IRS Issues Guidance on Deferring Payroll Taxes

The IRS issued guidance that provides some explanation of how employers can defer withholding and remitting an employee’s share of Social Security tax when wages are below a certain amount. The guidance in Notice 2020-65 was issued to implement President Trump’s executive action signed in early August.

Employers can defer withholding, deposit and payment of an eligible employee’s share of Social Security taxes on wages paid from September 1, 2020, through December 31, 2020.
Employers must pay the deferred taxes during the period between January 1, 2021, and April 30, 2021.
Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021.

The guidance is brief, and private employers still have questions about whether, and how, to implement the deferral. This action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability.

Read more about the deferral provisions.

We are sharing the IRS guidance for payroll tax deferral that is available to us at this point. We realize that there are many unanswered questions about implementing it, if your company or organization chooses to do so, and we will keep you updated as more information becomes available.

On August 28, the IRS issued guidance that provides some explanation of how employers can defer withholding and remitting an employee’s share of Social Security tax when wages are below a certain amount. The guidance in Notice 2020-65 was issued to implement President Trump’s executive action signed in early August.

The guidance is brief, and private employers still have questions about whether, and how, to implement the deferral. The President’s action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability.

Tax deferral background

On August 8, President Trump signed a Presidential Memorandum that permits the deferral of the employee portion of Social Security taxes for certain employees due to the COVID-19 pandemic.

The memorandum directed Treasury Secretary Steven Mnuchin to defer withholding, deposit and payment of an eligible employee’s share of Social Security taxes (or the employee’s share of Railroad Retirement taxes) on wages or compensation paid from September 1, 2020, through December 31, 2020. It applies to employees whose wages or compensation, payable during any biweekly pay period, generally are less than $4,000, or the equivalent amount with respect to other pay periods. Amounts can be deferred without penalties, interest or additions to the tax.

Note: Under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New guidance

Issued on August 28, the three-page guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

The guidance states that “if necessary,” the employer “may make arrangements to collect the total applicable taxes” from an employee. This appears to answer one question that employers have about what happens if an employee leaves a job later this year or before the deferred taxes are due. However, no additional details are given on how an employer should make arrangements to collect unpaid tax.

Pushback from business groups

Before the guidance was issued, several business and payroll groups stated that their members would not implement the deferral. The U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral unworkable.

“If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging,” the letter states. “But under a simple deferral, employees would be stuck with a large tax bill in 2021. Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”

The National Payroll Reporting Consortium, a payroll services industry association, stated there are “substantial” computer programming changes that are needed to implement the deferral.

“Payroll systems are designed to apply a single Social Security tax rate for the full year, and to all employees equally,” the consortium explained. “Applying a different tax rate for part of the year, beginning in the middle of a quarter, and applying such a change to some employers but not others, and to some employees but not others, is quite complex. Not all employers and payroll systems will be able to make these complex changes by September 1.”

Going forward

You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide range of qualifying property. Here are five important points to be aware of when it comes to this powerful tax-saving tool.

1. Bonus depreciation is scheduled to phase out

Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless:

The taxpayer previously used the property and
The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:

Land improvements other than buildings, for example fencing and parking lots, and
“Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you&rsqu;ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.

The novel coronavirus (COVID-19) pandemic has caused some people to contemplate their own mortality or that of a family member. For those whose life expectancies are short — because of COVID-19 or for other reasons — estate planning can be difficult. But while money matters may be the last thing you want to think about when time is limited, a little planning can offer you and your family financial peace of mind.

Action steps to take

Here are some (but by no means all) of the steps you should take if you have a short life expectancy. These steps are also helpful if a loved one has been told that time is limited.

Gather documents. Review all estate planning documents, including your:

Will,
Revocable or “living” trust,
Other trusts,
General power of attorney, and
Advance medical directive, such as a “living will” or health care power of attorney.

Make sure these documents are up-to-date and continue to meet your estate planning objectives. Modify them as appropriate.

Take inventory. Catalog all your assets and liabilities, estimate their value, and determine how assets are titled to ensure that they’ll pass to their intended recipients. For example, do you own assets jointly with your ex-spouse? If so, title will pass to your ex-spouse on your death. There may be steps you can take to separate your interest in the property and dispose of it as you see fit.

If you have a safe deposit box, make sure someone is authorized to open it. If you have a personal safe, be sure that someone you trust knows its location and combination.

Review beneficiary designations. Take another look at beneficiary designations in your IRAs, pension plans, 401(k) plans and other retirement accounts, insurance policies, annuities, deferred compensation plans and other assets. Make sure a beneficiary is named and that the designation continues to meet your wishes. For example, a divorced individual may find that an ex-spouse is still named as beneficiary of a life insurance policy.

Review digital assets. Ensure that your family or representatives will have access to digital assets, such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, social media accounts, websites, domain names, and cloud-based documents. You can do this by creating a list of usernames and passwords or by making arrangements with the custodians of these assets to provide access to your authorized representatives.

Gaining peace of mind

Although facing your own mortality can be difficult, great peace of mind can come from ensuring that your estate plan fulfills your wishes and minimizes the tax burden on your family. Contact us with any questions regarding your estate plan.

The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.

If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

The postponement means that you may be able to amend:

Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.

And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:

Capital loss deductions aren’t taken into account in computing the excess business loss and
The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Many businesses now offer, as part of their health care benefits, various types of accounts that reimburse employees for medical expenses on a tax-advantaged basis. These include health Flexible Spending Accounts (FSAs), Health Reimbursement Arrangement (HRAs) and Health Savings Account (HSAs, which are usually offered in conjunction with a high-deductible health plan).

For employees to get the full value out of such accounts, they need to educate themselves on what expenses are eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. Although an employer shouldn’t provide tax advice to employees, you can give them a heads-up that the rules for reimbursements or distributions vary depending on the type of account.

Pub. 502

Unfortunately, no single publication provides an exhaustive list of official, government-approved expenses eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. IRS Publication 502 — “Medical and Dental Expenses” (Pub. 502) comes the closest, but it should be used with caution.

Pub. 502 is written largely to help taxpayers determine what medical expenses can be deducted on their income tax returns; it’s not meant to address the tax-favored health care accounts in question. Although the rules for deductibility overlap in many respects with the rules governing health FSAs, HRAs and HSAs, there are some important differences. Thus, employees shouldn’t use Pub. 502 as the sole determinant for whether an expense is reimbursable by a health FSA or HRA, or eligible for tax-free distribution from an HSA.

Various factors

You might warn health care account participants that various factors affect whether and when a medical expense is reimbursable or a distribution allowable. These include:

Timing rules. Pub. 502 notes that expenses may be deducted only for the year in which they were paid, but it doesn’t explain the different timing rules for the tax-favored accounts. For example, a health FSA can reimburse an expense only for the year in which it was incurred, regardless of when it was paid.

Insurance restrictions. Taxpayers may deduct health insurance premiums on their tax returns if certain requirements are met. However, reimbursement of such premiums by health FSAs, HRAs and HSAs is subject to restrictions that vary according to the type of tax-favored account.

Over-the-counter (OTC) drug documentation. OTC drugs other than insulin aren’t tax-deductible, but they may be reimbursed by health FSAs, HRAs and HSAs if substantiation and other requirements are met.

Greater appreciation

The pandemic has put a renewed emphasis on the importance of employer-provided health care benefits. The federal government has even passed COVID-19-related relief measures for some tax-favored accounts.

As mentioned, the more that employees understand these benefits, the more they’ll be able to effectively use them — and the greater appreciation they’ll have of your business for providing them. Our firm can help you fully understand the tax implications, for both you and employees, of any type of health care benefit.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

Covering tax, accounting, technology, financial and advisory topics relevant to you and your business, Yeo & Yeo’s podcast is hosted by industry and subject matter professionals, where we go beyond the beans.

On episode five of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by two members of our Paycheck Protection Program (PPP) Loan Forgiveness team, Rachel Van Slembrouck, Manager in our Saginaw office, and Zaher Basha, Manager in our Auburn Hills office.

Listen in as David, Rachel, and Zaher unpack the PPP by discussing recent updates as of August 13, 2020, requirements, forgivable expenses, and more.

Overview of the PPP program (2:30)
Opportunities for forgiveness (7:20)
Recent updates and the PPP Flexibility Act (9:48)
Forgivable expenses (11:25)
Salary, wages, and FTEs (20:00)
How to apply for forgiveness (24:31)
Open questions regarding forgiveness (29:25)
Possible future updates from Congress (33:13)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

DISCLAIMER
The information provided in this podcast is believed to be valid and accurate on the date it was first published. The views, information, or opinions expressed during the podcast reflect the views of the speakers. This podcast does not constitute tax, accounting, legal or other business advice, or an advisor-client relationship. Before making any decision or taking action, consult with a professional regarding your specific circumstances.

On August 8, President Trump signed four executive actions, including a Presidential Memorandum to defer the employee’s portion of Social Security taxes for some people. These actions were taken in an effort to offer more relief due to the COVID-19 pandemic.

The action only defers the taxes, which means they’ll have to be paid in the future. However, the action directs the U.S. Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Legislative history

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act. A short time later, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act. Both laws contain economic relief provisions for employers and workers affected by the COVID-19 crisis.

The CARES Act allows employers to defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New bill talks fall apart

Discussions of another COVID-19 stimulus bill between Democratic leaders and White House officials broke down in early August. As a result, President Trump signed the memorandum that provides a payroll tax deferral for many — but not all — employees.

The memorandum directs the U.S. Treasury Secretary to defer withholding, deposit and payment of the tax on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020. This means that the employee’s share of Social Security tax will be deferred for that time period.

However, the memorandum contains the following two conditions:

The deferral is available with respect to any employee, the amount of whose wages or compensation, as applicable, payable during any biweekly pay period generally is less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods; and
Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax.

The Treasury Secretary was ordered to provide guidance to implement the memorandum.

Legal authority

The memorandum (and the other executive actions signed on August 8) note that they’ll be implemented consistent with applicable law. However, some are questioning President Trump’s legal ability to implement the employee Social Security tax deferral.

Employer questions

Employers have questions and concerns about the payroll tax deferral. For example, since this is only a deferral, will employers have to withhold more taxes from employees’ paychecks to pay the taxes back, beginning January 1, 2021? Without a law from Congress to actually forgive the taxes, will employers be liable for paying them back? What if employers can’t get their payroll software changed in time for the September 1 start of the deferral? Are employers and employees required to take part in the payroll tax deferral or is it optional?

Contact us if you have questions about how to proceed. And stay tuned for more details about this action and any legislation that may pass soon.

No company can afford to operate without the right accounting software. When considering whether to buy a new product or upgrade their current solutions, however, business owners often fall prey to some common mistakes. Here are five gaffes to avoid:

1. Relying on a generic solution. Some companies rush into buying an accounting system without stopping to consider all their options. Perhaps most important, they may be missing out on specific versions for their industries.

For instance, construction companies can choose from many applications with built-in features specific to how their businesses work. Nonprofit organizations also have industry-specific accounting software. If you haven’t already, check into whether a product addresses your company’s area of focus.

2. Spending too much or too little. When buying or upgrading something as important as an accounting system, it’s easy to overspend. Those bells and whistles can be enticing. Then again, frugal-minded business owners may underspend, picking up a low-end product and letting staff deal with the headaches.

The ideal approach generally lies somewhere in the middle. Perform a thorough review of your accounting needs, transaction volume and required reports, as well as your employees’ proficiency and the availability of tech support. Then calculate a reasonable budgeted amount to spend.

3. Getting stuck in a rut. Assuming you already have an accounting system, one of the keys to managing it is knowing precisely when to upgrade. You don’t want to spend money unnecessarily, but you also shouldn’t risk errors or outdated functionality by waiting too long.

There’s no one-size-fits-all answer. Your financial statements are a potentially helpful source of information. A general rule of thumb says that, when revenues hit certain benchmarks (perhaps $5 million, $10 million or $15 million), a business may want to start thinking “upgrade.” The right tipping point depends on various factors, however.

4. Neglecting the importance of integration and mobile access. Once upon a time, a company’s accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. You should be able to integrate your accounting system with all (or most) of your other software so that data can be shared seamlessly and securely.

Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that users can use on their smartphones or tablets.

5. Going it alone. Which accounting package you choose may seem an entirely internal decision. After all, you and your staff will be the ones using it, right? But you may be forgetting one rather obvious person who could help: your accountant.

We can help you assess and determine your accounting needs, set a feasible budget, choose the right solution (or upgrade) and implement it properly. Going forward, we can even periodically test your system to ensure it’s providing accurate data and generating the proper reports.

Payroll is a key transaction cycle in most organizations. Everyone likes to get paid! However, payroll is commonly an area where fraud can occur if the proper internal controls are not in place. Critical internal controls to help detect and prevent fraud or error within payroll are:

Wage rates are documented and approved by management or human resources.
The person processing the payroll and cutting checks does not have access to enter new employees or change pay rates.
Timesheets are reviewed and approved before wages are paid.
The person reconciling the payroll cash account is not the person processing the payroll.
Procedures are in place to remove terminated employees from the payroll system timely.
New employees entered into the system are reviewed to ensure that no fictitious employees are set up.
Payroll detail or registers are reviewed and approved before payment.

These basic controls will help segregate duties in the payroll cycle and ensure only legitimate employees of the organization are paid, and that they are paid accurately.

Most nonprofits face the struggle of fulfilling their mission with very limited resources. Organizations are always on the hunt for new revenue sources, which are often in the form of contributions and grants. Some nonprofits are lucky enough to have a significant revenue source or donor that consistently provides them with funding. Others have a well-known special event that generates a large amount of its annual contribution revenue. While consistently receiving a substantial chunk of money from a single source or event each year seems ideal, could it be a concern?

Revenue concentration could be considered one of the most significant risks facing nonprofits. When considering sustainability, nonprofits need to determine if they could survive if this key revenue source were suddenly gone. Diversification is critical for a financially sound organization. COVID-19 has shown us that unexpected events can arise at any time and severely affect and quickly reshape our businesses. By not placing high reliance on a small number of revenue sources, an organization increases its chances of an easy recovery should any major changes in funding levels occur from any source.

Some questions to consider when looking at the organization’s revenue:

Is more than 25% of our revenue coming from a single source or event?
How financially stable is the funding source? Are there concerns that funding could decline or be discontinued?
Could we survive if we lost the revenue from one of our large sources?
How can we better plan for a change in significant revenue sources or better diversify our revenue streams?

While having a large revenue source is not a bad thing by any means, it is essential to periodically evaluate that source and its ability to continue funding the organization. By staying informed regarding these sources, the organization can better ensure its ability to carry on if changes in these sources were to occur.

To combat some of the financial burden that has come with operating in a pandemic, many nonprofit organizations have qualified for and received government aid. Paycheck Protection Program (PPP) loans are the most prevalent of the government aid that many have received. However, often nonprofits are uncertain about how to account for these funds. Budgeting and accounting issues for the PPP loans are the significant question marks surrounding the new funding.

To assist with some of the questions that many nonprofits may have, we have outlined some key areas that can help to make these issues clearer.

Documentation

Documentation is one of the most critical factors in determining if an organization will have its PPP loans forgiven. Many nonprofits will be able to account for their full forgiveness amount just with payroll costs now, thanks to the extension from eight to 24 weeks, rather than having to include other forgivable expenses. For this funding to be forgiven, thorough documentation of the payroll costs will still be needed.

Accounting

The AICPA laid out two paths that demonstrate how the PPP funds should appear on the financial statements. The decision of which path to follow is a judgment decision that is entirely in the hands of management.

If a nonprofit has a goal to have their loans forgiven, and are actively pursuing this goal, the funds may be accounted for as either debt or a conditional contribution. However, the nonprofits that do not plan to request forgiveness should account for PPP funds as debt.

“Double-dipping” is not permitted

Nonprofits will not be allowed to use PPP funds for the same expenses that are being paid with other government funds. To ensure that such “double-dipping” does not occur, a great way to account for how the funding is being spent is to separate the expenses in the general ledger software so that expenses being paid with PPP funds are separate from those paid with other government money.

Challenges for June 30, July 31, and Aug. 31 year-ends

Accounting for PPP loans should be straightforward for nonprofits with calendar year-ends because their loan forgiveness will occur in the same year as the covered period.

However, nonprofits with fiscal year-ends of June 30, July 31, or Aug. 31 may have more difficulty with accounting for their loans because the loan forgiveness will most likely occur in the fiscal year following the covered period. Covered periods also have the potential to span over multiple fiscal years. These situations will call for more strategy in the use of the funding and even potential use of attorneys to figure out compliance with the new laws and legal interpretations of such laws.

Scenario planning

Some nonprofits rely on public events and conferences for revenue. Due to governmental restrictions around group gatherings, most have had to conduct these events virtually or reschedule them. Revenue recognition issues may arise as a result of when the events take place and when the funds were received from sponsors or participants.

Prioritize health and virtual capabilities

We encourage nonprofits to continue to look after the physical health of their customers and employees. Mental health should also be included as a focus, particularly as parents may face issues while many schools will be virtual on at least a part-time basis.

If an organization hasn’t taken advantage of online capabilities, such as electronic accounts payable or accepting donations through their website, now is a better time than ever to implement such tools.

Meanwhile, the ability of a nonprofit and its employees to be able to work in a virtual setting is more critical than ever. If there is anything positive that will come as a result of this pandemic, it is that many do not need to be in the office during traditional hours to be able to work effectively. While this may not be the case for some, it is good to have the flexibility and make sure that expectations are appropriately communicated with employees.

Unusual accounting and tax challenges

New strategies may result in new accounting and tax challenges. For example, some performing arts organizations and public charities that have had to cancel events are asking ticket holders to donate the cost of their ticket instead of receiving a refund. This circumstance changes an exchange transaction into a donation that must be documented and validated and requires new treatment for tax purposes.

Contact your Yeo & Yeo professional if you need assistance.

For more than 20 years, we have followed the financial reporting model established by GASB Statement No. 34, which includes the Management’s Discussion and Analysis and major fund reporting. GASB 34 makes it possible to more fully assess a government’s overall financial health with the recording of capital assets and long-term debt in the government-wide financial statements.

In 2013, the Governmental Accounting Standards Advisory Council added the reexamination of the financial reporting model to its slate of pre-agenda research activities. After two years of research, they determined that most of the components of the financial reporting model remain effective; however, the Council highlighted several areas for improvement.

In September 2015, GASB added the financial reporting model project to its agenda. The project focused on areas to enhance the effectiveness of the financial reporting model and reduce the complexity and length of the financial statements.

In September 2018, GASB issued its Preliminary Views with a comment period and held public hearings, which resulted in much discussion and deliberation of the concepts and wording included in the Exposure Draft.

Most recently, on June 30, 2020, GASB provided final edits and approved the issuance of the Exposure Draft of the proposed Statement, Financial Reporting Model Improvements, which included the following significant changes:

Management’s Discussion and Analysis (MD&A) would continue to be Required Supplementary Information (RSI). However, it would be limited to the related topics discussed in five sections: 1) Introduction, 2) Financial Summary, 3) Detailed Analyses, 4) Significant Capital Asset and Long-term Debt Activity, and 5) Currently Known Facts, Decisions, or Conditions. The proposed Statement emphasizes that “boilerplate” discussions should be avoided.
Unusual or infrequent items would be required to be displayed as the last presented flow of resources before the new change in resource flows in the government-wide, governmental fund and proprietary fund statements of resource flows.
Governmental funds would use a short-term financial resources measurement focus and accrual basis of accounting. This means the financial statement would reflect the amount of fund balance at the period-end that is available to spend in the next period. This would eliminate the current 60-day rule. Additionally, all long-term debt issued for short-term purposes would be recognized as a short-term transaction. Interfund balances and transfers would also be recognized as short-term transactions.
The governmental fund balance sheet will now be titled “Short-term Financial Resources Balance Sheet,” and the government fund statement of revenues, expenditures and changes in fund balances will be titled “Statement of Short-term Financial Resource Flows.” The new statement would separately report inflows and outflows of resources related to the purchase and disposal of capital assets and the issuance and payment of long-term debt from other activities in governmental funds. The governmental fund financial statement captions would be assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund balances, inflows of resources from current activities, outflows of resources from current activities, and net flows from noncurrent activities. This means governmental funds would no longer have revenues and expenditures. Also, special revenue funds will be known as special resources funds.
Proprietary funds are required to continue to present separately operating and nonoperating revenues and expenses of the statement of revenues, expenses, and changes in fund net position. Nonoperating revenues and expenses would include 1) subsidies received and provided, 2) revenues and expenses related to financing, 3) resources from the disposal of capital assets and inventory, and 4) investment income and expenses. Operating revenues and expenses would be defined as all other revenues and expenses other than nonoperating revenues and expenses. An additional subtotal for operating income (loss) and noncapital subsidies must be presented before reporting other nonoperating revenues and expenses. Subsidies would be defined as 1) resources received from another party or fund to keep the rates lower than otherwise would be necessary to support the level of goods and services to be provided and 2) resources provided to another party or fund that results in higher rates than otherwise would be established for the level of goods and services to be provided.
Budgetary comparison information would be presented using a single method of communication as Required Supplementary Information (RSI). Governments would also be required to present 1) variances between final budget and actual amounts and 2) variances between original and final budget amounts. An analysis of significant variances would be presented in notes to RSI rather than in the MD&A.

GASB plans for a comment period and public hearings to be held, after which time they will redeliberate the issues based upon all the feedback and plan to issue a final statement in June 2022.

Based on the timeline, GASB has spent many years determining the best approach to improving the financial reporting model and implementation is not planned until June 2025 or 2026, depending on the revenue size of the government.

Please contact your local Yeo & Yeo government auditor if you have questions.

To read the full Exposure Draft, click here and click the Accept button.

Management’s Discussion and Analysis (MD&A) would continue to be Required Supplementary Information (RSI). However, it would be limited to the related topics discussed in five sections: 1) Introduction, 2) Financial Summary, 3) Detailed Analyses, 4) Significant Capital Asset and Long-term Debt Activity, and 5) Currently Known Facts, Decisions, or Conditions. The proposed Statement emphasizes that “boilerplate” discussions should be avoided.
Unusual or infrequent items would be required to be displayed as the last presented flow of resources before the new change in resource flows in the government-wide, governmental fund and proprietary fund statements of resource flows.
Governmental funds would use a short-term financial resources measurement focus and accrual basis of accounting. This means the financial statement would reflect the amount of fund balance at the period-end that is available to spend in the next period. This would eliminate the current 60-day rule. Additionally, all long-term debt issued for short-term purposes would be recognized as a short-term transaction. Interfund balances and transfers would also be recognized as short-term transactions.
The governmental fund balance sheet will now be titled “Short-term Financial Resources Balance Sheet,” and the government fund statement of revenues, expenditures and changes in fund balances will be titled “Statement of Short-term Financial Resource Flows.” The new statement would separately report inflows and outflows of resources related to the purchase and disposal of capital assets and the issuance and payment of long-term debt from other activities in governmental funds. The governmental fund financial statement captions would be assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund balances, inflows of resources from current activities, outflows of resources from current activities, and net flows from noncurrent activities. This means governmental funds would no longer have revenues and expenditures. Also, special revenue funds will be known as special resources funds.
Proprietary funds are required to continue to present separately operating and nonoperating revenues and expenses of the statement of revenues, expenses, and changes in fund net position. Nonoperating revenues and expenses would include 1) subsidies received and provided, 2) revenues and expenses related to financing, 3) resources from the disposal of capital assets and inventory, and 4) investment income and expenses. Operating revenues and expenses would be defined as all other revenues and expenses other than nonoperating revenues and expenses. An additional subtotal for operating income (loss) and noncapital subsidies must be presented before reporting other nonoperating revenues and expenses. Subsidies would be defined as 1) resources received from another party or fund to keep the rates lower than otherwise would be necessary to support the level of goods and services to be provided and 2) resources provided to another party or fund that results in higher rates than otherwise would be established for the level of goods and services to be provided.
Budgetary comparison information would be presented using a single method of communication as Required Supplementary Information (RSI). Governments would also be required to present 1) variances between final budget and actual amounts and 2) variances between original and final budget amounts. An analysis of significant variances would be presented in notes to RSI rather than in the MD&A.

GASB plans for a comment period and public hearings to be held, after which time they will redeliberate the issues based upon all the feedback and plan to issue a final statement in June 2022.

Please contact your local Yeo & Yeo education auditor if you have questions.

To read the full Exposure Draft, click here and click the Accept button.

On August 8, 2020, President Trump signed an executive memorandum that defers an employee’s portion of Social Security and Medicare taxes from September 1 through December 31, 2020. At this point, the taxes are just deferred, meaning they’ll still have to be paid at a later date. However, the action directs U.S. Treasury Secretary Steven Mnuchin to “explore avenues, including legislation, to eliminate the obligation to pay the taxes.”

The exact impact on employers and employees isn’t yet known. There are many open questions, including President Trump’s legal ability to implement the deferral. Some professionals believe there may be legal challenges to this executive action.

Deferral details

The payroll tax deferral will be available for “any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000.”

The deferral will be calculated on a pretax basis or the equivalent amount with respect to other pay periods. Plus, the amounts will be deferred without any penalties, interest, additional amount or addition to the tax.

Stay tuned for additional guidance

No doubt there is much to flesh out about this payroll tax deferral. Secretary Mnuchin has been instructed to provide additional guidance and employers can’t act on the deferral until that happens. It’s also possible Congress could take action. We’ll be monitoring developments and their implications, so turn to us for the latest information.

Yeo & Yeo CPAs & Business Consultants is proud to be named an INSIDE Public Accounting (IPA) Top 200 Accounting Firm for the twelfth consecutive year.

“We are honored to be continuously recognized as one of the top 200 firms in the nation,” said Thomas E. Hollerback, President & CEO. “We are thankful to our staff and friends, and to our clients who put their trust in Yeo & Yeo, and we remain committed to helping our clients grow.”

This is INSIDE Public Accounting’s 30th annual ranking of the largest accounting firms in the nation. Firms are ranked according to U.S. net revenues and are further analyzed according to responses received for IPA’s Survey and Analysis of Firms.

Download and view the list of top-ranked IPA firms in its entirety.

INSIDE Public Accounting, founded in 1987, is published by The Platt Group. Dedicated to helping firm leaders, and their firms, achieve their ultimate potential, IPA reports and analyzes the news, trends, strategies and politics that affect the nation’s public accounting firms, providing them with the information and resources they need to compete and operate more profitably.

Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

Filing requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you will need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

Reasons for the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

What’s considered “cash”

For Form 8300 reporting, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

E-filing and batch filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Setting up an account

To file Form 8300 electronically, a business must set up an account with FinCEN’s BSA E-Filing System. For more information, interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST) or email them at BSAEFilingHelp@fincen.gov. Contact us with any questions or for assistance.

When the COVID-19 crisis exploded in March, among the many concerns was the state of the nation’s supply chains. Business owners are no strangers to such worry. It’s long been known that, if too much of a company’s supply chain is concentrated (that is, dependent) on one thing, that business is in danger. The pandemic has only complicated matters.

To guard against this risk, you’ve got to maintain a constant awareness of the state of your supply chain and be prepared to adjust as necessary and feasible.

Products or services

The term “concentration” can be applied to both customers and suppliers. Generally, concentration risks become significant when a business relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region.

Concentration related to your specific products or services is something to keep a close eye on. If your company’s most profitable product or service line depends on a few key customers, you’re essentially at their mercy. If just one or two decide to make budget cuts or switch to a competitor, it could significantly lower your revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, your profit margin could narrow considerably. This is especially problematic if your number of alternative suppliers is limited.

To cope, do your research. Regularly look into what suppliers might best serve your business and whether new ones have emerged that might allow you to offset your dependence on one or two providers. Technology can be of great help in this effort — for example, monitor trusted news sources online, follow social media accounts of professionals and use artificial intelligence to target the best deals.

Geography

A second type of concentration risk is geographic. When gauging it, assess whether many of your customers or suppliers are in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a substantial impact. As we’ve unfortunately encountered this year, the severity of COVID-19 in different regions of the country is affecting the operational ability and capacity of suppliers in those areas.

These same threats apply when dealing with global partners, with the added complexity of greater physical distances and longer shipping times. Geopolitical uncertainty and exchange rate volatility may also negatively affect overseas suppliers.

Challenges and opportunities

Business owners — particularly those who run smaller companies — have always faced daunting challenges in maintaining strong supply chains. The pandemic has added a new and difficult dimension. Our firm can help you assess your supply chain and identify opportunities for cost-effective improvements.

GUIDANCE UPDATE AS OF 8/7/2020:

The Revenue from ESSER fund cannot be recognized in fiscal year 2020 if a school did not receive its award letter/Grant Award Notification (GAN) by June 30, 2020. Prior guidance allowed for schools until August 31 to receive its GAN.

ORIGINAL POST 7/27/2020:

The following information about Coronavirus Relief Funds and Elementary and Secondary School Emergency Relief Funds is what we understand as of July 27, 2020, and is subject to change. The 2020 Compliance Supplement related to these funds has not been released from the U.S. Office of Management and Budget (OMB).

Coronavirus Relief Funds (CRF)

In July, within state School Aid payments, Local Education Agencies (LEAs) received a funding line item called “District COVID Costs,” equating to approximately $12 per pupil. Although these funds are coming through State Aid, they are restricted federal funds, Federal Coronavirus Relief Fund (CFDA 21.019), authorized by SB 690 and signed into law on July 1, 2020. Since SB 690 was not signed into law until after schools’ 2019-20 fiscal year ended, these revenues should not be recognized in 2019-20 financial reporting or audited financial statements.

Additionally, Senate Bill 373 has not been finalized and therefore, the timing and method of distribution of those funds are unknown. However, anticipate it will include an additional $350 per pupil in the August State Aid payment. These funds would follow the above concepts. They are also restricted federal dollars and are not to be recognized in the 2019-20 fiscal year.

The main reason for not recognizing the above funds until the 2020-21 Fiscal Year is the date the bill was signed into law, which was after year-end. GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, is very clear in the requirements of when the recipients (LEAs) have an asset (receivable) and it cannot be before the passing of the bill. Therefore, we recommend that as of June 30, 2020, no receivable, unearned, or earned revenue be reported. Amounts should be reported as Federal Expenditures and Revenue for fiscal year 2021.

CARES Act ESSER Funds

The Elementary and Secondary School Emergency Relief (ESSER) Fund (84.425) is part of the United States Education Department’s (USED) Educational Stabilization Fund Program. It awards grants to state educational agencies (SEAs) to provide LEAs, including charter schools, with emergency relief funds to address the impact that COVID-19 has had on elementary and secondary schools across the nation. Eligible applicants are those LEAs that received a 2019-20 Title I, Part A allocation from MDE. The grant period is March 13, 2020 through September 30, 2021. Eligible LEAs were able to apply for these funds beginning May 8, 2020. The LEAs will initiate and apply in the Michigan Electronic Grants System Plus (MEGS+).

This grant has led to questions about how to account for these funds as well. MDE has noted that many applications/award letters are not yet complete, which leads to concerns on the availability of revenue and when to recognize that revenue. This award (or a portion of the award) is allowable to be spent in fiscal year 2020. However, to do so, three items must happen before August 31 (the period the LEA uses for availability, also known as the 60-day rule):

The application must be submitted.
The award must be approved.
The funds must be requested and received by LEA.

Timing of recording the funds

The main concern with the CRF funds has been that they were intended by legislation to “backfill” the reduction in State Aid that is coming in August. The reduction will be approximately $175 per pupil, which will affect fiscal year 2020. The CRF funds, as noted above, will be approximately $362 per pupil, which is a net gain for cash flow purposes of $187 per pupil. However, due to the timing, the reduction and the CRF funding will be recorded at different times. Hence, fiscal year 2020 will show the entire per-pupil reduction and fiscal year 2021 will show the whole CRF amount.

The above items will affect your audit, single audit, major program testing, compliance testing, etc. Therefore, it is vital to work with your Yeo & Yeo auditor closely.

Michigan Department of Education (MDE) has provided guidance on some of these issues and will update it in the next few weeks. Initial guidance is available at MDE CARES Act Grant Information and MDE Financial Accounting Guidance During the COVID-19 Pandemic.

Q&A

When should I record revenue for CRF funds?
FY 2021.

Are CRF funds federal or state dollars?
Federal.

Can I have expenditures in FY 20 for CRF funds?
Technically, yes. However, the expenses cannot be recorded as such until fiscal year 2021, as the grant award did not exist as of 6/30/20. This will likely be handled through an adjustment to the SEFA in fiscal year 2021 and explained in the notes to the SEFA.

Are CRF funds subject to supplanting?
Yes.

Can ESSER Funds be used and recorded in fiscal year 2020?
Yes, provided the application is completed, you accounted for the spending of the funds, and the reimbursement (cash) was received before August 31, 2020.

UPDATE as of 8/7/2020: ESSER fund cannot be recognized in fiscal year 2020 if a school did not receive its award letter/Grant Award Notification (GAN) by June 30, 2020, not August 31 as previous guidance stated. If you have received the award letter/GAN as of June 30, 2020, it is allowable to have expenditures related to ESSER funds in fiscal year 2020, providing you have requested and received the funds within 60 days after year-end.

Are ESSER Funds subject to supplanting?
No.

What can the ESSER Funds be spent on?
The costs allowable for the ESSER funds are broad. Refer to a memo from MDE on the usages of the funds at MDE ESSER Important Information.

Are ESSER Funds the same as Title I, Part A funds?
No, although the LEA receives ESSER formula funds via the Title I, Part A formula, ESSER funds are not Title I, Part A funds and are not subject to Title I, Part A requirements.

Contact your Yeo & Yeo professional if you need assistance.

Timely, relevant financial data is critical to managing a business in today’s unprecedented conditions. Similar to the control panel in a vehicle or machine, dashboard reports provide a real-time snapshot of how your business is performing.

Why you need a dashboard report

Everything in a dashboard report can typically be found elsewhere in the company’s financial reporting systems, just in a less user-friendly format. Rather than report new information, a dashboard report captures the most critical data, based on the nature of the business. It can provide an early warning system for potential problems, allowing you to pivot as needed to minimize losses and jump on emerging opportunities in the marketplace.

To maximize the effectiveness of dashboard reports, make them accessible to managers across your organization via the company’s internal website or weekly email blasts. Widespread, easy access will allow your management team to quickly identify trends that require immediate attention. Additionally, businesses that are struggling during a reorganization or debt restructuring sometimes share these reports with their lenders as a condition of their continued support.

Metrics that matter

When deciding which information to target, look at your company’s loan covenants — lenders usually have a good sense of which metrics are worth monitoring. Then conduct your own risk assessment. What’s relevant varies depending on your industry, general economic conditions and the nature of your business operations.

In addition to tracking cash balances and receipts, most dashboard reports include the following ratios:

Gross margin [(revenue – cost of sales) / revenue],
Current ratio (current assets / current liabilities), and
Interest coverage ratio (earnings before interest and taxes / interest expense).

From here, consider adding a handful of company- or industry-specific performance metrics. For example, a warehouse might report daily shipments and inventory turnover. A hotel that’s struggling to reopen might provide a schedule of net operating income, average room rates and vacancy rates compared to the previous week or month. A law firm might report each partner’s realization rate.

A diagnostic test

Comprehensive financial statements are the best source of information about your company’s long-term stability and profitability — especially for external stakeholders. But dashboard reporting is critical for internal purposes, too. These reports can help assess a sudden change in market conditions, interim performance or potential downward trend in your financial performance. Contact us to help you compile a meaningful dashboard reporting process for your organization.