3 Ways That Internal Controls Can Increase Efficiency

Discussions about internal controls often center on mitigation of risk, fraud and unforeseen cost. Yet, internal controls – when thoughtfully designed and diligently implemented – can increase organizational efficiency and save you money. Below are three ways that internal controls can boost efficiency and reduce costs for your organization.

• Utilize non-accounting staff – Often organizations believe it would be more efficient and easier to have one employee issue receipts, record, and deposit funds. However, we know that segregation of duties is an important step in internal controls. Being able to utilize administrative staff to perform certain duties, such as cash deposits or cash receipts, that are currently performed by accounting staff will help maintain the segregation of duties and save money. Another option is to have your board and committee members who are considered “financial professionals” perform review processes normally performed by the chief financial officer, if that skill set does not exist at the staff level.
• Risk assessment – By having a strong risk assessment process and plan, organizations can identify specific areas that present the highest risk, and design controls to assess those risks. By focusing on controls related to high-risk areas, organizations can direct those limited resources to address the highest risk areas, and work to limit or reduce controls in those areas not considered to be as risky. Having the proper controls in place over financial reporting is key for decision making. Assessing the risk within financial reporting is important for accurate, timely, and complete information to help plan, monitor, and report financial information.
• Understand your software capabilities – Many times organizations can increase the effectiveness and possibly reduce the cost of internal controls by relying on preventative controls and less on detective controls. One way to do this is by knowing and understanding the capabilities of your software. Most accounting and software packages have controls built into the systems and should be utilized rather than having individuals perform manual controls, which are subject to human error. Some functions that are currently being performed by staff may exist as automated steps that are currently embedded in your accounting package. Another way to increase efficiency is by using an import/export feature to automatically transfer data from one system to another to avoid the re-entry of data.

A successful system of internal controls is not built overnight. It is an ongoing process that often changes and requires consistent monitoring to understand the inner workings of an organization. Many organizations summarize internal control systems in manuals, so employees can easily refer to the organization’s policies.

Please contact Yeo & Yeo for questions regarding internal controls, internal control studies or fraud detection. The firm’s YeoConsults Internal Controls program may be the perfect solution to help you identify weaknesses, safeguard assets, deter fraudulent activity and promote accountability.

One of the biggest financial challenges that small business owners face is supervision of cash flow. Managing cash flow is of the utmost importance, and incorrect management of your cash flow could result in significant cash flow gaps and can put a healthy company out of business.

A cash flow gap transpires when your business expenses (cash outflows) are due before revenue is received (cash inflows). This does not mean that you cannot afford the expenditures; it is simply a timing difference in which the cash is not yet available to pay your bills. Cash flow gaps can affect small business owners in several ways. Here are a few tips that can help you avoid deficiencies in your cash flow management.

1. Have a broad frame of mind

Always ask how this purchase will affect your cash flow. Analyze the costs and benefits of each transaction. Do you have enough cash on hand or credit to access? Do not follow through with the transaction unless you have favorable terms.

2. Create a forecasted budget and compare it to costs incurred

Create these on a weekly or monthly basis, while accumulating into an annual budget. This budget will show where the cash is flowing and prompt opportunities to shrink cash outflows. Including a variance in the budget (the difference between actual and forecast) will show you over or under budgeted revenues and expenses. From there, adjust the budget to focus on areas of improvement.

3. Stay conservative with timing

Do you expect to be paid in 5 days? Budget it as 10. Issue an invoice for 20 days? Expect to receive that money in 30 days. By establishing that buffer, you will have the ability to better manage your expectations, as to avoid a cash flow gap.

4. Maximize cash inflows and shrink cash outflows

This is especially important if the company has a project that is unusually large or complex. At that point, consider requesting a security deposit of half the amount owed and always pursue opportunities to bill additional amounts if products/services need modification, or are not specified in the original contract. Pursue ways to make payment simple for a customer through automated bill pay or payment schedules. Offer options to receive upfront cash for future costs to secure future sales and aid with inventory replenish scheduling. Lastly, decide whether or not to offer layaway programs or pre-payment plans as an alternative to sale and payment plans.

Business owners need to stay on top of bills owed and ensure payments are accurate and timely. Set up automated payments, but ensure the proper amount is being deducted. Some other cost-saving approaches include: repairing equipment rather than replacing it, buying used instead of new, delaying upgrades as necessary, and negotiating goods and services.

5. Build a cash reserve

Determine what you can reserve in a week, divide it by five business days and pay yourself that amount per day. Having this cash reserve could be used as a way to face cash flow gaps if they occur.

6. Make conscious decisions when it comes to administrative costs

There are two options for accounting: in-house or outsourced. Is your in-house accounting work shorting quality? Would it be more beneficial to rely on the professionals? Outsourced accounting does not necessarily imply it is more expensive, but it does point toward quality, timely and accurate work. If the decision is made to outsource, the only heavy lifting would be to obtain the financial information for the accountant to process.

Cash flow is the lifeblood of any business and those who can efficiently manage their cash flow will find that it can improve other aspects of their organization. For more information or questions, contact one of Yeo & Yeo’s consulting professionals.

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It’s astonishing how quickly business needs have changed! Not so long ago, business owners were able to manage their day-to-day accounting functions, “keep the books,” and then engage their CPA to produce that annual tax return, compile those pesky payroll tax forms, put together the financial statements needed for the bank, or audit their financial statements. Sometimes the CPA would come in to discuss that occasional tax planning need.

Technology advancements have enabled business managers to automate many of these functions to a certain extent and drive the business toward more paperless processes overall. While this has helped with daily financial tasks, proactive, intelligent insight is something technology by itself can never deliver.In some instances, technology can even lead to less business insight.

Client needs have evolved

Those of us in the accounting profession were all too happy to mold our client service lines around these traditional needs, settling in on the three main, standard service lines of accounting, auditing and tax. Unfortunately (or fortunately for those CPAs nimble enough to change and take advantage), our client needs have transformed to something much greater, threatening to disrupt the traditional CPA-client relationship.

For most businesses, the rapid pace of change on all levels has intensified their competition. The challenge of recruiting and retaining talent, and the need for faster, more effective data to provide financial clarity have converged on businesses. Business managers are looking for that trusted, proactive advisor to help them make sense of it all – now more than ever before.

Frankly, these needs have our clients asking (and sometimes demanding) more from us. Much more. A service that requires a transformative approach. A service that requires expertise to be provided quickly, proactively and at a much higher level of strategic insight. The exciting thing about all of this is that we are the only profession that is uniquely qualified to deliver if we can step back, really listen and interpret our client’s true needs, assess and refine what our skills can bring to the table and then retool our technology, processes and data intelligence to fulfill those needs.

How can CPAs provide high-level insight?

To make this happen, accounting professionals looking to step to the plate in this arena have found that they need to be more engaged with their clients’ workflow architecture. More willing to “get their hands dirty” to change or be a part of client systems if necessary, and more willing to be “financial systems architects” that enable data to flow in such a manner that regularly produces higher level insight. In the past, the only way to accomplish that was to be at our client’s place of business. Effective, certainly – but not scalable. In steps the magic ingredient: technology!

By leveraging technology and harnessing its power by designing rapid data workflow streams that produce clear, impactful, proactive insight – coupled with a trusted advisor to interpret this insight – accounting professionals can fulfill the need.

Outsourced accounting is part of the solution

Future-oriented accounting firms have realized that a fundamental starting point should be to design outsourced accounting functions that can be brought under the traditional brick and mortar of an accounting firm. When the outsourced workflow is designed with a view toward automation and scale – but with the ultimate end product not only taking the place of in-house bookkeeping tasks but even more importantly the production of high-level strategic insight – the service is a real game-changer!

That is why I am so excited and proud to be part of the Yeo & Yeo Consulting Services Group and the task force that has unveiled an entirely new approach under the umbrella product name YeoConsults. This bundled approach encompasses three distinct YeoConsults Business Solutions including YeoConsults Outsourced Accounting, YeoConsults Legacy Program and YeoConsults Internal Controls.

We believe this new approach will help us keep the promise of delivering a proactive, more insightful CPA-client relationship. Learn more about YeoConsults. Let us know when we can show you how.

Managing human resource demands can be overwhelming when you have limited personnel. Small businesses are finding that outsourcing some of their HR functions gives them more time to focus on business growth and other opportunities.

When deciding which human resources tasks to outsource, here are four areas to consider.

Payroll

Payroll processing is one of the most popular HR functions for an organization to outsource. Outsourcing to a provider that specializes in preparing payroll will not only save time and money but also reduce risk by ensuring tax and reporting compliance.

Recruiting

Finding the right talent for your organization has become increasingly harder. With unemployment at its lowest point in nearly two decades, qualified candidates are not staying on the market for long. Permitting an outside firm to manage job postings and recruit qualified candidates can save valuable time and allow your HR department to focus on more pressing responsibilities.

Background Checks

To complete the recruiting process quickly, it is tempting to take shortcuts. No matter how well the candidate may have interviewed or how impressive their resume may be, it is always a good idea to take the time to perform a background check. Pre-employment screening can help eliminate candidates who are not the right fit and can save you time and money associated with terminating them in the long run.

Creating and Maintaining Employee Handbooks and Policy Manuals

Employment laws and regulations change frequently, so it is essential for your organization to maintain an up-to-date employee handbook. Creating such a document can be tedious, so finding an organization that is familiar with developing handbooks and policy manuals can be very advantageous. Your handbook should serve as an introduction for new employees to best practices, procedures, and company culture, all while aligning those elements with employment laws.

By outsourcing the things that consume valuable time, your HR department will be able to maximize its resources and focus on the areas of human resource management that they do best.

Often, small business owners are unsure about whether to record an expenditure as a repairs and maintenance expense or as a capital improvement. Numerous court cases have addressed amounts paid to improve and restore property and whether to classify them as capital expenditures or as ordinary repairs and maintenance.

Use the following guidelines to decipher how to allocate the expenditures between the two different classifications.

Record an expenditure as repairs and maintenance expense if the repair/improvement:

• Repairs property to restore the regular operating condition
• Restores property to its previous condition
• Preserves property through routine maintenance, or is an incidental repair

Record an expenditure as a capital improvement (this in accordance with the Internal Revenue Service [IRS] regulations) if the repair/improvement constitutes one of the following:

• Adds value to the property
• Adapts property to a new and different use
• Improves efficiency, capacity or productivity
• Fixes a defect or design flaw
• Restores property to a “like new” condition
• Prolongs the useful life of the property

In addition to following these rules, the company has the option to elect the De Minimis Safe Harbor rule. This election eliminates the burden of determining whether every small transaction made for the improvement of property or equipment purchased is to be expensed or capitalized. As of January 1, 2016, the IRS increased the threshold for this election from $500 to $2,500 per invoice or item for taxpayers without Audited Financial Statements (AFS). If the company has AFS, they may use this safe harbor rule to deduct amounts paid for tangible property up to $5,000 per invoice or item. For example, if the company purchases a computer for $3,000, they are only able to automatically expense this computer if they have AFS; otherwise, it must be capitalized as an asset, as it is over the $2,500 threshold.

To use the De Minimis rules, the taxpayer must have a written policy in place at the beginning of the tax year and use those same capitalization procedures on their AFS.

If you have questions regarding whether to expense or capitalize, or about the De Minimis Safe Harbor election, contact one of Yeo & Yeo’s tax professionals.

For most businesses, it can be challenging to navigate the ever-changing IRS tax laws. Some of the most confusing laws pertain to self-employed income reporting and the related requirements for issuing Form 1099-MISC.

Form 1099-MISC is issued to a subcontractor or business and reports the income they received for services performed during the year. It is important to note that only services performed, not goods purchased, are included on Form 1099-MISC.

Employees vs. Subcontractors

The first step – before an individual performs any services for your business – is to make the distinction between an employee and a subcontractor. The IRS’s general rule is as follows: if you control the when, how, and what in regards to an individual’s duties and pay structure, they are considered an employee.

• If it is determined that the individual is an employee, you will issue them a W-2 for wages (instead of a 1099-MISC) and should be collecting and remitting payroll taxes on their behalf.  
• If instead it is determined that the individual is a subcontractor, you will issue a 1099-MISC for their services based on the information below. Refer to the IRS website, Independent Contractor (Self-Employed) or Employee?

If you are still unsure whether an individual should be classified as an employee or a subcontractor, consider using IRS Form SS-8. An employer can submit this form to the IRS for an official determination regarding whether or not an individual is an employee or a subcontractor. The downfall of this solution is that it will take at least six months to receive such a determination. If a six-month waiting period to determine a classification is not feasible, consider contacting a trusted CPA firm or tax professional for their expertise.

1099-MISC Requirements

Following are general guidelines for determining if a 1099-MISC should be issued to either an individual or business:

• They are not an employee
• They have performed a service
• The compensation received for the service they performed exceeds $600
  A few examples of services are:
  • Subcontract labor
  • Rent
  • Prizes and awards
  • Crop insurance proceeds
  • Medical and healthcare payments
  • Payments to an attorney
• Royalties or broker payments that exceed $10

There are some exceptions to the above guidelines. For example, if a business is incorporated, then a 1099-MISC should not be issued to them regardless of the amount paid for services. It is a good practice to send all potential 1099-MISC recipients a Form W-9 to acquire the information needed to properly file the required 1099-MISC forms. Form W-9 is used to request a taxpayer identification number and certifications along with contact information. This form should be requested at the time the service is performed and can be prepared and stored either electronically or on paper.

1099-MISC forms are required to be sent to the IRS and the individual or business who provided the services no later than January 31 for the previous calendar year. This deadline is intended to ensure that the 1099-MISC recipient ultimately reports the income they received for services provided on their annual income tax returns.

For information on where to file or how to electronically file your forms 1099-MISC, refer to the IRS instructions on information reporting (General Instructions for Certain Information Returns).

Form 1099-MISC can be complicated. For more information, please contact one of our advisors.

The Management’s Discussion and Analysis (MD&A) was first introduced when Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governmentswas issued. It has been in effect for all state and local governments since 2003 or earlier. Although this statement set forth the requirements for the MD&A, it also changed many other aspects of financial reporting.

The requirements of the MD&A are straightforward.

• It must provide an objective analysis of the government based on the current year’s operations or other known facts.
• Comparisons must be made of the current year’s balances and activity to the prior year’s balances and activity with a focus on whether the overall financial health of the government has improved or deteriorated. Although these comparisons are on the government-wide information, the government must provide an analysis of significant changes in the funds as well as significant budget variances.
• The government must also report capital asset and long-term debt activity.
• The last component to the MD&A is management’s future outlook, which should describe current circumstances that are expected to have a significant impact on the government’s monetary position.

Turn a good MD&A into a great MD&A

In many cases, governments begrudgingly prepare an MD&A template to be compliant with GASB Statement No. 34 and roll that template forward year after year. While the template is likely sufficient, an MD&A can be the focal point of your financial statements! When effectively prepared, it has the opportunity to present all of the most significant and relevant financial data to users of the financial statements and can typically be accomplished in less than 15 pages. As a CPA who presents financial statements to governing bodies, I always recommend that the governing body at least read the MD&A.

Consider enhancing your MD&A. When was the last time that you or your auditor didn’t just update the charts and figures? Do you believe that a user unfamiliar with your financial statements, or other financial conditions, could read your MD&A as a summary of your government and have a clear and objective position of the financial health of your government?

If you answered no, consider some of the following tips to improve your MD&A:

• Make the goal of your MD&A to be a complete summary of your financial statements, such that users could feel comfortable only reading the MD&A.
• Use easily understood terms, so that taxpayers and financial analysts alike can understand your MD&A.
• Use charts and pictures – and add some color.
• Focus on reasons why the balances and activities of the year have changed compared to the past, rather than the magnitude of the change.
• If your government presents a transmittal letter, avoid duplicating information with the MD&A.
• Make page references to the financial statements and footnotes to the financial statements.
• Discuss current accomplishments of the government.
• Focus on the primary government.
• Avoid boilerplate templates.
• Attempt to answer questions that users of the financial statements typically pose.

The value of a great MD&A

A great MD&A is valued by users of the financial statement because it allows users to spend less time to gain an understanding of the monetary position of a government. It can help citizens and the members of the governing body understand the financial statements with a summarized presentation. It can answer questions before they’re asked.

For more information, refer to GASB Statement No. 34.

If you would like additional assistance with your MD&A, please contact your Yeo & Yeo professional.

Many employers mistakenly believe that the misclassification of employees as independent contractors doesn’t really matter, so long as the contractors satisfy all of their tax obligations. This couldn’t be further from the truth. Improper classification of workers comes at a high cost, and both federal and state authorities have been cracking down on the practice in recent years.

Advantages of independent contractor status

It’s no surprise why employers prefer to treat workers as independent contractors. If a worker is legitimately treated as a contractor, the employer avoids a variety of financial obligations associated with employees, including withholding federal income taxes, paying the employer’s share of FICA taxes (and withholding the employee’s share), and paying federal unemployment taxes (FUTA).

The employer may also avoid obligations under state law, including withholding state income taxes, paying state unemployment taxes, paying or withholding state disability insurance contributions, and furnishing workers’ compensation insurance. (However, some states may require employers to provide workers’ comp to contractors or pay unemployment tax on amounts paid to contractors in certain situations.) Also, contractors aren’t entitled to employee benefits, minimum wages, overtime and other rights enjoyed by employees.

Why it matters

There’s a common misconception that the IRS and state tax authorities don’t care about worker classification so long as they’re receiving all the taxes they’re owed. After all, independent contractors are responsible for the taxes that otherwise would be paid by the employer. But the government does care, for several reasons:

• Employers are less likely to default on their tax obligations.
• It’s much easier to collect taxes from a single employer than from many independent contractors.
• Even if all taxes are collected, the government also wants to maximize unemployment contributions.
• The U.S. Department of Labor, state labor departments and other employment security agencies have an interest in expanding the class of workers entitled to employee benefits, wage-and-hour protections, and workers’ comp coverage.

The consequences of misclassification can be harsh. If the IRS determines that contractors should have been classified as employees, it may require the employer to pay back taxes (including the employees’ share of unpaid payroll and income taxes), plus penalties and interest. And if the employer lacks the resources to pay these liabilities, the IRS can collect from “responsible persons,” including certain executives, partners or managers. And keep in mind that federal and state tax authorities can impose penalties on employers who misclassify workers even if all their contractors satisfy their tax obligations.

How to protect yourself

If your business uses independent contractors, conduct an assessment to determine whether they constitute employees under federal and state law. In making this determination, the IRS examines a variety of factors that reflect the level of behavioral and financial control you have over a worker, as well as the nature of your relationship.

For example, workers are more likely to be considered contractors if they control how and when the work is done, cover their own expenses, invest in their own facilities and tools, make their services available to the relevant market, and can realize profits or incur losses. The IRS also considers the parties’ written agreements, any benefits provided to the worker and the permanency of the relationship.

Be proactive

Given the steep price of misclassification, be proactive when it comes to employee vs. contractor status. If you’re concerned about potential liability, discuss options with your tax advisor and consider participating in voluntary classification settlement programs. These programs allow you to resolve these issues with the IRS or other government agencies at the lowest possible cost.

© 2017

My annual audit is done. Now what? Many year-end deadlines and reporting requirements need to be carried out after your audit is completed.

November 1 is the deadline to submit the Michigan Department of Education (MDE) audit package.

The audit package includes:

• 1.MDE Required Reporting Package
• Data Collection Form (DCF)
• Audited financial statements
• A Summary Schedule of Prior Audit Findings
• Auditor’s reports
• A corrective action plan to resolve the current and prior audit findings
• 2.Management letter, if issued by auditors
• 3.AU 260 letter – The Auditor’s Communication with Those Charged with Governance
• 4.Single Audit (if expending more than $750,000 in federal funds)

Adhere to these submission guidelines:

• The audit package must be submitted electronically and without any type of security or password protection.
• The electronic file must be in PDF format created from an electronic source. Scanned documents will not be accepted.
• All of the above items, except the DCF, must be included in one PDF document.

The district or the district’s auditor should notify the MDE when the audit has been certified at the Federal Audit Clearinghouse. The MDE auditor will retrieve the DCF from the Federal Audit Clearinghouse’s website. The MDE has size, naming and submission requirements on its website on the Guidance on Electronic Filing of Financial Statement Audits page.

For additional information and details, refer to Section B – Report Distribution in the Michigan School Auditing Manual. Also, the MDE released an Accounting & Auditing Alert for FY 2017-2018 that highlighted the Mandatory Electronic Filing of School District Audits.

Data Collection Form submission

The Data Collection Form (DCF) is submitted to the Federal Audit Clearinghouse via their website. The DCF is a submission of a school district’s federal expenditures and findings. The DCF is prepared in cooperation with your auditors and must be certified by both the district and auditors for submission before November 1. For additional information about the DCF, refer to the Federal Audit Clearinghouse’s Internet Data Entry System Instructions.

Finance Information Data submission

The Center for Educational Performance and Information also has a November 1 deadline for all school districts to submit the Finance Information Data (FID). The FID includes the school district’s financial information. The electronic submission must comply with the Michigan Public School Accounting Manual Chart of Accounts. Please see the Center for Educational Performance and Information page for details. They also have an FID User Guide to help you through the process.

Please contact your local Yeo & Yeo auditor if you have questions or need additional information about year-end financial submissions.

For nonprofit organizations, expense reimbursement fraud schemes are the third most common type of fraud according to the Association of Certified Fraud Examiners’ 2018 Report to the Nations on Occupational Fraud and Abuse. These schemes were present in 29 percent of the reported fraud cases.

With employees more mobile than ever, how can your organization protect itself? The first step is to develop a travel and expense reimbursement policy. This policy dictates which expenses will be reimbursed, how employees should request reimbursement, and who will approve the expenses. The policy should also address situations of noncompliance and disciplinary measures that will be taken in the occurrence of fraud.

While trust is a crucial element in the workplace, it cannot replace essential internal controls like the approval process. It is imperative that the policy be in writing and that it is fully communicated to employees. It’s also important that those who are approving the reimbursements know which details they must check and why, if the approval is to be meaningful and effective. Furthermore, to discourage and detect potential fraud or error, analyze cost trends by employee and type on a monthly basis.

New Online System

Beginning October 1, 2018, a new system is accessible on the Michigan Department of Treasury’s website for both reporting unclaimed property and filing to receive unclaimed property.

• Business and individuals can search for unclaimed property in their name and submit validation information online to claim the unclaimed property.
• Holders of unclaimed property can file reports and make payments electronically.

The new electronic filing system allows for ease in reporting. Access the new system at https://unclaimedproperty.michigan.gov/.

Zero Balance Reporting

As reported in an earlier Yeo & Yeo eNewsletter, when the 2018 Reporting Manual was issued in April, the Michigan Department of Treasury removed the requirement to file a zero balance situation, where a business does not have any old outstanding checks that would meet the requirement to escheat the funds to the State. The Treasury still recommends that entities file a zero balance report to maintain a history of reporting. If this describes your situation, and you have not reported, you can find Form 2011 on the website and upload it.

Deadlines for reporting

• Current rules require the unclaimed property to be identified as of March 31 of each year and reported to the State on or before July 1.
• Once properties have been identified, organizations must prepare and mail due diligence letters to the property owners by April 15.
• By May 15, organizations must determine which property owners have not responded to the due diligence letters.
• Then, starting on June 1, organizations should begin preparing the annual unclaimed property report.

Property that has reached its applicable dormancy period as of March 31 must be remitted with and reported on Michigan State Form 2011, Michigan Holder Transmittal for Annual Report of Unclaimed Property, and the appropriate annual reporting form (there are separate forms for cash and safe deposit boxes, and for securities). If the holder (business or government entity) has more than ten items to report, they must use electronic media for the annual report. The due date for this filing was July 1 (or the next business day if the 1^st is on the weekend).

Penalties for failing to report

Fines and penalties may be assessed for organizations who fail to submit reports. Fines may be imposed of $100 per day for each day that the report is withheld, or the required duties outlined in the previous paragraph are not performed, not to exceed $5,000. Also, a 25 percent penalty on the value of the property that should have been paid or delivered may be assessed in addition to interest charged from the date that the property should have been delivered to the State of Michigan.

Voluntary Disclosure

Entities that would like to avoid penalties and interest charges on property that they are delinquent in reporting can become compliant by filing a Michigan Unclaimed Property Voluntary Disclosure Agreement (From 4869). If approved, then the holder will be notified of the obligation to complete and submit the proper reports for the current reporting year and four previous reporting years, and should remain current in reporting going forward. The instructions and form are all available in the 2018 reporting manual.

The Tax Cuts and Jobs Act (TCJA) is expected to cause some challenges for most in the nonprofit industry. While several significant tax law changes took effect in 2018, you should know and understand four of them now.

Two of the provisions that are most likely to affect your nonprofit organization are changes in unrelated business taxable income (UBTI).

Also, Revenue Procedure 2018-38 changed the rules regarding Schedule B – Schedule of Contributors, and a recent change in Michigan law applies to sales tax for 501(c)(3) and 501(c)(4) exempt organizations.

Let’s take a closer look at these four specific changes and how they may impact your nonprofit organization’s reporting and tax obligations.

Losses in one trade or business can no longer offset income in another trade or business.

Previously, the gain or loss from any unrelated trade or business regularly conducted were netted together to determine UBTI. If, for example, an organization conducts unrelated business A for a profit, and the organization also conducts unrelated business B and had a loss, the previous rules allowed the organization to net the activity from A and B. The income from A would be reduced by the deficit from B in calculating UBTI.

The new rules no longer allow the two to net. The income from A will be reported and the deficit from B will create a net operating loss to carry forward and only be applied to future UBTI generated by B. The specific deduction of $1,000 in computing UBTI is maintained but is not considered in determining the separate UBTI calculation of each separate trade or business.

This new rule applies to tax years beginning after December 31, 2017. Any net operating loss from tax years beginning before January 1, 2018, can be carried forward and applied to any income in subsequent years, regardless of which trade or business created it.

Organizations must carefully consider if their activities constitute more than one distinct trade or business and report accordingly going forward. Interim guidance suggests the NAICS code will be used to determine the unrelated trade or business. It is likely that the overall tax burden will increase for exempt organizations, since gains from one unrelated trade or business can no longer be offset by the shortfall from another unrelated trade or business.

Certain qualified transportation fringe benefits must be reported as unrelated business income.

Previously, when organizations provided employees with transportation fringe benefits, employees did not have to add those amounts to their taxable income, and the nonprofits included it in routine expenses. (For-profit entities could deduct these expenses from their taxable income). Under the new provision, the amounts paid for such benefits will be included in UBTI, effective for amounts paid or incurred after December 31, 2017. For-profit entities will no longer be able to deduct these costs. The effect is that for-profit entities and nonprofit organizations will be treated the same, both paying tax on these fringe benefits provided to their employees.

Qualified transportation fringe benefits include a parking garage where employees park for free, commuter transportation, and transit passes. If a parking garage is also used by nonemployees, the organization will need to allocate the cost of providing the parking to determine the amount to include in UBTI. The IRS indicated that these benefits cannot be shifted to taxable compensation for the employees so that they are deductible by the organization. The IRS updated Publication 15-B, Employer’s Tax Guide to Fringe Benefits, to reflect these changes. This change could mean that more nonprofit organizations will be required to file Form 990-T.

Schedule B is now required only for 501(c)(3) exempt organizations.

Revenue Procedure 2018-38, released on July 16, 2018, modifies the requirements to file Schedule B – Schedule of Contributors with Form 990 or 990-EZ. Schedule B is used to report names, addresses and amounts of substantial contributors to exempt organizations. This requirement now applies only to 501(c)(3) charitable organizations; previously it affected all 501(c) organizations.

Several reasons for this change include:

• The IRS is required to make annual returns available to the public. It cannot disclose the names and addresses of contributors but must include the contribution information. This meant the IRS was spending resources to redact that information from returns when making it available to the public.
• Exempt organizations faced increased time and resources to provide the information to the IRS and also redact it when complying with public disclosure requirements.
• There is a risk that the information could inadvertently be disclosed to the public.

Affected organizations must continue to maintain this information in their records and be able to provide it to the IRS under examination. The change is effective for taxable years ending on or after December 31, 2018.

Michigan law changed the rules for 501(c)(3) and 501(c)(4) organizations that collect sales tax.

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.

If you have questions or concerns about how any of these changes affect your organization’s tax and reporting responsibilities, contact a member of Yeo & Yeo’s Nonprofit Services Group.

In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options.

Insurance

Businesses can provide their employees with various types of insurance on a tax-free basis. Here are some of the most common:

Health insurance. If you maintain a healthcare plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but may be deductible on a limited basis as an itemized deduction.

Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income.

Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance can’t be provided through a cafeteria plan.

Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 are taxable to the extent they exceed the employee’s coverage contributions.

Other types of tax-advantaged benefits

Insurance isn’t the only type of tax-free benefit you can provide — but the tax treatment of certain benefits has changed under the Tax Cuts and Jobs Act:

Dependent care assistance. You can provide employees with tax-free dependent care assistance up to $5,000 for 2018 though a dependent care Flexible Spending Account (FSA), also known as a Dependent Care Assistance Program (DCAP).

Adoption assistance. For employees who’re adopting children, you can offer an employee adoption assistance program. Employees can exclude from their taxable income up to $13,810 of adoption benefits in 2018.

Educational assistance. You can help employees on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance and qualified scholarships.

Moving expense reimbursement. Before the TCJA, if you reimbursed employees for qualifying job-related moving expenses, the reimbursement could be excluded from the employee’s income. The TCJA suspends this break for 2018 through 2025. However, such reimbursements may still be deductible by your business.

Transportation benefits. Qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling, are tax-free to recipient employees. However, the TCJA suspends through 2025 the business deduction for providing such benefits. It also suspends the tax-free benefit of up to $20 a month for bicycle commuting.

Varying tax treatment

As you can see, the tax treatment of fringe benefits varies. Contact us for more information.

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Businesses that acquire, construct or substantially improve a building — or did so in previous years — should consider a cost segregation study. It may allow you to accelerate depreciation deductions, thus reducing taxes and boosting cash flow. And the potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA).

Real property vs. tangible personal property

IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you’ll depreciate a building’s structural components — such as walls, windows, HVAC systems, elevators, plumbing and wiring — along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, businesses allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for instance — the distinction between real and personal property is obvious. But often the line between the two is less clear. Items that appear to be part of a building may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.

Depreciation break enhancements

Last year’s TCJA enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing. Sec. 179 allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).

Assess the potential savings

Cost segregation studies may yield substantial benefits, but they’re not right for every business. To find out whether a study would be worthwhile for yours, contact us for help assessing the potential tax savings.

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If you’re age 70½ or older, you can make direct contributions — up to $100,000 annually — from your IRA to qualified charitable organizations without owing any income tax on the distributions. This break may be especially beneficial now because of Tax Cuts and Jobs Act (TCJA) changes that affect who can benefit from the itemized deduction for charitable donations.

Counts toward your RMD

A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (Deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.)

So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid to you.

Doesn’t require itemizing

You might be able to achieve a similar tax result from taking the RMD and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation.

And, with the TCJA’s near doubling of the standard deduction, fewer taxpayers will benefit from itemizing. Itemizing saves tax only when itemized deductions exceed the standard deduction. For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households, and $24,000 for married couples filing jointly.

Doesn’t have other deduction downsides

Even if you have enough other itemized deductions to exceed your standard deduction, taking your RMD and contributing that amount to charity has two more possible downsides.

First, the reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.

Second, if your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 60% of your adjusted gross income for the year. (The TCJA raised this limit from 50%, but if the cash donation is to a private nonoperating foundation, the limit is only 30%.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.

A charitable IRA rollover avoids these potential negative tax consequences.

Have questions?

The considerations involved in deciding whether to make a direct IRA rollover have changed in light of the TCJA. So contact us to go over your particular situation and determine what’s right for you.

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Yeo & Yeo CPAs & Business Consultants is asking manufacturing company owners and managers to participate in the third Yeo & Yeo / Leading Edge Alliance (LEA) National Manufacturing Outlook Survey. The survey results will provide valuable benchmarking data for manufacturers.

This short (< 25 questions) survey asks about manufacturing companies’ performance this year, managers’ expectations for next year, and the strategies that high-performing manufacturers find most effective. Individual responses will be kept strictly confidential. The survey closes on October 31. In January, the resulting aggregate report will be available on Yeo & Yeo’s website, providing insightful industry data as manufacturing companies plan for 2019.

The leader of Yeo & Yeo’s Manufacturing Services Group, Amy Buben, says, “Michigan ranks No. 4 in total manufacturing jobs, so it is crucial that our manufacturers remain competitive and profitable. The survey results help manufacturers compare their operation with others, and get a greater awareness of the industry’s priorities and challenges, as well as trends in revenue and spending.”

Also, by completing the survey, participants will be entered for a chance to win one of five $300 Visa or Mastercard gift cards.

Click here to take the survey.

This project is in partnership with LEA Global and is being conducted in association with leading accounting firms across the country. Please contact Yeo & Yeo if you have questions or concerns.

Our affiliate, Yeo & Yeo Technology, will be sharing cyber tips, tricks and best practices all month long, as October is Cybersecurity Awareness Month. Learn more about about how you can be more Cyber Aware by reading their latest blog post and be on the look out for more content from YYTECH all month long! 

Cybersecurity Statistics

Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data.

How it works

In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.

For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to claim refunds.

The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.

Red flags

There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:

• Your business doesn’t receive expected or routine mailings from the IRS,
• You receive an IRS notice that doesn’t relate to anything your business submitted, that’s about fictitious employees or that’s related to a defunct, closed or dormant business after all account balances have been paid,
• The IRS rejects an e-filed return or an extension-to-file request, saying it already has a return with that identification number — or the IRS accepts it as an amended return,
• You receive an IRS letter stating that more than one tax return has been filed in your business’s name, or
• You receive a notice from the IRS that you have a balance due when you haven’t yet filed a return.

Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your Employer Identification Number.

Prevention tips

Businesses should take steps such as the following to protect their own information as well as that of their employees:

• Provide training to accounting, human resources and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails.
• Use secure methods to send W-2 forms to employees.
• Implement risk management strategies designed to flag suspicious communications.

Of course identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us.

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