No, It’s Not Unusual to Include Your Pet in Your Estate Plan

An unexpected outcome of the recent death of designer Karl Lagerfeld is that the topic of estate planning for pets has been highlighted. Lagerfeld’s beloved cat, Choupette, played a major role in his brand. The feline was the subject of a coffee table book and has a large Instagram following. Before his death, Lagerfeld publicly expressed his wishes to have his ashes, and those of his cat if she had died before him, to be scattered with those of his mother’s. It’s unknown if Lagerfeld accounted for his beloved Choupette in his estate plan, but one vehicle he could have used to do so is a pet trust.

Another celebrity who famously set up a pet trust for her dog was hotel heiress Leona Helmsley. She left $12 million in a trust for her white Maltese, Trouble. (A judge later reduced the trust to $2 million and ordered the remainder to go to Helmsley’s charitable foundation.) Thanks to the pet trust, Trouble lived a luxurious life until she died in 2011, four years after Helmsley’s death.

ABCs of a pet trust

A pet trust is a legally sanctioned arrangement in all 50 states that allows you to set aside funds for your pet’s care in the event you die or become disabled. After the pet dies, any remaining funds are distributed among your heirs as directed by the trust’s terms.

The basic guidelines are comparable to trusts for people. The “grantor” — called a settlor or trustor in some states — creates the trust to take effect during his or her lifetime or at death. Typically, a trustee will hold property for the benefit of the grantor’s pet. Payments to a designated caregiver are made on a regular basis.

Depending on the state in which the trust is established, it terminates upon the death of the pet or after 21 years, whichever occurs first. Some states allow a pet trust to continue past the 21-year term if the animal remains alive. This can be beneficial for pets that have longer life expectancies than cats or dogs, such as parrots or turtles.

Specify your wishes

Because you know your pet better than anyone else, you may provide specific instructions for its care and maintenance (for example, a specific veterinarian or brand of food). The trust can also mandate periodic visits to the vet and other obligations. Feel more secure knowing that your pet’s care is forever ensured — legally. Contact us for additional details.

Donating to charity is a key estate planning strategy for many people. It reduces the size of your taxable estate and it can help you leave a lasting legacy with organizations you care about.

The benefit of making such gifts during life rather than at death is that you may be eligible for an income tax deduction. Qualifying for a charitable deduction is, in some respects, a matter of form over substance. The IRS could disallow a deduction, even if it’s otherwise legitimate, if you fail to follow the substantiation requirements to the letter.

If you’ve made charitable donations in 2018, it’s wise to review the substantiation rules as you file your 2018 tax return. Here’s a quick summary of the rules:

Cash gifts under $250: Use a canceled check, receipt from the charity or “other reliable written record” showing the charity’s name and the date and amount of the gift.

Cash gifts of $250 or more: Obtain a contemporaneous written acknowledgment from the charity stating the amount of the gift, whether you received any goods or services in exchange for it and, if so, a good-faith estimate of their value. An acknowledgment is “contemporaneous” if you receive it before the earlier of your tax return due date (including extensions) or the date you actually file your return. Also, there’s no need to combine separate gifts of less than $250 to the same charity (monthly contributions, for example) to determine if you’ve hit the $250 threshold for the contemporaneous written acknowledgment requirement.

Noncash gifts under $250: Get a receipt showing the charity’s name, the date and location of the donation, and a description of the property.

Noncash gifts of $250 or more: Obtain a contemporaneous written acknowledgment from the charity that contains the information required for cash gifts plus a description of the property. File Form 8283 if total noncash gifts exceed $500.

Noncash gifts of more than $500: In addition to the above, keep records showing the date you acquired the property, how you acquired it and your adjusted basis in it.

Noncash gifts of more than $5,000 ($10,000 for closely held stock): In addition to the above, obtain a qualified appraisal and include an appraisal summary, signed by the appraiser and the charity, with your return. (No appraisal is required for publicly traded securities.)

Noncash gifts of more than $500,000 ($20,000 for art): In addition to the above, include a copy of the signed appraisal (not the summary) with your return.

Failure to follow the substantiation rules can mean the loss of valuable tax deductions. We can help determine if you’ve properly substantiated your 2018 charitable donations.

If you’re getting a divorce, you know it’s a highly stressful time. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and your marital property will include all or part of it.

Transferring property tax-free

You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

For example, let’s say that, under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to postdivorce transfers so long as they’re made “incident to divorce.” This means transfers that occur within:

A year after the date the marriage ends, or
Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

Future tax implications

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.

Note that the person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.

In addition, the IRS now extends the beneficial tax-free transfer rule to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Avoid adverse tax consequences

Like many major life events, divorce can have major tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. Your tax advisor can help you minimize the adverse tax consequences of settling your divorce under today’s laws.

When fraud strikes, the culprit might be sitting in your accounts payable department. This department is particularly vulnerable to fraud because of the volume of transactions it processes and the varying pricing and billing policies that vendors use. Here’s a close-up of common vendor fraud scams and ways to lower your risks.

Phony vendors

A common type of purchasing scheme involves fictitious vendors. Here, an employee in the accounts payable department might set up a bogus supplier in the accounting system and then deposit payments to the supplier into his or her personal checking account.

Warnings of fictitious vendors include invoices that are photocopied, sequentially numbered, and from companies that have post office box addresses or addresses that match an employee’s home address. Also be wary of invoices with amounts that consistently fall just below sums that require approval for payment and, depending on your business, invoices for round dollar amounts.

Bogus invoices with real vendors

Some purchasing scams require collusion between an employee in the accounts payable department and someone at the vendor’s office. For example, a vendor might submit falsified invoices, and then an employee in the accounts payable department will deposit refunds into his or her personal account or split duplicate payments with his or her accomplice at the supply company.

Connections between procurement staff and suppliers may provide clues to these types of schemes. Is an employee related to, or otherwise linked with, the owner or management of a supplier? If so, that employee shouldn’t make purchasing decisions that involve the vendor.

Kickbacks

If you perform contract work, you also might be susceptible to kickbacks. That is, the person who approves the contracts could be receiving kickbacks from vendors. Red flags include fewer bids than expected or required, widely divergent bids on the same projects and unexplained deadline changes.

Kickbacks also might occur if it seems like you’re paying higher prices for lower quality products. Cash payments to employees can be difficult to detect because those payments are not reflected in the company’s books. They probably are, however, reflected in higher pricing from the vendor. Even fraudulent vendors must cover their costs.

Companies should look for consistent shortages, informal communication (such as mobile phone calls or personal emails) between accounts payable/purchasing staff and suppliers, and poor record-keeping.

Preventive measures

You can prevent vendor fraud by targeting one of the legs of the fraud triangle: motive, opportunity and rationalization. Many preventive measures strengthen internal controls and develop policies and procedures to prevent theft, thereby reducing the opportunity to commit fraud.

For example, no employee should be authorized to handle most or all of your purchasing or accounts payable procedures. The person who orders supplies and materials, for example, shouldn’t check shipments or approve invoices. Consider separating these functions or rotating who’s responsible for them every quarter.

Also, consider performing background checks on new vendors. Such checks can provide information on the vendors’ affiliations, ownership, Litigation Support, regulatory or legal violations or suspensions and financial standing. This can help you weed out vendors with dubious histories.

Companies also should state in writing how they expect employees — and vendors — to conduct business. This code of ethics should be reviewed and updated annually, and employees and vendors should be required to sign it every year, even if nothing changes. Annual reminders will reinforce the idea that the company considers ethical, professional business practices a priority.

Anonymous hotlines — one for employees and a separate one for vendors — can be a cost-effective way to detect purchasing fraud, especially those involving collusion. Giving vendors a separate hotline makes them more comfortable sharing concerns and allows them to ask questions about the business’s ethics practices.

To catch a thief

If you notice the warning signs of vendor fraud, contact your CPA immediately. He or she can help unearth the cause of any anomalies, quantify your losses, build a defensible case (if you decide to prosecute the thief) and fortify your defenses against future scams.

Have you made substantial gifts of wealth to family members? Or are you the executor of the estate of a loved one who died recently? If so, you need to know whether you must file a gift or estate tax return.

Filing a gift tax return

Generally, a federal gift tax return (Form 709) is required if you make gifts to or for someone during the year (with certain exceptions, such as gifts to U.S. citizen spouses) that exceed the annual gift tax exclusion ($15,000 for 2018 and 2019); there’s a separate exclusion for gifts to a noncitizen spouse ($152,000 for 2018 and $155,000 for 2019).

Also, if you make gifts of future interests, even if they’re less than the annual exclusion amount, a gift tax return is required. Finally, if you split gifts with your spouse, regardless of amount, you must file a gift tax return.

The return is due by April 15 of the year after you make the gift, so the deadline for 2018 gifts is coming up soon. But the deadline can be extended to October 15.

Being required to file a form doesn’t necessarily mean you owe gift tax. You’ll owe tax only if you’ve already exhausted your lifetime gift and estate tax exemption ($11.18 million for 2018 and $11.40 million for 2019).

Filing an estate tax return

If required, a federal estate tax return (Form 706) is due nine months after the date of death. Executors can seek an extension of the filing deadline, an extension of the time to pay, or both, by filing Form 4768. Keep in mind that the form provides for an automatic six-month extension of the filing deadline, but that extending the time to pay (up to one year at a time) is at the IRS’s discretion. Executors can file additional requests to extend the filing deadline “for cause” or to obtain additional one-year extensions of time to pay.

Generally, Form 706 is required only if the deceased’s gross estate plus adjusted taxable gifts exceeds the exemption. But a return is required even if there’s no estate tax liability after taking all applicable deductions and credits.

Even if an estate tax return isn’t required, executors may need to file one to preserve a surviving spouse’s portability election. Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exemption amount, but it’s not automatic. To take advantage of portability, the deceased’s executor must make an election on a timely filed estate tax return that computes the unused exemption amount.

Preparing an estate tax return can be a time consuming, costly undertaking, so executors should analyze the relative costs and benefits of a portability election. Generally, filing an estate tax return is advisable only if there’s a reasonable probability that the surviving spouse will exhaust his or her own exemption amount.

Seek professional help

Estate tax rules and regulations can be complicated. If you need help determining whether a gift or estate tax return needs to be filed, contact us.

Mike Evrard Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of Michael Evrard, CPA, to senior manager. Along with his promotion, Mike has transferred to Yeo & Yeo’s Kalamazoo office from Flint.

Mike is a member of the firm’s Nonprofit Services Group and the Audit Services Group. He assisted in the development of the firm’s award-winning YeoLEAN audit process and provides audit services, with an emphasis on school districts and nonprofit organizations. He has nine years of public accounting experience.

“We are excited to welcome Michael to our Kalamazoo team,” said Carol Patridge, managing principal of Yeo & Yeo’s Kalamazoo office. “His extensive experience in the nonprofit industry and audit adds to the depth of our client services and is a great addition to our community.”

Mike holds a Bachelor of Science in Business Administration in accounting from Central Michigan University. He is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants.

On April 1, 1923, a father and son joined in an accounting partnership in Saginaw, Michigan. Today, Yeo & Yeo has grown to more than 200 employees and is proud to be among the leading CPA firms in the country. Through our affiliates, we have created a strong network of professionals who are a complete resource for our clients – in accounting, tax, computer services, medical billing, wealth management and many other areas.

To our people: Thank you for your hard work and for using your ideas, knowledge and expertise to exceed client expectations. And thank you for donating your time, talent and financial support to more than 200 different community service organizations. Your commitment to our clients and community together is reflective of the firm’s core values – and that is how we are able to deliver outstanding business solutions every day.

To our clients: Thank you for giving us your trust and your business. Our success story is incomplete without your patronage. Not only have you helped us grow, but you have made us part of your lives. Because of clients like you, we are inspired and driven to continue to deliver the highest level of service.

To our communities: Thank you for your continued support. At Yeo & Yeo, our community is our foundation, and you have given us strong ones. We are proud to have nine office locations in Michigan, each of which is surrounded by passionate people who have helped us become the company we are today.

In the years to come, we look forward to continuing to adapt to the new, ever-changing challenges in technology, government regulations and social shifts to provide solutions for our clients and opportunities for our dedicated employees. As always, we will stay true to our roots of contributing to the great communities that we serve.

Tim_Crosson_Jr Yeo & Yeo CPAs & Business Consultants is pleased to announce that Timothy P. Crosson Jr., CPA, has been promoted to senior manager.

Tim provides audit services, with an emphasis on nonprofit organizations, government entities and school districts. He has 11 years of public accounting experience. He is a member of the firm’s Education and Audit Service Groups and serves in the Ann Arbor office.

“We are proud to recognize Tim for his leadership and expertise. He has excelled in providing professional services to our clients and is committed to helping them succeed,” said Michael Georges, Principal in the Ann Arbor office.

Tim holds a Bachelor of Business Administration, majoring in accounting, from The University of Michigan-Dearborn. He is a member of the Michigan Association of Certified Public Accountants, the American Institute of Certified Public Accountants, and The University of Michigan-Dearborn Alumni Association. He serves on the board of directors for Community Choice Credit Union.

AJ_Licht Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of A.J. Licht, CPA, to senior manager.

A.J. has eight years of public accounting experience. His areas of expertise include business consulting for management, financial reporting and tax planning and preparation with an emphasis in the construction sector, review and compilation services, and accounting software consulting.

He is the leader of the firm’s Construction Services Group and is responsible for the strategic direction and management of the firm’s state-wide Group, and oversees the Group’s business development, training and staff development.

“We are proud to recognize A.J. for his leadership and expertise, and for his commitment to serving our clients. He has excelled in providing professional services and is committed to helping Yeo & Yeo’s clients succeed,” said Suzanne Lozano, Principal in the Saginaw office.

A.J. is a member of the Associated Builders & Contractors Greater Michigan Chapter, the Home Builders Association of Saginaw, and the Construction Industry CPAs/Consultants Association. He is based in the firm’s Saginaw office. In addition to his work at Yeo & Yeo, A.J. is treasurer of the Saginaw Township Business Association. He is a member of the Saginaw Valley Young Professionals Network and the Saginaw County Chamber of Commerce, and is a Habitat for Humanity volunteer.

Employee stock ownership plans (ESOPs) offer closely held business owners an exit strategy and a tax-efficient technique for sharing equity with employees. But did you know that an ESOP can be a powerful estate planning tool? It can help you address several planning challenges, including lack of liquidity and the need to provide for children outside the business.

An ESOP in action

An ESOP is a qualified retirement plan, similar to a 401(k) plan. But instead of investing in a selection of stocks, bonds and mutual funds, an ESOP invests primarily in the company’s own stock. ESOPs are subject to the same rules and restrictions as qualified plans, including contribution limits and minimum coverage requirements.

Typically, companies make tax-deductible cash contributions to the ESOP, which uses the funds to acquire stock from the current owners. This doesn’t necessarily mean giving up control, though. The owners’ shares are held in a trust, and the trustees vote the shares.

An ESOP’s earnings are tax-deferred: Participants don’t recognize taxable income until they receive benefits — in the form of stock or cash — when they leave the company, die or become disabled.

Retirement and estate planning benefits

If a large portion of your wealth is tied up in a closely held business, lack of liquidity can create challenges as you approach retirement. Short of selling the business, how do you fund your retirement and provide for your family?

An ESOP may provide a solution. By selling some or all of your shares to an ESOP, you convert your shares into liquid assets. Plus, if the ESOP owns 30% or more of the company’s outstanding common stock immediately after the sale, and certain other requirements are met, you can defer or even eliminate capital gains taxes. How? By reinvesting the proceeds in qualified replacement property (QRP) — which includes most securities issued by U.S. public companies — within one year.

QRP provides a source of retirement income and allows you to defer your gain until you sell or otherwise dispose of the QRP. From an estate planning perspective, a simple but effective strategy is to hold the QRP for life. Your heirs receive a stepped-up basis in the assets, eliminating capital gains permanently.

If you want more investment flexibility, you can pay the capital gains tax upfront and invest the proceeds as you see fit. Or you can invest the proceeds in qualifying floating-rate long-term bonds as QRP. You avoid capital gains, but can borrow against the bonds and invest the loan proceeds in other assets.

If estate taxes are a concern, you can remove QRP from your estate, without triggering capital gains, by giving it to your children or other family members. These gifts may be subject to gift and generation-skipping transfer taxes, but you can minimize those taxes using traditional estate planning tools.

Weigh the pros and cons

ESOPs offer significant benefits, but they aren’t without their disadvantages. Contact us to help determine if an ESOP is right for you.

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

April 1

File with the IRS if you’re an employer that will electronically file 2018 Form 1097, Form 1098, Form 1099 (other than those with an earlier deadline) and/or Form W-2G.
If your employees receive tips and you file electronically, file Form 8027.
If you’re an Applicable Large Employer and filing electronically, file Forms 1094-C and 1095-C with the IRS. For all other providers of minimum essential coverage filing electronically, file Forms 1094-B and 1095-B with the IRS.

April 15

If you’re a calendar-year corporation, file a 2018 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.
Corporations pay the first installment of 2019 estimated income taxes.

April 30

Employers report income tax withholding and FICA taxes for the first quarter of 2019 (Form 941) and pay any tax due.

May 10

Employers report income tax withholding and FICA taxes for the first quarter of 2019 (Form 941), if you deposited on time and fully paid all of the associated taxes due.

June 17

Corporations pay the second installment of 2019 estimated income taxes.

The right estate planning strategy for you likely is the one that will produce the greatest tax savings for your family. Unfortunately, there can be tension between strategies that save estate tax and ones that save income tax. This is especially true now that the Tax Cuts and Jobs Act nearly doubled the gift and estate tax exemption — but only temporarily. Through 2025, income tax might be a greater concern, but, after that, estate taxes might be a bigger issue.

Fortunately, it’s possible to build an “on-off switch” into your estate plan.

Why the conflict?

Generally, the best way to minimize estate taxes is to remove assets from your estate as early as possible (through outright gifts or gifts in trust) so that all future appreciation in value escapes estate tax. But these lifetime gifts can increase income taxes for the recipients of appreciated assets. That’s because assets you transfer by gift retain your tax basis, potentially resulting in a significant capital gains tax bill should your beneficiaries sell them.

Assets held for life, on the other hand, receive a stepped-up basis equal to their fair market value on the date of death. This provides an income tax advantage: Your beneficiaries can turn around and sell the assets with little or no capital gains tax liability.

Until relatively recently, estate planning strategies focused on minimizing estate taxes, with little regard for income taxes. Why? Historically, the highest marginal estate tax rate was significantly higher than the highest marginal income tax rate, and the estate tax exemption amount was relatively small. So, in most cases, the potential estate tax savings far outweighed any potential income tax liability.

Today, the stakes have changed. The highest marginal estate and income tax rates aren’t too different (40% and 37%, respectively). And, the gift and estate tax exemption has climbed to $11.40 million for 2019, meaning fewer taxpayers need to be concerned about estate taxes, at least for now.

Flipping the switch

With a carefully designed trust, you can remove assets from your taxable estate while giving the trustee the ability to direct the assets back into your estate should that prove to be the better tax strategy in the future. There are different techniques for accomplishing this, but typically it involves establishing an irrevocable trust over which you retain no control (including the right to replace the trustee) and giving the trustee complete discretion over distributions. This removes the assets from your taxable estate.

If it becomes desirable to include the trust assets in your estate because income taxes are a bigger concern, the trustee can accomplish this by, for example, naming you as successor trustee or granting you a power of appointment over the trust assets.

Of course, irrevocable trusts also have their downsides. Contact us to discuss what estate planning strategies make the most sense for you.

People who live in states with high income taxes sometimes relocate to a state with a more favorable tax climate. A similar strategy can be available for trusts. If a trust is subject to high state income taxes, you may be able to change its residence — or “situs” — to a state with low or no income taxes.

What can a “trust-friendly” state offer?

In addition to offering low (or no) tax on trust income, some states:

Authorize domestic asset protection trusts, which provide added protection against creditors’ claims,
Permit silent trusts, under which beneficiaries need not be notified of their interests,
Allow perptual trusts, enabling grantors to establish “dynasty” trusts that benefit many generations to come,
Have directed trust statutes, which make it possible to appoint an advisor or committee to direct the trustee with regard to certain matters, or
Offer greater flexibility to draft trust provisions that delineate the trustee’s powers and duties.

If another state’s laws would be more favorable than your own state’s, you might benefit from moving a trust to that state — or setting up a new trust there.

Take states’ laws into consideration

It’s important to review both states’ laws for determining a trust’s “residence” for tax and other purposes. Typically, states make this determination based on factors such as:

The grantor’s home state,
The location of the trust’s assets,
The state where the trust is administered (that is, where the trustees reside or the trust’s records are kept), and
The states where the trust’s beneficiaries reside.

Keep in mind that some states tax income derived from in-state sources even if earned by an out-of-state trust.

Making the right move

To enjoy the advantages of a trust-friendly state, establish the trust in that state and take steps to ensure that your choice of residence is respected (such as naming a trustee in the state and keeping the trust’s assets and records there). It may also be possible to move an existing trust from one state to another.

We can assist you in determining if setting up trusts in another state would help you achieve your estate planning goals.

The Michigan Department of Education issued an update for GASB 84 to Section II, E.18, of the Michigan Public School Accounting Manual. The section now includes guidance and accounting code changes required to implement GASB 84. Updates were prepared and reviewed by the Michigan Department of Education’s 1022 Committee, of which Yeo & Yeo Principals Jennifer Watkins, CPA, and Kristi Krafft-Bellsky, CPA, are members.

Additional GASB 84 resources:

Recorded Webinar: How to Implement GASB 84 at Your School District

White Paper: GASB 84 — Understanding the Statement to Implement Efficiently in Your School District

If you have questions about implementing GASB 84 for your school district, please contact Yeo & Yeo.

The IRS has developed a number of resources to combat these taxpayer scams including two videos detailing the scams, and a recap summary of the IRS ‘Dirty Dozen.’

Visit, https://www.irs.gov/newsroom/dirty-dozen, for detailed information concerning the following IRS resources.

IRS Videos

Dirty Dozen – English | Spanish | ASL
Tax Scams – English | Spanish | ASL

Provided by the IRS, below is a recap of this year’s ‘Dirty Dozen’ scams:

Phishing: Taxpayers should be alert to potential fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a bill or tax refund. Don’t click on one claiming to be from the IRS. Be wary of emails and websites that may be nothing more than scams to steal personal information. (IR-2019-26)
Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (IR-2019-28)
Identity Theft: Taxpayers should be alert to tactics aimed at stealing their identities, not just during the tax filing season, but all year long. The IRS, working in conjunction with the Security Summit partnership of state tax agencies and the tax industry, has made major improvements in detecting tax return related identity theft during the last several years. But the agency reminds taxpayers that they can help in preventing this crime. The IRS continues to aggressively pursue criminals that file fraudulent tax returns using someone else’s Social Security number. (IR-2019-30)
Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest, high-quality service. There are some dishonest preparers who operate each filing season to scam clients, perpetrate refund fraud, identity theft and other scams that hurt taxpayers. (IR-2019-32)
Inflated Refund Claims: Taxpayers should take note of anyone promising inflated tax refunds. Those preparers who ask clients to sign a blank return, promise a big refund before looking at taxpayer records or charge fees based on a percentage of the refund are probably up to no good. To find victims, fraudsters may use flyers, phony storefronts or word of mouth via community groups where trust is high. (IR-2019-33)
Falsifying Income to Claim Credits: Con artists may convince unsuspecting taxpayers to invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers should file the most accurate tax return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing large bills to pay back taxes, interest and penalties. (IR-2019-35)
Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation to falsely inflate deductions or expenses on their tax returns to pay less than what they owe or potentially receive larger refunds. Think twice before overstating deductions, such as charitable contributions and business expenses, or improperly claiming credits, such as the Earned Income Tax Credit or Child Tax Credit. (IR-2019-36)
Fake Charities: Groups masquerading as charitable organizations solicit donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. (IR-2019-39)
Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is usually limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims often involve failures to participate in or substantiate qualified research activities or satisfy the requirements related to qualified research expenses. (IR-2019-42)
Offshore Tax Avoidance: Successful enforcement actions against offshore cheating show it’s a bad bet to hide money and income offshore. People involved in offshore tax avoidance are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. (IR-2019-43)
Frivolous Tax Arguments: Frivolous tax arguments may be used to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims about the legality of paying taxes despite being repeatedly thrown out in court. The penalty for filing a frivolous tax return is $5,000. (IR-2019-45)
Abusive Tax Shelters: Abusive tax structures including trusts and syndicated conservation easements are sometimes used to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2019-47)

A common theme throughout all: Scams put taxpayers at risk. Taxpayers who have received a call or an email from a scammer should report the case to the IRS at www.irs.gov or call 800-366-4484.

Additional Resources

Be Ready for Scams this Tax Season

10 Practices to Protect Against Cyberattacks and Phishing Scams

File Early to Avoid Identity Theft

Security Awareness Training – Educate Your Employees (Yeo & Yeo Technology)

How to Know It’s Really the IRS Calling or Knocking on Your Door (IRS Resource)

IRS Warns of Scam — Falsely Filed Returns with Refunds Deposited into Taxpayer’s Account

Treasury Warns of Collections Scam

On March 29, 2019, Michigan minimum wage will increase to $9.45 an hour.

Minors age 16 to 17 may be paid a reduced rate of 85 percent of the minimum hourly wage rate.

A youth training wage of $4.25 per hour may be paid to employees 16-19 years of age for the first 90 days of their employment.

Tipped employee hourly wage rates will increase to $3.59 an hour.

These rates will be adjusted annually for inflation, up to a maximum of 3.5 percent per year.

Note that the 2019 rate increases are effective for wages earned on or after the indicated date, and not the actual wage payment date.

Download the PDF rate schedule, including years 2020 and 2021 increases.

The full rate schedule is also available on the Michigan Department of Licensing and Regulatory Affairs website.

Contact your Yeo & Yeo payroll solutions professional for assistance.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Alan D. Panter, CPA, Principal, has achieved the Certified Government Financial Manager (CGFM) credential, awarded by the Association of Government Accountants (AGA).

“The CGFM credential is considered the mark of excellence in federal, state and local government,” says Jamie Rivette, CPA, CGFM, Principal and Government Services Group leader. “Alan’s achievement demonstrates Yeo & Yeo’s commitment to providing expert audit, accounting and consulting services to Michigan governmental entities by expanding our level of expertise.”

The CGFM credential establishes competency in governmental accounting, auditing, financial reporting, internal controls and budgeting. It recognizes the specialized knowledge and experience required to be an effective government financial manager.

Panter is a Principal in the Auburn Hills office audit department with nearly 30 years of experience providing audit and accounting services for government, nonprofit and education entities. He is a member of firm’s Government Services Group. Panter’s professional memberships include the Michigan Government Finance Officers Association, Michigan School Business Officials, Macomb–St. Clair School Business Officials and Detroit Economic Club.

In the community, Panter is a member of the Knights of Columbus St. Daniel Council #15967, the past managing director of the Greater Lansing Amateur Hockey Association, and the past President of the Fast Pitch Softball Club of Haslett.

The manufacturing industry is at a pivotal point in its history. Recognizing the significance of this juncture, the Manufacturing Leadership (ML) Council recently released its Critical Issues Agenda for 2018/2019, titled The Journey to Manufacturing 4.0.

The result of extensive research, consultation and refinement involving more than 1,000 members, this agenda identifies key issues facing the industry. Manufacturers of all shapes and sizes are advised to take note.

Real Challenges

The modern manufacturing plant, featuring robots doing jobs previously performed by humans and workers on the floor communicating electronically with supervisors in remote locations, may seem like something out of The Jetsons. Yet the challenges are real. Even with cutting-edge technology, manufacturers face pressure to be more innovative, nimble and cost-effective.

In fact, the evolution of advanced digital and analytical technology is forcing manufacturers around the globe to rethink the normal rules of competition, revisit how work is performed, and revise how companies are structured and managed. This fresh approach is what the ML Council calls Manufacturing 4.0 (M4.0).

Features

M4.0 goes a step beyond previous iterations of the new technology-driven manufacturing sector. The new regime is characterized by:

Production and supply networks that are increasingly data-driven, automated, modular, agile, sustainable, predictive and rapidly reconfigurable to meet changing demands and competition.
Products that are smart, customized, connected and self-diagnostic, and that provide a rich platform for new revenue streams.
Supply chains that are visible, traceable, risk-resilient, responsive and constantly analyzed in real time.
Enterprises that are cross-functional, collaborative and highly-integrated, often surrounding a single digital thread that stretches from design to deployment.
Leaders and employees who are highly engaged, digitally savvy, customer-centric and ready to meet new challenges and grasp emerging business opportunities.

Such a massive transformation doesn’t come without substantial effort. Manufacturers must identify and master various technological, organizational, cultural, workforce and leadership aspects. With that in mind, the agenda is designed to help manufacturers align their thoughts with practices.

Opportunities to Grow

The agenda covers five specific manufacturing areas.

1. Factories.

Both large and small manufacturers need to recognize and embrace the potential of new and evolving production models, materials and technology. This will help them create cost-efficient, responsive, flexible, transparent, connected, automated, and sustainable factories, production models and business plans.

The agenda spotlights:

M4.0 guidelines, maturity models and transformation frameworks that can help manufacturers move from current production models (often based on legacy systems) to a future state of digitally-enabled production readiness.
End-to-end digitization and analysis of manufacturing and engineering processes and functions in both centralized and distributed production networks.
Cybersecurity risk management.

Such cybersecurity includes preventive measures and cyberattack response strategies that minimize vulnerabilities of highly networked production platforms.

2. Culture.

Manufacturers of all sizes need to transform traditional operations so that their culture becomes collaborative, innovation-driven and cross-functional. This will drive growth, new product and service development, operational efficiency and success.

The agenda recommends:

Cross-functional processes and integrated organizational structures that harness multiple sources of data to drive innovation, facilitate faster and better decisions, reduce time-to-market and enhance competitive agility.
Collaborative innovation cultures and platforms that leverage the ideas and resources of employees, suppliers, external partners, customers, academics and “‘the crowd” to create new products, improve business processes and spawn innovation.
Best-practice approaches in deploying integrated M4.0 technology and platforms, such as digital threads, that enhance collaboration and integration to help deliver new ideas and improvements faster across the enterprise.

3. Technology.

Manufacturers must learn how to identify, adopt and scale promising technology. This will result in greater speed and efficiency while opening the door to new business models and improved customer experiences.

The agenda covers:

The impact of artificial intelligence (AI), machine learning and cognitive analytics on the industry’s future.
The latest developments in related transformational technology, including the Internet of Things, 3D printing, modeling and simulation, collaborative robotics, augmented and virtual realities, 5G networks, block chain and other emerging technologies.
Best practice approaches for selecting and deploying new technology in a manufacturing enterprise while implementing standards and architectures that support open systems.

4. Next-generation leadership.

It isn’t just the machinery that’s changing. Manufacturers must be more collaborative, innovative and responsive to disruptive change. Leaders will adopt new behaviors, structures, cultures, value systems and strategies. And they’ll consider ways to attract and engage the talent and skills of both the current workforce and the next generation of employees.

The agenda pinpoints:

Effective leadership role models, behaviors and mindsets that define a successful profile for tomorrow’s manufacturing leaders.
Employee transition, development and engagement strategies for an inclusive, diverse, multigenerational, multicultural, multinational workforce that interacts with AI and collaborative robots (“cobots”) and whatever else is developed in the future.
Identifying, attracting, and encouraging talent and skills for the next-generation manufacturing workforce.

Effective next-generation leaders will adopt new working cultures, change value systems and develop better ways to collaborate with educational and community organizations.

5. Sustainability.

This new vision provides an opportunity to leverage new analytical insights and more flexible production platforms. It maximizes resources, achieves major efficiency gains, drives revenue growth and minimizes environmental impacts. To successfully engage with others, manufacturers must become more transparent about their environmental and socially responsible practices.

The agenda recommends:

Products designed for easier reuse, remanufacture, refurbishment or recycling.
Production strategies that streamline production processes to increase efficiency and reduce costs and waste.
Holistic, sustainable manufacturing business models supported by collaborative cross-sector partnerships and deeper community engagement that can create a circular manufacturing economy.

Seize the Future

What does all this mean for your company? Manufacturers must embrace the future or risk being left in the dust. As you set your budgets and goals for 2019, review the ML Council’s agenda and consider ways you can leverage emerging technology, innovative business strategies, sustainable practices and other opportunities to grow your business agenda.

Recommended Reading: Manufacturing 4.0: The Cost of Progress

Make no mistake: Manufacturers will need to pay tolls along the road to Manufacturing 4.0.

Manufacturers invest time, energy and capital to implement advanced technology and best practices.

Cost is likely to be the biggest obstacle for many small- to mid-sized companies. Pilot programs may require you to revisit your budget and raise additional capital. And your company may need to make tough decisions regarding strategic investments, such as launching new products, purchasing new assets and making strategic acquisitions. You simply don’t have the resources to do everything at once.

We can help you strategize how to move forward by running financial projections to help you determine which alternatives to pursue today and which to table for future years.

For many small business owners, their ownership interest is one of their biggest personal assets. What will happen to your ownership interest if you get divorced? In many cases, your marital estate will include all (or part) of your business interest.

Sometimes, divorcing spouses continue to participate in the business’s operations after the divorce settles, and then both spouses retain an ownership interest in the business. But, more commonly, former spouses are unable to effectively co-manage the business. So, one spouse retains a controlling interest and the other spouse 1) retains a passive stake in the business, 2) is bought out, or 3) is allocated other marital assets in a property settlement agreement.

How a marital estate is divvied up can have significant tax consequences. Here’s what you need to know to get the best tax results.

Tax-Free Transfer Rule

In general, you can divide most assets, including cash and ownership interests in a business, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under the tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

To illustrate how this works, suppose that, under the terms of your divorce agreement, you give your primary residence to your ex-spouse in exchange for keeping all the stock in your small business. This asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made incident to divorce. Transfers incident to divorce are those that occur within:

A year after the date the marriage ends, or
Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

In recent years, the IRS has extended the beneficial tax-free transfer rule to ordinary-income assets, not just to capital-gain assets. For example, if you transfer business receivables or inventory to your ex-spouse in divorce, these types of ordinary-income assets also can be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Tax Implications of Tax-Free Transfers

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — where the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold, unless an exception applies.

For example, if you qualify for the principal residence gain exclusion break, you can exclude up to $250,000 of gain from your federal taxable income, or up to $500,000 of gain if you file a joint return with a future spouse.

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex continues to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex ultimately sells the shares, he or she (not you) will owe any resulting capital gains taxes.

Important: The person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. Always take taxes into account when negotiating your divorce agreement.

Splitting Up Qualified Retirement Plan Accounts

Many business owners set up qualified retirement plans, such as a profit-sharing, 401(k) or defined benefit pension plan. A percentage of the account balance or plan benefits may need to be transferred to your ex-spouse as part of the divorce property settlement.

To execute a transfer without owing taxes on amounts that go to your ex, you must use a qualified domestic relations order (QDRO). In effect, the QDRO causes your ex-spouse to become a co-beneficiary of your retirement account. The tax advantage comes from the fact that the QDRO also makes your ex responsible for the income taxes on retirement account money that he or she receives in the form of account withdrawals, a pension or an annuity. In other words, the QDRO causes the tax bill to follow the money.

The QDRO also allows your ex to withdraw his or her share of the retirement account balance and roll the money over tax-free into his or her own IRA (to the extent such withdrawals are permitted by your plan’s terms). The rollover strategy allows your ex to take over management of the money while continuing to postpone taxes until funds are withdrawn from the rollover IRA. When your ex withdraws funds from the rollover IRA, he or she (not you) will owe the related income taxes.

Warning: Without a QDRO, money that’s transferred from your qualified retirement plan account to your ex-spouse is treated as a taxable distribution to you. So, your ex gets a tax-free windfall at your expense. To add insult to injury, you may also owe the 10% early withdrawal penalty tax on money that goes to your ex before you’ve reached age 59½.

Splitting Up IRAs

You don’t need a QDRO to obtain an equitable tax outcome when you turn over IRA funds to your ex under your divorce agreement. This includes money held in SEP accounts, SIMPLE IRAs, traditional IRAs and Roth IRAs. QDROs are only relevant in the context of qualified retirement plans.

However, with IRAs, you still must be careful to avoid getting taxed on money that goes to your ex. The key to a tax-free transfer is to specifically order the transfer in your divorce or separation instrument. For this purpose, the tax code narrowly defines a divorce or separation instrument as a “decree of divorce or separate maintenance or a written instrument incident to such a decree.”

A transfer that meets this requirement can be arranged as a tax-free rollover of the applicable amount from your IRA into an IRA set up in your ex-spouse’s name. Your ex can then manage the money in the rollover IRA as he or she sees fit and can continue to defer taxes until withdrawals are taken. Any future income taxes are paid by your ex (not you).

Important: When it comes to IRA transfers, don’t jump the gun. If you voluntarily give your ex-spouse some IRA funds before it’s required under a divorce or separation instrument, it will be treated as a taxable distribution to you. If a taxable distribution occurs before you’re 59½, you also may be hit with the 10% early withdrawal penalty.

New Treatment for Alimony Payments

Allocating marital assets is just one part of settling your divorce. Deciding on maintenance payments is another critical component.

The Tax Cuts and Jobs Act (TCJA) permanently disallows deductions for alimony payments required by divorce agreements signed after December 31, 2018. Such payments are federal income-tax-free to the recipient. Under prior law, payers could deduct alimony, and recipients had to include alimony in their taxable income.

This recipient-favorable change should be taken into account when negotiating divorce agreements — and when drafting prenuptial agreements in the future.

Minimizing Taxes

Like any major life event, divorce can have major tax implications, especially if you own a private business interest. Your tax advisor can help you minimize the adverse tax consequences of settling your divorce under today’s laws.