USMCA: New Trade Agreement Will Modernize NAFTA

The United States-Mexico-Canada Agreement (USMCA) will take effect on July 1, 2020. President Trump has hailed the new North American trade treaty as a “colossal victory” for Americans. Whether the impact is worthy of superlatives will vary by industry sector and geography. Here’s what U.S. business owners should know.

Overview

When the Canadian parliament ratified the USMCA in mid-February, the clock began ticking for the parties to iron out the details. At the time, auto manufacturers — a sector that will be significantly affected by the USCMA — complained that they might not be able to comply by July 1.

The effects of the USMCA will be far-reaching. It updates the North American Free Trade Agreement (NAFTA), which has been in effect for 26 years.

Highlights from the new trade agreement can be divided into the following three categories:

1. Rules for Manufactured Goods

Automakers are especially concerned about complying with the USMCA provision that requires them to increase the proportion of auto parts in a vehicle made in the three countries covered by the treaty — from 62.5% under NAFTA to 75% by 2023. Vehicles that fail to meet the gradually increasing standard will incur a tariff when they’re sold across the borders of the United States, Mexico and Canada.

This provision aims to reduce the parts coming from China and other locations outside of North America. Will this rule increase demand for American-made parts? It depends on whether U.S. manufacturers can make auto parts formerly sourced outside of North America more competitively than parts makers in Mexico and Canada.

Another USMCA provision could help in that regard: It requires that 40% to 45% of auto content be made by workers earning an hourly wage of at least $16. That provision could lead to higher wages for workers in auto parts factories in Mexico — and it could also make U.S. auto parts more competitive in term of costs than under NAFTA.

U.S. auto industry executives, while optimistic about USMCA’s ultimate impact, anticipate higher costs for certain parts. A recent survey of those executives reveals that U.S. auto parts makers located closest to auto assembly plants are expected to benefit the most from the USMCA.

Beyond the auto sector, USMCA provisions intended to support labor unions in Mexico could ultimately push up costs for other goods made in Mexico. This could also help make American-made goods more competitive in terms of cost. According to a summary of the Agreement by the U.S. Trade Representative (USTR), “Mexico commits to specific legislative actions to provide for the legal recognition of the right to collective bargaining.” A related provision creates a “rapid response mechanism” that provides for “monitoring and expedited enforcement of labor rights to ensure effective implementation of Mexico’s landmark labor reform.”

The agreement also will facilitate agricultural trade in North America. For example, the United States, Mexico and Canada have agreed to provisions to enhance information exchange and cooperation on agricultural biotechnology trade-related matters.

In addition, the agreement will provide greater access to Canadian markets for U.S. farmers who produce such products as dairy, eggs, poultry, wheat and wine. In return, Canadian exporters of dairy and sugar will have greater access to U.S. markets. In total, American agricultural exports are expected to increase by $2.2 billion under the USMCA.

2. Rules for Intellectual Property (IP)

The USMCA strengthens IP protections by blocking the production of inexpensive knock-off products. The agreement, according to the USTR, will “provide strong patent protection for innovators, enshrining patentability standards and patent office best practices to ensure that U.S. innovators, including small- and medium-sized businesses, are able to protect their inventions with patents.” Along similar lines, it will “enhance provisions for protecting trademarks … to help companies that have invested effort and resources into establishing goodwill for their brand.”

The USMCA also provides new protections, such as customs duties and other measures, for products distributed digitally. These protections are expected to increase trade and investment in innovative digital products — such as videos, software, music, e-books and games — where U.S. manufacturers generally have a competitive advantage.

3. Small Business Provisions

Small business owners may be interested in a USMCA provision that adjusts the “de minimis shipping value level” for goods entering Canada. When a good’s value is below that minimum amount, they can move across the border with “minimal formal entry procedures.” Under the agreement, shipments worth up to $150 Canadian won’t be assessed duties otherwise eliminated under the treaty. The de minimis shipping value is $40 Canadian for basic taxation purposes.

“New traders just entering Mexico’s and Canada’s markets will also benefit from lower costs to reach consumers,” and U.S. express delivery carriers “stand to benefit through lower costs and improved efficiency,” according to the USTR. Specifically, a new and higher $2,500 value threshold is set for that purpose.

The USMCA includes a full chapter dedicated to smaller businesses. It’s designed to “promote cooperation … to increase trade and investment opportunities,” according to the Small Business Administration.

We Can Help

Contact your CPA to discuss how the new agreement could affect your supply chain. In some cases, changes may be warranted to comply with the USMCA and take advantage of new opportunities.

The coronavirus (COVID-19) pandemic has forced American businesses to adapt quickly to a radically new economic and operating landscape. If your company sells, manufactures, delivers, distributes or otherwise facilitates goods considered “essential” you may need to operate at full (or overtime) capacity. On the other hand, manufacturers whose goods aren’t deemed essential may be forced to idle their machines and close their doors indefinitely. (In many cases, state guidelines specify which businesses are essential and which ones aren’t.)

Both situations are challenging. But if you’re up and operating, here are four considerations to help you do so safely and productively:

1. Keep Workers Safe

The health and safety of workers has always been a priority for manufacturers. Now you must contend with the threat of COVID-19. If some of your employees can work from home, enable them to do so successfully by ensuring they have the technology and other resources they need. Even as states “open for business” again, consider keeping remote workers at home, if possible, until COVID-19 treatments or a vaccine are available.

For workers who must be on-site, consider scheduling skeleton crews in shifts and try to keep the same workers on individual crews to limit potential exposure. Also limit the number of managers working at any one time in production areas. Even if you normally operate nine to five, the transition to 24-hour operations may be easier than you think. Exercising flexibility helps lower the risk that the virus might spread. And if an employee does become sick, fewer coworkers will be required to self-quarantine.

Positive cases of COVID-19 exposure should be treated seriously. In addition to quarantining workers, you must thoroughly clean all production and office areas before allowing operations to resume.

2. Embrace Innovation

Doing things the way you always have may not be the best course right now. Instead, be ready to adapt and innovate whenever the situation calls for a different approach. For example, most manufacturing workers don’t work from home. But 3D printers may make it possible for some employees to produce goods while social distancing.

Or consider how your company might repurpose goods to meet new demands. As has been well-publicized, some companies are redeploying resources to produce ventilators and other needed medical equipment. In many cases, manufacturers may find it relatively easy to pivot to new production modes and goals. For instance, some distilleries are converting alcoholic beverages into disinfectants. Paper producers might ramp up production to meet increased demand for shipping boxes. And manufacturers already producing cardboard could redesign templates to make more “to-go” boxes for restaurants that have been forced to close dining areas.

Be sure you heed federal and state government mandates. Some companies may be asked to modify their operations so they can produce in-demand medical or cleaning products. Even if you aren’t required to change your operations, look for opportunities to address the current situation. Slight alterations could mean the difference between your products being deemed essential vs. non-essential. If you’re a link in an important supply chain, you may be able to make the case for continuing operations.

3. Plan for Financial Challenges

Your factory may be busy now, but there’s no guarantee that will be true in a few months. The financial ramifications of COVID-19 could be long-lived — and dire — for many businesses. Plan so that work slow-downs don’t sneak up on you.

Federal and state authorities have introduced various tax breaks, particularly for companies that keep workers on the payroll. The Families First Coronavirus Response Act made certain employers eligible for tax credits so long as they provide paid sick leave to COVID-19-positive employees or workers who have to stay home to care for sick family members.

The subsequent Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized several provisions, including:

Delays for payroll tax obligations,
An employee retention credit,
Favorable tax provisions for businesses incurring losses, and
Expanded unemployment benefits for workers.

The CARES Act also launched the massive Paycheck Protection Program (PPP) that offers qualified businesses forgivable loans and other forms of relief for keeping employees on the payroll. After the available money ran out, Congress approved a second round of funding for the PPP in late April.

State and local support levels vary depending on the municipality. For example, your state may have removed some restrictions for businesses producing essential products.

4. Get Professional Advice

Your manufacturing management team doesn’t have to tackle the many challenges of the COVID-19 crisis alone. We have up-to-date information on federal and state benefits available to manufacturers. And we can help you navigate the lending landscape. For example, we can help identify appropriate lenders and prepare the calculations and statements required to apply for PPP loans. Don’t hesitate to contact Yeo & Yeo’s manufacturing advisors.

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 companies have questions about how to handle employee benefits, especially health care coverage while employees are on furlough due to the novel coronavirus (COVID-19) pandemic. Here’s an example of a common question some employers are asking.

Q. Our company is closing one of its divisions for one month and placing all employees in that division on temporary unpaid leave in a mandatory furlough in response to COVID-19. Do we have to offer COBRA to employees who lose coverage under our group health plan because they aren’t working that month?

A. Assuming your plan is subject to COBRA, all covered employees experiencing a reduction of hours and loss of coverage due to the furlough are entitled to a COBRA election (as are their covered spouses and dependent children). This is true even though they’ll presumably elect and continue COBRA coverage for only one month. Your company should timely provide COBRA election notices and follow its standard COBRA procedures.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods under certain circumstances. These include voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events. Qualified individuals may be required to pay the entire premium for coverage up to 102% of the cost to the plan.
— The U.S. Department of Labor

A reduction of hours in a covered employee’s employment is a COBRA triggering event that commonly occurs when an employee goes from full-time to part-time, is temporarily laid off, takes a leave of absence, or has hours reduced due to a strike or lockout. If eligibility for the plan depends on the number of hours worked, and the employee fails to work the required hours, then the employee has experienced a reduction of hours for COBRA purposes.

Keep in mind that if the reduction in hours doesn’t cause a loss of health plan coverage, no COBRA obligation arises. For instance, an employee on COVID-19-related paid sick or family leave who hasn’t experienced a loss of coverage wouldn’t trigger COBRA.

As a practical matter, given the time-frames involved with offering COBRA — including at least 60 days in which to elect COBRA and 45 days in which to make the first premium payment — qualified beneficiaries can adopt a wait-and-see approach and elect coverage only if medical care is required before the election is due. In your situation, they can wait to see if they incur any medical expenses during the one-month furlough period and then decide whether to elect COBRA.

For more information, contact your HR advisor or employment attorney.

The $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act delivers good news to individuals and businesses, including valuable tax-relief measures. Some of that tax relief is retroactive. These provisions can affect 2018 and 2019 returns that have already been filed. One retroactive provision can, in some cases, go all the way back to 2013. Some taxpayers that file amended returns may receive a tax refund from prior years.

Here’s a summary of four retroactive CARES Act provisions that can potentially benefit you or your business entity after amended prior-year returns have been prepared and filed.

1. Liberalized Rules for Deducting NOLs

Business activities that generate tax losses can cause you or your business entity to have a net operating loss (NOL) for the year. Many businesses are currently operating at a loss. But there’s a bright side: The CARES Act significantly liberalizes the NOL deduction rules and allows NOLs that arise from 2018 to 2020 to be carried back five years.

That means an NOL that arises this year can be carried back to 2015. In addition, an NOL that arose in 2018 can be carried back to 2013. Such NOL carry-backs allow you to claim refunds for taxes paid in the carry-back years. Because tax rates were higher in pre-2018 years, NOLs carried back to those years can be especially beneficial.

2. Better Depreciation Rules for Real Estate QIP

The CARES Act includes a retroactive correction to the 2017 Tax Cuts and Jobs Act (TCJA) that allows much faster depreciation for real estate qualified improvement property (QIP) that’s placed in service after 2017.

QIP is 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. However, QIP doesn’t include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

The retroactive correction allows you to claim 100% first-year bonus depreciation for QIP expenditures 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.

Amending a 2018 or 2019 return to claim 100% first-year bonus depreciation for QIP placed in service in those years may result in a lower bill for the tax year the QIP was placed in service. It may even generate an NOL that can be carried back to a prior tax year to recover taxes paid in that prior year.

You could also amend a 2018 or 2019 return to claim 15-year straight-line depreciation for QIP placed in service in those years. That might not create an NOL for 2018 or 2019, but it would still lower your tax bill for those years.

3. Suspended Excess Business Loss Disallowance Rule for Noncorporate Taxpayers

An unfavorable TCJA provision disallowed current deductions for so-called “excess business losses” incurred by individuals and other noncorporate taxpayers in tax years beginning in 2018 through 2025. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. The $250,000 and $500,000 limits are adjusted annually for inflation.

The CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018 through 2020. Amending a 2018 or 2019 return to reflect the suspension of the excess business loss disallowance rule could result in a 2018 or 2019 NOL that could then be carried back to a prior tax year to recover taxes paid in that prior year. Or it could just lower the 2018 or 2019 tax bill. Either way, you’ll come out ahead.

4. Liberalized Limit on Business Interest Expense 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 beyond. 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 taxable income limitation from 30% of ATI to 50% of ATI for tax years beginning in 2019 and 2020. There’s no change for tax years beginning in 2018. Amending a 2019 return to reflect the liberalized taxable income limitation rule could result in a 2019 NOL that can be carried back to a prior tax year to recover taxes paid in that prior year. Or it could just lower the 2019 tax bill. Either way, you’ll come out ahead.

Special complicated rules apply to partnerships and LLCs that are treated as partnerships for tax purposes.

Important: Taxpayers with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the business interest expense deduction limitation. Certain real property businesses and farming businesses are also exempt if they choose to use slower depreciation methods for specified types of assets.

To Amend or Not to Amend?

The four retroactive tax-relief measures provided by the CARES Act can impact prior tax years for which returns have already been filed. Amended returns can allow you or your business to benefit from these changes and recover taxes paid in prior years. Contact your tax professional if you have questions, need more information or want to authorize us to start preparing amended returns for you or your business.

Before awarding credit, lenders demand detailed budgets, including cash flow forecasts. They want realistic projections, not unfounded profit and revenue estimates. Cash flow projections are an important element for lenders because they show how you plan to repay the money.

Even if your company doesn’t need credit, a well thought-out budget, including cash flow projections, is important for the ongoing operation of your business. For some projections, surety companies look closely at budgets before issuing the bond needed. Additionally, by preparing an effective annual budget and comparing it to your actual financial performance, you can find certain situations that need to be addressed.

For example, a business that expects $5 million in new projects in the first half of the year, but is awarded only half of that amount in contracts, need to review its bidding procedures. Perhaps the company needs to tighten up its bidding process, have someone review the work of the estimator before bids are submitted, and review other internal procedures to get more work.

Upon review of the actual performance, you may find expenses that are out of line and you want to look at instituting controls, safeguards — and perhaps even institute a bonus system for those responsible for controlling the job.

Effective budgeting requires knowledge of the technical aspects of the your industry — as well as experience with projections, job costing, and a host of related financial matters.

The recent Coronavirus Aid, Relief, and Economic Security” (CARES) Act provides relief to employers struggling to stay afloat during the novel coronavirus (COVID-19) pandemic. The not-for-profit sector is no exception. In fact, some provisions in the new law are specifically tied to charities. Following is a brief summary of seven key benefits for nonprofit employers and supporters.

Paycheck Protection Program (PPP) Loans

The PPP is the cornerstone of the COVID-19 federal stimulus package. Companies and nonprofits with 500 or fewer employees generally are eligible to apply for loans through authorized banks. After the initial $349 billion for PPP loans was exhausted within two weeks of the program’s introduction, Congress allocated an additional $325 billion on April 21.

PPP loans are forgivable if you use the proceeds to pay for certain expenses, including:

Payroll costs,
Mortgage interest incurred before February 15, 2020,
Rent under lease agreements in effect before February 15, 2020, and
Utilities for which services began before February 15, 2020

At least 75% of PPP loan proceeds must cover payroll costs, including staffers’ wages and benefits. However, loan funds can’t be used for compensating employees making $100,000 or more annually.

The amount of your loan eligible for forgiveness is reduced if you don’t keep employees on the payroll or if you reduce their wages by more than 25% compared with last year. If you’ve already laid off staffers, you can rehire them by June 30, 2020, and still qualify for loan forgiveness. Note that you’ll need to produce documentation (such as W-2s and quarterly payroll tax filings) to verify pay rates for current and prior years.

Disaster Grants

The CARES Act also sets aside $10 billion for Emergency Economic Injury Disaster Loan advances. Emergency grants are available to private nonprofit organizations, including 501(c) trade associations, advocacy organizations, unions and social clubs that aren’t eligible to participate in the PPP. If your organization qualifies, nonprofits may receive a $10,000 emergency advance within three days of applying for it.

Employee Retention Credits

Also available is a payroll credit comparable to the existing credit for family and medical leave. The CARES Act credit applies to payroll taxes for wages paid to employees in 2020. It’s available if your operations are fully or partially suspended due to COVID-19 or if gross receipts have declined by more than 50% when compared to the same quarter last year.

This refundable credit is equal to 50% of the first $10,000 of qualified wages paid to each employee during the year (the maximum credit is $5,000 per employee). It applies to wages paid or incurred from March 13, 2020 through December 31, 2020. Note, however, that you can’t claim both the employee retention credit and the family and medical leave credit for the same wages.

Economic Stabilization Fund

A new Economic Stabilization Fund offers loan guarantees and investments to organizations in industries affected by the COVID-19 pandemic. If your nonprofit can’t participate in the PPP — for instance, if it has more than 500 employees — it may qualify for this relief.

Loans can be direct loans or loan guarantees, but they can’t be forgiven like PPP loans. However, they must have an interest rate no higher than 2% and interest payments aren’t due in the first six months. If you qualify for this assistance, you’ll need to make certain certifications.

Unemployment Benefits

Organizations that elect to self-insure rather than pay state unemployment tax will be reimbursed for half the costs of benefits provided to laid-off employees. In addition, the CARES Act provides an extra $600 per week to employees on top of their state unemployment benefits for four months.

A new pandemic unemployment program aids unemployed and partially employed employees and individuals unable to work who don’t typically qualify for traditional benefits. This includes furloughed employees, contractors, gig economy and self-employed workers in the nonprofit sector.

Delayed Payroll Taxes

Businesses and nonprofits affected by the COVID-19 outbreak can defer payroll taxes that are due in 2020. This applies to the employer’s share of the 6.2% Social Security tax. Your organization may then arrange to pay 50% of the required amount by December 31, 2021, and the remaining 50% by December 31, 2022, without penalty.

Charitable Contributions

Finally, the new law offers various tax incentives intended to encourage charitable givers to continue making donations despite economic uncertainty. These incentives include:

A deduction of up to $300 for donations, even if the taxpayer doesn’t itemize — but only for the 2020 tax year.
Elimination of the deduction limit in 2020 for monetary contributions based on 60% of adjusted gross income (AGI).
Enhanced deductions for donations by corporations. The new law raises the usual limit of 10% of AGI to 25% and increases the deduction limit for gifts of food from 15% of AGI to 25%.

For Specific Advice

This is just an overview of the main CARES Act benefits for nonprofits. Every organization is unique, so you should contact your tax and financial advisor for specific advice about how to obtain loans and take advantage of new tax breaks.

The $2 trillion Coronavirus Aid, Relief and Economic Security Act that was signed into law on March 27 has several provisions you should know about with respect to personal finances.

A one-time payment of $1,200 per individual, $2,400 per married couple, will be paid as a rebate from the IRS. The payments will go to individuals with adjusted gross income (AGI) of up to $75,000 and married couples with AGI up to $150,000 based on 2019 tax returns. There will be an additional payment of $500 per child.
The 2019 deadline for Traditional and Roth IRAs contributions has been extended to July 15, the new tax filing deadline. Be sure to indicate the tax year on any contribution checks to make sure they are recorded properly by the custodian.
Required minimum distributions (RMDs) have been suspended for 2020. The suspension covers RMDs from IRAs, SIMPLE IRAs, SEP IRAs, 401(k)s and inherited IRAs. The waiver also covers those taking their first RMD in 2019 which would have been due by April 1.
Charitable contributions receive a new above-the-line deduction of up to $300. This provides a charitable tax deduction for those who do not itemize and take the standard deduction. Also, for those who do itemize, the 50% of adjusted gross income (AGI) limit for charitable contributions is suspended for 2020.
Early withdrawal penalty is waived for distributions from retirement accounts that are needed for coronavirus-related purposes. The 10% penalty is waived, retroactive to January 1. These distributions will still be taxed, but the taxes are spread over three years. The taxpayer could also roll the money back in within three years without being taxed or counted toward that year’s contribution limit.
The 401(k)-loan limit has been increased from $50,000 to $100,000.

Now that many nonprofit and nonpublic organizations are starting to put the implementation struggles of the new revenue recognition standards behind them, it seems that it is time to start shifting attention to the new lease standard (ASC Topic 842, Leases) … or is it?

A new proposal by FASB
FASB’s Proposed Accounting Standards Update for Revenue from Contracts with Customers and Leases is intended to provide relief to nonprofit and nonpublic organizations already dealing with other operational disruptions caused by COVID-19. Under this proposal, FASB has recommended deferring the lease standard implementation for yet another year (a one-year deferral was already approved in 2019). This would make the lease standard effective for fiscal years beginning after December 15, 2021, or in layman’s terms, for December 31, 2022, year-end financial reporting.

The COVID-19 pandemic has created a new wave of lease-related issues, such as short-term and long-term lease modifications, as well as other lease concessions, that could impact the accounting for lease assets and liabilities to be recorded under ASC Topic 842, Leases. So, a delay in implementation may be good news for some entities already at their capacity for change.

This proposed lease delay to date has yet to be accepted. However, in the event it is, use this additional time to continue getting your ducks in a row; don’t just put this off.

Start a log of your organization’s current leases.
Determine if you have any debt covenants that could be impacted by changes to the balance sheet.
Consider changes to policies, procedures and internal controls related to the new standard.

If you have questions or need assistance with accounting for your organization’s leases, please contact your local Yeo & Yeo professional.

Businesses that received Paycheck Protection Program (PPP) loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired, according to guidance issued on May 3, 2020, from the SBA, in consultation with the Treasury Department. The guidance was among three new questions the SBA added to its PPP Frequently Asked Questions (FAQ) file.

According to the guidance, SBA and Treasury plan to issue a new rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the loan forgiveness reduction calculation. The interim final rule will specify that a borrower may exclude an employee from loan forgiveness calculations if the borrower made a good-faith, written offer of rehire and documented the employee’s rejection of that offer. The guidance does not specify what form that documentation should take. Employees who reject good-faith offers of re-employment may find themselves ineligible for continued unemployment benefits.

The SBA’s FAQ #40 provides expressly:

FAQ – Question #40: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good-faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

Yeo & Yeo is pleased to announce that the firm was admitted as the newest member in North America for PrimeGlobal, one of the five largest associations of independent accounting firms in the world. PrimeGlobal will provide Yeo & Yeo with significant expertise and resources to meet growing client needs, both internationally and domestically.

“Our objective is to provide excellent opportunities for idea sharing and business referral to our member firms, with the result that PrimeGlobal members are known for their visionary business practices,” said Michelle Arnold, PrimeGlobal’s Chief Regional Officer, North America. “We are pleased to welcome Yeo & Yeo to our association, and excited to offer the clients of our member firms around the globe an excellent resource in Michigan through PrimeGlobal.”

As a PrimeGlobal member, Yeo & Yeo will receive a wide range of tools and resources to help furnish superior accounting, auditing, and management services to clients around the globe.

“After vetting several associations in search of the ideal fit for Yeo & Yeo, we choose PrimeGlobal for its impressive level of operational organization and superior resources available to meet the needs of our professionals, clients, and communities,” said Thomas Hollerback, Yeo & Yeo’s CEO. “The accessibility to premium international and multi-state expertise will bring long-term advantages for our firm. We look forward to building relationships and collaborating with an impressive global network of member firms and professionals.”

PrimeGlobal is comprised of approximately 300 highly successful independent public accounting firms with combined annual revenue of more than $2.5 billion. PrimeGlobal’s independent member firms house a combined total of more than 2,000 partners, 20,000 employees, and 800 offices in more than 80 countries around the globe. Through PrimeGlobal, independent member firms offer the strength and capabilities of a large, worldwide organization with technical depth and geographic reach impossible for a local firm alone.

For more information about PrimeGlobal, visit www.primeglobal.net.

The coronavirus (COVID-19) pandemic has affected many Americans’ finances. Here are some answers to questions you may have right now.

My employer closed the office and I’m working from home. Can I deduct any of the related expenses?

Unfortunately, no. If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expenses. For 2018–2025 employee home office expenses aren’t deductible. (Starting in 2026, an employee may deduct home office expenses, within limits, if the office is for the convenience of his or her employer and certain requirements are met.)

Be aware that these are the rules for employees. Business owners who work from home may qualify for home office deductions.

My son was laid off from his job and is receiving unemployment benefits. Are they taxable?

Yes. Unemployment compensation is taxable for federal tax purposes. This includes your son’s state unemployment benefits plus the temporary $600 per week from the federal government. (Depending on the state he lives in, his benefits may be taxed for state tax purposes as well.)

Your son can have tax withheld from unemployment benefits or make estimated tax payments to the IRS.

The value of my stock portfolio is currently down. If I sell a losing stock now, can I deduct the loss on my 2020 tax return?

It depends. Let’s say you sell a losing stock this year but earlier this year, you sold stock shares at a gain. You have both a capital loss and a capital gain. Your capital gains and losses for the year must be netted against one another in a specific order, based on whether they’re short-term (held one year or less) or long-term (held for more than one year).

If, after the netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit.

I know the tax filing deadline has been extended until July 15 this year. Does that mean I have more time to contribute to my IRA?

Yes. You have until July 15 to contribute to an IRA for 2019. If you’re eligible, you can contribute up to $6,000 to an IRA, plus an extra $1,000 “catch-up” amount if you were age 50 or older on December 31, 2019.

What about making estimated payments for 2020?

The 2020 estimated tax payment deadlines for the first quarter (due April 15) and the second quarter (due June 15) have been extended until July 15, 2020.

Need help?

These are only some of the tax-related questions you may have related to COVID-19. Contact us if you have other questions or need more information about the topics discussed above.

As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more).

No uniform definition

Who is an “employee?” Unfortunately, there’s no uniform definition of the term.

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. In general, this protection applies only if an employer:

Filed all federal returns consistent with its treatment of a worker as a contractor,
Treated all similarly situated workers as contractors, and
Had a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors.

Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.

Asking for a determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Be aware that workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Contact us if you receive such a letter or if you’d like to discuss how these complex rules apply to your business. We can help ensure that none of your workers are misclassified.

Updated May 6, 2020, to include the new FAQ #43 extending safe-harbor repayment date.

The SBA’s Paycheck Protection Program (PPP) requires businesses to certify that “current economic uncertainty makes this loan request necessary.” New guidance was released April 23 that said companies that had other sources of liquidity might not qualify. Further, on May 5, the Treasury Department and SBA extended the PPP safe-harbor repayment date from May 7 to May 14.

The SBA’s original PPP loan application contained two vague, but critical, certifications the business must make. Specifically, the representative of the applicant was required to certify that:

“Current economic uncertaintymakes this loan request necessary to support the ongoing operations of the Applicant.”
“The funds will be used to retain workers and maintain payrollor make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”

As of April 23, additional guidance was released requesting that companies that received or applied prior to the new guidance reaffirm their good faith by choosing to keep or return the funds by May 7, 2020. On May 5, the SBA issued new FAQ 43, extending the deadline for this safe harbor until May 14, 2020.

On April 23, Treasury issued FAQ – Question #31, which states, in part: “All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. …Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” FAQ 31 further states, “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.”
- On May 5, Treasury and SBA released FAQ – Question #43 extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
On April 28, Treasury Secretary Mnuchin announced the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate.”
On April 28, Treasury issued FAQ – Question #37, which makes it clear that the above-quoted statements in FAQ #31 apply to all businesses.
On April 29, Treasury also released FAQ Question #39, stating that the SBA will review files for PPP loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which it complied with the lender obligations set forth in the PPP rules.

The deadline to return the funds to your SBA lender is extended to May 14, 2020. No action is needed if keeping the funds. If returning the funds, employers may be eligible for other available payroll tax relief credits.

Please note that pursuant to guidance the IRS issued late last week in IRS Notice 2020-32, taxpayers will not be able to deduct any expenses paid with PPP loans for which the taxpayer receives forgiveness. Given this new development, we recommend that clients consult with their Yeo & Yeo tax professional to plan for the tax impact related to this guidance.

If you have questions, please contact your Yeo & Yeo professional and visit Yeo & Yeo’s COVID-19 Resource Center, which is updated continuously, for additional information, updates, and many resources available to assist you.

The Families First Coronavirus Relief Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) make two separate, but related, tax credits available to employers, including tax-exempt organizations, whose business is affected by the COVID-19 crisis.

The FFCRA provides small and mid-size businesses with fully refundable tax credits to reimburse them for the costs of paid sick and family leave wages to their employees for COVID-19-related leave.
The CARES Act encourages eligible employers to keep employees on their payroll by providing eligible employers with an employee retention tax credit. The CARES Act also permits employers to defer payment of their remaining 2020 Social Security payroll tax liabilities for up to two years.

The credits can help provide immediate cash flow. Read Yeo & Yeo’s COVID-19 Payroll Tax Relief Business Brief to learn about the provisions of both credits, eligibility, and the three ways to claim the credits.

Learn more about the COVID-19 Payroll Tax Relief Credits

Taking advantage of these credits can be a complex process for many employers, especially since guidance is still pending on specific aspects of the credits. Yeo & Yeo is closely monitoring the guidelines as they become available. Please contact us for assistance.

If you have outstanding loans to your children, grandchildren or other family members, consider forgiving those loans to take advantage of the current, record-high $11.58 million gift and estate tax exemption. Bear in mind that in 2026, the exemption amount will revert to $5 million ($10 million for married couples), indexed for inflation.

Under the right circumstances, an intrafamily loan can be a powerful estate planning tool because it allows you to transfer wealth to your loved ones free of gift taxes — to the extent the loan proceeds achieve a certain level of returns. But an outright gift is a far more effective way to transfer wealth, provided you don’t need the interest income and have enough unused exemption to shield it from transfer taxes.

Do intrafamily loans save taxes?

Generally, to ensure the desired tax outcome, an intrafamily loan must have an interest rate that equals or exceeds the applicable federal rate (AFR) at the time the loan is made. The principal and interest are included in the lender’s estate, so the key to transferring wealth tax-free is for the borrower to invest the loan proceeds in a business, real estate or other opportunity whose returns outperform the AFR.

The excess of these investment returns over the interest expense is essentially a tax-free gift to the borrower. Intrafamily loans work best in a low-interest-rate environment, when it’s easier to outperform the AFR.

Why forgive a loan?

An intrafamily loan is an attractive estate planning tool if you’ve already used up your exemption or if you wish to save it for future transfers. But if you have exemption to spare, forgiving an intrafamily loan allows you to transfer the entire loan principal plus any accrued interest tax-free, not just the excess of the borrower’s returns over the AFR.

It can be a strategy for taking advantage of the increased exemption amount before it disappears at the end of 2025. Of course, if you need the funds for your own living expenses, loan forgiveness may not be an option.

What about income taxes?

Before you forgive an intrafamily loan, consider any potential income tax issues for you and the borrower. In most cases, forgiving a loan to a loved one is considered a gift, which generally has no income tax consequences for either party.

Although forgiveness of a loan sometimes results in cancellation of debt (COD) income to the borrower, the tax code recognizes an exception for debts canceled as a “gift, bequest, devise or inheritance.” There’s also an exception for a borrower who’s insolvent at the time the debt is forgiven. But be careful: If there’s evidence that forgiving a loan isn’t intended as a gift — for example, if the borrower doesn’t have the cash needed to make the loan payments but isn’t technically insolvent — the IRS may argue that the borrower has COD income.

We can assist you in determining whether forgiving loans is a good strategy and, if it is, help implement that strategy without triggering unwanted tax consequences.

CARES Act allocation for Michigan schools
Schools received a memo announcing Michigan’s allocation of the Elementary and Secondary School Emergency Relief (ESSER) Fund portion of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in mid-April. On April 23, 2020, the U.S. Department of Education (USED) published initial ESSER guidance to support state education agency implementation.

On April 24, 2020, the Michigan Department of Education (MDE) released a memo stating they would apply to USED for the ESSER funding immediately. It is anticipated that the distribution of the USED funds will be based upon the fiscal year 2019-20 Title I, Part A funding formula and will be allowed to be used through September 30, 2022.

The ESSER funding is allowable for several uses not limited to, but including:

Coordination of preparedness and response efforts to prevent, prepare for and respond to coronavirus
Providing principals and other school leaders with the resources necessary to address the needs of their schools
Activities to address the unique needs of low-income children or students, children with disabilities, English learners, racial and ethnic minorities, students experiencing homelessness, and foster care youth, including how outreach and service delivery will meet the needs of each population.
Developing and implementing procedures and systems to improve the preparedness and response efforts
Training and professional development for staff on sanitation and minimizing the spread of infectious diseases
Purchasing supplies to sanitize and clean the facilities
Planning for and coordinating during long-term closures
Purchasing educational technology
Providing mental health services
Planning and implementing activities related to summer learning and supplemental afterschool program
Other activities that are necessary to maintain the operation and continuity of services

These will be one-time funds, and schools should allocate and spend the funds wisely.

Read the memo from MDE.

State Office Budget Presentation
The State Budget Office (SBO) provided information on April revenue and the anticipated May Revenue Estimating Conference. The SBO recommends that schools consider the following actions right now:

Mitigate expenses for the current fiscal year.
Hold off on large projects or contracts, if possible.
Start looking at various budget scenarios for the next fiscal year. At this time, recommendations have shown schools to anticipate three budget scenarios for fiscal 2021, including possible reductions of $500, $750, and $1,000 in per-pupil funding.

View the April 2020 SBO presentation on the budget and the ESSER funding.

We will watch the actual sales tax revenues during the upcoming months, the extent that federal funds will be freed up to mitigate the losses to the school aid fund, and how much of the state’s Budget Stabilization Fund the Governor and legislature will make available for state aid.

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

I hope you and yours continue to do well. With Governor Whitmer extending the stay-at-home order, Yeo & Yeo offices will remain closed through May 1.

Nearly 100% of our professionals are safely working from home and are available via email, phone, online meetings and video conferencing to continue to serve you. We encourage you to use our client-friendly portals for the safe and secure transfer of documents.

Many of you are looking to understand how the CARES Act and new SBA relief programs apply to your business. Our COVID-19 Resource Center continues to offer new regulatory updates and resources, so please continue to check it every day. And if you need help navigating any of this, we’re here to help.

On a personal note, I want to share how proud and inspired I am by the way our professionals have risen to this challenge with flexibility, resilience and an unwavering commitment to care for our clients’ needs while balancing their personal and family situations. You – our valued clients – are truly at the heart of what we do.

I also want to recognize our first responders and frontline heroes, many of whom are our clients and friends — thank you for your bravery and selfless efforts for us.

Stay Safe. Stay Healthy.

The novel coronavirus (COVID-19) pandemic and the resulting economic fallout is dealing a crushing blow to charitable organizations. Indeed, during a time when food banks, disaster relief, and other nonprofit services are needed most by the public, their funding is suffering due to canceled fundraising events and other factors.

If philanthropy is an important part of your legacy, now is a good time to make as many donations as possible. Your gifts reduce your taxable estate, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act has expanded charitable contribution deductions.

CARES Act incentives
Individual taxpayers can take advantage of a new above-the-line $300 deduction for cash contributions to qualified charities in 2020. “Above-the-line” means the deduction reduces adjusted gross income (AGI) and is available to taxpayers regardless of whether they itemize deductions.

The CARES Act also loosens the limitation on charitable deductions for cash contributions made to public charities in 2020, boosting it from 60% to 100% of AGI. No connection between the contributions and COVID-19 is required.

Place restrictions on contributions
Before making donations, it’s wise to take steps to ensure that they’re used to fulfill your intended charitable purposes. Outright gifts may be risky, especially large donations that will benefit a charity over a long period of time.

Even if a charity is financially sound when you make a gift, there are no guarantees it won’t suffer financial distress, file for bankruptcy protection, or even cease operations down the road. The last thing you likely want is for a charity to use your gifts to pay off its creditors or for some other purpose unrelated to the mission that inspired you to give in the first place.

One way to help preserve your charitable legacy is to place restrictions on the use of your gifts. For example, you might limit the use of your funds to assisting a specific constituency or funding medical research. These restrictions can be documented in your will or charitable trust or in a written gift or endowment fund agreement.

In addition to restricting your gifts, it’s a good idea to research the charities you’re considering, to ensure that they use their funds efficiently and effectively. One powerful online research tool is the IRS’s Tax Exempt Organization Search. The tool provides access to information about charitable organizations, including Form 990 information returns, IRS determination letters, and eligibility to receive tax-deductible contributions.

Doing your part
During this time of national emergency, charitable organizations need your donations more than ever as demand on them is on the rise. Making gifts benefits your overall estate plan by reducing your estate’s size, and the CARES Act provides additional charitable giving incentives. Contact us for help in making charitable gifts through your estate plan.

Paycheck Protection Program to be Replenished

President Trump signed a $484 billion coronavirus bill into law that includes $370 billion of additional money for programs administered by the U.S. Small Business Administration (SBA), as well as more funding for hospitals and testing.

Paycheck Protection Program
Banks have said they process SBA Paycheck Protection Program (PPP) loans on a first-come, first-served basis, and many continued accepting applications after the program’s initial funds were exhausted. Small-business owners should check with their lender to determine where they stand in the process, and if anything further is required of them at this time.

If you applied for a PPP loan when the program was first introduced, and didn’t get an answer, you do not need to reapply for the second round. Many lenders are continuing to process loan applications that didn’t get funded the first time around. You may be near the front if you applied shortly after the program got up and running April 3, but that depends on whether your application is complete and accurate and how your lender may be prioritizing loan applications.

While it isn’t too late for business owners who haven’t yet applied, demand is incredibly high. Reach out to your lender as soon as possible. The program is open to virtually every small business that has been adversely affected by COVID-19, including sole proprietors, self-employed individuals, independent contractors and nonprofits.

For more information, contact us, read our FAQs on Payroll Protection Program.

Yeo & Yeo CPAs & Business Consultants, a leading Michigan accounting firm, has been named one of West Michigan’s Best and Brightest Companies to Work For by the Michigan Business & Professional Association (MBPA) for the sixteenth consecutive year. Yeo & Yeo and the other winning companies will be honored at the MBPA’s digital conference and awards celebration on May 12.

“Being recognized as one of the Best and Brightest Companies to Work For is an honor for us. We are very proud to be listed among prominent companies not only in the greater Kalamazoo area, but also those in many other large Michigan cities such as Grand Rapids and Mt. Pleasant,” says Carol Patridge, CPA, managing principal of Yeo & Yeo’s Kalamazoo office.

Yeo & Yeo is proud to offer more than 200 employees rewarding careers in the accounting industry. Yeo & Yeo develops future leaders through its award-winning CPA certification bonus program, in-house training department, professional development training and formal mentoring while sustaining work-life balance.

Ali Barnes, CPA, managing principal of Yeo & Yeo’s Alma office, says, “This recognition is a testament to our dedicated employees and the culture we have built. I’m happy to see employees reporting that they are engaged and enriched through their work.”

The annual competition is a program of the Michigan Business & Professional Association and identifies organizations that display a commitment to exceptional human resources practices and employee enrichment. An independent research firm evaluates organizations on a list of key metrics.