Coverdell ESAs: The Tax-Advantaged Way to Fund Elementary and Secondary School Costs

With school out you might be focused on summer plans for your children (or grandchildren). But the end of the school year is also a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if the children are in grade school or younger.

One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.

Other benefits

Here are some other key ESA benefits:

• Although contributions aren’t deductible, plan assets can grow tax-deferred.
• You remain in control of the account — even after the child is of legal age.
• You can make rollovers to another qualifying family member.

A sibling or first cousin is a typical example of a qualifying family member, if he or she is eligible to be an ESA beneficiary (that is, under age 18 or has special needs).

Limitations

The ESA annual contribution limit is $2,000 per beneficiary. The total contributions for a particular ESA beneficiary cannot be more than $2,000 in any year, no matter how many accounts have been established or how many people are contributing.

However, the ability to contribute is phased out based on income. The phaseout range is modified adjusted gross income (MAGI) of $190,000–$220,000 for married couples filing jointly and $95,000–$110,000 for other filers. You can make a partial contribution if your MAGI falls within the applicable range, and no contribution if it exceeds the top of the range.

If there is a balance in the ESA when the beneficiary reaches age 30 (unless the beneficiary is a special needs individual), it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to a 10% penalty. But these taxes can be avoided by rolling over the full balance to another ESA for a qualifying family member.

Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!

© 2017

For entrepreneurs seeking a lower-risk, turnkey opportunity, a franchise can be a good fit.

But to help ensure you are making the right choice be sure to consider:

1. Self Assess. Franchise systems are highly structured and best suited to owners willing to follow rules and listen to feedback.

2. Perform Research. Some franchises are better than others. Look for negative media accounts and talk to current franchisees.

3. Be Realistic. Franchises are rarely profitable the first year – and can take even longer to yield a reliable income for owners.

4. Ask the Professionals. A lawyer needs to review your franchise agreement and an experienced CPA should prepare cash-flow projections.

5. Read the FDD. The Financial Disclosure Document covers everything from fees to advertising Litigation Support .

Contact us for more information.

Yeo & Yeo CPAs & Business Consultants, a leading Michigan accounting firm, is pleased to announce that Alex M. Wilson, CPA, Senior Accountant, has been appointed to the Young Professionals Steering Committee for the Leading Edge Alliance (LEA Global). LEA Global is an international professional association of more than 220 independently owned accounting and consulting firms in more than 100 countries.

As a member of the Young Professionals (YP) Steering Committee, Wilson will help coordinate YP efforts nationwide together with the other eight members of the Committee. Their goal is to ensure that YPs across the country have opportunities to help their firms grow and to stand out as industry leaders.

Wilson coordinates Yeo & Yeo’s participation in LEA Global Volunteer Days, held annually in June.Young professionals from member firms worldwide are encouraged to choose a charity they wish to support. Locally, Wilson leads Yeo & Yeo’s professionals firm-wide in donating time and money to local nonprofit organizations throughout Michigan; this year’s Volunteer Days will focus on animal causes.

Wilson works in collaboration with the firm’s Career Advocacy Team (CAT Team). Team members implement new policies and procedures and work to provide equal access to career development, assist women in advancing to leadership positions, and promote the successful integration of personal and professional lives.

“The CAT team recognizes and is consistently impressed with Alex’s leadership role here at Yeo & Yeo. When the CAT team decided to offer a new Summer Leadership Program for college accounting students – an idea brought forth by a few of the young professionals at the firm – Alex and his team stepped up and have been doing an exceptional job of organizing this event,” says John Haag, Principal and leader of the CAT Team.

In May 2017, Wilson attended the Michigan Young Professionals Network Statewide Conference in Mt. Pleasant, Mich. The two-day conference provided a forum for young professionals across the state to connect, build relationships, and share ideas about personal and professional growth. “I was able to connect with many local, young professionals who share the same desires and goals that I have. I learned how YPs can make a difference in both our companies and our communities, which I hope to demonstrate at Yeo & Yeo,” says Wilson.

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

• Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.)
• File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

• Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

• If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes.
• If a calendar-year S corporation or partnership that filed an automatic six-month extension:
  • File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
  • Make contributions for 2016 to certain employer-sponsored retirement plans.

© 2017

It’s common for closely held businesses to transfer money into and out of the company, often in the form of a loan. However, the IRS looks closely at such transactions: Are they truly loans, or actually compensation, distributions or contributions to equity?

Loans to owners

When an owner withdraws funds from the company, the transaction can be characterized as compensation, a distribution or a loan. Loans aren’t taxable, but compensation is and distributions may be.

If the company is a C corporation and the transaction is considered a distribution, it can trigger double taxation. If a transaction is considered compensation, it’s deductible by the corporation, so it doesn’t result in double taxation — but it will be taxable to the owner and subject to payroll taxes.

If the company is an S corporation or other pass-through entity and the transaction is considered a distribution, there’s no entity-level tax, so double taxation won’t be an issue. But distributions reduce an owner’s tax basis, which makes it harder to deduct business losses. If the transaction is considered compensation, as with a C corporation, it will be taxable to the owner and subject to payroll taxes.

Loans to the business

There are also benefits to treating transfers of money from owners to the business as loans. If such advances are treated as contributions to equity, for example, any reimbursements by the company may be taxed as distributions.

Loan payments, on the other hand, aren’t taxable, apart from the interest, which is deductible by the company. A loan may also give the owner an advantage in the event of the company’s bankruptcy, because debt obligations are paid before equity is returned.

Is it a loan or not?

To enjoy the tax advantages of a loan, it’s important to establish that a transaction is truly a loan. Simply calling a withdrawal or advance a “loan” doesn’t make it so.

Whether a transaction is a loan is a matter of intent. It’s a loan if the borrower has an unconditional intent to repay the amount received and the lender has an unconditional intent to obtain repayment. Because the IRS and the courts aren’t mind readers, it’s critical to document loans and treat them like other arm’s-length transactions. This includes:

• Executing a promissory note,
• Charging a commercially reasonable rate of interest — generally, no less than the applicable federal rate,
• Establishing and following a fixed repayment schedule,
• Securing the loan using appropriate collateral, which will also give the lender bankruptcy priority over unsecured creditors,
• Treating the transaction as a loan in the company’s books, and
• Ensuring that the lender makes reasonable efforts to collect in case of default.

Also, to avoid a claim that loans to owner-employees are disguised compensation, you must ensure that they receive reasonable salaries.

If you’re considering a loan to or from your business, contact us for more details on how to help ensure it will be considered a loan by the IRS.

© 2017

If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.

Catching the IRS’s eye

Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:

• Significant inconsistencies between previous years’ filings and your most current filing,
• Gross profit margin or expenses markedly different from those of other businesses in your industry, and
• Miscalculated or unusually high deductions.

An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.

Response measures

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors.

More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS selects you for an audit, our firm can help you:

• Understand what the IRS is disputing (it’s not always crystal clear),
• Gather the specific documents and information needed, and
• Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place.

© 2017

Nonprofits with years ending December 31, 2018, and later will implement the new nonprofit accounting standard, FASB ASU 2016-14, Presentation of Financial Statements of Non-Profit Entities. This new standard is the first significant change to nonprofit accounting in 20 years. The reporting of net assets will change under this standard.

Under current FASB standards, there are three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. However, with changes to relevant laws (UPMIFA) in the past few years, the boundaries between the classes of net assets have been blurred. The new standard will reduce the classes of net assets to those with donor restrictions and those without donor restrictions. On the face, this is a simplification. It takes away determining the nuances of what is permanently restricted versus temporarily restricted. It also clarifies what has always been the case – that restrictions must come from donors.

However, in exchange for this simplification, significantly more disclosures will be required. The disclosures need to include information amount the nature and amounts of different types of donor-imposed restrictions. This disclosure includes things like support of particular operating activities, investment for a specified term, use in a specified future period, etc. Essentially, what was previously disclosed through a combination of the numbers indicating temporarily and permanently restricted net assets, and a narrative disclosure of what those net assets were restricted for, has now been moved completely to the footnotes.

Let’s assume you previously had two different purpose restrictions and a time restriction in temporarily restricted net assets; you had a single line item for temporarily restricted net assets and then typically a general explanation of the purpose restrictions and time restriction in the footnotes, without corresponding dollar amounts. Now you will need to quantify the dollar amount in the footnotes subject to each of the purpose restrictions and the time restriction. If a contribution is subject to both the purpose and time restriction, you will have to list it in a manner that is careful not to double-count it in the footnotes. Also, information about the amounts and purposes of board-designated net assets without donor restrictions shall be provided in the notes or on the face of the financials.

In addition, there are changes to how underwater endowment funds are reported. In the past, when a permanently restricted endowment fund had losses that brought the fair value below the original gift amount, the difference was recorded as unrestricted net assets, so that the permanently restricted net assets were never below the original gift amount. This caused a lot of confusion and additional accounting record keeping. Under the new standard, the fair value of the endowment fund will be the amount reported as with donor restrictions, regardless of whether it is underwater. However, in exchange for that simplification, additional disclosures are required. The entity must disclose:

• their policy and actions taken related to appropriation from underwater endowment funds (such as whether the organization does any appropriations, reduced appropriations, etc. when a fund is underwater),
• the aggregate fair value of underwater endowment funds,
• the aggregate original gift amounts of the underwater endowments, and
• the aggregate amount by which endowments are underwater.

Contributions of long-lived assets previously had an accounting election to determine if they were released from restriction using a placed-in-service approach or over their estimated useful life. As part of the simplification effort, FASB will require all nonprofits to use the placed-in-service approach, unless there are explicit donor stipulations.

Overall, less detail will be required on the face of the financial statements. This may allow for easier accounting in some cases. However, all of the information that was previously needed for the face of the financial statements will now be disclosed in the footnotes, and in many cases will be disclosed in more detail than previously required. In the midst of all the transition, ensure that the required information is readily available to make those required disclosures.

Summer is upon us, which means schools are out and kids of various ages will be looking for summer jobs. As always, the agriculture industry will continue to offer many opportunities for summer employment for teenagers. However, the laws and regulations for youth employment in agriculture differ from nonfarm jobs, so be sure to understand and follow the rules.

The Fair Labor Standards Act of 1938 (FLSA), as amended, is the governing document when it comes to agriculture jobs. The FLSA covers employees whose work involves the production of agricultural goods that leave the state directly or indirectly and become part of interstate commerce.

The minimum age standards for agricultural employment set by the FLSA* are as follows:

• Youths age 16 and above may work in any farm job at any time.
• Youths ages 14 and 15 may work outside school hours in jobs not declared hazardous by the Secretary of Labor.
• Youths ages 12 and 13 may work outside of school hours in non-hazardous jobs on farms that also employ their parent(s) or with written parental consent.
• Youths under age 12 may work outside of school hours in a non-hazardous job with parental consent, but only on farms where none of the employees are subject to the minimum wage requirements of the FLSA.
• Youths ages 10 and 11 may hand-harvest short-season crops outside school hours for no more than eight weeks between June 1 and October 15, if their employers have obtained special waivers from the Secretary of Labor.
• Youths of any age may work at any time in any job on a farm owned or operated by their parents.

Be aware that many states have their own laws for youth employment in agriculture. When both state and federal youth employment laws apply, the law setting the most stringent standard must be observed. Michigan generally follows the federal laws except for operations involving detasseling, roguing, hoeing or similar work in the production of seed.* For those types of operations, students must be age 16 or older to work during school hours or age 13 or older during non-school hours. These students are also subject to maximum daily and weekly hour limitations.

To help make sure you are in compliance with these laws and regulations, follow these best practices:

• Properly verify all minor workers’ ages and keep good records.
• Review and understand what is considered hazardous work for agriculture employees.
• Make sure all of your minor employees are clear on what jobs they may and may not do.
• Regularly review safety procedures with all of your employees.
• Keep copies close at hand of any certifications that 14- and 15-year olds may have completed for machinery operation courses offered through vocational schools or 4-H.

An employer who violates the youth employment provisions may be subject to civil penalties, based on the specific circumstances of each case. These laws are enforced by investigators of the Wage and Hour Division of the Secretary of Labor. These investigators have the authority to conduct investigations and gather data on wages, hours, and other employment conditions or practices to assess compliance with all the provisions of the FLSA.*

Additional information can be obtained from the Wage and Hour Division’s website at http://www.wagehour.dol.gov or by calling the toll-free information helpline at 1-866-487-9243.

*Source: U.S. Department of Labor website, Child Labor Bulletin No. 102. Other portions of this article were also excerpted from the U.S. Department of Labor’s website.

Once taxpayers turn age 70½, required minimum distributions (RMDs) must be made annually from any non-Roth IRA accounts. These amounts are calculated each year, based on the total amount in the IRA and the taxpayer’s (and spouse’s, if applicable) ages. Over the years, Congress has passed provisions allowing for Qualified Charitable Distributions (QCDs) from these accounts; however, often the legislation was passed retroactively just before the end of the year, limiting planning and usage 100c. That has changed because part of the PATH Act of 2015 extends these provisions permanently. This is great news for charitable taxpayers with IRAs, as making use of the QCD deduction benefits taxpayers of many income levels.

How does it work?

Taxpayers age 70½ or older direct their IRA trustee to make a distribution check directly payable to the charity. The charity then must provide an acknowledgment of the gift. Then on Form 1040, the taxpayer reports the full amount of any IRA distributions on line 15a, but then subtracts any QCDs to get to the taxable amount on line 15b. If all IRA distributions are given directly to charity, the taxpayer would report zero on line 15b.

Isn’t this the same as itemizing?

No, it is not. When a taxpayer itemizes, the entire amount of the IRA distribution is included in Adjusted Gross Income (AGI), and the charitable amount is then added to Schedule A, as part of itemized deductions. Those deductions are then subtracted to arrive at taxable income only if they exceed the standard deduction amount ($15,100 for a couple in their 70s filing jointly). Including the IRA distributions in AGI can then affect the amount of Social Security income that is taxable, as well as raise the threshold needed to deduct medical and miscellaneous amounts on Schedule A. Using a QCD lowers the taxpayers’ AGI.

Part of the beauty of a QCD is that even people who don’t itemize can take advantage of it, be it people who donate thousands of dollars, or hundreds of dollars. Including charitable donations on Schedule A often does not benefit a taxpayer because itemized deductions may not exceed the standard deduction, especially once mortgages are paid off later in life and portions of the taxpayer’s retirement income is not taxable at the state level. For those whose retirement income is taxed at the state level, using a QCD may also lower state taxes, as using a QCD will directly reduce AGI.

Following is an example using 2016 tax rates for a couple in their 70s who receive a $20,000 IRA distribution, along with $50,000 in Social Security income. They donate $5,000 annually to various charities. As you can see below, using QCDs for the charitable donations instead of the taxpayers receiving the distributions and then making the donations results in federal tax savings of $1,758!

What to do next

Specific rules must be followed to allow for this preferred treatment, which include not exceeding the limit of $100,000 per taxpayer (and each taxpayer may use only his or her account to make the QCD). Gifts must be made from an individual IRA, which includes rollover IRAs, but not from a SEP or SIMPLE IRA. Qualifying charitable gifts may be made only to public charities—private foundations, donor advised funds and split interest charitable trusts are ineligible. Checks must be made payable directly to the charity; however, the taxpayer may have the check sent to him or her to then distribute to the charity personally. Finally, the taxpayer must be at least 70½ on the date of the gift, not just in the tax year in which the donation is made.

To determine if this is something that would benefit you, contact your tax advisor for more guidance on how to get the most benefit from your RMD.

The Association of Certified Fraud Examiners (ACFE) has published its 2016 Report to the Nations on Occupational Fraud and Abuse. The latest biennial study breaks down white-collar crimes by industry, highlighting the common scams that manufacturers need to watch for and ways for them to minimize potential losses from fraud.

How much does fraud cost?

The ACFE estimates that the annual cost of fraud globally is roughly $3.7 trillion, based on a gross world product of $74.16 trillion in 2014. That’s a significant amount of money, but what hits closer to home is how much fraud affects individual victim organizations.

The median loss for fraud occurring at U.S. companies was $120,000, according to the 2016 report. Even more disheartening is the median loss for manufacturers of $194,000. A loss of this size would be difficult for most small manufacturers to absorb. Moreover, these estimates include only direct monetary losses. Fraud also potentially costs companies in terms of lost productivity, diminished employee morale and loss of confidence with customers.

Which schemes are most common?

The ACFE breaks down its findings by industry, and manufacturing ranks third in terms of the frequency of fraud cases. The most common schemes reported by manufacturers include:

Corruption. Almost half of manufacturers in the study (48.4%) fell victim to these scams. Corruption includes bribery, illegal gratuities and economic extortion.

Billing scams. About one-third of fraud cases (32.8%) involved billing ploys. These scams may include submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.

Noncash theft. Rounding out the top three categories, noncash ploys were reported in more than 30% of fraud cases. These incidents often involve theft of such valuable assets as inventory and equipment.

In addition, roughly a quarter of fraud cases involved fictitious or exaggerated claims for expense reimbursement. Many fraudsters test the waters with these types of entry-level scams. Then they graduate to bolder schemes, if no one notices their expense fraud.

How can manufacturers fight fraud?

Fraud prevention and detection measures don’t necessarily have to be expensive to be effective. According to the ACFE, the anti-fraud  controls that offer the highest potential return on investment — that is, offer the biggest reduction in comparative median fraud losses — include:

• Regular data monitoring and analysis techniques,
• Management review, and
• Reporting hotlines.

Across the board, the presence of anti-fraud controls was correlated with lower losses and quicker fraud detection. More specifically, victim organizations that were using proactive data monitoring and analysis techniques as part of their anti-fraud program suffered fraud losses that were 54% lower and detected the fraud in half the time compared to organizations that didn’t use these techniques. Management review and the presence of a hotline were correlated with 50% lower median losses and 50% less time to detect the scheme.

How should victims handle fraud allegations?

The majority of the fraud victims in the ACFE study haven’t yet recovered a dime from the perpetrators. Many worry that prosecuting criminals could lead to bad publicity. Others prefer to just fire the wrongdoers and then focus on recovery, rather than spend time and resources pursuing a financial settlement or conviction.

Prosecuting fraud may be worthwhile for several reasons, however. It sends a message 100c to would-be thieves that management has adopted a zero-tolerance policy, thereby deterring future crimes. In addition, a conviction will be reported on the fraudster’s permanent record, which may prevent him or her from striking other victims in the future. If you suspect fraud, contact your attorney or a forensic accountant for help deciding how to proceed.

© 2016

Many nonprofit organizations rely on their CPA to prepare Form 990, but there are some key areas that nonprofit managers can help prepare to maximize their Form 990 as a marketing tool. Form 990 has many different users including contributors, funders, and the general public. Because it is public information that anyone can access, users may be looking at your 990 that you do not even know about!

Anywhere that a narrative appears on Form 990, it should be seen as an opportunity for the organization to tell users what the organization does and how its mission is making an impact in the community. The largest area on the form in which to tell the organization’s story is in Part III – Statement of Program Service Accomplishments. In this section, the organization defines its mission and also splits program revenues and expenses between its top three program areas, with a fourth “other” category available if needed. In this section, it is advisable to include current-year program highlights; the more factual and robust the information, the greater the potential impact. Think about adding details about the program names, the number of participants, quantifiable outcomes, etc. Additionally, Schedule O – Supplemental Information to Form 990 or 990-EZ has many answers for various questions on Form 990, including how compensation is set, how conflicts of interest are handled and the review process for the Form 990.

Much like the worded sections, Part IV – Checklist of Required Schedules should be reviewed in detail for any unique items about the organization. Many questions about the nonprofit organization appear on this schedule, including (but not limited to) questions about significant donations, related-party transactions, special events, grant making, lobbying and non-cash contributions. A “yes” answer will require additional information from your Form 990 preparer.

Finally, various sections give readers an idea of the size and scope of the organization. Form 990 discloses the names of officers and directors including their compensation, the number of volunteers, the number of employees, the number of grants given by the organization and details of special event revenue and expenses. An entire section on governance structures and policies is also included.

While there are many other nuanced areas of Form 990, these are three examples of areas that the organization should review in detail annually. While the CPA preparer may have a good idea of what you do, someone at the organization is best suited to describe the day-to-day details. In addition to financial management, consider having a marketing or development staff member read the Form 990 to ensure it is presenting the organization to the public in the best possible way. A properly completed and reviewed Form 990 could be a useful leveraging tool for organizations.

For more information about Form 990, please contact your Yeo & Yeo professional today.

If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. But to secure tax-advantaged treatment for your business and your employees, it’s critical to comply with IRS rules.

Reasons to Reimburse

While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees won’t be able to benefit from the deduction. Why?

It’s likely that some of your employees don’t itemize. Even those who do may not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income floor. And only expenses in excess of the floor can actually be deducted.

On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements (also subject to a 50% limit for meals and entertainment), and they’re excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.

Per Diem Method

The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.

You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.

Accountable Plan

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:

• It must pay expenses that would otherwise be deductible by the employee.
• Payments must be for “ordinary and necessary” business expenses.
• Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
• Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).

Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be pleased to help.

© 2017

What is new with the 3% contribution to the Education Retiree Healthcare Fund? Will the IRS refund the FICA taxes on the remittances? Two issues are currently impacting the situation.

Public School Employees Retirement Act

The first issue is PA-75-2010, which is the old 3% contribution that began in 2010 and continued through the first pay of February 2013. This matter is still in court. Overall, it is an issue of the constitutionality of the tax treatment of the 3% contributions.

Public School Employees Retirement Act Reform

The second issue deals with PA-300-2012, which began in February 2013 and deals with the current 3% contributions. This issue is a bit clearer. This is an issue of taxability of the 3% contributions regarding which the IRS has not formally issued a published position; however, the IRS has started to act on it. The IRS is refunding FICA tax from 2013-2015 if the school districts/academies withheld FICA during that time. Also, it appears that 2016 taxes will be refunded as well. If your school district/academy is still withholding FICA, keep filing for refunds.

Status of Protective Claims

Back to the first issue, PA-75. The majority of school districts/academies filed protective claims for 2010-2012 using Form 941-X. Those claims continue to wait for the Michigan Supreme Court’s decision. As of now, we are unsure when the Supreme Court will hear the case, but we have heard it may be this summer. [Update as of 6-7-17: The issue will be going to the Supreme Court.]

The IRS will not and is not refunding the FICA on PA-75 3% contributions. As of now, the IRS is waiting on the Supreme Court’s decision.

The Supreme Court will decide if the FICA exemption is unconstitutional or constitutional. If it is determined to be unconstitutional, the 3% contribution tax may be refunded, but it is a complicated situation. If it is determined to be constitutional, the amount in escrow will apply to the retirement plan, and school districts/academies could still have refunds of FICA depending on Private Letter Ruling results. However, the statute of limitations window for 2013 is about to close, since school districts/academies had until April 15, 2017, to file a protective claim for 2013.

Also, be aware that if you received a refund for 2013, you received it for PA-300 FICA paid only, but you would have needed to file a protective claim for PA-75 FICA paid.

Status of the Private Letter Ruling

The Private Letter Ruling (PLR) filed with the IRS by the Office of Retirement Services was declined because the PLR needed an employer name on it to make it valid. Certain school districts volunteered to be the employer for it, but the attorneys are still working on issuing a new PLR. Once the results are in, it will apply to both FICA contributions made under the PA-75 and PA-300 plans. If the IRS deems it not taxable, it would be a clear, published decision from the IRS for all. However, if it is deemed taxable, we are not sure what would happen, but hope it would be enacted prospectively.

Yeo & Yeo’s Education Services Group will keep you informed as we receive more information about the PLR or other updates on this situation.

Affiliated Medical Billing has changed its name to Yeo & Yeo Medical Billing & Consulting, announced Thomas E. Hollerback, President & CEO of Yeo & Yeo CPAs & Business Consultants and its affiliates.

The name change leverages the strength and longstanding reputation of the Yeo & Yeo name, reflects the broader range of professional services the company offers and aligns the affiliate under a single Yeo & Yeo brand name. The name change will create a unified name for all three of the firm’s affiliates: Yeo & Yeo Medical Billing & Consulting, Yeo & Yeo Technology, and Yeo & Yeo Financial Services. The new doing business as name is effective immediately and will be implemented throughout the calendar year 2017.

Announced in conjunction with the name change, Julia M. Lowe, CPC, former president of Affiliated Medical Billing, retired from the company after 19 years of providing medical billing and consulting services for physicians and healthcare organizations, and more than 40 years dedicated to serving the healthcare profession. Under Lowe’s leadership, Yeo & Yeo’s medical billing affiliate started as a two-person team and grew to a highly successful organization with 18 professionals.

Kati Krueger was named president of Yeo & Yeo Medical Billing & Consulting effective May 1, 2017. She has an extensive background with the medical billing affiliate, having joined the company in 2002. Krueger held the position of billing manager and also served as marketing manager for nearly five years, overseeing client relations and business development opportunities. She has more than ten years’ experience in medical billing and revenue cycle management, helping physicians and group practices throughout Michigan to be efficient and compliant. She has served as vice president since August 2016. Krueger is a member of the Medical Group Management Association, and holds a bachelor’s degree from Saginaw Valley State University.

“During the past year, Yeo & Yeo CPAs implemented Lean Six Sigma methodologies that focus on greater efficiency and quality in our audit and tax practices – it is a process we refer to as YeoLEAN. Now, under Kati’s leadership, Yeo & Yeo Medical Billing & Consulting is employing the YeoLEAN concepts that have allowed our medical billing professionals to streamline processes and focus on greater value for our clients,” says Kimberlee Dahl, Director of Marketing for Yeo & Yeo.

“I am excited to lead the future advances at Yeo & Yeo Medical Billing & Consulting under its new name. Our YeoLEAN process improvements will be ongoing, and the process has already led to the implementation of new software capabilities and paperless technologies, more efficient insurance reimbursement processing, and timelier communication with our healthcare clients – all with the goal of helping them maximize their profitability,” adds Krueger.

Yeo & Yeo Medical Billing & Consulting will continue its mission to be a leading provider of medical billing and practice management consulting services for the healthcare industry, as it has since 1998.

In today’s competitive environment, offering employees an equity interest in your business can be a powerful tool for attracting, retaining and motivating quality talent. If your business is organized as a partnership, however, there are some tax traps you should watch out for. Once an employee becomes a partner, you generally can no longer treat him or her as an employee for tax and benefits purposes, which has significant tax implications.

Employment taxes

Employees pay half of the Social Security and Medicare taxes on their wages, through withholdings from their paychecks. The employer pays the other half. Partners, on the other hand, are treated as being self-employed — they pay the full amount of “self-employment” taxes through quarterly estimates.

Often, when employees receive partnership interests, the partnership continues to treat them as employees for tax purposes, withholding employment taxes from their wages and paying the employer’s share. The problem with this practice is that, because a partner is responsible for the full amount of employment taxes, the partnership’s payment of a portion of those taxes will likely be treated as a guaranteed payment to the partner.

That payment would then be included in income and trigger additional employment taxes. Any employment taxes not paid by the partnership on a partner’s behalf are the partner’s responsibility.

Treating a partner as an employee can also result in overpayment of employment taxes. Suppose your partnership pays half of a partner’s employment taxes and the partner also has other self-employment activities — for example, interests in other partnerships or sole proprietorships. If those activities generate losses, the losses will offset the partner’s earnings from your partnership, reducing or even eliminating self-employment taxes.

Employee benefits

Partners and employees are treated differently for purposes of many benefit plans. For example, employees are entitled to exclude the value of certain employer-provided health, welfare and fringe benefits from income, while partners must include the value in their income (although they may be entitled to a self-employed health insurance deduction). And partners are prohibited from participating in a cafeteria plan.

Continuing to treat a partner as an employee for benefits purposes may trigger unwanted tax consequences. And it could disqualify a cafeteria plan.

Partnership alternatives

There are techniques that allow you to continue treating newly minted partners as employees for tax and benefits purposes. For example, you might create a tiered partnership structure and offer employees of a lower-tier partnership interests in an upper-tier partnership. Because these employees aren’t partners in the partnership that employs them, many of the problems discussed above will be avoided.

If your business is contemplating offering partnership interests to key employees, contact us for more information about the potential tax consequences and how to avoid any pitfalls.

© 2017

Yeo & Yeo’s new headquarters in Saginaw, Michigan, is scheduled to be complete in July. The move will include relocation of Yeo & Yeo CPAs & Business Consultants and affiliates Yeo & Yeo Technology, Yeo & Yeo Medical Billing & Consulting, and Yeo & Yeo Financial Services.

The accounting firm and its affiliates will move from 3023 Davenport Avenue in Saginaw and relocate four miles north to 5300 Bay Road, the site of Davenport University’s former Saginaw campus. Yeo & Yeo purchased the building in April 2016, and has been remodeling and enlarging it to accommodate over 125 professionals and future growth. The building offered an existing 30,000 square feet; another 14,000 square feet has been added.

In November 2016, eleven members of Yeo & Yeo’s administration group relocated to the new headquarters to free up needed space at the Davenport location for seasonal tax professionals and additional parking. The administration offices required only minor remodeling.

Yeo & Yeo employs nearly 220 professionals and has nine offices throughout Michigan. During the last three years, Yeo & Yeo’s Ann Arbor and Lansing offices also relocated within their communities to accommodate growth and offer a contemporary work environment for employees.

Check back for additional details as we get closer to the move.

If your company uses DocuSign for electronically-signed documents, we urge that if you receive an email from DocuSign, be vigilant and ensure that it is legitimate.

1. Verify the hyperlink. Do not click on the link in the email. Instead, go to docusign.com and enter the unique security code included at the bottom of every legitimate DocuSign email.
2. Verify that the email address of the sender is correct and not missing a letter, or that it is not some variation of the name or domain
3. If you are not expecting the email, contact the sender via another method (by phone or in person) to verify they sent the request to you.
4. Watch for and delete any emails with the subject line, “Completed: [domain name] – Wire transfer for recipient-name Document Ready for Signature” and “Completed [domain name/email address] – Accounting Invoice [Number] Document Ready for Signature.”

These emails are not from DocuSign; they are sent by cybercriminals and contain a link to malware.

DocuSign has requested that any users who receive a suspicious email forward it to spam@docusign.com.

Read more about the phishing attack on DocuSign.

Your security is important to us. Please call Yeo & Yeo if you have questions or need assistance.

• Entities with year-ends of December 26, 2016, through May 16, 2017, were already required to have adopted the Uniform Grant Guidance procurement policies. If procurement policies and procedures were not timely adopted and implemented for Uniform Grant Guidance, it will likely result in an audit finding in the next Single Audit.
• Entities that previously adopted and implemented procurement policies and procedures in accordance with 2 CFR 200 likely will not want to reverse those procurement policies and procedures. Reversing those policies and procedures part-way through the year will lead to additional confusion on the part of those in charge of procurements, may result in more noncompliance, and may result in additional testing by your auditor due to changes in internal controls. We recommend that if Uniform Guidance policies and procures were adopted and implemented, do not re-adopt the old policies and procedures.
• Entities that did not previously adopt and implement procurement policies and procedures in accordance with 2 CFR 200 should go through the appropriate channels in their organization to elect and document usage 100c of the additional grace period year. This could include entities that have adopted new policies and procedures with an implementation date of May 17, 2017, or later (for example, June 30, 2017, year-ends are likely to be in this position). However, the grace period decision and documentation should go through the same process as the adoptions of procurement policies.

It is imperative that your procurement policies – whatever they are documented as – be followed.

The Uniform Guidance and the old guidance in the OMB Circulars provide minimum requirements that must be covered by an entity’s procurement policies. If an entity’s policies are stricter than the federal rules, the entity policies still must be followed. As you adopt new procurement policies, we also recommend that you consider separate policies for federal and non-federal expenditures to ease the administrative burden of certain federal requirements.

If you have questions or need assistance, please contact Yeo & Yeo.

Summer — the traditional wedding season — is just around the corner. Marriage changes life in many ways. Here’s how it may affect your tax situation.

Marital Status

Your marital status at year end determines your tax filing options for the entire year. If you’re married on December 31, you’ll have two federal income tax filing choices for 2017:

• File jointly with your spouse, or            
• Opt for “married filing separate” status and then file separate returns based on your income and your deductions and credits.

Here are two reasons most married couples file jointly:

1. It’s simpler.You only have to file one Form 1040, and you don’t have to worry about figuring out which income, deduction and tax credit items belong to each spouse.

2. It’s often cheaper.The married filing separate status makes you ineligible for some potentially valuable federal income tax breaks, such as the child care credit and certain higher education credits. Therefore, filing two separate returns may result in a bigger combined tax bill than filing one joint return.

Risks of Filing Jointly

Filing jointly isn’t a sure-win for one big reason: For years that you file joint federal income tax returns, you’re generally “jointly and severally liable” for any underpayments, interest and penalties caused by your spouse’s deliberate misdeeds or unintentional errors and omissions.

Joint-and-several liability means the IRS can come after you for the entire bill if collecting from your spouse proves to be difficult or impossible. They can even come after you after you’ve divorced.

However, you can try to claim an exemption from the joint-and-several-liability rule under the so-called “innocent spouse” provisions. To successfully qualify as an innocent spouse, you must prove that you:

• Didn’t know about your spouse’s tax failings,
• Had no reason to know, and
• Didn’t personally benefit.

If you file separately, you’re certain to have no liability for your spouse’s tax misdeeds or errors. So, if you have doubts about a new spouse’s financial ethics, the best policy may be to file separately.

Penalty vs. Bonus

You’ve probably heard about the federal income tax “penalty” that happens when a married joint-filing couple owes more federal income tax than if they had remained single. The reason? At higher income levels, the tax rate brackets for joint filers aren’t twice as wide as the rate brackets for singles.

For example, the 28% rate bracket for singles starts at $91,901 of taxable income for 2017. For married joint-filing couples, the 28% bracket starts at $153,101. If you and your spouse each have $90,000 of taxable income in 2017, for a total of $180,000, you’ll pay a marriage penalty of $807. That’s because $26,900 of your combined taxable income will fall into the 28% rate bracket ($180,000 – $153,100). If you stay single, none of your income will be taxed at more than 25%. The marriage penalty is usually a relatively modest amount; so, it’s probably not a deal-breaker.

On the other hand, many married couples collect a federal income tax “bonus” from being married. If one spouse earns all or most of the income, it’s likely that filing jointly will reduce your combined tax bill. For a high-income couple, the marriage bonus can amount to several thousand dollars a year.

Important note:The preceding explanation of the marriage penalty and bonus assumes that the current federal income tax rates will remain in place for 2017. However, rates and rate brackets could change depending on tax reforms that may be proposed and enacted before year end. Ask your tax advisor for the latest details on federal tax reform efforts.

Home Sales

When people get married, they often need to combine two separate households before or after the big day. If you and your fiancé both own homes that have appreciated substantially in value, you may owe capital gains tax.

However, there’s a $250,000 gain exclusion for single taxpayers who sell real property that was their principle residence for at least two years during the five-year period ending on the sale date. The gain exclusion increases to $500,000 for married taxpayers who file jointly.

Suppose you and your fiancé both own homes. You could both sell your respective homes before or after you get married. Assuming you’ve both lived in your respective homes for two of the last five years, then you could both potentially claim the $250,000 gain exclusion. That’s a combined federal-income-tax-free profit of up to $500,000.

Conversely, let’s say you sell your home and move into your spouse’s home. After you’ve both used that home as your principal residence for at least two years, you could sell it and claim the larger $500,000 joint-filer gain exclusion.

In other words, you could potentially exclude up to $250,000 of gain on the sale of your home. Then you could later claim a gain exclusion of up to $500,000 on the sale of the house that your spouse originally owned. With a little patience and some smart tax planning, you could potentially exclude a combined total gain of $750,000 on your home sales.

Got Questions?

Getting hitched may open up new tax risks — and some new tax planning opportunities. It pays to be well-informed. Contact your tax advisor for guidance on how getting married could change your tax situation in 2017.

©2017.