GASB 84 and GASB 87 for Education Webinar Offered – September 26, 2019

As you are likely well aware, two important developments that will impact your school district’s financial statements are the implementation of GASB 84 Fiduciary Activities and GASB 87 Leases.

GASB 84 will be required to be implemented for a school district’s June 30, 2020, fiscal year. It will require the evaluation of the district’s activities to determine who controls the assets and who the beneficiaries are, to determine the appropriate fund in which that activity should be recorded.

GASB 87 will be required to be implemented for a school district’s June 30, 2021, fiscal year. The implementation of GASB 87 will require districts to treat their operating leases similarly to how they currently handle capital leases and record a lease asset and a lease liability.

GASB is offering a free CPE webinar on the implementation guide for GASB 84 Fiduciary Activities and GASB 87 Leases on Thursday, September 26, 2019, from 1:30-3:15 p.m. EST. The topics that will be discussed include:

Identifying fiduciary activities based on the requirements of Statement No. 84, Fiduciary Activities
Reporting fiduciary activities in fiduciary funds
Identifying contracts addressed in Statement No. 87, Leases
Recognizing and measuring financial statement elements associated with lease transactions
Audience question-and-answer session.

You may register for the webinar here. If you are unable to attend the live broadcast, GASB will have the video available on its website for 90 days after the event.

Earlier this year, Yeo & Yeo issued a white paper about implementing GASB 84 that you can download here.

If you have implementation questions, please reach out to Yeo & Yeo’s Education Services Group.

As you are likely well aware, two important developments that will impact your municipality’s financial statements are the implementation of GASB 84 Fiduciary Activities and GASB 87 Leases.

GASB 84 will be required to be implemented for fiscal years beginning after December 15, 2018, which means that governments with year-ends of December 31, 2019, will be the first to implement. It will require the evaluation of the government’s activities to determine who controls the assets and who the beneficiaries are, to determine the appropriate fund in which to record the activity.

GASB 87 will be required to be implemented for fiscal years beginning after December 15, 2019, which means that governments with year-ends of December 31, 2020, would be the first to implement. The implementation of GASB 87 will require governments to treat their operating leases similarly to how they currently handle capital leases and record a lease asset and a lease liability.

Identifying fiduciary activities based on the requirements of Statement No. 84, Fiduciary Activities
Reporting fiduciary activities in fiduciary funds
Identifying contracts addressed in Statement No. 87, Leases
Recognizing and measuring financial statement elements associated with lease transactions
Audience question-and-answer session.

You may register for the webinar here. If you are unable to attend the live broadcast, GASB will have the video available on its website for 90 days after the event.

Earlier this year, Yeo & Yeo issued a white paper about implementing GASB 84 that you can download here.

If you have implementation questions, please reach out to Yeo & Yeo’s Government Services Group.

As you are probably now aware, the new lease accounting standard has been delayed. In July, the Financial Accounting Standards Board (FASB) voted to propose delaying implementation of the new lease accounting standard for non-public companies (which include private companies and nonprofit organizations) for one year. Based on this proposal, the new standard would become effective for non-public companies in January 2021 and would be reported in December 31, 2021, financial statements.

FASB’s proposal is available for public comment through September 16, 2019, at which point FASB will finalize the new effective date.

The delay reflects a mindset shift by FASB and is the result of the board gaining a greater understanding of the challenges nonpublic companies and nonprofits encounter when adopting major accounting updates. Under this philosophy change, FASB intends to extend and simplify how effective dates are staggered between large public companies and all other entities (which include private companies, and nonprofit organizations).

Yeo & Yeo will continue to provide updates on the proposed change in the accounting standard. If you have questions, please contact your local Yeo & Yeo office.

Do you know what your business is worth right now? Practically speaking, it is worth what the highest bidder is willing to pay for it — no more or no less. Nevertheless, by taking all the relevant factors into account, you can position yourself for the best possible deal.

The first step is to have a business valuation prepared for your company. Our firm can provide a comprehensive report, which can be a starting point for negotiations.

Typically, potential buyers conduct their own due diligence of businesses they are interested in. They may rely on professional appraisers who use different measuring sticks and come up with another valuation. For example, a buyer may seek a valuation based on fair market value, intrinsic value or a different standard might be applied. Internal factors that are unique to the business are taken into account, such as the company’s financial position.

At this juncture, other external factors can also come into play. Some of these issues reflect the economy, market demand for the company’s products or services, and the health of the industry as a whole. If demand is low, it could suggest reduced profitability. Therefore, it might be advantageous to postpone your plans to sell the business until demand increases or stabilizes.

Interest rates can also affect the value of a business. When interest rates are rising, it can have an adverse effect on cash flow, since outstanding debts can result in higher charges. Therefore, you might want to sell a business when interest rates are relatively low.

Our firm provides a comprehensive set of services relating to business valuations. We can walk you through every step of the process so you understand it completely. Our services include an analysis of:

The relative strengths and weakness of your business.
Steps you can take to enhance the value.
How to keep taxes to a minimum.
Where to find potential buyers.
The optimal time to sell.
The value of tangible assets, such as real estate and equipment, as well as intangible assets, such as patents, trademarks and non-compete agreements.

Contact our office to arrange a meeting. Our business valuation professionals understand the complex internal and external factors involved in valuing a business.

Sooner or later, it will be time to “hand over the reins” to the younger generation. But it’s not as simple as walking out the door at retirement time with a few plaques in your hands. In order to improve the odds for continued success of your family business, you need to develop a plan of succession.

This situation may be complicated if you already have several relatives working for you. You may have to groom one of them for the top spot or divide up the responsibilities in a reasonable manner. Either way, you could be facing some difficult choices in the near future.

With that in mind, here are several practical suggestions:

Establish strict ground rules for hiring family members. For instance, don’t just hire a nephew or niece because of family obligations. Establish qualifications for each position regardless of a person’s family connection.
Teach your successor the ropes so he or she can gain the technical expertise and skills needed to lead the company. Implement a plan to evaluate job performance.
You might rely on an independent board of business professionals. They can help choose and train a successor if you haven’t designated a replacement.
Find a mediator to break stalemates. When conflicts threaten to disrupt the business operation, your business advisers may be able to patch things up.
Set up family meetings. Be honest in your discussions. While you lay out your vision of the future, allow younger family members to express their own goals.
Maximize potential tax benefits. With professional assistance, you may be able to transfer business interests without suffering any dire tax consequences.

A successful plan for succession should address all of these issues – and more. Don’t leave the fate of your business to chance. Contact us for assistance.

Do you want to withdraw cash from your closely held corporation at a low tax cost? The easiest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient, since it’s taxable to you to the extent of your corporation’s “earnings and profits.” But it’s not deductible by the corporation.

Different approaches

Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five ideas:

1. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make cash contributions to the corporation in the future, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.

2. Salary. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient. The same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In either case, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.

3. Loans. You may withdraw cash from the corporation tax-free by borrowing money from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.

4. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.

5. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

Minimize taxes

If you’re interested in discussing any of these ideas, contact us. We can help you get the maximum out of your corporation at the minimum tax cost.

Yeo & Yeo CPAs & Business Consultants, a leading Michigan accounting firm, has been named one of Metropolitan Detroit’s Best and Brightest Companies to Work For by the Michigan Business & Professional Association for the eighth consecutive year.

“It is an honor to be recognized as one of the Best and Brightest Companies to Work For,” said Thomas O’Sullivan, managing principal of the Ann Arbor office. “We credit the excellent work environment we’ve created to our dedicated employees. They are engaged in the work they do for our clients and committed to teamwork. The firm also supports their commitment to community service. I am proud of Yeo & Yeo and the employees who made this award possible,” says O’Sullivan.

Yeo & Yeo offers rewarding careers for individuals who have the desire and drive to grow as leaders in the accounting profession. More than 200 employees in offices throughout Michigan, including locations in Ann Arbor, Auburn Hills and Southgate, take pride in the firm’s reputation for personal service, commitment to clients and community support. Yeo & Yeo has a culture of developing future leaders through its in-house training department, professional development training and formal mentoring while sustaining a family friendly work environment. The firm also offers an award-winning CPA certification bonus program. Yeo & Yeo is a strengths-based organization where employees benefit from collaboration across offices and teams and have access to advisors and resources that help them succeed.

The annual competition is a program of the Michigan Business & Professional Association (MBPA) and recognizes organizations that display a commitment to excellence in their human resource practices and employee enrichment. Companies in counties as far north as Midland, Bay and Saginaw, as far west as Clinton, Ingham and Jackson, and those in the entire Thumb and Metropolitan Detroit regions were eligible to participate.

Yeo & Yeo and the other winning companies will be honored at the MBPA’s annual awards program and human resources symposium on October 22 at the Detroit Marriott at the Renaissance Center.

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

October 15

If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2018 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2018 to certain employer-sponsored retirement plans.

October 31

Report income tax withholding and FICA taxes for third quarter 2019 (Form 941) and pay any tax due. (See exception below under “November 12.”)

November 12

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

December 16

If a calendar-year C corporation, pay the fourth installment of 2019 estimated income taxes.

Although the implementation of the lease accounting standard has been delayed a year for non-public companies, it is not too early to begin looking at policies to implement in advance of this new standard.

To ensure effective implementation of this standard, it is critical that organizations maintain established processes to track the inventory of leases.

Documented procedures should address the following:

Determine which positions/departments have authority to enter into leases on behalf of the organization.
Establish a point department that is responsible for developing and maintaining a lease inventory list. It would likely be an accounting or legal department.
Document a timeline for how frequently the point department should be informed of new leases. Depending on an organization’s size, weekly could be sufficient.
Implement controls to ensure the completeness of the list. These will vary based on the size of an organization and number of leases but could include comparison of vendors on the master lease inventory list to active vendors in the payables system.

Check Out Our eBook on Creating Policies for Your Nonprofit

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Many nonprofit organizations believe that since the IRS has granted them tax-exempt status, the organization is exempt from all taxes. However, that is not the case, and Michigan sales tax is one area that significantly impacts most nonprofit organizations. The default treatment for sales tax for a nonprofit organization is the same as for a for-profit organization unless there is an exemption. As a result, in many situations, a nonprofit organization should pay sales tax on items it purchases and charge sales tax on items it sells.

Paying sales tax on purchases

When a nonprofit organization makes a purchase, it can claim an exemption from paying sales tax only if all of the following four conditions are met:

The organization has been granted tax-exempt status as a 501(c)(3) or 501(c)(4).
The item being purchased is tangible personal property.
The item being purchased will be used or consumed primarily in carrying out the organization’s exempt purposes.
The transaction does not fall under an exception.

To illustrate the first three conditions, consider an organization that is purchasing cards and dice for a Las Vegas Night fundraising event. The organization is a 501(c)(3) and the items being purchased are tangible personal property. However, the items will not be used in carrying out the organization’s exempt purposes. Even though fundraising is a necessary activity for most nonprofits, it is a means to achieve financial goals and is not itself an exempt purpose. The organization should not claim an exemption and should pay sales tax on this purchase.

Once an organization has met the first three conditions, the exceptions described in the sales tax rules should be carefully reviewed for any large transactions that are being considered. For example, purchasing a vehicle costing more than $5,000 that will be used primarily for fundraising would result in the organization owing sales tax, even if the other conditions are met.

If an organization meets all four conditions, then a sales tax exemption can be claimed by providing the vendor with a completed Michigan Form 3372 – Sales and Use Tax Certificate of Exemption, and a copy of the IRS determination letter. The State of Michigan does not issue tax exempt numbers. Form 3372 must be provided to the seller with each purchase and retained in their records for four years.

It is important to note that items purchased by a nonprofit organization for resale are subject to the same rules as for a for-profit organization. The organization can claim a sales tax exemption on the purchase by filing Michigan Form 3372 with the vendor (a copy of the IRS determination letter is not necessary since the exemption is being claimed for resale instead of for use in the nonprofit’s exempt purpose), but will need to collect sales tax on the sale of those items according to the guidelines outlined next.

Nonprofit schools, nonprofit hospitals, churches, or governmental agencies are given separate statutory exemption. These organizations would provide vendors with Form 3372 but would not have to provide a copy of their IRS determination letter.

Collecting sales tax on sales

A nonprofit organization must register for sales tax with the Michigan Department of Treasury before selling tangible personal property, regardless of whether an exemption will apply. Once registered, a nonprofit organization is subject to the same filing requirements that a for-profit organization is, even if no sales tax is due. Registration can be done online through the Unemployment Insurance Agency or by completing Form 518 – Registration for Michigan Taxes.

Effective September 26, 2018, the State of Michigan changed the rules for certain nonprofits collecting sales tax on fundraising sales through an update to the Michigan Compiled Laws (MCL 205-540).

The old rule stated that if less than $5,000 of sales were made, the nonprofit could elect not to collect and not to remit sales tax on those sales. However, as soon as $5,000 in sales were made, sales tax would need to be remitted on every dollar of taxable sales.

The new rule now states that sales of the first $10,000 of tangible personal property in a calendar year for fundraising purposes are exempt from sales tax as long as the nonprofit has aggregate sales at retail in the calendar year of less than $25,000.

The amount of nontaxable fundraising sales has doubled from $5,000 to $10,000. Previously it was all or nothing for the exemption, and now it is truly an exemption for the first $10,000 sold. However, there are still planning and budgeting issues to consider because once aggregate sales at retail hit $25,000, there is no exemption. The $25,000 threshold is for gross sales for the calendar year, not per event.

It is important to note that all sales tax collected must be remitted to the State of Michigan unless it is first refunded to the customer. If the organization collects sales tax on all of its sales, then later determines that they have less than $25,000 in aggregate sales, they would still be required to remit all sales tax collected during the year or refund it to each customer for the first $10,000 of sales.

A conservative way to plan is that if the organization believes during the budget process that sales will be $10,000 or less, do not charge sales tax. Then, as things change during the year, if sales exceed $10,000, start to charge sales tax on those exceeding $10,000.

It is critical that an organization carefully review the sales tax rules before conducting any sales of tangible personal property, including serving meals at a fundraising event or holding an auction. These types of activities have special rules and additional recordkeeping that may be required, so appropriate steps should be taken before the event.

Planning ahead ensures compliance

The Michigan sales tax rules can be confusing for general taxpayers, and the exemptions and exceptions that apply specifically to nonprofit organizations only make them more complex. Nonprofit organizations should take the necessary steps to understand these rules to ensure compliance with the state. Also, if the organization has transactions in other states, those sales tax rules may be different from the Michigan rules discussed here.

For more information, please contact any member of Yeo & Yeo’s Nonprofit Services Group or visit the Sales and Use Tax section of the Michigan Department of Treasury website.

Additional resources regarding Michigan sales tax as applied to nonprofit organizations:

State of Michigan Revenue Administrative Bulletin 2016-04 – Sales and Use Tax Exemption Claim Procedures and Formats

State of Michigan Revenue Administrative Bulletin 1995-3 – Sales and Use Tax – Nonprofit Entities

Michigan Department of Treasury – Common Sales and Use Tax Exemptions and Requirements

As teachers head back for a new school year, they often pay for various expenses for which they don’t receive reimbursement. Fortunately, they may be able to deduct them on their tax returns. However, there are limits on this special deduction, and some expenses can’t be written off.

For 2019, qualifying educators can deduct some of their unreimbursed out-of-pocket classroom costs under the educator expense deduction. This is an “above-the-line” deduction, which means you don’t have to itemize your deductions in order to claim it.

Eligible deductions

Here are some details about the educator expense deduction:

For 2019, educators can deduct up to $250 of trade or business expenses that weren’t reimbursed. (The deduction is $500 if both taxpayers are eligible educators who file a joint tax return, but these taxpayers can’t deduct more than $250 each.)
Qualified expenses are amounts educators paid themselves during the tax year.
Examples of expenses that educators can deduct include books, supplies, computer equipment (including software), other materials used in the classroom, and professional development courses.
To be eligible, taxpayers must be kindergarten through grade 12 teachers, instructors, counselors, principals or aides. They must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

Educators should keep receipts when they make eligible expenses and note the date, amount and purpose of each purchase.

Ineligible deductions

Teachers or professors may see advertisements for job-related courses in out-of-town or exotic locations. You may have wondered whether traveling to these courses is tax-deductible on teachers’ tax returns. The bad news is that, for tax years 2018–2025, it isn’t, because the outlays are employee business expenses.

Prior to 2018, employee business expenses could be claimed as miscellaneous itemized deductions. However, under the Tax Cuts and Jobs Act, miscellaneous itemized deductions aren’t deductible by individuals for tax years 2018–2025.

The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This benefit results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefits of driving the cars!) Even better, recent tax law changes and IRS rules make the perk more valuable than before.

Here’s an example

Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips with your family. Therefore, your usage 100c of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new luxury $50,000 sedan.

Your cost for personal use of the vehicle will be equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.

Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to business-interest limitation under the tax code).

In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.

And finally, the purchase of the car by your corporation will have no effect on your credit rating.

Administrative tasks

Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.

Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.

Yeo & Yeo CPAs & Business Consultants was proud to join with the Young Professionals group of the Leading Edge Alliance (LEA YPs) for its annual LEA YP Global Volunteer Days. LEA member firms worldwide were encouraged to donate to or volunteer for a local charity. This year all member firms decided to rally around a single cause: the fight against hunger.

During July, more than 200 Yeo & Yeo employees throughout the firm’s nine offices donated food, made monetary donations and volunteered their time in local organizations. Through these efforts, Yeo & Yeo supported ten Michigan nonprofits including the Children’s Advocacy Center of Gratiot County, Detroit Rescue Mission Ministries, I Support the 1% Veterans Food Pantry, Food Bank of Eastern Michigan, Food Gatherers, Forgotten Harvest Farm, Greater Lansing Food Bank, Kalamazoo Loaves & Fishes, Midland County Emergency Food Pantry Network and St. Luke N.E.W. Life Center.

Alex Wilson, a member of the LEA YP Steering Committee and manager at Yeo & Yeo, said, “We are thankful to have been able to work together with the LEA to not only impact multiple Michigan communities, but to collectively spread our time, talent and treasures as a profession worldwide to fight hunger.”

This is the ninth consecutive year that Yeo & Yeo employees have participated in the annual LEA YP Global Volunteer Days. The firm is proud of its employees’ outreach and pleased to participate in these efforts to support communities both locally and globally.

Operating a business as an S corporation may provide many advantages, including limited liability for owners and no double taxation (at least at the federal level). Self-employed people may also be able to lower their exposure to Social Security and Medicare taxes if they structure their businesses as S corps for federal tax purposes. But not all businesses are eligible — and with changes under the Tax Cuts and Jobs Act, S corps may not be as appealing as they once were.

Compare and contrast

The main reason why businesses elect S corp status is to obtain the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when it’s distributed to shareholders. Instead, tax items pass through to the shareholders’ personal returns, and they pay tax at their individual income tax rates.

But double taxation may be less of a concern today due to the 21% flat income tax rate that now applies to C corporations. Meanwhile, the top individual income tax rate is 37%. S corp owners may be able to take advantage of the qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.

In order to assess S corp status, you have to run the numbers with your tax advisor, and factor in state taxes to determine which structure will be the most beneficial for you and your business.

S corp qualifications

If you decide to go the S corp route, make sure you qualify and will stay qualified. To be eligible to elect to be an S corp or to convert, your business must:

Be a domestic corporation,
Have only one class of stock,
Have no more than 100 shareholders, and
Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.

In addition, certain businesses are ineligible, such as financial institutions and insurance companies.

Base compensation on what’s reasonable

Another important consideration when electing S status is shareholder compensation. One strategy for paying less in Social Security and Medicare employment taxes is to pay modest salaries to yourself and any other S corp shareholder-employees. Then, pay out the remaining corporate cash flow (after you’ve retained enough in the company’s accounts to sustain normal business operations) as federal-employment-tax-free cash distributions.

However, the IRS is on the lookout for S corps that pay shareholder-employees unreasonably low salaries to avoid paying employment taxes and then make distributions that aren’t subject to those taxes.

Paying yourself a modest salary will work if you can prove that your salary is reasonable based on market levels for similar jobs. Otherwise, you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties. We can help you decide on a salary and gather proof that it’s reasonable.

Consider all angles

Contact us if you think being an S corporation might help reduce your tax bill while still providing liability protection. We can help with the mechanics of making an election or making a conversion, under applicable state law, and then handling the post-conversion tax issues.

What is your business worth to you, to a third party, to your family, to your employees? You have built this business from the ground up, or acquired it many years ago, and turned it into the successful business it is today. How do you put a value to something you have dedicated your entire life to?

It is hard to plan for the future if you don’t have all the facts. With a baseline business valuation you can operate from a position of strength, because you’ll be relying on facts rather than estimates or opinions.

What is a baseline? A baseline is a fixed point of reference that is used for comparison purposes. A project’s results would be measured against a baseline number for costs, sales and all other variables; to determine if it was a success. Your company should be treated the same way you would treat a new project or venture. In order to determine a baseline of a business, a business valuation needs to be performed.

A baseline business valuation, prepared by an independent third-party will provide you with an objective view on where your business is today. A business valuation advisor will conduct a financial statement analysis. This analysis involves common size analysis, ratio analysis, trend analysis and industry comparative analysis. The advisor will use this financial statement analysis to compare your business to the other businesses in the industry. The value of the business is based on not only the multiples similar businesses in the industry are selling for, but it is important to determine the business’s annual cash flow. It may be determined that your business is performing better than the industry and has substantial more annual cash flow. In the end, a baseline value is determined.

Once a baseline business value has been determined, it is time to look to the future:

Goal Setting. We can look to improve the business through setting goals to increase revenues, cut costs, increase the bottom line, add divisions or add products/services. On an annual or semiannual basis, an updated business valuation can be performed. You can then compare the new value determined for the business, after your goals have been set and strategies implemented, to the baseline business value to measure the performance and see if you reached those goals.
Increase Value. In order to improve the overall value of the business, it may not be all about the bottom line. You can increase revenues and cut costs, improving the business’s net income, but that may not be the ultimate driver of value for your business. We may look to increase the overall cash flow, acquire new equipment, pay down outstanding debts, add divisions or acquire other businesses.
Exit Planning. You may have no intentions on selling your business today. Suppose you are unexpectedly approached by a potential buyer and they make you an offer on your business. It is imperative to know the true value of the business, to make a proper decision on the offer.

Perhaps you are not planning to sell the business, but rather pass it down to a family member or employee. Passing down the business involves several complicated issues, such as how to logically divide the business and allocate value. Business valuations help owners establish a baseline value that they can use as a springboard for future planning whether stock is intended to be purchased, gifted or inherited. Read more about succession planning here.

The business valuation advisors at Yeo & Yeo CPAs & Business Consultants can review your company’s financial position and determine its value. A valuation advisor can help you, your family and your attorney customize solutions to meet your goals and special needs. Read more about business valuations here.

Expect the unexpected. No one knows when their plans will change or what unforeseen circumstances may come along the way. Be prepared and confident for the future to come, when you know the true value of your business.

The long-awaited 2019 Compliance Supplement was released by the Office of Management and Budget (OMB) on July 1, 2019. It is effective for audits of fiscal years beginning after June 30, 2018. The new supplement includes many key changes after last year’s “skinny” version was released in May 2018. The most talked-about change was the inclusion of a mandate that each agency limit the number of requirements identified as being subject to the compliance audit to six. The only exception is the Research and Development cluster which was permitted to identify seven requirements. Part 2 of the supplement, Matrix of Compliance Requirements, identifies the requirements relevant to each major program this year, and the requirements are likely to be different from those in prior years.

What does this change for the audit? Not as much as you might imagine. While the respective agencies limited the number of requirements, due to the late release, the Michigan Department of Education (MDE) issued their 2018-2019 Michigan School Auditing Manual before the final version of the Compliance Supplement was available. As a result, some of the compliance requirements shown as being “not subject to audit” in the Compliance Supplement, i.e., Equipment/Real Property Management in the Child Nutrition Cluster, are still deemed relevant by MDE, thus still required to be tested by the school district’s auditor as part of the Single Audit.

Additional Changes

Increased Procurement Threshold

The 2017 and 2018 National Defense Authorization Acts (NDAA) increased the micro-purchase threshold to $10,000 for procurement under grants, first for institutions of higher education, nonprofit entities, nonprofit research organizations, or independent research institutes and, later, for effectively all auditees for all federal grants. However, these changes have not yet been formally codified in the Federal Acquisition Regulations at 48 CFR Subpart 2.1 and early implementation is not permissible. While OMB issued a memorandum (M-18-18) on June 20, 2018, that clarified the implementation date, it was recognized that there was confusion as to when it was truly applicable. As a result, OMB stated that auditors are not expected to develop audit findings for school districts that have implemented the increased purchase threshold, as long as the school district updated their federal procurement policy. If the policy contains a blanket statement that the district will follow federal requirements, it is expected that they are still complying with the $3,500 micro-purchase threshold.

Internal Controls

Part 6 of the Compliance Supplement received a major overhaul with increased requirements for internal controls, why they are important, and specific examples. These examples include both entity-wide controls and items specific to each type of compliance requirement. The updates were implemented to more closely align the audit requirements with the five components of internal controls as identified by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework: control environment, risk assessment, control activities, information and communication, and monitoring. School district auditors will have an increased focus on risk assessment this year and auditees should expect more questions relating to internal control than in the past.

The changes above are those that will be the most relevant to school districts as the 2019 fiscal year audits are underway. We recommend that district management review their policies and procedures that are currently in place to be as prepared as possible for their auditors. Districts should carefully go over their request or “prepared by client” (PBC) list, as there may be new or more extensive items requested. Internal control narratives should be updated with the most relevant and timely information. Communication is always key, but especially important during a year of change. Yeo & Yeo’s Education Services Group is here to help with any questions or concerns that you may have.

Redesigned Online Tool Makes it Easier to Do a Paycheck Checkup

IRS News Release August 6, 2019:

The Internal Revenue Service today launched the new Tax Withholding Estimator, an expanded, mobile-friendly online tool designed to make it easier for everyone to have the right amount of tax withheld during the year.

The Tax Withholding Estimator replaces the Withholding Calculator, which offered workers a convenient online method for checking their withholding. The new Tax Withholding Estimator offers workers, as well as retirees, self-employed individuals and other taxpayers, a more user-friendly step-by-step tool for effectively tailoring the amount of income tax they have withheld from wages and pension payments.

“The new estimator takes a new approach and makes it easier for taxpayers to review their withholding,” said IRS Commissioner Chuck Rettig. “This is part of an ongoing effort by the IRS to improve quality services as we continue to pursue modernization and enhancements of our taxpayer relationships.”

The IRS took the feedback and concerns of taxpayers and tax professionals to develop the Tax Withholding Estimator, which offers a variety of new user-friendly features including:

Plain language throughout the tool to improve comprehension.
The ability to more effectively target at the time of filing either a tax due amount close to zero or a refund amount.
A new progress tracker to help users see how much more information they need to input.
The ability to move back and forth through the steps, correct previous entries and skip questions that don’t apply.
Enhanced tips and links to help the user quickly determine if they qualify for various tax credits and deductions.
Self-employment tax for a user who has self-employment income in addition to wages or pensions.
Automatic calculation of the taxable portion of any Social Security benefits.
A mobile-friendly design.

In addition, the new Tax Withholding Estimator makes it easier to enter wages and withholding for each job held by the taxpayer and their spouse, as well as separately entering pensions and other sources of income. At the end of the process, the tool makes specific withholding recommendations for each job and each spouse and clearly explains what the taxpayer should do next.

The new Tax Withholding Estimator will help anyone doing tax planning for the last few months of 2019. Like last year, the IRS urges everyone to do a Paycheck Checkup and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It’s also an important step for those who made withholding adjustments in 2018 or had a major life change.

Those most at risk of having too little tax withheld include:

those who itemized in the past but now take the increased standard deduction,
two-wage-earner households,
employees with nonwage sources of income, and
those with complex tax situations.

To get started, check out the Tax Withholding Estimator on IRS.gov.

It has been a year since the landmark case of South Dakota v. Wayfair, Inc. was decided. One by one, states continue to pass economic nexus provisions for sales tax. Economic nexus requires out-of-state businesses to collect sales tax (on taxable goods and services) for states in which they are not physically present once the business reaches a certain sales dollar threshold or a set number of transactions. Businesses have been scrambling to assess their risk and ensure they are compliant with these new sales tax laws.

Since last June, when the Wayfair case was remanded back to South Dakota, states with laws similar to South Dakota’s have begun enforcement. Others without laws previously in place have drafted and passed legislation so they too could increase their collection of sales tax in a world of consumers who are increasingly moving from brick and mortar stores to online marketplaces. Five states (AK, DE, MT, NH and OR) do not have a state sales tax. Currently, three (FL, LA and MO) of the 45 states that do have sales tax have not yet adopted an economic nexus provision for sales tax. Of those three, each one has begun the drafting process, but final versions have not yet been signed into law.

If all states’ sales tax laws were consistent, it would not be such a hard pill for businesses to swallow. However, when we look at the various states’ rules to compare what is taxable, they are all across the board. The differences are especially evident in the tech realm: Some states tax downloads, others tax digital goods and yet others tax SaaS (software as a service). Some tax all three of these; others tax none of the three.

Some states have multiple tax rates for different types of items or buyers. Even more states have local taxes to be collected that vary by county, city, township or mandated taxing jurisdictions. These circumstances can make neighbors on the same street subject to different tax rates based on their exact address, and it adds an additional layer of complexity for business compliance.

In determining economic nexus, some states have a dollar threshold or a number of transactions threshold, whereby crossing either line would subject a business to collecting sales tax within the state. Others require both a dollar threshold and a number of transactions threshold to be met, so that both must be present to trigger the collection obligation. Some laws base the dollar amounts on taxable sales only, where others use gross receipts. “Transactions” too can be tricky, since what counts as a transaction is often not explicitly defined.

Further, determining how quickly a business needs to react to hitting the threshold is a concern. In some states, the next transaction after hitting the threshold is subject to tax collection. Others allow for implementation in the next month, quarter or year.

One misconception is that Wayfair applies only to online retailers. The implications are more far-reaching. In many states, in addition to tangible goods, services are also subject to sales tax. In this global economy, it is not only online retailers who cross state lines. Wayfair impacts all businesses with sales outside of their home state.

Yeo & Yeo is working with businesses to evaluate sales tax collection obligations. We assess risk and obligations by looking at not only what the business does, but also how it is done and where. We analyze sales by state along with other business activity. Working with key personnel within the business, we identify filing obligations and assist with registrations and voluntary disclosure agreements. This allows employees to focus on their business while we work through the intricacies state by state.

Could your business be at risk? We are available to discuss your business operations and determine whether an in-depth analysis is warranted. Please reach out to us at 800.968.0010.

If you’re lucky enough to be a winner at gambling or the lottery, congratulations! After you celebrate, be ready to deal with the tax consequences of your good fortune.

Winning at gambling

Whether you win at the casino, a bingo hall, or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line on Schedule 1 of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the race track turns into a $110 win, you’ve won $80, not $110.

You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. So you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.

Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.

Winning the lottery

The chances of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.

Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.

You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.

If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.

Since your federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

We can help

If you’re fortunate enough to hit a sizable jackpot, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.

The record-high lifetime exemption amount currently in effect means that fewer families are affected by gift and estate taxes. As a result, the estate planning focus for many people has shifted from transfer taxes to income taxes. However, the Tax Cuts and Jobs Act (TCJA) imposed limitations on certain itemized deductions that affected many taxpayers.

The TCJA imposed a $10,000 limitation on combined state and local income taxes and property taxes while also increasing standard deductions to $12,000 for a single filer and $24,000 for a joint filer. These changes made it much more difficult for most taxpayers to itemize their deductions and impacted traditional tax planning strategies. However, strategies are still available that will allow you to deduct both state and local income taxes and property taxes over the $10,000 limit.

The use of one or several nongrantor trusts can be an effective option to reduce income taxes. Nongrantor trusts offer a way around the itemized deduction limitations imposed by the TCJA and may increase the overall benefit of the newly-created qualified business income (QBI) deduction.

What is a nongrantor trust?

A nongrantor trust is simply a trust that is a separate taxable entity from the grantor, or creator of the trust. The trust owns the assets it holds and is responsible for taxes on any income those assets generate. A grantor trust, in contrast, is one in which the grantor retains certain powers and, therefore, is treated as the owner for income tax purposes.

Both grantor and nongrantor trusts can be structured so that contributions are considered “completed gifts” for transfer tax purposes (thereby removing contributed assets from the grantor’s taxable estate). Traditionally, grantor trusts have been the estate planning tool of choice because the trust’s income is taxed to the grantor. This ultimately reduces the size of the grantor’s estate and allows the trust assets to grow tax-free, leaving more wealth for beneficiaries. Essentially, the grantor’s tax payments serve as an additional tax-free gift.

With less emphasis today on gift and estate tax savings, nongrantor trusts have become a viable option for individuals to reduce their overall income tax liabilities while still maintaining their estate planning strategy.

How can nongrantor trusts reduce income taxes?

Nongrantor trusts may offer a way to avoid the itemized deduction limitations imposed by the TCJA. By placing assets in nongrantor trusts, it may be possible to increase your deductions, because each trust enjoys its own $10,000 state and local income tax and property tax deduction.

For example, Randy and Kate, a married couple filing jointly, pay well over $10,000 per year in state income taxes. They also own two homes, each of which generates $20,000 per year in property taxes. Under the TCJA, the couple’s state and local income tax deduction is limited to $10,000, which covers a portion of their state income taxes, but they receive no tax benefit for the $40,000 they pay in property taxes.

To avoid this limitation, Randy and Kate transfer the two homes to an LLC, together with assets that earn approximately $40,000 per year in income. Next, they give 25% LLC interests to four nongrantor trusts. Each trust earns around $10,000 per year, which is offset by its $10,000 property tax deduction. Essentially, this strategy allows the couple to deduct their entire $40,000 property tax bill.

In addition to avoiding the itemized deduction limitations, nongrantor trusts also enjoy their own qualified business income deduction. This deduction can be as much as 20% of a taxpayer’s qualified business income from a pass-through entity (partnership or S-Corp) or sole proprietorship; C-Corporations and their owners are not eligible for this deduction. However, the qualified business income deduction itself has several limitations, one of which disallows an individual’s entire QBI deduction if their adjusted gross income is over a certain threshold.

Since a nongrantor trust is a separate taxable entity, it is allowed its own QBI deduction. If structured correctly, an individual taxpayer not eligible for his or her own QBI deduction, or whose deduction is being limited, may be able to maximize their overall QBI deduction by spreading business income across one or several nongrantor trusts. Since this would involve gifting shares or interests in a company to the nongrantor trusts and potentially triggering transfer taxes, this option should be considered as part of an overall estate planning strategy.

Beware the multiple trust rule

If you’re considering this strategy, be aware that the tax code contains a provision that treats multiple trusts with substantially the same grantors and beneficiaries as a single trust if their purpose is tax avoidance. To ensure that this rule doesn’t erase the benefits of the nongrantor trust strategy, designate a different beneficiary for each trust.

If you would like additional information about other ways to reduce your future tax liabilities, please contact a Yeo & Yeo tax professional.