a cumulative 25% of the shortfall). The interest charge and penalty go away as soon as you pay up.

Important: If you don’t use a calendar year for federal income tax purposes, ask your tax advisor if any COVID-19 deadline relief is available to you.

Extending Federal Income Tax Returns Past July 15

As this was written, you must follow the normal procedures to extend federal income tax return filing deadlines past July 15. For example, you can extend your 2019 personal federal income tax return to October 15 by filing Form 4868 with the IRS by July 15. Business entities can also extend their federal income tax returns past July 15, if a further extension is allowed, by filing Form 7004 with the IRS by July 15.

Important: Extending a return past July 15 does not extend the due date for paying any tax that will be due with that return when it’s eventually filed. You could still owe interest and penalties for taxes not paid by the July 15 deadline.

Deadlines for Owners of Pass-Through Businesses

The new July 15 deadline also helps individuals who use the calendar year for federal income tax purposes and own interests in so-called “pass-through” businesses, including:

Sole proprietorships,
Single-member limited liability companies (LLCs) treated as sole proprietorships for tax purposes,
Partnerships,
Multi-member LLCs treated as partnerships for tax purposes, and
S corporations.

For example, Joe is a member in a multi-member LLC that’s treated as a partnership for tax purposes. Like almost all individuals, Joe uses the calendar year for tax purposes. The normal April 15 deadline for filing his 2019 personal federal income tax return (Form 1040) is postponed to July 15.

Joe can also defer paying any federal income tax (including any self-employment tax) that’s still owed for the 2019 tax year until July 15. The normal payment deadline was April 15.

Finally, Joe can defer his first and second quarterly estimated federal income tax installments for the 2020 tax year until July 15. The normal deadlines for those payments would have been April 15 and June 15.

All this relief is automatic. Joe doesn’t need to submit anything to the IRS to take advantage, and he won’t owe any interest or penalty if he does.

Important: If you don’t use the calendar year for federal income tax purposes, consult your tax advisor for COVID-19 deadline relief that might be available to you.

Deadlines for Business Entities

The July 15 deadline can also apply to business entities. Here, the term “business entity” refers to:

C corporations,
S corporations,
Partnerships, and
LLCs.

For example, Red Co. is a C corporation that uses the calendar year for tax purposes. The normal deadline for Red to file its 2019 corporate federal income tax return (Form 1120) is April 15, 2020. That deadline has been postponed to July 15, 2020.

The normal April 15 deadline for paying any federal income tax that’s owed for Red’s 2019 tax year is also postponed to July 15.

Finally, the normal deadlines for Red to make its first and second quarterly estimated federal income tax installments for the 2020 tax year are April 15 and June 15. Both deadlines are postponed to July 15.

Some business entities use fiscal (noncalendar) tax years that don’t end on December 31. The revised July 15 deadline can potentially apply to them too, for federal income tax return filings and federal income tax payments that would otherwise be due on or after April 1, 2020, and before July 15, 2020.

For example, Green Co. is a C corporation that uses an August 31 tax year-end, because its business is seasonal. The original due date for Green to file its federal income tax return (Form 1120) for the tax year that ended on August 31, 2019, was December 15, 2019. However, the owner extended the due date to May 15, 2020. Because that date is on or after April 1 and before July 15, the deadline for filing Green’s federal income tax return is postponed to July 15, 2020.

The COVID-19 deadline relief is automatic. Red doesn’t have to submit anything to the IRS to take advantage of the tax filing and payment relief, and Red won’t owe any interest or penalty if it does. As for Green, it qualifies for tax filing relief without having to submit anything to the IRS, and no penalty will apply if Green takes advantage of that relief.

Deadlines for Other Federal Tax Return Filings and Payments

IRS Notice 2020-23 grants the same July 15 deadline relief for many other federal tax return filings and payments that would otherwise be due on or after April 1, 2020, and before July 15, 2020. Examples include:

Federal income tax returns for trusts and estates (Form 1041) and federal income tax payments owed by trusts and estates,
Federal estate tax returns (Form 706) and federal estate tax payments owed by estates,
Federal gift tax returns (Form 709) and federal gift tax payments owed by gift givers,
Quarterly estimated federal income tax payments due with various IRS forms.

This is not a complete list of federal tax filings and federal tax payments that can be postponed to July 15. Contact your tax advisor for the full details.

This relief is also automatic. You don’t need to submit anything to the IRS to take advantage, and there’s no penalty if you do.

Deadlines for Paying Deferred Federal Payroll Taxes

Thanks to a provision included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, your business can defer paying certain federal payroll taxes. This privilege applies to the employer’s 6.2% share of the Social Security tax component of FICA tax owed on the first $137,700 of an employee’s 2020 wages.

The deferral privilege applies to federal payroll tax deposits and payments that would otherwise be due during the deferral period. The deferral period began on the March 27, 2020 (the date the CARES Act became law) and will end on December 31, 2020.

The deferral privilege is available to all employers (small and large) for eligible payroll taxes on wages paid to all employees, including wages paid to owners who are employed by their corporations. There’s no requirement to show that the business has been adversely affected by the COVID-19 crisis.

A business must pay in the deferred payroll tax in two installments:

50% of the deferred amount by December 31, 2021, and
The remaining 50% by December 31, 2022.

Important: The IRS will revise Form 941, “Employer’s Quarterly Federal Tax Return,” starting with the version for the second quarter of 2020, to allow employers to take advantage of this payroll tax deferral relief.

Does PPP Loan Forgiveness Prevent Your Business from Deferring Payroll Tax?

Good news! The Paycheck Protection Program (PPP) Flexibility Act of 2020 was signed into law on June 5. The new law repeals a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that could disallow the payroll tax deferral privilege for some taxpayers that receive PPP loans that are later forgiven.

So, the payroll tax deferral privilege is now fully available to taxpayers that benefit from forgiven PPP loans. Apparently, the same is true for self-employed individuals who take advantage of the self-employment tax deferral privilege and benefit from forgiven PPP loans.

Deadlines for Paying Deferred Federal Self-Employment Taxes

In addition, self-employed people can defer half of their liability for the 12.4% Social Security tax component of the self-employment (SE) tax for the deferral period, which began on March 27, 2020, and will end on December 31, 2020.

For federal income tax purposes, the following are generally classified as self-employed individuals:

Sole proprietors,
Owners of single-member LLCs who are treated as sole proprietors for tax purposes,
Partners, and
LLC members who are treated as partners for tax purposes.

The 12.4% Social Security component of the SE tax hits the first $137,700 of 2020 net SE income. Deferred SE tax must be paid in two installments:

50% of the deferred amount by December 31, 2021, and
The remaining 50% by December 31, 2022.

Time Is Running Out

July is right around the corner. If you or your business has taken advantage of the COVID-19 federal filing and payment deferral opportunities, it’s time to contact your tax advisor about filing any outstanding returns (or filing extensions for those returns) and paying taxes that are due by July 15.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

Many family businesses have been adversely affected by the novel coronavirus (COVID-19) pandemic. But there’s a silver lining: Proactive tax planning can help your family business take advantage of potential opportunities in the COVID-19 era. Here are some tax-smart ideas to consider.

Hire Your Kids

This tax-saving strategy is most beneficial when your family business operates as:

A sole proprietorship,
A single-member limited liability company (LLC) that’s treated as a sole proprietorship for tax purposes,
A partnership that’s owned by a married couple, or
An LLC that’s treated as a married couple’s partnership for tax purposes.

Owners of these types of noncorporate family businesses can hire their under-age-18 children — as legitimate employees — and the children’s wages will be exempt from Social Security, Medicare and FUTA taxes. In fact, the FUTA tax exemption lasts until your employee-child reaches age 21.

Hiring your kid — instead of an unrelated person — also keeps more money in the family. Right now, that’s a big advantage. It could be part of an overall life-saving strategy for your business.

You can hire your child part-time or full-time. Currently, your under-age-18 child may not be attending school — either due to the pandemic or summer break. And the 2020-2021 school year could be delayed or conducted remotely. So, in the COVID-19 era, your child’s availability to work in the family business may be greater than during normal conditions.

Thanks to the Tax Cuts and Jobs Act (TCJA), your employee-child can use his or her standard deduction to shelter up to $12,400 of 2020 wages paid by your business from federal income tax. Back in 2017, prior to the TCJA, the standard deduction was only $6,350. The TCJA nearly doubled it for 2018 through 2025. So, under current law, your child can shelter almost twice as much wage income with the today’s much bigger standard deduction.

This means that your under-age-18 child will owe no federal income tax on the first $12,400 of wages for 2020 unless he or she has income from other sources. Your child can use his or her wages to help keep the family afloat financially — or to fund a college savings account or contribute to a Roth IRA.

Rules for Older Kids

If you hire a son or daughter who’s 18 or older, his or her wages are subject to Social Security and Medicare taxes, like for any other employee. However, the wages won’t be subject to the FUTA tax if the child is under age 21. And, under the TCJA, an unmarried child can use the standard deduction to shelter up to $12,400 of 2020 wages received from the family business from federal income tax, or up to $24,800 if your child is married and files a joint tax return with his or her spouse.

Rules for Incorporated Businesses

If you operate your business as an S or C corporation, your child’s wages will be subject to Social Security, Medicare and FUTA taxes, like for any other employee, regardless of the child’s age. However, you can deduct the wages and the employer’s share of the related payroll taxes as a business expense.

Rules for Other Family Members

Wages paid to other relatives — such as grandchildren, uncles or nieces — will be subject to Social Security, Medicare and FUTA taxes, like for any other employee. The family member can use his or her standard deduction to shelter up to $12,400 of 2020 wages received from the family business from federal income tax, or up to $24,800 if the family member is married and files a joint return with his or her spouse.

Income Tax Advantages

When you hire a child or other family member, you get a business tax deduction for employee wage expense, plus:

For so-called “pass-through” entities, including the noncorporate entities listed above and S corporations, the wage expense deduction reduces your individual federal taxable income, your individual net self-employment income (if applicable) and probably your individual state taxable income (if applicable).
If you operate your business as a C corporation, the deduction reduces your corporation’s federal taxable income and probably your corporation’s state taxable income (if applicable).

If your business will be unprofitable this year due to the COVID-19 crisis, the deductions might create or increase a net operating loss (NOL) for 2020. If so, that NOL can be carried back as many as five tax years — potentially all the way back to 2015. The NOL carryback privilege can trigger a refund of income taxes paid for earlier years.

Got Questions?

This article only covers a few strategies that can help family businesses save taxes in the COVID-19 era. For more information or ideas, contact your tax advisor.

What is the Work Share program?

As employers start to reopen across Michigan, they are doing what is best for their business and their employees. Some companies have reduced their hours and are doing a slow startup. This situation has raised some concerns for laid-off employees regarding the potential reduction in their unemployment benefits.

One option employers could consider is utilizing Michigan’s Work Share program. Work Share allows employers to bring back their employees with reduced hours, while employees still collect partial unemployment benefits to make up for the portion of lost wages.

How does this program work?

Weekly benefit amounts will vary depending on past employment history. Let’s say an employee earns $360 per week. The company had to cut hours and reduced this employee’s hours by 10%. Under the Work Share program, this employee would receive a Work Share benefit payment of $36 ($360 x 10%) in addition to their wages. Employees participating in this plan due to COVID-19 are also eligible to receive the Federal Pandemic Unemployment Compensation (FPUC) of $600 per week in addition to their Work Share benefit through July 2020.

Who is eligible?

Under Executive Order 2020-57, the Work Share program eligibility requirements have been expanded.

All employees in the affected unit must participate in the plan.
A plan must include at least two employees.
Employee work hours and wages may be reduced by a minimum of 10% or up to a maximum of 60%.
This plan may be approved for a period of up to 52 consecutive weeks.

This program may be used by almost all types of business in any industry. However, Work Share does not apply to seasonal, temporary, or intermittent employment.

Why is it beneficial, and why should employers take advantage of it?

It helps minimize or eliminate the need for layoffs.
The program enables businesses to retain trained employees and avoid the expense of recruiting, hiring, and training new employees.
Employees are spared the hardship of full unemployment and get more income than if they were entirely laid off.
It helps save the business money by keeping the skilled workforce intact.

How does a business apply?

Employers must apply for this program online through the Michigan Web Account Manager (MiWAM) at michigan.gov/uia. For this process, the employer will need the following information:

A description of the affected work unit (or units) that will be covered under the plan
The number of full- or part-time workers in the unit covered by the plan
The percentage of workers in the unit that will be covered under the plan
The name and social security number of everyone covered in the plan
The employer’s unemployment tax account number (UIA account number)
An estimate of the number of workers who would have been laid off in the absence of the Work Share plan (for example, if they would have had to lay off 50% of employees who would have then had to collect unemployment)
The plan must include a description of how workers in the affected unit will be given advance notice of the employer’s participation in the Work Share plan.

For businesses that aren’t prepared to resume operations all at once and need a more gradual alternative, Work Share can provide that flexibility. Employers can visit Michigan.gov/WorkShare for a tutorial on how to sign up, FAQs and other resources to participate in the program.

The Provider Relief Fund provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act supports American families, workers, and the heroic healthcare providers in the battle against the COVID-19 outbreak. The Department of Health and Human Services (HHS) is distributing $175 billion to hospitals and healthcare providers on the front lines of the coronavirus response.

The following are answers to frequently asked questions about the Provider Relief Fund, including how payments are calculated, the difference between general and targeted distributions, what the money can be used for, how to return a payment, and more.

1. What is the money for and what do providers need to do to keep it?

The funding is required to be used for necessary expenses to prevent, prepare for, and respond to COVID-19, as well as to recoup losses that are a direct result of COVID-19. Necessary expenses include:

supplies or equipment used to provide healthcare services for possible or actual COVID-19 patients;
workforce training;
developing and staffing emergency operation centers;
reporting COVID-19 test results to federal, state, or local governments;
building or constructing temporary structures to expand capacity for COVID-19 patient care or to provide healthcare services to non-COVID-19 patients in a separate area from where COVID-19 patients are being treated; and
acquiring additional resources, including facilities, equipment, supplies, healthcare practices, staffing, and technology to expand or preserve care delivery.

If the terms and conditions are met, then the funds will not be required to be paid back. Each recipient must keep adequate records to document their expenses and losses. The records that HHS will require have not yet been disclosed, but HHS will require recipients to submit future reports relating to the recipient’s use of its Provider Relief Fund money. HHS will notify recipients of the content and due dates of such reports in the coming weeks. The following are terms and conditions for the first and second distributions and current reporting requirements.

Terms and Conditions – Initial $30 Billion

Terms and Conditions – Additional $20 Billion

Current Information on Reporting Requirements

2. If I am unable to spend the funding on qualified expenses or assign to losses, received multiple payments, or no longer would like the funding, how do I return the payment?

HHS has not yet detailed how recoupment or repayment will work. However, the terms and conditions associated with payment require that the recipient be able to certify, among other requirements, that it was eligible to receive the funds (provided after January 31, 2020, diagnoses, testing, or care for individuals with possible or actual cases of COVID-19) and that the funds were used per allowable purposes (to prevent, prepare for, and respond to the coronavirus). Additionally, recipients must submit all required reports as determined by the Secretary. Non-compliance with any term or condition is grounds for the Secretary to direct the recoupment of some or all the payments made.

HHS will have significant anti-fraud monitoring of the funds distributed, and the Office of Inspector General will provide oversight as required in the CARES Act to ensure that federal dollars are used appropriately.

Providers may return a payment by going into the attestation portal within 90 days of receiving payment and indicating they are rejecting the funds. The CARES Act Provider Relief Fund Payment Attestation Portal will guide providers through the attestation process to reject the funds.

To return the money, the provider needs to contact their financial institution and ask the institution to refuse the received Automated Clearinghouse (ACH) credit by initiating an ACH return using the ACH return code of “R23 – Credit Entry Refused by Receiver.” If a provider received the money via ACH, they must return the money via ACH. If a provider was paid via paper check, after rejecting the payment in the Payment Attestation Portal, the provider should destroy the check if not deposited or mail a paper check to UnitedHealth Group with notification of their request to return the funds.

If received via check, and the recipient has not yet deposited, destroyed, shredded, or securely disposed of it, or the provider has already deposited the check, then they should mail a refund check for the full amount payable to “UnitedHealth Group” to the address below. Please list the check number from the original Provider Relief Fund check in the memo.

UnitedHealth Group
Attention: CARES Act Provider Relief Fund
PO Box 31376
Salt Lake City, UT 84131-0376

If your bank does not allow you to return the payment electronically, contact UnitedHealth Group’s Provider Support Line at (866) 569-3522 (for TTY, dial 711).

3. Can I receive a new payment after originally rejecting a Targeted Distribution?

No, HHS will not issue a new Targeted Distribution payment to a provider that received and then subsequently rejected and returned the original payment. The provider may be considered for future distributions if it meets the eligibility criteria for that distribution.

If a provider would like to reject one payment, the provider may still accept future distribution payments. The provider must use the Payment Attestation Portal to accept or reject payments.

If you affirmatively attested to a Provider Relief Fund payment already received and later wish to reject those funds and retract your attestation, you may do so by calling the provider support line at (866) 569-3522; for TTY dial 711. Note: HHS is posting a public list of providers and their payments once they attest to receiving the payment and agree to the Terms and Conditions.

4. What can the money be used for?

Funding can be used to prevent, prepare for, and respond to COVID-19. HHS expects that it would be “highly unusual” that these expenses would have been incurred before January 1, 2020.

Funding can also be used to recoup losses that are associated with fewer outpatient visits, canceled elective procedures or services, or increased uncompensated care. Providers can use Provider Relief Fund payments to cover any cost that the lost revenue otherwise would have covered, so long as that cost prevents, prepares for, or responds to coronavirus. Thus, these costs do not need to be specific to providing care for possible or actual coronavirus patients, but the lost revenue that the Provider Relief Fund payment covers must have been lost due to coronavirus. HHS encourages the use of funds to cover lost revenue so that providers can respond to the coronavirus public health emergency by maintaining healthcare delivery capacity, such as using Provider Relief Fund payments to cover:

Employee/contractor payroll (employee payroll limited to $197,300/person [executives])
Employee health insurance
Rent/mortgage payments
Equipment lease payments
Electronic health record licensing fees

5. What is the difference between the General Distributions and the Targeted Distributions?

The $50 billion General Distribution is allocated proportionally to providers’ share of 2018 net patient revenue. The allocation methodology is designed to provide relief to providers who bill Medicare fee-for-service, with at least 2% of that provider’s net patient revenue regardless of the provider’s payer mix. Payments are determined based on the lesser of 2% of a provider’s 2018 (or most recent complete tax year) net patient revenue or the sum of incurred losses for March and April. Payments began on April 10.

HHS is allocating Targeted Distribution funding to providers in areas particularly impacted by the COVID-19 outbreak, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured Americans. The fast and transparent dispersal of funds gives relief to those providers who are struggling to keep their doors open. Providers had to apply for these Targeted Distribution funds by June 3. Payments began on April 24 and the HHS is still reviewing applications, so some of the money is still coming.

6. How are eligibility and the payment amount determined? What is the maximum amount distributed?

For General Distributions

First, the provider must have billed Medicare on a fee-for-service basis in 2019. Second, the provider must have provided diagnoses, testing, or care for individuals with possible or actual cases of COVID-19.

The distributions are based on the lesser of 2% of a provider’s 2018 (or most recent complete tax year) gross receipts or the sum of incurred losses for March and April. If the initial distribution that was received between April 10 and April 17 was determined to be at least 2% of the annual gross receipts, then the provider may not receive additional General Distribution payments.

To calculate the 2%, providers should use this equation:
(Individual Provider Revenues/$2.5 Trillion) X $50 Billion = Expected Combined General Distribution

Providers should work with a tax professional for accurate submission. This includes any payments under the first $30 billion General Distribution as well as under the $20 billion General Distribution allocations. Providers may not receive a second distribution payment if the provider received a first distribution payment of equal to or more than 2% of gross receipts.

For Targeted Distributions

Rural Targeted Distributions:

The base payment will account for Rural Health Clinics (RHCs) with no reported Medicare claims, such as pediatric RHCs, and Community Health Clinics lacking expense data, by ensuring that all clinical, non-hospital sites receive a minimum level of support no less than $100,000, with additional payment based on operating expenses.

Rural acute care hospitals and Critical Access Hospitals will receive a minimum level of support of no less than $1,000,000, with additional payment based on operating expenses.

COVID-19 High Impact Area Targeted Distributions:

Must have had at least 100 COVID-19 inpatient admissions for initial distributions. Hospitals that received this funding accounted for more than 70% of the national COVID-19 admissions reported by April 10, 2020.

Skilled Nursing Facilities Targeted Distributions:

$50,000 per facility and an additional $2,500 per bed. Eligible facilities have between 6 and 1,389 beds.

Must be certified under Medicare and/or Medicaid.

Indian Health Service Targeted Distributions:

Was determined by:

a. Indian Health Service (HIS) Hospitals and Tribal Hospitals
Per hospital allocation = $2.815 million base + (Total Operating Expenses * 3%)

b. IHS and Tribal Clinics/Programs
Per IHS clinic allocation = Base amount of $187,000 + 5% of (estimated service population * average cost per user)

c. IHS Urban Programs
Per IHS Urban Indian health allocation = Base amount of $181,250 + 6% of (estimated service population * average cost per user)

HHS is partnering with UnitedHealth Group to deliver the funds.

Medicaid Targeted Distributions:

Providers who received funding from the General Distribution will not receive funding. Payment from a Targeted Distribution does not affect eligibility. Must have filed in 2017, 2018, 2019 or is not required to file.

Safety Net Hospitals Targeted Distributions:

Distributions are a minimum of $5 million and a maximum of $50 million per hospital. These distributions are allocated to hospitals that serve a disproportionate number of Medicaid patients or provide large amounts of uncompensated care. Qualifying hospitals include:

Medicare Disproportionate Patient %
Age (DPP) of 20.2% or higher
Average Uncompensated Care per bed of $25,000 or more. For example, a hospital with 100 beds would need to provide $2,500,000 in Uncompensated Care in a year to meet this requirement
Profitability of 3% or less, as reported to CMS in its most recently filed Cost Report

7. Are the Provider Relief Funds taxable?

Currently, it is unclear if the funds are taxable or not. CMS will issue guidance about how Provider Relief Fund payments should be treated for purposes of uncompensated care and how it should be reported on cost reports.

Conclusion

Navigating the CARES Act Provider Relief Funds is complex. Yeo & Yeo will continue to monitor developments that affect your practice and keep you informed. For more information about how payments are calculated and how they apply to the various types of providers, visit the HHS website at https://www.hhs.gov/provider-relief/index.html, refer to the CARES Act Provider Relief Fund Frequently Asked Questions, or call your Yeo & Yeo professional.

During May 2020, the Governmental Accounting Standards Board (GASB) issued Statement No. 95: Postponement of the Effective Dates of Certain Authoritative Guidance. This Statement provides temporary relief to governments and other stakeholders by postponing the effective dates of certain provisions in recent Statements and Implementation Guides. The postponement includes GASB Statement No. 84: Fiduciary Activities, which is now postponed by one year. GASB 84 was originally in effect for the current fiscal year ending June 30, 2020.

This postponement is an option for schools, but not a requirement. Schools can decide if they would like to continue and implement it in the current year. Schools have prepared for implementation for over a year and have approved budgets as required for their new special revenue fund. Schools have also set up new funds and new account numbers to prepare for the changes this Statement requires. To continue to implement it in the current year or postpone it is a choice each school must make. Michigan Department of Education (MDE) issued guidance in its May 2020 “State School Aid Update,” encouraging schools to work closely with their auditors to determine whether the postponement will result in any changes to planned 2019-20 financial reporting.

Yeo & Yeo agrees and stresses how important it is to plan. We recommend you discuss it with your auditor during the planning phase of the audit. To implement or not will significantly change your financial statements and affect many pieces of the audit. We do not recommend one way or another for implementing now or next year. This is each school’s decision based on what works best for them.

Additional Guidance

MDE issued guidance in Section II (E.18) of the Michigan Public School Accounting Manual issued by the 1022 Committee.
GASB states the objective of GASB No. 84 is to “improve guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be reported.” GASB published the GASB 84 Implementation Guide for Fiduciary Activities in June 2019.
Yeo & Yeo issued various guidance including a webinar and a whitepaper, GASB 84: Understanding the Statement to Implement Efficiently in Your School District

Contact your Yeo & Yeo professional for assistance.

While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to launch new businesses. For example, some businesses are being launched online to provide products and services to people staying at home.

Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

How expenses must be handled

If you’re starting or planning a new enterprise, keep these key points in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Expenses that qualify

In general, start-up expenses include all amounts you spend to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organizational expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking ahead

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

Outsourcing may appeal to organizations that are currently struggling with mounting overhead costs during the COVID-19 crisis. By outsourcing, certain fixed overhead costs associated with compensating and supporting employees are converted into flexible costs that can be scaled back in an economic downturn — or dialed up in times of growth and transition.

One department that’s ripe with outsourcing opportunities to reduce administrative time and cost is finance and accounting. You can find professional services providers of these specialized, time-consuming services such as payroll processing, tax preparation and bookkeeping. You can even outsource the controller or CFO function. But do the benefits of outsourcing these tasks outweigh the potential downsides?

Recognize the upsides

Outsourcing finance and accounting functions allows you to work with financial professionals of varying levels of experience and expertise tailored to the tasks they’ll perform. These responsibilities could include:

Processing payables, receivables and cash transactions
Reconciling accounts at each month-end
Preparing financial statements, budgets and forecasts
Assisting with tax and financial reporting requirements
Communicating financial matters to the shareholders or board of directors

Depending on your needs and budget, you can outsource the tasks that make sense for the organization. You also may benefit from occasionally using other firm professionals — investment advisors, HR and IT support, and valuation specialists, as necessary. COVID-19 has put a significant strain on businesses’ HR functions, and this could be an area where opportunity exists as it relates to outsourcing recruiting activities, interviewing and writing policies. For businesses looking to sell, a valuation may be the first step in determining the baseline value of the business to move forward. When looking at investments and the long-term financial impacts of COVID-19, it is often important to stress-test the plan to determine if the savings, investments and insurances will allow you to meet your financial goals.

Another benefit that many smaller organizations derive in working with external accounting and financial service providers is reduced fees for year-end audit and tax services — because of the professional attention to accounting and finance functions received throughout the year. And most of the accounting questions that typically arise in an audit already will have been resolved.

Be aware of the trade-offs

Cost is a top concern when outsourcing these functions. But keep in mind that, with an outside firm, you pay only for the amount and level of services required.

For example, an in-house accountant may spend some time doing work that someone at a lower pay level could handle equally well. Outsourcing also will spare the organization the expenses associated with a regular employee, such as payroll taxes, health insurance, paid leave and training to stay atop any tax law or regulatory changes and continuing education requirements.

If you use an outsider to perform the duties of the CFO or controller, that person may not be at your immediate disposal whenever a financial question arises. Meetings with the CPA firm will need to be planned and scheduled. You’ll also need to determine how financial data will flow between your company and the accountant who is providing these services. Some tasks may be difficult to perform remotely.

To outsource or not to outsource?

Outsourcing finance and accounting functions is a smart move for many organizations — but it’s not right for everyone. Contact us to discuss the pros and cons of using this strategy in your organization.

Just about every business owner’s strategic plans for 2020 look far different now than they did heading into the year. The COVID-19 pandemic has changed the economy in profound ways, forcing many companies to recalibrate suddenly and severely.

As your business moves forward in this uncertain environment, it’s important to re-evaluate competitiveness. You may have lost an edge that previously existed, or you may have the opportunity to gain one. Here are some critical elements to consider.

Objectively assess leadership

More than likely, you and your management team have had to make some difficult decisions over the last few months. Even if you feel confident that you’ve done most everything right, objectively examine and discuss your successes, failures, strengths and weaknesses.

For instance, maybe you’ve had some contentious interactions with employees while adjusting to remote work environments or increased safety protocols. Ask your managers whether underlying tensions exist and, if so, how you might improve morale.

Reassess external relationships

Most businesses rely on relationships to function competitively. These include connections with customers, suppliers, lenders, advisors and the local community. In addition, if your company is subject to regulatory oversight, it must cooperate with local, state and federal officials.

Review and discuss the state of each of these relationships. Are you getting positive customer feedback on your response to the crisis? Have you been paying suppliers on time? If not, are you openly communicating about potential solutions?

Examine supply chain and technology

Competitiveness can hinge on a company’s ability to access the supplies it needs to operate profitably, and the crisis has had a major impact on supply chains. Are you in danger of being cut off or limited from any mission-critical supplies or materials?

Also, look into whether you have access to optimal and scalable technology that allows you to produce and deliver competitive products or services. This has become a major issue in many industries as companies pivot to operate more virtually and do less business in-person.

Look to the future

Finally, identify how COVID-19 and the resulting economic fallout is affecting your industry. Many sectors have obviously struggled, but others are booming in response to pandemic-driven needs for certain supplies and services.

Study how this year’s changes are affecting industry outlook and projected customer demand. You may need to operate more cautiously to deal with lower revenue for another year or more. Then again, now could be the time to claim greater market share if competitors have been struggling more than you.

Rise to the challenges

The pandemic has complicated strategic planning for every business owner. You must now anticipate not only the usual challenges to your competitiveness, but also the difficulties of operating safely in a pandemic and recovering economy. Our firm can help you identify, quantify and analyze all the factors that contribute to stability and profitability.

If you operate a small business, or you’re starting a new one, you probably know you need to keep records of your income and expenses. In particular, you should carefully record your expenses in order to claim the full amount of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns if you’re ever audited by the IRS or state tax agencies.

Certain types of expenses, such as automobile, travel, meals and office-at-home expenses, require special attention because they’re subject to special recordkeeping requirements or limitations on deductibility.

It’s interesting to note that there’s not one way to keep business records. In its publication “Starting a Business and Keeping Records,” the IRS states: “Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.”

That being said, many taxpayers don’t make the grade when it comes to recordkeeping. Here are three court cases to illustrate some of the issues.

Case 1: Without records, the IRS can reconstruct your income

If a taxpayer is audited and doesn’t have good records, the IRS can perform a “bank-deposits analysis” to reconstruct income. It assumes that all money deposited in accounts during a given period is taxable income. That’s what happened in the case of the business owner of a coin shop and precious metals business. The owner didn’t agree with the amount of income the IRS attributed to him after it conducted a bank-deposits analysis.

But the U.S. Tax Court noted that if the taxpayer kept adequate records, “he could have avoided the bank-deposits analysis altogether.” Because he didn’t, the court found the bank analysis was appropriate and the owner underreported his business income for the year. (TC Memo 2020-4)

Case 2: Expenses must be business-related

In another case, an independent insurance agent’s claims for a variety of business deductions were largely denied. The Tax Court found that he had documentation in the form of cancelled checks and credit card statements that showed expenses were paid. But there was no proof of a business purpose.

For example, he made utility payments for natural gas, electricity, water and sewer, but the records didn’t show whether the services were for his business or his home. (TC Memo 2020-25)

Case number 3: No records could mean no deductions

In this case, married taxpayers were partners in a travel agency and owners of a marketing company. The IRS denied their deductions involving auto expenses, gifts, meals and travel because of insufficient documentation. The couple produced no evidence about the business purpose of gifts they had given. In addition, their credit card statements and other information didn’t detail the time, place, and business relationship for meal expenses or indicate that travel was conducted for business purposes.

“The disallowed deductions in this case are directly attributable to (the taxpayer’s) failure to maintain adequate records,“ the court stated. (TC Memo 2020-7)

We can help

Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach to how you keep records can protect your deductions and help make an audit much less painful.