Maximize the QBI Deduction Before it’s Gone

The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, it’s scheduled to disappear. So if you’re eligible, you want to make the most of the deduction while it’s still on the books because it can potentially be a big tax saver.

Deduction basics

The QBI deduction is written off at the owner level. It can be up to 20% of:

QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, plus
QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation.

How is QBI defined? It’s qualified income and gains from an eligible business, reduced by related deductions. QBI is reduced by: 1) deductible contributions to a self-employed retirement plan, 2) the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums.

Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals.

Limitations

At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively.

If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.

The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business.

Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).

Unfavorable rules for certain businesses

For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB.

Other factors

Other rules apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately.

There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result.

Use it or potentially lose it

The QBI deduction is scheduled to disappear after 2025. Congress could extend it, but don’t count on it. So, maximizing the deduction for 2024 and 2025 is a worthy goal. We can help.

Occupational fraud is a crime generally committed by employees against their employers. Ironically, employees also are most likely to notice or suspect occupational fraud schemes conducted by their coworkers or managers. Whether they report through an anonymous tipline or directly to management or HR, rank-and-file workers often are the first to raise the alarm.
If an employee alleges that someone has committed theft or fraud, or simply exhibits suspicious behavior, it’s your responsibility is to take the charges seriously and investigate them. Here’s how.

Preliminary digging

If you receive a fraud tip, you’ll need to assess its validity by conducting preliminary interviews — even if you plan to eventually turn the investigation over to legal and fraud professionals. To help avoid unnecessary legal complications, keep details of any allegation private, particularly the identities of the accused and the accuser.

Assure workers involved that the investigation will be held in strict confidence and inform them that they can’t discuss any part of the process with anyone outside it. Remind managers that they need to have all conversations behind closed doors, store all meeting notes securely and speak only to those people who are necessary to the complaint investigation.

One-on-one interviews

When you sit down with the accuser, the accused or potential witnesses, start with an opening statement that describes what’s being investigated and then ask open-ended questions that encourage employees to say more than “yes” or “no.” Ask all interviewees the same questions so that you can compare answers, identify patterns and uncover discrepancies. Also, have a witness present to verify what was said and what occurred during the interviews.

Keep an open mind while gathering facts. Just because an employee has a reputation around the office as a “troublemaker” or “crank,” doesn’t mean that person is lying or guilty of an impropriety. If an interview seems to veer into dangerous territory — for example, an accused individual claims harassment or asks about legal rights — contact your attorney immediately. Also consider allowing a third-party investigator, such as a fraud expert, to handle future interviews. This can help preserve impartiality and show all parties that the investigation is being taken seriously.

Tying up loose ends

You’ll want to keep detailed notes on all the steps of your investigation. Include the dates and times of workspace searches, computer forensic activity and conversations. After every interview or action taken, review your notes to ensure they capture all relevant information.

Even if your investigation turns up no evidence of misconduct or criminal behavior, you’ll need to follow up and close the loop with those involved. When complaints are found to have merit, take appropriate action as quickly as possible. You may be able to handle some minor issues with in-house personnel. But consult legal and financial advisors — and possibly law enforcement — if a crime seems to have occurred or you detect financial losses.

Document your policy

So that workers know what to expect if they make a complaint — of any kind — detail the resolution process in your employee handbook. Just make sure your managers understand and adhere to anything you put in writing. Contact us if you need help investigating fraud.

Auditor independence is the cornerstone of the accounting profession. Auditors’ commitment to follow the standards set forth by the American Institute of Certified Public Accountants (AICPA), the Securities and Exchange Commission (SEC), and the International Auditing and Assurance Standards Board (IAASB) ensures stakeholders can trust that audited financial statements present an accurate picture of the performance and condition of companies.

Close-up on AICPA standards

Auditors of U.S. publicly traded and privately held companies must be members of the AICPA. According to AICPA standards, “Accountants in public practice should be independent in fact and appearance when providing auditing and other attestation services.” Specifically, the Professional Ethics Division of the AICPA defines independence as, “The state of mind that permits a member to perform an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.”

In short, auditors can’t provide any services for an audit client that would normally fall to the company’s management to complete. Auditors also can’t engage in any relationships with their clients that would:

Compromise their objectivity,
Require them to audit their own work, or
Result in self-dealing, a conflict of interest or advocacy.

In addition to maintaining their independence, all AICPA members must comply with a code of professional conduct. This code requires every member of the AICPA to act with integrity, objectivity, due care and competence, and maintain client confidentiality.

Benefits for your organization

Although auditor independence might seem relevant only to the accounting profession, it matters to the entire business community. When auditors adhere to the profession’s independence and ethics standards, they enhance the reliability of the financial reports they audit. The production of audited financial statements helps companies establish and maintain stakeholder confidence. This can help companies attract investors, secure bank loans and demonstrate financial stability to other stakeholders, including employees, suppliers and regulators.

Auditor independence is a critical issue for public and private companies alike. Contact us to discuss any questions you may have regarding independence.

How long should you keep business records?

The retention of tax and business records depends on the nature of the information and how it is used. This schedule has been developed as a guide only. Various regulatory, statutory and industry practices may supersede these general recommendations and alter the holding period. Consult legal counsel before destroying records if you are uncertain and before implementing any business record retention policy. This schedule applies to both paper and electronic resources.

Download and read the PDF

The updated Form W-9, released in March 2024, plays a crucial role in tax compliance and reporting by serving as a fundamental document for individuals and entities required to file information returns with the IRS. This form is essential for gathering precise taxpayer information, especially for reporting payments to contractors or vendors through Form 1099 at the end of the year. Ensuring accurate completion of the Form W-9 is vital to avoid potential complications. The recent updates to the Form W-9 aim to enhance clarity and accuracy in taxpayer information reporting.

View Updated Form W-9

Notable changes include:

Clarification of Taxpayer Identification Number (TIN) Requirement: The revised form stresses the importance of providing a correct TIN to prevent backup withholding on payments, emphasizing the significance of accurate taxpayer information.
Addition of Legal Entity Box: A new box has been introduced to specify the type of legal entity, such as sole proprietorship, corporation, partnership, or LLC. This addition simplifies the identification process, ensuring precise categorization of taxpayer entities.
Removal of Exempt Payee Code: The updated form no longer features an exempt payee code box, streamlining the form and eliminating potential confusion for taxpayers.
Updated Instructions: The accompanying instructions have been revamped to offer more explicit guidance on accurately completing the form. This ensures taxpayers have clear directions to follow, reducing errors in the submission process.

By acquainting themselves with the modifications in the new Form W-9, taxpayers can effectively navigate its requirements, guaranteeing the correct completion and submission of this critical document for tax reporting purposes. Contact your Yeo & Yeo advisor if you have questions.

Michigan has recently made significant updates to its antidiscrimination law, expanding protections for employees and applicants. As of February 13, 2024, Michigan now prohibits discrimination against individuals on various fronts, affecting employers of all sizes.

Key Updates:

Inclusion of “Sex” Definition: The definition of “sex” has been broadened to encompass all terminations of pregnancy and related medical conditions. Previously, this definition excluded abortions not intended to save the mother’s life.
Addition of Protected Categories: Michigan has added sexual orientation and gender identity or expression as protected categories under the statute. While federal law already prohibits discrimination based on sexual orientation and gender identity for employers with 15 or more employees, Michigan has extended these protections statewide.

Action Item:

Employers are advised to update their Equal Employment Opportunity (EEO) policy and other relevant policies referencing protected classes. Ensure that sexual orientation and gender identity or expression are included in these policies if they are not already.
Additionally, if your policy consists of a definition of sex, make sure to update it accordingly. These changes mark a significant step towards ensuring equal rights and protections for all Michigan workforce individuals. Michigan aims to create a more inclusive and equitable environment for its residents by aligning state laws with evolving societal norms.

These updates reflect Michigan’s commitment to fostering a more inclusive and diverse workplace environment while upholding the rights of all individuals within the state.

The U.S. Department of Labor (DOL) is on track to finalize a new overtime rule in April 2024, with a swift implementation timeline of just 60 days after that. This accelerated process deviates from past practices, where employers had up to 192 days to comply. The DOL’s rationale for this expedited timeline stems from economic shifts necessitating an update to the salary level standard. Should the DOL adhere to its April deadline, the new rule could be enacted by June 2024. While the DOL has faced challenges meeting deadlines, employers are advised to prepare for timely implementation this time.

The impending overtime rule will elevate the minimum annual salary for most exempt employees paid on a salary basis from $35,568 to an estimated range of $55,068-$60,209 per year. Approximately 3.4 million exempt employees earning below this threshold will require adjustments in salaries or classification as nonexempt employees.

Considering these anticipated changes, consider the following proactive steps:

Identify Impacted Employees

Determine which employees are exempt from federal overtime regulations and fall below the proposed new salary threshold.

Consider Base Pay Adjustments

Evaluate whether transitioning affected employees to nonexempt status or raising their salaries above the new threshold is the best action.

Implement Time Tracking and Training

Initiate work hours tracking for potentially nonexempt employees to accurately anticipate overtime payments.

Review Telework and Flex-time Policies

Assess existing policies related to remote work and non-standard hours to ensure precise compensation and overtime tracking.

Evaluate Compensation Methods

Consider paying newly nonexempt employees hourly to streamline tracking working hours and ensure compliance with FLSA regulations.

Calculate Potential Costs and Budget Impact

Conduct a thorough analysis of the financial implications of adjusting salary levels and overtime payments on yearly budgets, making necessary updates.

For inquiries or clarification regarding the proposed overtime rule changes, reach out to your dedicated advisor at Yeo & Yeo. The specialists in our Payroll Solutions Group and HR Advisory Solutions Group are ready to provide further assistance.

International Women’s Day is, first and foremost, a day to celebrate the social, economic, cultural, and political achievements of women. It is also an important day to raise awareness, educate and inspire communities, and highlight the significance of gender equity.

This year, the theme of International Women’s Day is “Inspire Inclusion,” a call to action for individuals and organizations to foster environments that embrace diversity and empower women. Here are some ways to mark the day – whether with friends, family, colleagues, or the global community.

Support women-owned businesses: Encourage economic empowerment by supporting businesses owned and led by women.
Volunteer: Get involved with organizations that support and empower women to make a positive impact in your community.
Reach out to a friend: Send a text, email, or handwritten note to each of your female friends to let them know what you admire about them and how much you appreciate them.
Mentorship: Offer mentorship to women in your community or workplace to help them navigate their professional journeys.

Yeo & Yeo is incredibly proud of its family-friendly culture and ability to attract and retain women. In 1987, Mari McKenzie became the first female Principal at Yeo & Yeo. She was a trailblazer in a male-driven industry, serving on Yeo & Yeo’s board of directors and forging the way for future women leaders in the firm. Today, our workforce is more than 54% female, and the number of women in leadership positions exceeds 50%, well above the industry average in professional service firms. Internally, the firm’s mentorship and career advocacy programs ensure that everyone receives support to achieve their goals and be successful. We are passionate about supporting our many women-owned business clients, helping them navigate challenges and achieve their goals. Through the Yeo & Yeo Foundation, our people also support women-focused organizations, including Girl Scouts, Women of Colors, Self Love Beauty, the Clean Love Project, and more.

“Yeo & Yeo has given me incredible opportunities to learn and grow in my career,” said Principal Rachel Van Slembrouck. “As a woman in accounting, I am truly grateful for the incredible support system I have both personally and professionally.”

Today and every day, we thank our women for providing valuable insights that uplift our clients and communities. We encourage you to take time to reflect on the achievements of the women in your life and watch Yeo & Yeo’s women’s success stories video, which celebrates our women’s accomplishments over the past year. Through their experiences, we hope to inspire and empower women to achieve their full potential and celebrate their accomplishments.

The driving revenue force of just about every kind of business is sales. But all too often, once a sales team is up and running, it’s left to its own devices to maintain its strengths, develop new skills and upgrade its technology. This can produce mixed results — some sales departments are remarkably self-sufficient while others could really use more organizational support.

To remove the guesswork, many of today’s businesses are investing in sales enablement. This is an enterprise-wide, collaborative and continuous approach to empowering the sales department to do its best work.

Pillars of the concept

Wait a minute, you might say, isn’t sales enablement just another name for sales training? No, not entirely.

Training is certainly a part of the equation. A sales enablement program will involve ongoing training on the latest sales techniques, changes in the marketplace, the company’s latest products or services, and so forth. But this training doesn’t occur haphazardly — it’s regularly scheduled and typically segmented into easily digestible learning modules, generally a more effective approach than overloading sales reps with info on a sales retreat or in sporadic seminars.

There are several other pillars of sales enablement as well. One is content. Under their programs, many companies build a library of materials that features items such as:

Books and articles on best practices,
Customer testimonials,
Product “spec sheets,” slide decks and demos, and
Reports and spreadsheets with the latest competitive intelligence.

Another key feature of a sales enablement program is coaching. This may involve engaging outside consultants to provide coaching services to sales reps or developing internal mentoring or partnering.

Technology is also central to sales enablement. Most programs involve regular discussions with the leadership team and IT department about what tools could best serve the sales team. Notably, there are multiple software platforms on the market focused on sales enablement that can help businesses set up and manage their programs. Some customer relationship management software offers help in this area, too.

Benefits in the offing

There’s a reason sales enablement has caught on with many different types of companies. There are significant benefits in the offing.

First, a well-designed program can get new hires up to speed much more quickly than a more casual, ad hoc approach to “rookie” training. And for fully onboarded and seasoned employees, sales enablement can save time and effort by providing easy access to the relevant and up-to-date data, content and tools that support their activities. Ultimately, it can boost productivity for the whole team and, thereby, revenue for the business.

Also, the ongoing training and coaching features of sales enablement help sales reps keep their skills sharp and their knowledge growing. The aforementioned learning modules, webinars, podcasts, quizzes and other learning formats may give them an edge over competitors with less educational support.

There’s the engagement factor, too. A sales enablement program communicates to new hires, as well as established reps, that the organization fully supports them. As word gets around, you may attract stronger job candidates and enjoy better employee retention rates.

A major initiative

As the saying goes, nothing worth doing is easy. To implement and run a successful sales enablement program, you’ll need to invest considerable time and resources. And before any of that, you’ll need to set clear, measurable objectives — as well as a reasonable budget. For help with the financial side of planning a major initiative like this, contact us.

Estate planning isn’t just about sharing wealth with the younger generation. For many people, it’s equally important to share one’s values and to encourage their children or other heirs to lead responsible, productive and fulfilling lives. One tool for achieving this goal is an incentive trust, which conditions distributions on certain behaviors or achievements that you wish to inspire.

Incentive trusts can be effective, but they should be planned and drafted carefully to avoid unintended consequences. Let’s examine four tips for designing a more effective incentive trust.

1. Focus on the positives

Avoid negative reinforcement, such as conditioning distributions on the avoidance of undesirable or self-destructive behavior. This sort of “ruling from the grave” is likely to be counterproductive. Not only can it lead to resentment on the part of your heirs, but it may backfire by encouraging them to conceal their conduct and avoid seeking help. Trusts that emphasize positive behaviors, such as going to college or securing gainful employment, can be more effective.

2. Be flexible

Leading a worthy life means different things to different people. Rather than dictating specific behaviors, it’s better to establish the trust with enough flexibility to allow your loved ones to shape their own lives.

For example, some people attempt to encourage gainful employment by tying trust distributions to an heir’s earnings. But this can punish equally responsible heirs who wish to be stay-at-home parents or whose chosen careers may require them to start with low-paying, entry-level jobs or unpaid internships. A well-designed incentive trust should accommodate nonfinancial measures of success.

3. Consider a principle trust

Drafting an incentive trust can be a challenge. Rewarding positive behavior requires a complex set of rules that condition trust distributions on certain achievements or milestones, such as gainful employment, earning a college degree or reaching a certain level of earnings. But it’s nearly impossible to anticipate every contingency.

One way to avoid unintended consequences is to establish a principle trust. Rather than imposing a complex, rigid set of rules for distributing trust funds, a principle trust guides the trustee’s decisions by setting forth the principles and values you hope to encourage and providing the trustee with discretion to evaluate each heir on a case-by-case basis. Bear in mind that for this strategy to work, the trustee must be someone you trust to carry out your wishes.

4. Provide a safety net

An incentive trust need not be an all-or-nothing proposition. If your trust beneficiaries are unable to satisfy the requirements you set forth in your incentive trust, consider offering sufficient funds to provide for their basic needs and base additional distributions on the behaviors you wish to encourage.

According to Warren Buffett, the ideal inheritance is “enough money so that they feel they could do anything, but not so much that they could do nothing.” A carefully designed incentive trust can help you achieve this goal. If you have questions regarding the use of an incentive trust, please contact us.

The Michigan Department of Treasury announced a return to the 4.25% income tax rate for individuals and fiduciaries for the 2024 tax year.

A law passed in 2015 by the Michigan legislature requires a decrease in the state’s individual income tax rate when general fund revenue grows by a higher percentage than the inflation rate for the same period. That led to the income tax rate falling from 4.25% to 4.05% in 2023. Michiganders will see the 2023 rate adjustment in the form of less total tax when they file their 2023 state income taxes.

State officials have determined that the conditions requiring a formulary reduction to the rate for 2024 have not been met; therefore, the state income tax rate for individuals and trusts will return to 4.25%.

Read the notice published by the Michigan Department of Treasury here.

The credit for increasing research activities, often referred to as the research and development (R&D) credit, is a valuable tax break available to certain eligible small businesses. Claiming the credit involves complex calculations, which we’ll take care of for you.

But in addition to the credit itself, be aware that there are two additional features that are especially favorable to small businesses:

Eligible small businesses ($50 million or less in gross receipts for the three prior tax years) may claim the credit against alternative minimum tax (AMT) liability.
The credit can be used by certain smaller startup businesses against their Social Security payroll and Medicare tax liability.

Let’s take a look at the second feature. The Inflation Reduction Act (IRA) has doubled the amount of the payroll tax credit election for qualified businesses and made a change to the eligible types of payroll taxes it can be applied to, making it better than it was before the law changes kicked in.

Election basics

Subject to limits, your business can elect to apply all or some of any research tax credit that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence you to undertake or increase your research activities. On the other hand, if you’re engaged in — or are planning to undertake — research activities without regard to tax consequences, you could receive some tax relief.

Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, any wage-paying business, even a new one, has payroll tax liabilities. Therefore, the payroll tax election is an opportunity to get immediate use out of the research credits that you earn. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.

Eligible businesses

To qualify for the election a taxpayer must:

Have gross receipts for the election year of less than $5 million, and
Be no more than five years past the period for which it had no receipts (the start-up period).

In making these determinations, the only gross receipts that an individual taxpayer considers are from the individual’s businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that an entity or individual can’t make the election for more than six years in a row.

Limits on the election

The research credit for which the taxpayer makes the payroll tax election can be applied against the employer portion of Social Security and Medicare. It can’t be used to lower the FICA taxes that an employer withholds and remits to the government on behalf of employees. Before a provision in the IRA became effective for 2023 and later years, taxpayers were only allowed to use the payroll tax offset against Social Security, not Medicare.

The amount of research credit for which the election can be made can’t annually exceed $500,000. Prior to the IRA, the maximum credit amount allowed to offset payroll tax before 2023 was only $250,000. Note, too, that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for the research credit to reduce current or past income tax liabilities.

These are just the basics of the payroll tax election. Keep in mind that identifying and substantiating expenses eligible for the research credit itself is a complex task. Contact us about whether you can benefit from the payroll tax election and the research tax credit.

Employers have long been told that, to create and maintain an engaged workforce, they’ve got to do more than pay competitively. At least one recent survey supports the notion, if only by a percentage point.

In November 2023, online job-postings provider Monster conducted a poll exploring the workplace trend of why employees decide to give their two weeks’ notice and quit. The number one reason was feeling underappreciated, cited by 50% of respondents. But as alluded to above, compensation came in a close second — 49% of respondents said their salaries were too low.

What can your organization do to keep employees engaged — or boost engagement if it’s lagging? There are plenty of ways to do so. The tough part is figuring out which engagement measures will bring about the best results for you.

Money still matters

Although engagement isn’t solely determined by compensation, it’s the easiest place to start. After all, you’re dealing with numerical amounts quite amenable to analysis. By conducting a benchmarking study, for example, you can figure out exactly what salary ranges or wage amounts are typical for your industry and area — and how your organization compares to the norm.

From there, you may be able to make adjustments to ensure your employees, or key employees, are compensated more competitively. Doing so is easier said than done, however, if your organization is operating under financial constraints. In such a case, you might need to consider looking for outside investors or perhaps even reducing your workforce to raise compensation levels.

Also bear in mind that compensation goes beyond base pay. To further help employees feel like they’re truly well paid, choose carefully from the wide array of fringe benefits available. Ideally, you want to curate a package that suits the demographics and values of your workforce.

Top-down approach

Now let’s discuss the more challenging aspect of engagement. As indicated by the Monster survey, employees largely want to feel appreciated for their work. And this is where employers can struggle to find a balance between going so far overboard with praise and recognition that it loses meaning and doing so little that employees feel taken for granted.

Solving the riddle starts at the top. Ownership and management should mindfully and regularly acknowledge in communications that employees are the organization’s most valuable resource. But don’t just talk the talk. Show employees that they’re appreciated by providing:

Ongoing education, training and upskilling,
Proper equipment and up-to-date technology,
Flexible scheduling to allow for a healthy work-life balance, and
A clear path forward with the organization.

Supervisors also play a critical role. In one way or another, it’s been said that “people leave bosses, not employers.” Be sure to continuously train and manage the performance of those in charge of your teams so they know how to communicate with and support workers.

Some supervisors may turn to micromanaging to show employees that they’re paying attention. But workers tend to feel more appreciated when they’re given the autonomy to make decisions and perform in a productive manner of their own choosing. They want to be appreciated for their work, not told precisely how to do it.

Address the issue

Naturally, there are obvious ways to appreciate employees — solicit their feedback on strategic decisions, offer financial incentives, throw parties, give awards — but it’s important to choose the approaches that suit your budget and culture. The most important thing to do is view engagement as something that needs to be continuously nurtured. Contact us for help identifying cost-effective ways of addressing the issue.

Owners of closely held businesses typically have a significant portion of their wealth tied up in their enterprises. If you own a closely held business with your relatives involved, and don’t take the proper estate planning steps to ensure that it lives on after you’re gone, you may be placing your family at financial risk.

Differences between ownership and management succession

One challenge of transferring a family-owned business is distinguishing between ownership and management succession. When a business is sold to a third party, ownership and management succession typically happen simultaneously. But in a family-owned business, there may be reasons to separate the two.

From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing any estate tax liability. However, you may not be ready to hand over the reins of your business or you may feel that your children aren’t yet ready to take over.

There are several strategies owners can use to transfer ownership without immediately giving up control, including:

Placing business interests in a trust, family limited partnership (FLP) or other vehicle that allows the owner to transfer substantial ownership interests to the younger generation while retaining management control,
Transferring ownership to the next generation in the form of nonvoting stock, or
Establishing an employee stock ownership plan.

Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the business. Providing heirs outside the business with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth while allowing those who work in the business to take over management.

Conflicts may arise

Another unique challenge presented by family businesses is that the older and younger generations may have conflicting financial needs. Fortunately, several strategies are available to generate cash flow for the owner while minimizing the burden on the next generation. They include:

An installment sale of the business to children or other family members. This provides liquidity for the owners while easing the burden on the younger generation and improving the chances that the purchase can be funded by cash flows from the business. Plus, as long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes.

A grantor retained annuity trust (GRAT). By transferring business interests to a GRAT, owners obtain a variety of gift and estate tax benefits (provided they survive the trust term) while enjoying a fixed income stream for a period of years. At the end of the term, the business is transferred to the owners’ children or other beneficiaries. GRATs are typically designed to be gift-tax-free.

Because each family business is different, it’s important to work with your estate planning advisor to identify appropriate strategies in line with your objectives and resources.

Plan sooner rather than later

Regardless of your strategy, the earlier you start planning the better. Transitioning the business gradually over several years or even a decade or more gives you time to educate family members about your succession planning philosophy. It also allows you to relinquish control over time and implement tax-efficient business transfer strategies.

Michigan’s Flow-Through Entity (FTE) tax became available for tax years beginning January 1, 2021, as a workaround to the $10,000 state and local tax limitation imposed by the 2017 Tax Cuts and Jobs Act. Flow-through entities (partnerships and S-corporations) that elect into the tax receive the benefit of deducting Michigan income tax at the entity level for its shareholders or members, thus saving federal income tax. Members or shareholders can then receive a credit on their personal income tax returns to offset the Michigan tax liability created by the flow-through entity income reported on their K-1s.

The Michigan FTE tax is unique compared to many other states’ FTE taxes. The election must be made in advance, by March 15 of the year the election is for. The election is irrevocable and effective for three years, beginning with the year of election plus the two subsequent years. Therefore, if an entity first elected into Michigan’s FTE tax for the 2021 tax year, its election expired with the 2023 tax year. If you made a Michigan FTE election for the 2021 tax year, you must renew it by March 15, 2024, if you want to continue the election.

If a company wishes to retain the federal tax benefit for the 2024 tax year or make a first-time election, an election must be made by March 15, 2024. To make an election, a payment must be made through Michigan Treasury Online (MTO) in the amount of $1 or more, applied towards the 2024 tax year. There is no option for late elections. Since MTO does not post same-day payments, taxpayers should initiate their payment no later than March 14 on MTO to have a timely election.

Key dates for Michigan FTE during the first few months of 2024:

March 15 – new or renewal elections due (requires payment on MTO)
March 31 – annual 2023 filing due on MTO
April 15 – first quarter 2024 estimate due

With limited time to renew your election or make a first-time FTE election, contact your Yeo & Yeo advisor with questions.

Financial statements are critical to monitoring your business’s financial health. In addition to helping management make informed business decisions, year-end and interim financial statements may be required by lenders, investors and franchisors. Here’s an overview of two common accounting methods, along with the pros and cons of each method.

1. Cash basis

Under the cash-basis method of accounting, transactions are recorded when cash changes hands. That means revenue is recognized when payment is received, and business expenses are recorded when they’re paid. This method is used mainly by small businesses and sole proprietors because it’s easy to understand. It also may provide tax-planning opportunities for certain entities.

The IRS allows certain small businesses to use cash accounting. Eligible businesses must have average annual gross receipts for the three prior tax years equal to or less than an inflation-adjusted threshold of $25 million. The inflation-adjusted threshold is $30 million for the 2024 tax year (up from $29 million for 2023). Businesses that use this method have some flexibility to control the timing of income and deductions for income tax purposes. However, this method can’t be used by larger, more complex businesses for federal income tax purposes.

Beware: There are some disadvantages to cash-basis accounting. First, it doesn’t necessarily match revenue earned with the expenses incurred in the accounting period. So cash-basis businesses may have a hard time evaluating how they’ve performed over time or against competitors. Management also may not know how much money the company needs to collect from customers (accounts receivable) or pay to suppliers and vendors (accounts payable and accrued expenses).

2. Accrual basis

The accrual-basis method of accounting is required by U.S. Generally Accepted Accounting Principles (GAAP). So most mid-sized and large businesses in the United States use accrual accounting. Under this method, businesses record revenue when it’s earned and expenses when they’re incurred, regardless of when cash changes hands. It’s based on the matching principle, where revenue and the related business expenses are recorded in the same accounting period. This principle may help reduce significant fluctuations in profitability over time.

Revenue that’s earned but not yet received appears on the balance sheet, usually as accounts receivable. And expenses incurred but not yet paid are reported on the balance sheet, typically as accounts payable or accrued liabilities. Accrual accounting also may require some companies to report complex-sounding line items, such as prepaid assets, work-in-progress inventory and contingent liabilities.

Although this method is more complicated than cash accounting, accrual accounting provides a more accurate, real-time view of a company’s financial results. So it’s generally preferred by stakeholders who review your business’s financial statements. Accrual accounting also facilitates strategic decision making and benchmarking results from period to period — or against competitors that use the accrual method.

Additionally, businesses that use accrual accounting may enjoy a few tax benefits. For example, they can defer income on certain advance payments and deduct year-end bonuses that are paid within the first 2½ months of the following tax year. However, there’s also a tax-related downside: Accrual-basis businesses may report taxable income before they receive cash payments from customers, which can create hardships for businesses without enough cash reserves to pay their tax obligations.

Choosing the right method

To recap, not every business is able to use cash-basis accounting — and it has some significant downsides. But if your business has the flexibility to use it, you might want to discuss the pros and cons. Contact us for more information.

Although employers have long helped employees save for retirement and have insurance in place for health care, another urgent need has persisted over the years: funds for financial emergencies.

To address this problem, SECURE 2.0, a law enacted in 2022, contains a provision allowing employer-sponsors of certain retirement plans to offer “pension-linked” emergency savings accounts (PLESAs) starting this year. So far, two federal agencies have issued guidance on the applicable rules.

Essential details

To offer PLESAs, an employer must sponsor a qualified defined contribution plan such as a 401(k), 403(b) or 457(b). Notably, only employees who aren’t “highly compensated” under the IRS definition may open an account. (We can help you determine whether any of your employees meet the definition.)

Employees can be either offered enrollment in a PLESA or auto-enrolled. Employers that choose the latter option must notify employees in writing of auto-enrollment and allow them to opt-out and withdraw any contributed funds at no cost.

The portion of a PLESA balance attributable to participant contributions can’t exceed an inflation-indexed $2,500 a year or a lower amount determined by the plan sponsor. Also, contributions count toward the Internal Revenue Code’s total limit on elective deferrals, which is an inflation-indexed $23,000 in 2024.

Contributions may be held as cash, in an interest-bearing deposit account or in an investment product. PLESA contributions are “Roth” in nature; in other words, they’re included in taxable income, but withdrawals are tax-free.

Account holders may withdraw funds at least once per calendar month. The first four withdrawals in a plan year can’t be subject to any fees or charges. From there, withdrawals may be subject to reasonable fees or charges.

IRS guidance: Anti-abuse rules

The first guidance on PLESAs to come out this year was IRS Notice 2024-22, issued on January 12. It discusses anti-abuse procedures intended to prevent participants from manipulating rules to cause excessive matching contributions.

According to the IRS, a reasonable policy balances PLESA participants’ ability to use the accounts for their intended purpose with plan sponsors’ obligation to prevent manipulation of matching contribution rules. The guidance states that it’s generally unreasonable to:

Forfeit contributions already made,
Suspend a participant’s PLESA use because of a withdrawal, or
Suspend matching contributions to an associated retirement savings account.

However, plan sponsors may adopt anti-abuse procedures in addition to those already established under the Internal Revenue Code, so long as those supplementary procedures are reasonable.

DOL guidance: ERISA compliance

On January 24, the U.S. Department of Labor (DOL) issued its own guidance as a list of frequently asked questions (FAQs) on the agency’s website. The DOL’s FAQs focus largely on compliance with the Employee Retirement Income Security Act (ERISA).

For instance, ERISA prohibits minimum contribution requirements as well as minimum account balances. So, one DOL FAQ explains that plan sponsors offering PLESAs can’t:

Force participants to close their accounts and take a distribution of the balance because of a minimum balance requirement,
Impose penalties such as fees or right-of-withdrawal suspensions for failing to meet balance requirements, or
Require a minimum contribution amount per pay period.

Another FAQ clarifies that plan sponsors may combine required PLESA notices with other ERISA-required notices, so long as they’re timely provided. The DOL intends to issue an updated 2024 version of Form 5500, “Annual Return/Report of Employee Benefit Plan,” to include reporting requirements for PLESAs.

A way to be helpful

PLESAs are a way for employers to help employees care for themselves through proper financial planning. However, as you can see, there are many rules involved. Contact us for help deciding whether your organization should add a PLESA feature to its qualified plan.

Few and far between are businesses that can either launch or grow without an infusion of outside capital. In some cases, that capital comes in the form of a commercial loan from a bank or some other type of lender.

If you and your company’s leadership team believe a loan will soon be necessary, it’s important to approach the endeavor with confidence. That starts with having valid, well-considered strategic reasons for borrowing. From there, you need to engage your bank or a prospective lender with a strong air of professionalism and certainty.

Essential questions

First, familiarize yourself with how the process works. It’s essentially built on four basic questions:

How much money do you want?
How do you plan to use the loan proceeds?
When do you need the funds?
How soon can you repay the loan?

Your loan officer will also likely ask about your business’s previous sources of financing. So, be ready to explain how you’ve financed your company to date. Methods may include personal cash infusions, forgone salaries and sweat equity, as well as any equity contributions from friends, family members and outside investors.

Loan products

As you’re probably aware, banks and lenders offer a variety of commercial loan products. Another way of expressing confidence is to know what you want. Common options include:

Lines of credit. One of these gives you access to an agreed-upon amount of funds that you can draw on as needed. As is the case with a credit card, you pay interest only on the outstanding balance.

Traditional term loans. These are what most people likely envision when they see the term “commercial loan.” You receive a lump sum with repayment terms, which include a payment schedule and interest rate.

Asset-based loans. True to the name, asset-based loans typically fund equipment purchases or plant expansions. The length of the loan is usually tied to the life of the asset being financed, and that asset is usually pledged as collateral.

Supporting documents

No matter the product, banks and lenders want to work with serious borrowers who are deeply knowledgeable about the financial condition and projected performance of their businesses. To this end, don’t go into the initial meeting empty-handed. Prepare a comprehensive loan application package that includes:

A “statement of purpose” explaining your strategic plans for the funds,
Your business plan,
Three years of financial statements, if available,
Three years of business tax returns, if available,
Personal financial statements and tax returns for all owners,
Appraisals of any assets pledged as collateral, and
Carefully prepared, reasonable financial projections.

Remember that most loan officers have been around the block. They know how to critically evaluate financial documents and prospective borrowers’ underlying assumptions. As much as possible, support your case with market research and data. Be confident — but realistic — about your strengths and market opportunities, as well as forthcoming about the challenges you’ll likely face in accomplishing your strategic objectives.

If your bank or lender finds your business a viable borrower, your application will be given to an underwriting committee or department. Underwriters will have greater confidence in your financial statements if they’re prepared by a CPA and conform to U.S. Generally Accepted Accounting Principles. Professionally prepared financial projections are also recommended.

Shop around

Underwriters don’t approve every loan application, so don’t give up if a bank or lender turns you down. In fact, it’s a good idea to shop around. For help preparing to apply for a commercial loan and managing the approval process, contact us.

Have you completed your company’s year-end financial statements yet? Most calendar-year entities issue their year-end financials by March of the following year. Lenders and investors may think the worst if a company’s financial reports aren’t submitted in a timely manner. Here are three assumptions your stakeholders could make when your financial statements are late.

1. Negative financial results

No one wants to be the bearer of bad news. Deferred financial reporting can lead investors and lenders to presume that the company’s performance has fallen below historical levels or what was forecast at the beginning of the year. Some companies also may procrastinate issuing financial statements if they’re at risk for violating their lending covenants.

2. Weak management

Alternatively, stakeholders may assume that management is incompetent or disorganized and can’t pull together the requisite data to finish the financials. For example, late financials may be common when a controller is inexperienced, the accounting department is understaffed or a major accounting rule change has gone into effect. Delays also may happen when external auditors and managers are at odds over adjusting journal entries — or when auditors are unwilling to issue an unqualified (clean) opinion or have going concern issues.

Delayed statements may also signal that management doesn’t consider financial reporting a priority. This lackadaisical mindset implies that no one is monitoring financial performance throughout the year.

3. Occupational fraud risks

If financial statements aren’t timely or prioritized by the company’s owners, unscrupulous employees may see it as a golden opportunity to steal from the company. Fraud is more difficult to hide if you insist on timely financial statements and take the time to review them.

Don’t procrastinate

Late financial statements cost more than time; they can impair relations with lenders and investors. Timely financial statements foster goodwill with outside stakeholders. We can help you stay focused, work through complex reporting issues and communicate weaker-than-expected financial results in a positive, professional manner.

The U.S. Department of Labor’s (DOL’s) test for determining whether a worker should be classified as an independent contractor or an employee for purposes of the federal Fair Labor Standards Act (FLSA) has been revised several times over the past decade. Now, the DOL is implementing a new final rule rescinding the employer-friendly test that was developed under the Trump administration. The new, more employee-friendly rule takes effect March 11, 2024.

Role of the new final rule

Even though the DOL’s final rule isn’t necessarily controlling for courts weighing employment status issues, it’s likely to be considered persuasive authority. Moreover, it will guide DOL misclassification audits and enforcement actions.

If you are found to have misclassified employees as independent contractors, you may owe back pay if employees weren’t paid minimum wage or overtime pay, as well as penalties. You also could end up liable for withheld employee benefits and find yourself subject to various federal and state employment laws that apply based on the number of affected employees.

The rescinded test

The Trump administration’s test (known as the 2021 Independent Contractor Rule) focuses primarily on whether, as an “economic reality,” workers are dependent on employers for work or are in business for themselves. It examines five factors. And while no single factor is controlling, the 2021 rule identifies two so-called “core factors” that are deemed most relevant:

The nature and degree of the employer’s control over the work, and
The worker’s opportunity for profit and loss.

If both factors suggest the same classification, it’s substantially likely that classification is proper.

The new test

The final new rule closely shadows the proposed rule published in October 2022. According to the DOL, it continues the notion that a worker isn’t an independent contractor if, as a matter of economic reality, the individual is economically dependent on the employer for work. The DOL says the rule aligns with both judicial precedent and its own interpretive guidance prior to 2021.

Specifically, the final rule enumerates six factors that will guide DOL analysis of whether a worker is an employee under the FLSA:

The worker’s opportunity for profit or loss depending on managerial skill (the lack of such opportunity suggests employee status),
Investments by the worker and the potential employer (if the worker makes similar types of investments as the employer, even on a smaller scale, it suggests independent contractor status),
Degree of permanence of the work relationship (an indefinite, continuous or exclusive relationship suggests employee status),
The employer’s nature and degree of control, whether exercised or just reserved (control over the performance of the work and the relationship’s economic aspects suggests employee status),
Extent to which the work performed is an integral part of the employer’s business (if the work is critical, necessary or central to the principal business, the worker is likely an employee), and
The worker’s skill and initiative (if the worker brings specialized skills and uses them in connection with business-like initiative, the worker is likely an independent contractor).

In contrast to the 2021 rule, all factors will be weighed — no single factor or set of factors will automatically determine a worker’s status.

The final new rule does make some modifications and clarifications to the proposed rule. For example, it explains that actions that an employer takes solely to comply with specific and applicable federal, state, tribal or local laws or regulations don’t indicate “control” suggestive of employee status. But those that go beyond compliance and instead serve the employer’s own compliance methods, safety, quality control, or contractual or customer service standards may do so.

The final rule also recognizes that a lack of permanence in a work relationship can sometimes be due to operational characteristics unique or intrinsic to particular businesses or industries and the workers they employ. The relevant question is whether the lack of permanence is due to workers exercising their own independent business initiative, which indicates independent contractor status. On the other hand, the seasonal or temporary nature of work alone doesn’t necessarily indicate independent contractor classification.

The return, and clarification, of the factor related to whether the work is integral to the business also is notable. The 2021 rule includes a noncore factor that asks only whether the work was part of an integrated unit of production. The final new rule focuses on whether the business function the worker performs is an integral part of the business.

For tax purposes

In a series of Q&As, the DOL addressed the question: “Can an individual be an employee for FLSA purposes even if he or she is an independent contractor for tax purposes?” The answer is yes.

The DOL explained that the IRS applies its version of the common law control test to analyze if a worker is an employee or independent contractor for tax purposes. While the DOL considers many of the same factors as the IRS, it added that “The economic reality test for FLSA purposes is based on a specific definition of ‘employ’ in the FLSA, which provides that employers ‘employ’ workers if they ‘suffer or permit’ them to work.”

In court cases, this language has been interpreted to be broader than the common law control test. Therefore, some workers who may be classified as contractors for tax purposes may be employees for FLSA purposes because, as a matter of economic reality, they’re economically dependent on the employers for work.

Next steps

Not surprisingly, the DOL’s final new rule is already facing court challenges. Nonetheless, you should review your work relationships if you use freelancers and other independent contractors and make any appropriate changes. Remember, too, that states can have different tests, some of which are more stringent than the DOL’s final rule. Contact your employment attorney if you have questions about the DOL’s new rule.