How Will Tax Reform Affect Agribusiness?

President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. While the law does not simplify the tax code, it is expected to provide tax relief for most in agriculture.

93% of U.S. farmers pay income tax at the individual income tax level. Here are some of the highlights of individual tax changes that may impact farmers:

The new law imposes a new tax rate structure with seven tax brackets – 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed.
The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
Standard deduction almost doubled – $12,000 for individuals, $18,000 head of household, and $24,000 for married couples. The personal exemption is repealed.
Many farmers will no longer itemize due to the new standard deduction and the $10,000 tax cap referenced in the next bullet point.
State & local tax deduction – limited deduction up to $10,000 of property, sales or income taxes. This will be significant for some.
Medical expenses exceeding 7.5% of adjusted gross income are allowed as itemized deductions. This replaces the previously threshold of 10% of AGI.
Mortgage interest is now limited to interest paid on debt up to $750,000 in debt (compared with the previous limit of $1,000,000 in debt).
Boosts phase-out thresholds for itemized deductions. This will have less of an affect due to the $10,000 cap as well.
Child and family tax credit – the credit for children under 17 is increased to $2,000 per child. $1,400 of the credit is refundable even if no tax is owed. The law also establishes a $500 credit for dependents that are not qualifying children. Phase-out of the credit begins at $200,000 single and $400,000 married filing joint. These changes will eliminate any penalty that families with young children may have felt from the repeal of the personal exemptions.
Net operating losses (NOLs) can be carried forward indefinitely instead of 20 years in the old law, but are limited to 80 percent of income. NOLs can be carried back for two years instead of the five years as previously allowed for farms and ranches.
Alternative minimum tax (AMT) is not repealed for individuals but income thresholds at which the tax is calculated increased significantly. Farmers and individuals with higher income levels may benefit from this change.

While the individual tax changes will have some impact on producers, the business provisions of the law while have a much deeper impact.

C Corporations

The top corporate tax rate decreases from 34% to 21% effective January 1. Unlike the other changes in the law, this change is permanent. For farmers who operate as a C corporation and typically have less than $50,000 of taxable income, this is a 40% tax increase because the old corporate tax brackets are replaced with a flat tax rate regardless of taxable income. Under the old law, taxable income under $50,000 was taxed at a 15% corporate income tax rate. Large producers and agribusinesses that are incorporated will enjoy a significant reduction in corporate income taxes. Hopefully, the increased cash flow will spur additional capital investment, hiring and wage increases for many in the agriculture industry.

Pass-through entities (S Corporations, Partnerships, LLCs, Sole Proprietorships)

85% of U.S. farms are structured as pass-through entities. The law introduces a new 20% deduction for business income from pass-through entities. Business income includes payments from cooperatives, commodity wages and farmland rental income. The deduction is limited to taxpayers with joint income exceeding $315,000 or single filers exceeding $157,000. The limitation is the greater of 50% of wages paid or 25% of wages paid plus 2.5% of the depreciable business property. The deduction can be carried forward in loss situations.
With a 20% deduction for farm income, the top rate is 29.6%, which is only 8.6% higher than corporate rates. Unless you are in a 32% or higher tax bracket, net farm income will always be taxed lower than 21%. Dividends from the corporation are still subject to a top tax rate of 23.8%. Many flow-through entities get step-up in basis, only corporate stock gets a step-up. In Michigan, only C Corporations are subject to the Corporate Income Tax. In general, very few farmers would benefit from establishing a C Corporation.

Ag Cooperatives

Ag cooperatives and members lost the benefit of the Section 199 deduction, which the legislation repeals. The law establishes Section 199A which makes co-ops eligible for the pass-through deduction. Farmers will receive a 20% deduction on all payments from a farmer cooperative. The deduction cannot exceed the taxpayer’s taxable income for the year. Cooperatives will receive a 20% deduction on gross income less payments to patrons, limited to the greater of 50% of wages, or 25% of wages plus 2.5% of the cooperative’s investment in property. Changes will require extensive planning before year-end for farmer cooperatives.

General Business Tax Changes

Section 199 – the domestic production activities deduction is no more. This impacts farms that paid significant wages and farmers that are members of farm cooperatives. While this was a significant deduction for those that qualified, the new 20% deduction for pass-throughs will make up for it in many cases.
Farms can fully expense interest costs – up to $25 million in revenue can continue expensing interest. Businesses owned through trusts or estates would receive the same tax treatment as other kinds of businesses.
Meals are only 50% deductible for farmers who provide meals on-site.
New farming equipment and machinery is 5-year property. For property placed in service after Dec. 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer. Also, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.
Qualified leasehold improvement property placed in service after Dec. 31, 2017, is now generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease or placed in service more than three years after the date the building was first placed in service.Full expensing of new and used capital investments will be permitted through 2022 (100% bonus depreciation). After 2022, the 100% allowance would be phased down by 20% each year through 2027.
Section 179 expensing permanently doubles the amount eligible for special small business investment write-offs. The allowance only applies to new equipment and cannot exceed taxable business income. The Section 179 allowance is now $1 million, with the phase-out beginning at $2.5 million in purchases. Most farmers will not exceed these limits.
Like-kind exchanges – previously, Section 1031 exchanges were allowed for equipment and some livestock, including cattle, as well as real estate. The new law limits like-kind exchanges to real estate only. Personal property exchanges will be taxed but not subject to self-employment tax. You must purchase replacement property, which will be 100% deductible under bonus depreciation until 2023 and Section 179 may be available to cover any remaining balance.
Corporate Alternative Minimum Tax (AMT) is repealed.
Cash Accounting – the law expands the number of farm corporations and farm partnerships that can use the cash basis of accounting for tax purposes.
The tax bill maintains federal credits for wind and solar energy projects and keeps intact the terms of a previous agreement to phase out wind credits through 2019.
Tax break for citrus growers – citrus growers can immediately deduct replanting expenses even if they raise capital from investors to help cover the costs. This will help growers who need to replant diseased trees, such as those hit with a citrus greening disease that is ravaging Florida’s industry.
The measure also provides major tax breaks for wine and cider makers. The lower rates, however, expire after two years.

Estate Tax

Estate tax exemptions double – 40% tax on estates over $11.2 million for individuals and $22 million for couples. Stepped-up basis and the transfer of unused exemptions to the spouse is retained. The exemption will continue to be adjusted for inflation but would go back to the previous law in 2026.

So How Will Tax Reform Affect Agriculture?

The cut in the corporate tax rate and international tax rule changes are permanent to encourage long-range planning, but other business provisions sunset in as few as eight years. If these provisions expire, a large gap would appear between the new permanent 21% corporate tax rate and highest pass-through rate, which could reset near 40%.

Two individual tax provisions are permanent. One changes to a slower measure of inflation, which means thresholds for tax brackets increase at a slower pace, and leaves more households in higher brackets than they would be under previous law. The other ends the individual health insurance mandate and penalty. It remains to be seen what impact that will have on premium costs and the health insurance industry. Nearly everything else ends after eight years.

In the meantime, most Americans will have more money in their pockets due to the tax cuts. That could boost purchases, including food and other agricultural products. Individual investments should see gains as stock markets, for example, have already noted impressive gains since it became evident that tax reform would clear Congress. The big drop in the corporate tax rate is good for business growth, including an eventual boost in investments, jobs and worker wages. For farmers, it is a net gain, but how much remains to be seen.

Depreciation rules and immediate expensing are set for a longer period than businesses have seen for a long time. This should give them more confidence in the consistency of tax treatments and spur capital investment.

The increase in the estate tax exemptions will be a significant boost to succession planning for farmers who previously struggled to plan how to pass farms to the next generation. A much larger estate can now be passed on without the risk of having to liquidate farmland and other assets upon death. Again, the new exemption amount sunsets in 2025 unless Congress extends the existing law.

Farmers and the agribusiness industry should be cautiously optimistic about the new tax law. Planning with the help of experienced advisors and consultants will be paramount to successfully navigating these new waters.

Many workplace crimes are “inside jobs.” They can involve employees stealing cash, inventory, equipment or intellectual property, or they could include more sophisticated schemes such as bribery, kickbacks or payroll fraud.

Internal fraud investigations can pose numerous challenges. Here are five costly mistakes an organization can make when faced with the possibility that one of its employees or administrators is engaging in fraudulent behavior.

Making a Rush to Judgment.

The facts may appear to show clearly that the targeted individual has perpetrated internal fraud. However, regardless of how compelling the facts may be, your company must conduct an appropriately rigorous investigation.

Example: The internal audit department had evidence that the finance director had used city funds to pay personal expenses. The city terminated the finance director without any additional investigation because his supervisors felt the documentation showed a clear pattern of fraud. The finance director sued the city for wrongful termination. Since the city failed to complete a rigorous investigation, including an interview of the finance director, its legal counsel advised that the city settle the matter out of court.

Letting Word of an Investigation Get Out.

The existence of an internal fraud investigation should only be shared with those with a “need to know.” Divulging information beyond these individuals can doom an investigation to failure, especially if the targets are made aware of the fact that their actions are being scrutinized.

Example: A school district determined that a food service employee was stealing the credit card numbers used to pay for meals. The manager shared his suspicions with one of the other supervisors. Unfortunately, that supervisor was involved in the fraud. She notified the other perpetrator that management was hot on the trail. The employees destroyed numerous notebooks that allegedly contained detailed records about the theft and the credit card numbers stolen. Without this evidence, the district had to spend considerable time and effort building a case against those employees.

Proceeding Without Notifying Legal Counsel and HR Professionals.

Employees have certain rights and, if they are violated, it can directly affect the results of the investigation, and it can also create considerable legal risk for the school district. Before a formal internal fraud investigation is launched, both legal and human resource professionals should be briefed on the situation.

Example: An internal audit performed by the accounting supervisor of the school bookstore suspected that one of the employees was part of a group of shoplifters. The internal investigator contacted local police to share his suspicions. The police did not have a detective available right away to interview the suspect. However, the police faxed the district’s investigator a list of questions to ask. The investigator conducted an interview where she asked the employee all of the questions obtained from the police. Since the district’s investigator conducted the interview at the request of law enforcement, the employee should have been read his Miranda rights. (It is generally not required in a private investigation.) If the district’s investigator had consulted with legal counsel before conducting the interview, she would have been informed that any statements gathered during the interview violated the employee’s Miranda rights and most likely would be suppressed by a judge.

Failing to Maintain a Document Trail.

Even a simple fraud will likely involve documentary evidence. No matter how straightforward the fraud may appear at the time, it is critical that the investigation case files contain all relevant information compiled by the company during the investigation.

Example: An employee was terminated by a Township for stealing certain higher-priced supplies for his online side business. The employee filed a claim with Equal Employment Opportunity Commission alleging racial discrimination. The Township provided the EEOC a copy of its documents from the investigation. Unfortunately, several crucial pieces of evidence were missing from the files. In the absence of direct evidence demonstrating the employee’s guilt, the Township was subsequently fined by the EEOC.

Not Holding Leaders to the Same Standards.

A successful fraud investigation depends upon secrecy. If alleged fraudsters determine that your government is investigating them, they will probably attempt to destroy evidence, influence witnesses, or disappear with their ill-gotten gains. In some cases when leaders are suspected of fraud, the government handles them with kid gloves.

Example: A County was notified via its confidential hotline that the clerk had stolen frequent flier mile rewards for their personal use. The County Administrator expressed a great deal of skepticism and would only allow the investigation to proceed if multiple employees corroborated the allegations. Before confronting the clerk, the County interviewed a dozen employees. Not surprisingly, the clerk became aware of the investigation and created a plausible explanation for the use of the rewards. Without compelling evidence to support termination, the clerk remained employed and was even subsequently promoted.

Not only can special treatment of leaders result in significant financial losses from that individual, but it can also lead to subsequent losses from others in the government. If staff members become aware that leaders are permitted to get away with fraud while lower-level employees are held accountable, they are more likely to steal too.

The mistakes made in each of the investigations above were avoidable. Consult with your attorney and auditor to assist with internal fraud cases. By doing so, you dramatically improve the chances that you will conduct a successful investigation while helping to avoid these and other pitfalls.

The beginning of a new year is often when businesses analyze their inventory and consider writing off old or obsolete products. Manufacturing company owners should be aware that IRS regulations make the process of writing off inventory more complicated than simply expensing the value of the outdated product.

Essentially, there are two types of obsolete products: 1) finished goods, and 2) unusable raw materials and work-in-process inventory.

Finished Goods

For finished goods that may still potentially be sold, IRS rules state the inventory may be valued at a price of an actual offering of goods during a period ending not later than 30 days after the inventory date.

For example, on December 31, a manufacturer determines the market for one of its products, Widget A, has deteriorated. The prospects of the business selling its remaining units of Widget A for a profit are nonexistent. Widget A units cost $150 to produce, but the manufacturer determines the units can only be sold at a price of $100 each. To write off the $50 per unit loss in the current tax year, the manufacturer will have to offer Widget A for sale at a price of $100 per unit within 30 days.

Unusable Raw Materials and Work-in-Process Inventory

Unusable raw materials and work-in-process inventory may be written off without being offered for sale. However, the obsolete inventory should never be less than scrap value.

Expanding on the example above, the manufacturer had several unfinished units of Widget A recorded as work-in-process. The manufacturer may use a reasonable basis to determine the value of the unfinished units and record the loss without offering the units for sale. The value used to determine the loss may not be less than the value of the items if they were sold as scrap materials.

Raw materials that have been rendered unusable by obsolescence or poor quality may be written off using a reasonable basis. Once again, the new value may not be less than the scrap value of the materials.

Documentation is Key

While the process of writing off inventory seems cut-and-dried, it is important to remember that documentation of all the inventory and pricing is crucial. When writing off obsolete products, the burden of proof lies with the manufacturer to support the expense that recorded the change in the value of the outdated product.

Two types of simple documentation you will want to keep:

1.Copies of the offering price, such as a pricing sheet or website listing.
2.Documentation showing the dates offerings are made to ensure the sale date is within the 30-day period.

If you have questions regarding writing off obsolete inventory, please contact a member of Yeo & Yeo’s Manufacturing Services Group.

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The sweeping changes made by the 2017 Tax Cuts and Jobs Act impacts nearly all taxpayers. Nonprofit organizations are also affected by the legislation. Here’s how:

Changes the computation of unrelated business taxable income (UBTI) if an organization has more than one unrelated trade or business
Increases UBTI by the amount of certain fringe expenses for which a deduction is disallowed
Imposes a 21% excise tax on compensation over $1 million for the five highest paid employees
Imposes a 1.4% excise tax on net investment income of certain educational institutions
Modifies the rules for charitable contributions:

Repeals the special rule in Code Sec. 170(l) that provides a charitable deduction for the amount paid for the right to purchase tickets for athletic events;
Repeals the Code Sec. 170(f)(8)(D), effectively ensuring that donee organizations will not be allowed or required to report details of donations of $250 or more
Increases the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations to 60%;
Suspends the overall limitation on itemized deductions

Let’s take a closer look:

UBTI

Sec. 13702 of the Act amends Code Sec. 512(a). Previously, the gross receipts 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 gross income less cost of goods sold is 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 loss from B in calculating UBTI. The new rules do not allow the two trades or businesses to net. The income from A will be reported and the loss 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 included in determining the separate UBTI calculation of each unrelated 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 unrelated trade or business and report accordingly going forward. It is likely that the overall tax burden will increase for exempt organizations, as gains from one unrelated trade or business can no longer be offset by the losses from another unrelated trade or business. Organizations should give careful consideration to restructuring or moving activities to taxable subsidiaries and consider all the possible implications.

In addition, UBTI is changed by Sec. 13703 of the Act. Previously, organizations could provide employees with transportation fringe benefits and on-premises gyms and other athletic facilities. Employees did not have to include those amounts in their taxable income and there was no tax effect for nonprofits (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 unrelated business taxable income, 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 transportation fringe benefits and on-premises gyms and other athletic facilities provided to their employees.

With the overall reduction of the corporate tax rate to 21%, exempt organizations who already pay tax on UBTI could benefit from the lower tax rate.

Excise Tax

Sec. 13602 of the Act adds Code Sec. 4960. Currently, taxable employers face deduction limits regarding excess compensation. Until now, exempt organizations have not had comparable rules. The new provision subjects tax-exempt organizations to a 21% excise tax on the sum of:

1)the remuneration paid (other than any excess parachute payment) by an applicable tax-exempt organization for the taxable year with respect to employment of any covered employee in excess of $1 million, plus

2)any excess parachute payment paid by such an organization to any covered employee.

Remuneration is treated as paid when there is no substantial risk of forfeiture. It includes any remuneration paid by a related entity, but does not include amounts paid to a licensed medical professional (including a veterinarian) for the performance of medical or veterinary services.

An excess parachute payment is the excess amount of any parachute payment over the portion of the base amount. A parachute payment is any compensation paid to or for a covered employee if the payment is contingent on their separation from employment and the aggregate present value equals or exceeds three times the base amount. The base amount is the annualized includible compensation for the most recent five taxable years ending before the date of separation (see Section 280G(b)(3)).

An applicable tax-exempt organization includes an organization exempt under Section 501(a), an exempt farmers’ cooperative, a federal, state or local governmental entity with income excludable under Section 115, or a Section 527 political organization.

A covered employee includes the five highest compensated employees (including former employees) for the taxable year, or a covered employee for any previous taxable year beginning after December 31, 2016.

This provision will have a significant impact on covered organizations with highly compensated individuals. Such organizations need to assess the total compensation for their executives and closely monitor the amount and timing of compensation payments. It’s important to note that once an employee is a covered employee, they remain a covered employee. And, even if a covered employee’s compensation does not exceed $1 million, excise tax would apply to the excess parachute payment for such an employee. Impacted organizations will want to keep a close eye on additional details sure to develop.

Sec. 13701 of the Act adds Section 4968. Previously, the excise tax imposed by Code Sec. 4940 on the net investment income of private foundations did not apply to public charities, including colleges and universities that may have had substantial investment income. Going forward, certain private colleges and universities will be subject to a 1.4% excise tax on their net investment income. Institutions subject to the excise tax include 1)those with more than 500 daily average full-time students in the preceding taxable year and 2) those with an aggregate fair market value of assets (other than those assets which are used directly in carrying out the institution’s exempt purpose) of more than $500,000 per student at the end of the preceding tax year. In addition, assets and net investment income of related organizations would be treated as assets and net investment income of the institution. The new provision applies to taxable years beginning after December 31, 2017.

Charitable contributions

Sec. 13704 of the Act changes Code Sec. 170(l). Previously, individuals could deduct 80% of the amounts paid to colleges and universities which includes the right to purchase tickets for seating at an athletic event in an athletic stadium of such an institution. The changes disallow the deduction for the portion paid in exchange for the seating rights, effective for contributions made in taxable years beginning after December 31, 2017.

Sec. 13705 of the Act changes Code Sec. 170(f)(8). This section disallows a deduction for any contribution of $250 or more unless it is substantiated by a contemporaneous written acknowledgment. Previously this did not apply to a contribution if the donee organization filed a return which included the required information. This change ensures that there is no possibility of regulations that would allow or require charities to report details of donations of $250 or more.

Sec. 11023 of the Act changes Code Sec. 170(b)(1). Individuals may deduct charitable contributions limited to 50%, 30% or 20% of their adjusted gross income. The deduction class depends on the donee organization’s classification and the type of property. The new regulations increase the 50% limitation to 60% for cash contributions to public charities and certain private foundations. Amounts exceeding 60% of adjusted gross income can be carried forward for five years. This change may provide an incentive to donors to make significant gifts after December 31, 2017, and before January 1, 2026. This may help exempt organizations that are nervous about how the higher standard deduction for individuals will affect charitable giving in the future. Because the standard deduction is nearly doubled, fewer taxpayers will itemize and be able to see a tax benefit from charitable donations.

Indirectly affecting charitable contributions, Sec. 11046 of the Act suspends Code Sec. 68 for taxable years beginning after December 31, 2017, and before January 1, 2026. Previously, this section limited the overall itemized deductions for higher-income taxpayers. This may provide some taxpayers an incentive to donate larger amounts to exempt organizations.

Conclusion

Several changes included in the 2017 Tax Cuts and Jobs Act will directly impact nonprofits, and several will have an indirect impact. Changes to the calculation of UBTI include disallowing organizations to net profits and losses from more than one unrelated trade or business, as well as increasing UBTI by the amount of certain fringe expenses. Excise tax changes include imposing a 21% excise tax on compensation over $1 million for the five highest paid employees and imposing a 1.4% excise tax on net investment income of certain educational institutions.

The far-reaching tax law changes also impact charitable contributions by repealing the special rule that provides a charitable deduction for the amount paid for the right to purchase tickets for athletic events; ensuring that donee organizations will not be allowed or required to report details of donations of $250 or more; increasing the 50% limitation for cash contributions to public charities and certain private foundations to 60%; suspension of overall limitation on itemized deductions; and increasing the standard deduction.

Some of these changes will be easy for organizations to quantify but, for others, only time will tell. Exempt organizations should consult with their tax professional to determine exactly how their particular situation will be impacted and what actions they should take to mitigate their tax consequences. Organizations may also need to explore new ways to garner contributions from individual taxpayers. It’s imperative that exempt organizations keep up to date on additional regulations that are likely to result from these tax law changes.

President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. While the law does not simplify the tax code, it is expected to provide tax relief for most in agriculture.

View this as an eBook.

93% of U.S. farmers pay income tax at the individual income tax level. Here are some of the highlights of individual tax changes that may impact farmers:

The new law imposes a new tax rate structure with seven tax brackets – 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed.
The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
Standard deduction almost doubled – $12,000 for individuals, $18,000 head of household, and $24,000 for married couples. The personal exemption is repealed.
Many farmers will no longer itemize due to the new standard deduction and the $10,000 tax cap referenced in the next bullet point.
State & local tax deduction – limited deduction up to $10,000 of property, sales or income taxes. This will be significant for some.
Medical expenses exceeding 7.5% of adjusted gross income are allowed as itemized deductions. This replaces the previously threshold of 10% of AGI.
Mortgage interest is now limited to interest paid on debt up to $750,000 in debt (compared with the previous limit of $1,000,000 in debt).
Boosts phase-out thresholds for itemized deductions. This will have less of an affect due to the $10,000 cap as well.
Child and family tax credit – the credit for children under 17 is increased to $2,000 per child. $1,400 of the credit is refundable even if no tax is owed. The law also establishes a $500 credit for dependents that are not qualifying children. Phase-out of the credit begins at $200,000 single and $400,000 married filing joint. These changes will eliminate any penalty that families with young children may have felt from the repeal of the personal exemptions.
Net operating losses (NOLs) can be carried forward indefinitely instead of 20 years in the old law, but are limited to 80 percent of income. NOLs can be carried back for two years instead of the five years as previously allowed for farms and ranches.
Alternative minimum tax (AMT) is not repealed for individuals but income thresholds at which the tax is calculated increased significantly. Farmers and individuals with higher income levels may benefit from this change.

While the individual tax changes will have some impact on producers, the business provisions of the law while have a much deeper impact.

C Corporations

The top corporate tax rate decreases from 34% to 21% effective January 1. Unlike the other changes in the law, this change is permanent. For farmers who operate as a C corporation and typically have less than $50,000 of taxable income, this is a 40% tax increase because the old corporate tax brackets are replaced with a flat tax rate regardless of taxable income. Under the old law, taxable income under $50,000 was taxed at a 15% corporate income tax rate. Large producers and agribusinesses that are incorporated will enjoy a significant reduction in corporate income taxes. Hopefully, the increased cash flow will spur additional capital investment, hiring and wage increases for many in the agriculture industry.

Pass-through entities (S Corporations, Partnerships, LLCs, Sole Proprietorships)

85% of U.S. farms are structured as pass-through entities. The law introduces a new 20% deduction for business income from pass-through entities. Business income includes payments from cooperatives, commodity wages and farmland rental income. The deduction is limited to taxpayers with joint income exceeding $315,000 or single filers exceeding $157,000. The limitation is the greater of 50% of wages paid or 25% of wages paid plus 2.5% of the depreciable business property. The deduction can be carried forward in loss situations.
With a 20% deduction for farm income, the top rate is 29.6%, which is only 8.6% higher than corporate rates. Unless you are in a 32% or higher tax bracket, net farm income will always be taxed lower than 21%. Dividends from the corporation are still subject to a top tax rate of 23.8%. Many flow-through entities get step-up in basis, only corporate stock gets a step-up. In Michigan, only C Corporations are subject to the Corporate Income Tax. In general, very few farmers would benefit from establishing a C Corporation.

Ag Cooperatives

Ag cooperatives and members lost the benefit of the Section 199 deduction, which the legislation repeals. The law establishes Section 199A which makes co-ops eligible for the pass-through deduction. Farmers will receive a 20% deduction on all payments from a farmer cooperative. The deduction cannot exceed the taxpayer’s taxable income for the year. Cooperatives will receive a 20% deduction on gross income less payments to patrons, limited to the greater of 50% of wages, or 25% of wages plus 2.5% of the cooperative’s investment in property. Changes will require extensive planning before year-end for farmer cooperatives.

General Business Tax Changes

Section 199 – the domestic production activities deduction is no more. This impacts farms that paid significant wages and farmers that are members of farm cooperatives. While this was a significant deduction for those that qualified, the new 20% deduction for pass-throughs will make up for it in many cases.
Farms can fully expense interest costs – up to $25 million in revenue can continue expensing interest. Businesses owned through trusts or estates would receive the same tax treatment as other kinds of businesses.
Meals are only 50% deductible for farmers who provide meals on-site.
New farming equipment and machinery is 5-year property. For property placed in service after Dec. 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer. Also, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.
Qualified leasehold improvement property placed in service after Dec. 31, 2017, is now generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease or placed in service more than three years after the date the building was first placed in service.Full expensing of new and used capital investments will be permitted through 2022 (100% bonus depreciation). After 2022, the 100% allowance would be phased down by 20% each year through 2027.
Section 179 expensing permanently doubles the amount eligible for special small business investment write-offs. The allowance only applies to new equipment and cannot exceed taxable business income. The Section 179 allowance is now $1 million, with the phase-out beginning at $2.5 million in purchases. Most farmers will not exceed these limits.
Like-kind exchanges – previously, Section 1031 exchanges were allowed for equipment and some livestock, including cattle, as well as real estate. The new law limits like-kind exchanges to real estate only. Personal property exchanges will be taxed but not subject to self-employment tax. You must purchase replacement property, which will be 100% deductible under bonus depreciation until 2023 and Section 179 may be available to cover any remaining balance.
Corporate Alternative Minimum Tax (AMT) is repealed.
Cash Accounting – the law expands the number of farm corporations and farm partnerships that can use the cash basis of accounting for tax purposes.
The tax bill maintains federal credits for wind and solar energy projects and keeps intact the terms of a previous agreement to phase out wind credits through 2019.
Tax break for citrus growers – citrus growers can immediately deduct replanting expenses even if they raise capital from investors to help cover the costs. This will help growers who need to replant diseased trees, such as those hit with a citrus greening disease that is ravaging Florida’s industry.
The measure also provides major tax breaks for wine and cider makers. The lower rates, however, expire after two years.

Estate Tax

Estate tax exemptions double – 40% tax on estates over $11.2 million for individuals and $22 million for couples. Stepped-up basis and the transfer of unused exemptions to the spouse is retained. The exemption will continue to be adjusted for inflation but would go back to the previous law in 2026.

So How Will Tax Reform Affect Agriculture?

Yeo & Yeo, along with Michigan School Business Officials, the 1022 Committee, and various representatives of the State of Michigan met again regarding the 3% refunds last Friday. Many questions arose on reporting and issuance that we will answer to assist school districts with completing employee distributions and tax reporting. A few issues still need to be resolved, but we were able to get guidance to some key questions.

We still recommend that school districts wait for the written guidance that will be sent once finalized, but we have summarized several items below that will help districts plan and issue their distributions correctly.

Note: We receive new guidance on this daily. As meetings occur between the Office of Retirement Services (ORS), the 1022 Committee, MSBO, etc., certain guidance may change. We will send updates as we receive them and adjust the items below accordingly.

Frequently Asked Questions:

When will I receive the funds and how will I get the payment?

The payment is planned to be pushed out on January 22. It will be a separate deposit from the monthly State Aid amount.

What is the initial journal entry?

Once the money is received, initial accounting should be straightforward. Below is an example journal entry for the initial payment.

Debit – Cash
Credit – Liability

(It is recommended that the cash be placed in a non-interest bearing account.)

Will there be impact on revenue and expenditure accounts?

Revenue – No impact.

Expenditure – Maybe, depending on the treatment of the 3% refund. If the amount being received for previous wages (3% refund) was not initially taxed for FICA, districts will have an expenditure for FICA in the current year. The 1022 Committee is looking into a recommendation as to account number and allocation of this expenditure, taking into account the effect of other reporting and calculations, such as COE or indirect cost rates, etc.

Can we cut a check through Accounts Payable or does it have to go through payroll and be reported on a W-2?

For the majority of districts, the answer is no. However, if your district included the 3% refund in federal and state wages and included it for FICA wages then yes, you would return the payment through an Accounts Payable check with no follow-up in reporting (no 1099s or W-2s necessary for the wages piece).

Should we try to obtain a new W-4?

We recommend using the most current W-4 on file.

What should we do with the interest and how do we need to report it?

The interest will need to be paid out to each individual in addition to the 3% refund. As for the reporting, currently we do not see any reporting that will need to be done by the districts. Many issues have arisen in relation to the interest – at the most basic level, whose responsibility is the reporting in the first place? However, none of the interest payments to individuals are anticipated to be more than the $600 limit for either a 1099-Misc. or a 1099-Int (*limit for non-financial institutions). Therefore, the reporting of the funds should not be a requirement for your district.

Will there be W-2 reporting?

For the majority of districts, yes. If the district excluded the 3% refund for federal and state wages and included or excluded for FICA wages, then it must be reported on the W-2. It will depend on the district’s treatment of FICA as to what box (1, 3, and/or 5) on the W-2 the 3% refund will need to be reported in.

The FICA rate has changed since 2011, which one should we use?

We recommend using the current rate.

What should I tell my Board and my employees as to a timeline?

This is an individual district decision; however, we feel April 30, or 60 to 90 days past receipt, would be a good target. It is likely that most districts will first issue current employee checks, and then work on distributing the deceased and/or former employee payments next. A few items to consider that may affect your individual timeline are: # of employees who are no longer active, changes in district software, etc.

Is the 3% refund subject to retirement?

No, it is a refund of wages and has already been subject to retirement.

Do the one-year Unclaimed Property laws for payroll checks apply and when does the timeline start?

Yes, if you are unable to find contact information for a former employee, the unclaimed property rules do apply. The start of the one-year mark is from the date of last activity or when the funds are available to be issued to the individual.

Below are the links to other resources:

Yeo & Yeo will send updates as we receive them.

For further information see our article, FICA 3% Healthcare Contribution Refunds – Guidance for Distribution will be Forthcoming.

The IRS has just announced that it will begin accepting 2017 income tax returns on January 29. You may be more concerned about the April 17 filing deadline, or even the extended deadline of October 15 (if you file for an extension by April 17). After all, why go through the hassle of filing your return earlier than you have to?

But it can be a good idea to file as close to January 29 as possible: Doing so helps protect you from tax identity theft.

All-too-common scam

Here’s why early filing helps: In an all-too-common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

The IRS is working with the tax industry and states to improve safeguards to protect taxpayers from tax identity theft. But filing early may be your best defense.

W-2s and 1099s

Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2017 interest, dividend or reportable miscellaneous income payments.

If you don’t receive a W-2 or 1099, first contact the entity that should have issued it. If by mid-February you still haven’t received it, you can contact the IRS for help.

Earlier refunds

Of course, if you’ll be getting a refund, another good thing about filing early is that you’ll get your refund sooner. The IRS expects over 90% of refunds to be issued within 21 days.

E-filing and requesting a direct deposit refund generally will result in a quicker refund and also can be more secure. If you have questions about tax identity theft or would like help filing your 2017 return early, please contact us.

Although the drop of the corporate tax rate from a top rate of 35% to a flat rate of 21% may be one of the most talked about provisions of the Tax Cuts and Jobs Act (TCJA), C corporations aren’t the only type of entity significantly benefiting from the new law. Owners of noncorporate “pass-through” entities may see some major — albeit temporary — relief in the form of a new deduction for a portion of qualified business income (QBI).

A 20% deduction

For tax years beginning after December 31, 2017, and before January 1, 2026, the new deduction is available to individuals, estates and trusts that own interests in pass-through business entities. Such entities include sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). The deduction generally equals 20% of QBI, subject to restrictions that can apply if taxable income exceeds the applicable threshold — $157,500 or, if married filing jointly, $315,000.

QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.

The limitations

For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:

50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.

Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income.

Another restriction is that the QBI deduction generally isn’t available for income from specified service businesses. Examples include businesses that involve investment-type services and most professional practices (other than engineering and architecture).

The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

Careful planning required

Additional rules and limits apply to the QBI deduction, and careful planning will be necessary to gain maximum benefit. Please contact us for more details.

The recently passed tax reform bill, commonly referred to as the “Tax Cuts and Jobs Act” (TCJA), is the most expansive federal tax legislation since 1986. It includes a multitude of provisions that will have a major impact on businesses.

Here’s a look at some of the most significant changes. They generally apply to tax years beginning after December 31, 2017, except where noted.

Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
Repeal of the 20% corporate alternative minimum tax (AMT)
New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
Other enhancements to depreciation-related deductions
New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
New limits on net operating loss (NOL) deductions
Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
New rule limiting like-kind exchanges to real property that is not held primarily for sale
New tax credit for employer-paid family and medical leave — through 2019
New limitations on excessive employee compensation
New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Keep in mind that additional rules and limits apply to what we’ve covered here, and there are other TCJA provisions that may affect your business. Contact us for more details and to discuss what your business needs to do in light of these changes.

On December 20, Congress completed passage 100c of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.

The following is a brief overview of some of the most significant provisions. Except where noted, these changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026.

Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately)
Elimination of personal exemptions
Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent
Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers)
Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
Elimination of the deduction for interest on home equity debt
Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
Elimination of the AGI-based reduction of certain itemized deductions
Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent
AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers
Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing)

Be aware that additional rules and limits apply. Also, there are many more changes in the TCJA that will impact individuals. If you have questions or would like to discuss how you might be affected, please contact us.

The Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.

Pre-TCJA bonus depreciation

Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50% first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.

In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.

TCJA expansion

The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.

The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.

Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80% for property placed in service in 2023, 60% in 2024, etc., until it would be fully eliminated in 2027.

For certain property with longer production periods, the reductions are delayed by one year. For example, 80% bonus depreciation would apply to long-production-period property placed in service in 2024.

Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Contact us for more information on this and other changes that will impact your business.

Yeo & Yeo CPAs & Business Consultants is pleased to jointly release the results of the second annual 2018 Leading Edge Alliance (LEA Global) National Manufacturing Outlook Survey.

The survey report contains the expectations and opinions of 450 manufacturing executives, especially those from the Midwest, who produce a wide variety of products including machining/industrial, automotive/transportation, construction, food and beverage, and other products.

Results from the survey include:

81% of manufacturers expect their revenue to grow in 2018; only 3% expect their revenue to decrease.
Manufacturers are more optimistic about the regional/local economy and the national economy than the global economy.
The top priority for 70% of manufacturers in 2018 is growing sales. Almost three-fourths of manufacturers expect to increase sales through organic growth within the U.S., while 44% expect to grow by developing new products or services.
More than half (55%) of manufacturers indicated that labor will be the greatest barrier to growth. Strategies to attract and retain talent will include increasing compensation packages and conducting internal training and apprenticeships.
Most manufacturers expect to invest 1%-5% of revenue in R&D during 2018.
Cybersecurity, by far, is the top technology focus for manufacturers. Beyond cybersecurity, almost 50% of manufacturers are also prioritizing predictive business analytics/big data and erp solution.
More manufacturers are exploring mergers/sales and acquisitions in 2018.

The good news is that manufacturers have a positive outlook about their own performance and that of the industry and economy as a whole in 2018. However, some hurdles may become more significant. Increased hiring will result in increased wage costs, technology development will not slow in the coming year, and tax reform will bring the need for different tax planning.

Manufacturing owners and managers should have ongoing conversations with all of their advisors, including their accounting and tax provider, about how to overcome these challenges and achieve their business goals.

“We understand the challenges facing the manufacturing industry, and we are committed to helping companies improve their operations and achieve growth. Especially now – when manufacturers need to find the best strategy to take advantage of tax reform – having a team of industry-experienced advisors providing manufacturers insight and answers is critically important,” says Yeo & Yeo Principal and Manufacturing Services Group leader Amy Buben.

Read the entire survey report, 2018 National Manufacturing Outlook and Insights – Planning for Potential and Seizing Opportunity, for in-depth information about the challenges the respondents face, the key strategies that the best-run manufacturers believe will be most effective, and the outlook for 2018.

On December 20, 2017, the Michigan Supreme Court ordered refunds, upholding a Court of Appeals ruling that a 2010 Michigan law violated contract clauses of the state and federal constitutions by involuntarily reducing pay for teachers and other school employees by 3% to fund retiree healthcare benefits.

The Office of Retirement Services (ORS) will release the detail of the amount your district will receive from the State. The detailed lists will contain the amount of payment, the amount of interest, the most recent address of the individual the refund is being issued to, and the social security number. The payment is expected to be made in a separate payment on the same day that districts receive their State Aid payment.

For more information, see the ORS FAQ.

The 1022 Committee is working with the Michigan School Business Officials, the Michigan Department of Education and the ORS to issue streamlined guidance for all districts. Yeo & Yeo is a member of the 1022 Committee and has been actively involved throughout the process. As of now, we recommend that once your district receives the payment, you should wait to issue payments to employees and/or former employees until the guidance is issued. We realize that you may be getting pressure from employees to make the payments, but it will be best if all school districts wait for the guidance and are consistent with the payouts and reporting. We anticipate that we will send an update on the guidance next week, with the actual written guidance coming out in 15 to 30 days.

Please contact your Yeo & Yeo representative with any specific questions.

Read our updated blog with tentative guidance on the FICA 3% Healthcare Contribution Refund.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Tara Stensrud, CPA, NSSA^®, has been promoted to the position of principal.

Thomas E. Hollerback, president, and CEO, says, “Tara has shown tremendous development and continues to do outstanding work. We are proud to recognize her for her leadership and commitment to serving our valued clients. She has excelled in making meaningful connections with her clients and helps them succeed. We are pleased to welcome Tara to the principal/ownership group.”

Stensrud recently transferred from the firm’s Alma office to the Midland office. She has 11 years of public accounting experience and specializes in business consulting, financial reporting and tax issues, with a strong emphasis on the manufacturing and agriculture sectors. She also provides tax planning and preparation services for individuals and small and midsize businesses, and assists businesses in administering employee stock ownership (ESOP) plans. Stensrud is a member of the firm’s Manufacturing Services Group and Tax Services Group. She is an active member of the Michigan Manufacturers Association and the Central Michigan Manufacturers Association.

Stensrud is an Advanced Certified QuickBooks ProAdvisor, consulting with businesses using QuickBooks software, and a National Social Security Advisor, counseling clients on the most advantageous way to claim Social Security benefits. She holds a Bachelor of Business Administration from Central Michigan University and is a Leadership Gratiot alumni.

David R. Youngstrom, CPA, and Michael A. Georges, CPA, have been elected to the Yeo & Yeo CPAs & Business Consultants board of directors effective January 1, 2018, announced Thomas E. Hollerback, president and CEO. They will serve for a two-year term.

David R. Youngstrom, CPA, principal, is the firm’s Assurance Service Line leader. He is responsible for all audits performed throughout Michigan, and provides audit services for school districts, government entities, and for-profit businesses. He is a frequent presenter on audit topics at statewide conferences and also provides various consulting services. He is a member of the firm’s Government Services Group, the Education Services Group, and the Quality Assurance Committee. He has 22 years of public accounting experience.

In the community, Youngstrom is treasurer of Freeland Community School District and immediate past chair of the board of the United Way of Saginaw County, and serves on the board of directors of the Saginaw Valley State University Alumni Association. He is based in the firm’s Saginaw office.

Michael A. Georges, CPA, principal in the Ann Arbor office, joined Yeo & Yeo in 2014 and has 35 years of public accounting experience. He leads the firm’s Nonprofit Services Group. His areas of expertise include audit services for nonprofit organizations, government entities and school districts, as well as tax planning and preparation for individuals, small and medium-size businesses, and nonprofit organizations. He is a member of the Michigan School Business Officials and the Southern Wayne County Chamber of Commerce.

In the community, Georges serves as a board member for the Grosse Ile Education Foundation, and for the Child’s Hope Child Abuse Prevention Council of Out-Wayne County.

Congress is enacting the biggest tax reform law in 30 years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax to be paid. Since most of the changes will go into effect next year, there is still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way.

Here’s a quick rundown of last-minute moves you should think about making.

Lower tax rates are coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-throughs, such as partnerships, may see their tax bills cut.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
Earlier this year, you may have already converted a regular IRA to a Roth IRA, but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization – making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you will not be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
If you run a business that renders services and operates on the cash basis, the income you earn is not taxed until your clients or patients pay. So if you hold off on billings until next year – or until so late this year that no payment will likely be received this year – you will likely succeed in deferring income until next year.
If your business is on the accrual basis, deferral of income until next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction.Here’s what you can do about this right now:

Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than December 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before December 31, 2017, of a 2018 property tax installment is apparently OK.
The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall into this category, consider accelerating some charitable giving into 2017.
The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018, these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won’t be able to itemize deductions after this year but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Other year-end strategies. Here are some other last-minute moves that can save tax dollars given the new tax law:

The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you will not be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after December 31, 2017, such swaps will be possible only if they involve real estate that is not held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue to apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before December 31, 2017.
For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after December 31, 2017, there is no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
Under current rules, alimony payments generally are an above-the-line deduction for the payor and included in the income of the payee. Under the new law, alimony payments are not deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement – for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Please keep in mind that we’ve described only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call your Yeo & Yeo tax professional.

You may also be interested in these articles:

Early Friday evening, Congressional GOP leaders agreed upon a tax reform bill that both the House and the Senate are expected to vote on this week. If passed, the bill will go to President Trump for his signature.

Key provisions of the bill are as follows:

Individual provisions

Seven marginal tax brackets are retained, with lower rates. The rates will be 0%, 10%, 12%, 22%, 24%, 32%, 35% and 37%.
The standard deduction is nearly doubled to $24,000 for married couples, and $12,000 for single filers.
Allows taxpayers to deduct a maximum of $10,000 of combined real estate taxes and state and local income taxes. Previous proposals completely eliminated the state and local income tax deduction.
The Child Tax Credit is expanded from $1,000 to $2,000, with up to $1,400 being refundable. Phase-out of the credit begins at $400,000 for married couples.
The Child and Dependent Care Credit, as well as the Adoption Tax Credit, have been preserved.
Mortgage interest deduction – no change for taxpayers with existing mortgages; however, for new mortgages interest will only be deductible on up to $750,000 of mortgage indebtedness.
The medical deduction is retained and expanded for 2018 and 2019, allowing deductions of medical expenses in excess of 7.5% of adjusted gross income, before increasing to 10% in 2020.
Retains the ability to deduct charitable contributions.
Eliminates the Affordable Care Act’s individual mandate to have health insurance or pay a tax penalty.
Expands use of 529 accounts to allow qualified distributions for elementary, secondary and college education.
Retains the alternative minimum tax, but significantly increases the exemption level.
Retains the estate tax, but doubles the exemption level to nearly $11 million per individual.

Business provisions

Lowers the corporate tax rate to 21%, effective January 1, 2018 (down from 35%).
Creates a 20% tax deduction for pass-through businesses (S Corporations, LLCs, partnerships, and sole proprietors) on the first $315,000 of business profits, excluding certain industries, such as personal service businesses.
Allows businesses to immediately expense the cost of new and used equipment purchased through December 31, 2022, phasing out beginning January 1, 2023, through December 31, 2027, and significantly increases Section 179 expensing of qualified property.
Eliminates the corporate alternative minimum tax.
Retains provisions such as the ability to deduct business interest expense, the research and development tax credit, and the tax-preferred status of private-activity bonds.

Numerous other provisions affect substantially all tax filers. Please consult your Yeo & Yeo tax advisor with any questions you may have on this bill.

As cold weather approaches, contractors everywhere are trying to finish as much work as possible before winter. Once it becomes too cold or snowy, some will retreat indoors and wait until spring. However, construction professionals should consider doing several things during the down time to stay ahead with their business.

1.Attend trade shows and conferences – Throughout the first quarter of the year, there are opportunities to attend conferences throughout the country. The conferences shed light on new laws and best practices within the industry, and offer fresh ideas to incorporate into your own business. There are also opportunities to be an exhibitor at most local trade shows, which is an easy way to get name exposure for potential clients who otherwise may not know about your business.
2.Network – Making solid connections is something every builder should do year-round. However, during the down time, there is no excuse of having too much work to do, so going to association meetings or mixers is a great way to meet new people. This is a time to showcase your expertise in your field, and attending these events can be a valuable tool in building relationships with colleagues (such as potential subcontractors to work with), industry professionals (such as a board member of an association) or potential new clients.
3.Learn from last year – Taking time to review the numbers from the prior year and identify ways to grow or improve processes is key to long-term success of your company. Forecasting for the next year and implementing a budget are ways to effectively manage cash flow. One of the biggest struggles contractors face is cash flow during the slower times of the year. Having a budget and being smart and precise with expenditures will allow your company to maintain momentum into the down times. Whether it be purchasing materials for jobs ahead of time, paying down debt earlier in the year, or restructuring the bidding process, identifying these options early and having a plan will ensure the health of your company.

For help in preparing a budget or a forecast for future years, or assistance in identifying which construction industry associations make the most sense to join, contact me or a member of Yeo & Yeo’s Construction Services Group.

Are you considering implementing a bonus plan for your employees? The first thing you should do when structuring a bonus plan is to decide why you’re creating the plan in the first place.

To share the company’s profits with employees?
To reward employees for company and/or individual success?
To boost employee morale and retention?
As a response to your competitors who are offering bonuses to their employees?

The answers to these questions will help you determine the structure of your bonus plan. Ideally, the bonus plan will motivate employees to focus their efforts and energy on activities that will help achieve specific company goals. Bonuses tied directly to profits are also referred to as profit-sharing plans, which provide you with maximum flexibility: If profits suffer during the year, the company payout is lower (if anything). Keep in mind, however, that this can have a negative effect on employee morale if employees believe that the work they did had little if any direct impact on profitability (or lack thereof).

One way to avoid this problem is to structure your bonus plan around the achievement of specific individual goals by each employee. This gives employees more control over whether they will receive a bonus, and how much. Or, you can structure the plan around the achievement of specific goals by departments or teams, over which employees may feel like they have more direct control.

Structuring the plan

Consider the following five things when structuring any type of employee bonus plan:

1. Put it in writing. Document the details of the bonus plan and make sure the plan and structure is clearly communicated to all employees.

2. Tie the bonus to measurable performance standards. Financial rewards should be contingent upon the achievement of specific and measurable standards. Preferably, employees should be able to exert some degree of influence on these standards.

3. Encourage employees to help meet annual company goals. As noted above, bonus plans can be structured to provide employees with financial incentives to help meet specific company goals, whether financial or otherwise. These are usually annual goals that are measured at the end of the year.

4. Make the bonus large enough to be a strong incentive. A one-time $100 bonus isn’t going to be a very strong incentive for most employees. One benchmark is to give employees the opportunity to earn up to 10 percent of their regular wage or salary in additional bonus.

5. Use the plan to create employee loyalty to your company. Ideally your bonus plan will encourage key employees to stay with your company for the long term. Non-qualified deferred compensation plans, stock options and phantom stock plans are specific types of executive bonus plans often used to accomplish this goal.

One of the biggest benefits of bonus plans is that they can encourage your employees to think and act like business owners, not just employees. Giving employees the opportunity to reap financial rewards based on their individual or team’s performance can help prompt them to work harder and make better decisions that are in the long-term best interests of your company.

By this time, all Non-Profit Organizations (NPOs) have heard that the upcoming new standards under ASU 2016-14 will change the financial statement presentation for all NPOs starting with fiscal year ends December 31, 2018. One of the most significant changes that will affect almost all NPOs is the new presentation of net assets. While the name and presentation of the net assets will change on the financials, how the restrictions are tracked and followed will not change. Don’t think that what you have known in the past is going away!

Currently there are three types of net assets:

1. Permanently restricted – amounts designated by donors to be held in perpetuity,

2. Temporarily restricted net assets – amounts designated by donors that are restricted based on purpose (example: to build a new playground) or time (example: a $50,000 pledge to be paid over five years), and

3. Unrestricted net assets – all other amounts, some of which may be designated for a specific purpose by the board.

The new standards will essentially combine the permanently and temporarily restricted categories into one new category, “with donor restrictions” and all other amounts will be considered “without donor restrictions.” It is important to know that while the financial statement presentation will be modified, the different types of restrictions will still remain and they must continue to be tracked individually.

One new change for valuing net assets under ASU 2016-14 relates to underwater endowments. If a donor designates a specific amount of funds to be held in an endowment, and the market value falls below that initially pledged amount due to overspending or a less than favorable investment market, the negative “underwater” portion is to be separately disclosed in the “with donor restrictions” section as an “underwater endowment.” Previously, the amount would be netted with unrestricted net assets. Additional disclosures will be required to describe how the NPO will recover and maintain the initial donor restrictions.

When the ASU 2016-14 standards are applied to the annual financial statements beginning with year ends December 31, 2018, it is a good time for NPOs to take a fresh look at their financials and footnotes regarding net assets. The amounts that are restricted for each category must be disclosed in the footnotes or on the face of the financial statements by broad categories – temporary time restrictions, temporary purpose restrictions, or permanent time restrictions. NPOs may choose to describe the restrictions in more detail within each of the categories. Some areas of detail could be expanded to better tell the organization’s story, or some items currently may be disclosed at a level of detail that is no longer material or relevant.

Consult your Yeo & Yeo professional with any questions regarding the upcoming changes including but not limited to net asset designations under ASU 2016-14.