Business Owners: An Exit Strategy Should Be Part Of Your Tax Planning

Tax planning is a juggling act for business owners. You have to keep your eye on your company’s income and expenses and applicable tax breaks (especially if you own a pass-through entity). But you also must look out for your own financial future.

For example, you need to develop an exit strategy so that taxes don’t trip you up when you retire or leave the business for some other reason. An exit strategy is a plan for passing on responsibility for running the company, transferring ownership and extracting your money from the business.

Buy-sell agreement

When a business has more than one owner, a buy-sell agreement can be a powerful tool. The agreement controls what happens to the business when a specified event occurs, such as an owner’s retirement, disability or death. Among other benefits, a well-drafted agreement:

• Provides a ready market for the departing owner’s shares,
• Prescribes a method for setting a price for the shares, and
• Allows business continuity by preventing disagreements caused by new owners.

A key issue with any buy-sell agreement is providing the buyer(s) with a means of funding the purchase. Life or disability insurance often helps fulfill this need and can give rise to several tax issues and opportunities. One of the biggest advantages of life insurance as a funding method is that proceeds generally are excluded from the beneficiary’s taxable income.

Succession within the family

You can pass your business on to family members by giving them interests, selling them interests or doing some of each. Be sure to consider your income needs, the tax consequences, and how family members will feel about your choice.

Under the annual gift tax exclusion, you can gift up to $15,000 of ownership interests without using up any of your lifetime gift and estate tax exemption. Valuation discounts may further reduce the taxable value of the gift.

With the gift and estate tax exemption approximately doubled through 2025, gift and estate taxes may be less of a concern for some business owners. But others may want to make substantial transfers now to take maximum advantage of the high exemption. What’s right for you will depend on the value of your business and your timeline for transferring ownership.

Plan ahead

If you don’t have co-owners or want to pass the business to family members, other options include a management buyout, an employee stock ownership plan (ESOP) or a sale to an outsider. Each involves a variety of tax and nontax considerations.

Please contact us to discuss your exit strategy. To be successful, your strategy will require planning well in advance of the transition.

© 2018

The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly.

With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.

Taxation of pass-through entities

These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:

• Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
• A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)
• Changes to many other tax breaks for individuals that will impact owners’ overall tax liability

Taxation of corporations

These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:

• Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
• Replacement of the flat PSC rate of 35% with a flat rate of 21%
• Repeal of the 20% corporate alternative minimum tax (AMT)

Tax break positives

These changes generally apply to both pass-through entities and corporations:

• Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets
• Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
• A new tax credit for employer-paid family and medical leave

Tax break negatives

These changes generally also apply to both pass-through entities and corporations:

• A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
• New limits on net operating loss (NOL) deductions
• Elimination of the Section 199 deduction (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction”
• A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
• New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Preparing for 2018 filing

Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too.

© 2018

We are pleased to announce that Rachel Van Slembrouck, CPA, was recently honored with the most prestigious award bestowed by the firm, the Spirit of Yeo award. The Spirit of Yeo award recognizes an individual within the firm who exemplifies the attributes of the organization’s mission and core values.

“Rachel’s attention to client service is outstanding,” said President & CEO Thomas Hollerback. “Her clients rave about her, she is very responsive to their needs and genuinely cares about every one of them. She is deserving of the award, and we are proud of her accomplishments as well as her commitment to serving the community.”

Van Slembrouck is a manager in the Saginaw office and serves in the consulting service line, specializing in outsourced accounting. She is also a member of the firm’s Client Accounting Software Team.

Van Slembrouck received multiple nominations for the Spirit of Yeo Award. One of her nominators said, “Rachel is championing our outsourced accounting services. The consulting service line has had great success due to Rachel’s ability to build client relationships and train the staff to expand our outsourced accounting solutions.”Another nominator said, “Rachel puts her heart and soul into everything she does and holds herself to the highest standards. She is well organized and a great communicator. She demonstrates great leadership.”

In the community, she serves as the treasurer for the Saginaw Valley State University College of Business and Management’s Young Alumni board. She is a board member for the Saginaw County Animal Control Advisory Council, and was treasurer for the August 2018 Saginaw County Animal Control Millage campaign. Van Slembrouck also volunteers as a volleyball coach at Bethlehem Lutheran School.

2018 marked the fifth year of the award with Yeo & Yeo employees submitting 32 nominations for 23 individuals. The firm’s Career Advocacy Team reviewed the submissions, and many individuals were nominated more than once.

Our affiliate, Yeo & Yeo Technology is proud to have secured another two-year contract with the Regional Educational Media Center Association of Michigan (REMC) to sell Ergotron products during 2019 and 2020. Beginning January 1, 2019, the REMC contract allows us to provide special, pre-approved, bid pricing to schools, local and state government entities, and teaching hospitals.

Learn more about Yeo & Yeo Technology and REMC SAVE. 

Governor Snyder recently signed legislation that will affect most Michigan businesses. Yeo & Yeo wants to keep you informed of changes in Michigan Minimum Wage and the new Earned Sick Leave Act.

Michigan Minimum Wage Increases

• Requires a gradual increase in minimum wage from $9.25 per hour to $12.05 per hour by January 1, 2030, based on the following schedule:

End of March 2019: $9.45/hour

1/1/20: $9.65/hour

1/1/21: $9.87/hour

1/1/22: $10.10/hour

1/1/23: $10.33/hour

1/1/24: $10.56/hour

1/1/25: $10.80/hour

1/1/26: $11.04/hour

1/1/27: $11.29/hour

1/1/28: $11.54/hour

1/1/29: $11.79/hour

1/1/30: $12.05/hour

• No inflationary increases.

• The minimum wage for tipped employees remains tied to 38% of the regular minimum wage rate.*

*Under the law, all tipped employees are guaranteed to make at least the minimum wage. If their tips plus the tipped employee minimum wage does not equal or exceed the regular minimum wage, the employer must pay any shortfall to the employee. Failure to comply results in fines and fees.

Paid Sick Leave

The Act goes into effect in March 2019.

Which employers and employees are exempt?

• Applies only to employers who employ 50 or more employees.
• Time begins to accrue on the effective date or date of hire, but the employer may allow new employees to wait 90 days before using their time.
• Exempts employees exempt from FLSA overtime requirements, private sector employees covered by a collective bargaining agreement, temporary workers, employees who work in other states, independent contractors, variable hour employees, certain part-time and seasonal employees and flight deck, cabin crew and railroad workers. (Note: Part-time is defined as an individual who has worked, on average, fewer than 25 hours/week during the preceding calendar year. Seasonal employee is defined as an individual employed by an employer for 25 weeks or less in a calendar year for a job scheduled for 25 weeks or fewer.)

Accrual and carry-over

• Employees would accrue 1 hour of paid sick leave for every 35 hours worked, up to 40 hours per year. Allows employer to limit accrual to 1 hour per week. An employer is not required to allow an eligible employee to use more than 40 hours of paid sick leave in a single benefit year or to carry over more than 40 hours of time from one benefit year to another.
• Employers may provide all 40 hours at the start of a benefit year to avoid carry-over. Can pro-rate time for new employees.
• The law creates a rebuttable presumption that an employer complies with the law if the employer provides the requisite hours annually. This time can include paid vacation days, personal days and paid time off.

Use and payment of time

• Time may be used in 1-hour increments unless the employer has a different increment policy and that policy is in writing in an employee handbook.
• The employer must pay at a pay rate equal to the greater of either the normal hourly wage, the base wage or the applicable minimum wage rate. An employer is not required to include overtime pay, holiday pay, bonuses, commissions, supplemental pay, piece-rate pay or gratuities in the calculation. 

Notification / documentation

• The employer may require the employee to comply with the employer’s usual and customary notification, procedural and documentation requirements. Employer must give the employee three days to produce any required documentation.

Litigation Support , fines and fees

• The law creates an administrative process for employees to lodge complaints. The Department must issue a determination upon conclusion of an investigation and inform the employer of its appeals rights. The Department may assess payment of medical leave and back-pay and will serve as the trustee.
• The law ensures employees are aware of their rights and able to seek relief if they’ve been affected by a violation.

Please contact Yeo & Yeo if you need assistance with implementing these laws into your payroll process.

Tax planning is a year-round activity, but there are still some year-end strategies you can use to lower your 2018 tax bill. Here are six last-minute tax moves business owners should consider:

1. Postpone invoices. If your business uses the cash method of accounting, and it would benefit from deferring income to next year, wait until early 2019 to send invoices. Accrual-basis businesses can defer recognition of certain advance payments for products to be delivered or services to be provided next year.
2. Prepay expenses. A cash-basis business may be able to reduce its 2018 taxes by prepaying certain expenses — such as lease payments, insurance premiums, utility bills, office supplies and taxes — before the end of the year. Many expenses can be deducted up to 12 months in advance.
3. Buy equipment. Take advantage of 100% bonus depreciation and Section 179 expensing to deduct the full cost of qualifying equipment or other fixed assets. Under the Tax Cuts and Jobs Act, bonus depreciation, like Sec. 179 expensing, is now available for both new and used assets. Keep in mind that, to deduct the expense on your 2018 return, the assets must be placed in service — not just purchased — by the end of the year.
4. Use credit cards. What if you’d like to prepay expenses or buy equipment before the end of the year, but you don’t have the cash? Consider using your business credit card. Generally, expenses paid by credit card are deductible when charged, even if you don’t pay the credit card bill until next year.
5. Contribute to retirement plans. If you’re self-employed or own a pass-through business — such as a partnership, limited liability company or S corporation — one of the best ways to reduce your 2018 tax bill is to increase deductible contributions to retirement plans. Usually, these contributions must be made by year-end. But certain plans — such as SEP IRAs — allow your business to make 2018 contributions up until its tax return due date (including extensions).
6. Qualify for the pass-through deduction. If your business is a sole proprietorship or pass-through entity, you may qualify for the new pass-through deduction of up to 20% of qualified business income. But if your taxable income exceeds $157,500 ($315,000 for joint filers), certain limitations kick in that can reduce or even eliminate the deduction. One way to avoid these limitations is to reduce your income below the threshold — for example, by having your business increase its retirement plan contributions.
   
   

Most of these strategies are subject to various limitations and restrictions beyond what we’ve covered here, so please consult us before you implement them. We can also offer more ideas for reducing your taxes this year and next.

© 2018

With the dawn of 2019 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2018 ends:

Check your FSA balance. If you have a Flexible Spending Account (FSA) for healthcare expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.

Max out tax-advantaged savings. Reduce your 2018 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2018 return if they’re made by April 15, 2019.)

Take RMDs. If you’ve reached age 70½, you generally must take required minimum distributions (RMDs) from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2019, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.

Consider a QCD. If you’re 70½ or older and charitably inclined, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).

Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.

Contribute to a Sec. 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).

Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld due to changes under the Tax Cuts and Jobs Act. Use its withholding calculator (available at irs.gov) to review your situation. If it looks like you could face underpayment penalties, increase withholdings from your or your spouse’s wages for the remainder of the year. (Withholdings, unlike estimated tax payments, are treated as if they were paid evenly over the year.)

For assistance with these and other year-end planning ideas, please contact us.

© 2018

Crowdfunding, also known as crowdsourcing, was originally used by entrepreneurs and artists to raise money for creative projects and business endeavors; however, it has increasingly become a way for teachers to obtain classroom supplies or funding for projects. Education-focused crowdsourcing sites have been introduced to help teachers fill the gaps in funding provided by the school. It is important for districts to have the proper policies and procedures in place regarding these funds.

Crowdfunding policy

The policy should be broad and define what crowdfunding is, and make it clear which activities are allowable. Typically, this involves the use of an online service or website-based platform to host the fundraiser and a digital campaign to solicit funds. The specific details of the project management should be outlined in the district’s procedures manual.

Crowdfunding procedures

Key elements of the procedures surrounding crowdfunding include the following:

• Platform approval – A list of websites/services permitted should be approved by an appropriate level of authority (i.e., the superintendent).
• Application/pre-approval – An application should be submitted to the proper level of authority (principal, etc.) to review and determine if any issues are present. The application should include the following:
  • Budget for the project
  • Description of the project that will be used on the website, including any photos. This description should avoid 1) casting the district in a negative light, 2) specific student needs, and 3) implying that the funds are necessary for the students to be appropriately served and educated.
  • Copy of the personal profile that will be utilized by the staff member on the site
  • Confirmation that the funds raised and/or the items purchased by the crowdfunding site will go directly from the crowdfunding site to the Principal (or another appropriate body) of the school that will benefit
  • Description of any rewards, perks, or thank-you gifts that will be provided to donors, including the cost and source
• Submission – Once approved, the project can be posted to the crowdfunding site.
• Tax implications – The crowdfunding site should be a charitable organization (i.e., a 501(c)(3) entity) so that donations to it are tax-deductible to the donors. If not, the posting should make it clear that donors are responsible for any tax consequences.
• Campaign – The staff member should keep the Principal informed of the status of the campaign as it progresses.
• Conclusion – Once the funds and/or supplies/equipment are received by the district, they should be made available to the staff member responsible for the campaign and used specifically for the stated purpose of the project. Documentation should be submitted for any expenditures of the funds and a final expenditure report should be utilized at its conclusion.
• Ownership – All funds raised and materials donated should be considered the property of the district. In the event the staff member who ran the crowdfunding campaign terminates his/her employment with the district, the funds/materials should remain with the district.

Please contact your local Yeo & Yeo professional if you have questions or need additional information about crowdfunding.

Trusts and estates have been allowed a variety of miscellaneous itemized deductions. However, the Tax Cuts and Jobs Act (TCJA) has changed these deductions.

Miscellaneous itemized deductions (MIDS) are generally costs that would be incurred by individuals as well as estates and trusts. MIDS have historically been deductible on both individual and trust tax returns to the extent that they exceed the 2 percent of Adjusted Gross Income. The TCJA has suspended these deductions for tax years 2018-2025. So, how does this impact your client’s trust?

Many costs will still be deductible. In general, if an individual would not incur the cost, it is deductible. Those include:

• Fiduciary fees not associated with investment advice
• Appraisal fees incurred for the administration of a trust or estate
• Probate fees
• Bond premiums
• Legal notices
• Fiduciary accountings
• Exemptions
• Income distribution deduction

Many costs will no longer be deductible by a trust. In general, if the cost could also be incurred by an individual, it would not be deductible. These include:

• Investment advisory fees—except for fees incurred to implement a specialized investment strategy; distinguish between normal fees versus these extraordinary fees
• Appraisal fees (unless they are incurred in the administration of a trust or an estate)—
• oAn appraisal taken due to the death of the taxpayer is deductible
• oAn appraisal taken due to a bank request is not nondeductible
• Property ownership costs for nontrade or business property—i.e., utilities, insurance, etc.
• oIf the trust rents out a property, these costs would be deductible to offset the rental income
• oMortgage interest and property taxes ($10,000 state and local tax limitation applies) are still deductible
• MIDS from partnerships and S Corps
• Excess deductions on termination of an estate or trust
• Safe deposit box rental

If you wish to discuss the impact of these deductibility rules on a particular trust or estate situation, please contact Yeo & Yeo.

View the press release here.

Wage Statements Must Be Submitted Before Filing Sales, Use and Withholding Taxes Annual Return

Business taxpayers are reminded about a new state law that modifies the due date for wage statements, according to the Michigan Department of Treasury (Treasury).

Public Act 118 of 2018 requires that wage statements — such as W-2, W-2G, 1099-R and 1099-MISC — must be submitted on or before Jan. 31, 2019. This state law change was made to match both Treasury and Internal Revenue Service wage statement submission deadlines.

Beginning January 2019, employers may electronically upload their wage statements by using Michigan Treasury Online (MTO). Employers with more than 250 employees must file their wage statements electronically.

For more information about MTO and how to file wage statements electronically, visit: mto.treasury.michigan.gov

Although the wage statements are due on or before Jan. 31, 2019, the Sales, Use and Withholding Taxes Annual Return (Form 5081) is still due on Feb. 28. Wage statements filed on or before the Jan. 31 due date need not be submitted again with Form 5081.

“Business taxpayers should keep these changes and options in mind when submitting wage statements and filing returns,” said State Deputy Treasurer Glenn White, who oversees Treasury’s Tax Administration programs. “If deadlines are missed, there could be processing delays and penalties applied.”

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

Yeo & Yeo recognized 18 associates across the firm and its affiliates for years of dedicated service at the firm’s annual holiday celebration held at Horizons Conference Center in Saginaw.

Thomas Hollerback, President & CEO, Saginaw, is CEO for all of Yeo & Yeo’s nine offices and affiliates, was honored for 35 years of service. Tom serves on Yeo & Yeo’s Board of Directors, is the Cornerstone Leader for Yeo & Yeo’s One Firm Concept, and M & A and Investments. He has served as the chairman of the Saginaw Medical Federal Credit Union for more than 20 years.

Peter Bender, CPA, CFP, Managing Principal, Saginaw, was honored for 30 years of service. Peter is the Managing Principal for Yeo & Yeo’s Saginaw office, is the leader for affiliate Yeo & Yeo Financial Services and is a member of Yeo & Yeo’s board of directors. He also serves on the board of Wellspring Lutheran Services, is board chairman for the Frankenmuth Credit Union and serves on the Valley Lutheran High School Growing Campaign committee. Check the background of Pete Bender on FINRA’s Broker Check.

Michael Oliphant, CPA, CVA, CFE, Principal, Kalamazoo, was honored for 25 years of service. Michael is the firm’s Organic Growth Cornerstone leader and a member of the Business Valuation and Litigation Support Services Group. He specializes in business consulting, financial reporting, and tax planning and preparation. Michael is a member of the Rotary Club of Kalamazoo and treasurer of Kalamazoo Habitat for Humanity.

The following professionals were honored for 20 years of service.

Danielle Cary, CPA, Principal, Ann Arbor, Danielle leads the firm’s State and Local Tax Team and serves in the Tax Service Line. She has expertise in tax planning services for individuals and businesses, multi-state taxation, and business consulting.

Brian Dixon, CPA, Principal, Saginaw, serves in the Assurance Service Line and has expertise in audits for healthcare organizations, schools, and nonprofits. He is board treasurer for the United Way of Saginaw County and the Frankenmuth Credit Union. He also serves on the board of the Saginaw Area Jaycees Foundation.

Denise Garrett, CPC, CPPM, CSFAC, AAPC Fellow, Training & Development Coordinator, Yeo & Yeo Medical Billing & Consulting, is an account manager and helps staff with coding questions and appealing claims. She also works on consulting projects including billing audits and chart audits. Denise is a Certified Professional Coder and a Certified Foot & Ankle Surgical Coder, with expertise in the coding of diagnoses, services, and procedures for physician practices.

Suzanne Lozano, CPA, Principal, Saginaw, leads the firm’s Consulting Service Line, with a focus on healthcare. She serves on the Saginaw County Chamber board and is involved with the Mid-Michigan Children’s Museum, Heritage High School, and Peace Lutheran Church and School.

Christine Porras, Payroll Supervisor, Saginaw, oversees client payroll services. She is a co-founder of the Great Lakes Bay Chapter of the American Payroll Association. She is also the treasurer of the Saginaw County Veteran’s Memorial Plaza.

Jean Vollink, CPA, Tax Supervisor, Kalamazoo, works part-time in the Consulting Service Line and the Tax Service Line with a focus on tax preparation and serves on the firm’s Tax Services Group and the Estate & Trust Services Group. She joined Yeo & Yeo through a merger and brought with her 23 years of prior accounting experience.

The following professionals were honored for 15 years of service.

Linda Bender, Accounting Assistant, Yeo & Yeo Technology, works part-time and has expertise in purchasing, hardware and software billings, and merchandise returns. She is active in three different ministries at St. Lorenz Church in Frankenmuth.

Kimberly Jako, Administrative Assistant, Kalamazoo, is responsible for tax e-filing and document formatting and management. She is a volunteer with the Kalamazoo Animal Rescue.

Kristi Krafft-Bellsky, CPA, Director of Quality Control, Saginaw, is responsible for internal quality control throughout Yeo & Yeo’s nine offices and implements policies to comply with professional standards and regulatory requirements and oversees the firm’s peer review process. Kristi is the treasurer and chair of the Frankenmuth Community Foundation’s Legacy Ball. She is also the treasurer of the Frankenmuth Jaycees’ $1 million spray park project.

Jan Morris, Payroll Accountant, Saginaw, works part-time processing payroll for clients. She served the Saginaw Valley Concert Association as a board member for six years and board president for three years.

The following professionals were honored for 10 years of service.

Marisa Ahrens, CPA, Manager, Saginaw, audits employee benefit plans, nonprofits, school districts, and healthcare organizations. Marisa is the board treasurer for the Saginaw County Business & Education Partnership, a board member for the Mid-Michigan Children’s Museum, a member of the Frankenmuth Jaycees and an AYSO 5U assistant soccer coach.

Jody Darby, Help Desk Coordinator, Yeo & Yeo Technology, works with customers to schedule appointments, solve problems and assist with inquiries. She also coordinates multiple dispatch schedules for the affiliates and technicians.

Jen Gibas, Administrative Assistant, Saginaw, serves in the Consulting Service Line and leads the Administrative Assistant team in Saginaw. She serves two of the Saginaw office principals and performs many administrative tasks to keep the office running smoothly. She oversees most of the supply ordering for the firm.

David Jewell, CPA, Principal, Kalamazoo, is the leader of the firm’s Tax Service Line and is responsible for the oversight of the firm’s tax services. He devotes significant time to the Boys & Girls Club of Greater Kalamazoo – he serves on the Club’s executive committee and is board treasurer and chair of the finance committee.

Jessica Rolfe, CPA, Senior Manager, Saginaw, is an auditor and leads the firm’s Nonprofit Services Group. She serves in the Assurance Service Line and specializes in school districts, nonprofits, and healthcare organizations. She is treasurer of Tri-CAP and an allocation panel member for the United Way of Midland County.

With the advancements in technology – ranging from newer and more efficient machinery, to being able to run your farm from your phone – farmers have more opportunities today than ever before to keep their costs low. Today’s young farmers, many of whom have attended a secondary school specializing in agriculture, have been exposed to these new technologies and are finding ways to implement them into their farm management programs. The next step, and one that is sometimes overlooked, is making proper and timely adjustments to the production process to limit unnecessary spending in the field.

Having a strategy of what to plant where is nothing new to farmers; they do it every year. Right after the current year harvest ends, they are already planning for next year’s crop. In Michigan, looking ahead to the 2019 crop year, there are no signs that crop prices are going to skyrocket, so making sound planning decisions with your inputs is more important than ever before. Margins are going to be tighter, so it is even more important than in past years to make smart decisions on seed type, fertilizer and spray combinations, and other necessary input costs. What works in one field may not work in another, and being able to proactively identify those situations and respond in a cost-effective manner is what separates a profitable farm from the rest.

A few examples of farm management practices that act as tax planning methods as well include buying newer equipment with better efficiencies, prepaying for seed, fertilizer, and spray, and controlling labor costs in the down months. With commodity prices where they are today, (and likely will remain for 2019), cash flow may not permit some of the above options. Buying new equipment at the end of the year to write off for tax purposes has been one of the most beneficial planning strategies for farmers in the past, but with commodity prices not being as strong recently and production costs rising, cash flow shortages have made this option more difficult.

With the TCJA, there are some new guidelines pertinant to the agriculture industry that can be utalized to minimize tax burden. Another way farmers plan for taxes is to prepay for expenses the year before they implement. Per the tax laws, you cannot deduct more than 50 percent of other operating expenses using prepaid plans. With cash flow difficulties that some farmers face, this option could also be harder to manage in future years.

However, other steps can be taken to maintain a profitable farm. Tracking inputs and keeping detailed records of when, how, and where you are putting inputs into the fields is key to keeping costs in check. Marketing your commodities to guarantee a certain price, instead of trying to guess when prices will be the highest, is another option to consider to make more with your crop yield. Finally, using results from the current year to make adjustments going forward will help preserve needed cash flow. Many software packages are available that help track these costs at the field level, which makes it easier to identify which fields are not performing up to par.

If you have any questions regarding methods used to track field input prices, please reach out to me or another member of Yeo & Yeo’s Agribusiness Services Group.

Prepare now for the following payroll changes that will take effect on January 1, 2019, and also consider some actions to take before year-end.

Michigan Minimum Wage and Earned Sick Leave Act.

Social Security Wage Base. The 2019 wage base will be $132,900. The employee and employer match will be 6.2%. The maximum deduction will be $8,239.80 ($132,900 x 6.2%).

Dependent Care Limits. The maximum exclusion from gross income under a dependent care program is $5,000 for an individual or a married couple filing jointly.

Health Flexible Spending Arrangements. The dollar limitation on voluntary employee salary reductions for contributions to a health flexible spending arrangement (FSA) is $2,700.

Health Savings Accounts. HSAs are for eligible individuals in a high deductible health plan. The maximum annual contribution that can be made to an HSA in 2019:

Individual: $3,500
Family: $7,000

Catch-up contributions: Individuals 55 and older can make additional catch-up contributions to an HSA until they are enrolled in Medicare. The additional allowable contribution is $1,000.

IRA Contribution Limits. The 2019 contribution limit for Simple IRAs is $13,000. The catch-up contribution for those age 50 or older by December 31, 2019, is $3,000.

401(k), 403(b) and 457 Contribution Limits. The contribution limit for these plans’ employee deferrals is $19,000. The catch-up contribution for those age 50 or older by December 31, 2019, is $6,000.

Scammers are Attempting to Collect Past-due Tax Debts with Fake Letters

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

In the scheme, taxpayers are sent what appears to be a government-looking letter about an overdue tax bill, asking the taxpayer to immediately call a toll-free number to resolve a tax debt or face asset seizure. The correspondence appears credible to the taxpayer because it uses specific personal facts about the outstanding tax debt pulled directly from publicly available information. The scammer’s letter attempts to lure the taxpayer into a situation where they could make a payment to a criminal.

Taxpayers who receive a letter from a scammer or have questions about their state debts should call Treasury’s Collections Service Center at 1-866-218-7224. A customer service representative can log the scam, verify outstanding state debts and provide flexible payment options. To learn more about Michigan’s taxes and the collections process, go to www.michigan.gov/taxes or follow the state Treasury Department on Twitter at @MITreasury.

Scams at this time of year are surging, from tax-related schemes to holiday phishing attempts. Yeo & Yeo shares key practices that can help you prevent falling victim to such scams.

1. Do not click on suspicious links or attachments in an email or call a number sent via email, mail, text or phone message 100c. Instead, go through an independent source such as an online google search to go to the company’s website for contact information and verification.
   
2. Do not reveal personal or company information until you have safely verified the source.
   
3. Keep computers and mobile devices secure by keeping all software updated and password protecting all access.
   
4. Stay abreast of current scams by signing up for free scam alerts from the Federal Trade Commission at ftc.gov/scams.
   

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

January 31

• File 2018 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
• Provide copies of 2018 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
• File 2018 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
• File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2018 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

February 28

• File 2018 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 1.)

March 15

• If a calendar-year partnership or S corporation, file or extend your 2018 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2018 contributions to pension and profit-sharing plans.

© 2018

The familiar W-4 Employee’s Withholding Allowance Certificate hasn’t undergone many significant changes in recent years.

However, as the Tax Cuts and Jobs Act (TCJA) completely overhauled the tax rules for individuals, the IRS has been hard at work revising the W-4. This past summer, the agency released a couple of drafts of the new version and its accompanying instructions, and invited comments from the public.

Recently, however, the IRS announced it’s postponing the application of the new version until 2020 while it works out some kinks. “Launching the redesigned form in 2020 will allow the Treasury and the IRS to properly implement changes to the withholding system and ensure taxpayers have a positive and simplified experience,” said U.S. Secretary of the Treasury Steven T. Mnuchin.

While we wait, here’s an overview of the evolution of this new form.

Individual Tax Changes

The TCJA has brought about a slew of tax changes. Among the key provisions affecting individuals are:

1. Most individual tax rates have been lowered and tax brackets adjusted. While the lowest rate remains at 10%, the top rate is reduced from 39.6% to 37%. In addition, the method for indexing future tax bracket adjustments has been changed, which generally is expected to result in smaller inflation-based increases.

2. Personal exemptions, including those for qualified dependents, have been eliminated. This may be offset somewhat for certain families by an increase in the Child Tax Credit (CTC), which has been doubled to $2,000. Of that amount, $1,400 is refundable.

3. Some itemized deductions have been scaled back and others eliminated. For instance, the deduction for state and local tax payments is limited to $10,000 annually. No deduction is allowed for miscellaneous expenses, including unreimbursed employee business expenses.

Because of these and other related changes, millions of employees who previously itemized deductions may be claiming the standard deduction. This standard deduction generally is effective for 2018 and is scheduled to expire December 31, 2025.

Highlights of W-4 Drafts

Tax simplification was one of the initial objectives when Congress tackled tax reform legislation. As a result, the W-4 the IRS initially proposed was only two pages long, half its previous length. The accompanying instructions, however, were 11 pages. Previously, the instructions were incorporated into the four-page W-4 document.

The draft W-4 contains no place to list the number of allowances claimed. What’s more, some historical components — including the Personal Allowances Worksheet, the Two-Earners/Multiple Jobs Worksheet — have disappeared.

Instead of featuring the number of allowances, the IRS added lines for the optional reporting of:

• non-wage income that isn’t subject to withholding,
  
• expected bonuses,
  
• itemized deductions,
  
• credits like the CTC, and
  
• wages of other household members.
  

Thus, withholding is tied directly to the calculation for individual income tax liability, rather than the number of allowances. Although this may be a more accurate method, it’s also more complicated on the front end.

Some critics maintain that employees may not be comfortable with sharing this information with employers. The American Institute of Certified Public Accountants (AICPA) has strongly objected to the proposal.

On the flip side, the IRS has made it clear that employers and employees will have the option of continuing to use the current W-4s. This reflects the agency’s goal to make the system “backwards compatible.” So, employees don’t have to file a new form and employers can rely on the ones they have on file.

Questions and Confusion

The new W-4 drafts seem to raise as many questions as they provide answers. Employers remain confused about certain aspects, such as if the new and old forms will co-exist in the same payroll system. Also, because the new withholding approach is tied to tax liability calculations, employees may be inclined to re-file W-4s whenever they get a pay raise. Other changes in circumstances might require frequent updates.

Bottom line: Due to the new format and the extra calculations, it may be more complicated for employees to figure out their withholding accurately.

© 2018

An important issue in personal injury and economic damages cases is whether the plaintiff will owe taxes on the settlement proceeds or an amount awarded by the court.

Injured parties who are unexpectedly hit with a hefty tax bill might not be made “whole” again, as demonstrated by this recent U.S. Tax Court case. (Zinger v. Commissioner, T.C. No. 2018-33, July 2, 2018.)

Employee Battles Army

In 2011, Nicole Zinger worked for the U.S. Army. One night, she was in a car accident on her drive home from work. Zinger’s injuries required physical therapy and her supervisor allowed her to classify the time she spends on treatments as sick time. That supervisor was reassigned in late 2011.

Zinger’s new supervisor was unaware of her accident and he was stricter regarding time-off requests. After a two-week vacation, Zinger’s grandmother fell ill and eventually died, requiring Zinger to take additional time off. When Zinger returned to work from her bereavement leave, her desk had been moved, isolating her from coworkers.

Zinger alleged that she often felt “belittled and personally attacked” by her new supervisor. She testified that, because of her interactions with the supervisor, “her heart began racing, she experienced shortness of breath, and she felt as though she might be having a heart attack.”

In May 2012, Zinger’s blood test revealed an elevated white blood cell count and she was placed on medical leave to determine her condition. When she returned to work she received a memorandum of reprimand from her supervisor for “discourteous behavior toward a supervisor.” Zinger subsequently filed a formal written grievance to dispute her supervisor’s memorandum. Her grievance listed Zinger’s medical issues and conditions, including “chest pains, shortness of breaths, hypertension due to stress, high blood pressure, and high white blood cell count.”

In June, Zinger took another medical leave to undergo additional testing. Her doctor identified her condition as anxiety, panic attacks and hypothyroidism. Her treatment included medication, rest and a stress-free environment. When Zinger returned to work in August she had lost her computer access and security clearance. She was required to sit at a desk with little work to perform.

Shortly thereafter, the U.S. Equal Employment Opportunity Commission (EEOC) began an investigation to determine whether Zinger was discriminated against based on sex and whether she was subjected to a hostile work environment. As a result, Zinger was placed on administrative leave while the EEOC conducted its investigation.

In January 2013, Zinger settled her EEOC complaint with the Army for $20,000. Pursuant to the settlement agreement, she resigned from federal service. The agreement didn’t refer to Zinger’s formal written grievance. It also didn’t identify any of her personal injuries or sickness.

Complex Tax Issues

Based on the nature of Zinger’s claims against the Army, she and her husband didn’t report the settlement proceeds on her 2013 federal income tax return.

The IRS issued a notice of deficiency for the unreported settlement. The Tax Court turned to the settlement agreement to determine how to classify the settlement proceeds. The agreement indicated that its purpose was to settle the taxpayer’s EEOC complaint. The EEOC statement of claims neither references any injuries or sickness nor allocates the $20,000 settlement payment as compensation to Zinger for any injuries or sickness.

Instead, the statement of claims explicitly states that the EEOC was investigating whether Zinger had been subjected to a hostile work environment or was discriminated against on the basis of sex. Therefore, the agreement suggests that the Army didn’t intend to compensate Zinger for injuries or sickness.

Because the settlement agreement didn’t reference 1) the taxpayer’s physical injuries, 2) her written grievance against the Army, or 3) the EEOC complaint that listed her physical injuries, the court determined that the taxpayer didn’t meet the required burden of proof. Therefore, the payment received pursuant to the settlement agreement wasn’t excludable from the Zingers’ gross income for 2013.

Lesson Learned

This case shows the importance of detailed settlement agreements. A defendant may not want to admit wrongdoing. But what’s spelled in a settlement agreement provides evidence to prove whether the proceeds meet the requirements to be excluded from gross income. In this case, an ambiguous settlement agreement proved costly to the taxpayer.

Before settling a dispute, discuss potential tax issues with a financial expert to minimize the risk of IRS scrutiny.

© 2018

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of Alex Wilson, CPA to manager. Along with his promotion, Wilson has transferred to Yeo & Yeo’s Alma office from Saginaw. Alex is a key member of the Firm’s agribusiness and construction service groups.

In addition to his role with Yeo & Yeo’s MAS division, Wilson is a member of the firm’s Agribusiness Services Group and the Construction Services Group. Wilson’s areas of expertise include business advisory services, strategic tax planning and Affordable Care Act reporting. He is also a member of the Leading Edge Alliance’s Young Professionals Steering Committee.

In addition to his role within Yeo & Yeo’s Management Advisory Services department, Wilson serves as a member of the MICPA Agribusiness Task Force, and the Leading Edge Alliance’s Young Professionals Steering Committee. At Yeo & Yeo, Wilson leads the Yeo Young Professionals group and serves as an advisor for the firm’s Career Advocacy Team.

In the community, Wilson volunteers with the Special Olympics Michigan and Central Michigan University’s Accounting Advisory Council.

The holiday season is fast approaching. It’s the time when people traditionally make gifts to charities. Generally, year-end donations increase the charitable deduction you can claim on the personal tax return you’ll file the next year. But 2018 is different from most previous tax years.

From 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) nearly doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. The TCJA also reduces or eliminates several itemized deductions.

As a result, millions of taxpayers who previously itemized deductions will instead claim the standard deduction for 2018, thereby eliminating the tax benefit from their charitable donations. Does it make more sense for you to itemize deductions or to take the standard deduction on your 2018 return? The answer to this question will determine your overall strategy for the rest of the year.

For those who will continue to itemize, it’s important to be creative at year end. Here are five ways to maximize the tax savings from your donations.

1. Bunch Donations

You can “bunch” donations in the tax years that you plan to itemize deductions, thereby exceeding the standard deduction amount. That way, you can reap tax rewards for your generosity by making donations that you can write off as itemized deductions.

If you expect to itemize deductions for 2018, consider increasing your charitable gift-giving at year end. You can generally deduct the full amount of cash contributions made this year, up to 60% of your adjusted gross income (AGI). Prior to the TCJA, the limit was 50% of AGI. Any excess is carried over for up to five years.

If you expect to claim the standard deduction for 2018, you might consider postponing large charitable gifts to 2019 or beyond, when you may be itemizing deductions. That way, you can still derive tax benefits for your donations.

2. Gift Property with Low Tax Basis

If you donate appreciated property to charity, your current deduction for those contributions is limited to 30% of your AGI. Any excess may be carried over for up to five years.

The value of the donation depends on how long you’ve owned the property. If you’ve owned donated property for more than a year, it would have qualified for a long-term gain had you sold it instead of donating it. In this situation, you can deduct its full fair market value on the date of the donation. However, if a sale of the donated property would have resulted in a short-term gain, you can deduct only your basis (generally, your initial cost).

Therefore, it makes sense to donate property with a low basis that you’ve owned longer than one year. For instance, suppose you acquired artwork for $5,000 in 2016 that’s now worth $15,000. If you donate the artwork to a charity in 2018, you can deduct $15,000. The appreciation in value from the date of acquisition to the date of the donation ($10,000) will never be taxed.

Conversely, you might decide to hold onto high-basis property, rather than donating it. Similarly, don’t donate low-basis property you have owned less than a year. Keep it until you qualify for a deduction based on the property’s full fair market value.

3. Set Up a Donor-Advised Fund

With a donor-advised fund, you can earmark money for future charitable gifts while qualifying for a tax deduction on your tax return. The money is invested and grows until it’s distributed to the designated charitable recipients.

Typically, a sponsoring financial institution manages the fund. It usually requires an initial minimum deposit of at least $1,000. In addition, you may have to pay annual fees to cover administrative and other expenses.

A donor-advised fund allows you to choose the qualified charitable organizations that will benefit from your generosity. Your recommendations are reviewed by staffers who verify that the charity is eligible to receive deductible contributions. Once the grant is approved, the money is sent to the specified charity, indicating that you’ve donated to the organization. Alternatively, gifts may be made anonymously.

The usual tax rules for charitable contributions apply. For instance, under the TCJA, current deductions to a donor-advised fund, when combined with other cash donations, are limited to 60% of AGI, with a five-year carryover for any excess.

4. Establish a Charitable Trust

A charitable remainder trust (CRT) can generate tax benefits in a year in which you expect to itemize deductions. How does it work? The CRT pays out income at regular intervals to the designated income beneficiary or beneficiaries (typically, you, your spouse or both). The trust terminates upon your death or a specified term of years. Then the remainder goes to the charity. The main tax benefits are as follows:

You can claim a charitable deduction based on the value of the remainder interest.

There’s no capital gains tax due on the value of any appreciated property transferred to the trust. The appreciation in value remains untaxed forever.

The property is removed from your taxable estate.

A CRT can be structured as a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). In either event, the term of the trust can’t exceed 20 years. With a CRAT, the payment must be a fixed amount equal to at least 5% of the initial value of the trust property, while a CRUT requires payment of a fixed percentage of not less than 5% of trust assets.

5. Transfer Funds from Your IRA

People age 70½ or older can choose to transfer funds directly from an IRA to a qualified charitable organization. Although the contribution isn’t deductible, it’s not subject to income tax, either. But because the donated IRA money would otherwise be taxed when you withdraw it, this treatment equates to a 100% deduction for the amount donated to charity.

The maximum amount you can transfer each year is $100,000. If your spouse has one or more IRAs set up in his or her own name and is also age 70½ or older, your spouse is entitled to a separate $100,000 annual limit.

To qualify for this tax break, the distribution must go directly from the IRA trustee to the charitable organization. In other words, the funds cannot pass through your hands on the way to the charity.

The transfer also counts as a required minimum distribution (RMD). Taxpayers age 70½ or older are required to take RMDs from their IRAs every year. So, you can effectively replace taxable RMDs with tax-free transfers to charity.

Act Now

There’s still time in 2018 to make moves that can cut your tax bill. Contact your tax advisor to review your personal situation and help modify your charitable giving strategy based on today’s tax law. If itemizing deductions is part of your tax plan for 2018, that could be a good reason to be especially generous this holiday season.

© 2018

Prepaying property taxes related to the current year but due the following year has long been one of the most popular and effective year-end tax-planning strategies. But does it still make sense in 2018?

The answer, for some people, is yes — accelerating this expense will increase their itemized deductions, reducing their tax bills. But for many, particularly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.

What’s changed?

The TCJA made two changes that affect the viability of this strategy. First, it nearly doubled the standard deduction to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for singles and married couples filing separately, so fewer taxpayers will itemize. Second, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes.

For property tax prepayment to make sense, two things must happen:

1. You must itemize (that is, your itemized deductions must exceed the standard deduction), and
2. Your other SALT expenses for the year must be less than $10,000.

If you don’t itemize, or you’ve already used up your $10,000 limit (on income or sales taxes or on previous property tax installments), accelerating your next property tax installment will provide no benefit.

Example

Joe and Mary, a married couple filing jointly, have incurred $5,000 in state income taxes, $5,000 in property taxes, $18,000 in qualified mortgage interest, and $4,000 in charitable donations, for itemized deductions totaling $32,000. Their next installment of 2018 property taxes, $5,000, is due in the spring of 2019. They’ve already reached the $10,000 SALT limit, so prepaying property taxes won’t reduce their tax bill.

Now suppose they live in a state with no income tax. In that case, prepayment would potentially make sense because it would be within the SALT limit and would increase their 2018 itemized deductions.

Look before you leap

Before you prepay property taxes, review your situation carefully to be sure it will provide a tax benefit. And keep in mind that, just because prepayment will increase your 2018 itemized deductions, it doesn’t necessarily mean that’s the best strategy. For example, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a greater benefit over the two-year period.

For help determining whether prepaying property taxes makes sense for you this year, contact us. We can also suggest other year-end tips for reducing your taxes.

© 2018