New Requirements for Reporting Net Asset Restrictions – Totally Different or Just a New Name?

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.

Succession planning is important in any business, but it’s sometimes overlooked in family-owned operations. This is a big mistake. There are numerous former family-run companies that no longer exist due to poor or no succession plan.

The plan needs to be well thought out and discussed with everyone affected. Don’t just assume that a son or daughter will want to carry on the family business. Even if your children say they will take over, they may not have the true desire required to continue a successful operation.

The “heir to the throne” also may not have the business skills to succeed after a parent (or aunt, uncle, etc.) turns over the reins.

Another question that needs to be settled in the case of multiple potential successors (for example, more than one child): What responsibilities will each person have upon succession? It’s important that the details be worked out early, because, in the case of an unexpected death or disability, succession might occur sooner than planned.

You also need to address the involvement of the next generation. In some situations, the retiring family elder has adult grandchildren – some who may already be working in the business.

Beyond the discussion of the roles of younger family members, you will also need to outline the times for major transitions, barring unexpected illnesses or death.

You want to make sure that the future leaders of the business have the proper training. There are several different options. One is having younger family members work in several different areas of the business. Another is having aspiring family business leaders get some experience in another, non-family business to learn alternative ways of doing things.

The importance of preparing for succession can’t be overemphasized. Neither can the importance of transitioning the business in an orderly fashion.

Sometimes, as planned retirement nears, elder family members don’t want to let go. This can cause resentment on both sides. Naturally, the elder family members want to see the business they built (or took over, if already a second generation business), continue to succeed as it did under their leadership. They can be concerned that the firm won’t flourish without their direction.

At the same time, the younger family members may think they can bring the business to even greater success if the older relatives would just step aside. This is where a scheduled, gradual transition of management and leadership responsibilities from one generation to the next can help.

As they turn over the reins of the business, elder family members can be compensated through preferred stock in the corporation. They can also look to stay involved in business — if not directly — through participation in industry groups and associations.

Such actions recognize the contributions of retiring members and help them recoup their equity. Meanwhile, the new manager and active relatives can plan for the future.

And once retiring family members are no longer immersed in the daily grind of running the business, they may be interested in pursuing non-business community activities, personal hobbies, and travel that they never had time for before.

The drumbeats for tax reform are growing louder.

The Trump administration, in conjunction with the president’s hand-picked “Big Six”¹group of GOP leaders, has released a nine-page outline of tax reform proposals. Not only would the plan overhaul numerous individual provisions, it would have a major impact on corporations and pass-through business entities, including significant changes for the manufacturing sector.

Manufacturers are likely to look favorably on the tax plan’s provisions. The quarterly survey by the National Association of Manufacturers released at the end of September 2017 found that a strong majority of small and large manufacturers said the promise of tax reform will spur growth and create jobs. The survey found that 64% of manufacturers would expand, 57% would hire more workers and 52% would raise wages and benefits if the GOP proposals are passed.

Generally, the tax reform provisions don’t include any effective dates, nor is enactment assured, with or without modifications. Here is an overview of the key proposals and their expected impact.

Corporate Tax Proposals

These key changes for C corporations, including incorporated manufacturing firms, are designed to stimulate business growth:

Reduce the top corporate tax rate from 35% to 25%. Trump’s initial proposal lowered the rate to 15%.
Allow immediate “expensing” for at least five years of new investments in depreciable assets, other than buildings, purchased after September 27, 2017.
Partially limit interest deductions for C corporations (details weren’t provided).
Repeal the corporate alternative minimum tax (AMT).
Preserve the research credit (Congress would review most other business credits).
Repeal the Section 199 deduction for domestic production activities. This deduction is currently available to all business entities.

The list of corporations that might profit from these proposed changes is long. Larger corporations would benefit from a reduction in the top corporate tax rate and businesses of all sizes could use the expensing allowance.

However, partially limiting interest expense deductions will likely play a significant role in C corporations’ investing and financing decisions and affect corporations carrying significant debt. It’s unclear how Congress will handle carryforwards of any credits that are eliminated. Many manufacturing firms would miss the Section 199 deduction.

Pass-Through Tax Proposals

The tax outlook for pass-through business entities — including partnerships, S Corporations and Limited Liability Companies (LLCs) — will be very different if the new tax reform plan is approved. It proposes that:

Business income received by pass-through entities be taxed at a maximum rate of 25%. Currently, this income is taxed at ordinary income rates for individuals, which can be as high as 39.6%. It isn’t clear if personal services firms would qualify for the tax break.
The lower rate on income for pass-through entities be coordinated with tax law provisions that don’t permit wages to be treated as business profits.
Congress be required to determine the ramifications for pass-through entities and sole proprietorships of the partial limits on interest expense deductions.

This series of tax reforms could change the thinking of business owners. In theory, the shift away from the current tax format is designed to align C Corporations and pass-through entities. However, some professionals fear that this could lead to an unfair tax advantage for wealthier business owners.

With the top tax rate now set at 39.6% and a proposed maximum 35% rate, owners may have an opportunity to slash their tax bills. Restricting these changes to qualified small businesses has been discussed and could be put into effect.

International Tax Proposals

The Trump campaign pledged to bring business back from overseas. In support of that objective, the tax reform plans proposes several changes relating to manufacturing:

Impose a one-time repatriation levy on offshore profits to encourage a return of U.S. multinational corporations from so-called tax havens. However, the proposals don’t specify a rate or time period for this change.
Adopt a territorial method of international taxation that would include an exemption for dividends from foreign subsidiaries if the U.S. company owns at least 10% of the subsidiary.
Authorize a global minimum tax on foreign profits of U.S. multinational corporations. Congress would be directed to “even the playing field” between companies headquartered in the United States and those based in foreign jurisdictions.

If these proposals have their desired effect, certain multinational corporations would be encouraged to shift more business operations to the United States. This would represent an historic shift in the way that companies are taxed. But the proposed guidelines leave as many questions as they provide answers, including how foreign tax credits would be used against repatriated earnings.

Individual Tax Proposals

The new tax plan features a wide variety of changes that would affect individuals, including:

Consolidating the current seven income tax brackets into three brackets of 12%, 25% and 35%. There are no details about the potential bracket thresholds. An add-on tax for the wealthiest taxpayers was discussed, but not finalized.
Increasing the standard deduction from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for married couples filing jointly. All personal exemptions would be repealed.
Repealing most itemized deductions other than those for charitable contributions and mortgage interest.
Eliminating the AMT.
Condensing several tax breaks for families. Along with the repeal of dependency exemptions, the new plan features a proposed $500 credit for non-child dependents.

Again, the professionals are divided as to whether these changes would mostly benefit the low-to-middle or upper-income classes. In many cases, it makes sense for individuals to accelerate deductions into 2017, unless there are special circumstances that prevent that.

Expect Some Modifications

Although the tax reform plan has some momentum, there’s still a long way to go before it becomes law. Even if key tax reforms are enacted, some modifications can be expected.

2017

As 2017 winds down, it’s time to consider making some moves to lower your federal income tax bill and position yourself for tax savings in future years. This year, the big unknown factor is whether major tax reform proposals will be enacted.

Even if all goes according to the GOP timeline, the changes generally won’t take effect until next year at the earliest. So your 2017 return will follow the current rules. Here are five year-end moves for you to consider as Congress works on tax reform.

1. Prepay Deductible Expenditures

If you itemize deductions, accelerating deductible expenditures into this year to produce higher 2017 write-offs makes sense if you expect to be in the same or lower tax bracket next year. If you expect to be in a higher tax bracket next year, the reverse could make sense — but that situation is less likely if tax reform proposals take effect in 2018.

Tax reform considerations related to prepaid expenses. Tax rates would be lower in 2018 and beyond for most taxpayers under congressional tax reform proposals. (See “Close-Up on Federal Income Tax Rates” below.) If you turn out to be in a lower bracket next year, deductions claimed this year will be worth more than the same deductions claimed next year.

In addition, proposed tax reforms would reduce or eliminate many itemized deductions. Both the House and Senate proposals would eliminate the following itemized deductions starting in 2018:

Tax preparation fees,
Foreign property taxes,
State and local income taxes,
Unreimbursed employee business expenses, and
Most other miscellaneous items.

But there are some differences between the House and Senate proposals.

The House tax reform bill would eliminate itemized deductions for 2018 and beyond, except for 1) charitable contributions, 2) state and local property taxes (subject to a $10,000 limit), and 3) a scaled-back home mortgage interest deduction. Specifically, the home mortgage deduction would:

Be subject to a lower debt limit of only $500,000 for new loans vs. $1 million under current law, and
Allow deductions for only one residence vs. two residences under current law and eliminate the deduction for interest of up to $100,000 of home equity debt allowed under current law.

The Senate tax reform proposal also would eliminate most itemized deductions, except:

Home mortgage interest, subject to the current-law debt limit of $1 million but with no deduction allowed for interest on home equity loans,
Medical expenses, and
Personal casualty losses in federally declared disaster areas.

Plus, the property tax deductions would be completely eliminated under the Senate proposal.

The bottom line is that, under both the House and Senate proposals, increased standard deduction amounts would offset some or all of the itemized deductions lost to tax reform, depending on your specific circumstances. In any case, prepaying deductible items before the end of 2017 will generally help lower this year’s tax bill.

But watch out for the alternative minimum tax (AMT): If you’ll owe AMT for 2017, the prepayment strategy may backfire. That’s because write-offs for state and local taxes are completely disallowed under the AMT rules and so are miscellaneous itemized deductions subject to the 2%-of-AGI rule. So prepaying these expenses may do little or no tax-saving good for AMT victims.

Fortunately, there’s good news for AMT victims. Both the House and Senate tax reform proposals would eliminate the AMT for 2018 and beyond. But, of course, that won’t help for 2017.

Which bills should you consider prepaying for 2017?

Mortgage payment for January. Accelerating the mortgage payments for your primary residence and/or vacation home that are due in January 2018 will allow you to deduct 13 months of mortgage interest in 2017, unless you prepaid for January 2017, in which case you’ll have 12 months of mortgage interest deductions for your 2017 return.

State and local taxes due in early 2018. Prepaying state and local income and property taxes that would otherwise be due in early 2018 will increase your itemized deductions for 2017, thereby reducing your federal income tax bill for this year.

Medical and miscellaneous expenses. Consider prepaying expenses that are subject to deduction limits based on your adjusted gross income (AGI). For example, under current law, medical expenses are deductible only to the extent they exceed 10% of AGI. So loading up on elective procedures, dental care, prescription medicine, glasses and contacts before year end could get you over the 10%-of-AGI hurdle on this year’s return.

Likewise, under current law, miscellaneous deductions — for investment expenses, job-hunting expenses, fees for tax preparation and unreimbursed employee business expenses — count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into 2017, you’ll have a chance of clearing the 2%-of-AGI hurdle this year.

2. Evaluate Charitable-Giving Options

Prepaying tax-deductible charitable donations that you would otherwise make next year can reduce your 2017 federal income tax bill. Donations charged to credit cards before year end will count as 2017 contributions, even though you won’t pay the credit card bills until early next year.

Charitable deductions claimed this year will be worth more than deductions claimed next year if your tax rate goes down next year, which is likely to happen for most taxpayers if tax reform proposals are enacted.

Your tax advisor may have other creative year-end tax planning ideas for charitably inclined taxpayers to consider. For example, if you own appreciated stock or mutual fund shares that you’ve held for more than a year, you might consider donating the assets to an IRS-approved charity, instead of donating cash. Doing so will allow you to claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.

Alternatively, if you own marketable securities that have decreased in value since you bought them, consider selling them and donating the proceeds. This strategy will generally allow you to claim an itemized charitable deduction for the cash donation, as well as take the resulting tax-saving capital loss.

Charitably inclined seniors (over age 70½) can also make up to $100,000 in cash donations to IRS-approved charities directly out of their IRAs. These donations — known as qualified charitable distributions (QCDs) — are tax-free. Although you can’t deduct QCDs from your tax bill, they count as withdrawals for purposes of meeting the required minimum distribution (RMD) rules that apply to your traditional IRAs after age 70½.

So, if you haven’t yet taken your 2017 RMDs, you can arrange to take tax-free QCDs before year end in place of taxable RMDs. That way you can meet your 2017 RMD obligations in a tax-free manner while also satisfying your philanthropic goals.

3. Deduct State and Local Sales Tax Instead of Income Tax

If you’ll owe little or nothing for state and local income taxes in 2017, you can choose to instead deduct state and local general sales taxes on this year’s return. You can deduct a prescribed sales tax amount from an IRS table based on where you live and other factors. However, if you’ve kept receipts that support a larger deduction, you can use that amount instead.

For example, you might want to deduct the actual sales tax amounts for major purchases, like a vehicle, motor home, boat, plane, prefabricated mobile home, or a substantial home improvement or renovation. You can also include actual state and local general sales taxes paid for a leased motor vehicle. So purchasing or leasing an item before year end could give you a bigger sales tax deduction and cut this year’s federal income tax bill.

State tax deductions affected by federal tax reform. Both the House and Senate tax reform proposals would eliminate the deduction for state and local income taxes (along with the option to deduct state and local sales taxes instead) for 2018 and beyond. So, if you don’t use this strategy in 2017, you’ll probably lose out if tax reform legislation is enacted.

4. Prepay Tuition Cost for Postsecondary Education

If you or your children qualify for either the American Opportunity or Lifetime Learning credits, consider prepaying tuition bills due in early 2018 for academic periods that begin in January through March 2018. Doing so may result in a bigger credit for higher education costs in 2017.

However, these credits are phased out for individuals with income above thresholds. Specifically:

The American Opportunity credit is gradually phased out for single individuals with modified AGI of between $80,000 and $90,000 and married joint filers with modified AGI between $160,000 and $180,000.

The Lifetime Learning credit is also gradually phased out for single individuals with modified AGI of between $56,000 and $66,000 and married joint filers with modified AGI between $112,000 and $132,000.

Tax reform considerations related to higher-education credits. The Senate tax reform proposal would leave the existing rules in place for both higher education credits. The House bill would eliminate the Lifetime Learning credit for 2018 and beyond and liberalize the American Opportunity credit to cover the first five years of undergraduate education vs. four years under the current rules.

If the Lifetime Learning credit is eliminated, no credit will be available for graduate school or other postsecondary education beyond the first five years of undergraduate study. So if you don’t take advantage of the Lifetime credit this year, you could possibly lose out.

5. Time Investment Gains and Losses for Tax Savings

Evaluate investments held in your taxable brokerage firm accounts and identify securities that have appreciated in value. For most people, the federal income tax rate on long-term capital gains is still much lower than the rate on short-term gains. If you plan on selling an investment, try to hold onto it for at least a year and a day before selling in order to qualify for the lower long-term capital gains rate.

Another tax-saving move is to consider selling securities that are currently worth less than you paid for them before year end. The resulting capital losses will offset any capital gains from earlier sales in 2017, including high-taxed short-term gains from securities that you owned for one year or less. In other words, you don’t have to worry about paying a high rate on short-term gains that you’ve successfully sheltered with capital losses.

If your capital losses exceed your capital gains, you’ll have a net capital loss for 2017. Married people who file jointly can use it to shelter up to $3,000 of this year’s high-taxed ordinary income from such sources as salaries, bonuses and self-employment income ($1,500 if you’re single or married and file separately).

Any excess net capital loss is carried over to 2018 and beyond until you use it up. So it won’t go to waste. You can use it to shelter both future short- and long-term gains.

Tax reform considerations when selling securities. These tax planning strategies will continue to be viable regardless of whether congressional tax reform legislation is enacted. Both the House and Senate proposals would retain the existing three federal income tax rates for long-term capital gains and dividends (0%, 15%, and 20%) and the existing rate brackets. So the 2018 brackets would be the same as the 2017 brackets with minor adjustments for inflation.

Act Soon

Right now, nobody is certain whether major tax changes will be enacted or when they’ll go into effect. But these strategies are worth considering regardless of whether tax reform happens. As Congress works on lower tax rates and simplifying the tax law, stay in touch with your tax advisor. He or she is monitoring tax reform developments and will help you take the most favorable path in your situation.

Close-Up on Federal Income Tax Rates

The 2017 federal income tax rates and brackets for individuals are the same as last year, adjusted slightly for inflation. Specifically, there are still seven graduated rates, ranging from 10% to 39.6%.

Under both the House and Senate tax reform proposals, individual tax rates would generally decrease for 2018 and beyond. But there are major differences between the two versions of the bill.

House Bill

For 2018 and beyond, the House proposal calls for four tax brackets, based on the levels of taxable income in 2018.

Senate Proposal

For 2018 through 2024, the Senate proposal calls for seven brackets, based on the levels of taxable income in 2018.

The Senate’s proposed tax cuts are only temporary. The proposed tax rates and brackets would return to current levels, adjusted for inflation, in 2025.

Peak production season can be a nightmare. It’s the time you need all employees to show up consistently and pull their weight. But reality is often far removed from the ideal.

If that’s the case in your plant, you need to consider some strategies to build resilience into your staffing. Here are six tips that can help ease the strain of production peaks:

Cross-train. Teach employees to perform various jobs. Cross-training not only ensures coverage when it’s needed, it boosts job satisfaction because staff members feel challenged. Have higher-level employees mentor trainees until they get up to speed.

Offer incentives. Motivate the performance you want, but don’t overuse incentives. They’re ideal for addressing short-term attendance issues. Offer something in return for perfect attendance — being at work on time every day, with no doctor’s appointments or sick days. One company that goes into mandatory overtime during peak production gives employees gift certificates for dinner and a movie for two month’s perfect attendance. And at the end of the time period, the names of all the people who had perfect attendance are entered into a drawing with the prize being a Saturday off with regular pay.

Hire temps. You can find good temporary help through staffing agencies. This strategy can be especially powerful if combined with cross-training. For example, full-time pickers who have been cross-trained can run machines or work in receiving while temps do picking. Work with two or three agencies so that you’re not dependent on just one.

Shift into overtime if necessary. Most employees welcome the extra income from overtime. On a limited basis, overtime may be no more costly than temporary labor when you factor in training expenses.

Seek referrals. Ask employees to refer friends and relatives. Some companies avoid hiring employees’ friends and relatives, even for temporary positions, but they can be a source of reliable help.

Tap academia. Technical colleges or universities are often a good source for supervisory help. If your peak production times are predictable, you can arrange to hire management or logistics students as interns to assist supervisors.

Any way you look at it, gearing up for peak production in advance saves your company money, time, hassles and missed deadlines. And those advantages go to your bottom line.

2017

Paying people used to be simple. More and more federal and state regulations have complicated the payroll process. Important changes in 2018 include the State of Michigan minimum wage increase to $9.25 per hour for wages earned starting January 1, 2018. Following are changes for 2018.

2018 Payroll Changes

Social Security Wage Base. The 2018 wage base will be $128,400. The employee and employer match will be 6.2%. The maximum deduction will be $7,960.80 ($128,400 x 6.2%).

Medicare Tax. As in prior years, there is no limit to the wages subject to the Medicare Tax; therefore, all covered wages are still subject to the 1.45% tax. Wages paid in excess of $200,000 will be subject to an extra 0.9% Medicare tax that will be withheld only from employees’ wages.

Health Flexible Spending Arrangements. The dollar limitation on voluntary employee salary reductions for contributions to a health flexible spending arrangement (FSA) is $2,650.

Health Savings Accounts. HSAs are for eligible individuals in a high deductible health plan.

The maximum annual contribuition that can be made to an HSA in 2018:

Individual: $3,450
Family: $6,900

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

IRA Contribution Limits. The 2018 contribution limit for Simple IRAs is $12,500. The catch-up contribution for those age 50 or older by December 31, 2018, is $3,000.

401(k), 403(b) and 457 Contribution Limits. The contribution limit for these plans’ employee deferrals is $18,500. The catch-up contribution for those age 50 or older by December 31, 2018, is $6,000.

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

For more information, view our 2018 Payroll Planning Brief.

It’s not too late! You can still take steps to significantly reduce your business’s 2017 income tax bill and possibly lay the groundwork for tax savings in future years.

Here are five year-end tax-saving ideas to consider, along with proposed tax reforms that might affect your tax planning strategies.

1. Juggle Income and Deductible Expenditures

If you conduct business using a so-call “pass-through” entity, your share of the business’s income and deductions is passed through to your personal tax return and taxed at your personal tax rates. Pass-through entities include sole proprietorships, S corporations, limited liability companies (LLCs) and partnerships.

If the current tax rules still apply in 2018, next year’s individual federal income tax rate brackets will be about the same as this year’s (with modest increases for inflation). Here, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2017 until 2018. (See “How to Defer Income” at right.)

On the other hand, you should take the opposite approach if your business is healthy and you expect to be in a significantly higher tax bracket in 2018. That is, accelerate income into this year (if possible) and postpone deductible expenditures until 2018. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

Tax reform considerations for pass-through business entities. The House tax reform bill that passed on November 16 — known as the Tax Cuts and Jobs Act of 2017 — would lower federal income tax rates for most individual taxpayers. However, some upper-middle-income and high-income individuals could pay a higher rate under the proposal.

The House bill would also install a maximum 25% federal income tax rate for passive business income from a pass-through entity. And it would tax the capital percentage of active business income from a pass-through entity at the preferential 25% maximum rate. The capital percentage would be either 30% or a higher percentage for capital-intensive businesses. The preferential 25% rate wouldn’t be available for personal service businesses, such as medical practices, law offices and accounting firms. Pass-through business income that doesn’t qualify for the preferential 25% rate would be taxed at the regular rates for individual taxpayers.

The Senate tax reform proposal — also called the Tax Cuts and Jobs Act of 2017 — would also lower federal income tax rates for most individuals. And it would generally allow an individual taxpayer to deduct 17.4% of domestic qualified business income from a pass-through entity. However, the deduction would be phased out for income that’s passed through from specified service businesses starting at taxable income of $500,000 for married joint-filers and $250,000 for individuals.

On the other hand, if your business operates as a C corporation, the 2017 corporate tax rates are the same as in recent years. If you don’t expect tax law changes and you expect the business will pay the same or lower tax rate in 2017, the appropriate strategy would be to defer income into next year and accelerate deductible expenditures into this year. If you expect the opposite, try to accelerate income into this year while postponing deductible expenditures until next year.

Tax reform considerations for C corporations. Under the House tax reform proposal, income from C corporations would be taxed at a flat 20% rate for tax years beginning in 2018 and beyond. A flat tax rate of 25% would apply to personal service corporations. If you think that these rate changes will happen, C corporations should consider deferring some income into 2018, when it could be taxed at a lower rate. Accelerating deductions into this year would have the same beneficial effect.

The Senate proposal would also install a flat 20% corporate rate, but it wouldn’t take effect until tax years beginning in 2019. The 20% tax rate would also be available to personal service corporations under the Senate bill.

Tax reform considerations for all businesses. Both the House and Senate tax reform proposals would eliminate some business tax breaks that are allowed under current law. So, try to maximize any tax breaks in 2017 that might be eliminated for 2018. Doing so will help reduce your tax bill for 2017.

2. Buy a Heavy Vehicle

Large SUVs, pickups and vans can be useful if you haul people and goods for your business. They also have major tax advantages.

Thanks to the Section 179 deduction privilege, you can immediately write off up to $25,000 of the cost of a new or used heavy SUV that is placed in service by the end of your business tax year that begins in 2017 and is used over 50% for business during that year.

If the vehicle is new, 50% first-year bonus depreciation allows you to write off half of the remaining business-use portion of the cost of a heavy SUV, pickup or van that’s placed in service in calendar year 2017 and used over 50% for business during the year.

After taking advantage of the preceding two breaks, you can follow the “regular” tax depreciation rules to write off whatever’s left of the business portion of the cost of the heavy SUV, pickup or van over six years, starting with 2017.

To cash in on this favorable tax treatment, you must buy a “suitably heavy” vehicle, which means one with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. The first-year depreciation deductions for lighter SUVs, trucks, vans, and passenger cars are much skimpier. You can usually find a vehicle’s GVWR specification on a label on the inside edge of the driver’s side door where the hinges meet the frame.

To highlight how the tax savings can add up, let’s suppose your calendar-year business purchases a new $65,000 heavy SUV today and uses it 100% for business between now and December 31, 2017.

What’s your write-off for 2017?

1. You can deduct $25,000 under Sec. 179.

2. You can use the 50% first-year bonus depreciation break to write off another $20,000 (half the remaining cost of $40,000 after subtracting the Section 179 deduction).

3. You then follow the regular depreciation rules for the remaining cost of $20,000. For 2017, this will usually result in an additional $4,000 deduction (20% x $20,000).

So, the total depreciation write-off for 2017 is $49,000 ($25,000 + $20,000 + $4,000). This represents roughly 75% of the vehicle’s cost.

In contrast, if you spend the same $65,000 on a new sedan that you use 100% for business between now and year end, your first-year depreciation write-off will be only $11,160.

Important note: Estimate your taxable income before considering any Sec. 179 deduction. If your business is expected to have a tax loss for the year (or to be close to a loss), you might not be able to use this tax break. The so-called “business taxable income limitation” prevents businesses from claiming Sec. 179 write-offs that would create or increase an overall business tax loss.

3. Cash in on Other Depreciation Tax-Savers

There are more Section 179 breaks, beyond those that apply to heavy vehicle purchases. For the 2017 tax year, the maximum Section 179 first-year depreciation deduction is $510,000. This break allows many smaller businesses to immediately deduct the cost of most or all of their equipment and software purchases in the current tax year.

This can be especially beneficial if you buy a new or used heavy long-bed pickup (or a heavy van) and use it over 50% in your business. Why? Unlike heavy SUVs, these other heavy vehicles aren’t subject to the $25,000 Sec. 179 deduction limitation. So, you can probably deduct the full business percentage of the cost on this year’s federal income tax return.

You can also claim a first-year Sec. 179 deduction of up to $510,000 for qualified real property improvement costs for the business tax year beginning in 2017. This break applies to the following types of real property:

Certain improvements to interiors of leased nonresidential buildings,
Certain restaurant buildings or improvements to such buildings, and
Certain improvements to interiors of retail buildings.

Deductions claimed for qualified real property costs count against the overall $510,000 maximum for Section 179 deductions.

Section 179 tax reform considerations. For tax years beginning in 2018 through 2022, the House tax reform bill would increase the maximum Sec. 179 deduction to $5 million per year, adjusted for inflation. The maximum deduction would start to phase out if your business places in service over $20 million (adjusted for inflation) of qualifying property during the tax year. Qualified energy efficient heating and air conditioning equipment acquired and placed in service after November 2, 2017, would be eligible for the Sec. 179 deduction.

The Senate tax reform bill would increase the maximum annual Sec. 179 deduction to $1 million and increase the deduction phaseout threshold to $2.5 million. (Both amounts would be adjusted annually for inflation.) The Senate bill would also allow Sec. 179 deductions for tangible personal property used in connection with furnishing lodging, as well as for the following improvements made to nonresidential buildings after the buildings are placed in service:

Roofs,
HVAC equipment,
Fire protection and alarm systems, and
Security systems.

In addition to Sec. 179, you can claim 50% first-year bonus depreciation for qualified new (not used) assets that your business places in service in calendar year 2017. Examples of qualified asset additions include new computer systems, purchased software, vehicles, machinery, equipment and office furniture.

You can also claim 50% bonus depreciation 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. However, qualified improvement costs don’t include expenditures for:

The enlargement of a building,
Any elevator or escalator, or
The internal structural framework of a building.

Bonus depreciation tax reform considerations. Under current law, the bonus depreciation percentage is scheduled to drop to 40% for qualified assets that are placed in service in calendar year 2018. However, both the House and Senate tax reform proposals would allow unlimited 100% first-year depreciation for qualifying assets acquired and placed in service after September 27, 2017, and before January 1, 2023.

Under the House bill, qualified property could be new or used, but it couldn’t be used in a real property business.

For property placed in service in 2018 and beyond, the Senate bill would shorten the depreciation period for residential rental property and commercial real property to 25 years (vs. 27-1/2 years and 39 years, respectively, under current law). Additionally, a 10-year depreciation period would apply to qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.

4. Create an NOL

When deductible expenses exceed income, your business will have a net operating loss (NOL). You can create (or increase) a 2017 NOL using the business tax breaks and strategies discussed in this article (with the exception of the Sec. 179 first-year depreciation deduction).

Then you have a choice. You can opt to carry back a 2017 NOL for up to two years in order to recover taxes paid in those earlier years. Or you can opt to carry forward the NOL for up to 20 years.

Tax reform considerations. Under both the House and Senate tax reform bills, taxpayers could generally use an NOL carryover to offset only 90% of taxable income for the year the carryover is utilized (versus 100% under current law). Under both bills, NOLs couldn’t be carried back to earlier tax years, but they could be carried forward indefinitely. Under the House bill, these changes would generally take effect for tax years beginning in 2018 and beyond. Under the Senate proposal, the changes would take effect in tax years beginning in 2023 and beyond.

5. Sell Qualified Small Business Stock

For qualified small business corporation (QSBC) stock that was acquired after September 27, 2010, a 100% federal gain exclusion break is potentially available when the stock is eventually sold. That equates to a 0% federal income tax rate if the shares are sold for a gain.

What’s the catch? First, you must hold the shares for more than five years to benefit from this break. Also be aware that this deal isn’t available to C corporations that own QSBC stock, and many companies won’t meet the definition of a QSBC.

Ready, Set, Plan

This year end, tax planning for businesses is complicated by the possibility of major tax reforms that could take effect next year. The initial proposals set forth in Congress are ambitious in scope and would generally help small businesses and small business owners lower their taxes. However, tax rate cuts and other pro-business changes could be balanced by the elimination of some longstanding tax breaks. Your tax advisor is monitoring tax reform developments and will help you take the most favorable path in your situation.

In 2014, Governor Snyder signed legislation increasing the Michigan minimum wage rate in stages. Increases took effect on September 1, 2014, on January 1, 2016, and on January 1, 2017, raising the minimum wage to $8.90 per hour.

On January 1, 2018, Michigan minimum wage will increase to $9.25 per hour.

Beginning in 2019, the rate will be adjusted annually for inflation, up to a maximum of 3.5 percent per year.

Note that the rate increases are effective for wages earned on or after the indicated date, and not the actual wage payment date.

On January 1, 2018, tipped employee hourly wage rates will also increase to $3.52 an hour. The State of Michigan has a reduced rate of $7.86 available for minors age 16 to 17. A youth training wage of $4.25 per hour may be paid to employees 16-19 years of age for the first 90 days of their employment.

The full rate schedule is available on the Michigan Department of Licensing and Regulatory Affairs website.

Contact your Yeo & Yeo payroll solutions professional for assistance.

As the end of 2017 rapidly approaches, it is time to start thinking about year-end tax planning for your farm or agribusiness. While year-end planning can involve a variety of topics, one tool that is often overlooked in the agricultural community is the use of retirement plans. Depending on the type of plan you have set up, the use of retirement plans can offer planning options both before and after the end of the year for self-employed farmers or small agribusiness owners.

The options for plans available to self-employed individuals or small businesses involved in farming vary depending on how much you want to contribute to a retirement plan and how many employees you have, if any. Retirement accounts allow you to set aside money for your retirement on a tax deductible basis, which saves the owner tax dollars now. The money in the account grows tax free and is not taxed until you take a distribution from the account when you are in retirement. Your options include the following:

Individual Retirement Account (IRA) – these are accounts that can be set up and funded for the owner and their spouse. They are low-cost, easy to establish and can be set up and funded up until the due date of the individual’s personal tax return, not including an extension, which is generally April 15. Provided they have wages or earned income from their farming operations of a similar amount, a farmer and their spouse can each fund up to $5,500 in 2017 and 2018, plus an additional $1,000 if they are over age 50.
Simplified Employee Pension (SEP-IRA) – these are IRAs with higher funding limits that are established by an employer for the benefit of the owner and their employees. This type of plan works well for a taxpayer who wants the flexibility to fund more money to his retirement account in years when he has greater profits. It is similar to a profit-sharing plan in that the owner can fund a discretionary amount from 0% to 25% of their earnings in any given year. Also, the owner can decide what percentage to fund up until the due date of his personal or business tax return, including an extension. This provides greater flexibility after the year is over. One thing to keep in mind with a SEP-IRA: If the owner chooses to fund money for himself in any given year, he must also fund that same percentage for all eligible employees who worked for the business in that year. While this is a great benefit to offer your employees and will hopefully generate added loyalty from them, it does increase the cost to the employer, although all contributions will be tax deductible to the business.
Savings Incentive Match Plan for Employees (SIMPLE-IRA) – A SIMPLE-IRA is another type of retirement plan that can be set up by small business owners. This type of plan allows for the owner and their employees to defer a portion of their pay (i.e., elective deferrals) into the plan on a pre-tax basis. This money has to be deposited in the employees’ accounts as soon as possible, but no later than 30 days after the end of the month during which it was withheld from the employees’ paycheck. Also, the employer is required to fund either a matching contribution or a profit-sharing contribution to the accounts of any eligible employees, subject to certain limitations. This money must be funded by the due date of the employer’s tax return, including an extension. The maximum amount of elective deferrals an owner or employee can fund into their account for 2017 and 2018 is $12,500. If those individuals are over age 50, however, they can fund an additional $3,000 in elective deferrals. Please note that a SIMPLE-IRA does need to be established before the end of the tax year, generally by October 1, for any contributions to be made for that particular tax year.
Additional qualified retirement plans such as 401(k) plans or profit-sharing plans are also allowed to be established by agribusinesses. However, these are generally used for larger companies as they are more costly to establish and administer.

So, as you work through your year-end planning with your key advisors, remember to think about funding any retirement plans you already have in place, or establishing a new plan to help reduce your tax bill when filing your 2017 tax return.

Should you have any questions on the above material or if you would like to discuss establishing a retirement plan for your farming operations, please contact one of the Yeo & Yeo Agribusiness Services Group members.

Have you ever thought about the integrity of your accountant? Integrity can have a different meaning to each individual and a slightly different interpretation for each professional industry. For many, integrity is incorruptibility, completeness, and communication. Sounds simple enough, right? Now, how do these three key elements apply to the professional services that Yeo & Yeo’s accountants provide for their clients?

Incorruptibility has been an important part of our profession. To prevent unethical practices, an individual must understand what ethics are. Ethics are defined as moral principles that govern a person’s behavior or the conducting of any activity. In other words, ethics are known as a person’s value system. Ethics and objectivity are fundamental principles that accounting professionals choose to abide by.

Financial information obtained from an accountant is heavily relied upon by many, such as businesses, creditors, investors and the public, so it is very important for accountants to use reasonable judgement and maintain ethical practices. An important thing to remember is an accountant’s reputation equates to their livelihood. We take our ethics seriously and apply our standards to the work we do.

Completeness can be satisfied by having a general framework to follow. As with many industries, the accounting industry has rules and regulations that must be followed, especially with the presentation of financial statements. These rules and regulations help accountants maintain integrity and uniformity.

One of the most prominent terms in the accounting profession is GAAP which stands for generally accepted accounting principles. GAAP is a set of accounting principles, standards and procedures that a company must follow when compiling financial statements. GAAP is a combination of authoritative standards set by policy boards and the commonly accepted ways of recording and reporting financial information. GAAP allows there to be uniformity and in many cases, comparability, amongst all accounting professionals in the presentation of financial information. Even though GAAP provides a general framework, there is still room for accountants to work with you to apply the framework.

Communication is an important aspect of our integrity. Technology changes continually, and the accounting profession has seen astronomical changes in recent years. Though the advancement in technology has been far more beneficial to accountants and their clients, it still has come with challenges due to cyberattacks. Utilizing technology to assist in our communication allows us to better serve you by having the ability to complete tasks more timely and store information in a more organized fashion with easier access on demand, which provides flexibility to you.

Skill set, confidentiality and ethics are all important components of financial integrity. Financial integrity is a fundamental component of the accounting profession. As a trusted advisor to our clients, accountants should act objectively, responsibly, ethically and maintain confidentiality in all situations pertaining to client information. As a result, professional services will be considered accurate, and therefore, others will be able to rely on the information provided by your trusted advisor.

Inefficiency is the downward slope that can take a government from the top of its game to a place where citizens become frustrated, employees are unhappy, and community goals are more challenging to achieve. Turning around an inefficient environment requires change. Change is often difficult, which is why inefficiency is frequently ignored. Employees are usually comfortable with the status quo, but what if employees could work in an environment where tasks were clearly defined, proper training occurred, redundancy was eliminated, excellence was applauded, and meaningful goals were achieved?

Creating such an environment requires thoughtful change. To successfully implement change, acceptance from those who will be affected is imperative. The size of the government’s finance or accounting department will drive the number of employees who need to be involved in the details of evaluating inefficiency.

The following areas address the most common issues we see clients face when it comes to running the finance or accounting department. In fact, many of these areas are problems in other departments too, and the same core thoughts can be applied throughout your municipality to improve efficiency.

1. Define Your Role

Consider for a moment all of the activity that goes on in the department in a day, week, month and year. It’s overwhelming at times. Employees have likely spent years “doing more with less.” Collectively consider: What should be accomplished within the department during these time periods? What tasks are being completed that should be taken on by another department? What added value could be produced if the department took on other responsibilities? Once the core functions of the department have been determined, the details can be evaluated.

2. Document Processes

If the accounts payable clerk unexpectedly quit, would anyone know how to get vendors paid? Processes are typically not documented at local governments, but they should be. Employees should document their processes to perform key functions. At the local government level, a good place to start is accounts payable, cash receipting, and payroll. The documentation should include step-by-step instructions on how to accomplish a task. Information related to the use of technology, what forms of approval are required from others, and an approximate timeline should be included. A separate employee should perform a test run of the documentation to determine if the task can be completed by simply following the written process. Employees should question their current process during this phase to determine if it could be more efficient. Questions to consider:

Can a step be automated?
Is a procedure redundant?
What road blocks are regularly faced?

3. Cross Training

Properly documenting processes also aides in the ability to cross train employees. When an employee is sick, on vacation, or leaves without notice, organizations with cross-trained employees experience lower levels of disruption because another employee can step in to temporarily handle the tasks. The government should identify the functions that would benefit most from a cross-trained employee, and then determine which employees to cross train. Cross-trained employees should periodically switch roles to keep the process fresh in their mind even if the need doesn’t exist.

4. Training

While considering the three areas above, organizations typically identify areas where either the department as a whole is weak, or an employee lacks training. An appropriate training plan should be developed to ensure employees are properly trained in the areas in which they are working. Training can take on many forms from external conferences, in-house seminars, one-on-one time spent with an external trainer or time spent training one another. Resources spent on proper training benefit the organization through greater employee satisfaction, fewer mistakes, and less time spent on tasks.

5. Technology

Accounting and general ledger software have more capabilities than ever before. Taking advantage of the government’s existing technology is crucial to eliminating inefficiency. Here are some questions to ask:

Has the software been properly set up to eliminate manual entry of duplicate information?
Is the chart of accounts in alignment with the recommended State chart of accounts?
Is the chart of accounts unnecessarily complex?
Have the vendor and payroll data files been reviewed, and old vendors or old employees properly removed?
Does the software have the ability to do bank reconciliations and is the government utilizing this function?

Some software vendors provide user training. Consider if such training would benefit employees.

6. Communicate Expectations

Communicating concise expectations to employees up front reduces the amount of guesswork required to perform their functions. Deadlines should be clear. Work quality issues should be addressed throughout the year. Praise should be given when expectations are met or exceeded. Follow up should be done when expectations are not met, and a defined plan set forth with how expectations will be met in the future.

Conclusion

Inefficiency does not have to define an organization. Great strides can be made when the six areas defined above are addressed. Also, remember to empower employees within the organization to take ownership of eliminating inefficiency. This will create an enjoyable work environment where the primary goal of serving citizens is successfully met.

After major disasters like the devastation of hurricanes in Houston and Florida, people are always eager to donate to help the victims. These days it’s easier than ever to donate online to existing charities or through crowdfunding sites like GoFundMe, Causes.com, or Crowd Rise. Philanthropy in these times of great need is wonderful, but when it comes to donations to crowdfunding sites, you’re probably wondering, is my donation going to be tax deductible?

The answer to that question depends on the type of campaign to which you donated.

Donation to a campaign for an individual or small group

If a campaign is for the benefit of a specific person – or a specific, small group of people – your donation is not likely to be tax deductible. Usually, to be tax deductible, a donation must be made to a large, indefinite group. According to the IRS, one of the requirements for a donation to be tax deductible is that it be made for the benefit of a group that can be considered a “charitable class.” To be considered a charitable class, a group must be “large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance [i.e., a group that is] large enough that the potential beneficiaries cannot be individually identified and providing benefits to this group would benefit the entire community.”

Additionally, if you donated to an individual through a crowdfunding campaign, especially one on a site like GoFundMe, that donation is probably considered a personal gift. Personal gifts still are not tax-deductible, but they won’t otherwise impact your taxes unless you gave more than the 2017 gift-tax exclusion amount of $14,000 to any one individual. If you did, you might have to file a gift tax return.

Donation to a campaign for a qualified charity

As crowdfunding becomes increasingly popular, more and more crowdfunding campaigns are supported by qualified charities. If the campaign is backed by a qualified charity, then the donation you make is almost certain to be tax-deductible. However, just because a crowdfunding campaign claims to be supported by a qualified charity, doesn’t mean that it is. It is always important to read the fine print.

Crowdfunding sites like Causes.com and CrowdRise only allow U.S.-based 501(c)(3) nonprofits that have valid listings on the website Guidestar.org to fundraise on their platform. Even so, the Causes.com FAQ page about donations states, “We cannot guarantee that every donation you give through Causes is a tax-deductible donation to the extent allowed by law. You must check with the nonprofit organization to ensure that your donation is tax deductible.”

On the GoFundMe’s FAQ page that discusses the tax deductibility of donations made to campaigns on their platform, it states, “Only donations made to GoFundMe Certified Charity campaigns (valid for U.S registered 501(c)(3) charitable organizations only) are guaranteed to be tax-deductible…” The site has a “Certified Charity” badge for those qualified charities to show that they meet the requirements.

Other Donation Options

It may be tempting to donate to a specific cause promoted by a crowdfunding campaign, but in cases of natural disasters, it may not be necessary. According to Publication 8388, Disaster Relief: Providing Assistance through Charitable Organizations, the IRS notes that it may make more sense to find an existing charity to which to donate. Existing charities like United Way, the Salvation Army, or the Red Cross provide targeted disaster relief and emergency hardship assistance. Additionally, “community-based organizations and charities with a local presence often know best what assistance is needed and understand the social and cultural context of a disaster. Working with and supporting these existing organizations may prove to be a more efficient use of disaster relief resources.”

Additionally, if you want to make sure that your donation to an existing charity goes toward helping people affected by a recent disaster event, you can indicate that you want your money to go toward flood or hurricane relief when you make your donation. You cannot, however, earmark your donation to benefit a specific individual because federal law dictates that a “qualified charity must be given full control over the use of donated funds.”

The Bottom Line

Crowdfunding is still a relatively new way to donate money for charitable purposes, and there have not been any formal rulings from the IRS on the subject. Until there are, we will have to use the existing guidance to determine if donations made to a crowdfunding campaign are tax-deductible. Information provided by the crowdfunding sites’ terms of service can also be helpful in determining the best way to treat crowdfunding donations.

Save the receipts you receive for any donations you make during the year, and if you have a question about whether a donation is tax deductible, your CPA will be happy to help.

While many Michigan residents will complain about the approaching harsh winter weather, we are fortunate because dealing with snow is nothing compared to coping with the devastation caused by the recent hurricanes. Personally, this winter I will be extra thankful as snow only makes travel more difficult, where those who live in the southern part of the country were not that fortunate this hurricane season.

Fortunately, in the aftermath of such events, there are those people and companies that are willing to lend a helping hand to rebuild in addition to making a reasonable profit for their time. I have spoken with numerous construction clients, and some are considering sending their crews to Florida and Texas to help with the rebuilding process. And while I commend their efforts, I also tell them to pump the breaks before starting such an endeavor. I’m not saying they should cancel their plans, but to consider the tax implications of doing business in such states. Planning ahead can help you rebuild the destroyed communities while keeping your incentives in your pocket and not in the government’s.

Whenever you are considering doing business in another state, you should start with researching the tax implications of doing business in that state for the entity type under which your business operates. Once you have become comfortable that you understand the tax implications and have decided you will begin operating in that state, you should begin the process by registering to do business with the Secretary of State to ensure that you have the legal authority to transact business within the state. The next steps are determining which types of taxes apply to your operations, determining the compliance requirements for each tax type, and then registering for those taxes.

Proper planning and knowledge related to state and local taxes are imperative to the long-term success of your business. Consulting with your Yeo & Yeo tax professional is a great first step in making sure you’re setting your business up for success.

If you are interested in donating to existing charities for hurricane relief, or donating via crowdfunding sites, you may wish to read Yeo & Yeo’s article, Crowdfunding Donations: Tax Deductible or Not?

If you acquire a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, if you neglect tax issues during the negotiation process, the negative consequences can be serious. To improve the odds of a successful acquisition, it’s important to devote resources to tax planning before your deal closes.

Complacency can be costly

During deal negotiations, you and the seller should discuss such issues as whether and how much each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa. So it’s common for the parties to wrangle over taxes at this stage.

Just because you seem to have successfully resolved tax issues at the negotiation stage doesn’t mean you can become complacent. With adequate planning, you can spare your company from costly tax-related surprises after the transaction closes and you begin to integrate the acquired business. Tax management during integration can also help your company capture synergies more quickly and efficiently.

You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via postmerger synergies. However, if your taxation projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.

Merging accounting functions

One of the most important tax-related tasks is the integration of your seller’s and your own company’s accounting departments. There’s no time to waste: You generally must file federal and state income tax returns — either as a combined entity or as two separate sets — after the first full quarter following your transaction’s close. You also must account for any short-term tax obligations arising from your acquisition.

To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel you’ll retain. If you and your seller use different tax processing software or follow different accounting methods, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise the company’s previous tax filings to align them with your own accounting system.

The tax consequences of M&A decisions may be costly and could haunt your company for years. We can help you ensure you plan properly and minimize any potentially negative tax consequences.

Two valuable depreciation-related tax breaks can potentially reduce your 2017 taxes if you acquire and place in service qualifying assets by the end of the tax year. Tax reform could enhance these breaks, so you’ll want to keep an eye on legislative developments as you plan your asset purchases.

Section 179 expensing

Sec. 179 expensing allows businesses to deduct up to 100% of the cost of qualifying assets (new or used) in Year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and real property improvements.

The Sec. 179 expensing limit for 2017 is $510,000. The break begins to phase out dollar-for-dollar for 2017 when total asset acquisitions for the tax year exceed $2.03 million. Under current law, both limits are indexed for inflation annually.

Under the initial version of the House bill, the limit on Sec. 179 expensing would rise to $5 million, with the phaseout threshold increasing to $20 million. These higher amounts would be adjusted for inflation, and the definition of qualifying assets would be expanded slightly. The higher limits generally would apply for 2018 through 2022.

The initial version of the Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would be indexed for inflation and generally apply beginning in 2018. Significantly, unlike under the House bill, the higher limits would be permanent under the Senate bill. There would also be some small differences in which assets would qualify under the Senate bill vs. the House bill.

First-year bonus depreciation

For qualified new assets (including software) that your business places in service in 2017, you can claim 50% first-year bonus depreciation. Examples of qualifying assets include computer systems, software, machinery, equipment, office furniture and qualified improvement property. Currently, bonus depreciation is scheduled to drop to 40% for 2018 and 30% for 2019 and then disappear for 2020.

The initial House bill would boost bonus depreciation to 100% for qualifying assets (which would be expanded to include certain used assets) acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period).

The initial Senate bill would allow 100% bonus depreciation for qualifying assets acquired and placed in service during the same period as under the House bill, though there would be some differences in which assets would qualify.

Year-end planning

If you’ve been thinking about buying business assets, consider doing it before year end to reduce your 2017 tax bill. If, however, you could save more taxes under tax reform legislation, for now you might want to limit your asset investments to the maximum Sec.179 expense election currently available to you, and then consider additional investments depending on what happens with tax reform. It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. Contact us to discuss the best strategy for your particular situation.

The House has released a tax bill.

This bill contains sweeping changes for both businesses and individuals. Most provisions are effective for tax years beginning after 2017.

What happens from here? The Senate will introduce its version of the bill. The Joint Committee will be charged with hammering out the differences and producing a bill to be voted on by both chambers.

Yeo & Yeo will monitor the activity as it unfolds. Follow us on social media and continue to check our blog for late-breaking news and updated information about the tax bills.

Overview of proposed changes impacting individual taxpayers

Changes in Tax Rates. The current seven individual tax rates would be reduced to four (12%, 25%, 35% and 39.6%), and applicable at the following levels:

12% – applies to the first $45,000 of taxable income for single filers and $90,000 for joint filers.
25% – applies to taxable income over $45,000 for single filers and $90,000 for joint filers.
35% – applies to taxable income over $200,000 for single filers and $260,000 for joint filers.
39.6% – rate applies to taxable income over $500,000 for single filers and $1 million for joint filers.

Capital Gains and Dividends. Net capital gains and dividends would continue to be taxed at their current 0%, 15% and 20% rates, and would also continue to be subject to 3.8% net investment income tax.

Taxation of Pass-through Income. The proposal contains a complex set of rules governing the tax rate applicable to income from S corporations, partnerships, LLCs and sole proprietorships.

Passive Activities. Income from passive activities qualify for the 25% tax rate.

Nonpassive Activities. In order to prevent abuse, active businesses will use a default 70%-30% allocation ratio. 70% will be taxed at ordinary individual rates with 30% qualifying for the 25% rate. For personal services, like doctors, lawyers, accountants, and financial advisors, all income is presumed to be earned income and subject to ordinary individual rates. An alternate calculation will be available.

Itemized deductions.

Medical expenses would no longer be deductible.
State and local income tax expenses are no longer deductible.
Real estate taxes may be deducted, but limited to $10,000.
Mortgage interest expense is deductible on a principal residence only, with an indebtedness cap of $500,000 for new mortgages after November 2, 2017.
No deduction for home equity loans would be allowed going forward.
The limitation for charitable contributions increases from 50% of AGI to 60%.
The deduction for personal casualty losses would be eliminated, as would most miscellaneous itemized deductions.

Other changes. The following additional changes are outlined in the proposed bill:

Increase in the standard deduction to $24,400 for joint filers, and $12,200 for single filers.
Elimination of personal exemptions.
Elimination of the “Pease” limitation on itemized deductions.
Repeal of the alternative minimum tax.
Retention of the estate tax through 2023, with a doubled basic exemption to $10 million. After 2023, the estate tax and generation-skipping tax would be repealed (but the step-up in basis provision would remain).
Increase in the child tax credit from $1,000 to $1,600, with a new $300 credit available for non-child dependents and taxpayers themselves.
Elimination of the ability to deduct the payment of alimony (with receiving spouse no longer having to include in income).

Phase-outs. Certain tax benefits would be phased out for higher income taxpayers. The benefit of the new 12% individual tax bracket would be phased out for single taxpayers with adjusted gross income over $1,000,000 and joint filers with income over $1,200,000. The phase-out for the child tax credit and new family tax credit would increase for single filers from $75,000 to $115,000 and for joint filers from $110,000 to $230,000.

Education. A number of changes were made to education provisions. First, the American Opportunity Tax Credit, Hope Scholarship Credit, and Lifetime Learning Credit would be combined into one American Opportunity Tax Credit (AOTC). The new AOTC provides for a 100% credit for the first $2,000 of qualified expenses, and a 25% credit for the next $2,000 of expenses, for the first four year of post-secondary education. The new AOTC also provides for a credit for a fifth year of post-secondary education at half the rate of the first four years.

The bill also eliminates new contributions to Coverdell education savings accounts, and expands 529 plans to allow unborn children to be designated as beneficiaries. It also covers expenses for apprenticeship programs and up to $10,000 of elementary and high school expenses.

Other education provisions that were repealed include:

Above-the-line deduction for student loan interest expense.
Above-the-line deduction for qualified tuition and related expenses.
Exclusion from income of employer-provided education assistance.

If you have questions, please contact a member of Yeo & Yeo’s Tax Services Group or your local Yeo & Yeo office.

The House has released a tax bill.

This bill contains sweeping changes for both businesses and individuals. Most provisions are effective for tax years beginning after 2017.

Yeo & Yeo will monitor the activity as it unfolds. Follow us on social media and continue to check our blog for late-breaking news and updated information about the tax bills.

Overview of proposed changes impacting business taxpayers

Corporate Rate Reduction. Corporate tax rate cut to a flat 20%; 25% for personal service corporations. Corporate AMT would be repealed.

Taxation of Pass-through Income. The proposal contains a complex set of rules governing the tax rate applicable to income from S corporations, partnerships, LLCs and sole proprietorships.

Passive Activities. Income from passive activities qualify for 25% tax rate.

Nonpassive Activities. In order to prevent abuse, active businesses will use a default 70%-30% allocation ratio. 70% will be taxed at ordinary individual rates with 30% qualifying for the 25% rate. For personal services, like doctors, lawyers, accountants, and financial advisors, all income is presumed to be earned income and subject to ordinary individual rates. An alternate calculation will be available.

Business Asset Purchases. 100% bonus depreciation for assets purchased after September 27, 2017, expires in 2023. This provision is expanded to include used property, but specifically excludes property used in real estate businesses. Section 179 limit increases to $5,000,000 for purchases after 2017.

Many Deductions and Credits Limited or Repealed

Repealed. Business Entertainment Expense, Domestic Production Activity Deduction, Work Opportunity Credit, Rehab Credit, tax-free employer educational assistance payments, employer child care credit, lobbying expense deduction, partnership technical termination rules.

Limited. Net interest deduction limited to 30% of adjusted income, Net Operating Losses will only offset 90% of taxable income, Net Operating Losses will not be allowed a carryback, like-kind exchanges will only be allowed for real estate.

Retained. Research and Development Credit, Low Income Housing Credit.

Small Business Breaks. Small businesses defined as those with gross revenue of $25 million or less will have some breaks in the new rules:

Will not be subject to the net interest deduction limitation;
Will be allowed to use the cash basis of accounting;
Will be allowed to account for inventory as non-incidental supplies;
Will be exempt from Section 263A UNICAP rules;
Will be allowed to utilize the completed contract method.

If you have questions, please contact a member of Yeo & Yeo’s Tax Services Group or your local Yeo & Yeo office.

With Veterans Day on November 11, it’s an especially good time to think about the sacrifices veterans have made for us and how we can support them. One way businesses can support veterans is to hire them. The Work Opportunity tax credit (WOTC) can help businesses do just that, but it may not be available for hires made after this year.

As released by the Ways and Means Committee of the U.S. House of Representatives on November 2, the Tax Cuts and Jobs Act would eliminate the WOTC for hires after December 31, 2017. So you may want to consider hiring qualifying veterans before year end.

The WOTC up close

You can claim the WOTC for a portion of wages paid to a new hire from a qualifying target group. Among the target groups are eligible veterans who receive benefits under the Supplemental Nutrition Assistance Program (commonly known as “food stamps”), who have a service-related disability or who have been unemployed for at least four weeks. The maximum credit depends in part on which of these factors apply:

Food stamp recipient or short-term unemployed (at least 4 weeks but less than 6 months): $2,400
Disabled: $4,800
Long-term unemployed (at least 6 months): $5,600
Disabled and long-term unemployed: $9,600

The amount of the credit also depends on the wages paid to the veteran and the number of hours the veteran worked during the first year of employment.

You aren’t subject to a limit on the number of eligible veterans you can hire. For example, if you hire 10 disabled long-term-unemployed veterans, the credit can be as much as $96,000.

Other considerations

Before claiming the WOTC, you generally must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you.

Also be aware that veterans aren’t the only target groups from which you can hire and claim the WOTC. But in many cases hiring a veteran will provided the biggest credit. Plus, research assembled by the Institute for Veterans and Military Families at Syracuse University suggests that the skills and traits of people with a successful military employment track record make for particularly good civilian employees.

Looking ahead

It’s still uncertain whether the WOTC will be repealed. The House bill likely will be revised as lawmakers negotiate on tax reform, and it’s also possible Congress will be unable to pass tax legislation this year. Under current law, the WOTC is scheduled to be available through 2019.

But if you’re looking to hire this year, hiring veterans is worth considering for both tax and nontax reasons. Contact us for more information on the WOTC or on other year-end tax planning strategies in light of possible tax law changes.

Does your small business engage in qualified research activities? If so, you may be eligible for a research tax credit that you can use to offset your federal payroll tax bill.

This relatively new privilege allows the research credit to benefit small businesses that may not generate enough taxable income to use the credit to offset their federal income tax bills, such as those that are still in the unprofitable start-up phase where they owe little or no federal income tax.

QSB status

Under the Protecting Americans from Tax Hikes Act of 2015, a qualified small business (QSB) can elect to use up to $250,000 of its research credit to reduce the Social Security tax portion of its federal payroll tax bills. Under the old rules, businesses could use the credit to offset only their federal income tax bills. However, many small businesses owe little or no federal income tax, especially small start-ups that tend to incur significant research expenses.

For the purposes of the research credit, a QSB is generally defined as a business with:

Gross receipts of less than $5 million for the current tax year, and
No gross receipts for any taxable year preceding the five-taxable-year period ending with the current tax year.

The allowable payroll tax reduction credit can’t exceed the employer portion of the Social Security tax liability imposed for any calendar quarter. Any excess credit can be carried forward to the next calendar quarter, subject to the Social Security tax limitation for that quarter.

Research activities that qualify

To be eligible for the research credit, a business must have engaged in “qualified” research activities. To be considered “qualified,” activities must meet the following four-factor test:

The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business.
There must be an intention to eliminate uncertainty.
There must be a process of experimentation. In other words, there must be a trial-and-error process.
The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.

Expenses that qualify for the credit include wages for time spent engaging in supporting, supervising or performing qualified research, supplies consumed in the process of experimentation, and 65% of any contracted outside research expenses.

Complex rules

The ability to use the research credit to reduce payroll tax is a welcome change for eligible small businesses, but the rules are complex and we’ve only touched on the basics here. We can help you determine whether you qualify and, if you do, assist you with making the election for your business and filing payroll tax returns to take advantage of the new privilege.

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

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

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

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