A QDRO Can Ease the Transfer of Retirement Plan Assets in a Divorce

Getting divorced and dividing up assets is no easy matter. At least you can sell a house, a car or certain other possessions and distribute the proceeds to the two ex-spouses according to ownership rights under the law. But liquidating other types of property, such as assets in a qualified retirement plan, can be more complicated.

Using a qualified domestic relations order (QDRO) may provide for the transfer of assets in a qualified retirement plan to a nonparticipant spouse without incurring dire tax consequences. This can help you preserve more of your retirement account savings for your estate.

How a QDRO works

A QDRO provides a relatively straightforward means of accommodating a transfer of qualified retirement plan assets. A court with jurisdiction or another appropriate authority issues the QDRO. Essentially, the QDRO establishes that one spouse has a claim to some of the other spouse’s retirement plan accounts.

Typically, the QDRO will state either a dollar amount or a percentage of assets that belongs to the spouse of the participant, called the “alternate payee” in legal parlance. It also specifies the number of payments to be made (or the length of time for which the terms apply).

A QDRO may be used for qualified plans covered by the Employee Retirement Income Security Act (ERISA), including 401(k) plans, traditional pension plans and various other plans. In contrast, IRA funds, which aren’t covered by ERISA, generally are disbursed according to the terms of the divorce agreement.

With an approved QDRO in place, the alternate payee doesn’t owe any penalty tax on distributions. Thus, you can arrange a lump-sum distribution or series of periodic payments penalty-free according to the order, regardless of your age.

A QDRO must provide certain information. This includes the names and addresses of both the plan participant and the alternate payee; the dollar amount or percentage of assets being transferred to the alternate payee; and other vital details such as the amount, form and frequency of payments. If required information is omitted, a judge won’t sign off on the order. Rely on your legal and financial advisors to ensure that all formalities are met.

After a QDRO is approved by the judge, there’s still more work to do. The alternate payee must submit it to the administrator of the retirement plan. Every plan governed by ERISA must follow the authorized process for QDRO filings.

Available payment options

Assuming QDROs are allowed by the plan, the alternate payee will have payment options to consider. For starters, he or she can take a lump-sum distribution of the full amount. However, this may result in a higher overall tax liability than if the payments were spread out. Or, the alternate payee can arrange to receive regular payments just like the plan participant, thereby reducing the total tax hit.

Another option is to roll over the assets into another plan or IRA. If the usual requirements are met — for example, the rollover is completed within 60 days — no current tax is owed for the year of the transfer.

Finally, the alternate payee may leave the money where it is. If permitted by the plan, additional contributions to the account may be made in the future.

Accurate financial statements are essential to making informed business decisions. So, managers and other stakeholders may express concern when a company restates its financial results. Before jumping to premature conclusions, however, it’s important to dig deeper to evaluate what happened.

Uptick in restatements

In June 2024, the Center for Audit Quality (CAQ) reported a recent uptick in financial restatements by public companies. The report, “Financial Restatement Trends in the United States: 2013–2022,” delves into a ten-year study by research firm Audit Analytics. It found that the number of restatements in 2022 had increased by 11% from the previous year.

More alarming is a trend toward more “Big R” restatements. Big Rs indicate that the company’s previously filed financial reports were deemed unreliable by the company or its auditors. Although most restatements are due to minor technical issues, the proportion of total restatements that were Big Rs rose to 38% in 2022, up from 25% in 2021. The 2022 figure is also up from 28% in 2013 (the peak year for restatements in the study) — and it’s the third consecutive year that the proportion of Big Rs has increased.

However, the CAQ report states, “It is too early to tell if the increase in restatements toward the end of the sample period is a true inflection point or simply a brief disruption of the previous downward trend.” Overall, financial restatements have decreased from 858 in 2013 to 402 in 2022.

Reasons for restatement

The Financial Accounting Standards Board defines a restatement as a revision of a previously issued financial statement to correct an error. Whether they’re publicly traded or privately held, businesses may reissue their financial statements for several “mundane” reasons. For instance, management might have misinterpreted the accounting standards, requiring the company’s external accountant to adjust the numbers. Or they simply may have made minor mistakes and need to correct them.

Common reasons for restatements include:

Recognition errors (for example, when accounting for leases or reporting compensation expense from backdated stock options),
Income statement and balance sheet misclassifications (for instance, a company may need to shift cash flows between investing, financing and operating on the statement of cash flows),
Mistakes reporting equity transactions (such as improper accounting for business combinations and convertible securities),
Valuation errors related to common stock issuances,
Preferred stock errors, and
The complex rules related to acquisitions, investments, revenue recognition and tax accounting.

Often, restatements happen when the company’s financial statements are subjected to a higher level of scrutiny. For example, restatements may occur when a private company converts from compiled financial statements to audited financial statements or decides to file for an initial public offering. They also may be needed when the owner brings in additional internal (or external) accounting expertise, such as a new controller or audit firm.

Material restatements often go hand-in-hand with material weakness in internal controls over financial reporting. In rare cases, a financial restatement also can be a sign of incompetence — or even fraud. Such restatements may signal problems that require corrective actions. However, the CAQ report found that only 3% of all restatements and 7% of Big Rs involved fraud over the 10-year period.

We can help

The restatement process can be time consuming and costly. Regular communication with interested parties — including lenders and shareholders — can help businesses overcome the negative stigma associated with restatements. Management also needs to reassure employees, customers and suppliers that the company is in sound financial shape to ensure their continued support.

Accounting and tax rules are continuously updated and revised. So, your in-house accounting team may need help understanding the evolving accounting and tax rules to minimize the risk of restatements, as well as help them effectively manage the restatement process. We can help you stay atop the latest rules, reinforce your internal controls and issue reports that conform to current Generally Accepted Accounting Principles.

Most businesses have websites today. Despite their widespread use, the IRS hasn’t issued formal guidance on when website costs can be deducted.

But there are established rules that generally apply to the deductibility of business expenses and provide business taxpayers launching a website with some guidance about proper treatment. In addition, businesses can turn to IRS guidance on software costs. Here are some answers to questions you may have.

What are the tax differences between hardware and software?

Let’s start with the hardware you may need to operate a website. The costs fall under the standard rules for depreciable equipment. Specifically, for 2024, once these assets are operating, you can deduct 60% of the cost in the first year they’re placed in service. This favorable treatment is allowed under the first-year bonus depreciation break.

Note: The bonus depreciation rate was 100% for property placed in service in 2022 and was reduced to 80% in 2023, 60% in 2024 and it will continue to decrease until it’s fully phased out in 2027 (unless Congress acts to extend or increase it).

Alternatively, you may be able to deduct all or most of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2024, the maximum Sec. 179 deduction is $1.22 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount ($3.05 million in 2024) of qualified property is placed in service during the year.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Was the software developed internally?

If, instead of being purchased, the website is designed in-house by the taxpayer launching it (or designed by a contractor who isn’t at risk if the software doesn’t perform), bonus depreciation applies to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either:

Deduct the development costs in the year paid or incurred, or
Choose one of several alternative amortization periods over which to deduct the costs.

Generally, the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

If your website is primarily for advertising, you can currently deduct internal website software development costs as ordinary and necessary business expenses.

What if you pay a third party?

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

What about expenses before business begins?

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

We can help

We can determine the appropriate tax treatment of website costs. Contact us if you want more information.

The IRS has published new regulations relevant to taxpayers subject to the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. The final regs, which take effect in 2025, require many beneficiaries to take annual RMDs in the 10 years following the deceased’s death.

SECURE Act ended stretch IRAs

The genesis of the new regs dates back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. One of the many changes in that tax law was the elimination of so-called “stretch IRAs.”

Previously, all beneficiaries of inherited IRAs could stretch RMDs over their entire life expectancies. Younger heirs in particular benefited by taking smaller distributions for decades, deferring taxes while the accounts grew. These heirs also could pass on the IRAs to later generations, deferring the taxes even longer.

The SECURE Act created limitations on which heirs can stretch IRAs. These limits are intended to force beneficiaries to take distributions and expedite the collection of taxes. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) are permitted to stretch out payments over their life expectancies. The following heirs are considered eligible for this favorable treatment:

Surviving spouses,
Children younger than “the age of majority,”
Individuals with disabilities,
Chronically ill individuals, and
Individuals who are no more than 10 years younger than the account owner.

All other heirs (known as designated beneficiaries) are required to take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) of his or her RMDs.

Note: In 2023, under another law, the age at which account owners must begin taking RMDs increased from 72 to 73, pushing the RBD date to April 1 of the year after the account owner turns 73. The age is slated to jump to 75 in 2033.

Proposed regs muddied the waters

In February 2022, the IRS issued proposed regs addressing the 10-year rule — and they brought some bad news for many affected heirs. The proposed regs provided that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. A lump-sum distribution at the end of 10 years wouldn’t be allowed.

The IRS soon heard from confused taxpayers who had recently inherited IRAs or defined contribution plans and didn’t know when they were required to start taking RMDs. Beneficiaries could have been hit with a penalty based on the amounts that should have been distributed but weren’t. This penalty was 50% before 2023 but was lowered to 25% starting in 2023 (or 10% if a corrective distribution was made in a timely manner). The plans themselves could have been disqualified for failing to make RMDs.

As a result, the IRS issued a series of waivers on enforcement of the 10-year rule. With the release of the final regulations, the waivers will come to an end after 2024.

Final regs settle the matter

The IRS reviewed comments on the proposed regs suggesting that if the deceased began taking RMDs before death, the designated beneficiaries shouldn’t be required to continue the annual distributions as long as the remaining account balance is fully distributed within 10 years of death. The final regs instead require these beneficiaries to continue receiving annual distributions.

If the deceased hadn’t begun taking his or her RMDs, though, the 10-year rule is somewhat different. While the account has to be fully liquidated under the same timeline, no annual distributions are required. That gives beneficiaries more opportunity for tax planning.

To illustrate, let’s say that a designated beneficiary inherited an IRA in 2021 from a family member who had begun to take RMDs. Under the waivers, the beneficiary needn’t take RMDs for 2022 through 2024. The beneficiary must, however, take annual RMDs for 2025 through 2030, with the account fully distributed by the end of 2031. Had the deceased not started taking RMDs however, the beneficiary would have the flexibility to not take any distributions in 2025 through 2030. So long as the account was fully liquidated by the end of 2031, the beneficiary would be in compliance.

Additional proposed regs

The IRS released another set of proposed regs regarding other RMD-related changes made by SECURE 2.0, including the age when individuals born in 1959 must begin taking RMDs. Under the proposed regs, the “applicable age” for them would be 73 years.

They also include rules addressing:

The purchase of an annuity with part of an employee’s defined contribution plan account,
Distributions from designated Roth accounts,
Corrective distributions,
Spousal elections after a participant’s death,
Divorce after the purchase of a qualifying longevity annuity contract, and
Outright distributions to a trust beneficiary.

The proposed regs would take effect in 2025.

Timing matters

It’s important to realize that even though RMDs from an inherited IRA aren’t yet required, that doesn’t mean a beneficiary shouldn’t take distributions. If you’ve inherited an IRA or a defined contribution plan and are unsure of whether you should be taking RMDs, contact us. We’d be pleased to help you determine the best course of action for your tax situation.

Starting a nonprofit organization can be a daunting prospect. You see a need in your community and want to do what you can to help. You know it’s possible to start a nonprofit, but the unfamiliar territory may hold you back. Let’s take a closer look at the steps that will allow you to get on your way to fulfilling your mission.

Choose your name

The first step in starting an organization is choosing your entity name. In Michigan, you can search for a business entity by name to see if your desired name is available.

SS-4

Once you have chosen an available name, you’re ready to file Form SS-4, Application for Employer Identification Number with the IRS. You may or may not have employees, but this is the number that the IRS will use to identify you going forward. It is possible to file the SS-4 online and get your EIN in a matter of minutes. Find out more here.

When filing the SS-4, it is important to choose Corporation, Church or church-controlled organization, or Other nonprofit organization (and specify trust or association) as the type of entity because the IRS requires that an organization be one of these types to qualify for exempt status.

Articles of Incorporation

At this point, you’re ready to file your Articles of Incorporation with the State of Michigan Department of Licensing and Regulatory Affairs. This is a critical step in the process of becoming a nonprofit. It’s imperative that you include the proper wording required by the IRS:

The articles must limit your organization’s purposes to those described in IRS Section 501(c)(3).

Charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children and animals.
The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
Example: High School Scholarship Endowment is a nonprofit corporation and shall be operated exclusively for educational and charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code or the corresponding section of any future federal tax code. Specifically, the purpose of the organization is to assist the school district for outstanding graduates to offset costs of higher education.

The articles must not specifically authorize activities, other than as an insubstantial part of your activities, that do not further your exempt purpose. In other words, the articles prohibit the organization from engaging in unrelated activities. In the following example, we have taken that a step further by prohibiting the earnings of the corporation from being used to benefit the individuals, restricting the organization from engaging in political campaign activities, and restricting the undertakings to those that further the exempt purpose.

Example: Notwithstanding any other provision of these Articles, no director, officer, employee, member, or representative of this corporation shall take any action or carry on any activity by or on behalf of the corporation not permitted to be taken or carried on by an organization exempt under Section 501(c)(3) of the Internal Revenue Code as it now exists or may be amended, or by any organization contributions to which are deductible under Section 170(c)(2) of such Code and Regulations as it now exists or may be amended. No part of the net earnings of the corporation shall inure to the benefit or be distributable to any director, officer, member, or other private person, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in these Articles of Incorporation. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office.

Finally, the articles must permanently dedicate organization assets to the exempt purpose.

Example: Upon termination or dissolution of the corporation, any assets lawfully available for distribution shall be distributed for one or more qualifying exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to state or local government, for a public purpose.

Board, Bylaws, and Conflict of Interest

After filing the articles of incorporation with the State of Michigan, your next step is to choose a board of directors who then adopt bylaws and a conflict of interest policy. While the IRS does not require that your organization have bylaws and a conflict of interest policy, adopting them is a best practice. If you have them, you’ll be required to attach them to Form 1023 when you file it. If you don’t have them, you’ll have to explain how your officers, directors, or trustees are selected and how you will manage conflicts of interest. The Form 1023 instructions provide an example of a conflict of interest policy that can be your starting point. We recommend consulting an attorney to assist you in preparing your bylaws.

Apply for exemption

Now it is time to prepare and file your application with the IRS to obtain tax-exempt status. You may qualify to file 1023-EZ, which will save you time and money in the application process. To find out if you’re eligible, read the instructions and answer the questions in the Eligibility Worksheet found at the end of the instructions https://www.irs.gov/pub/irs-pdf/i1023ez.pdf. If you’re able to file the 1023-EZ, you’ll have to register at https://www.pay.gov/ to file and pay online.

To prepare the full Form 1023, you will also have to register at https://www.pay.gov to file and pay online. Be sure to include all required additional documentation and answer all applicable questions. We suggest you consult a professional at this point to review your prepared Form 1023 and answer any further questions you have. Be sure to include the user fee with your application. Once the Form 1023, supporting documentation, and user fee are submitted, you can start operating as if your application is already approved. Donations made to you during this time will be tax deductible as long as your application is approved. If it’s not approved, then they won’t be. If your year end occurs during this time, you are required to file a Form 990 series return or file for an extension, by the due date.

There are certain organizations that are not required to file Form 1023. Contributions to the following organizations are tax deductible. Although these organizations don’t have to apply for exemption, they may choose to. If they do, they are required to file annual information returns, as discussed later.

Churches, including synagogues, temples and mosques
Integrated auxiliaries of churches and conventions or associations of churches
Any organization that has annual gross receipts that are normally not more than $5,000

Sales tax

Although nonprofit organizations are exempt from income tax on activities related to their exempt purpose, they may still be liable for sales tax. We suggest you consult a professional to help determine the requirements for your organization’s specific activities. In general, nonprofit organizations are exempt from paying sales tax on their purchases if the purchase of tangible personal property is used or consumed primarily in carrying out their exempt purpose. They are not exempt if it is unrelated. One important aspect here is regarding fundraising. Fundraising is not a charitable activity, even though the organization uses the income generated to accomplish their exempt purpose. Because fundraising is not a charitable activity, transactions that would normally be taxable for sales tax are still taxable. So, a gala fundraising event will still have to pay sales tax to the facility where it’s held. If the organization conducts a silent or live auction at the gala, they are required to collect and remit sales tax on the tangible personal property sold.

Another consideration regarding sales tax: The State of Michigan has a special rule for 501(c)(3), 501(c)(4), schools, churches, hospitals, parent cooperative preschools, and nonprofit organizations with an exemption ruling letter. Those entities with total sales at retail of $25,000 or less can claim exemption from sales tax on the first $10,000 of sales. The exemption does not apply if the nonprofit already specifically collected the sales tax; all sales tax collected must be remitted. But if the nonprofit was going to do algebra to determine what amount of the gross price was sales tax versus sales price, they do not need to remit taxes on the first $10,000 as long as they keep total sales at retail below $25,000. Once $25,000 is met, all retail sales are taxable (subject to standard sales tax rules).So, for example, your organization sells t-shirts and you charge $10 for the t-shirt, plus tax, so the customer pays you $10.60. Regardless of whether your total sales are less than $25,000, you are required to remit the $0.60 to the state because you collected it. If, instead, you charge $10 for the t-shirt and the customer pays you only $10, and your total sales for the year are less than $25,000, then you do not have to pay any sales tax on the first $10,000. If you charge the $10 and get paid the $10 and your sales do end up being more than $25,000, you will have to back into how much sales tax was included in the $10 and pay it to the state.

Nonprofit organizations must register for Michigan Taxes before selling tangible personal property, regardless of whether or not an exemption will apply. Register online at https://www.michigan.gov/uia. You can also register for Michigan Treasury Online, which will allow you to file and pay the required monthly, quarterly, and annual sales, use and withholding tax forms: https://mto.treasury.michigan.gov/.

License to solicit

Michigan law requires organizations to register with the Department of Attorney General if they solicit and receive charitable contributions in Michigan. To register, an Initial Solicitation Form, with attachments, must be filed. There is no fee to register. For faster processing, the Charitable Trust Section accepts registrations by email or e-filing. Your license expires seven months after the end of your fiscal year, and the Renewal Solicitation Form is due 30 days before that expiration. So if you are a calendar year end, that means that your renewal is due July 1, and your previous license expires July 31.

The financial information included in your form will also determine if you are required to have audited or reviewed financial statements. If contributions, plus net fundraising and gaming activity, less governmental grants, is between $300,000 and $550,000, then reviewed financial statements are required. If over $550,000, then audited financial statements are required.

Annual filings

To maintain their exempt status, organizations must stay current on filing a 990-Series return annually. If gross receipts are normally $50,000 or less, the organization is eligible to file Form 990-N e-Postcard. This filing requires only a few pieces of information. If gross receipts are less than $200,000 and total assets are less than $500,000, an organization would be eligible to file Form 990-EZ. Gross receipts or assets equal to or above those thresholds must file Form 990. Returns are due on the 15th day of the 5th month following the end of your fiscal year. This means May 15 for calendar year filers and November 15 for June fiscal year filers. Organizations that choose to file an annual information return above what they’re required to file, must file a complete return; they cannot fill it out partially.

Conclusion

Though it may seem daunting at first, the steps provided here will help you start your nonprofit organization. They will also ensure that your nonprofit starts out in conformity with the rules that are most important for compliance with federal and Michigan authorities.

Employers tend to spend a lot of time strategizing ways to improve their products or services, or perhaps innovate new ones. Meanwhile, strategies for the human resources (HR) department may get devised and rolled out in a more haphazard or reactionary fashion.

Given the importance of strong hiring, onboarding and performance management practices in today’s employment environment, carefully planning your organization’s HR moves is highly advisable. One way to increase the likelihood that they’ll pay off is by first performing a strengths, weaknesses, opportunities and threats (SWOT) analysis.

Strengths and weaknesses

Generally, in the context of a SWOT analysis, strengths are competitive advantages or core competencies that generate value, such as a strong sales force or exceptional quality of products or services.

Conversely, weaknesses are factors that limit an organization’s performance. These are often revealed in comparison with competitors. Examples include a negative brand image because of a recent controversy or an inferior reputation for customer service.

However, you can apply a SWOT analysis to more specific aspects of your operations — including HR. Think about your HR department’s core competencies, such as:

Filling open positions,
Administering benefits, and
Supporting employees with specific needs or those in crisis.

What does it do well and in what areas could it improve?

Opportunities and threats

The third and fourth factors in a SWOT analysis are opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the organization acts on them. Threats are external factors that could inhibit operational performance or undermine strategic goals.

When differentiating strengths from opportunities, or weaknesses from threats, ask yourself whether something would be an issue if your organization didn’t exist. If the answer is yes, the issue is external and, therefore, an opportunity or threat. Examples include changes in demographics or government regulations.

Putting it to use

Your organization can benefit from applying a SWOT analysis to its HR initiatives in various ways. It all depends on the specific factors you identify.

Let’s say you determine, by benchmarking yourself against similar organizations, that “time to hire” is a strength. This typically means that your HR staff is skilled at placing targeted, effectively worded ads; working well with recruiters; and interacting in a timely, efficient and positive manner with applicants.

A strong hiring process is undoubtedly a competitive advantage. If hiring is a weakness, however, you could be headed toward an employment crisis if you lose too many employees — particularly coupled with the skilled labor shortages in some industries.

Opportunities and threats are important from an HR perspective as well. For example, if your organization decides to strengthen employee retention through expanded benefits, you’ll need to discuss the opportunities and challenges this will pose to your HR staff. By investing in their training and upskilling, you can strengthen HR competencies while providing a better benefits package to employees.

And, unfortunately, there’s no shortage of external threats. An aggressive competitor may begin poaching your employees, which will put added stress on your HR department. Evolving tax regulations and compliance requirements for health and retirement benefits can also catch HR staffs off-guard and put an employer in a precarious position. Watch out for regulatory changes in your industry, too.

Strategize carefully

Your HR department may seem to exist on an island with a somewhat different mission from your organization as a whole. But how it interacts with job candidates, helps manage employees’ performance and communicates about benefits — just to name a few things — has a huge impact on your success. Be sure to strategize carefully.

When the leadership teams of many companies engage in strategic planning, they may be inclined to play it safe. And that’s understandable; sticking to strengths and slow, measured growth are often safe pathways to success.

But substantial growth — and, in some industries, just staying competitive — calls for innovation. That’s why, as your business looks to the future, be sure you’re creating an environment where you and your employees can innovate in ways big or small.

Encourage ideas

It’s sometimes assumed that innovation requires limitless resources or is solely the province of those in technical or research roles. But every department, from accounting to human resources, can come up with ways to work more efficiently or even devise a game-changing product or service concept.

Developing an innovative business culture typically calls for actively encouraging employees to come up with ideas and explore their feasibility without fear of making mistakes. As part of your strategic plan every year, challenge staff to identify problems, ask questions, and seek out solutions and answers. In addition, build and maintain a strong structure for innovation. Doing so includes:

Establishing policies that promote research and development,
Incorporating discussions about innovation into performance reviews,
Allowing some or all employees to occasionally shift from their usual responsibilities to focus on innovative processes or new product or service ideas, and
Allocating funds to innovation in the company budget.

Ideas can come from other sources, too. For example, what do your customers complain about or ask for? Customer feedback can be an excellent source of innovative concepts. Encourage employees to engage in conversations with customers about what new products or services they may be looking for, as well as about ways to improve your current ones.

Hold brainstorming sessions

Innovation is rarely a straight shot. Outrageous, seemingly unworkable ideas may be the genesis of concepts that ultimately prove both viable and profitable. Employees need to be confident they can propose ideas without fear of ridicule or adverse employment actions. One way to make this happen is through regularly scheduled strategic innovation brainstorming sessions. The goal of these meetings is to help staff get comfortable suggesting bold ideas without censoring themselves or harshly criticizing others. Make it clear to participants that there are no bad ideas.

Be sure to include employees from throughout the business. People tend to feel comfortable with co-workers they know well and work with regularly, but “echo chambers” may develop that limit the feasibility of ideas. Staff members from other departments are often able to provide different perspectives. They can help employees with ideas question their assumptions and view concepts from different angles. In other words, when pursuing prospective innovations, it’s helpful to assemble cross-functional teams that can cover more ground.

Find your next breakthrough

Waiting around for the next big breakthrough in your business or industry to fall in your lap is a huge gamble. By making room for innovation in your strategic planning, you’ll increase the likelihood that you’ll find it.

While many facets of the economy have improved this year, the rising cost of living and other economic factors have caused many businesses to close their doors. If this is your situation, we can help you, including taking care of various tax responsibilities.

To start with, a business must file a final federal income tax return and some other related forms for the year it closes its doors. The type of return that must be filed depends on the type of business you have. For example:

Sole Proprietors will need to file the usual Schedule C, “Profit or Loss from Business,” with their individual returns for the year they close their businesses. They may also need to report self-employment tax.
Partnerships must file Form 1065, “U.S. Return of Partnership Income,” for the year they close. They also must report capital gains and losses on Schedule D. They indicate that this is the final return and do the same on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
All Corporations need to file Form 966, “Corporate Dissolution or Liquidation,” if they adopt a resolution or plan to dissolve an entity or liquidate any of its stock.
C Corporations must file Form 1120, “U.S. Corporate Income Tax Return,” for the year they close. They report capital gains and losses on Schedule D and indicate this is the final return.
S Corporations need to file Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. They report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
All Businesses may need to be filed other tax forms to report sales of business property and asset acquisitions if they sell the business.

Tying up loose ends with workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

You may face more obligations

If your business has a retirement plan for employees, you’ll generally need to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met when terminating a plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

You also must cancel your Employer Identification Number (EIN) and close your IRS business account. In addition, you need to keep business records for a certain amount of time.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these responsibilities and get answers to any questions.

The Inflation Reduction Act provided the IRS with billions of dollars of additional funding to reduce the so-called “tax gap” between what taxpayers owe and what they actually pay. The tax agency has already launched numerous initiatives aimed at this goal, including several business-related compliance campaigns. Let’s take a closer look at three of the most significant recent targets.

Abusive pass-through practices

The IRS has accelerated its enforcement efforts against partnerships and other pass-through entities, which it claims have been overlooked for more than a decade. According to the IRS, while tax filings for pass-through entities have jumped by 70% since 2010, audit rates for them fell from 3.8% in 2010 to 0.1% in 2019.

To remedy this, the tax agency is creating a new office that will focus exclusively on partnerships, S corporations, and trusts and estates. That’s in addition to a special work group focused on pass-throughs, including complex partnerships, in its Large Business and International Division.

The IRS also launched a new regulatory initiative to prevent basis-shifting, which it calls “a major tax loophole exploited by large, complex partnerships.” Basis-shifting occurs when a single business with many related-party entities enters a series of transactions to maximize deductions and minimize taxes. For example, a partnership might transfer tax basis from property that doesn’t generate tax deductions (stock or land) to property that does (equipment).

The end game, the IRS says, is to take abusive deductions or reduce gains when the asset is sold, effectively making taxable income vanish. The IRS claims these “shell games” cost the federal government billions of dollars annually. To combat the losses, it plans on issuing regulations that:

Eliminate the inappropriate tax benefits created from basis-shifting between related parties, and
Prohibit partnership basis-shifting among members of a consolidated group.

Proposed regulations released in June 2024 would require the reporting of certain basis-shifting transactions. The IRS has also issued a Revenue Ruling that provides that certain related-party partnership transactions involving basis-shifting lack economic substance — a sign it intends to challenge the transactions.

Improper Employee Retention Tax Credit claims

The IRS crackdown on ineligible Employee Retention Tax Credit (ERTC) claims came to light in July 2023, when the tax agency announced that it was shifting its ERTC review focus to compliance concerns. It began intensified audits and criminal investigations of both promoters and businesses that filed or were filing suspect claims.

Two months later, the IRS instituted a moratorium on processing claims submitted after September 14, 2023. The moves came in response to what the tax agency described as a flood of illegitimate claims largely driven by fraudulent promoters.

The moratorium gave the IRS time to review more than 1 million ERTC claims totaling more than $86 billion. The review found that 10% to 20% of claims have clear signs of being erroneous and another 60% to 70% of claims reveal an unacceptable level of risk. Tens of thousands of the former group have been or will be denied, and the IRS will perform additional analysis of the latter group.

The IRS continued to process claims made before September 14, 2023, during its review period. As of late June, it had processed 28,000 claims worth $2.2 billion and rejected more than 14,000 claims worth more than $1 billion. Review of claims filed for 2020 uncovered more than 22,000 improper claims, resulting in $572 million in assessments against taxpayers. These figures could be even higher when the IRS turns its attention to the 2021 tax year because the maximum per-employee credit amount was $7,000 per quarter that year. It was $5,000 for the 2020 tax year.

With more than 1.4 million ERTC claims still unprocessed, concerned businesses may want to take advantage of the IRS’s Withdrawal Program. The program is available to eligible employers that filed a ERTC claim but haven’t yet received, cashed or deposited a refund. The IRS will treat withdrawn claims as if they were never filed, so taxpayers aren’t at risk of liability for repayment, penalties or interest.

The IRS also may reopen its now-closed Voluntary Disclosure Program for employers that claimed and received the credit but weren’t entitled to it. A decision is expected this summer.

Personal use of corporate jets

In February 2024, the IRS unveiled a new audit initiative scrutinizing the personal use of corporate aircraft. The Tax Cuts and Jobs Act provides a generous bonus depreciation provision that prompted numerous businesses to buy corporate jets. These aircraft, however, are often used for both business and personal reasons, triggering some complicated tax implications.

Businesses generally can claim a deduction for expenses related to maintaining a corporate jet if it’s used for business purposes. Deductible expenses include depreciation, pilot wages, interest, insurance and hangar fees. The amount of the deduction for aircraft travel on a business’s tax return can reach into the tens of millions of dollars.

Corporate jets, however, are frequently used for both business and personal reasons by a company’s executives, shareholders and partners, as well as their family and friends. The personal use generally results in income inclusion for the individuals and can limit a business’s ability to deduct costs related to that travel.

Notably, personal use includes not only taking the jet for purely personal purposes (for example, to attend a concert in another city) but also bringing family members or other guests along on a trip that’s otherwise for a business purpose. That’s because the purpose of a trip is determined on a passenger-by-passenger basis.

The new audit initiative includes audits of aircraft usage by large corporations and partnerships (and also high-income taxpayers). The exams will focus on whether jet usage is properly allocated between business and personal reasons. While the initial plans called for dozens of audits, the IRS indicated that the number could increase based on the results and as it continues to add new examiners.

Protect yourself

An aggressive and well-funded IRS makes tax compliance more important than ever. We can help businesses minimize their tax bills while staying on the right side of the law.

Owning and running a company tends to test one’s patience. You wait for strategies to play out. You wait for materials, supplies or equipment to arrive. You wait for key positions to be filled. But, when it comes to sales, how patient should you be? A widely used metric called “sales velocity” can help you decide.

Four-point formula

In a nutshell, sales velocity tells you how quickly deals move through the various stages of your sales cycle to fruition, where revenue is generated.

Putting a number to sales velocity can enable you to benchmark it internally going forward, typically with the goal of speeding it up. Or you may even be able to find industry standards, so you can benchmark your number against those of other similar companies.

So, how do you calculate it? The most widely used formula for sales velocity comprises four components measured over a predetermined period:

Number of qualified opportunities (leads that meet certain criteria),
Average deal value in dollars,
Win rate (percentage of opportunities converted to actual sales), and
Sales cycle length in months.

The formula is then expressed as:

Sales Velocity = Opportunities × Deal Value × Win Rate / Sales Cycle Length.

How often you should assess sales velocity depends on your strategic goals. If you really want to improve it, calculate the formula quarterly so you can see how quickly or slowly deals are moving over a year or more. If you’re approaching the subject from more of a curiosity standpoint, you might calculate it annually or semi-annually.

Common challenges

When businesses begin calculating and tracking sales velocity, they run into a variety of common challenges.

First, you might have trouble locating or trusting the four data points included in the formula. If you’re not tracking them regularly, or the information you have is inconsistent or contradictory, you won’t get much benefit from the metric.

In such situations, you’ll probably need to reassess and improve how your business gathers sales data. Make sure you have the right software for your company size and type, and that everyone is using it regularly and properly.

Assuming your data is solid, you might eventually be able to diagnose your business with other typical maladies related to suboptimal sales velocity. One example: lack of alignment between marketing and sales. If the marketing department is focused on certain features or solutions related to your products or services, but your sales staff must constantly readjust the expectations of prospects and customers, closing deals can take much longer.

Other times, sales velocity can reveal issues with the quality or volume of qualified opportunities. It all starts with your leads; bad or shaky ones usually take much longer to turn into qualified opportunities. And even if they do, the criteria used to classify leads as qualified opportunities may be flawed. Also, sometimes businesses overfocus on volume of leads and opportunities. If you’re chasing too many prospects, your sales cycle will tend to take much longer to play out.

Last, there’s the most obvious problem: Your sales processes are too complicated! Sales velocity can often be increased by simplifying workflows, reducing unnecessary steps and redundancies, improving internal or external communication (or both), and upskilling salespeople.

Sweet spot

Although it’s tempting to want to make your sales cycle as short as possible, you don’t want to rush things recklessly. The optimal goal of sales velocity is to find your sweet spot and then make continuous improvements and adjustments to stay there. Our firm can help you gather, organize and analyze your sales data.

With a median loss of $766,000, financial misstatement schemes are the costliest type of fraud, according to “Occupational Fraud 2024: A Report to the Nations,” a study published by the Association of Certified Fraud Examiners. Fortunately, auditors and forensic accountants may be able to detect financial statement fraud by testing journal entries for errors and irregularities. Here’s what they look for and how these tests work.

Suspicious entries

Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, provides valuable audit guidance that can be applied when investigating fraudulent financial statements. It notes that “material misstatements of financial statements due to fraud often involve the manipulation of the financial reporting by … recording inappropriate or unauthorized journal entries throughout the year or at period end.”

Financial misstatement comes in many forms. For example, out-of-period revenue can be recorded to inflate revenue — or checks can be held to hide current period expenses and boost earnings. Accounts payable can be understated by recording post-closing journal entries to income. Or expenses can be reclassified to reserves and intercompany accounts, thereby increasing earnings.

To detect these types of scams, SAS 99 requires financial statement auditors to:

Learn about the entity’s financial reporting process and controls over journal entries and other entries,
Identify and select journal entries and other adjustments for testing,
Determine the timing of the testing,
Compare journal entries to original source documents, such as invoices and purchase orders, and
Interview individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries or other adjustments.

Forensic accountants also follow audit guidelines when investigating allegations of financial misstatement. And financial statement auditors may call on these professionals when they notice significant irregularities in a company’s financial records.

Testing procedures

AICPA Practice Alert 2003-02, Journal Entries and Other Adjustments, identifies several common denominators among fraudulent journal entries. Auditors will ask for access to the company’s accounting system to test journal entries made during the period for signs of fraud.

Specifically, they tend to scrutinize entries made:

To unrelated, unusual or seldom-used accounts,
By individuals who typically don’t normally make journal entries,
At the end of the period or as post-closing entries that have little or no explanation or description,
Before or during the preparation of the financial statements without account numbers, and
To accounts that contain transactions that are complex or unusual in nature and that have significant estimates and period-end adjustments.

Other red flags include adjustments for intercompany transfers and entries for amounts made just below the individual’s approval threshold or containing large, round dollar amounts.

Getting professional help

Financial misstatement can be costly. But your organization can take steps to minimize its risk. External financial statement audits, surprise audits and forensic accounting investigations can help identify vulnerabilities and unearth anomalies. Contact us for more information, including how we use computer-assisted audit techniques to review accounting transactions.

Social media gets blamed for a lot these days — sometimes for good reason. Recently, the IRS issued a warning to individual and business taxpayers to beware of false claims about various federal tax breaks that appear on social media platforms. The common denominator of such claims is that they involve legitimate tax provisions for which most taxpayers don’t qualify. If you claim these breaks erroneously, it could delay a refund, require time-wasting correspondence and paperwork, and even result in penalties and criminal prosecution.

Abusing legitimate tax breaks

Intentionally fraudulent or even honestly inaccurate tax advice can come from many sources. These days, a lot of people put faith in social media “influencers,” who may not be qualified to dispense financial advice. According to the IRS, thousands of taxpayers submitted falsified returns during the 2023 filing season, many claiming they relied on advice from social media.

The tax agency is particularly concerned about bogus claims and filings involving:

The Fuel Tax Credit. Generally, only off-highway (non-fuel) businesses and farms can claim this credit. To file Form 4136, Credit for Federal Tax Paid on Fuels, you need to have a business purpose and qualifying business activity. Social media promoters and other fraudsters might try to convince you otherwise, and might even offer to sell you fictitious documents, including fuel receipts.

The Sick and Family Leave Credit. This credit was made available to employers and certain self-employed taxpayers during the pandemic in 2020 and 2021 but was no longer effective after 2021. Nevertheless, many people who weren’t eligible claimed it on 2022 and 2023 tax returns. Some claimed the credit for household workers they didn’t have and never paid.

Clean energy tax credits. The IRS has received returns that improperly claim clean energy credits made available by the Inflation Reduction Act (IRA). The returns might claim credits that offset income tax from sources including wages, Social Security and retirement account withdrawals. One particular scam involves an IRA provision that enables taxpayers to purchase federal income tax credits from investments in clean energy. Before claiming such credits, ensure that you are indeed eligible for them.

Trust and verify

The best way to avoid making serious tax mistakes is to arm yourself with accurate information from us and the IRS. Also, it’s important to work with qualified and experienced tax professionals when preparing tax returns and making strategic plans to reduce your tax burden.

In addition, be careful when using social media. If someone sends you an unsolicited friend request (even if you share a real-life friend), investigate thoroughly before accepting the invitation. And ignore suspicious messages and tax advice that seems “too good to be true.” Most social media platforms should enable you to block these unwanted posts and shady users.

Friends vs. foes

Whether you’re concerned about your individual or business taxes, it pays to remain skeptical of unsolicited tax advice. Although social media can be an important forum for communicating and connecting, users need to differentiate between friends and foes.

Are you buying a business that will have one or more co-owners? Or do you already own one fitting that description? If so, consider installing a buy-sell agreement. A well-drafted agreement can do these valuable things:

Transform your business ownership interest into a more liquid asset,
Prevent unwanted ownership changes, and
Avoid hassles with the IRS.

Agreement basics

There are two basic types of buy-sell agreements: Cross-purchase agreements and redemption agreements (sometimes called liquidation agreements).

A cross-purchase agreement is a contract between you and the other co-owners. Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners if a triggering event, such as a death or disability, occurs.

A redemption agreement is a contract between the business entity and its co-owners (including you). Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the entity if a triggering event occurs.

Triggering events

You and the other co-owners specify the triggering events you want to include in your agreement. You’ll certainly want to include obvious events like death, disability and attainment of a stated retirement age. You can also include other events that you deem appropriate, such as divorce.

Valuation and payment terms

Make sure your buy-sell agreement stipulates an acceptable method for valuing the business ownership interests. Common valuation methods include using a fixed per-share price, an appraised fair market value figure, or a formula that sets the selling price as a multiple of earnings or cash flow.

Also ensure the agreement specifies how amounts will be paid out to withdrawing co-owners or their heirs under various triggering events.

Life insurance to fund the agreement

The death of a co-owner is perhaps the most common, and catastrophic, triggering event. You can use life insurance policies to form the financial backbone of your buy-sell agreement.

In the simplest case of a cross-purchase agreement between two co-owners, each co-owner purchases a life insurance policy on the other. If one co-owner dies, the surviving co-owner collects the insurance death benefit proceeds and uses them to buy out the deceased co-owner’s interest from the estate, surviving spouse or other heir(s). The insurance death benefit proceeds are free of any federal income tax, so long as the surviving co-owner is the original purchaser of the policy on the other co-owner.

However, a seemingly simple cross-purchase arrangement between more than two co-owners can get complicated, because each co-owner must buy life insurance policies on all the other co-owners. In this scenario, you may want to use a trust or partnership to buy and maintain one policy on each co-owner. Then, if a co-owner dies, the trust or partnership collects the death benefit proceeds tax-free and distributes the cash to the remaining co-owners. They then use the money to fund their buyout obligations under the cross-purchase agreement.

To fund a redemption buy-sell agreement, the business entity itself buys policies on the lives of all co-owners and then uses the death benefit proceeds buy out deceased co-owners.

Specify in your agreement that any buyout that isn’t funded with insurance death benefit proceeds will be paid out under a multi-year installment payment arrangement. This gives you (and any remaining co-owners) some breathing room to come up with the cash needed to fulfill your buyout obligation.

Create certainty for heirs

If you’re like many business co-owners, the value of your share of the business comprises a big percentage of your estate. Having a buy-sell agreement ensures that your ownership interest can be sold by your heir(s) under terms that you approved when you set it up. Also, the price set by a properly drafted agreement establishes the value of your ownership interest for federal estate tax purposes, thus avoiding possible IRS hassles.

As a co-owner of a valuable business, having a well-drafted buy-sell agreement in place is pretty much a no-brainer. It provides financial protection to you and your heir(s) as well as to your co-owners and their heirs. The agreement also avoids hassles with the IRS over estate taxes.

Buy-sell agreements aren’t DIY projects. Contact us about setting one up.

If your organization is having a tough time finding the right person to fill a key role, it might be time to set aside the resumés and pick up your organizational chart. Many employers become so consumed with posting job ads and conducting interviews that they overlook the potential of their own in-house talent. Let’s review some of the upsides of internal hires, as well as some of the inevitable risks.

Cost-effective approach

Two of the biggest upsides to promoting employees to open positions are efficiency and cost-effectiveness. (For the purposes of this article, we’re assuming internal hires are promotions. In some cases, they may be lateral moves.)

It’s usually faster and easier to identify and meet with employees than to find and schedule interviews with outside candidates. And promoting internally is generally less expensive because you save on the costs of finding, recruiting and hiring. These costs include advertising on job boards and engaging with recruiters. Plus, internal hires won’t need onboarding and may require less training, depending on the position.

In addition, promoting employees can help boost morale and improve retention. One reason some employees leave their jobs is because they don’t see opportunities for advancement. Staff members might be less likely to feel this way if they see colleagues promoted to higher positions.

Another benefit is the level of familiarity you have with your employees. An external applicant’s resumé might look impressive, and the interviews could go great, but the individual’s personality might clash with your organizational culture once work begins. Or the person’s actual skill level might not match up to what was presented. You should already have documented records of internal candidates’ skill sets and performance histories.

Risks to consider

Naturally, for many positions, promoting employees isn’t risk-free. Some employees simply aren’t cut out to be managers, supervisors or to fill other “high stakes” roles. For example, a star salesperson might thrive out in the world selling but flounder when asked to sit in an office and manage a sales team.

Indeed, shifting more emphasis to internal promotions shouldn’t mean giving up on outside hires. The greater job market still offers a much larger pool of candidates. And new employees could provide fresh perspectives, innovative ideas, new skills and insightful experiences that might lead to more efficient processes and improved organizational performance.

Furthermore, recruiting outside candidates avoids the unhealthy competition that may arise when employees vie against each other for higher positions. Resentment often occurs among those ultimately passed over for promotion who now must report to someone who used to be their peer. For these reasons, it’s critical to carefully choose which positions to open to internal hires.

The right balance

Hiring internally is no silver bullet. For starters, if you promote an employee to a new position, you’ll need to fill that person’s former job! Then again, it does tend to be easier to fill lower-level positions than upper-level ones.

The bottom line is to ensure your approach to hiring is flexible and isn’t turning a blind eye to the cost- and time-efficiencies of internal hires. We can help you assess your hiring costs, compensation structure and other factors that play into staffing decisions.

Controlling costs is fundamental for every business. But where and how to address this challenge can change over time based on various economic and logistical factors.

Earlier this year, global consultancy Boston Consulting Group published a report entitled The CEO’s Guide to Costs and Growth. Within it were the results of a survey of 600 C-suite executives that found, among other things, cost management was a top priority for respondents heading into 2024. According to the survey, three of the top categories for cost-cutting initiatives were:

1. Supply chain / manufacturing. Not every company incurs manufacturing costs, but most have a supply chain. Costs and delays in this area soared during the pandemic because of global disruptions and backups. Since then, some sense of normalcy has returned, though that doesn’t mean managing supply chain costs has become easy.

Many companies find that most of their spending is done with just a few vendors. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing.

It also pays to really know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.

2. Labor/nonlabor overhead. Controlling labor costs is tricky in today’s environment. Many industries are facing skilled labor shortages, meaning businesses would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, it’s critical to monitor these costs and prevent overspending.

A logical first step in managing labor costs is to know how much you’re spending. And the answer isn’t as simple as looking at the total gross wages you pay out every month or year. You need to know the actual and total amount of these costs. Fortunately, there’s a metric for that. Labor burden rate reflects the additional costs that companies incur beyond gross wages. These generally include expenses such as payroll taxes, workers’ compensation insurance and fringe benefits. Knowing your labor burden rate can enable you to truly “right-size” your workforce.

Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you’ll obviously incur costs when outsourcing, the time and labor cost that it saves you could end up a net gain. Carefully chosen and implemented technology upgrades can provide similar results.

3. Marketing/sales. Much like labor, strong marketing and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment.

Again, choosing and monitoring the right metrics can prove useful here. The optimal ones tend to vary by industry and company type, but some of the most widely used for marketing purposes include lead conversion rate, click-through rate for online ads and cost per lead. Popular sales metrics include total revenue, year-over-year growth and average customer lifetime value.

Whether it’s sales metrics, labor burden rate or supply chain management, getting objective, professional advice can help you and your leadership team obtain an accurate picture of what’s going on with your costs and target feasible solutions. Please consider our firm for assistance.

Effectively managing a 401(k) plan is a significant responsibility for employers, not only to benefit their employees but also to comply with regulatory requirements. One critical aspect of this responsibility is ensuring that all participant disclosures are properly communicated. Here’s what employers need to know about 401(k) participant disclosures.

Key Disclosures Required

Summary Plan Description (SPD): The SPD is the primary document that describes the plan’s provisions, including eligibility requirements, benefits, participant rights, and the plan’s claims and appeals process. It must be provided within 90 days of an employee becoming a plan participant or within 120 days of the plan becoming subject to ERISA.
Summary of Material Modifications (SMM): Whenever the plan undergoes significant changes, such as amendments or modifications, participants must receive an SMM within 210 days after the end of the plan year in which the change was made.
Summary Annual Report (SAR): The SAR is a summary of the plan’s financial status, including information from the plan’s annual report (Form 5500). This must be furnished to participants within nine months after the end of the plan year or two months after Form 5500 is filed.
Individual Benefit Statements: These statements provide participants with information on their account balances and vested benefits. Participants should receive these statements quarterly if their plan allows for participant-directed investments or annually otherwise.
Fee Disclosures: Employers must disclose information about the 401(k) plan fees, including plan administration fees, individual service fees, and investment fees. These disclosures must be provided annually, with any changes communicated at least 30 days in advance.

Timing and Delivery Requirements

The timing and method of delivering these disclosures are critical. Employers can distribute disclosures electronically if participants can effectively access them and are notified of their significance. However, paper disclosures must be provided for those without electronic access.

Best Practices for Compliance

Develop a Disclosure Calendar. A calendar outlining when each disclosure must be provided can help ensure timely distribution. Using a disclosure calendar reduces the risk of missing deadlines and helps maintain regulatory compliance.
Use Clear and Understandable Language. Disclosures should be written in plain language to ensure participants can easily understand the information. Avoiding technical jargon can improve comprehension and participant engagement.
Maintain Accurate Records. Keeping detailed records of all disclosures and their distribution dates is essential. This documentation can be crucial if the plan is audited or disputes arise.
Regularly Review and Update Procedures. Laws and regulations can change, so it’s important for employers to review their disclosure procedures and update them as necessary. Staying informed about regulatory changes can help avoid compliance issues.

Proper management of 401(k) participant disclosures is crucial for both regulatory compliance and participant satisfaction. Partnering with a qualified 401(k) provider can help employers navigate requirements and avoid penalties. Yeo & Yeo CPAs & Advisors can help. Get in touch.

Source: https://www.employeefiduciary.com/blog/401k-participant-disclosures-what-employers-need-to-know

Yeo & Yeo is proud to announce that Bill Stec has received the Don Hunt Service Award from the Michigan Career Educator & Employer Alliance. This award recognizes a member of the Michigan Co-op and/or Internship community for significant contributions to promoting and sustaining the cooperative education and internship philosophy in Michigan.

“Winning the Don Hunt Service Award is a tremendous honor that underscores the importance of collaborative efforts in education and employment,” Stec said. “I am proud to be part of a community that is committed to providing valuable opportunities for students and helping them build successful careers.”

Bill Stec is the Manager of Recruitment & Campus Relations at Yeo & Yeo. He develops and executes strategic talent management initiatives to recruit the best candidates, engage and retain current employees, and drive a high-performance culture across all Yeo & Yeo offices. With over seven years of experience in college career services, he understands the challenges of navigating career choices and employment opportunities.

Recognized for his passion and dedication, Bill was selected as the 2019 Michigan Career Services Professional of the Year. In 2021, he was honored as a RUBY Award recipient for his impact in the Great Lakes Bay Region. He is the past President of the Michigan Career Educator & Employer Alliance and just completed a term as Vice President of employers for the organization. He is actively involved in Saginaw, Bay City, and Midland’s Chambers of Commerce. Bill is also a member of the National Association of Colleges and Employers and the Valley Society for Human Resource Management.

“Bill’s exceptional leadership in recruitment and campus relations has profoundly strengthened our organization,” said Yeo & Yeo President & CEO Dave Youngstrom. “This award is a testament to his passion for career development and the positive impact he has made on our firm and the broader Michigan community.”

If you’re selling property used in your trade or business, you should understand the tax implications. There are many complex rules that can potentially apply. To simplify this discussion, let’s assume that the property you want to sell is land or depreciable property used in your business, and has been held by you for more than a year.

Note: There are different rules for property held primarily for sale to customers in the ordinary course of business, intellectual property, low-income housing, property that involves farming or livestock, and other types of property.

Basic rules

Under tax law, your gains and losses from sales of business property are netted against each other. The tax treatment is as follows:

If the netting of gains and losses results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. Long-term capital gain treatment is generally more favorable than ordinary income treatment.
If the netting of gains and losses results in a net loss, that loss is fully deductible against ordinary income. (In other words, none of the rules that limit the deductibility of capital losses apply.)

The availability of long-term capital gain treatment for business property net gain is limited by “recapture” rules. Under these rules, amounts are treated as ordinary income, rather than capital gain, because of previous ordinary loss or deduction treatment.

There’s a special recapture rule that applies only to business property. Under this rule, to the extent you’ve had a business property net loss within the previous five years, any business property net gain is treated as ordinary income instead of long-term capital gain.

Different types of property

Under the Internal Revenue Code, different provisions address different types of property. For example:

Section 1245 property. This consists of all depreciable personal property, whether tangible or intangible, and certain depreciable real property (usually real property that performs specific functions). If you sell Section 1245 property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset.
Section 1250 property. In general, this consists of buildings and their structural components. If you sell Section 1250 property that’s placed in service after 1986, none of the long-term capital gain attributable to depreciation deductions will be subject to depreciation recapture. However, for most noncorporate taxpayers, the gain attributable to depreciation deductions, to the extent it doesn’t exceed business property net gain, will (as reduced by the business property recapture rule above) be taxed at a rate of no more than 28.8% (25% plus the 3.8% net investment income tax) rather than the maximum 23.8% rate (20% plus the 3.8% net investment income tax) that generally applies to long-term capital gains of noncorporate taxpayers.

Other rules apply to, respectively, Section 1250 property that you placed in service before 1987 but after 1980 and Section 1250 property that you placed in service before 1981.

As you can see, even with the simple assumptions in this article, the tax treatment of the sale of business assets can be complex. Contact us if you’d like to determine the tax implications of transactions, or if you have any additional questions.

Traditional and Roth IRAs can be powerful estate planning tools. With a “self-directed” IRA, you may be able to amp up the benefits of these tools by enabling them to hold alternative investments that offer potentially greater returns.

However, self-directed IRAs may present pitfalls that can lead to unfavorable tax consequences. Therefore, you need to handle these vehicles with care.

Alternative investments

Unlike traditional IRAs, which typically offer a limited menu of stocks, bonds and mutual funds, self-directed IRAs can hold a variety of alternative investments that may offer the potential to earn higher returns. The investments can include real estate, closely held business interests, commodities and precious metals. Bear in mind that they can’t hold certain assets, including S corporation stock, insurance contracts and collectibles (such as art or coin collections).

From an estate planning perspective, self-directed IRAs have considerable appeal. Imagine transferring real estate or closely held stock with substantial earnings potential to a traditional or Roth IRA and allowing it to grow on a tax-deferred or tax-free basis for the benefit of your heirs.

Risks and tax traps

Before taking action, it’s critical to understand the significant risks and tax traps involved with self-directed IRAs. For example:

The prohibited transaction rules restrict dealings between an IRA and disqualified persons, including you, close family members, businesses that you control and your advisors. This makes it difficult, if not impossible, for you or your family to manage, work for, or have financial dealings with business or real estate interests held by the IRA without undoing the IRA’s tax benefits and triggering penalties.
IRAs that invest in operating companies may generate unrelated business income taxes, which are payable currently out of an IRA’s funds.
IRAs that invest in debt-financed property may generate unrelated debt-financed income, creating a current tax liability.

Proceed with caution

If you’re considering a self-directed IRA, determine the types of assets in which you’d like to invest and carefully weigh the potential benefits against the risks. Contact us with any questions.

When companies reach the point where they’re ready to sponsor a qualified retirement plan, the first one that may come to mind is the 401(k). But there are other, lesser-used options that could suit the distinctive needs of some business owners. Case in point: the 412(e)(3) plan.

Nuts and bolts

Unlike 401(k)s, which are defined contribution plans, 412(e)(3) plans are defined benefit plans. This means they provide fixed benefits under a formula based on factors such as each participant’s compensation, age and years of service.

For 2024, the annual benefit provided by 412(e)(3)s can’t exceed the lesser of 100% of a participant’s highest three-year average compensation or $275,000. As with other defined benefit plans, 412(e)(3)s are funded only by employers. They don’t accept participant contributions.

But unlike other defined benefit plans, which are funded through a variety of investments, 412(e)(3)s are funded with annuity contracts and insurance. In fact, the IRS refers to them as “fully insured” plans. The name “412(e)(3)” refers to Section 412(e)(3) of the Internal Revenue Code, which authorizes the plan type’s qualified status.

Under Sec. 412(e)(3), defined benefit plans funded with annuity contracts and insurance aren’t subject to minimum funding requirements — so long as certain conditions are met. Companies sponsoring these plans don’t have to make annual actuarial calculations or mandatory contributions. However, they risk penalties if a plan’s insurer doesn’t satisfy certain obligations. In other words, the plan needs to be safely insured.

Potential benefits

Some professionals advise relatively older business owners who want to maximize retirement savings in a short period to consider 412(e)(3)s because of the way defined benefit plans differ from defined contribution plans. That is, business owners who sponsor and participate in defined benefit plans can take a bigger share of the pie — particularly if they have few, if any, highly compensated employees. Meanwhile, they can also enjoy substantial tax deductions for plan contributions.

In addition, 412(e)(3)s may be more attractive than other defined benefit plans for some small business owners. Although they tend to sacrifice potentially higher investment returns, these plans offer greater flexibility by using potentially lower-risk and easy-to-administer annuity contracts and insurance. They might also appeal to closely held business owners who want to maximize tax-deductible contributions to a retirement plan in the early years of ownership.

As is the case with all defined benefit plans, however, sponsors must have the financial stability to support their plans indefinitely. So, 412(e)(3)s usually aren’t appropriate for start-ups.

Administrative requirements

Tax-favored treatment for 412(e)(3)s isn’t automatic. These plans must meet various requirements as spelled out in the tax code.

For example, as mentioned, 412(e)(3)s must be funded exclusively by the purchase of annuity contracts or a combination of annuity contracts and insurance. Sponsors must buy the contracts and/or insurance from insurers licensed by at least one of the 50 states or the District of Columbia.

Also, the contracts must provide for level annual (or more frequent) premium payments starting on the date each participant joins the plan. Premium payments need to end no later than the normal retirement age of a participant — or by the date the individual ceases participation in the plan, if earlier.

These are just a couple examples of the rules involved. It’s critical to fully understand all the requirements before sponsoring a plan.

An intriguing possibility

A 412(e)(3) plan may be an under-the-radar choice for some businesses under the right circumstances. For help choosing the best plan for your company, contact us.