Jennifer Watkins is Elected Zonta Board President and Named Zontian of the Year

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Jennifer M. Watkins, CPA, has been elected president of the Zonta Club of Flint and was named Zontian of the Year.

Jennifer was elected to a two-year term as president, beginning June 1, 2019, by members of the club who also named her Zontian of the Year. This year, Jennifer chaired the club’s fundraising committee and planned two fundraisers, increasing fundraising profits by more than 25 percent. She also hosted a pool party at the Whaley House during the summer and planned the Thanksgiving event for the Whaley Children’s Center. She previously served a two-year term as the club’s vice president and has been a member of the club since 2011.

The Zonta Club of Flint was chartered in 1923 as a charter club of Zonta International. Flint-area Zontians are committed to improving the status of women locally and worldwide by empowering women through service and advocacy. The Zonta Club includes women from a variety of traditional and non-traditional professions, including law, education, medicine, and finance.

At Yeo & Yeo, Jennifer has extensive experience in providing audit services for nonprofit organizations and school districts and is the Education Services Group’s technical advisor. She is a frequent presenter at regional and statewide school and governmental accounting conferences and is a member of Michigan Department of Education Committees that provide accounting guidance for school districts. She is a member of the Association of School Business Officials, Michigan School Business Officials and several regional School Business Officials organizations. Jennifer is based in the firm’s Flint office.

In addition to her work with the Zonta Club of Flint, Jennifer also volunteers for Genesee County Habitat for Humanity, Carriage Town Ministries and United Way of Genesee County. She is a graduate of Leadership Genesee.

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of three associates to manager.

Kelly J. Brown, CPA, MST, provides tax planning and preparation services for individuals, partnerships, and corporations. She is a member of the firm’s State and Local Tax Services Group, specializing in sales tax.She holds a Master of Science in Taxation from Walsh College and with her advanced education in complex tax topics assists both the firm’s individual tax clients, as well as business entities as they face a challenging tax environment. She is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants. She joined Yeo & Yeo in 2016 and serves in the firm’s Saginaw headquarters. In our community, Brown serves as a board member for the Bay County Salvation Army, as a Community Investment Process chairperson for the United Way of Bay County and also volunteers with Making Strides of Saginaw Bay.

Nolan Felsing, CPA, provides business valuation services for the firm’s top manufacturing clients. He is a member of the firm’s Manufacturing Services Group, specializing in personal property tax, and federal and state tax preparation. He is also a member of the firm’s Business Valuation Services Group. Felsing joined Yeo & Yeo in 2015 and serves in the firm’s Midland office. He is an active member of the Great Lakes Bay Manufacturers Association and the Central Michigan Manufacturers Association, the Hemlock Business Association and is a member of the Michigan Manufacturers Association. He holds a Bachelor of Business Administration in accounting and a Master of Business Administration from Central Michigan University.

Steven Treece, CPA, provides tax planning and preparation services, and management consulting services, for the firm’s agribusiness, for-profit, and individual clients. He joined Yeo & Yeo in 2013 and serves in the firm’s Flint office. He is a member of the firm’s Agribusiness Services Group. Treece holds a Bachelor of Business Administration in accounting from The University of Michigan. In the community, he is a member of the Rotary Club of Burton and serves as a Committee Chairperson for the Boy Scouts of America and the Old Newsboys of Flint.

If you’re a volunteer who works for charity, you may be entitled to some tax breaks if you itemize deductions on your tax return. Unfortunately, they may not amount to as much as you think your generosity is worth.

Because donations to charity of cash or property generally are tax deductible for itemizers, it may seem like donations of something more valuable for many people — their time — would also be deductible. However, no tax deduction is allowed for the value of time you spend volunteering or the services you perform for a charitable organization.

It doesn’t matter if the services you provide require significant skills and experience, such as construction, which a charity would have to pay dearly for if it went out and obtained itself. You still don’t get to deduct the value of your time.

However, you potentially can deduct out-of-pocket costs associated with your volunteer work.

The basic rules

As with any charitable donation, to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can check by using the IRS’s “Tax Exempt Organization Search” tool at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.

If the charity is qualified, you may be able to deduct out-of-pocket costs that are unreimbursed; directly connected with the services you’re providing; incurred only because of your charitable work; and not “personal, living or family” expenses.

Expenses that may qualify

A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering).

Transportation costs to and from the volunteer activity generally are deductible — either the actual expenses (such as gas costs) or 14 cents per charitable mile driven. The cost of entertaining others (such as potential contributors) on behalf of a charity may also be deductible. However, the cost of your own entertainment or meal isn’t deductible.

Deductions are permitted for away-from-home travel expenses while performing services for a charity. This includes out-of-pocket round-trip travel expenses, taxi fares and other costs of transportation between the airport or station and hotel, plus lodging and meals. However, these expenses aren’t deductible if there’s a significant element of personal pleasure associated with the travel, or if your services for a charity involve lobbying activities.

Recordkeeping is important

The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records and receipts. You must meet the other requirements for charitable donations. For example, no charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the organization. The acknowledgment generally must include the amount of cash, a description of any property contributed, and whether you got anything in return for your contribution.

And, in order to get a charitable deduction, you must itemize. Under the Tax Cuts and Jobs Act, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you have expenses from volunteering that qualify for a deduction, you may not get any tax benefit if you don’t have enough itemized deductions.

If you have questions about charitable deductions and volunteer expenses, please contact us.

Yeo & Yeo CPAs & Business Consultants was selected by the readers of Great Lakes Bay Magazine as Greatest of the Great Lakes Bay in Accounting.

Each year, Great Lakes Bay Magazine invites its readers to select the best of the best in the Great Lakes Bay Region. Readers can vote for their favorite business in categories including restaurants, home improvement, shopping, health, and services. 2019 is the first year that readers could vote for local businesses in the accounting category.

“It is an honor for Yeo & Yeo to be selected as Greatest of the Great Lakes Bay by those who live and work where our headquarters is based,” said Thomas Hollerback, President & CEO. “We are pleased to be recognized for providing accounting and consulting services that benefit individuals and businesses in our community. We are proud to be a respected member of the Great Lakes Bay Region.”

For 96 years, individuals in the Great Lakes Bay Region have trusted Yeo & Yeo with their business. It is the community’s continued support that allows the firm to provide outstanding business solutions. In addition to accounting services, Yeo & Yeo and its affiliates have created a strong network of professionals who are a complete resource for their clients.

Yeo & Yeo CPAs & Business Consultants has been listed as one of the top 10 largest CPA firms in Michigan by Crain’s Detroit Business.

The Largest Michigan Accounting Firms annual survey ranks firms by the size of local professional staff. The list of 34 firms also highlights the number of local CPAs, the number of firm-wide professionals, and worldwide revenue.

“We are proud to be recognized as one of Michigan’s top 10 largest CPA firms by Crain’s Detroit Business,” said Thomas Hollerback, president and CEO of Yeo & Yeo. “We credit the firm’s success to our clients, communities and employees. They are all essential to our continued growth.”

Founded in 1923, the firm has grown to more than 200 professionals with nine locations throughout Michigan and three affiliates. Yeo & Yeo’s industry-specialized Michigan accountants and consultants provide clients with outstanding business solutions in accounting, audit, tax, business consulting, technology and medical billing.

The number of Yeo & Yeo employees has continued to increase. The firm provides the venue for individuals who have the desire and drive to grow as leaders in the accounting industry and their communities. The firm develops future leaders through its award-winning CPA certification bonus program, in-house training department, professional development training, and formal mentoring while sustaining work-life balance.

Yeo & Yeo and the other ranking firms were announced in the June issue of Crain’s Detroit Business.

John Haag Yeo & Yeo CPAs & Business Consultants is pleased to announce that John W. Haag Sr., CPA/ABV, CVA, CFF, has received the State Chapter President Leadership Award from the National Association of Certified Valuators and Analysts (NACVA).

Haag has been a member of the NACVA Michigan State Chapter for the past 15 years, served as president since 2017, and previously served as its vice president. NACVA is a global, professional association that delivers training and certification in accounting and financial consulting fields and has over 7,000 members worldwide.

Haag is the managing principal of Yeo & Yeo’s Midland office. His areas of expertise include business valuation and Litigation Support services for privately owned businesses. He provides managerial consulting services and prepares individual and corporate income tax returns. Haag is a Certified Valuation Analyst and also holds the Accredited in Business Valuation and Certified in Financial Forensics designations.

In our community, Haag is a member of the Midland Community Foundation Grant Committee, a member of the United Way of Midland County Campaign Cabinet, treasurer of the Midland Experimental Aircraft Association Chapter 1093, and past president of the Midland Noon Rotary Club.

Now that most schools are out for the summer, you might be sending your children to day camp. It’s often a significant expense. The good news: You might be eligible for a tax break for the cost.

The value of a credit

Day camp is a qualified expense under the child and dependent care credit, which is worth 20% to 35% of qualifying expenses, subject to a cap. Note: Sleep-away camp does not qualify.

For 2019, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.Other expenses eligible for the credit include payments to a daycare center, nanny, or nursery school.

Keep in mind that tax credits are especially valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax.

For example, if you’re in the 32% tax bracket, $1 of deduction saves you only $0.32 of taxes. So it’s important to take maximum advantage of all tax credits available to you.

Work-related expenses

For an expense to qualify for the credit, it must be related to employment. In other words, it must enable you to work — or look for work if you’re unemployed. It must also be for the care of your child, stepchild, foster child, or other qualifying relative who is under age 13, lives in your home for more than half the year and meets other requirements.

There’s no age limit if the dependent child is physically or mentally unable to care for him- or herself. Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Credit vs. FSA

If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

If your employer offers a child and dependent care FSA, you may wish to consider participating in the FSA instead of taking the credit. With an FSA for child and dependent care, you can contribute up to $5,000 on a pretax basis. If your marginal tax rate is more than 15%, participating in the FSA is more beneficial than taking the credit. That’s because the exclusion from income under the FSA gives a tax benefit at your highest tax rate, while the credit rate for taxpayers with adjusted gross income over $43,000 is limited to 20%.

Proving your eligibility

On your tax return, you must include the Social Security number of each child who attended the camp or received care. There’s no credit without it. You must also identify the organizations or persons that provided care for your child. So make sure to obtain the name, address and taxpayer identification number of the camp.

Additional rules apply to the child and dependent care credit. Contact us if you have questions. We can help determine your eligibility for the credit and other tax breaks for parents.

The Tax Cuts and Jobs Act (TCJA) has changed the landscape for business taxpayers. That’s because the law introduced a flat 21% federal income tax rate for C corporations. Under prior law, profitable C corporations paid up to 35%.

The TCJA also cut individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and LLCs (treated as partnerships for tax purposes). However, the top rate dropped from 39.6% to only 37%.

These changes have caused many business owners to ask: What’s the optimal entity choice for me?

Entity tax basics

Before the TCJA, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations. A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.

Although C corporations are still potentially subject to double taxation, their current 21% tax rate helps make up for it. This issue is further complicated, however, by another tax provision that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, that deduction is available only through 2025.

Many factors to consider

The best entity choice for your business depends on many factors. Keep in mind that one form of doing business might be more appropriate at one time (say, when you’re launching), while another form might be better after you’ve been operating for a few years. Here are a few examples:

Suppose a business consistently generates losses. There’s no tax advantage to operating as a C corporation. C corporation losses can’t be deducted by their owners. A pass-through entity would generally make more sense in this scenario because losses would pass through to the owners’ personal tax returns.
What about a profitable business that pays out all income to the owners? In this case, operating as a pass-through entity would generally be better if significant QBI deductions are available. If not, there’s probably not a clear entity-choice answer in terms of tax liability.
Finally, what about a business that’s profitable but holds on to its profits to fund future projects? In this case, operating as a C corporation generally would be beneficial if the corporation is a qualified small business (QSB). Reason: A 100% gain exclusion may be available for QSB stock sale gains. Even if QSB status isn’t available, C corporation status is still probably preferred — unless significant QBI deductions would be available at the owner level.

As you can see, there are many issues involved and taxes are only one factor.

For example, one often-cited advantage of certain entities is that they allow a business to be treated as an entity separate from the owner. A properly structured corporation can protect you from business debts. But to ensure that the corporation is treated as a separate entity, it’s important to observe various formalities required by the state. These include filing articles of incorporation, adopting by-laws, electing a board of directors, holding organizational meetings and keeping minutes.

The best long-term choice

The TCJA has far-reaching effects on businesses. Contact us to discuss how your business should be set up to lower its tax bill over the long run. But remember that entity choice is easier when starting up a business. Converting from one type of entity to another adds complexity. We can help you examine the ins and outs of making a change.

There is an old saying, “The best time to plant a tree was 20 years ago; the next best time is now.” This saying can be used when thinking about future planning for your family business. Only one-third of all family businesses successfully make the transition to the next generation. Many different factors can play into this statistic, but almost all of them can be related to the lack of proper family planning.

Most family businesses never have an actual plan in place for the transition of owners, and this can cause major issues when the time comes for the transition to happen. Sometimes, nothing has been put in place, and the transition happens because of a death or tragedy that forcefully leaves the next generation in charge. Below are some simple considerations to make when you are preparing a succession plan.

Identify who is interested. Most family businesses struggle tremendously after the transition process because the members who inherit the business want nothing to do with it. They either already have jobs, or they have no interest in continuing the business. On the other hand, some situations have multiple members that want to run the company, and there is no true hierarchy or plan set in place. The disputes and clashing management styles can end up running the business under.

It is important to have conversations and plans in place with members to determine who is interested and who isn’t. Once this is determined, set up a plan outlining who will be responsible for what, and start getting them exposed to the business.
Don’t lose key contacts. Most family businesses are built strongly on the owner’s relationship with vendors, customers and suppliers. When the owner transitions out, key driving factors of the business can be lost. To ensure that your transition out of the business doesn’t hurt your company’s relationships, introduce the successor to key business contacts so that they can build their own relationships and trust.
Consider changing your business entity. Planning the transition can mean changing the entity of the business. If the company is a sole proprietorship, it may make more sense to change to an S corporation or C corporation. These changes will allow you to have stock in the company, which is easily transferrable.

Stock can be purchased, gifted or inherited very easily without having to halt business operations. Having stock also allows numerous owners, such as children, to have different amounts of shares, which is important if multiple children want to be part of the business but have different roles or responsibilities.
Have a business valuation performed. Families are often faced with the difficult decision of whether to sell, close or pass down the business to family members. Passing down the business involves several complicated issues, such as how to logically divide the business and allocate value. Business valuations help owners establish a baseline value that they can use as a springboard for future succession or sale.

In planning for succession, it is critical to work with many experienced advisors — starting with a business valuation advisor and CPA — to review your company’s financials and determine its value. A valuation advisor can help you, your family and your attorney customize solutions to meet your goals and special needs. Read more about business valuations here.

Succession planning for family businesses is typically overlooked or put off because people are unsure about where or how to start. There doesn’t have to be a formal business plan in place. Sometimes, it just takes a simple conversation. If you are in the process of planning for the future, these are some simple ideas to help you get started. If you want to learn more, check out this article on succession planning.

The Michigan Department of Treasury has released the following information about scammers targeting northern Michigan residents.

Northern Michigan taxpayers with past-due tax debts should be aware of an aggressive scam making the rounds through the U.S. Postal Service, according to the Michigan Department of Treasury.

Recently, an Emmet County taxpayer received what appeared to be an official-looking letter about an overdue tax bill, asking the individual to immediately contact a toll-free number to resolve their outstanding state tax debt. The letter threatened to seize the taxpayer’s assets ― including property, bank accounts and income ― if the state tax debt wasn’t settled.

The piece of correspondence appeared credible to the taxpayer because it used specific personal facts about their real outstanding tax debt that was pulled directly from publicly available information. The scammer’s letter attempted to lure the taxpayer into a situation where they could make a payment to a criminal.

“Please don’t fall victim to this terrible scam,” State Treasurer Rachael Eubanks said. “Taxpayers have rights. If you have questions about an outstanding state tax debt, please contact us through a verified number so we can talk about options.”

The state Treasury Department corresponds with taxpayers through official letters sent through the U.S. Postal Service, providing several options to resolve an outstanding debt and information outlining taxpayer rights.

Taxpayers who receive a letter from a scammer or have questions about their state debts should call Treasury’s Collections Service Center at 517-636-5265. A customer service representative can log the scam, verify outstanding state debts and provide flexible payment options.

To learn more about Michigan’s taxes and the collections process, go to www.michigan.gov/taxes or follow the state Treasury Department on Twitter at @MITreasury.

The responsibilities of School Food Authorities (SFAs) go beyond simply managing a school’s meal programs. From organizing free and reduced lunches to purchasing equipment and determining meal prices, there are many challenges SFAs face. Check out this presentation to see some of the common problems for SFAs and how to solve them.

Download the presentation

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2019. Keep in mind that this list isn’t all-inclusive, so additional deadlines may apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

Report income tax withholding and FICA taxes for the second quarter of 2019 (Form 941) and pay any tax due. (See the exception below, under “August 12.”)
File a 2018 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 12

Report income tax withholding and FICA taxes for the second quarter of 2019 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 16

If a calendar-year C corporation, pay the third installment of 2019 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic six-month extension:
- File a 2018 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2018 to certain employer-sponsored retirement plans.

Often, when you hear that a school district is being audited, it is automatically associated with negativity. The common reactions are “What did they do wrong?” or “There must have been fraud!” However, Michigan Department of Education requires annual financial statement audits, performed in accordance with Generally Accepted Auditing Standards and Government Audit Standards, of all Michigan public school districts and public school academies, regardless of size. Also, if a public school district or academy expends greater than $750,000 in federal funds in its fiscal year, the public school district or academy is also required to have a single audit performed under Uniform Grant Guidance. Below are five ways to work smarter, not harder, when preparing for your annual audit.

Assistance list – Most auditors provide their clients with an assistance list or a “Prepared by Client” (PBC) list. Take advantage of this tool to set yourself up for a smooth audit. The assistance list is a working document and should be updated as you go. If something doesn’t apply, remove it from the list. If the auditors request something each year and it is not on the list, add it to the list. Make sure everything on the list is complete before the auditors arrive on-site.Once the auditors are on-site, it is difficult to juggle daily work, audit requests, and audit preparation. Using this list will help you prepare and stay organized for a headache-free audit.
Internal control documentation – Auditors are required to gain an understanding of internal controls related to the key transaction cycles. They typically rely on internal control narratives and questionnaires. We all know that these take time to update; however, they can be updated during the year. You do not need to wait until audit fieldwork to update these. If you implemented new payroll software during the year, update the payroll internal control documents at that time. Don’t put added work on your plate during an already busy audit preparation time by waiting until fieldwork.
Debt & Capital Asset schedules – These schedules can be updated for the auditors as soon as you make the last debt payment or your final capital asset purchase during the fiscal year. If your fiscal year-end is June and you make the last debt payment of the fiscal year in May, you can complete the debt work papers in May. If you know in early June all of your budgeted capital assets have been purchased, you can complete the capital asset work papers at that point. This is another item to check off that assistance list well before audit field work.
Communicate with your auditors – Communicate with your auditors throughout the year. It is much more efficient to discuss an issue when it happens and determine the proper way to handle it. While it is fresh in your mind, reach out to the auditors for advice so you can get it right the first time. This could help avoid an adjusting journal entry and potential findings. Also, if there are any issues with the audit process or timing, communicate that with the auditors too. This will give the auditors guidance on what improvements need to be made in the subsequent year. No one is perfect and there is always room for improvement.
Balance sheet accounts – The auditors will request external evidence to support significant balance sheet accounts. This is something that can be done before the auditors arrive on-site. Providing the external support on a portal or shared drive will reduce the number of questions and audit requests that occur during the audit. It may even reduce the amount of time the auditors need to be on-site if they can get a jump-start on some of the audit procedures from their office.

The audit process involves teamwork from both the school district and the auditor. Good communication should be flowing both ways before, during, and after fieldwork. The common goal is the timely issuance of the audited financial statements. Being prepared for your audit will not only provide a better balance between day-to-day duties and the audit process for key employees, but it will also give the auditors more time to offer suggestions for efficiency and process improvements.

About the authors

Brian Dixon, CPA, Principal, is a member of the firm’s Education Services Group. He is Advanced Single Audit certified by the AICPA and an active member of Michigan School Business Officials.

Jamie L. Rivette, CPA, CGFM, Principal, leads the firm’s Government Services Group. She serves on the Michigan Government Finance Officers Association’s Board of Directors and on its Standards Committee.

Within your nonprofit, be careful not to blur the lines between lobbying and political expenditures. Although these terms may seem alike, they are two distinct activities that carry significant compliance requirements and can impact your nonprofit’s tax-exempt status. Therefore, it is imperative to be well-versed in the compliance requirements related to these matters to eliminate confusion and ensure your organization complies with the intentions of the IRS.

What is lobbying?

Lobbying is activities intended to influence foreign, national, state, or local legislation. It includes direct lobbying (attempting to influence the legislators) and grassroots lobbying (attempting to influence legislation by influencing the general public).

What are political expenses?

Political expenditures are synonymous with political campaign activities. Political expenditures have to do with supporting or opposing candidates for elected offices, whether federal, state, or local.

Is lobbying allowable?

The short answer is yes. In general, nonprofits may participate to some extent in lobbying regardless of their tax-exempt status. However, for 501(c)(3) organizations, if a “substantial” part of their activities involve lobbying, then the nonprofits can lose their 501(c)(3) charitable status. Therefore, it is important that these organizations monitor the amount of time and dollars spent on lobbying activities.

Other nonprofit classifications, such as 501(c)(4), (5), and (6) entities, are not subject to the restrictions noted above, and merely have to ensure that tax is paid on lobbying activities. This is accomplished in one of two ways, the most common being through reporting of non-deductible dues. The second is through paying a proxy tax.

Are political expenses allowed?

The answer depends on your nonprofit’s tax-exempt classification.

501(c)(3) organizations are prohibited from participating in political campaigns and incurring political expenses. Unlike lobbying, there is not a “substantial part” test, and the IRS can revoke an organization’s tax-exempt status for any participation in a political campaign, regardless of whether there is a cost or not.
Non-501(c)(3) organizations may incur political expenditures but, similar to lobbying, tax must be paid on those.

What can organizations do to ensure the lines aren’t blurred?

Understand the nuances, including the fact that lobbying is specific to legislation, and political activities have to do with supporting or opposing candidates for elected offices.

Additionally, for all classifications, it is important to have a process to track and monitor lobbying and political activities which will not only ensure accurate reporting to the IRS, but also help an organization stay on the right side of the rules when it comes to compliance.

Many nuances and considerations must be taken into account related to these complex areas, and we have barely scratched the surface. If your organization participates in or is considering participating in lobbying and political activities, we encourage you to download our eBook, Lobbying and Political Expenditures for Nonprofits.

Generally speaking, operating reserves are your organization’s “rainy day fund.” Why are they important?

For starters, an organization’s rainy day fund is there to protect against the unexpected. Those of us who have worked in or with the nonprofit industry for a long enough time know not to take anything for granted. Regular contribution sources can dry up or disappear with little to no lead time, and short-term reputation damages can scare away funders and take years to rebuild confidence. These situations can be devastating to operations, which is why it’s important to have reserves to keep the organization afloat.

The other benefit of reserves is that they allow for flexibility and opportunity. Having the ability to invest in a new program, event, partnership or service can sometimes be the difference-maker in diversifying revenue sources and expanding the footprint of your organization.

With the adoption of ASU 2016-14, the new nonprofit reporting standards, potential donors will be even more informed about how nonprofits manage their resources and liquidity to meet cash needs. Those organizations that have been able to build strong cash positions will be able to stand out from other nonprofits by emphasizing their track record of strong management and effective use of resources. Therefore, now is as good a time as any to start putting your organization’s operating reserves front and center or revisiting your current policies.

Adoption of an operating reserve policy is an excellent starting point. An organization’s board should be responsible for adopting the policy. The policy should address:

the purpose of the reserves
a calculation of the target amount (for example, one year of operating expenses)
the intended use of the reserves
who has authority over the reserves and who monitors the use of the reserves
a plan for replenishing the reserve balance

Finally, it is not required that the reserves be set aside in a separate bank account; however, if a short-term intended use has not been determined, it may be wise to explore potential investment vehicles for those funds to maximize their impact for the organization.

Check Out Our eBook on Creating Policies for Your Nonprofit

Download eBook

Often, when you hear that an organization is being audited, it is automatically associated with negativity. The common reactions are “What did they do wrong,” or “There must have been fraud.” However, the Department of Treasury requires annual audits of local units that have a population of 4,000 or more, and an annual audit is required for charter townships, regardless of population. If a municipality has a population of 4,000 or less, it is required to have an audit every other year. Below are five ways to work smarter, not harder, when preparing for your annual audit.

Assistance list – Most auditors provide their clients with an assistance list or a “Prepared by Client” (PBC) list. Take advantage of this tool to set yourself up for a smooth audit. The assistance list is a working document and should be updated as you go. If something doesn’t apply, remove it from the list. If the auditors request something each year and it is not on the list, add it to the list. Once the auditors are on-site, it is difficult to juggle daily work, audit requests, and audit preparation. Using this list will help you stay organized for a headache-free audit.
Internal control documentation – Auditors are required to gain an understanding of internal controls related to the key transaction cycles. They typically rely on internal control narratives and questionnaires. We all know that these take time to update; however, they can be updated during the year. You do not need to wait until audit fieldwork to update these. If you implemented new payroll software during the year, update the payroll internal control documents at that time. Don’t put added work on your plate during an already busy audit preparation time by waiting until fieldwork.
Debt schedules – This schedule can be updated for the auditors as soon as you make the last debt payment during the fiscal year. If your fiscal year-end is June and you make the last debt payment of the fiscal year in May, you can complete the debt work papers in May. This is another item to check off that assistance list well before field work preparation.
Communicate with your auditors – Communicate with your auditors throughout the year. It is much more efficient to discuss an issue when it happens and determine the proper way to handle it. While it is fresh in your mind, reach out to the auditors for advice so you can get it right the first time. This could help avoid an adjusting journal entry and potential findings. Also, if there are any issues with the audit process or timing, communicate that with the auditors too. This will give the auditors guidance on what improvements need to be made in the subsequent year. No one is perfect and there is always room for improvement.
Balance sheet accounts – The auditors will request external evidence to support significant balance sheet accounts. This is something that can be done before the auditors arrive on-site. Providing the external support on a portal or shared drive will reduce the number of questions and audit requests that occur during the audit. It may even reduce the amount of time the auditors need to be on-site if they can get a jump-start on some of the audit procedures in their office.

The audit process involves teamwork from both the organization and the auditor. Good communication should be flowing both ways before, during, and after fieldwork. The common goal is the timely issuance of the audited financial statements. Being prepared for your audit will not only provide a better balance between day-to-day duties and the audit process for key employees, but it will also give the auditors more time to offer suggestions for efficiency and process improvements.

Is your business hiring this summer? If the employees come from certain “targeted groups,” you may be eligible for the Work Opportunity Tax Credit (WOTC). This includes youth whom you bring in this summer for two or three months. The maximum credit employers can claim is $2,400 to $9,600 for each eligible employee.

10 targeted groups

An employer is generally eligible for the credit only for qualified wages paid to members of 10 targeted groups:

Qualified members of families receiving assistance under the Temporary Assistance for Needy Families program,
Qualified veterans,
Designated community residents who live in Empowerment Zones or rural renewal counties,
Qualified ex-felons,
Vocational rehabilitation referrals,
Qualified summer youth employees,
Qualified members of families in the Supplemental Nutrition Assistance Program,
Qualified Supplemental Security Income recipients,
Long-term family assistance recipients, and
Qualified individuals who have been unemployed for 27 weeks or longer.

For each employee, there’s also a minimum requirement that the employee have completed at least 120 hours of service for the employer, and that employment begin before January 1, 2020.

Also, the credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, working as a house cleaner in the employer’s home). And it generally isn’t available for employees who have previously worked for the employer.

Calculate the savings

For employees other than summer youth employees, the credit amount is calculated under the following rules. The employer can take into account up to $6,000 of first-year wages per employee ($10,000 for “long-term family assistance recipients” and/or $12,000, $14,000 or $24,000 for certain veterans). If the employee completed at least 120 hours but less than 400 hours of service for the employer, the wages taken into account are multiplied by 25%. If the employee completed 400 or more hours, all of the wages taken into account are multiplied by 40%.

Therefore, the maximum credit available for the first-year wages is $2,400 ($6,000 × 40%) per employee. It is $4,000 [$10,000 × 40%] for “long-term family assistance recipients”; $4,800, $5,600 or $9,600 [$12,000, $14,000 or $24,000 × 40%] for certain veterans. In order to claim a $9,600 credit, a veteran must be certified as being entitled to compensation for a service-connected disability and be unemployed for at least six months during the one-year period ending on the hiring date.

Additionally, for “long-term family assistance recipients,” there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000 [$10,000 × 40% plus $10,000 × 50%].

The “first year” described above is the year-long period which begins with the employee’s first day of work. The “second year” is the year that immediately follows.

For summer youth employees, the rules described above apply, except that you can only take into account up to $3,000 of wages, and the wages must be paid for services performed during any 90-day period between May 1 and September 15. That means that, for summer youth employees, the maximum credit available is $1,200 ($3,000 × 40%) per employee. Summer youth employees are defined as those who are at least 16 years old, but under 18 on the hiring date or May 1 (whichever is later), and reside in an Empowerment Zone, enterprise community or renewal community.

We can help

The WOTC can offset the cost of hiring qualified new employees. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit. And you must fill out and submit paperwork to the government. Contact us for assistance or more information about your situation.

Yeo & Yeo CPAs & Business Consultants welcomes Erin Flannery, CPA, back to the firm as a senior accountant in the Auburn Hills office. Previously she worked in Yeo & Yeo’s Alma office before relocating to the Detroit area.

“We are thrilled to welcome Erin back to Yeo & Yeo,” says Tammy Moncrief, Managing Principal of the Auburn Hills office. “Her experience in forensic accounting and corporate accounting are a tremendous addition.”

Flannery provides forensic accounting, tax planning and preparation services for the firm’s business, Non-Profit and individual clients, as well as management advisory services. She has six years of public accounting experience. She holds a Bachelor of Business Administration from Grand Valley State University, majoring in accounting, and a Master of Forensic Accounting from the University of Charleston.

When you retire, you may consider moving to another state — say, for the weather or to be closer to your loved ones. Don’t forget to factor state and local taxes into the equation. Establishing residency for state tax purposes may be more complicated than it initially appears to be.

Identify all applicable taxes

It may seem like a no-brainer to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.

If the states you’re considering have an income tax, look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.

Watch out for state estate tax

The federal estate tax currently doesn’t apply to many people. For 2019, the federal estate tax exemption is $11.4 million ($22.8 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to (or in lieu of) an estate tax.

Establish domicile

If you make a permanent move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Each state has its own rules regarding domicile. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but didn’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.

How do you establish domicile in a new state? The more time that elapses after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state are to:

Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party),
Change your mailing address at the post office,
Change your address on passports, insurance policies, will or living trust documents, and other important documents,
Register to vote, get a driver’s license and register your vehicle in the new state, and
Open and use bank accounts in the new state and close accounts in the old one.

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. We can help with these returns.

Make an informed choice

Before deciding where you want to live in retirement, do some research and contact us. We can help you avoid unpleasant tax surprises.

The IRS just released its audit statistics for the 2018 fiscal year, and fewer taxpayers had their returns examined as compared with prior years. However, even though a small percentage of tax returns are being chosen for audit these days, that will be little consolation if yours is one of them.

Latest statistics

Overall, just 0.59% of individual tax returns were audited in 2018, as compared with 0.62% in 2017. This was the lowest percentage of audits conducted since 2002.

However, as in the past, those with very high incomes face greater odds. For example, in 2018, 2.21% of taxpayers with adjusted gross incomes (AGIs) of between $1 million and $5 million were audited (down from 3.52% in 2017).

The richest taxpayers, those with AGIs of $10 million and more, experienced a steep decline in audits. In 2018, 6.66% of their returns were audited, compared with 14.52% in 2017.

Surviving an audit

Even though fewer audits are being performed, the IRS will still examine thousands of returns this year. With proper planning, you should fare well even if you’re one of the unlucky ones.

The easiest way to survive an IRS examination is to prepare in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.

Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected when they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years within which to conduct an audit, and often the exam won’t begin until a year or more after you file your return.

More audit details

The scope of an audit depends on the tax return’s complexity. A return reflecting business or real estate income and expenses is likely to take longer to examine than a return with only salary income.

An audit can be conducted by mail or through an in-person interview and review of records. The interview may be conducted at an IRS office or may be a “field audit” at the taxpayer’s home, business, or accountant’s office.

Important: Even if your return is audited, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.

Representation

It’s advisable to have a tax professional represent you at an audit. A tax pro knows what issues the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow deduction of a certain expense) even though courts and other guidance have expressed a contrary opinion on the issue. Because pros can point to the proper authority, the IRS may be forced to throw in the towel.

If you receive an IRS audit letter or simply want to improve your recordkeeping, we’re here to assist you. Contact us to discuss this or any other aspect of your taxes.