Using Nongrantor Trusts as an Effective Tax Planning Tool After the TCJA

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.

Pen and paper are great, but spreadsheets can maximize efficiency and assist users with the interpretation of data by presenting financial information both numerically and graphically. Spreadsheets allow for the input and manipulation of data that may enhance decision-making. Graphs that help tell the story can be created in a matter of moments. Following are factors to keep in mind when using spreadsheets. The commands provided are for Microsoft Excel 2016, but most work with other versions.

Uses for a Spreadsheet

• Budgets and forecasts 
• Reconciling financial information such as property taxes and grants 
• Analyzing situations with variable financial elements 
• Complex calculations  

Naming Conventions

Defining ahead of time how naming conventions will be used will increase the organization of documents, and make locating those documents easier. When information pertains to a specific fiscal year, we recommend starting the naming convention with the fiscal year end date. For instance, the original budget for the year ended June 30, 2019, could be saved as 2019-06 Original Budget.

Access to Documents

Consider who needs access to electronic documents. If multiple people will be using the documents, ensure that the documents are saved in a location accessible by others. If sensitive information is included that should be seen by a limited group, consider password-protecting the document. Limiting access to the document can be accomplished by selecting File>Info>Protect Workbook>Encrypt with Password.

Verify Formulas

When work has been completed in the spreadsheet, take a few moments to review it; look for input and formula errors. To quickly view the formulas, navigate to the Formulas tab on the ribbon and select the Show Formulas button that is located in the section labeled Formula Auditing. When this option is selected, you can view formulas throughout the spreadsheet. If you navigate to the cell that includes the formula, the cells included in the formula will be highlighted.

Tips & Tricks

• “Alt =” is a keyboard shortcut that brings up the =SUM formula and automatically sums the numbers above the cell selected.
• Format Painter allows you to copy the format from one cell to another cell. To use it, highlight the cell that has the formatting you desire and click the Format Painter. Then click in the cell you want formatted.
• Double-clicking on the Format Painter button keeps it selected so you can format more than one cell.
• On the ribbon, select View and then New Window to open a second copy of the same document. This feature will allow you to view a second copy of the workbook if you need to compare numbers between multiple tabs.
• To modify information in a cell, using the F2 button on the keyboard will take you to the end of the cell.
• To create a chart, input information with column and row headers. Then, on the ribbon, select the Insert tab and then click on Recommended Charts. Several options that fit the data input will be presented.

Want to learn more? Click here for how Yeo & Yeo Technology can provide training solutions tailored for you.

Bitcoin and other forms of virtual currency are gaining popularity. But many businesses, consumers, employees and investors are still confused about how they work and how to report transactions on their federal tax returns. And the IRS just announced that it is targeting virtual currency users in a new “educational letter” campaign.

The nuts and bolts

Unlike cash or credit cards, small businesses generally don’t accept bitcoin payments for routine transactions. However, a growing number of larger retailers — and online businesses — now accept payments. Businesses can also pay employees or independent contractors with virtual currency. The trend is expected to continue, so more small businesses may soon get on board.

Bitcoin has an equivalent value in real currency. It can be digitally traded between users. You can also purchase and exchange bitcoin with real currencies (such as U.S. dollars). The most common ways to obtain bitcoin are through virtual currency ATMs or online exchanges, which typically charge nominal transaction fees.

Once you (or your customers) obtain bitcoin, it can be used to pay for goods or services using “bitcoin wallet” software installed on your computer or mobile device. Some merchants accept bitcoin to avoid transaction fees charged by credit card companies and online payment providers (such as PayPal).

Tax reporting

Virtual currency has triggered many tax-related questions. The IRS has issued limited guidance to address them. In a 2014 guidance, the IRS established that virtual currency should be treated as property, not currency, for federal tax purposes.

As a result, businesses that accept bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received. This is measured in equivalent U.S. dollars.

From the buyer’s perspective, purchases made using bitcoin result in a taxable gain if the fair market value of the property received exceeds the buyer’s adjusted basis in the currency exchanged. Conversely, a tax loss is incurred if the fair market value of the property received is less than its adjusted tax basis.

Wages paid using virtual currency are taxable to employees and must be reported by employers on W-2 forms. They’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date of receipt.

Virtual currency payments made to independent contractors and other service providers are also taxable. In general, the rules for self-employment tax apply and payers must issue 1099-MISC forms.

IRS campaign

The IRS announced it is sending letters to taxpayers who potentially failed to report income and pay tax on virtual currency transactions or didn’t report them properly. The letters urge taxpayers to review their tax filings and, if appropriate, amend past returns to pay back taxes, interest and penalties.

By the end of August, more than 10,000 taxpayers will receive these letters. The names of the taxpayers were obtained through compliance efforts undertaken by the IRS. The IRS Commissioner warned, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics.”

Last year, the tax agency also began an audit initiative to address virtual currency noncompliance and has stated that it’s an ongoing focus area for criminal cases.

Implications of going virtual

Contact us if you have questions about the tax considerations of accepting virtual currency or using it to make payments for your business. And if you receive a letter from the IRS about possible noncompliance, consult with us before responding.

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ASU 2016-14, Presentation of Financial Statements for Non-Profit Entities, went into effect for year ends December 31, 2018, and later. One of the changes brought about by this standard was the required liquidity disclosure in the financial statements. As a result, nonprofit organizations should consider updating or creating a liquidity policy.

The policy should address how the organization manages its liquidity needs or, in other terms, the cash needs of the organization. How does the organization meet cash needs for general expenditures? The organization should set goals for liquid assets, such as maintaining enough liquid assets to cover a certain number of monthly expenses. Liquid assets include items such as cash, receivables and investments. Other items used to manage liquidity could be board designated reserves, endowments, investments and lines of credit. The methods and plan will vary based on the activities, size and complexity of the organization.

Please contact Yeo & Yeo if you have questions.

As the way we conduct business continues to change at a rapid pace due to technology, political changes, and changes in standards, one must stop and look at whether the services an organization needs are being adequately provided. Selecting a trusted advisor is one of those needs that can sometimes be overlooked. Nonprofits often ask us how they should go about selecting a trusted advisor, whether it is for legal services, accounting services, human resource support, banking, investing or something else.

Keep the following factors in mind when considering a relationship with a trusted advisor.

Reputation – Ask around. Nonprofits are a very connected group. They talk and work together regularly to better serve their programs and communities. Reach out to other nonprofits and ask who they are using. What do they like and dislike? Who would they recommend and why?

Specializations – Who specializes in what you need? A lawyer may be very well known and successful in their field, but they may not serve any nonprofit organizations or be familiar with the nonprofit experience your organization needs. Look for advisors who specialize in nonprofit organizations and the matters with which you need assistance.

Willingness to serve – Is the advisor willing to coach and advise? A true advisor helps your organization grow. Are you getting the most out of the relationship? Advisors should not only want to complete the task at hand, but look for ways to improve and better serve the organization and their mission going forward. You want advisors who are looking into the future and not just analyzing the past.

Fees – While we would all like to have the best and brightest advisor, nonprofits are often mindful of the price tag. The organization is trying to do the most with limited funds to fulfill its programs and help those in need. Therefore, it’s imperative to ask about fees and compare. Be sure to inquire how fees are charged for a quick phone call or email. Some advisors charge for every minute and others may include those quick, one-time questions that come up throughout the year as part of their normal fees. Like many things in the consumer world, be aware that you often get what you pay for, so find the balance between fees and services that works best for the nonprofit. Too, remember that if your information is organized and accurate, fees will likely be less.

Working from home has its perks. Not only can you skip the commute, but you also might be eligible to deduct home office expenses on your tax return. Deductions for these expenses can save you a bundle, if you meet the tax law qualifications.

Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you.

If you’re a homeowner and use part of your home for business purposes, you may be entitled to deduct a portion of actual expenses such as mortgage, property taxes, utilities, repairs and insurance, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500).

Requirements to qualify

To qualify for home office deductions, part of your home must be used “regularly and exclusively” as your principal place of business. This is defined as follows:

1. Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use isn’t considered regular use.

2. Exclusive use. You use a specific area of your home only for business. It’s not required that the space be physically partitioned off. But you don’t meet the requirements if the area is used for both business and personal purposes, such as a home office that you also use as a guest bedroom.

Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don’t have another fixed location where you conduct substantial administrative or management activities.

Examples of activities that meet this requirement include:

• Billing customers, clients or patients,
• Keeping books and records,
• Ordering supplies,
• Setting up appointments, and
• Forwarding orders or writing reports.

Other ways to qualify

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if you physically meet with patients, clients or customers on the premises. The use of your home must be substantial and integral to the business conducted.

Alternatively, you may be able to claim the home office deduction if you have a storage area in your home — or in a separate free-standing structure (such as a studio, workshop, garage or barn) — that’s used exclusively and regularly for your business.

An audit target

Be aware that claiming expenses on your tax return for a home office has long been a red flag for an IRS audit, since many people don’t qualify. But don’t be afraid to take a home office deduction if you’re entitled to it. You just need to pay close attention to the rules to ensure that you’re eligible — and make sure that your recordkeeping is complete.

The home office deduction can provide a valuable tax-saving opportunity for business owners and other self-employed taxpayers who work from home. Keep in mind that, when you sell your house, there can be tax implications if you’ve claimed a home office. Contact us if you have questions or aren’t sure how to proceed in your situation.

© 2019

 

If you’re considering buying or selling a business — or you’re in the process of a merger or acquisition — it’s important that both parties report the transaction to the IRS in the same way. Otherwise, you may increase your chances of being audited.

If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.

What’s reported?

When buying business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:

• Equipment,
• Buildings and improvements,
• Software,
• Furniture, fixtures and
• Intangibles (including customer lists, licenses, patents, copyrights and goodwill).

In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.

IRS scrutiny

The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the IRS finds that different allocations are used, auditors may dig deeper and the investigation could expand beyond just the transaction. So, it’s in your best interest to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.

The tax implications of buying or selling a business are complicated. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best postacquisition results, consult with us before finalizing any transaction.

© 2019

The IRS uses Audit Techniques Guides (ATGs) to help IRS examiners get ready for audits. Your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, child care providers and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

How they’re used

IRS auditors need to examine all types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers may not be in compliance.

By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

For example, one ATG focuses specifically on businesses that deal in cash, such as auto repair shops, car washes, check-cashing operations, gas stations, laundromats, liquor stores, restaurants., bars, and salons. The “Cash Intensive Businesses” ATG tells auditors “a financial status analysis including both business and personal financial activities should be done.” It explains techniques such as:

• How to examine businesses with and without cash registers,
• What a company’s books and records may reveal,
• How to analyze bank deposits and checks written from known bank accounts,
• What to look for when touring a business,
• Ways to uncover hidden family transactions,
• How cash invoices found in an audit of one business may lead to another business trying to hide income by dealing mainly in cash.

Auditors are obviously looking for cash-intensive businesses that underreport their cash receipts but how this is uncovered varies. For example, when examining a restaurants or bar, auditors are told to ask about net profits compared to the industry average, spillage, pouring averages and tipping.

Learn the red flags

Although ATGs were created to help IRS examiners ferret out common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. Contact us if you have questions about your business. For a complete list of ATGs, visit the IRS website here: https://bit.ly/2rh7umD

© 2019

During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed.

If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.)

Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.

Calculate provisional income

To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules:

• If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed.
• If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income. For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income.
• If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040. For single taxpayers, if your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income.

Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.

For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result.

Avoid a large tax bill

If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax withheld from the payments by filing a Form W-4V with the IRS. Otherwise, you may have to make estimated tax payments.

Contact us to help you with the exact calculations on whether your Social Security will be taxed. We can also help you with tax planning to keep your taxes as low as possible during retirement.

© 2019

 

Small businesses may find it beneficial to barter for goods and services instead of paying cash for them. If your business engages in bartering, be aware that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

Income is also realized if services are exchanged for property. For example, if a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory.

Barter clubs

Many business owners join barter clubs that facilitate barter exchanges. In general, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

Bartering is generally taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,000 credit units one year, and that each unit is redeemable for $1 in goods and services. In that year, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income at a 24% rate.

Required forms

By January 31 of each year, the barter club will send you a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services, and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

If you don’t contract with a barter exchange but you do trade services, you don’t file Form 1099-B. But you may have to file a form 1099-MISC.

Many benefits

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. Contact us for more information.

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HK Financial Services (HKFS) named Yeo & Yeo CPAs & Business Consultants the 2018 New Firm of the Year at the HKFS annual conference held recently in Dubuque, Iowa. Yeo & Yeo was selected in recognition of its commitment and dedication in providing financial planning services for its clients.

Representatives of HKFS stated that Yeo & Yeo received the award because the firm “has displayed excellence in client communication, guidance and results.”

Yeo & Yeo works in alliance with HKFS to provide independent and objective financial services for clients. Combining the strengths of Yeo & Yeo and HKFS allows Yeo & Yeo to provide more robust financial planning services that help clients better understand their financial situation and reach their goals.

Disclosure
Investment advisory services offered through HK Financial Services (HKFS), an Independent Registered Investment Adviser. Commission-based securities products are sold by ProEquities registered representatives and offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA and SIPC. HKFS, ProEquities, and Yeo & Yeo are unrelated entities. Neither HKFS nor ProEquities offer accounting, tax or legal services.

 

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Peter J. Bender, CPA, CFP®, has received the President’s Club Award from HK Financial Services (HKFS).

The President’s Club award recognizes outstanding individuals for providing wealth management services for high-net-worth clients. It also recognizes a high level of ethics and integrity, and leadership, and exemplifies the best of the best of HKFS affiliates. Yeo & Yeo works closely with HKFS to provide independent and objective financial services for their clients.

Bender is the managing principal of Yeo & Yeo’s Saginaw office and leads the firm’s wealth management services. He serves on Yeo & Yeo’s board of directors and is a member of the firm’s Agribusiness Services Group and the Estate Planning Group. He has 30 years of experience in auditing, financial planning, and tax planning and preparation for businesses and individuals with a focus on family business.

Bender is a member of the Michigan Association of Certified Public Accountants’ Agribusiness Task Force. He is a Certified Financial Planner™ and a member of the Financial Planning Association. In our community, Bender serves on the board of directors for Frankenmuth Credit Union and Wellspring Lutheran Services. He also serves on the St. Lorenz Foundation Finance Committee and the Valley Lutheran High School Growing Campaign Cabinet.

This award was presented to Bender at the HK Financial Services Conference in Dubuque, Iowa.

Disclaimer
Investment advisory services offered through HK Financial Services (HKFS), an Independent Registered Investment Adviser. Commission-based securities products are sold by ProEquities registered representatives and offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA and SIPC. HKFS, ProEquities, and Yeo & Yeo are unrelated entities. Neither HKFS nor ProEquities offer accounting, tax or legal services.

Check the background of Pete Bender on FINRA’s BrokerCheck.

 

Yeo & Yeo CPAs & Business Consultants welcomes Robert Sanders to the firm as a retirement plan auditor in the Saginaw office.

“We are excited to welcome Robert to Yeo & Yeo,” says David Youngstrom, Principal. “He is a great addition to our Service Line and allows us to continue to grow our retirement services practice.Robert will work directly with our clients to proactively manage their employee retirement plans audits and expand our menu of services.”

Sanders provides employer-sponsored retirements plan audits, including 401(k) plans, 403(b) plans, employee stock ownership plans, defined benefit pension plans, and health and welfare plans. He holds a Bachelor of Business Administration from Northwood University, majoring in accounting.

 

There’s good news about the Section 179 depreciation deduction for business property. The election has long provided a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time. And it was increased and expanded by the Tax Cuts and Jobs Act (TCJA).

Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break provided by the TCJA, the entire cost of eligible assets placed in service in 2019 can be written off this year.

Sec. 179 basics

The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.

The annual deduction limit is $1.02 million for tax years beginning in 2019, subject to a phaseout rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.55 million for tax years beginning in 2019. (Note: Different rules apply to heavy SUVs.)

There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).

In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.

The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.

Bonus depreciation basics

With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the TCJA, you could deduct only 50% of the cost of qualified new property.)

This break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).

Bonus depreciation is now allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.

Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it.

Maximize eligible purchases

These favorable depreciation deductions will deliver tax-saving benefits to many businesses on their 2019 returns. You need to place qualifying assets in service by December 31. Contact us if you have questions, or you want more information about how your business can get the most out of the deductions.

© 2019

School districts manage many traditional risks, including operational, compliance and program risks, as part of their daily operations. Cybercriminals, however, are putting a new risk on your radar – the “click risk.”

The days of obvious and even comical scams to steal your money or information are history. Today’s cybercriminals are sophisticated and have become a pervasive part of our day by using well-thought-out attacks to lure unsuspecting employees into sending them money and confidential information via simple email clicks. Proven tactics for generating email clicks include mimicking legitimate companies’ emails, using readily available social media or school district websites to create personalized emails, and using phony emergencies to prompt quick action. All of these methods have the same goal: steal your money or gain access to your network.

How does it work?

Cybercriminals are taking advantage of our busy lives and full email inboxes by developing realistic emails that include plausible requests targeting you and your co-workers. For example, using social media or even the employee directory available on your district’s website, cybercriminals will send a reasonable request such as “change your password” or “transfer money to this account” to a district employee from another district employee or vendor. The email will look legitimate but, once an employee clicks on it, malicious software could be installed on that computer, giving the cybercriminal access to software and passwords. Other attacks could even walk an employee through sending money directly to cybercriminals.

Recently, in Florida, a city employee was tricked into following instructions in an email sent by a cybercriminal. As a result, malicious software was installed that locked the city out of their email and computers. The city’s systems remained locked until they paid the cybercriminals’ demand for $600,000 in bitcoin.

How can the risk be reduced?

Several low-cost ways to manage the “click risk” are available.

First, back up all data routinely, including your accounting and pupil information systems, emails and all network files. The backups should occur automatically, be stored off-site on regular intervals and be tested at least annually. If your software is backed up or hosted by a vendor, make sure you understand the vendor’s security system and how the vendor’s restore process works.

Second, be proactive and train your district’s employees. Emails sent by cybercriminals will include red flags that can be quickly detected with simple training. These programs offer low-cost training via short videos that help employees detect red flags and delete the emails before clicking on them.

Finally, take the “click risk” seriously regardless of your district’s size. Cybercriminals win any time they hijack your files or have you transfer money outside of the district regardless of the amount. As large organizations invest increasing amounts of time and money to combat cybercriminals, it is more likely that smaller organizations – which are more likely to be unprepared – will become cybercriminals’ new preferred target.

 

Many local government officials and employees struggle with determining what is considered a lawful expenditure. While some expenditures may appear to be lawful at first glance, it is important that government officials and employees be aware of the basic guidelines and legal restrictions for expenditures. This will help to ensure that all purchases made by the governmental unit are allowable and in compliance with laws and regulations.

Essentially, governmental units are not to expend public funds on activities that do not benefit the residents of the governmental unit or are unrelated to operating the governmental unit.

The following are three common examples of unlawful expenditures that may be incurred by a governmental unit and suggestions for how to avoid them.

1. It may seem completely reasonable for an employer to offer refreshments for employees such as coffee, soda or bottled water. It is also very common for employers to host company picnics in the summer for employees, or parties around the holidays. These are not allowable expenditures for governmental units since the purchases are not benefiting the general public and are not furthering the government’s activities. To avoid these expenditures, employees of governmental units often will pool their own funds to purchase bottled water, coffee, soda, and other refreshments. If the governmental unit wants to host a picnic or party, they can avoid unlawful expenditures by opening up the event to the public which may or may not be ideal depending on the size of the governmental unit and other factors.
2. Another typical unlawful expenditure for governmental units is the purchase of retirement gifts for employees or officials. For example, a city is not allowed to purchase a recognition award for a firefighter who has worked for the governmental unit for 30 years. This can be a controversial area for employers because they want to recognize employees for their years of service and commitment to the governmental unit. These expenses are specifically not allowable per the State of Michigan. These expenditures can also be avoided by asking employees to contribute to purchasing the award rather than the governmental unit incurring the expenditure.
3. Finally, purchasing flowers or cards for sick employees or for someone who has passed away is not an allowable expenditure for a governmental unit. This can also be a sensitive subject as employees may be close or want to express their sympathy to a fellow co-worker; however, these types of items should not be purchased with governmental monies. Again, collecting amounts from employees voluntarily for these expenditures is the easiest way for governmental units to avoid these types of charges.

To help avoid incurring unlawful expenditures, those charged with approving expenditures should be knowledgeable in what is considered unlawful by law. Governmental units should educate employees who have authority to make purchases, or access to a government credit card, about common unlawful expenditures. Including the definition and examples of unlawful expenditures in the governmental unit’s purchasing policy will also help to clarify what unlawful expenditures are and will help to ensure that the governmental unit remains in compliance.

Social media allows nonprofits to interact and share their mission, vision, and core values with many audiences. Developing a social media policy to enact clear guidelines is essential in the development of a nonprofit organization’s online presence.

A social media policy outlines how the organization and its employees should conduct themselves online. Alignment with the organization’s core values is vital to a quality policy. For some, this may be spelling out what staff can or cannot do by establishing roles and rules. For others, it could be a vision statement that guides staff and empowers them to make an acceptable decision while advocating for the organization and at the same time safeguarding the organization’s reputation. By sharing content relating to the organization’s mission and finding an individual niche, the organization will continuously draw the right audience and entice them to return.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Jennifer M. Watkins, CPA, has been elected president of the Zonta Club of Flint and was named Zontian of the Year.

Jennifer was elected to a two-year term as president, beginning June 1, 2019, by members of the club who also named her Zontian of the Year. This year, Jennifer chaired the club’s fundraising committee and planned two fundraisers, increasing fundraising profits by more than 25 percent. She also hosted a pool party at the Whaley House during the summer and planned the Thanksgiving event for the Whaley Children’s Center. She previously served a two-year term as the club’s vice president and has been a member of the club since 2011.

The Zonta Club of Flint was chartered in 1923 as a charter club of Zonta International. Flint-area Zontians are committed to improving the status of women locally and worldwide by empowering women through service and advocacy. The Zonta Club includes women from a variety of traditional and non-traditional professions, including law, education, medicine, and finance.

At Yeo & Yeo, Jennifer has extensive experience in providing audit services for nonprofit organizations and school districts and is the Education Services Group’s technical advisor. She is a frequent presenter at regional and statewide school and governmental accounting conferences and is a member of Michigan Department of Education Committees that provide accounting guidance for school districts. She is a member of the Association of School Business Officials, Michigan School Business Officials and several regional School Business Officials organizations. Jennifer is based in the firm’s Flint office.

In addition to her work with the Zonta Club of Flint, Jennifer also volunteers for Genesee County Habitat for Humanity, Carriage Town Ministries and United Way of Genesee County. She is a graduate of Leadership Genesee.

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of three associates to manager.

Kelly J. Brown, CPA, MST, provides tax planning and preparation services for individuals, partnerships, and corporations. She is a member of the firm’s State and Local Tax Services Group, specializing in sales tax.She holds a Master of Science in Taxation from Walsh College and with her advanced education in complex tax topics assists both the firm’s individual tax clients, as well as business entities as they face a challenging tax environment. She is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants. She joined Yeo & Yeo in 2016 and serves in the firm’s Saginaw headquarters. In our community, Brown serves as a board member for the Bay County Salvation Army, as a Community Investment Process chairperson for the United Way of Bay County and also volunteers with Making Strides of Saginaw Bay.

Nolan Felsing, CPA, provides business valuation services for the firm’s top manufacturing clients. He is a member of the firm’s Manufacturing Services Group, specializing in personal property tax, and federal and state tax preparation. He is also a member of the firm’s Business Valuation Services Group. Felsing joined Yeo & Yeo in 2015 and serves in the firm’s Midland office. He is an active member of the Great Lakes Bay Manufacturers Association and the Central Michigan Manufacturers Association, the Hemlock Business Association and is a member of the Michigan Manufacturers Association. He holds a Bachelor of Business Administration in accounting and a Master of Business Administration from Central Michigan University.

Steven Treece, CPA, provides tax planning and preparation services, and management consulting services, for the firm’s agribusiness, for-profit, and individual clients. He joined Yeo & Yeo in 2013 and serves in the firm’s Flint office. He is a member of the firm’s Agribusiness Services Group. Treece holds a Bachelor of Business Administration in accounting from The University of Michigan. In the community, he is a member of the Rotary Club of Burton and serves as a Committee Chairperson for the Boy Scouts of America and the Old Newsboys of Flint.

 

If you’re a volunteer who works for charity, you may be entitled to some tax breaks if you itemize deductions on your tax return. Unfortunately, they may not amount to as much as you think your generosity is worth.

Because donations to charity of cash or property generally are tax deductible for itemizers, it may seem like donations of something more valuable for many people — their time — would also be deductible. However, no tax deduction is allowed for the value of time you spend volunteering or the services you perform for a charitable organization.

It doesn’t matter if the services you provide require significant skills and experience, such as construction, which a charity would have to pay dearly for if it went out and obtained itself. You still don’t get to deduct the value of your time.

However, you potentially can deduct out-of-pocket costs associated with your volunteer work.

The basic rules

As with any charitable donation, to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can check by using the IRS’s “Tax Exempt Organization Search” tool at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.

If the charity is qualified, you may be able to deduct out-of-pocket costs that are unreimbursed; directly connected with the services you’re providing; incurred only because of your charitable work; and not “personal, living or family” expenses.

Expenses that may qualify

A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering).

Transportation costs to and from the volunteer activity generally are deductible — either the actual expenses (such as gas costs) or 14 cents per charitable mile driven. The cost of entertaining others (such as potential contributors) on behalf of a charity may also be deductible. However, the cost of your own entertainment or meal isn’t deductible.

Deductions are permitted for away-from-home travel expenses while performing services for a charity. This includes out-of-pocket round-trip travel expenses, taxi fares and other costs of transportation between the airport or station and hotel, plus lodging and meals. However, these expenses aren’t deductible if there’s a significant element of personal pleasure associated with the travel, or if your services for a charity involve lobbying activities.

Recordkeeping is important

The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records and receipts. You must meet the other requirements for charitable donations. For example, no charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the organization. The acknowledgment generally must include the amount of cash, a description of any property contributed, and whether you got anything in return for your contribution.

And, in order to get a charitable deduction, you must itemize. Under the Tax Cuts and Jobs Act, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you have expenses from volunteering that qualify for a deduction, you may not get any tax benefit if you don’t have enough itemized deductions.

If you have questions about charitable deductions and volunteer expenses, please contact us.

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