New Michigan Sick Time Act and Minimum Wage Increase

In September 2018, the Michigan legislature enacted an Earned Sick Time Act as well as increases in the minimum wage.

It is anticipated that both measures will take effect in March 2019, but it is expected that legislators will make significant adjustments before year-end.

Yeo & Yeo wants to keep you informed of the current status and will communicate changes as they become available.

Earned Sick Time Act

Under the new Earned Sick Time Act, Michigan workers will accrue one hour of paid sick leave for every 30 hours worked, capping out at 72 hours per year for larger businesses and 40 hours per year for small businesses.

Minimum Wage and Wages for Tipped Workers

The One Fair Wage Act involves a minimum wage increase to $10 in March 2019 and $12 by 2022. As written, the new law slowly brings minimum wage for tipped workers up to the same level as the regular minimum wage.

The holiday season is a great time for businesses to show their appreciation for employees and customers by giving them gifts or hosting holiday parties. Before you begin shopping or sending out invitations, though, it’s a good idea to find out whether the expense is tax deductible and whether it’s taxable to the recipient. Here’s a brief review of the rules.

Gifts to customers

When you make gifts to customers, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you need not include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift-wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as pens or stress balls imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (a gift basket for all to share, for example) as long as they’re “reasonable.”

Gifts to employees

Generally anything of value that you transfer to an employee is included in the employee’s taxable income (and, therefore, subject to income and payroll taxes) and deductible by you. But there’s an exception for noncash gifts that constitute “de minimis fringe benefits.”

These are items so small in value and given so infrequently that it would be administratively impracticable to account for them. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.

De minimis fringe benefits are not included in an employee’s taxable income yet are still deductible by you. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Keep in mind that cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.

Holiday parties

The Tax Cuts and Jobs Act reduced certain deductions for business-related meals and eliminated the deduction for business entertainment altogether. There’s an exception, however, for certain recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludible from recipients’ income) provided they’re primarily for the benefit of non-highly-compensated employees and their families. If customers also attend, holiday parties may be partially deductible.

Gifts that give back

If you’re thinking about giving holiday gifts to employees or customers or throwing a holiday party, contact us. With a little tax planning, you may receive a gift of your own from Uncle Sam.

Will you be age 50 or older on December 31? Are you still working? Are you already contributing to your 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE) up to the regular annual limit? Then you may want to make “catch-up” contributions by the end of the year. Increasing your retirement plan contributions can be particularly advantageous if your itemized deductions for 2018 will be smaller than in the past because of changes under the Tax Cuts and Jobs Act (TCJA).

Catching up

Catch-up contributions are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. They were designed to help taxpayers who didn’t save much for retirement earlier in their careers to “catch up.” But there’s no rule that limits catch-up contributions to such taxpayers.

So catch-up contributions can be a great option for anyone who is old enough to be eligible, has been maxing out their regular contribution limit and has sufficient earned income to contribute more. The contributions are generally pretax (except in the case of Roth accounts), so they can reduce your taxable income for the year.

More benefits now?

This additional reduction to taxable income might be especially beneficial in 2018 if in the past you had significant itemized deductions that now will be reduced or eliminated by the TCJA. For example, the TCJA eliminates miscellaneous itemized deductions subject to the 2% of adjusted gross income floor — such as unreimbursed employee expenses (including home-off expenses) and certain professional and investment fees.

If, say, in 2018 you have $5,000 of expenses that in the past would have qualified as miscellaneous itemized deductions, an additional $5,000 catch-up contribution can make up for the loss of those deductions. Plus, you benefit from adding to your retirement nest egg and potential tax-deferred growth.

Other deductions that are reduced or eliminated include state and local taxes, mortgage and home equity interest expenses, casualty and theft losses, and moving expenses. If these changes affect you, catch-up contributions can help make up for your reduced deductions.

2018 contribution limits

Under 2018 401(k) limits, if you’re age 50 or older and you have reached the $18,500 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,500. If your employer offers a SIMPLE instead, your regular contribution maxes out at $12,500 in 2018. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.

But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. Also keep in mind that additional rules and limits apply.

Additional options

Catch-up contributions are also available for IRAs, but the deadline for 2018 contributions is later: April 15, 2019. And whether your traditional IRA contributions will be deductible depends on your income and whether you or your spouse participates in an employer-sponsored retirement plan. Please contact us for more information about catch-up contributions and other year-end tax planning strategies.

Under the Tax Cuts and Jobs Act (TCJA), many more businesses are now eligible to use the cash method of accounting for federal tax purposes. The cash method offers greater tax-planning flexibility, allowing some businesses to defer taxable income. Newly eligible businesses should determine whether the cash method would be advantageous and, if so, consider switching methods.

What’s changed?

Previously, the cash method was unavailable to certain businesses, including:

C corporations — as well as partnerships (or limited liability companies taxed as partnerships) with C corporation partners — whose average annual gross receipts for the previous three tax years exceeded $5 million, and
Businesses required to account for inventories, whose average annual gross receipts for the previous three tax years exceeded $1 million ($10 million for certain industries).

In addition, construction companies whose average annual gross receipts for the previous three tax years exceeded $10 million were required to use the percentage-of-completion method (PCM) to account for taxable income from long-term contracts (except for certain home construction contracts). Generally, the PCM method is less favorable, from a tax perspective, than the completed-contract method.

The TCJA raised all of these thresholds to $25 million, beginning with the 2018 tax year. In other words, if your business’s average gross receipts for the previous three tax years is $25 million or less, you generally now will be eligible for the cash method, regardless of how your business is structured, your industry or whether you have inventories. And construction firms under the threshold need not use PCM for jobs expected to be completed within two years.

You’re also eligible for streamlined inventory accounting rules. And you’re exempt from the complex uniform capitalization rules, which require certain expenses to be capitalized as inventory costs.

Should you switch?

If you’re eligible to switch to the cash method, you need to determine whether it’s the right method for you. Usually, if a business’s receivables exceed its payables, the cash method will allow more income to be deferred than will the accrual method. (Note, however, that the TCJA has a provision that limits the cash method’s advantages for businesses that prepare audited financial statements or file their financial statements with certain government entities.) It’s also important to consider the costs of switching, which may include maintaining two sets of books.

The IRS has established procedures for obtaining automatic consent to such a change, beginning with the 2018 tax year, by filing Form 3115 with your tax return. Contact us to learn more.

If most of your money is tied up in your business, retirement can be a challenge. So if you haven’t already set up a tax-advantaged retirement plan, consider doing so this year. There’s still time to set one up and make contributions that will be deductible on your 2018 tax return!

More benefits

Not only are contributions tax deductible, but retirement plan funds can grow tax-deferred. If you might be subject to the 3.8% net investment income tax (NIIT), setting up and contributing to a retirement plan may be particularly beneficial because retirement plan contributions can reduce your modified adjusted gross income and thus help you reduce or avoid the NIIT.

If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements. But this can help you attract and retain good employees.

And if you have 100 or fewer employees, you may be eligible for a credit for setting up a plan. The credit is for 50% of start-up costs, up to $500. Remember, credits reduce your tax liability dollar-for-dollar, unlike deductions, which only reduce the amount of income subject to tax.

3 options to consider

Many types of retirement plans are available, but here are three of the most attractive to business owners trying to build up their own retirement savings:

1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2018 contributions as late as the due date of your 2018 tax return, including extensions — provided your plan exists on Dec. 31, 2018. For 2018, the maximum contribution is $55,000, or $61,000 if you are age 50 or older and your plan includes a 401(k) arrangement.

2. Simplified Employee Pension (SEP). This is also a defined contribution plan, and it provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2019 and still make deductible 2018 contributions as late as the due date of your 2018 income tax return, including extensions. In addition, a SEP is easy to administer. For 2018, the maximum SEP contribution is $55,000.

3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2018 is generally $220,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit.

You can make deductible 2018 defined benefit plan contributions until your tax return due date, including extensions, provided your plan exists on Dec. 31, 2018. Be aware that employer contributions generally are required.

Sound good?

If the benefits of setting up a retirement plan sound good, contact us. We can provide more information and help you choose the best retirement plan for your particular situation.

As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid surprise capital gains

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit.

Seller beware

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think beyond just taxes

Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.

But taxes are still an important factor to consider. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

Recently I attended the Michigan Association of CPAs Agribusiness Conference and came away with several items to share. The agribusiness industry is going through many changes, some tied to tax reform, and some based on economic and weather changes. The presenters shared their thoughts on the status of the industry in general and, while their opinions are not concrete, the fact that they had consistent views made their opinions more credible.

Industry Outlook

Taken in whole, 2018 appears to be a down year. While some areas are producing crops at near-record yields, the economic strains on the market are going to limit profitability somewhat. For example, China is the largest importer of soybeans from the United States, and with tariffs and lack of movement with new trade deals being made, trading was down 97 percent through October between the U.S. and China.

However, one point that was made clear was that the numbers being reported are not that far removed from the norm of pre-2012 when the agribusiness sector hit quite a boom for three to five years. These outputs, across many commodities, are returning to what the rolling average was before.

Michigan PA 116

The Farmland Preservation Program has received more resources and overhauled its system for reporting and processing PA 116 agreements. A few key reminders to consider:

Several counties were recoded, so it is important to ensure you have the correct County Code on all of your agreements. This will also help expedite the return processing on the back end, resulting in more timely refunds.

Regarding splitting and/or transferring parcels and agreements, please make sure that you, the local assessor, and the Preservation office are all on the same page with altering any agreement. If handled improperly, it could result in an agreement being disallowed, triggering repayment of previously received credits.

Tax Reform Issues

The Tax Cuts and Jobs Act brings several key changes in preparing tax returns for agribusinesses. First, for all pass-through entities, there is a new deduction that will reduce taxable income by up to 20 percent for the owner/shareholder. Also, if the owner deals with cooperatives and receives flow-through deductions (formerly known as DPAD), additional calculations need to be made.

It is strongly recommended that you contact your CPA to ensure that you are getting the best tax advice for your agribusiness operation.

Fraud in some form is happening in almost all school districts. Fraud is most prevalent where there is cash or small inventory items. Examples include ticket sales at athletic games or concessions stands, food items in the cafeteria, and even office supplies. Fraud at a higher level is also common. This could happen by creating fake bank documentation or ghost employees, embezzling from student accounts, or getting kickbacks from vendors that are related parties.

The best way to ensure your district is shielded against fraudulent situations is to implement strong internal controls. Consider these five ways to safeguard your assets through controls over the business office and other decentralized cash collections. Also, learn why employees commit fraud, the red flags to watch for, and the most common ways fraud is perpetrated.

“Donate to my nonprofit because 95% of our money goes towards programs.”

“Don’t donate to their nonprofit because 25% of their money goes to administration.”

These are common phrases heard when talking about nonprofits and charitable giving. What you may not know is that these phrases are referencing functional expenses. Functional expenses refer to the classification of expenses between program, management and general and fundraising. Additional subsets of the three main categories could also be shown.

There is a perception that management and general costs are “bad;” however, they can be seen as a positive.

Having a ‘healthy’ amount of overhead can show that the organization has the resources to effectively manage a grant or handle a donor’s request to ensure that funds are spent on a particular program or focus area.
If you are properly tracking the overhead costs, you may be able to negotiate a higher indirect cost rate with grantors.
Having almost all of your costs allocated to program may make an informed financial statement reader question if the cost allocations are incorrect or purposefully misleading; what else in the financial statements could be skewed?
If you have too little in management and general and fundraising, that may show the board that additional funding needs to be allotted to accounting and development functions to alleviate burden on the staff or help to maintain smooth operations.

All 501(c)3 organizations are required to show the functional expense classifications in their IRS Form 990, which is public information through guidestar.org. Additionally, many nonprofits show the allocations in their financial statements. Under the new FASB ASU 2016-14 Non-Profit Financial Reporting and Disclosures, all nonprofits will be required to show expenses by their natural and functional categories in a formal statement of functional expenses or a footnote in a grid format. Significant emphasis will be placed on the footnote disclosures about how the allocations were comprised and allocated. The new standard also provides additional guidance on what falls into each category, that may be different from how you are classifying now.

Costs can be allocated directly or based on an indirect allocation. Direct costs are fairly simple to allocate. As an example, program staff salaries are program, legal fees are likely administration, and event costs are fundraising. Note that supervision of program staff by a CEO and tasks like preparing grant billings, while related to a program, are considered management and general for the financial statements.

The difficulty is allocating expenses that cross categories or relate to the organization as a whole. The two main ways of allocating such costs are time studies and square footage analysis.

A time study is a period spent recording where an employee spends their time. Staff should select a “normal” week and track the time spent on each activity. Initially, an organization may do a quarterly time study and then scale back to an annual study after a thorough analysis has been performed.
A square footage study should be utilized for occupancy and overhead related items. Unless there are changes to the size or utilization of space, the square footage analysis can be utilized year after year. It is important to document your considerations of allocations, not only for footnote disclosure purposes but also as a potential audit consideration.

Properly stating the functional allocations is extremely important. As mentioned, donors and grantors may be looking at the allocations when making funding decisions. It could also be used as a tool to make adjustments to the budget.

Are we not spending enough on fundraising and adding costs to the category that could potentially lead to additional contribution revenue?
Is there a program that has high costs but does not add value to the organization’s mission?

While nonprofits want to spend 100 percent of their time on their mission, it is important to remember that nonprofits are still businesses and have certain supporting service costs related to running the organization. To be a well-managed organization or fundraise for contributions, a certain level of non-program costs are incurred.

Additional information about functional expense allocations, including guidance under the new FASB guidelines, can be found in our whitepaper, Functional Expense Allocation for Nonprofits After FASB ASU 2016-14.

During a nonprofit’s day-to-day operations, various instances will require a credit card to be used, including payment for travel and emergency purposes, and for convenience in running programs smoothly. Additionally, many organizations are looking at credit cards to enroll in auto-pay and receive various rewards that benefit the organization.

Ensure that your nonprofit has adopted and is staying up to date with its credit card policy. Following are a few things to consider:

- Who should have a credit card? – Is it just the Executive Director? Program staff? Try to strike a balance between having too many credit cards, yet still providing easy access for those who need to use one.
- What should be bought on a credit card? – Travel, business meals, emergency supplies and online bill-pay are reasonable. However, avoid making unnecessary small purchases that would be better managed in bulk.
- What are the limits? – Set reasonable limits for each credit card. Monitor use to ensure that the limits are ‘right-sized.’
- How will the cards be secured? – Ensure that any shared cards are locked away, and establish a procedure for revoking a card once an employee leaves. Do not use a debit card as that allows a fraudster to have unlimited access to your bank account.
- What type of support is needed for the purchases? – All items must have a detailed receipt (including meals). How will staff be held liable for missing documentation? What are the repercussions of multiple instances of missing support? Is there a limit for not needing a receipt?
  - A simple tip is to take a photo of receipts and then email them to the appropriate staff collecting receipts.
- Who is approving purchases? – If a card is shared, there should be some sort of check in/out process, and purchases should be approved in advance. All statements should be reviewed and approved by management. No one should review their own statement, which may mean that a board member reviews the Executive Director’s purchases.

Check Out Our eBook on Creating Policies for Your Nonprofit

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Yeo & Yeo’s Year-end Tax Planning Checklist provides action items that may help you save tax dollars if you act before year-end.

These are just some of the year-end steps that can be taken to save taxes. Not all actions may apply in your particular situation, but you or a family member can likely benefit from many of them.

Your Yeo & Yeo tax professional can help narrow down the specific actions that you can take and tailor a tax plan for your current situation. Please review the checklist and contact us at your earliest convenience so that we can help advise you on which tax-saving moves to make.

For other helpful tools, visit the Tax Center at yeoandyeo.com.

Yeo & Yeo is pleased to provide 2019 Tax Planning Calendars and other helpful tax planning resources.

What are the due dates for next year’s tax filings? When are the various tax payments due?

The 2019 Tax Calendar for Business and the 2019 Tax Calendar for Individuals and Trusts are valuable tools to help you plan for the deadlines.

What can you do now – before year-end – to save tax dollars?

Yeo & Yeo’s 2018 Year-end Tax Planning Checklist of action items may help you or your business save tax dollars. Please review the checklist and contact us soon if you would like help with deciding which tax-saving moves to make.

For more extensive information, visit Yeo & Yeo’s Tax Guide Online.

The Michigan Attorney General’s office recently completed an investigation regarding concerns of allegedly deceptive language used in a nonprofit organization’s solicitation materials.

The main issue, in summary, was that the language used in the solicitation materials stated that a very high percentage “of all donations go directly to programs” for charitable purposes. The organization that was investigated receives a large amount of gifts-in-kind each year. These gifts, per Generally Accepted Accounting Principles, are required to be recorded on the financial statements as revenue with an offsetting expense. Therefore, due largely to the amount of gifts in kind that were recorded, the organization had a very high program expense ratio.

The issue raised by the Attorney General was that the phrase used in the solicitation materials (noted above) misrepresented the true program percentage of cash donations. Potential donors would reasonably expect that a very high percentage of their cash donation would be directly used for programs, when in reality the actual percentage was much lower. In other words, a potential donor’s cash donation would be used to fund significantly more fundraising and administrative costs than was represented by the statement in the solicitation materials. The Attorney General concluded that the statement was misleading.

Similarly, other language was questioned as well, such as making a statement that a certain dollar amount was able to provide a specific, significant benefit for charitable purposes. This was also deemed to be misleading since the donor would reasonably expect that their dollar would go directly to funding this benefit, but the organization did not restrict the donations received to procuring this benefit.

In the end a settlement was reached, which included fines in excess of a quarter million dollars. While the organization has maintained that there was no intention to deceive, this example illustrates the need to carefully choose the language used in solicitation materials. As nonprofit organizations prepare solicitation materials for the upcoming holiday season and beyond, Yeo & Yeo encourages those with in-kind donations to review the language used and ensure the appeal does not misrepresent the organization’s program expense ratio specific to cash donations, or the intended use of potential donations.

Please contact your Yeo & Yeo Principal or Nonprofit Services Group member if you would like assistance.

Newly elected local government officials face many challenges. Often, they do not realize their role in ensuring that the accounting and required filings are completed not only completely and accurately, but timely as well. We understand that you may need assistance in identifying resources to aid your transition, and a heads-up on key deadlines. Following are explanations of commonly misunderstood or unknown items that will help you on your new journey. For future efficiency, save the websites as favorites in your web browser as you’ll likely visit them often. If you need assistance with complying in any of these areas, don’t hesitate to reach out.

1.Uniform Chart of Accounts

A uniform chart of accounts is required to be used in local governments’ accounting systems. Early implementation of the most recent version is recommended. A due date for some time in 2019 will be issued at a later date.

Michigan Department of Treasury Uniform Chart of Accounts for Local Units of Government

2.Accounting Procedures Manual

The Accounting Procedures Manual was developed to assist local government officials in applying accounting procedures in their local units of government.

Michigan Department of Treasury Accounting Procedures Manual

3.Uniform Budget Manual

The Uniform Budget Manual provides local governments with the provisions of the budget act, provides recommendations for compliance, suggested timelines, and sample budgets. Budgets must be approved before the start of a fiscal year, and budget amendments must be approved before the end of a fiscal year. Refer to the manual and your local unit’s internal policies for further information.

Michigan Department of Treasury Uniform Budget Manual

4.Audit

Local units with a population of 4,000 or more are required to have an audit every year, which is due no later than six months after the local unit’s fiscal year end. An annual audit is required for charter townships, regardless of population. Local units with a population less than 4,000 are required to have an audit every other year. This does not mean that the smaller units cannot have an audit every year; the Department of Treasury strongly recommends an audit every year.

5.Michigan Form F-65

Local units must file Form F-65 every year regardless of the unit’s population or fiscal year end. Primary units are the only governments required to submit the F-65. Primary units include counties, townships, cities and villages.

Instructions for Preparing Form F-65

6.Public Act 51

Recipients of Michigan Transportation Funds are required to report their annual earnings and expenditures to the Michigan Department of Transportation (MDOT). The report is due not more than 120 days after the end of a local unit’s fiscal year.

Instructions for Preparing the Act 51

7.Pension and Retiree healthcare Reports (PA 202)

Local units of government that offer or provide retirement pension benefits and retirement health benefits are required to report additional information related to these plans no later than six months after the end of the local unit’s fiscal year. If your local unit of government does not offer a retirement pension system or retirement healthcare system, no action is required.

Local Retirement Reporting Information

8.Qualifying Statement

Qualifying Statements are due annually no later than six months after the local unit’s fiscal year end.

Click here to file

Qualifying Statement General Instructions
Qualifying Statement Bulletin 6

If you have questions, contact your local Yeo & Yeo professional.

Have you ever contemplated purchasing a second home? Have you wondered about renting out the home to cover some of the costs? Consider how the following pros and cons will affect your tax situation.

Usually, when you own a second home, the only expenses that are deductible are mortgage interest and property taxes which are deducted on Schedule A of your Form 1040. One of the perks to renting out your second home is that you have the opportunity to deduct expenses that normally would not be deductible, such as utilities, homeowners insurance, and minor repairs (i.e., painting, replacing a small appliance such as a microwave, etc.).

However, to benefit from the additional costs, you must pay close attention to the personal-use days of the home. In order for a second residence to be considered a rental property, making the usually non-deductible tax deductible, the home must be rented for more than 14 days (at fair rental value) and personal use can be no more than 14 days or 10 percent of the number of days the home is rented, whichever is greater.

The fair rental value will vary depending upon the location and condition of the dwelling. Refer to the U.S. Department of Housing and Urban Development (HUD) Fair Market Rents Documentation System. This website can help you determine the fair rental value of your home.

The IRS deems personal use to be any day that the home is used by:

You or any other person who has an interest in it, unless a fair rental price is charged
A member of your family
Anyone who is charged less than fair value rental

When the personal use days are restricted to the 14 days or less than 10 percent of total days rented, whichever is greater, the owner reports 100 percent of all expenses directly related to rental activity on Schedule E of Form 1040 along with a portion of expenses not directly related to the rental activity (i.e., property taxes, mortgage interest, etc.). As the owner, you also can depreciate the home, thus reducing the rental income even more. However, this could affect the treatment of any gain or loss on a future sale, so it is something that should be discussed with a tax professional before electing to do so.

Many aspects must be considered when thinking about renting your second home. It is always best to get advice from a tax professional before making final decisions. Please contact me if you would like additional information.

The Tax Cuts and Jobs Act (TCJA) has enhanced two depreciation-related breaks that are popular year-end tax planning tools for businesses. To take advantage of these breaks, you must purchase qualifying assets and place them in service by the end of the tax year. That means there’s still time to reduce your 2018 tax liability with these breaks, but you need to act soon.

Section 179 expensing

Sec. 179 expensing is valuable because it allows businesses to deduct up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. Sec. 179 expensing can be used for assets such as equipment, furniture and software. Beginning in 2018, the TCJA expanded the list of qualifying assets to include qualified improvement property, certain property used primarily to furnish lodging and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.

The maximum Sec. 179 deduction for 2018 is $1 million, up from $510,000 for 2017. The deduction begins to phase out dollar-for-dollar for 2018 when total asset acquisitions for the tax year exceed $2.5 million, up from $2.03 million for 2017.

100% bonus depreciation

For qualified assets that your business places in service in 2018, the TCJA allows you to claim 100% first-year bonus depreciation • compared to 50% in 2017. This break is available when buying computer systems, software, machinery, equipment and office furniture. The TCJA has expanded eligible assets to include used assets; previously, only new assets were eligible.

However, due to a TCJA drafting error, qualified improvement property will be eligible only if a technical correction is issued. Also be aware that, under the TCJA, certain businesses aren’t eligible for bonus depreciation in 2018, such as real estate businesses that elect to deduct 100% of their business interest and auto dealerships with floor plan financing (if the dealership has average annual gross receipts of more than $25 million for the three previous tax years).

Traditional, powerful strategy

Keep in mind that Sec. 179 expensing and bonus depreciation can also be used for business vehicles. So purchasing vehicles before year end could reduce your 2018 tax liability. But, depending on the type of vehicle, additional limits may apply.

Investing in business assets is a traditional and powerful year-end tax planning strategy, and it might make even more sense in 2018 because of the TCJA enhancements to Sec. 179 expensing and bonus depreciation. If you have questions about these breaks or other ways to maximize your depreciation deductions, please contact us.

When are the new sales tax rules effective and are you required to follow the old rules prior to the effective date?

Previously, 501(c)(3) and 501(c)(4) organizations in Michigan that had less than $5,000 of taxable sales in a calendar year were not required to collect and remit sales tax. The previous law caused issues for organizations who were close to that threshold because it was not an exemption of the first $5,000, but all or nothing. If they were over $5,000, they owed sales tax on all of the sales. If they were under, they owed sales tax on none of it.

The new law states that the first $10,000 of taxable sales for fundraising purposes are exempt as long as total sales for the calendar year are less than $25,000. This change took effect September 26, 2018, according to Michigan Compiled Law (MCL) 205.54o. We anticipate receiving further guidance from the State of Michigan as well as updates to forms and instructions.

Prior to the effective date of September 26, 2018, the old law would technically still apply.

Whether the organization wants to follow the new rules for the entire year should be based on risk tolerance. Keep in mind, if sales tax was expressly collected, it must be remitted; no options. If the organization was not expressly collecting it, and had not yet remitted it, then there is a risk choice to make. Technically if you went over $5,000 before 9/28, there should be tax paid in on everything prior to 9/28, and then no tax thereafter for the remaining amount of the $10,000 (assuming the organization is under the $25,000 in sales).

Example: $6,000 in sales prior to 9/28, $5,000 after. First $6,000 was before 9/28 and fell under old rules, so all $6,000 would have tax; the next $4,000 is non-taxable; the last $1,000 is taxable.

If you hadn’t already paid the tax on $6,000, that’s $360; what’s the chance the state comes after the organization for that? The organization could just remit tax on the last $1,000. We do not believe that is legally the correct answer, but there is an element of what risk the organization is ok with.

Yeo & Yeo, a leading Michigan Accounting firm, is pleased to recognize Talent Manager Cara Newby as the recipient of the 2018 Leading Edge Alliance (LEA) Edge Award for Unique Ability of a Non-accounting Professional. The recognition was announced at this year’s LEA Global Conference in San Diego, and this new award category recognizes a non-accounting professional for outstanding service to their organization.

Yeo & Yeo nominated Cara for successfully driving several recruiting and retention initiatives in less than 18 months to include the launch of a Summer Leadership Program, implementation of an Applicant Tracking System (ATS), development of an online-based New Employee Orientation program, aiding in the creation of firm-wide Career Maps, overhauling the firm’s onboarding and mentor program, and streamlining several processes resulting in increased efficiency throughout the firm.

This was in addition to day-to-day duties that included the review of over 7,000 incoming applications, conducting over 360 phone interviews, onboarding 60 new hires (seasonal and permanent), attending numerous career fairs and facilitating many presentations and trainings in the past year. Her motivation in fulfilling so many initiatives is driven through the goals set forth under the firm’s Career Advocacy Cornerstone and the Career Advocacy Team, of which Cara is a member.

“Cara is an energetic and passionate professional dedicated to proactively leading the firm’s recruitment and retention efforts and exceeding goals,” says Thomas Hollerback, President and CEO. “She’s made a significant impact as the firm’s first-ever Talent Manager.”

When not in the office, you will find Cara volunteering and participating in numerous nonprofit events throughout our communities.

This is the fifth Edge Award for Yeo & Yeo, including awards for Outstanding Diversity and Innovation, Process Improvement, and Cultural & HR Innovation.

Many people choose to pass assets to the next generation during life, whether to reduce the size of their taxable estate, to help out family members or simply to see their loved ones enjoy the gifts. If you’re considering lifetime gifts, be aware that which assets you give can produce substantially different tax consequences.

Multiple types of taxes

Federal gift and estate taxes generally apply at a rate of 40% to transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2018, it’s $11.18 million (twice that for married couples with proper estate planning strategies in place).

Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption is scheduled to drop back to an inflation-adjusted $5 million in 2026.

Minimizing estate tax

If your estate is large enough that estate tax is a concern, consider gifting property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.

If estate tax isn’t a concern, your family may be better off tax-wise if you hold on to the property and let it appreciate in your hands. At your death, the property’s value for income tax purposes will be “stepped up” to fair market value. This means that, if your heirs sell the property, they won’t have to pay any income tax on the appreciation that occurred during your life.

Even if estate tax is a concern, you should compare the potential estate tax savings from gifting the property now to the potential income tax savings for your heirs if you hold on to the property.

Minimizing your beneficiary’s income tax

You can save income tax for your heirs by gifting property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.

On the other hand, hold on to property that has already appreciated significantly so that your heirs can enjoy the step-up in basis at your death. If they sell the property shortly after your death, before it’s had time to appreciate much more, they’ll owe no or minimal income tax on the sale.

Minimizing your own income tax

Don’t gift property that’s declined in value. A better option is generally to sell the property so you can take the tax loss. You can then gift the sale proceeds.

Capital losses can offset capital gains, and up to $3,000 of losses can offset other types of income, such as from salary, bonuses or retirement plan distributions. Excess losses can be carried forward until death.

Choose gifts wisely

No matter your current net worth, it’s important to choose gifts wisely. Please contact us to discuss the gift, estate and income tax consequences of any gifts you’d like to make.

AJ Licht, CPA and Christopher Sheridan, CPA provide a comprehensive overview of the new revenue recognition standards and how they will impact the way you recognize revenue going forward.

This webinar has concluded.