Got Fraud Losses? How Professionals Put a Number on Them

If your company suffers significant losses due to a fraud incident, you may decide to pursue the perpetrator in court, possibly to obtain compensatory damages. Assuming you win your case, you should know that estimating fraud damages is challenging. It generally requires the assistance of a financial expert, who will consider the facts of the case and the harm suffered by your business. Let’s take a look at calculation methods.

Benefit-of-the-bargain vs. out-of-pocket

Damages professionals typically use either the benefit-of-the-bargain or out-of-pocket approach to make estimates. The appropriate method depends to some degree on the location and nature of the fraud. But in most cases, the benefit-of-the-bargain method results in greater restitution for victims.

Take, for example, a real estate developer who buys a parcel of land that the seller says is worth $2 million but is being offered at $1.5 million. In reality, the seller is lying about the parcel’s value and has falsified the valuation report. The land is actually worth about $800,000. Putting aside the developer’s failure to perform proper due diligence, how might fraud damages be assessed?

Using the out-of-pocket rule, the buyer would be awarded $700,000 in damages, or the difference between the land’s real value and the amount paid for it. Using the benefit-of-the-bargain rule, however, damages would be calculated at $1.2 million — the difference between the seller’s misrepresented value and the parcel’s actual worth.

Other calculation approaches

Plaintiffs typically prefer the benefit-of-the-bargain method, for obvious reasons. But there are other methods professionals might use to calculate lost profits — for example, the benchmark (or yardstick) method. Here, the expert compares a fraud victim’s corporate profits to those of another, similar company that wasn’t defrauded. This method is particularly appropriate for new businesses or franchises.

The hypothetical (or model) method is also generally appropriate for businesses with little history. It requires the expert to gather marketing evidence that demonstrates potential lost sales. After calculating the total, the costs that would have been associated with the lost sales are subtracted to arrive at lost profits.

For longer-established businesses, the before-and-after method typically is preferred. Professionals look at the company’s profits before and after the fraud compared to profits during the time the fraud was being committed. The difference is the business’s lost profits.

Boost the odds

To boost your chances of receiving adequate restitution in court, you or your attorney should engage an experienced damages expert early in the litigation process. Contact us if you have questions.

Reporting on environmental, social and governance (ESG) matters is an increasingly crucial area of corporate compliance. While ESG reporting and disclosure apply primarily to public companies, there are efforts aimed at requiring private companies to also report on these matters. For example, the European Union’s Corporate Sustainability Reporting Directive requires private organizations that meet specific criteria to publish social and environmental risks and their impacts.

The basics

ESG reports address the demand from governments, investors, consumers and activists for companies to adopt sustainable and socially conscious business practices. They also help companies achieve compliance with the growing number of ESG-related laws and regulations.

ESG reporting is a relatively new area of corporate governance and is of interest to stakeholders worldwide. Numerous reporting frameworks and standards currently exist. Regardless of the format, the goals of ESG reporting are 1) to provide transparency about ESG-related activities and 2) to satisfy regulatory requirements, if applicable.

Additionally, by focusing on ESG, management can improve their understanding of the business’s operations and approach to risk management. In some cases, this can also create a competitive edge in the marketplace.

Producing high-quality reports backed by accurate data is challenging, particularly for companies with domestic and international operations. The evolution of existing standards and the introduction of new approaches complicate the reporting process.

ESG audits

According to a recent study by the American Institute of Certified Public Accountants, Chartered Institute of Management Accountants and International Federation of Accountants (IFA), 98% of large companies report on sustainability. While conducting an ESG audit is optional in all jurisdictions, it’s a best practice for many companies that issue reports. Of the companies included in the recent study, 69% obtained some level of assurance.

There are typically two levels of assurance. The most common type is a review, which provides limited assurance and doesn’t automatically include site visits. An examination, which delivers a higher level of assurance and is more involved, applies many auditing techniques and often includes site visits.

Benefits for private companies

While most private companies aren’t required to report on ESG issues, voluntary reporting can build trust with investors, lenders, employees, customers and other stakeholders. Additionally, producing an ESG report may help private companies establish and maintain their reputations and improve access to investment capital.

An ESG audit can uncover risk, allowing private companies to minimize their exposure and potential losses. At the same time, auditing ESG-related aspects of operations can highlight cost savings and possible efficiency gains. Producing an ESG report can also help to attract and retain employees, ensure your business can respond quickly to supplier demands for sustainable practices, and prepare for potential future regulations that could apply to private companies.

We can help

ESG reporting allows you to communicate responsible business practices to stakeholders. Even if your business isn’t yet required to produce ESG reports, doing so voluntarily can demonstrate your commitment to this increasingly important financial reporting issue. Contact us for help reporting ESG matters in a transparent and accurate manner.

Every employer needs a thorough and legally sound hiring process. Although there’s no federal law mandating background checks for private sector jobs, they’re generally considered a recommended step for some positions and a clear-cut necessity for others.

But background checks are apparently far from perfect. In an article published in the February 2024 issue of Criminology, researchers described their analysis of both legally regulated and unregulated background checks on 101 people with criminal records in New Jersey.

The study found that 90% of participants had false negatives in their regulated background checks, meaning the background checks failed to report incidents found in official government records. Meanwhile, 60% of participants had at least one false positive error in their regulated background checks, meaning the background checks reported an incident that doesn’t appear in official government records.

Paint a fuller picture

Do disappointing statistics like these mean your organization should give up on background checks? Probably not. Comprehensive and legally compliant background checks, properly conducted by either your organization or a trusted third party, can still reveal noteworthy information about job applicants such as:

Resumé inaccuracies,
Personal financial difficulties,
Motor vehicle violations,
Litigious behavior, and
Criminal charges or convictions.

Now, in and of themselves, any of these items may or may not represent “deal breakers” to hiring someone. Much depends on the specific facts and circumstances, as well as the type of position you’re looking to fill. But background checks can still paint a fuller picture of job candidates that may enable you to lower the risk level of new hires. It’s just important to bear in mind that background checks are but one piece of the puzzle.

Look deeply

How deeply your background checks should go is a subject worth considering — or reconsidering if you haven’t done so in a while. For instance, verifying previous employment history is typically considered optional but advisable. Contact all references to ensure applicants held the positions they claim. As you may already be aware, many employers today will confirm only basic details about former employees because of liability concerns. Also confirm that applicants have the academic credentials, military service records and professional licenses stated on their resumés.

In some instances, employers are now checking job candidates’ credit reports to learn whether applicants are consistently late paying bills, swimming in debt or have filed for bankruptcy. This is obviously critical information if you’re hiring someone who will have access to cash or financial accounts. Just keep in mind that money troubles might stem from personal hardships such as prolonged unemployment or illness.

Keep it legal

While conducting background checks, or just considering whether and how to conduct them, be sure to make legal compliance your highest priority. Particularly germane is the Fair Credit Reporting Act. Among other requirements, it mandates employers to obtain signed employee agreements before the hiring organization requests any type of “consumer report” — which includes credit reports, criminal background checks and many other types of documents.

And a final point of distinction: Conducting background checks isn’t the same as verifying applicants’ work eligibility status in compliance with U.S. Citizenship and Immigration Services rules. Employers must complete Form I-9, “Employment Eligibility Verification,” for every person they hire.

Protect yourself

The job market remains relatively tight for employers in most industries. So, if you need to hire, don’t be surprised if it’s slow going or there’s tough competition. Just make sure to take the necessary steps to protect your organization from those who would do it harm and to maximize the likelihood of hiring productive, long-term employees. That should include working with an attorney when necessary. For help identifying and managing the costs and financial risks of your hiring process, contact us.

A living will could provide peace of mind for both you and your family should the unthinkable occur. Yet many people neglect to draft this important estate planning document.

Will vs. living will

It’s not uncommon for a living will to be confused with a last will and testament, but they aren’t the same thing. These separate documents serve different, but vital, purposes.

A last will and testament is what many people think of when they hear the term “will.” This document details how your assets will generally be distributed when you die. A living will (or health care directive) details how life-sustaining medical treatment decisions would be made if you were to become incapacitated and unable to communicate them yourself.

The thought of becoming terminally ill or entering into a coma isn’t pleasant, which is one reason why many people put off creating a living will. However, it’s important to think through what you’d like to happen should this ever occur. A living will is the vehicle for ensuring your wishes are carried out.

For example, if you were in a permanent vegetative state due to an accident, with little or no medical chance of ever coming out of the coma, would you want your life to be artificially prolonged by machines and feeding tubes? Ideally, you’re the one who should make this decision, not grief-stricken relatives and loved ones who may not be sure what your wishes would be — or who might not abide by them.

Other important documents

Often, a living will is drafted in conjunction with two other documents: a durable power of attorney for property and a health care power of attorney.

The durable power of attorney identifies someone who can handle your financial affairs — paying bills and other routine tasks — should you become incapacitated. The health care power of attorney becomes effective if you’re incapacitated, but not terminal or in a vegetative state. Your designee can make medical decisions, but not life-sustaining ones, on your behalf if you’re unable to do so.

Seek assistance in drafting your living will

It’s important to work closely with an attorney in drafting your living will (as well as your durable power of attorney and power of attorney for health care). Be sure to also discuss the details of these important documents with your loved ones.

Keep in mind that these documents aren’t cast in stone. You can revoke them at any time if you change your mind about how you’d like life-sustaining decisions to be made or whom you’d like to handle financial and medical decisions.

If you follow the news, you’ve probably heard a lot about artificial intelligence (AI) and how it’s slowly and steadily expanding into various aspects of our lives. One widely cited example is ChatGPT, an AI “chatbot” that can engage in conversations with users and create coherently written articles, as well as other content, when prompted.

ChatGPT and other similar chatbots are what’s known as “generative” AI. The operative word there refers to software that’s able to generate new content based on input from users and existing data either inputted during development or gathered from the internet.

Along with college students and the curious, more and more businesses are joining the ranks of generative AI users. Research and advisory firm Gartner surveyed more than 1,400 company leaders in September 2023. Two in five (40%) said their organizations were piloting generative AI programs — a substantial increase from the 15% results of the same survey conducted by Gartner about six months earlier.

Imagine the possibilities

Naturally, how companies are using generative AI depends on factors such as industry, mission, operational needs and strategic objectives. But it can be informative to look at a few examples.

In consumer goods and retail, for instance, businesses are using generative AI to create new product designs, optimize materials and align aesthetics with the latest trends. In the energy sector, it’s being used to improve supply chain logistics and better forecast demand. In health care, generative AI is helping accelerate scientific research and enhance medical imaging.

More generally, this technology could help many types of businesses:

Generate marketing and advertising content,
Analyze financial data and produce reports that assess risk or draw trendlines, and
Develop chatbots or other means to automate customer service.

There’s no harm in letting your imagination run wild. Think about what types of content and knowledge AI could create for your company that, in years previous, would’ve probably only been possible to develop by hiring new employees or engaging consultants.

Be methodical

Of course, pondering the possibilities of generative AI should never translate to blindly throwing money at it. To start exploring the possibilities, sit down with your leadership group and discuss the topic.

If you’re wholly new to it, be sure everyone does some preliminary research. You might even ask an IT staffer or someone else knowledgeable about AI to do a presentation. As part of your research and discussion, make sure to learn about the potential legal and public relations liabilities.

Should everyone agree that pursuing generative AI is a good strategic decision, form a project team to identify “use cases” — that is, specific ways your business could use it to deliver practical, competitive functionalities. Prioritize the use cases you come up with and choose a winner to go after first.

You may be able to buy an AI product to fulfill this need. In such a case, you’d have to shop carefully, thoroughly train the appropriate staff members and cautiously roll out the solution. Doing so would be relatively simpler than developing your own AI app, but you’d need to manage the purchase and implementation with return on investment firmly in mind.

The other option is to create your own proprietary generative AI app indeed. This would likely be a much more costly and labor-intensive option, but you’d be able to customize the solution to your ultra-specific needs.

Prepare for the future

What can generative AI do for your business? Maybe a little, maybe a lot. One thing’s for sure, its influence on how business is done will only get stronger in the years ahead. We can help you assess the costs vs. benefits of this or any other technology.

Yeo & Yeo’s Education Services Group professionals are pleased to present four sessions during the April 24-25 MSBO Conference & Exhibit Show at Amway Grand Plaza and DeVos Place in Grand Rapids. We invite you to join us to gain new insights into managing your Michigan school.

Wednesday, April 24

School Nutrition Program Financial Reporting and Auditing Considerations – 9:20-10:20 a.m.
- Presenters: Kristi Krafft-Bellsky, Yeo & Yeo CPAs & Advisors and Brenda Sweatman, MDE

Frequently Found Audit Issues – 10:40-11:40 a.m.
- Presenters: Joselito Quintero and Gloria Jean Suggitt, MDE and Jennifer Watkins, Yeo & Yeo CPAs & Advisors

Thursday, April 25

How to Prepare for a Headache-Free Audit – 9:40-10:40 a.m.
- Presenter: Michael Evrard, Yeo & Yeo CPAs & Advisors

The ABCs of Your Single Audit – 2:00-2:30 p.m.
- Presenter: Jennifer Watkins, Yeo & Yeo CPAs & Advisors

We encourage you to visit our booth #700 for one-on-one conversations with our education professionals. Hope to see you there!

Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 15

If you’re a calendar-year corporation, file a 2023 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.
For corporations, pay the first installment of 2024 estimated income taxes. Complete and retain Form 1120-W (worksheet) for your records.
For individuals, file a 2023 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due.
For individuals, pay the first installment of 2024 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES).

April 30

Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941) and pay any tax due.

May 10

Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941), if they deposited on time, and fully paid, all of the associated taxes due.

May 15

Employers deposit Social Security, Medicare and withheld income taxes for April if the monthly deposit rule applies.

June 17

Corporations pay the second installment of 2024 estimated income taxes.

External auditors spend a lot of time during fieldwork evaluating how businesses report work in progress (WIP) inventory. Here’s why this warrants special attention and how auditors evaluate whether WIP estimates seem reasonable.

Valuing WIP

Companies may report various categories of inventory on their balance sheets, depending on the nature of their operations. For companies that convert raw materials into finished goods, a key element is WIP inventory. This refers to partially finished products at various stages of completion. Management uses estimates to determine the value of WIP. In general, the more materials, labor and overhead invested in WIP, the higher its value.

Most experienced managers use realistic estimates, but inexperienced or dishonest managers may inflate WIP values. This can make a company appear healthier than it really is by overstating the value of inventory at the end of the period and understating cost of goods sold during the current accounting period.

Accounting for costs

Companies assign costs to WIP depending on the type of products they produce. When a company produces large volumes of the same product, they allocate costs as they complete each phase of the production process. This is known as standard costing. For example, if a production process involves six steps, at the completion of step two the company might allocate one-third of their costs to the product.

On the other hand, when a company produces unique products — such as the construction of an office building or made-to-order parts — it typically uses a job costing system to allocate materials, labor and overhead costs as incurred.

Auditing WIP

Financial statement auditors closely analyze how companies quantify and allocate their costs. Under standard costing, the WIP balance grows based on the number of steps completed in the production process. Therefore, auditors analyze the methods used to quantify a product’s standard costs, as well as how the company allocates the costs corresponding to each phase of the process.

With job costing, auditors analyze the process to allocate materials, labor and overhead to each job. In particular, auditors test to ensure that costs assigned to a particular product or projects correspond to that job.

Recognizing revenue

Auditors perform additional audit procedures to ensure that a company’s recognition of revenue complies with its accounting policies. Under standard costing, companies typically record inventory (including WIP) at cost, and then recognize revenue once they sell the products. For job costing, revenue recognition typically happens based on the percentage-of-completion or completed-contract method.

Get it right

Under both the standard and job costing methods, accounting for WIP affects the balance sheet and the income statement. Contact us if you need help reporting WIP. We can help you make reliable estimates based on your company’s specific production process.

When employees leave their jobs, financial advisors typically encourage them to roll over their 401(k) plans into a new employer’s plan or perhaps an IRA. Many people follow this advice, but not everyone.

As you may be able to attest, many employers that sponsor 401(k)s or other qualified plans end up with account holders who are former employees with out-of-date contact information. In benefits parlance, these individuals are “missing participants.”

The situation can create administrative hassles for you at first and, later, turn into a major problem when the accounts in question must start making distributions. Here are some best practices to consider when you find yourself with a missing participant.

Getting started

When a participant is unresponsive or you reasonably believe your contact information is inaccurate, first consider taking four basic steps:

Use certified mail to reach out to the person or, if more cost-effective, a private delivery service with similar tracking features,
Review your employment records and all your benefits plans for up-to-date information,
Attempt to identify and contact the individual’s designated beneficiaries under those plans for information, and
Use free electronic tools such as internet search engines, public record databases and social media accounts.

You might also reach out to a participant’s colleagues or union, as well as register the person’s name on public or private pension registries. According to guidance issued by the U.S. Department of Labor, privacy concerns regarding such actions can be alleviated if your retirement plan fiduciary asks the missing participant’s current employer, other plan fiduciary or beneficiary to have the missing participant contact your retirement plan.

Escalating your efforts

If initial search steps are unsuccessful and the account balance is large enough to justify the expense, paying for a professional search may be appropriate. This could mean using fee-based internet search engines, commercial locator services, credit-reporting agencies, information brokers, investigation databases and other similar premium services.

You might be able to charge the fee against the account if it’s reasonable and the allocation method is consistent with your plan’s terms and the Employee Retirement Income Security Act.

Giving up

Some plan documents describe how to handle account balances of missing participants when search efforts fail. Others may authorize administrative committees to adopt policies for this situation. Following written policies and procedures for handling missing participants — and documenting actions taken — helps ensure consistency and lower the risk of legal liability.

Some plan provisions or policies direct fiduciaries to allocate the funds in the account among the accounts of the remaining participants, subject to restoration if the individual should reappear. Under IRS regulations, such an allocation may be a permissible forfeiture so long as the plan is obligated to restore the missing individual’s account balance in the event the person is eventually found.

Preventing the issue

Perhaps obviously, the best practice of all is to establish strong administrative procedures that minimize the likelihood of missing participants. These include:

Proactively maintaining an accurate plan census,
Periodically prompting participants and beneficiaries to reconfirm their contact info, and
Regularly auditing census data, paying special attention to contact info in business transactions or when recordkeepers change.

Even changing the way plan communications are written and designed can increase the chances that participants will recognize and engage with them.

Addressing the challenges

Sponsoring a 401(k) plan can help attract strong job candidates, retain employees and boost morale. But plan administration has its challenges — and one of them is missing participants. Work with your benefits advisors to address the matter. Meanwhile, we can help you assess the costs and financial impact of your plan.

Business owners are commonly and rightfully urged to regularly generate financial statements in compliance with Generally Accepted Accounting Principles (GAAP). One reason why is external users of financial statements, such as lenders and investors, place greater trust in financial reporting done under the rigorous standards of GAAP.

But that’s not the only reason. GAAP-compliant financial statements can reveal details of your company’s financial performance that you and your leadership team may otherwise not notice until a major problem has developed.

Earnings are only the beginning

Let’s begin with the income statement (also known as the profit and loss statement). It provides an overview of revenue, expenses and earnings over a given period.

Many business owners focus only on earnings in the income statement, which is understandable. You presumably went into business to make money. However, though revenue and profit trends are certainly important, they aren’t the only metrics that matter.

For example, high-growth companies may report healthy top and bottom lines but not have enough cash on hand to pay their bills. So, be sure to look beyond your income statement.

A snapshot is just that

The second key part of GAAP-compliant financial statements is the balance sheet (also known as the statement of financial position). It provides a snapshot of your company’s financial health by tallying assets, liabilities and equity.

For instance, intangible assets — such as patents, customer lists and goodwill — can provide significant value to businesses. But internally developed intangibles aren’t reported on the balance sheet. Intangible assets are reported only when they’ve been acquired externally.

Similarly, owners’ equity (or net worth) is the extent to which the book value of assets exceeds liabilities. If liabilities exceed assets, net worth will be negative. However, book value may not necessarily reflect market value. Some companies provide the details of owners’ equity in a separate statement called the statement of retained earnings. It covers sales or repurchases of stock, dividend payments, and changes caused by reported profits or losses.

Ultimately, your balance sheet can tell you a lot about what you’ve got, what you owe and how much equity you truly have in your company. But it doesn’t tell you everything, so it’s important to read the balance sheet in the context of the other two parts of your financial statements.

Cash is (you guessed it) king

The third key part of GAAP-compliant financial statements is the statement of cash flows. True to the name, it shows all the cash flowing in and out of your business. Cash inflows aren’t necessarily limited to sales; they can also include loans and stock sales. Outflows typically result from paying expenses, investing in capital equipment and repaying debt.

Typically, statements of cash flow are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period.

Read your statement of cash flows closely as soon as it’s available. It’s essentially telling you how much liquidity your business had during the reporting period. A sudden slowdown in cash flow can quickly lead to a crisis if you aren’t generating enough cash to pay creditors, vendors and employees.

Detailed picture

In the day-to-day commotion of running a company, it can be easy to think of your financial statements solely as paperwork for the purposes of obtaining loans or other capital infusions. But these documents paint a detailed picture of the financial performance of your business. Use them wisely. For help generating GAAP-compliant financial statements, or just understanding them better, contact us.

As tax season unfolds, Microsoft Threat Intelligence sheds light on the latest targets and innovative tactics employed by cyber adversaries. With tax-related scams on the rise, understanding these emerging threats is crucial for organizations and individuals alike to fortify their defenses and protect sensitive financial information.

The report highlights the heightened activity of threat actors targeting tax professionals, businesses, and individual taxpayers through various malicious techniques, including phishing emails, ransomware attacks, and identity theft schemes. By leveraging sophisticated social engineering tactics and exploiting vulnerabilities in tax software and systems, cybercriminals aim to capitalize on the frenzy of tax filings to maximize their illicit gains.

In response to these evolving threats, Microsoft emphasizes the importance of adopting proactive security measures, such as multi-factor authentication, email filtering, and employee training, to mitigate the risk of falling victim to tax-related cybercrime. By staying vigilant and staying informed about the latest threat landscape, organizations and individuals can safeguard their financial assets and personal data during tax season and beyond.

Read the original article here.

The Section 27k Student Loan Repayment Program strives to increase the retention of teachers, including those in critical shortage areas, aligning with goal 7 of Michigan’s Top 10 Strategic Education Plan. A district or intermediate district that applies for funding under this section must use the funding to implement a student loan repayment program for its employees.

Learn more about the grant program in the Michigan Department of Education’s Student Loan Repayment Program web page and Frequently Asked Questions.

Applications opened February 29, 2024, and are due April 11, 2024.

Accounting issues

Is the grant taxable income to the employee?

The payment is provided as a “reimbursement.” Therefore, it would not be taxable and should not be included in box 1 of the employee’s W-2.

For educational reimbursements, amounts up to $5,250 are nontaxable. (Note: Must be under an Educational Assistance Program [EAP] – see below.) Any amounts that exceed $5,250 could be taxable unless other exemptions are met.

Education reimbursements fall into two sections of the Internal Revenue Code. The first, and the section we recommend using, is Section 127. Following is a summary of the requirements for the reimbursements to be nontaxable.

Under Section 127, the employer must pay such reimbursements under an Educational Assistance Program (EAP). EAPs may range in formality and length; however, specific criteria must be included in each EAP. The EAP must:

Be a written document.
Not provide eligible employees with a choice between educational assistance benefits and any other taxable compensation (whether cash or noncash)
Provide eligible employees with reasonable notification of the availability of the terms of the program.
Benefit employees in an employer-designated classification that does not discriminate in favor of highly compensated employees. Highly compensated employees, for purposes of this section, would include either of the following:
- Owned at least 5% of the employer’s stock in the preceding or current calendar year (would not apply to schools)
- Received compensation from the employer in the preceding year in excess of a specified amount denoted annually by the IRS.

The other section that relates to educational reimbursements is Section 132. Under Section 132, education reimbursements can exceed $5,250. Such reimbursements would be tuition payments under the fringe benefit program, which must qualify as a working condition benefit. However, unlike having an EAP under Section 127, a course-by-course analysis must apply to nontaxability under Section 132.

A working condition benefit under Section 132 is an employer-provided benefit that an employee could deduct on their tax return if they had paid the amount themselves. Educational expenses are deductible for an employee if they are directly related to the employee’s current job responsibilities. To be directly related, the expense must meet both of the following requirements:

Maintains or improves skills required by the employer, including refresher courses and courses dealing with current developments in the employee’s profession.
Meets the requirements of any applicable law or regulation or any expressed requirements imposed by the employer for bona fide business reasons as a condition to the employee’s continued employment, status or rate of compensation.

Courses that enable an employee to meet the minimum educational requirements for qualification in either the employee’s current field or a new field are not directly related to the employee’s current job responsibilities; therefore, payment or reimbursement for such courses is not nontaxable under Section 132.

How should the district issue the check?

How payments are issued is up to the district, but we recommend using the same method you would use for employee reimbursement. Typically, this would be through payroll. However, we realize situations may arise where accounts payable/vendor checks may be more efficient, such as when an employee has left the district before payment.

How should the payment be recorded?

The MDE’s 1022 Committee will issue guidance for recording Sec. 27k payments. Currently, we recommend the following:

Grant code:	273	(Section 27k)
Expenditure object code:	2390	(Employee Benefits – Other Special Allowances)
Revenue function code:	312	(Restricted – State Revenues)

This is a restricted grant; therefore, expenditures should match the revenues recorded. Revenue information from the State will be released in July and August. We recommend accruing amounts anticipated in July and August at year-end (June 30). Reminder: Include the anticipated amount in year-end budget amendments for both revenue and expenditures.

New information will come out on this topic. Yeo & Yeo will provide an update as additional significant information becomes available from MDE.

Contact your Yeo & Yeo auditor or the Education Services Group with questions. We recommend that you contact legal counsel for additional advice.

When it comes to business structure, manufacturing company owners have a few choices. Among them are an S corporation and a limited liability company (LLC). They’re popular with manufacturers because of their combination of liability protection and tax benefits. Both forms have pros and cons, as well as some variations in tax consequences. Here’s an overview of these two business structures.

S corporation

Unlike in a C corporation, items of income and expenses are passed through to S corporation owners and reported on their individual income tax returns, similar to partners in a partnership. To qualify for S corporation status, the corporation must:

Be a U.S. corporation,
Have only eligible shareholders (including individuals and certain trusts and estates),
Have no more than 100 shareholders, and
Have only one class of stock.

An existing manufacturing company can switch to S corporation status by making an election by the 15th day of the third month of the tax year.

On the plus side, an S corporation:

Limits owners’ liability. Generally, S corporation shareholders can’t be held personally liable for debts of the company. Thus, creditors can’t come after their personal assets (except in limited instances).

Avoids double taxation (generally). A C corporation is subject to tax twice — once on income at the corporate level and again at the individual level when shareholders receive dividends. With an S corporation, income is generally taxable only at the individual level. In fact, an S corporation itself is exempt from federal income tax, though state tax treatment varies.

Provides tax-saving opportunities for owner-employees. An S corporation owner-employee can choose how much to receive as salary vs. income distributions from the corporation. Finding the right mix can save tax overall. Unlike salary, income distributions aren’t subject to payroll taxes. But the owner-employee must be paid a reasonable salary for services rendered. Otherwise, the IRS could reclassify distributions as salary, subject to payroll taxes, and also assess interest and penalties.

Eases ownership transfer. It’s generally easier to transfer S corporation shares than ownership in other business entities. It’s possible to do so without dire tax consequences even if the business is terminated. An S corporation also can survive the departure of its sole owner.

On the minus side, an S corporation:

Restricts ownership options. As outlined in the list above, the requirements under federal law are rigid. For example, depending on the situation, the limit on the number of shareholders or restriction to one class of stock may hamper operations. However, certain family members can be counted as a single shareholder.

Limits profit and loss allocations. An S corporation is required to allocate profits and losses among the owners based on the percentage of ownership or number of shares owned.

Is bound by state-based corporate formalities. S corporations are bound by the strict laws affecting corporations, imposed by the state. This means they must meet certain registration and regulatory obligations. Be aware that an S corporation must register to do business in other states outside of its home jurisdiction.

LLC

An LLC combines the liability protection of C corporations with the tax benefits of partnerships, but without some of the restrictions of S corporations. LLCs are authorized under state laws that vary around the country. (In fact, many states don’t restrict ownership.) LLC owners generally are referred to as “members.”

On the plus side, an LLC:

Reduces owners’ liability. As the name implies, the limited liability protection afforded to LLCs is a significant appeal to LLC members. Creditors generally can’t touch their personal assets. This benefit can’t be overemphasized. In fact, liability protection may be even greater for LLCs than S corporations under prevailing state laws.

Is taxed as a partnership. Unless an LLC elects otherwise, it’s typically taxed as a partnership. As a result, it avoids double taxation. An LLC owner may not even have to file a tax return for the LLC. However, a return is required if the LLC has more than one member.

Provides for profit and loss allocation. An LLC member may be entitled to receive a disproportionate share of income and expenses. Unlike an S corporation, the allocation doesn’t have to be based strictly on ownership percentages.

Offers ownership flexibility. There’s no limit on the number of members. Also, ownership is available to corporate and foreign entities.

On the minus side, an LLC:

May put owner-employees at a tax disadvantage. Generally, all business income that flows through to LLC owner-employees is subject to self-employment tax — even if it isn’t distributed to the owner-employee.

Can cause ownership transfer problems. It’s often more difficult to transfer ownership of an LLC than it is to transfer S corporation ownership. Unlike corporations, there are no shares of stock. Typically, all members must approve new members or changes in the ownership percentages of existing members. Also, a single-member LLC will automatically be terminated if the member exits the organization.

Weighing the pros and cons

Determining which form of ownership is right for your manufacturing company isn’t easy. There are many pros and cons to weigh before coming to a decision. We can provide the tax advice you need to help you make the right choice.

Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results.

Sec. 179 deduction basics

Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction.

Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems.

The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.)

Bonus depreciation basics

Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer.

For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023.

Sec. 179 vs. bonus depreciation

The current Sec. 179 deduction rules are generous, but there are several limitations:

The phase-out rule mentioned above,
A business taxable income limitation that disallows deductions that would result in an overall business taxable loss,
A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and
Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations.

First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively.

So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can.

Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 [$300,000 + (60% x $200,000) = $420,000]. That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year.

Manage tax breaks

As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have.

Many businesses support their communities by donating to local charities. Although there are plenty of nonprofits that deserve your support, some exist solely to facilitate fraud. How can you avoid the latter? Familiarize yourself with the deceptive tactics scammers use and carefully screen charities for legitimacy — before you write a check.

Branding tricks

Fraud perpetrators employ many tried-and-tested approaches to trick businesses into donating to fake charities. One of the most effective ways that they secure donations is by creating entities that resemble established nonprofits. They use familiar-sounding names and familiar-looking logos. They also make their websites and marketing materials appear like those of the charities they’re impersonating.

These scammers often use their fake branding in emails and on social media platforms. Not only do they hope you’ll donate money, but many also try to lure potential victims into clicking on links that download malware. The fraudsters might use the malware to hack networks, steal data and commit identity theft.

Tried-and-tested cons

Some other common methods used by con artists include:

Telemarketing scams. Using readily available technology, scammers can disguise their phone numbers to make it look like they’re calling from legitimate charities. During calls, they use high-pressure tactics that leave little time for would-be supporters to vet their organizations. This approach can be especially effective when a natural disaster occurs and potential donors understand the need to take quick action.

Fake endorsements. Some perpetrators use “endorsements” from celebrities, prominent companies and community leaders to lend fake charities an air of legitimacy and encourage you to donate. In most instances, the quoted individuals didn’t actually provide endorsements — or they might have been conned into lending their support. Artificial intelligence increasingly is being used by bad actors to impersonate the voices and appearances of well-known individuals.

False invoices. Most businesses receive a lot of invoices, and it may be easy to overlook an invoice for a charitable pledge you never made. To encourage prompt payment, an invoice from a fake charity might include a note referencing a previous conversation in which you or another person in your company approved the donation.

The real deal

There are a few simple steps you can take to help ensure your business’s charitable contributions go to real nonprofits. Most states require legitimate charities to register, and your state should have a website that will confirm whether a charity has filed and is in good standing. You can also enter a charity’s tax ID number on the IRS’s website to learn whether the organization is tax-exempt and if donations to it are eligible for deductions.

Keep in mind that a fake charity could potentially provide you with the tax ID number of a real charity. If you’re suspicious, further investigate the claims of the person soliciting donations. The websites of Charity Navigator, GuideStar and BBB Wise Giving Alliance can provide addresses, phone numbers, key performance metrics, tax and compliance information, and ratings relative to other nonprofits.

To help ensure you’re using best practices to avoid fraud, write and circulate a charitable donation policy. Your policy should describe processes to verify a nonprofit’s legitimacy and authorize donations in your company’s name. And it should specify approved payment methods and include instructions on tracking and reporting all charitable contributions. Also, make sure you educate employees about charitable scams and how to respond to unsolicited calls, texts and emails. If they’re in doubt, employees should feel empowered to ignore and delete messages.

Importance of philanthropy

Many businesses donate to charities in their communities to demonstrate their commitment to helping others. While there’s no shortage of worthy charities with important missions, scammers often take advantage of philanthropic businesses. Putting in place a donation policy, vetting charities and ensuring employees know how to handle unsolicited requests can go a long way to ensuring your giving ends up in deserving hands.

Open enrollment for most health care plans is many months away. That makes now a good time for businesses to consider changing their employer-sponsored coverage for next year, or perhaps to think about launching a plan for the very first time.

If you’re going to do either, you’ll have many details to sort through. To simplify matters a bit, let’s look at a few “big picture” factors that can serve as good starting points for contemplating the size and shape of your plan.

Funding approach

As you’re likely aware, there are two broad types of employer-sponsored health insurance plans: fully insured and self-funded (also known as self-insured). A fully insured plan is simply one you buy from an insurer. This is the most common approach for small to midsize businesses because it limits financial risk while offering the most predictable costs.

Under a self-funded plan, your company funds and administers the insurance, usually with the help of a third-party administrator. This approach may save money if your business can design its own plan and manage the claims process. However, you assume financial risk for the plan — costs can be unpredictable and potentially catastrophic.

Size of network

The size of a plan’s network determines how many options employees have when picking providers and how much they’ll pay out of pocket. A smaller network of preferred providers often grants the most coverage with lower out-of-pocket costs for employees when they visit those providers. Participants can typically still pick out-of-network services, but they’ll usually pay more out of pocket. Rightsizing your network is critical to participant satisfaction.

Tax-advantaged accounts

Although technically not insurance, widely used tax-advantaged accounts can be strong additions to a benefits package. These include Health Savings Accounts (HSAs), which must be offered in conjunction with high-deductible health plans, and Flexible Spending Accounts (FSAs).

HSAs and FSAs let employees set aside pretax dollars from their paychecks to use for eligible medical expenses. HSA funds remain in participants’ accounts until used, while FSA dollars typically must be spent within the year or lost (though a plan can provide for a grace period of up to 2½ months after the end of the plan year). A third option is a Health Reimbursement Arrangement (HRA). This is an employer-funded plan under which participants submit out-of-pocket medical expenses, such as deductibles and copays, for tax-free reimbursement.

Availability of government assistance

If your business happens to be considered a small business for health insurance purposes, you may want to check out the Small Business Health Options Program (SHOP). This federal marketplace is designed for small-business owners looking for health care plans. To qualify, a company typically must:

Have one to 50 employees,
Provide health benefits to all staffers working 30 or more hours per week,
Reach plan enrollment of at least 70% of employees,
Maintain an office or have an employee in the state of the SHOP used.

Every state runs its own SHOP marketplace, but they’re similar. Your state’s SHOP may be a good place to start if you’re ready to sponsor a plan but aren’t sure where to begin.

A major decision

Making changes to an existing health care plan or launching a new one is a major business decision, so be sure to go about it carefully. Hold honest discussions with your leadership team. Perhaps survey your employees to get a better idea of what plan features they value and whether there are any you should add. Consider engaging an insurance broker for assistance. For help identifying the costs and tax impact of health insurance, or any employer-sponsored benefit, contact us.

President Biden has released his proposed budget for the 2025 fiscal year, including numerous tax provisions affecting both businesses and individual taxpayers. While most of these provisions have little chance of coming to fruition while the U.S. House of Representatives remains controlled by the Republican Party, they might gain new life depending on the outcome of the November elections. Here’s an overview of the major tax proposals included in the budget.

Business tax provisions

The budget proposal includes many changes that could affect businesses’ tax outlook, several of which Biden has previously endorsed. Among the most notable:

Corporate tax rates. Under this proposal, the tax rate for C corporations would increase from 21% to 28% — still below the 35% rate that was in effect before the Tax Cuts and Jobs Act (TCJA). The effective global intangible low-taxed income (GILTI) rate would increase to 14%, and additional proposed changes would further increase the effective GILTI rate to 21%. The corporate alternative minimum tax rate would go up to 21%, from 15%.

Executive compensation. Biden proposes extending the current limitation on the deductibility of compensation in excess of $1 million for certain executives in publicly owned C corporations to privately held C corporations. A new aggregation rule would treat all members of a controlled group as a single employer for purposes of determining covered executives.

Excess business loss (EBL) limitation. Under the TCJA, noncorporate taxpayers can apply their business losses to offset only business-related income or gain, plus there’s an inflation-adjusted threshold (for 2024, $305,000 or $610,000 if filing jointly). The proposal would make this limitation permanent and treat EBLs carried forward from the prior year as current-year business losses rather than as net operating loss deductions.

Stock buyback excise tax. The Inflation Reduction Act (IRA) created a 1% excise tax on the fair market value when corporations repurchase their stock to reduce the difference in the tax treatment of buybacks and dividends. The proposal would quadruple the tax to 4%. It also would extend the tax to the acquisition of an applicable foreign corporation by certain affiliates of the corporation.

Like-kind exchanges. Owners of certain real property can defer the taxable gain on the exchange of the property for real property of a “like-kind.” The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million for joint filers) each year for real property like-kind exchanges. (Other types of assets wouldn’t be eligible.) Excess like-kind gains would be recognized in the year the taxpayer transfers the real property.

Individual tax provisions

Biden continues to promise that he won’t raise taxes on filers earning less than $400,000 annually but opposes extending tax cuts for those making more than that amount. Among other things, his budget proposal would affect:

Tax rates. The proposal would return the top individual marginal income tax rate for single filers earning more than $400,000 ($450,000 for joint filers) to the pre-TCJA rate of 39.6%.

Net investment income tax (NIIT). The NIIT on income over $400,000 would include all pass-through business income not otherwise covered by the NIIT or self-employment tax. The budget also would increase both the additional Medicare tax rate (on earnings above $400,000) and the NIIT rate (on investment income above $400,000) to 5%.

Capital gains taxes. Individuals with taxable income exceeding $1 million would see capital gains taxed at ordinary income rates, up from the current highest capital gains rate of 20%. Also, unrealized gains at death would be taxed, subject to a $5 million exemption ($10 million for married couples).

Child Tax Credit (CTC). The proposal would boost the maximum per-child credit — to $3,600 for qualifying children under age six and $3,000 for all other qualifying children — and increase the maximum age to 17, through 2025. It also would implement an advance monthly payment program, establish a “presumptive eligibility” concept and permanently make the CTC fully refundable.

Premium tax credits (PTCs). Biden would make permanent the IRA’s expansion of health insurance subsidies to taxpayers with household income above 400% of the federal poverty line, as well as the reduction in the amount of household income that must be contributed to qualify for PTCs.

Gift and estate taxes. The proposal would close several gift and estate tax loopholes that help the wealthy reduce their taxes. For example, certain transfers would be subject to a new annual gift tax exclusion, whereby a donor’s transfers that exceed a total of $50,000 in a year would be taxable regardless of whether the total gifts to each individual recipient didn’t exceed the annual gift exclusion amount ($18,000 per recipient in 2024).

Tax changes are coming one way or another

Even if none of these provisions are enacted as proposed, new legislation addressing taxes is likely in the next year or two. Indeed, absent congressional action, many significant TCJA provisions are scheduled to expire after 2025. Extensive tax debates and negotiations will likely soon take center stage. Turn to us for the latest developments.

Managing accounts receivable can be challenging, especially in an uncertain economy. To keep your company financially fit, it’s a good idea to occasionally revisit your billing and collections processes to ensure they’re as efficient and effective as possible. Consider these helpful tips.

Resolve billing issues quickly

The quality of your products or services, and the efficiency of order fulfillment and distribution processes, can significantly impact collections. When an order arrives damaged, late or not at all, the customer has an excuse to question or not pay your invoice. Other mistakes include incorrectly billing a customer or failing to deliver on promised discounts or special offers.

Make sure you resolve billing mistakes quickly and ask customers to pay any portion of the bill they’re not disputing. Once the matter has been resolved and the product or service has been delivered, ask the customer to pay the remainder of the bill. Depending on the circumstances, you also may consider asking the customer to sign off on the matter by making a note on the final invoice. Doing so will help protect you from potential future claims.

A lengthy cycle time for resolving billing disputes can have ripple effects on finance and accounting processes, such as reporting and forecasting. For instance, if you prepare your first quarter financial statements with numerous outstanding adjustments, management won’t be able to evaluate first quarter results until the adjustments are made. Delays in financial reporting can lead to missed business opportunities and postpone detection of impending financial problems.

Send timely invoices

If you haven’t already done so, implement an automated collection system that generates invoices when work is complete, flags problem accounts and produces useful financial reports. Consider sending invoices electronically and enabling customers to pay online. You can still send statements out monthly as a routine reminder of outstanding balances.

Delays in invoicing can impair collection efforts. Familiarize yourself with industry norms before setting payment schedules (whether they’re on 30-, 45- or 60-day cycles). If your most important or largest customers have their own payment schedules, be sure to set them up in your system.

It’s also important to regularly verify account information to ensure invoices and statements are accurate and they get into the right hands. Set clear standards and expectations with customers — both verbally and in writing — about your credit policy, including pricing, delivery and payment terms.

Consider rewards for early payment and penalties for delays

Despite your best efforts, you’re still likely to encounter slow-paying customers. Here are some ideas to encourage timely payments:

Request payment up front with deposits or service retainers,
Reward timely payments with early-payment discounts, and
Provide incentives to customers that improve their payment practices.

If positive reinforcement isn’t working, consider implementing late-payment penalties. For instance, you could assess fees on past-due accounts. You might also put a credit hold on extremely delinquent accounts or adjust their payment terms to cash on delivery.

Stay connected with high-maintenance customers

Make regular calls and send e-mail reminders to customers who haven’t settled their accounts. If necessary, the manager who works directly with the customer should try to resolve the payment issues with the lead contact at the company — or even the owner. Consider executing a promissory note to prevent the customer from disputing the charges in the future. If your efforts aren’t fruitful, get help from an attorney or collection agency. Keep in mind, though, that third-party fees may consume much of the collected amount.

If an outstanding debt is uncollectible, you can write it off as an ordinary business expense. Be sure to document customers’ promises to pay and your collection efforts, as well as why you believe the debt is worthless.

We can help

Solid billing and collections strategies are integral to a company’s financial health. Contact us for more ideas for improving your company’s approach to accounts receivable.

Many employers now allow employees to work remotely, either all or part of the time. If your organization does and sponsors a health care plan, here’s a brief refresher on some of the rules regarding protected health information (PHI) and the Health Insurance Portability and Accountability Act (HIPAA).

The Privacy Rule

One major feature of HIPAA is its Privacy Rule. This is essentially a set of national standards for safeguarding PHI. Always keep in mind that PHI is much broader than details about diagnosis and treatment. It also includes demographic data such as participants’ addresses, phone numbers, email addresses and financial information, as well as details about their plan participation.

Some staff members — managers, in particular — may be able to access PHI. When working remotely, these employees should ideally:

Have private workspaces where others can’t overhear conversations involving PHI,
Use only employer-issued devices and never access electronic PHI (ePHI) on shared devices, and
Put hard copies of PHI in a locked filing cabinet, shredding anything they can’t store securely.

Be sure to know which remote workers can access PHI. Each should be able to verify that there are proper measures in place to protect it.

The Security Rule

Another major HIPAA feature is its Security Rule, which is essentially a set of regulations for safeguarding ePHI. Every plan sponsor should conduct an organizational risk analysis and implement a risk management plan that addresses remote work. Doing so is even more important if, in recent years, you’ve seen a substantial increase in the number of remote workers. Your risk management plan should address the three prongs of the HIPAA Security Rule. These are:

1. Physical safeguards. Although the Security Rule applies to ePHI, physical safeguards are still important. Employers should track the location of each computer accessing ePHI. Lost or stolen computers may result in unauthorized disclosure of large amounts of ePHI, so making sure employees keep them in a secure room is critical.

In addition, employees need to report loss or theft immediately. Devices should never be left unattended in a vehicle or public space. Employees may be tempted to write down passwords and keep them near their computers. However, this practice is as unacceptable when working remotely as it is when working on-site.

2. Technical safeguards. Controlling access is key. This includes:

Restricting access to the minimum-necessary ePHI for each employee’s job function,
Requiring unique user IDs, passwords and multifactor authentication,
Implementing automatic log off or lock screen, and
Using robust encryption tools.

Advise employees to avoid downloading and storing ePHI on their computers. An individual machine often has weaker protection than a network — cloud storage may be more secure. Warn them against using portable storage media, such as thumb drives, from unknown or unauthorized sources. These items may install malware onto an employee’s computer.

3. Administrative safeguards. Implement procedures to supervise remote employees. Routinely monitor logins and system activity to identify potential security incidents, such as transfers or removal of large amounts of data. For new employees, or those new to remote work, mandate training on your organization’s policies and procedures.

Even with heightened awareness and safeguards, the nature of remote work increases the possibility of unauthorized use or disclosure of ePHI. Because the breach notification rules continue to apply, and you could incur HIPAA penalties if breach notification is inadequate or untimely, train employees to recognize and promptly report possible breaches.

Top of mind

Regular reminders and occasional retraining are good ways to keep HIPAA compliance top of mind for employees involved in plan administration, whether they work remotely or on-site. For help identifying and managing the costs and financial risks of your health care plan, contact us.

Few things can derail your estate plan as quickly as unanticipated long-term care (LTC) expenses. Most people will need some form of LTC — such as a nursing home or an assisted living facility stay — at some point in their lives. And the cost of this care is steep.

Contrary to popular belief, LTC expenses generally aren’t covered by traditional health insurance policies, Social Security or Medicare. So, to help ensure that LTC expenses don’t deplete savings or other assets meant to go to your heirs, have a plan for funding them. Here are some of your options.

Self-funding

If your nest egg is large enough, it may be possible to pay for LTC expenses out-of-pocket as (or if) they’re incurred. An advantage of this approach is that you’ll avoid the high cost of LTC insurance premiums. In addition, if you’re fortunate enough to avoid the need for LTC, you’ll enjoy a savings windfall that you can use for yourself or your family. The risk, of course, is that your LTC expenses will be significantly larger than anticipated, eroding the funds available to your heirs.

Any type of asset or investment can be used to self-fund LTC expenses, including savings accounts, pension or other retirement funds, stocks, bonds, mutual funds, or annuities. Another option is to tap the equity in your home by selling it, taking out a home equity loan or line of credit, or obtaining a reverse mortgage.

Two vehicles that are particularly effective for funding LTC expenses are Roth IRAs and Health Savings Accounts (HSAs). Roth IRAs aren’t subject to minimum distribution requirements, so you can let the funds grow tax-free until they’re needed. And an HSA, coupled with a high-deductible health insurance plan, allows you to invest pretax dollars that can be withdrawn tax-free to pay for qualified unreimbursed medical expenses, including LTC. Unused funds may be carried over from year to year, making an HSA a powerful savings vehicle.

LTC insurance

LTC insurance policies — which are expensive — cover LTC services that traditional health insurance policies typically don’t cover. Determining when to purchase such a policy can be a challenge. The younger you are, the lower the premiums, but you’ll be paying for insurance coverage during a time that you’re not likely to need it.

Although the right time for you to buy coverage depends on your health, family medical history and other factors, many people purchase these policies in their early to mid-60s. Keep in mind that once you reach your mid-70s, LTC coverage may no longer be available to you or may be prohibitively expensive.

Hybrid insurance

Hybrid policies combine LTC coverage with traditional life insurance. Often, these take the form of a permanent life insurance policy with an LTC rider that provides for tax-free accelerated death benefits in the event of certain diagnoses or medical conditions.

These policies can have advantages over stand-alone LTC policies, such as less stringent underwriting requirements and guaranteed premiums that won’t increase over time. The downside, of course, is that to the extent you use the LTC benefits, the death benefit available to your heirs will be reduced.

Potential tax breaks

If you buy LTC insurance, you may be able to deduct a portion of the premiums on your tax return. And if you need LTC, you may be able to deduct some of the costs. If you have questions regarding LTC funding or the tax implications, please don’t hesitate to contact us.