Are Your Construction Contracts COVID-proof

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

Force Majeure for Infectious Disease

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

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

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

Price Acceleration

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

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

Change-in-Law

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

Health, Safety and Environmental Obligations

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

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

Assurances of Financing

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

Insurance Requirements

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

Long-term impact

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

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

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

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

What to Do If You’re Attacked

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

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

How Can I Protect My Business?

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

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

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

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

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

Get specific

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

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

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

Communicate optimally

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

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

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

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

Revisit and update

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

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

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

Heed the lessons

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

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

The general rules

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

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

Keep some records longer

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

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

Other reasons to retain records

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

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

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

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

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

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

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

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

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

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

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

Passive vs. material

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

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

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

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

Rental activities

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

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

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

Need for change

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

Specifically, the update requires insurers to:

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

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

Requests for deferral

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

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

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

We can help

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What’s “joint and several” liability?

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

When are spouses “innocent?”

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

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

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

How can liability be limited?

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

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

What is an “injured” spouse?

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

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

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

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

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

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

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

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

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

IRS audit rates are historically low, according to the latest data, but that’s little consolation if your return is among those selected to be examined. But with proper preparation and planning, you should fare well.

In fiscal year 2019, the IRS audited approximately 0.4% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation — invoices, bills, cancelled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all your records in one place. And it helps to know what might catch the attention of the IRS.

Audit hot spots

Certain types of tax-return entries are known to the IRS to involve inaccuracies so they may lead to an audit. Here are a few examples:

Significant inconsistencies between tax returns filed in the past and your most current tax return,
Gross profit margin or expenses markedly different from those of other businesses in your industry, and
Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.

Responding to a letter

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS chooses you for an audit, our firm can help you:

Understand what the IRS is disputing (it’s not always clear),
Gather the specific documents and information needed, and
Respond to the auditor’s inquiries in the most expedient and effective manner.

The IRS normally has three years within which to conduct an audit, and often an audit doesn’t begin until a year or more after you file a return. Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.

On September 17, the Financial Accounting Standards Board (FASB) issued an accounting rule that will provide more detailed information about noncash contributions charities and other not-for-profit organizations receive known as “gifts in kind.” Here are the details.

Need for change

Gifts in kind can play an important role in ensuring a charity functions effectively. They may include various goods, services and time. Examples of contributed nonfinancial assets include:

Fixed assets, such as land, buildings and equipment,
The use of fixed assets or utilities,
Materials and supplies, such as food, clothing or pharmaceuticals,
Intangible assets, and
Recognized contributed services.

Increased scrutiny by state charity officials and legislators over how charities use and report gifts in kind prompted the FASB to beef up the disclosure requirements. Specifically, some state legislators have been concerned about the potential for charities to overvalue gifts in kind and use the figures to prop up financial information to appear more efficient than they really are. Other worries include the potential for a nonprofit to hide wasteful use of its resources.

Enhanced transparency

Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, aims to give donors better information without causing nonprofits too much cost to provide the information.

The updated standard will provide more prominent presentation of gifts in kind by requiring nonprofits to show contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets. It also calls for enhanced disclosures about the valuation of those contributions and their use in programs and other activities.

Specifically, nonprofits will be required to split out the amount of contributed nonfinancial assets it receives by category and in footnotes to financial statements. For each category, the nonprofit will be required to disclose the following:

Qualitative information about whether contributed nonfinancial assets were either monetized or used during the reporting period and, if used, a description of the programs or other activities in which those assets were used,
The nonprofit’s policy (if any) for monetizing rather than using contributed nonfinancial assets,
A description of any associated donor restrictions,
A description of the valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition, and
The principal market (or most advantageous market) used to arrive at a fair value measurement if it is a market in which the recipient nonprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial asset.

The new rule won’t change the recognition and measurement requirements for those assets, however.

Coming soon

ASU 2020-07 takes effect for annual periods after June 15, 2021, and interim periods within fiscal years after June 15, 2022. Retrospective application is required, and early application is permitted. Contact us for more information.

On September 30, Governor Whitmer signed Senate Bill 927. Section 18 (4)(e) of the bill extends the due date for filing school audit reports for fiscal year 2019-2020 until December 1 (the previous due date was November 1). This is only for the 2019-2020 fiscal year. It had already been determined that schools have until the December 1 extension to file their Financial Information Database (FID).

Contact your Yeo & Yeo professional if you have questions or need assistance.

Whether it’s a smart phone, tablet or laptop, mobile devices have become the constant companions of today’s employees. And this relationship has only been further cemented by the COVID-19 pandemic, which has thousands working from home or other remote locations.

From a productivity standpoint, this is a good thing. So many tasks that once kept employees tied to their desks are now doable from anywhere on flexible schedules. All this convenience, however, brings considerable risk.

Multiple threats

Perhaps the most obvious threat to any company-owned mobile device is theft. That could end a workday early, hamper productivity for days, and lead to considerable replacement hassles and expense. Indeed, given the current economy, thieves may be increasing their efforts to snatch easy-to-grab and easy-to-sell technological items.

Worse yet, a stolen or hacked mobile device means thieves and hackers could gain possession of sensitive, confidential data about your company, as well as its customers and employees.

Amateur criminals might look for credit card numbers to fraudulently buy goods and services. More sophisticated ones, however, may look for Social Security numbers or Employer Identification Numbers to commit identity theft.

5 protective measures

There are a variety of ways that businesses can reinforce protections of their mobile devices. Here are five to consider:

Standardize, standardize, standardize. Having a wide variety of makes and models increases risk. Moving toward a standard product and operating system will allow you to address security issues across the board rather than dealing with multiple makes and their varying security challenges.
Password protect. Make sure that employees use “power-on” passwords — those that appear whenever a unit is turned on or comes out of sleep mode. In addition, configure devices to require a power-on password after 15 minutes of inactivity and to block access after a specified number of unsuccessful log-in attempts. Require regular password changes, too.
Set rules for data. Don’t allow employees to store certain information, such as Social Security numbers, on their devices. If sensitive data must be transported, encrypt it. (That is, make the data unreadable using special coding.)
Keep it strictly business. Employees are often tempted to mix personal information with business data on their portable devices. Issue a company policy forbidding or severely limiting this practice. Moreover, establish access limits on networks and social media.
Fortify your defenses. Be sure your mobile devices have regularly and automatically updated security software to prevent unauthorized access, block spyware/adware and stop viruses. Consider retaining the right to execute a remote wipe of an asset’s memory if you believe it’s been stolen or hopelessly lost.

More than an object

When assessing the costs associated with a mobile device, remember that it’s not only the value of the physical item that matters, but also the importance and sensitivity of the data stored on it. We can help your business implement a cost-effective process for procuring and protecting all its technology.

As a result of the current estate tax exemption amount ($11.58 million in 2020), many estates no longer need to be concerned with federal estate tax. Before 2011, a much smaller amount resulted in estate plans attempting to avoid it. Now, because many estates won’t be subject to estate tax, more planning can be devoted to saving income taxes for your heirs.

While saving both income and transfer taxes has always been a goal of estate planning, it was more difficult to succeed at both when the estate and gift tax exemption level was much lower. Here are some strategies to consider.

Plan gifts that use the annual gift tax exclusion. One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from the donor’s estate.

As mentioned, estate tax savings may not be an issue because of the large estate exemption amount. Further, making an annual exclusion transfer of appreciated property carries a potential income tax cost because the recipient receives the donor’s basis upon transfer. Thus, the recipient could face income tax, in the form of capital gains tax, on the sale of the gifted property in the future. If there’s no concern that an estate will be subject to estate tax, even if the gifted property grows in value, then the decision to make a gift should be based on other factors.

For example, gifts may be made to help a relative buy a home or start a business. But a donor shouldn’t gift appreciated property because of the capital gain that could be realized on a future sale by the recipient. If the appreciated property is held until the donor’s death, under current law, the heir will get a step-up in basis that will wipe out the capital gain tax on any pre-death appreciation in the property’s value.

Take spouses’ estates into account. In the past, spouses often undertook complicated strategies to equalize their estates so that each could take advantage of the estate tax exemption amount. Generally, a two-trust plan was established to minimize estate tax. “Portability,” or the ability to apply the decedent’s unused exclusion amount to the surviving spouse’s transfers during life and at death, became effective for estates of decedents dying after 2010. As long as the election is made, portability allows the surviving spouse to apply the unused portion of a decedent’s applicable exclusion amount (the deceased spousal unused exclusion amount) as calculated in the year of the decedent’s death. The portability election gives married couples more flexibility in deciding how to use their exclusion amounts.

Be aware that some estate exclusion or valuation discount strategies to avoid inclusion of property in an estate may no longer be worth pursuing. It may be better to have the property included in the estate or not qualify for valuation discounts so that the property receives a step-up in basis. For example, the special use valuation — the valuation of qualified real property used for farming or in a business on the basis of the property’s actual use, rather than on its highest and best use — may not save enough, or any, estate tax to justify giving up the step-up in basis that would otherwise occur for the property.

With the presidential election only weeks away, many people are beginning to pay closer attention to each candidate’s positions on such issues as the COVID-19 pandemic, health care, the environment and taxes.

Among their many differences, President Donald Trump and former Vice President Joe Biden have widely divergent tax proposals. Their stances could have a major impact on the amount of taxes you’ll owe in the future. Here’s an overview of each candidate’s tax proposals for both individuals and businesses.

Trump’s tax proposals for individuals

The GOP-backed Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. It included a number of temporary federal tax cuts and breaks for individuals and families for 2018 through 2025. President Trump has indicated support for preserving tax reforms under the TCJA — and possibly providing additional breaks for individuals and families.

The White House budget document for the government’s 2021 fiscal year (which starts on October 1, 2020) indicates support for extending these TCJA individual tax provisions beyond 2025:

The current federal income tax and estate tax regimes,
The expanded child and dependent tax credits (along with continued disallowance of dependent exemptions),
Increased standard deduction amounts (along with continued disallowance of personal exemptions),
More favorable alternative minimum tax (AMT) rules, and
Continued limitations on itemized deductions for home mortgage interest and state and local taxes (SALT).

In August, Trump promised that, if reelected, he’ll find a way to forgive federal payroll taxes that were temporarily deferred for certain employees from September 1, 2020, through December 31, 2020, by an executive action issued on August 8.

He has also mentioned permanent federal payroll tax cuts, without providing details. However, forgiving or cutting payroll taxes would need to be part of a bill passed by Congress and that type of relief hasn’t received much support from Democrats or Republicans.

Unless the Republicans regain control of the House and retain control of the Senate, any tax cut proposals are likely to face strong opposition from congressional Democrats. And if reelected, Trump is unlikely to sign any legislation that calls for major federal tax increases for individuals.

Biden’s tax proposals for individuals

If former Vice President Joe Biden is elected, he has expressed support for major federal tax law changes. The Biden plan would raise the top individual rate on ordinary income and net short-term capital gains back to 39.6%, the top rate that was in effect before the TCJA lowered it to 37% (for 2018 through 2025). Biden has also promised not to increase taxes for those who make under $400,000. However, it’s unclear whether that limit refers to taxable income, gross income or adjusted gross income — or whether it would apply equally to singles, heads of households and married joint-filing couples.

Other elements of Biden’s plan that would affect individual taxpayers include:

Limits on itemized deductions. For upper-income individuals, Biden would reinstate the pre-TCJA rule that reduces total allowable itemized deductions above an applicable income threshold. Prior to the TCJA, allowable deductions were reduced by 3 cents for every dollar of income above a threshold. Regardless of who’s elected president in 2020, the pre-TCJA limits will be reinstated in 2026 under current law, unless they’re extended by Congress.

Relief for certain homeowners. Biden is calling for the elimination of the TCJA’s $10,000 cap on itemized SALT deductions, which mainly affects residents of high-tax states. His plan also would create a new refundable tax credit of up to $15,000 for eligible first-time homebuyers that would be collected when a home is purchased, rather than later at tax-return filing time.

Expanded breaks for eligible families. Biden’s plan includes a refundable federal tax credit of up to half of a family’s costs to care for children under the age of 13 and other disabled dependents. He would like the maximum credit to be $8,000 for one qualifying child or $16,000 for two or more qualifying children. Families earning between $125,000 and $400,000 could qualify for partial credits.

Higher maximum rate on long-term capital gains. Higher-income individuals would face higher capital gains taxes under the Biden plan. Net long-term gains (and presumably dividends) collected by those with incomes above $1 million would be taxed at the same 39.6% maximum rate that he would apply to ordinary income and net short-term capital gains. With the 3.8% net investment income tax (NIIT) add-on, the maximum effective rate on net long-term gains would be 43.4% (39.6% + 3.8%). That would be almost double the current maximum effective rate for high-income individuals.

Elimination of basis step-up for inherited assets. Under current law, the federal income tax basis of an inherited capital-gain asset is the stepped up fair market value as of the deceased’s date of death. So, if heirs sell inherited capital-gain assets, they owe federal capital gains tax only on the post-death appreciation, if any. The Biden plan would eliminate this tax-saving provision.

Trump’s tax proposals for businesses

President Trump has indicated support for preserving business-focused tax reforms under the TCJA if he’s elected for a second term. The TCJA includes many federal tax cuts and breaks for businesses, such as:

A flat 21% tax rate for C corporations and personal service corporations,
Permanently liberalizing the Section 179 first-year depreciation rules,
Temporarily expanding first-year bonus depreciation deductions, and
Repealing the AMT for C corporations.

Without providing specifics, Trump has said he would push for the following tax law changes if reelected:

A new “Made in America” tax credit,
A new tax credit for companies that bring back jobs from China,
Enhanced tax breaks for certain industries, including pharmaceuticals and robotics, that bring manufacturing back to the United States, and
Permanent federal payroll tax cuts. (However, Trump hasn’t laid out a plan for how Social Security benefits would be paid if the withholding taxes that fund them are eliminated.)

Trump’s tax proposals leave many unanswered questions. For example:

What will happen with the 100% bonus depreciation deduction after 2022, when it’s scheduled to begin being phased out under current tax law?
Will Trump support the requirement for businesses to amortize research and development costs over five years, which is scheduled to start after 2022? (Under current law, research and development costs can be fully deducted when paid or incurred.)

Unless Republicans regain control of the House and retain control of the Senate, any tax cut proposals would likely face strong opposition from congressional Democrats. And if reelected, Trump is unlikely to sign legislation that calls for major federal business tax increases.

Biden’s tax proposals for businesses

Former Vice President Biden’s plans include rollbacks or revisions of several TCJA provisions, which would be necessary to pay for his plan to rebuild the U.S. economy under the moniker of “Rebuilding America Through Investment.”

Notably, the Biden plan would increase the corporate federal income tax rate from 21% to 28%. The change would raise an estimated $1.1 trillion over 10 years. This rate is significantly lower than the 35% maximum effective rate for profitable corporations that was in place before the TCJA was enacted. But Biden’s proposed tax rate would be a flat rate, not based on a graduated schedule.

In addition, if elected, Biden would support a new 15% minimum tax on corporations with at least $100 million in annual income that pay little or no federal income tax under the “regular rules.” An affected corporation would pay the greater of the regular federal income tax bill or 15% of reported book net income. This new tax would raise an estimated $160 billion to $320 billion over 10 years.

Biden also supports “green energy” tax changes. Specifically, if elected, Biden would support reinstating or expanding tax incentives intended to reduce carbon emissions, including:

Deductions for emission-reducing investments in residential and commercial buildings, and
Credits for buying electric vehicles produced by manufacturers with credits that have been phased out under current law.

Biden would also like to eliminate federal income tax deductions for oil and gas drilling costs and depletion.

Looking ahead

More details regarding the two candidates’ tax plans may be revealed during interviews, ads and debates in the coming weeks. No matter who wins the presidency, we can help you implement planning strategies to keep your tax bill as low as possible.

Do you buy or lease computer software to use in your business? Do you develop computer software for use in your business, or for sale or lease to others? Then you should be aware of the complex rules that apply to determine the tax treatment of the expenses of buying, leasing or developing computer software.

Purchased software

Some software costs are deemed to be costs of “purchased” software, meaning software that’s either:

Non-customized software available to the general public under a non-exclusive license or
Acquired from a contractor who is at economic risk should the software not perform.

The entire cost of purchased software can be deducted in the year that it’s placed into service. The cases in which the costs are ineligible for this immediate write-off are the few instances in which 100% bonus depreciation or Section 179 small business expensing isn’t allowed or when a taxpayer has elected out of 100% bonus depreciation and hasn’t made the election to apply Sec. 179 expensing. In those cases, the costs are amortized over the three-year period beginning with the month in which the software is placed in service. Note that the bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.

If you buy the software as part of a hardware purchase in which the price of the software isn’t separately stated, you must treat the software cost as part of the hardware cost. Therefore, you must depreciate the software under the same method and over the same period of years that you depreciate the hardware. Additionally, if you buy the software as part of your purchase of all or a substantial part of a business, the software must generally be amortized over 15 years.

Leased software

You must deduct amounts you pay to rent leased software in the tax year they’re paid, if you’re a cash-method taxpayer, or the tax year for which the rentals are accrued, if you’re an accrual-method taxpayer. However, deductions aren’t generally permitted before the years to which the rentals are allocable. Also, if a lease involves total rentals of more than $250,000, special rules may apply.

Software developed by your business

Some software is deemed to be “developed” (designed in-house or by a contractor who isn’t at risk if the software doesn’t perform). For tax years beginning before calendar year 2022, bonus depreciation applies to developed software to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either deduct the development costs in the year paid or incurred or choose one of several alternative amortization periods over which to deduct the costs. For tax years beginning after calendar year 2021, generally the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

If following any of the above rules requires you to change your treatment of software costs, it will usually be necessary for you to obtain IRS consent to the change.

Contact us

We can assist you in applying the tax rules for treating computer software costs in the way that is most advantageous for you.

Remote audit procedures can help streamline the audit process and protect the parties from health risks during the COVID-19 crisis. In a previous article, we discussed some ways to overcome the challenges of remote auditing. However, seeing people can be essential when it comes to identifying and assessing fraud risks during a financial statement audit. Virtual face-to-face meetings can be a solution.

Asking questions

Auditing standards require auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks. Specific areas of inquiry under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit include:

• Whether management knows of any actual, suspected or alleged fraud,
• Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
• The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
• Any specific fraud risks that management has identified or that have been brought to its attention, and
• The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist.

Also, auditors will inquire about management’s communications, if any, to those charged with governance about the management team’s process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.

Seeing is believing

Traditionally, auditors require in-person meetings with managers and others to discuss fraud risks. That’s because a large part of uncovering fraud involves picking up on nonverbal cues of dishonesty. In a face-to-face interview, the auditor can, for example, observe signs of stress on the part of the interviewee in responding to the question.
However, during the COVID-19 pandemic, in-person meetings may give rise to safety concerns, especially if either party is an older adult or has underlying medical conditions that increase the risk for severe illness from COVID-19 (or lives with a person who is at high risk). In-person meetings with face masks aren’t ideal from an audit perspective because they can muffle speech and limit the interviewer’s ability to observe facial expressions.

A videoconference can help address both issues. Though some people may prefer the simplicity of telephone or audioconferences, the use of up-to-date video conferencing technology can help retain the visual benefits of in-person interviews. As awkward and uncomfortable as this is in the beginning, it does get easier. The first few times you see yourself in the little square on the screen are weird, but just like most things, the more you do it, the easier it becomes. For example, high-definition videoconferencing equipment can allow auditors to detect nonverbal cues, which may be critical to assessing an interviewee’s honesty and reliability. Remember to remain flexible with possible technical issues and practice; the more you do it, the better you’ll get at it.

Risky business

Evaluating fraud risks is a critical part of your auditor’s responsibilities. You can facilitate this process by anticipating the types of questions your auditor will ask and ensuring your managers and accounting personnel are all familiar with how videoconferencing technology works. Contact us for more information.