How to Develop a Fund Balance Policy to Help Communicate With Governmental Stakeholders

Since the release of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, many governments have developed and adopted policies that communicate what management and those charged with governance believe to be the appropriate levels and a framework for use and maintenance of fund balance reserves. Formally adopted fund balance policies help to define and communicate the balance that should be maintained in specific funds, use and replenishment of funds, authority to make changes, reporting requirements, and priority of use.

The fund balance policy should begin with a statement of scope and purpose. The General Fund, as the primary operating fund of the government, will be included but the policy should also define which other funds are covered and which are exempted. A purpose statement frames the policy and lays out what the governing body believes to be the methodology for sound financial management practices as it applies to fund balance.

Fund balance definitions are readily available from a variety of sources, but a fund balance policy will generally contain either a glossary of terms as an attachment or include those definitions in the body of the policy. The policy should define what fund balance is, the various components of fund balance, any budgetary terms being used, and any necessary terms related to enterprise funds if they are included in the policy.

Appropriate levels of fund balance reserves are the focal point of most fund balance policies. Each government will need to determine what that level is for each fund included in the policy and how it is defined. Considerations will include contingencies, credit standing, risk tolerances, cash flow, and transparency. Fund balance levels are generally expressed as a percentage (or range of percentages) of annual operating expenditures, total expenditures (including capital outlay, debt service, and other financing uses), or as a percent of revenues, and this may vary from fund to fund in the policy. The Government Finance Officers Association (GFOA) recommends that general-purpose governments maintain a minimum level of unrestricted fund balance in the General Fund of at least two months’ operating revenues or expenditures. Maximum fund balance levels are more a matter of discretion and depend heavily on what the governing body’s plans and economic expectations are.

The policy will contain guidance on when, how, and if reserves can be used and how they are to be replenished if a given fund falls below the defined target range. Reserves could be used for capital projects, as a “rainy day” fund, or to invest in new or expanded governmental programs. Replenishment of the reserves would be discussed in terms of where the funds are to come from (whether that is through excess of revenues over expenditures or one-time revenue sources) and the time frame anticipated for this to take place.

Governmental funds report fund balances categorized per GASB 54 as non-spendable, restricted, committed, assigned, and unassigned. Non-spendable and restricted amounts generally are not considered to be part of the desired levels of reserves discussed above, which is generally defined as the total of committed, assigned and unassigned amounts in a fund. Committed funds are established, modified, or rescinded by formal action of the highest level of decision-making authority such as a City Council, Board of Commissioners, or a Board of Education. The fund balance policy often defines what that formal action is. The authority to assign fund balance for specific purposes is reserved to the governing body unless that is delegated, which can be done in the fund balance policy. This authority is often delegated to the Chief Financial Officer, City Manager, County Administrator, or Superintendent as applicable.

Enterprise funds may or may not be included in the fund balance policy. Fund equity in an enterprise fund is referred to as net position and is calculated on the full accrual basis of accounting (and therefore contains non-current items such as capital assets and debt) as opposed to the modified accrual basis used in governmental funds. Fund balance policies generally concentrate on currently available financial resources, which is more directly related to fund balance in a governmental fund. As a result, an enterprise fund generally would focus on net working capital (the difference between current assets and current liabilities) as the accepted way to measure liquidity and reserves. The GFOA recommends a target level of working capital in enterprise funds to be between 45 and 90 days of annual operating expenses.

GASB 54 requires governments to disclose in the annual financial statements what their policy is as to the order of use that would be applied to restricted or unrestricted (committed, assigned, unassigned) funds. In the absence of a formal fund balance policy, this is often “boilerplate” language suggested by the auditors or borrowed from another government’s statements. The fund balance policy would include a statement on when restricted or unrestricted funds would be used as well as the order in which unrestricted amounts are considered to be reduced when expenditures are incurred.

A simple internet search will yield a lot of resources available to help with the development of a fund balance policy, including many examples from other governments. Also, your Yeo & Yeo professionals are available to assist you as well. Please don’t hesitate to reach out if we can be of assistance.

 

 

 

 

 

Legitimate business expenses – including parking expenses – that have always been deductible may now be nondeductible. There has been an increasingly large uproar about these nondeductible expenses since the regulations were released in December 2018 (Notice 2018-99). The regulations were billed as describing the process for nonprofits, but when you read them, they apply to all entities. The IRS accepted public comments about the parking expense regulations through February 22, 2019. The hope is that this will be repealed, but until that happens, here are the current regulations.

The regulations apply to all entities, regardless of whether the entity is nonprofit or for-profit and regardless of whether it is paid or unpaid parking. All entities need to evaluate nondeductible parking expenses.

The regulations are straightforward when determining if the taxpayer pays a third party, such as a local parking garage, for employee parking spots. The payment from the taxpayer to the third party that is not included as taxable income on the employee’s W-2 is the amount of “nondeductible parking expenses.” Many people have tried to devise ways for the payments to be included in an employee’s W-2 as taxable wages to prevent the entity from being taxed. In general, that is a challenging task as qualified parking is a qualified transportation fringe and therefore non-taxable, up to certain dollar amounts. Talk to your payroll professional before making any changes.

The difficulty comes into play when a taxpayer owns or leases all or a portion of a parking facility or lot. The regulation is applicable anytime a lease gives the lessee access to the parking facilities as part of the lease, whether listed separately or not. Some calculations are required under the regulations. The order listed below is not the order in the regulations, but is a more efficient order in which to do the steps.

1. Determine if the entity has any employee reserved spots. If the answer is yes, the rest of the calculations must be done. However, the regulations do allow an entity to change their reserved employee parking until March 31, 2019, and treat the change as if it was made on January 1, 2018. For every employee reserved parking spot, a proportionate amount of the parking lot expenses will be allocated to the spot and will be considered nondeductible expenses.
   
   For example, there are ten reserved employee spots and 100 total spots. If the reserved employee spots are unreserved by March 31, 2019, then 0% (0/100) of the parking lot expenses will be nondeductible under this step. If on March 31, 2019, ten spots are still reserved, then 10% (10/100) of the total parking lot expenses will be nondeductible.
   
   
2. Determine the primary use of the remaining parking lot spots. Primary use means greater than 50%. On any regular business day, this is the percentage of those remaining parking spots used by the general public. Note that spots that are typically empty during business hours are considered used by the general public.
   
   For example, we have the same 100 spots from above. The entity chose not to change the reserved employee spots, so there are ten reserved employee spots. That means that there are 90 (100-10) remaining parking spots. If greater than 50% are for the general public (non-employees), the primary use test says the general public is the primary user. So if 46 ((90 spots x 50%) + 1) are used by the general public (i.e., non-employee spots), the primary purpose is the general public, and none of those 90 spots will have nondeductible expenses.
   
   
3. If you have no employee reserved spots (by March 31, 2019) and the primary use of the parking lot is for the general public, you are done. Otherwise, you have to calculate what the parking expenses are. This includes costs for repairs and maintenance of the parking lot, utilities related to the parking lot (such as lights), insurance for the parking lot, property taxes related to the parking lot, interest related to the parking lot, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses and security. It also includes rent or lease payments for the parking lot. If the lot is not separately listed in the rent or lease payment of a building, then the allocable portion of the building rent that relates to the parking lot, and anything else that might be a parking lot expense, is included. The one exception is that depreciation of the lot is not considered a parking expense. The IRS has not given any guidance as to a reasonable methodology to allocate these expenses between the parking lot and the non-parking lot, other than to say that the reasonable allocation methods are allowable. The implications of this guidance appear to be the most challenging portion of the entire calculation.
   
   
4. Next, determine the deductible expenses that relate to reserved non-employee spots such as visitor or customer spots. Going back to our previous example, assume that there are ten visitor reserved spots. We will also assume that the total parking expenses are $1,000. In the first step, we said 10% went to reserved employee parking, so $100 is nondeductible. We have 10 out of 90 remaining spots that are visitor reserved which is 11%. We have $900 to allocate among the remaining spots. 11% of $900 is $100, which is deductible.
   
   
5. Finally, take all the remaining unreserved spots and allocate costs based on typical usage 100c. So we have $800 and 80 spots remaining to be allocated. If employees typically used 45 spots, then 45/80 * $800 = $450 is nondeductible for unreserved spots. Add the nondeductible reserved spots of $100 plus the nondeductible unreserved spots of $450 to get total taxable (nondeductible) expenditures of $550.
   

The nondeductible expenses are then, essentially, increasing taxable income for the entity. Therefore, in our example, if the entity previously had taxable income, the $550 would increase that taxable income, resulting in $115.50 more of income tax paid at a corporate level using the 21% rate. Pass-through entities would instead pass on that $550 of additional taxable income to the individual owners who would pay tax at their individual tax rate. If instead, the entity had a taxable loss before the $550, the $550 would decrease the amount of the taxable loss, thus reducing the net operating loss carryforwards allowed for corporations and reducing the tax losses to the individual owners in pass-through entities.

We do not know what the revised guidance issued by the IRS will contain. If the first two steps of the process indicate your entity will have no nondeductible parking expenses, and there are no other nondeductible qualified transportation fringes, complete your tax filing as usual. If instead, this would result in nondeductible expenses, you will need to determine how to proceed.

If you can extend the tax return and wait to file, that may be the most efficient way to deal with this uncertainty. You could always file either with the nondeductible expenses or without the nondeductible expenses and amend the return at a later date if the IRS does not issue revised regulations to match the manner in which you have filed. However, that results in additional preparation fees for amended returns and, if no tax was initially paid, penalties and interest for the late filing.

Also consider whether changes to reserved employee parking should be made now or wait until closer to March 31, 2019, in case the regulations change.

This area of tax law may be a moving target, but these are the current regulations. Talk with your tax return preparer for further information.

 

As we get into the last quarter of the fiscal year, it’s time to start thinking ahead of all of the year-end tasks that await. In many cases, preparing the required Management’s Discussion and Analysis (MD&A) is sometimes more of an afterthought than something at the top of the list. The MD&A is to provide an objective and easily readable analysis of your district’s financial activities based on currently known facts, decisions, or conditions. The MD&A should always be presented before the basic financial statements as it is intended to provide a broad picture of how the year went, for an individual who doesn’t necessarily understand how to read the rest of the financial statements.

Although it’s called Management’s Discussion and Analysis and should be written from Management’s perspective, GASB has indicated a few required components that must be included to make sure useful information is presented. The main goal is to focus on the primary government (district-wide focus, excluding any potential component units) activities for the current year compared to the prior year and should be in a summary format, not a duplication of information presented in the basic financial statements.

At a minimum, the MD&A should describe the basic financial statements and how they relate to each other and what information each statement provides, and convey an understanding of why the measurements used in the statements differ.

Next, the following information is to be presented comparing the current year to the prior year, and would be expected to be presented in every MD&A, if they are applicable:

• Total assets, distinguished between capital and other assets
• Total liabilities, distinguished between long-term liabilities and other liabilities
• Total net assets distinguished between:
  • Amounts invested in capital assets, net of related debt
  • Restricted amounts
  • Unrestricted amounts
• Program revenues, by major source
• General revenues, by major source
• Total revenues
• Program expenses, at a minimum by function
• Total expenses
• Excess (deficiency) before contributions to endowments, special and extraordinary items and transfers
• Contributions
• Special and extraordinary items
• Transfers
• Change in net assets
• Ending net assets

Now, remember, the goal of the MD&A is for an individual not well-versed in reading a financial statement to understand how the year went. Once the above information is presented, the true value in the MD&A is the analysis that management can offer to explain the numbers presented. GASB indicates you should present an analysis of the following information in the MD&A:

• Has the overall financial position and results of operations improved or deteriorated this year compared to last year, and what were the reasons for the change? These reasons should include any known economic factors such as changes in tax, or employment bases that impacted the year.
• Have there been significant changes in fund balances or fund net assets or the availability of any fund resources for future use?
• What caused the variations between the original and final budget amounts as well as variances between the actual results and the final budget amendment for the General Fund?
• What sort of activity took place relating to capital assets and long-term debt activity? This should include any changes in credit ratings and debt limitations.

Finally, GASB indicates you should describe known situations that would have a significant effect on financial position or results of operations going forward.

Aside from those minimum requirements, any additional information that is deemed of value to the users can be added to the MD&A at management’s discretion. To avoid duplication of efforts, it might be useful to print a copy of last year’s MD&A, and as you are preparing your final budget amendments and closing out the year, jot down some of those factors that differed from the prior year, and those are the key takeaways you will want to present in your MD&A. Also, if there are significant variances from the prior year that your auditor inquires about, those would also be helpful to include to explain variances within the MD&A.

If you would like assistance in preparing your MD&A, a Yeo & Yeo professional would be happy to help you verify that you comply with the minimum requirements.

 

The Michigan School Business Officials Annual Conference will be held at the DeVos Place in Grand Rapids, April 30-May 2, 2019. Members of Yeo & Yeo’s Education Services Group will present four of the sessions. We welcome you to join us to gain new insights into managing your Michigan school.

Ethics and Fraud Prevention – Jennifer Watkins, CPA
Learn about the common ethical dilemmas that arise in schools and examine examples of actual fraud that have occurred at local school districts and what you can do to prevent it from happening in your district.

Federal Procedures Manual and Policy Writing – Kristi Krafft-Bellsky, CPA, and Taylor Diener, CPA
Learn policies and procedures for federal requirements and get examples. After taking this class no one should have write-ups in their audit for procedures.

IT Vendor Fraud – Tim Crosson Jr., CPA
Learn the issue/risks with IT vendor fraud and ways your school district can mitigate those risks through necessary controls.

Frequently Found Audit Issues – Jennifer Watkins, CPA
Learn common findings in audit compliance, internal controls and other deficiencies from both an auditor’s perspective, as well as from MDE.

We encourage you to attend. Register and learn more about the MSBO Annual Conference.

 

The new FASB ASU 2016-14, Presentation of Financial Statements of Non-Profit Entities, is now in effect for year-ends December 15, 2018, and later. One of the major changes with this standard is the change in classes of net assets to “without donor restrictions” and “with donor restrictions.” Not only does this standard change the look of the financial statements, but it also affects the organization’s policies and procedures. Nonprofits should ensure they have a net asset policy that reflects these updates.

The policy should document how contributions and grants are identified as having donor restrictions, how these items are recorded, how the restrictions are tracked, and how expenses are applied. The policy should also use the new terminology rather than the old unrestricted, temporarily restricted, and permanently restricted classifications. Keep in mind, the organization still needs to be able to segregate the donor-restricted items between those that are permanent and temporary.

Finally, the policy should address how the organization identifies restrictions that are received and met in the same fiscal year, whether they are recorded through “with donor restrictions” or “without donor restrictions.”

It’s also important to keep in mind any other policies that include net asset classification terminology so that these can be updated as well for the new standard.

Recent changes to federal tax law and accounting rules could affect whether you decide to lease or buy equipment or other fixed assets. Although there’s no universal “right” choice, many businesses that formerly leased assets are now deciding to buy them.

Pros and cons of leasing

From a cash flow perspective, leasing can be more attractive than buying. And leasing does provide some tax benefits: Lease payments generally are tax deductible as “ordinary and necessary” business expenses. (Annual deduction limits may apply.)

Leasing used to be advantageous from a financial reporting standpoint. But new accounting rules that bring leases to the lessee’s balance sheet go into effect in 2020 for calendar-year private companies. So, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans.

Leasing also has some potential drawbacks. Over the long run, leasing an asset may cost you more than buying it, and leasing doesn’t provide any buildup of equity. What’s more, you’re generally locked in for the entire lease term. So, you’re obligated to keep making lease payments even if you stop using the equipment. If the lease allows you to opt out before the term expires, you may have to pay an early-termination fee.

Pros and cons of buying

Historically, the primary advantage of buying over leasing has been that you’re free to use the assets as you see fit. But an advantage that has now come to the forefront is that Section 179 expensing and first-year bonus depreciation can provide big tax savings in the first year an asset is placed in service.

These two tax breaks were dramatically enhanced by the Tax Cuts and Jobs Act (TCJA) — enough so that you may be convinced to buy assets that your business might have leased in the past. Many businesses will be able to write off the full cost of most equipment in the year it’s purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules.

The primary downside of buying fixed assets is that you’re generally required to pay the full cost upfront or in installments, although the Sec. 179 and bonus depreciation tax benefits are still available for property that’s financed. If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating. If you decide to finance fixed asset purchases, be aware that the TCJA limits interest expense deductions (for businesses with more than $25 million in average annual gross receipts) to 30% of adjusted taxable income.

Decision time

When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, including tax implications. We can help you determine the approach that best suits your circumstances.

© 2019

 

Shakespeare’s words don’t apply just to Julius Caesar; they also apply to calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes. Why? The Ides of March, more commonly known as March 15, is the federal income tax filing deadline for these “pass-through” entities.

Not-so-ancient history

Until the 2016 tax year, the filing deadline for partnerships was the same as that for individual taxpayers: April 15 (or shortly thereafter if April 15 fell on a weekend or holiday). One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April filing deadline. After all, partnership (and S corporation) income passes through to the owners. The earlier date allows owners to use the information contained in the pass-through entity forms to file their personal returns.

For partnerships with fiscal year ends, tax returns are now due the 15th day of the third month after the close of the tax year. The same deadline applies to fiscal-year S corporations. Under prior law, returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.

Avoiding a tragedy

If you haven’t filed your calendar-year partnership or S corporation return yet and are worried about having sufficient time to complete it, you can avoid the tragedy of a late return by filing for an extension. Under the current law, the maximum extension for calendar-year partnerships is six months (until September 16, 2019, for 2018 returns). This is up from five months under the old law. So the extension deadline is the same — only the length of the extension has changed. The extension deadline for calendar-year S corporations also is September 16, 2019, for 2018 returns.

Whether you’ll be filing a partnership or an S corporation return, you must file for the extension by March 15 if it’s a calendar-year entity.

Extending the drama

Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now.

But to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There probably won’t be any tax liability from the partnership or S corporation return. But, if filing for an extension for the entity return causes you to also have to file an extension for your personal return, it could cause you to owe interest and penalties in relation to your personal return.

We can help you file your tax returns on a timely basis or determine whether filing for an extension is appropriate. Contact us today.

© 2019

Wednesday, March 13, 2019
1:00 PM – 2:30 PM EST

Webinar has passed, visit our Events page for future webinars.

View a recording of the Webinar

In January 2017, the Governmental Accounting Standards Board issued Statement No. 84 Fiduciary Activities (GASB 84). For school districts, the Statement is effective for fiscal years ending in 2020. GASB 84 defines and clarifies fiduciary activities and establishes criteria for identifying those activities with a focus on whether a government is controlling the assets and the beneficiaries with whom the relationship exists.

In this webinar, we will review the technical accounting changes in GASB 84 and show examples of how to execute the new standard in your school district. Then a Q&A will provide answers to common questions.

Webinar highlights include:

1. Review GASB 84 and the technical pieces that are most important
2. Walk through the implementation of GASB 84 (how to apply it at your district)
3. Provide answers to common questions: What fund and how many funds to use, how to budget, and more.
4. Show examples of activities that qualify as either Fiduciary or Governmental
5. Take individual examples of student activities and walk through the implementation to determine what fund type

This webinar qualifies for CPE credit.

• CPE Credit: 1.8 CPE credit in the Accounting (Governmental) field of study may be awarded upon verification of participant attendance during live broadcast.
• Program Level: Intermediate
• Prerequisites: GASB financial statement knowledge
• Advance Preparation: None
• Business Managers, Assistant Superintendents of Business/Operations, CFO, Finance Directors, and others in the finance arena for school districts 
• Refund Policy: There is no fee associated with this webinar.
• Yeo & Yeo CPE FAQ

PRESENTER:
Jennifer Watkins, CPA, Principal
Education Services Group  
VIEW PROFILE

 

While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers. Here are five deductions you may see shrink or disappear when you file your 2018 income tax return:

1. State and local tax deduction. For 2018 through 2025, your total itemized deduction for all state and local taxes combined — including property tax — is limited to $10,000 ($5,000 if you’re married and filing separately). You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.

2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. For 2018 through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with some limited exceptions.

3. Home equity debt interest deduction. Before the TCJA, an itemized deduction could be claimed for interest on up to $100,000 of home equity debt used for any purpose, such as to pay off credit cards (for which interest isn’t deductible). The TCJA effectively limits the home equity interest deduction for 2018 through 2025 to debt that would qualify for the home mortgage interest deduction.

4. Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018 through 2025. If you’re an employee and work from home, this includes the home office deduction. (Business owners and the self-employed may still be able to claim a home office deduction against their business or self-employment income.)

5. Personal casualty and theft loss deduction. For 2018 through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.

Be aware that additional rules and limits apply to many of these deductions. Also keep in mind that the TCJA nearly doubles the standard deduction. The combination of a much larger standard deduction and the reduction or elimination of many itemized deductions means that, even if itemizing has typically benefited you in the past, you might be better off taking the standard deduction when you file your 2018 return. Please contact us with any questions you have.

© 2019

 

Nonprofits have strict compliance rules for what they can – or, more correctly, cannot – do related to lobbying and political expenditures. Although these terms seem to complement one another, they are in fact distinct from each other, and the layman’s understanding of the terms is not the same as the IRS’s definitions in most cases.

Worse yet, having a wrong understanding of these terms can cause a nonprofit to be subject to more income tax than they should be, or to subject themselves to an IRS audit. Therefore, it is imperative to understand the differences in these activities, and how they impact various tax-exempt designations, to eliminate confusion and ensure your organization complies with the intentions of the IRS.

Read Yeo & Yeo’s eBook, Lobbying and Political Expenditures for Nonprofits to learn more:

• What is lobbying?
• Considerations in making a 501(h) election
• Political expenditures: 501(c)(3) vs. Non-501(c)(3)

 

 

Litigation Support is the process of providing consultation and support services to attorneys regarding current and pending cases. Below I have outlined six examples of how CPAs can bring value to attorneys when they are assisting their clients.

1.Lost Profits – If a company experiences a loss such as a fire or other damage, and is then out of business (or a portion of their business) for some time, interruption needs to be valued. Insurance companies can be very particular when determining a calculation of lost profits. An experienced CPA can prepare a fully supported calculation of lost profits that can be compared with the insurance companies’ calculation. The additional calculation of value in Litigation Support could make a case for a substantial increase in the insurance proceeds, which ultimately would benefit the attorney’s client.

2.Breach of Contract – If a former employee fails to comply with a company’s non-solicitation agreement and begins convincing clients to move their business to his/her new employer, damages must be calculated. Knowledgeable CPAs can calculate the damages associated with the breach and work with attorneys to successfully sue the former employee and their new employer to pay for the damages caused.

3.Wrongful Death – In the unfortunate case of accidents in the workplace that result in death, CPAs can help. They can represent insurance companies, perform calculations about the economic impact of the accident and ultimately help family members receive reparations during this difficult time.

4.Divorce Engagements / Family Law – When assisting attorneys with divorce cases, a CPA’s involvement can extend far beyond preparing a valuation of the family business. CPAs can work with clients to identify marital assets and allocate the assets and liabilities among the parties. With the help of Forensics Professionals, CPAs can assist in finding hidden assets, as well. CPAs can also work with either spouse to invest their money appropriately and ensure that it doesn’t run out in the future.

5.Employee Theft – Fraud and embezzlement cases continue to increase every year. Experienced CPAs can navigate through the multitude of papers and reports to provide a detailed, credible analysis of the amount of loss. They can also provide internal control studies to help reduce the possibility of future employee theft.

6.Tax Effect – With each of the above instances, and whenever damages are considered or money changes hands, there are tax consequences for both sides. CPAs can work with attorneys in drafting a settlement with the best possible tax outcome for their clients.

The competency, experience and qualifications of the CPA are extremely important in Litigation Support engagements. Juries and judges have a high expectation of CPAs and an even higher expectation of specialists. Be sure to choose a CPA that is accustomed to Litigation Support and cross-examination.

When Yeo & Yeo’s Litigation Support Services Group is referred to an attorney’s client for a specific reason, we often find that, because of our unique qualifications and experience, we can provide assistance well beyond the standard calculations of damages. A CPA’s involvement throughout your case can include:

• Assisting in preparing interrogatories and request for production of documents
• Researching and analyzing financial issues
• Understanding the tax effects of various outcomes
• Assisting in preparation for depositions and trial
• Providing expert witness testimony

The value of a CPA in litigation support can be invaluable if their expertise is applied appropriately. The examples above help portray a small amount of the breadth and depth of what our Litigation Support Services Group can offer you in order to secure the best possible outcome for your clients. Make Yeo & Yeo your first call when you have a new litigation support case – we can help and guide you through all of the opportunities and resources we have available to help you and your client be successful.

 

The Michigan Department of Licensing and Regulatory Affairs (LARA) has released posters for the Paid Medical Leave Act (PMLA) and Workforce Opportunity Wage Act which go into effect March 29, 2019. LARA also issued Frequently Asked Questions (FAQs) about the PMLA.

In December, Governor Rick Snyder signed into law the Paid Medical Leave Act, formerly known as “Earned Sick Time Act,” and Public Act 368 of 2018 amending the Improved Workforce Opportunity Wage Act, both of which affect most Michigan businesses.

The Workforce Opportunity Wage Act raises the minimum wage to $9.45 effective March 29, 2019. The minimum wage rate will increase every January 1 thereafter until it reaches $12.05 in 2030. The required poster summarizes the general requirements of the Act. Employers are required to display workplace posters in a conspicuous and accessible place. Visit Michigan.gov to download and print the poster, or directly access the poster here.

LARA also released FAQs about the PMLA, also located on the Michigan.gov website. Read the FAQs here.

For detailed highlights of the PMLA and minimum wage, please read Yeo & Yeo’s prior blog post in December here.

Yeo & Yeo will continue to keep you informed should additional information be released about PMLA. Please contact Yeo & Yeo if you have questions or need assistance with implementing these laws into your payroll process.

 

In January 2017, the Governmental Accounting Standards Board issued Statement No. 84 Fiduciary Activities (GASB 84). For school districts, the Statement is effective for fiscal years ending in 2020. GASB 84 defines and clarifies fiduciary activities and establishes criteria for identifying those activities with a focus on whether a government is controlling the assets and the beneficiaries with whom the relationship exists.

In this webinar, we will review the technical accounting changes in GASB 84 and show examples of how to execute the new standard in your school district. Then a Q&A will provide answers to common questions.

The webinar has concluded.

When you file your 2018 income tax return, you’ll likely find that some big tax law changes affect you — besides the much-discussed tax rate cuts and reduced itemized deductions. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) makes significant changes to personal exemptions, standard deductions and the child credit. The degree to which these changes will affect you depends on whether you have dependents and, if so, how many. It also depends on whether you typically itemize deductions.

1. No more personal exemptions

For 2017, taxpayers could claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions could really add up.

For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates and other changes, might mitigate this increase.

2. Nearly doubled standard deduction

Taxpayers can choose to itemize certain deductions or take the standard deduction based on their filing status. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

For 2017, the standard deductions were $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. For 2019, they’re $12,200, $18,350 and $24,400, respectively. (These amounts will continue to be adjusted for inflation annually through 2025.)

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.

3. Enhanced child credit

Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.

The TCJA also makes the child credit available to more families. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.

The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.

Maximize your tax savings

These are just some of the TCJA changes that may affect you when you file your 2018 tax return and for the next several years. We can help ensure you claim all of the breaks available to you on your 2018 return and implement TCJA-smart tax-saving strategies for 2019.

© 2019

 

Many businesses will pay less federal income taxes in 2018 and beyond, thanks to the Tax Cuts and Jobs Act (TCJA). And some will spend their tax savings on merging with or acquiring another business. Before you jump on the M&A bandwagon, it’s important to understand how your transaction will be taxed under current tax law.

Stock vs. Asset Purchase

From a tax perspective, a deal can be structured in two basic ways:

1. Stock (or ownership interest) purchase. A buyer can directly purchase the seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes. This is commonly referred to as a “stock sale,” although some sales may involve partner or member units.

The now-permanent flat 21% corporate federal income tax rate under the TCJA makes buying the stock of a C corporation somewhat more attractive for two reasons. First, the corporation will pay less tax and, therefore, generate more after-tax income. Second, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold. These considerations may justify a higher purchase price if the deal is structured as a stock purchase.

In theory, the TCJA’s reduced individual federal tax rates may also justify higher purchase prices for ownership interests in S corporations, partnerships and LLCs treated as partnerships for tax purposes. Why? The passed-through income from these entities also will be taxed at lower rates on the buyer’s personal tax returns. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and they could be eliminated even earlier, depending on future changes enacted by Congress.

2. Asset purchase. A buyer can also purchase the assets of the business. This may be the case if the buyer cherry-picks specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC (SMLLC) that’s treated as a sole proprietorship for tax purposes.

Under federal income tax rules, the existence of a sole proprietorship or an SMLLC treated as a sole proprietorship is ignored. Rather, the seller, as an individual taxpayer, is considered to directly own all the business assets. So, there’s no ownership interest to buy.

Important: In certain circumstances, a corporate stock purchase can be treated as an asset purchase by making a Section 338 election. Ask your tax advisor for details.

Divergent Objectives

Business buyers and sellers typically have differing financial and tax objectives. While the TCJA doesn’t change these basic objectives, it may change how best to achieve them.

Buyers typically prefer asset purchases. A buyer’s main objective is usually to generate sufficient cash flow from the newly acquired business to service any acquisition-related debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

For legal reasons, buyers usually prefer to purchase business assets rather than ownership interests. A straight asset purchase transaction generally protects a buyer from exposure to undisclosed, unknown and contingent liabilities.

In contrast, when an acquisition is structured as the purchase of an ownership interest, the business-related liabilities generally transfer to the buyer — even if they were unknown at closing.

Buyers also typically prefer asset purchases for tax reasons. That’s because a buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price.

Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets. Expanded first-year depreciation deductions under the TCJA make asset purchases even more attractive, possibly warranting higher prices if the deal is structured that way. (See “3 Favorable TCJA Changes for Businesses” at right.)

In contrast, when corporate stock is purchased, the tax basis of the corporation’s assets generally can’t be stepped up unless the transaction is treated as an asset purchase by making a Sec. 338 election.

Important: When an ownership interest in a partnership or LLC treated as a partnership for tax purposes is purchased, the buyer may be able to step up the basis of his or her share of the assets. Consult your tax advisor for details.

Sellers generally prefer stock sales. On the other side of the negotiating table, a seller has two main nontax objectives:

• Safeguarding against business-related liabilities after the sale, and
• Collecting the full amount of the sales price if the seller provides financing.

A seller may provide financing through an installment sale or an earnout provision (where a portion of the purchase price is paid over time or paid only if the business achieves specific financial benchmarks in the future).

Of course, the seller’s other main objective is minimizing the tax hit from the sale. That can usually be achieved by selling his or her ownership interest in the business (corporate stock or partnership or LLC interest) as opposed to selling the business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Important: Some, or all, of the gain from selling a partnership interest (including an interest in an LLC treated as a partnership for tax purposes) may be treated as higher-taxed ordinary income. Consult your tax advisor for details.

Balancing Act

When negotiating a sale, the buyer and seller need to give and take, depending on their top priorities. For example, a buyer may want to structure the deal as an asset purchase. Agreeing on a higher purchase price, combined with an earnout provision, may convince the seller to agree to an asset sale, which comes with a higher tax bill than a stock sale.

Alternatively, a seller might insist on a stock sale that would result in lower-taxed long-term capital gain. In exchange, the buyer might agree to pay a lower purchase price to partially compensate for the inability to step up the basis of the corporation’s assets. And the seller might agree to indemnify the buyer against certain specified contingent liabilities (such as underpaid corporate income taxes in tax years that could still be audited by the IRS).

Purchase Price Allocations

Another bargaining chip in asset purchase deals — including corporate stock sales that are treated as asset sales under a Sec. 338 election — is how the purchase price is allocated to specific assets. The amount allocated to each asset becomes the buyer’s initial tax basis in the asset for depreciation or amortization purposes. It also serves as the sales price for the seller’s taxable gain or loss on each asset.

In general, buyers generally want to allocate more of the purchase price to:

• Assets that will generate higher-taxed ordinary income when converted into cash, such as purchased receivables and inventory, and
• Assets that can be depreciated in the first year under the expanded bonus depreciation and Sec. 179 deduction breaks.

Buyers prefer to allocate less to assets that must be amortized or depreciated over relatively long periods (such as buildings and intangibles) and assets that must be permanently capitalized for tax purposes (such as land).

On the flip side, sellers want to allocate more of the purchase price to assets that will generate low-taxed long-term capital gains, such as intangibles, buildings and land. Tax-smart negotiations can result in allocations that satisfy both sides.

Need Help?

Buying or selling a business may be the most important transaction of your lifetime, so it’s critical to seek professional tax advice as you negotiate the deal. After the deal is done, it may be too late to get the best tax results.

Every nonprofit strives to advance its mission. The board of directors is responsible for guiding the organization in its pursuit of that mission. It is the board’s responsibility to ensure that all assets and activities are used to further the mission, that conflicts of interest are recognized and disclosed, and that the organization obeys laws, regulations, and its bylaws. The board must ensure that decisions are in the best interest of the organization and accomplishment of its exempt purpose.

In adherence to these responsibilities, the board provides a foundation for the organization by adopting formal policies. Policies not only provide guidance, but they protect the organization from legal challenges, provide compliance with regulations and funding agencies, and set the tone for ethical and transparent conduct by employees. Policies also allow organizations to operate consistently when similar or recurring situations arise or when turnover in management and governance occurs.

If your nonprofit organization has been operating for some time, you likely have policies in place already. If you don’t have an inventory of your policies, now is a good time to create one. Start with identifying which policies you currently have in place. Every policy should be reviewed and approved by the board, so begin with reading previous board minutes. Also, the management team or department heads likely know of policies that affect them directly. Once you have identified what you have in place already, group them together in one location, electronically or on paper, and create an index, assigning numbers to each policy. Once you have the inventory of current policies, determine which additional policies are needed.

Policies to consider:

• Code of Ethics (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-code-of-ethics) 
• Conflict of Interest Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-conflict-of-interest-policy) 
• Credit Card Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-credit-card-policy) 
• Delegation of Authority Policy
• Designation of Funds Policy
• Document Retention Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-document-retention-policy) 
• Gift Acceptance Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-gift-acceptance-policy) 
• Information Security Policy 
• Investment Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-investment-policy) 
• Liquidity Policy (https://www.yeoandyeo.com/blog/start-creating-a-liquidity-policy-now) 
• Operating Reserve Policy 
• Restricted Net Assets Policy 
• Social Media Policy
• Travel and Expense Reimbursement Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-travel-and-expense-reimbursement-policy) 
• Whistleblower Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-whistleblower-policy)

In determining which policies your organization needs to implement, don’t assume that your organization needs a written policy for everything; customize this list to adhere to your organization’s specific needs. Also consider the enforceability of the policy, as well as the consequences of not adopting a policy. Be sure to use a template or sample policy, making appropriate changes for your organization.

As you identify the policies your organization needs to implement, consider the process for implementation. It may seem overwhelming, but use a system for addressing these policies. Determine who introduces a policy and who must review new policies before they go to the board. If your board meets once a month, you may consider reviewing and adopting a policy every month or every other month until you have each of them in place. One or two people should be assigned to manage the policy process.

A significant part of the policy process is communication. Policies will be effective only if the board and staff are knowledgeable about the policies and their significance. This is done through board orientation and new hire training, as well as ongoing meetings and trainings. Not only do your board and staff need to know what the policy is, but they also need to know who is responsible for enforcing it, who is monitoring compliance, and what the consequences are for noncompliance.

Forms should be developed where necessary. For example, your conflict of interest policy may stipulate that board members will disclose, at least annually, any conflicts of interest. To facilitate this disclosure, you may create a form that captures the appropriate information for board members to complete and return at your annual meeting.

By using a systematic approach, the board can provide the guidance and oversight needed to steer the organization in the pursuit of its mission. Formal policies provide a solid foundation for ensuring decisions are in the best interest of the organization, allowing board members to uphold their responsibilities and obligations to the organization. Effective board policies produce effective nonprofit boards.

An organization’s code of ethics establishes the integrity and ethical values that provide a framework for decision-making. It guides behavior to be in support of the mission, for staff, board members, volunteers and others who work with the organization. The code of ethics is also an important step in creating a control environment where internal controls throughout the organization are effectively carried out.

Key elements to include in a code of ethics are: responsibilities of the board; expectation of personal and professional integrity; commitment to prudent financial management; requirement for compliance with applicable laws and regulations; and declaration of inclusiveness and diversity. As your organization establishes a code of ethics, it’s also important to consider how deviations will be identified and remedied in a timely and consistent manner.

Once established, the code of ethics will promote appropriate and consistent decision-making and behavior that is in alignment with your organization’s mission. Set your organization up for success by establishing the right tone at the top.

The new FASB lease standard (ASC Topic 842, Leases) is not here yet, but it is not too early to think about how this will impact your organization, especially if it is subject to debt covenants. Throughout 2019, we will highlight some of the nuances and concepts to begin preparing for in relation to this new standard.

The most talked-about impact of Topic 842 is the fact that lessees following U.S. GAAP will now recognize assets and liabilities from operating leases. The new criteria intends to provide financial statement users with a more complete picture of the extent of an organization’s right-of-use assets, and the impact on its future cash flows. Under current U.S. GAAP, assets and liabilities were not recognized for operating leases, only for financing leases. Therefore, this new standard is poised to significantly impact the balance sheet.

As you begin to consider this change, ask yourself, “What are my organization’s operating leases?” and begin keeping a log of these. The standard defines a lease as a “contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” Under the new standard, organizations will recognize a right-of-use asset and a lease liability for nearly all of their leases associated with an asset (i.e., property and equipment). There are exceptions for leases with terms of less than 12 months and where there is not a reasonably certain expectation of renewal. For these shorter-term leases, organizations can elect not to recognize a lease asset and liability. Additionally, leases for services, or service contracts, are generally not required to be recognized as assets and liabilities.

The accounting for operating leases generally will be straightforward. Organizations will recognize a right-of-use asset and a lease liability on the balance sheet. Initially, both will be measured at the present value of the lease payments. On the income statement, organizations will recognize a single lease expense, which will include the charge-off of both the discount on the lease liability and amortization of the right-of-use asset. The lease liability will be amortized using the effective interest rate method, while the right-of-use asset will be amortized on the straight-line basis.

In summary, the key takeaways from this article are:

• Operating leases with terms over 12 months will now be recognized on the balance sheet as assets and liabilities.
• It’s not too early to start thinking about how this will impact your financial statements.
  • Start a log of your organization’s current leases.
  • Determine if you have any debt covenants that could be impacted by changes to the balance sheet.
  • Consider changes to policies, procedures and internal controls related to the new standard.

As a reminder, implementation of this new standard becomes effective for non-public companies for fiscal years ending December 15, 2020, and after. Stay tuned as we will continue to highlight the nuances and impacts of this new standard as we move closer to the implementation date.

 

 

 

 

 

Qualifying Small Employer Health Reimbursement Accounts FAQ

On December 13, 2016, President Obama signed the 21st Century Cures Act (Cures Act) into law. The Cures Act provides a method for certain small employers to reimburse individual health coverage premiums up to a dollar limit through HRAs called “Qualified Small Employer Health Reimbursement Arrangements” (QSE HRAs). This provision will go into effect on January 1, 2017.

Public Act 202 of 2017 requires governments to prepare additional reporting for pension and other post-employment benefits (OPEB) plans using Form 5572. By this time, every government that has had this reporting requirement has filed this form, and the potential waivers or corrective action plans to address underfunded status.

• For primary governments, underfunded status for a pension plan is defined as having plan assets that are not at least 60 percent of the total liability, and the actuarially determined contribution is greater than 10 percent of total governmental fund revenues.
• For primary governments, underfunded status for an OPEB plan is defined as having plan assets that are not at least 40 percent of the total liability, and the actuarially determined contribution is greater than 12 percent of total governmental fund revenues.

The Michigan Department of Treasury (Treasury) issued a memo on September 25, 2018, regarding the application of uniform assumptions. For reporting on Form 5572, Treasury requires uniform assumptions to be included for fiscal years ending 2019, if the audited financial statements were based on an actuarial valuation issued after December 31, 2018. In all other cases, reporting of pension and OPEB liabilities under the uniform assumptions is required for fiscal years ending no later than 2020. Refer to the full memo found on the State of Michigan’s website.

Treasury will use the uniform assumptions to increase comparability of pension and OPEB plans from one municipality to the next. Treasury recommends that all actuarial valuations issued after December 31, 2018, include the provisions of the uniform assumptions. It is important to consider whether using the uniform assumptions for the measurement of your municipality’s pension or OPEB liabilities are appropriate under GAAP, or whether the liabilities should be calculated using two sets of assumptions. If using two sets of assumptions is appropriate, both amounts will be reported to Treasury on Form 5572. If your municipality uses two sets of assumptions, the calculated liabilities may vary greatly.

The uniform assumptions were developed by Treasury with the help of an independent actuary firm as well as numerous stakeholders that represented local governments, employees and retirees, actuaries, and accounting professionals. The uniform assumptions are not radically different than what most local governments are currently using in their assumptions to calculate pension and OPEB liabilities; however, the assumptions can vary greatly from one government to another based on the individual government’s experience.

Treasury has issued the following uniform assumptions for fiscal year 2019:

Assumption	Uniform Assumption
Investment Rate of Return	Maximum of 7.00%
Discount Rate	Blended discount rate calculated using GASB Statements No. 68 and No. 75 methodology. For periods in which projected plan assets are Sufficient to make Projected Benefit Payments: Maximum of 7.00% For periods in which projected plan assets are Not Sufficient to make Projected Benefit Payments: 3.00%
Salary Increase	A minimum of 3.50% or based on an actuarial experience study conducted within the last five years.
Mortality Table	A version of the RP-2014 Mortality Table or based on an actuarial experience study conducted within the last five years.
Healthcare Inflation (for Medical and Drug)	Non-Medicare: Initial rate of 8.50% decreasing .25% per year to a 4.50% long-term rate Medicare: Initial rate of 7.00% decreasing .25% per year to a 4.50% long-term rate
Amortization of the Unfunded Actuarial Accrued Liability	Local units must amortize the Unfunded Actuarial Accrued Liability (UAAL) over a maximum closed period of: Pension Systems: 20 years Retiree Healthcare Systems: 30 years Closed plans must use a level dollar amortization method.  Open plans may use a level dollar or percent of pay amortization method.

The CPAs at Yeo & Yeo recommend that municipalities work with their actuaries to ensure compliance with Public Act 202 of 2017 and make certain that appropriate assumptions are applied when developing pension and OPEB liabilities.