GASB 84: Accounting Codes and Guidance Added to Michigan Public School Accounting Manual

The Michigan Department of Education issued an update for GASB 84 to Section II, E.18, of the Michigan Public School Accounting Manual. The section now includes guidance and accounting code changes required to implement GASB 84. Updates were prepared and reviewed by the Michigan Department of Education’s 1022 Committee, of which Yeo & Yeo Principals Jennifer Watkins, CPA, and Kristi Krafft-Bellsky, CPA, are members.

Additional GASB 84 resources:

Recorded Webinar: How to Implement GASB 84 at Your School District

White Paper: GASB 84 — Understanding the Statement to Implement Efficiently in Your School District

If you have questions about implementing GASB 84 for your school district, please contact Yeo & Yeo.

The IRS has developed a number of resources to combat these taxpayer scams including two videos detailing the scams, and a recap summary of the IRS ‘Dirty Dozen.’

Visit, https://www.irs.gov/newsroom/dirty-dozen, for detailed information concerning the following IRS resources.

IRS Videos

Dirty Dozen – English | Spanish | ASL
Tax Scams – English | Spanish | ASL

Provided by the IRS, below is a recap of this year’s ‘Dirty Dozen’ scams:

Phishing: Taxpayers should be alert to potential fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a bill or tax refund. Don’t click on one claiming to be from the IRS. Be wary of emails and websites that may be nothing more than scams to steal personal information. (IR-2019-26)
Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (IR-2019-28)
Identity Theft: Taxpayers should be alert to tactics aimed at stealing their identities, not just during the tax filing season, but all year long. The IRS, working in conjunction with the Security Summit partnership of state tax agencies and the tax industry, has made major improvements in detecting tax return related identity theft during the last several years. But the agency reminds taxpayers that they can help in preventing this crime. The IRS continues to aggressively pursue criminals that file fraudulent tax returns using someone else’s Social Security number. (IR-2019-30)
Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest, high-quality service. There are some dishonest preparers who operate each filing season to scam clients, perpetrate refund fraud, identity theft and other scams that hurt taxpayers. (IR-2019-32)
Inflated Refund Claims: Taxpayers should take note of anyone promising inflated tax refunds. Those preparers who ask clients to sign a blank return, promise a big refund before looking at taxpayer records or charge fees based on a percentage of the refund are probably up to no good. To find victims, fraudsters may use flyers, phony storefronts or word of mouth via community groups where trust is high. (IR-2019-33)
Falsifying Income to Claim Credits: Con artists may convince unsuspecting taxpayers to invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers should file the most accurate tax return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing large bills to pay back taxes, interest and penalties. (IR-2019-35)
Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation to falsely inflate deductions or expenses on their tax returns to pay less than what they owe or potentially receive larger refunds. Think twice before overstating deductions, such as charitable contributions and business expenses, or improperly claiming credits, such as the Earned Income Tax Credit or Child Tax Credit. (IR-2019-36)
Fake Charities: Groups masquerading as charitable organizations solicit donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. (IR-2019-39)
Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is usually limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims often involve failures to participate in or substantiate qualified research activities or satisfy the requirements related to qualified research expenses. (IR-2019-42)
Offshore Tax Avoidance: Successful enforcement actions against offshore cheating show it’s a bad bet to hide money and income offshore. People involved in offshore tax avoidance are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. (IR-2019-43)
Frivolous Tax Arguments: Frivolous tax arguments may be used to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims about the legality of paying taxes despite being repeatedly thrown out in court. The penalty for filing a frivolous tax return is $5,000. (IR-2019-45)
Abusive Tax Shelters: Abusive tax structures including trusts and syndicated conservation easements are sometimes used to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2019-47)

A common theme throughout all: Scams put taxpayers at risk. Taxpayers who have received a call or an email from a scammer should report the case to the IRS at www.irs.gov or call 800-366-4484.

Additional Resources

Be Ready for Scams this Tax Season

10 Practices to Protect Against Cyberattacks and Phishing Scams

File Early to Avoid Identity Theft

Security Awareness Training – Educate Your Employees (Yeo & Yeo Technology)

How to Know It’s Really the IRS Calling or Knocking on Your Door (IRS Resource)

IRS Warns of Scam — Falsely Filed Returns with Refunds Deposited into Taxpayer’s Account

Treasury Warns of Collections Scam

On March 29, 2019, Michigan minimum wage will increase to $9.45 an hour.

Minors age 16 to 17 may be paid a reduced rate of 85 percent of the minimum hourly wage rate.

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.

Tipped employee hourly wage rates will increase to $3.59 an hour.

These rates will be adjusted annually for inflation, up to a maximum of 3.5 percent per year.

Note that the 2019 rate increases are effective for wages earned on or after the indicated date, and not the actual wage payment date.

Download the PDF rate schedule, including years 2020 and 2021 increases.

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

Contact your Yeo & Yeo payroll solutions professional for assistance.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Alan D. Panter, CPA, Principal, has achieved the Certified Government Financial Manager (CGFM) credential, awarded by the Association of Government Accountants (AGA).

“The CGFM credential is considered the mark of excellence in federal, state and local government,” says Jamie Rivette, CPA, CGFM, Principal and Government Services Group leader. “Alan’s achievement demonstrates Yeo & Yeo’s commitment to providing expert audit, accounting and consulting services to Michigan governmental entities by expanding our level of expertise.”

The CGFM credential establishes competency in governmental accounting, auditing, financial reporting, internal controls and budgeting. It recognizes the specialized knowledge and experience required to be an effective government financial manager.

Panter is a Principal in the Auburn Hills office audit department with nearly 30 years of experience providing audit and accounting services for government, nonprofit and education entities. He is a member of firm’s Government Services Group. Panter’s professional memberships include the Michigan Government Finance Officers Association, Michigan School Business Officials, Macomb–St. Clair School Business Officials and Detroit Economic Club.

In the community, Panter is a member of the Knights of Columbus St. Daniel Council #15967, the past managing director of the Greater Lansing Amateur Hockey Association, and the past President of the Fast Pitch Softball Club of Haslett.

The manufacturing industry is at a pivotal point in its history. Recognizing the significance of this juncture, the Manufacturing Leadership (ML) Council recently released its Critical Issues Agenda for 2018/2019, titled The Journey to Manufacturing 4.0.

The result of extensive research, consultation and refinement involving more than 1,000 members, this agenda identifies key issues facing the industry. Manufacturers of all shapes and sizes are advised to take note.

Real Challenges

The modern manufacturing plant, featuring robots doing jobs previously performed by humans and workers on the floor communicating electronically with supervisors in remote locations, may seem like something out of The Jetsons. Yet the challenges are real. Even with cutting-edge technology, manufacturers face pressure to be more innovative, nimble and cost-effective.

In fact, the evolution of advanced digital and analytical technology is forcing manufacturers around the globe to rethink the normal rules of competition, revisit how work is performed, and revise how companies are structured and managed. This fresh approach is what the ML Council calls Manufacturing 4.0 (M4.0).

Features

M4.0 goes a step beyond previous iterations of the new technology-driven manufacturing sector. The new regime is characterized by:

Production and supply networks that are increasingly data-driven, automated, modular, agile, sustainable, predictive and rapidly reconfigurable to meet changing demands and competition.
Products that are smart, customized, connected and self-diagnostic, and that provide a rich platform for new revenue streams.
Supply chains that are visible, traceable, risk-resilient, responsive and constantly analyzed in real time.
Enterprises that are cross-functional, collaborative and highly-integrated, often surrounding a single digital thread that stretches from design to deployment.
Leaders and employees who are highly engaged, digitally savvy, customer-centric and ready to meet new challenges and grasp emerging business opportunities.

Such a massive transformation doesn’t come without substantial effort. Manufacturers must identify and master various technological, organizational, cultural, workforce and leadership aspects. With that in mind, the agenda is designed to help manufacturers align their thoughts with practices.

Opportunities to Grow

The agenda covers five specific manufacturing areas.

1. Factories.

Both large and small manufacturers need to recognize and embrace the potential of new and evolving production models, materials and technology. This will help them create cost-efficient, responsive, flexible, transparent, connected, automated, and sustainable factories, production models and business plans.

The agenda spotlights:

M4.0 guidelines, maturity models and transformation frameworks that can help manufacturers move from current production models (often based on legacy systems) to a future state of digitally-enabled production readiness.
End-to-end digitization and analysis of manufacturing and engineering processes and functions in both centralized and distributed production networks.
Cybersecurity risk management.

Such cybersecurity includes preventive measures and cyberattack response strategies that minimize vulnerabilities of highly networked production platforms.

2. Culture.

Manufacturers of all sizes need to transform traditional operations so that their culture becomes collaborative, innovation-driven and cross-functional. This will drive growth, new product and service development, operational efficiency and success.

The agenda recommends:

Cross-functional processes and integrated organizational structures that harness multiple sources of data to drive innovation, facilitate faster and better decisions, reduce time-to-market and enhance competitive agility.
Collaborative innovation cultures and platforms that leverage the ideas and resources of employees, suppliers, external partners, customers, academics and “‘the crowd” to create new products, improve business processes and spawn innovation.
Best-practice approaches in deploying integrated M4.0 technology and platforms, such as digital threads, that enhance collaboration and integration to help deliver new ideas and improvements faster across the enterprise.

3. Technology.

Manufacturers must learn how to identify, adopt and scale promising technology. This will result in greater speed and efficiency while opening the door to new business models and improved customer experiences.

The agenda covers:

The impact of artificial intelligence (AI), machine learning and cognitive analytics on the industry’s future.
The latest developments in related transformational technology, including the Internet of Things, 3D printing, modeling and simulation, collaborative robotics, augmented and virtual realities, 5G networks, block chain and other emerging technologies.
Best practice approaches for selecting and deploying new technology in a manufacturing enterprise while implementing standards and architectures that support open systems.

4. Next-generation leadership.

It isn’t just the machinery that’s changing. Manufacturers must be more collaborative, innovative and responsive to disruptive change. Leaders will adopt new behaviors, structures, cultures, value systems and strategies. And they’ll consider ways to attract and engage the talent and skills of both the current workforce and the next generation of employees.

The agenda pinpoints:

Effective leadership role models, behaviors and mindsets that define a successful profile for tomorrow’s manufacturing leaders.
Employee transition, development and engagement strategies for an inclusive, diverse, multigenerational, multicultural, multinational workforce that interacts with AI and collaborative robots (“cobots”) and whatever else is developed in the future.
Identifying, attracting, and encouraging talent and skills for the next-generation manufacturing workforce.

Effective next-generation leaders will adopt new working cultures, change value systems and develop better ways to collaborate with educational and community organizations.

5. Sustainability.

This new vision provides an opportunity to leverage new analytical insights and more flexible production platforms. It maximizes resources, achieves major efficiency gains, drives revenue growth and minimizes environmental impacts. To successfully engage with others, manufacturers must become more transparent about their environmental and socially responsible practices.

The agenda recommends:

Products designed for easier reuse, remanufacture, refurbishment or recycling.
Production strategies that streamline production processes to increase efficiency and reduce costs and waste.
Holistic, sustainable manufacturing business models supported by collaborative cross-sector partnerships and deeper community engagement that can create a circular manufacturing economy.

Seize the Future

What does all this mean for your company? Manufacturers must embrace the future or risk being left in the dust. As you set your budgets and goals for 2019, review the ML Council’s agenda and consider ways you can leverage emerging technology, innovative business strategies, sustainable practices and other opportunities to grow your business agenda.

Recommended Reading: Manufacturing 4.0: The Cost of Progress

Make no mistake: Manufacturers will need to pay tolls along the road to Manufacturing 4.0.

Manufacturers invest time, energy and capital to implement advanced technology and best practices.

Cost is likely to be the biggest obstacle for many small- to mid-sized companies. Pilot programs may require you to revisit your budget and raise additional capital. And your company may need to make tough decisions regarding strategic investments, such as launching new products, purchasing new assets and making strategic acquisitions. You simply don’t have the resources to do everything at once.

We can help you strategize how to move forward by running financial projections to help you determine which alternatives to pursue today and which to table for future years.

For many small business owners, their ownership interest is one of their biggest personal assets. What will happen to your ownership interest if you get divorced? In many cases, your marital estate will include all (or part) of your business interest.

Sometimes, divorcing spouses continue to participate in the business’s operations after the divorce settles, and then both spouses retain an ownership interest in the business. But, more commonly, former spouses are unable to effectively co-manage the business. So, one spouse retains a controlling interest and the other spouse 1) retains a passive stake in the business, 2) is bought out, or 3) is allocated other marital assets in a property settlement agreement.

How a marital estate is divvied up can have significant tax consequences. Here’s what you need to know to get the best tax results.

Tax-Free Transfer Rule

In general, you can divide most assets, including cash and ownership interests in a business, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under the tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

To illustrate how this works, suppose that, under the terms of your divorce agreement, you give your primary residence to your ex-spouse in exchange for keeping all the stock in your small business. This asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made incident to divorce. Transfers incident to divorce are those that occur within:

A year after the date the marriage ends, or
Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

In recent years, the IRS has extended the beneficial tax-free transfer rule to ordinary-income assets, not just to capital-gain assets. For example, if you transfer business receivables or inventory to your ex-spouse in divorce, these types of ordinary-income assets also can be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Tax Implications of Tax-Free Transfers

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — where the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold, unless an exception applies.

For example, if you qualify for the principal residence gain exclusion break, you can exclude up to $250,000 of gain from your federal taxable income, or up to $500,000 of gain if you file a joint return with a future spouse.

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex continues to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex ultimately sells the shares, he or she (not you) will owe any resulting capital gains taxes.

Important: The person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. Always take taxes into account when negotiating your divorce agreement.

Splitting Up Qualified Retirement Plan Accounts

Many business owners set up qualified retirement plans, such as a profit-sharing, 401(k) or defined benefit pension plan. A percentage of the account balance or plan benefits may need to be transferred to your ex-spouse as part of the divorce property settlement.

To execute a transfer without owing taxes on amounts that go to your ex, you must use a qualified domestic relations order (QDRO). In effect, the QDRO causes your ex-spouse to become a co-beneficiary of your retirement account. The tax advantage comes from the fact that the QDRO also makes your ex responsible for the income taxes on retirement account money that he or she receives in the form of account withdrawals, a pension or an annuity. In other words, the QDRO causes the tax bill to follow the money.

The QDRO also allows your ex to withdraw his or her share of the retirement account balance and roll the money over tax-free into his or her own IRA (to the extent such withdrawals are permitted by your plan’s terms). The rollover strategy allows your ex to take over management of the money while continuing to postpone taxes until funds are withdrawn from the rollover IRA. When your ex withdraws funds from the rollover IRA, he or she (not you) will owe the related income taxes.

Warning: Without a QDRO, money that’s transferred from your qualified retirement plan account to your ex-spouse is treated as a taxable distribution to you. So, your ex gets a tax-free windfall at your expense. To add insult to injury, you may also owe the 10% early withdrawal penalty tax on money that goes to your ex before you’ve reached age 59½.

Splitting Up IRAs

You don’t need a QDRO to obtain an equitable tax outcome when you turn over IRA funds to your ex under your divorce agreement. This includes money held in SEP accounts, SIMPLE IRAs, traditional IRAs and Roth IRAs. QDROs are only relevant in the context of qualified retirement plans.

However, with IRAs, you still must be careful to avoid getting taxed on money that goes to your ex. The key to a tax-free transfer is to specifically order the transfer in your divorce or separation instrument. For this purpose, the tax code narrowly defines a divorce or separation instrument as a “decree of divorce or separate maintenance or a written instrument incident to such a decree.”

A transfer that meets this requirement can be arranged as a tax-free rollover of the applicable amount from your IRA into an IRA set up in your ex-spouse’s name. Your ex can then manage the money in the rollover IRA as he or she sees fit and can continue to defer taxes until withdrawals are taken. Any future income taxes are paid by your ex (not you).

Important: When it comes to IRA transfers, don’t jump the gun. If you voluntarily give your ex-spouse some IRA funds before it’s required under a divorce or separation instrument, it will be treated as a taxable distribution to you. If a taxable distribution occurs before you’re 59½, you also may be hit with the 10% early withdrawal penalty.

New Treatment for Alimony Payments

Allocating marital assets is just one part of settling your divorce. Deciding on maintenance payments is another critical component.

The Tax Cuts and Jobs Act (TCJA) permanently disallows deductions for alimony payments required by divorce agreements signed after December 31, 2018. Such payments are federal income-tax-free to the recipient. Under prior law, payers could deduct alimony, and recipients had to include alimony in their taxable income.

This recipient-favorable change should be taken into account when negotiating divorce agreements — and when drafting prenuptial agreements in the future.

Minimizing Taxes

Like any major life event, divorce can have major tax implications, especially if you own a private business interest. Your tax advisor can help you minimize the adverse tax consequences of settling your divorce under today’s laws.

Since the release of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, many governments have developed and adopted policies that communicate what management and those charged with governance believe to be the appropriate levels and a framework for use and maintenance of fund balance reserves. Formally adopted fund balance policies help to define and communicate the balance that should be maintained in specific funds, use and replenishment of funds, authority to make changes, reporting requirements, and priority of use.

The fund balance policy should begin with a statement of scope and purpose. The General Fund, as the primary operating fund of the government, will be included but the policy should also define which other funds are covered and which are exempted. A purpose statement frames the policy and lays out what the governing body believes to be the methodology for sound financial management practices as it applies to fund balance.

Fund balance definitions are readily available from a variety of sources, but a fund balance policy will generally contain either a glossary of terms as an attachment or include those definitions in the body of the policy. The policy should define what fund balance is, the various components of fund balance, any budgetary terms being used, and any necessary terms related to enterprise funds if they are included in the policy.

Appropriate levels of fund balance reserves are the focal point of most fund balance policies. Each government will need to determine what that level is for each fund included in the policy and how it is defined. Considerations will include contingencies, credit standing, risk tolerances, cash flow, and transparency. Fund balance levels are generally expressed as a percentage (or range of percentages) of annual operating expenditures, total expenditures (including capital outlay, debt service, and other financing uses), or as a percent of revenues, and this may vary from fund to fund in the policy. The Government Finance Officers Association (GFOA) recommends that general-purpose governments maintain a minimum level of unrestricted fund balance in the General Fund of at least two months’ operating revenues or expenditures. Maximum fund balance levels are more a matter of discretion and depend heavily on what the governing body’s plans and economic expectations are.

The policy will contain guidance on when, how, and if reserves can be used and how they are to be replenished if a given fund falls below the defined target range. Reserves could be used for capital projects, as a “rainy day” fund, or to invest in new or expanded governmental programs. Replenishment of the reserves would be discussed in terms of where the funds are to come from (whether that is through excess of revenues over expenditures or one-time revenue sources) and the time frame anticipated for this to take place.

Governmental funds report fund balances categorized per GASB 54 as non-spendable, restricted, committed, assigned, and unassigned. Non-spendable and restricted amounts generally are not considered to be part of the desired levels of reserves discussed above, which is generally defined as the total of committed, assigned and unassigned amounts in a fund. Committed funds are established, modified, or rescinded by formal action of the highest level of decision-making authority such as a City Council, Board of Commissioners, or a Board of Education. The fund balance policy often defines what that formal action is. The authority to assign fund balance for specific purposes is reserved to the governing body unless that is delegated, which can be done in the fund balance policy. This authority is often delegated to the Chief Financial Officer, City Manager, County Administrator, or Superintendent as applicable.

Enterprise funds may or may not be included in the fund balance policy. Fund equity in an enterprise fund is referred to as net position and is calculated on the full accrual basis of accounting (and therefore contains non-current items such as capital assets and debt) as opposed to the modified accrual basis used in governmental funds. Fund balance policies generally concentrate on currently available financial resources, which is more directly related to fund balance in a governmental fund. As a result, an enterprise fund generally would focus on net working capital (the difference between current assets and current liabilities) as the accepted way to measure liquidity and reserves. The GFOA recommends a target level of working capital in enterprise funds to be between 45 and 90 days of annual operating expenses.

GASB 54 requires governments to disclose in the annual financial statements what their policy is as to the order of use that would be applied to restricted or unrestricted (committed, assigned, unassigned) funds. In the absence of a formal fund balance policy, this is often “boilerplate” language suggested by the auditors or borrowed from another government’s statements. The fund balance policy would include a statement on when restricted or unrestricted funds would be used as well as the order in which unrestricted amounts are considered to be reduced when expenditures are incurred.

A simple internet search will yield a lot of resources available to help with the development of a fund balance policy, including many examples from other governments. Also, your Yeo & Yeo professionals are available to assist you as well. Please don’t hesitate to reach out if we can be of assistance.

Legitimate business expenses – including parking expenses – that have always been deductible may now be nondeductible. There has been an increasingly large uproar about these nondeductible expenses since the regulations were released in December 2018 (Notice 2018-99). The regulations were billed as describing the process for nonprofits, but when you read them, they apply to all entities. The IRS accepted public comments about the parking expense regulations through February 22, 2019. The hope is that this will be repealed, but until that happens, here are the current regulations.

The regulations apply to all entities, regardless of whether the entity is nonprofit or for-profit and regardless of whether it is paid or unpaid parking. All entities need to evaluate nondeductible parking expenses.

The regulations are straightforward when determining if the taxpayer pays a third party, such as a local parking garage, for employee parking spots. The payment from the taxpayer to the third party that is not included as taxable income on the employee’s W-2 is the amount of “nondeductible parking expenses.” Many people have tried to devise ways for the payments to be included in an employee’s W-2 as taxable wages to prevent the entity from being taxed. In general, that is a challenging task as qualified parking is a qualified transportation fringe and therefore non-taxable, up to certain dollar amounts. Talk to your payroll professional before making any changes.

The difficulty comes into play when a taxpayer owns or leases all or a portion of a parking facility or lot. The regulation is applicable anytime a lease gives the lessee access to the parking facilities as part of the lease, whether listed separately or not. Some calculations are required under the regulations. The order listed below is not the order in the regulations, but is a more efficient order in which to do the steps.

Determine if the entity has any employee reserved spots. If the answer is yes, the rest of the calculations must be done. However, the regulations do allow an entity to change their reserved employee parking until March 31, 2019, and treat the change as if it was made on January 1, 2018. For every employee reserved parking spot, a proportionate amount of the parking lot expenses will be allocated to the spot and will be considered nondeductible expenses.

For example, there are ten reserved employee spots and 100 total spots. If the reserved employee spots are unreserved by March 31, 2019, then 0% (0/100) of the parking lot expenses will be nondeductible under this step. If on March 31, 2019, ten spots are still reserved, then 10% (10/100) of the total parking lot expenses will be nondeductible.
Determine the primary use of the remaining parking lot spots. Primary use means greater than 50%. On any regular business day, this is the percentage of those remaining parking spots used by the general public. Note that spots that are typically empty during business hours are considered used by the general public.

For example, we have the same 100 spots from above. The entity chose not to change the reserved employee spots, so there are ten reserved employee spots. That means that there are 90 (100-10) remaining parking spots. If greater than 50% are for the general public (non-employees), the primary use test says the general public is the primary user. So if 46 ((90 spots x 50%) + 1) are used by the general public (i.e., non-employee spots), the primary purpose is the general public, and none of those 90 spots will have nondeductible expenses.
If you have no employee reserved spots (by March 31, 2019) and the primary use of the parking lot is for the general public, you are done. Otherwise, you have to calculate what the parking expenses are. This includes costs for repairs and maintenance of the parking lot, utilities related to the parking lot (such as lights), insurance for the parking lot, property taxes related to the parking lot, interest related to the parking lot, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses and security. It also includes rent or lease payments for the parking lot. If the lot is not separately listed in the rent or lease payment of a building, then the allocable portion of the building rent that relates to the parking lot, and anything else that might be a parking lot expense, is included. The one exception is that depreciation of the lot is not considered a parking expense. The IRS has not given any guidance as to a reasonable methodology to allocate these expenses between the parking lot and the non-parking lot, other than to say that the reasonable allocation methods are allowable. The implications of this guidance appear to be the most challenging portion of the entire calculation.
Next, determine the deductible expenses that relate to reserved non-employee spots such as visitor or customer spots. Going back to our previous example, assume that there are ten visitor reserved spots. We will also assume that the total parking expenses are $1,000. In the first step, we said 10% went to reserved employee parking, so $100 is nondeductible. We have 10 out of 90 remaining spots that are visitor reserved which is 11%. We have $900 to allocate among the remaining spots. 11% of $900 is $100, which is deductible.
Finally, take all the remaining unreserved spots and allocate costs based on typical usage 100c. So we have $800 and 80 spots remaining to be allocated. If employees typically used 45 spots, then 45/80 * $800 = $450 is nondeductible for unreserved spots. Add the nondeductible reserved spots of $100 plus the nondeductible unreserved spots of $450 to get total taxable (nondeductible) expenditures of $550.

The nondeductible expenses are then, essentially, increasing taxable income for the entity. Therefore, in our example, if the entity previously had taxable income, the $550 would increase that taxable income, resulting in $115.50 more of income tax paid at a corporate level using the 21% rate. Pass-through entities would instead pass on that $550 of additional taxable income to the individual owners who would pay tax at their individual tax rate. If instead, the entity had a taxable loss before the $550, the $550 would decrease the amount of the taxable loss, thus reducing the net operating loss carryforwards allowed for corporations and reducing the tax losses to the individual owners in pass-through entities.

We do not know what the revised guidance issued by the IRS will contain. If the first two steps of the process indicate your entity will have no nondeductible parking expenses, and there are no other nondeductible qualified transportation fringes, complete your tax filing as usual. If instead, this would result in nondeductible expenses, you will need to determine how to proceed.

If you can extend the tax return and wait to file, that may be the most efficient way to deal with this uncertainty. You could always file either with the nondeductible expenses or without the nondeductible expenses and amend the return at a later date if the IRS does not issue revised regulations to match the manner in which you have filed. However, that results in additional preparation fees for amended returns and, if no tax was initially paid, penalties and interest for the late filing.

Also consider whether changes to reserved employee parking should be made now or wait until closer to March 31, 2019, in case the regulations change.

This area of tax law may be a moving target, but these are the current regulations. Talk with your tax return preparer for further information.

The Michigan School Business Officials Annual Conference will be held at the DeVos Place in Grand Rapids, April 30-May 2, 2019. Members of Yeo & Yeo’s Education Services Group will present four of the sessions. We welcome you to join us to gain new insights into managing your Michigan school.

Ethics and Fraud Prevention – Jennifer Watkins, CPA
Learn about the common ethical dilemmas that arise in schools and examine examples of actual fraud that have occurred at local school districts and what you can do to prevent it from happening in your district.

Federal Procedures Manual and Policy Writing – Kristi Krafft-Bellsky, CPA, and Taylor Diener, CPA
Learn policies and procedures for federal requirements and get examples. After taking this class no one should have write-ups in their audit for procedures.

IT Vendor Fraud – Tim Crosson Jr., CPA
Learn the issue/risks with IT vendor fraud and ways your school district can mitigate those risks through necessary controls.

Frequently Found Audit Issues – Jennifer Watkins, CPA
Learn common findings in audit compliance, internal controls and other deficiencies from both an auditor’s perspective, as well as from MDE.

We encourage you to attend. Register and learn more about the MSBO Annual Conference.

The new FASB ASU 2016-14, Presentation of Financial Statements of Non-Profit Entities, is now in effect for year-ends December 15, 2018, and later. One of the major changes with this standard is the change in classes of net assets to “without donor restrictions” and “with donor restrictions.” Not only does this standard change the look of the financial statements, but it also affects the organization’s policies and procedures. Nonprofits should ensure they have a net asset policy that reflects these updates.

The policy should document how contributions and grants are identified as having donor restrictions, how these items are recorded, how the restrictions are tracked, and how expenses are applied. The policy should also use the new terminology rather than the old unrestricted, temporarily restricted, and permanently restricted classifications. Keep in mind, the organization still needs to be able to segregate the donor-restricted items between those that are permanent and temporary.

Finally, the policy should address how the organization identifies restrictions that are received and met in the same fiscal year, whether they are recorded through “with donor restrictions” or “without donor restrictions.”

It’s also important to keep in mind any other policies that include net asset classification terminology so that these can be updated as well for the new standard.

Check Out Our eBook on Creating Policies for Your Nonprofit

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As we get into the last quarter of the fiscal year, it’s time to start thinking ahead of all of the year-end tasks that await. In many cases, preparing the required Management’s Discussion and Analysis (MD&A) is sometimes more of an afterthought than something at the top of the list. The MD&A is to provide an objective and easily readable analysis of your district’s financial activities based on currently known facts, decisions, or conditions. The MD&A should always be presented before the basic financial statements as it is intended to provide a broad picture of how the year went, for an individual who doesn’t necessarily understand how to read the rest of the financial statements.

Although it’s called Management’s Discussion and Analysis and should be written from Management’s perspective, GASB has indicated a few required components that must be included to make sure useful information is presented. The main goal is to focus on the primary government (district-wide focus, excluding any potential component units) activities for the current year compared to the prior year and should be in a summary format, not a duplication of information presented in the basic financial statements.

At a minimum, the MD&A should describe the basic financial statements and how they relate to each other and what information each statement provides, and convey an understanding of why the measurements used in the statements differ.

Next, the following information is to be presented comparing the current year to the prior year, and would be expected to be presented in every MD&A, if they are applicable:

Total assets, distinguished between capital and other assets
Total liabilities, distinguished between long-term liabilities and other liabilities
Total net assets distinguished between:
- Amounts invested in capital assets, net of related debt
- Restricted amounts
- Unrestricted amounts
Program revenues, by major source
General revenues, by major source
Total revenues
Program expenses, at a minimum by function
Total expenses
Excess (deficiency) before contributions to endowments, special and extraordinary items and transfers
Contributions
Special and extraordinary items
Transfers
Change in net assets
Ending net assets

Now, remember, the goal of the MD&A is for an individual not well-versed in reading a financial statement to understand how the year went. Once the above information is presented, the true value in the MD&A is the analysis that management can offer to explain the numbers presented. GASB indicates you should present an analysis of the following information in the MD&A:

Has the overall financial position and results of operations improved or deteriorated this year compared to last year, and what were the reasons for the change? These reasons should include any known economic factors such as changes in tax, or employment bases that impacted the year.
Have there been significant changes in fund balances or fund net assets or the availability of any fund resources for future use?
What caused the variations between the original and final budget amounts as well as variances between the actual results and the final budget amendment for the General Fund?
What sort of activity took place relating to capital assets and long-term debt activity? This should include any changes in credit ratings and debt limitations.

Finally, GASB indicates you should describe known situations that would have a significant effect on financial position or results of operations going forward.

Aside from those minimum requirements, any additional information that is deemed of value to the users can be added to the MD&A at management’s discretion. To avoid duplication of efforts, it might be useful to print a copy of last year’s MD&A, and as you are preparing your final budget amendments and closing out the year, jot down some of those factors that differed from the prior year, and those are the key takeaways you will want to present in your MD&A. Also, if there are significant variances from the prior year that your auditor inquires about, those would also be helpful to include to explain variances within the MD&A.

If you would like assistance in preparing your MD&A, a Yeo & Yeo professional would be happy to help you verify that you comply with the minimum requirements.

Recent changes to federal tax law and accounting rules could affect whether you decide to lease or buy equipment or other fixed assets. Although there’s no universal “right” choice, many businesses that formerly leased assets are now deciding to buy them.

Pros and cons of leasing

From a cash flow perspective, leasing can be more attractive than buying. And leasing does provide some tax benefits: Lease payments generally are tax deductible as “ordinary and necessary” business expenses. (Annual deduction limits may apply.)

Leasing used to be advantageous from a financial reporting standpoint. But new accounting rules that bring leases to the lessee’s balance sheet go into effect in 2020 for calendar-year private companies. So, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans.

Leasing also has some potential drawbacks. Over the long run, leasing an asset may cost you more than buying it, and leasing doesn’t provide any buildup of equity. What’s more, you’re generally locked in for the entire lease term. So, you’re obligated to keep making lease payments even if you stop using the equipment. If the lease allows you to opt out before the term expires, you may have to pay an early-termination fee.

Pros and cons of buying

Historically, the primary advantage of buying over leasing has been that you’re free to use the assets as you see fit. But an advantage that has now come to the forefront is that Section 179 expensing and first-year bonus depreciation can provide big tax savings in the first year an asset is placed in service.

These two tax breaks were dramatically enhanced by the Tax Cuts and Jobs Act (TCJA) — enough so that you may be convinced to buy assets that your business might have leased in the past. Many businesses will be able to write off the full cost of most equipment in the year it’s purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules.

The primary downside of buying fixed assets is that you’re generally required to pay the full cost upfront or in installments, although the Sec. 179 and bonus depreciation tax benefits are still available for property that’s financed. If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating. If you decide to finance fixed asset purchases, be aware that the TCJA limits interest expense deductions (for businesses with more than $25 million in average annual gross receipts) to 30% of adjusted taxable income.

Decision time

When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, including tax implications. We can help you determine the approach that best suits your circumstances.

Shakespeare’s words don’t apply just to Julius Caesar; they also apply to calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes. Why? The Ides of March, more commonly known as March 15, is the federal income tax filing deadline for these “pass-through” entities.

Not-so-ancient history

Until the 2016 tax year, the filing deadline for partnerships was the same as that for individual taxpayers: April 15 (or shortly thereafter if April 15 fell on a weekend or holiday). One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April filing deadline. After all, partnership (and S corporation) income passes through to the owners. The earlier date allows owners to use the information contained in the pass-through entity forms to file their personal returns.

For partnerships with fiscal year ends, tax returns are now due the 15th day of the third month after the close of the tax year. The same deadline applies to fiscal-year S corporations. Under prior law, returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.

Avoiding a tragedy

If you haven’t filed your calendar-year partnership or S corporation return yet and are worried about having sufficient time to complete it, you can avoid the tragedy of a late return by filing for an extension. Under the current law, the maximum extension for calendar-year partnerships is six months (until September 16, 2019, for 2018 returns). This is up from five months under the old law. So the extension deadline is the same — only the length of the extension has changed. The extension deadline for calendar-year S corporations also is September 16, 2019, for 2018 returns.

Whether you’ll be filing a partnership or an S corporation return, you must file for the extension by March 15 if it’s a calendar-year entity.

Extending the drama

Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now.

But to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There probably won’t be any tax liability from the partnership or S corporation return. But, if filing for an extension for the entity return causes you to also have to file an extension for your personal return, it could cause you to owe interest and penalties in relation to your personal return.

We can help you file your tax returns on a timely basis or determine whether filing for an extension is appropriate. Contact us today.

Wednesday, March 13, 2019
1:00 PM – 2:30 PM EST

Webinar has passed, visit our Events page for future webinars.

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In January 2017, the Governmental Accounting Standards Board issued Statement No. 84 Fiduciary Activities (GASB 84). For school districts, the Statement is effective for fiscal years ending in 2020. GASB 84 defines and clarifies fiduciary activities and establishes criteria for identifying those activities with a focus on whether a government is controlling the assets and the beneficiaries with whom the relationship exists.

In this webinar, we will review the technical accounting changes in GASB 84 and show examples of how to execute the new standard in your school district. Then a Q&A will provide answers to common questions.

Webinar highlights include:

Review GASB 84 and the technical pieces that are most important
Walk through the implementation of GASB 84 (how to apply it at your district)
Provide answers to common questions: What fund and how many funds to use, how to budget, and more.
Show examples of activities that qualify as either Fiduciary or Governmental
Take individual examples of student activities and walk through the implementation to determine what fund type

This webinar qualifies for CPE credit.

CPE Credit: 1.8 CPE credit in the Accounting (Governmental) field of study may be awarded upon verification of participant attendance during live broadcast.
Program Level: Intermediate
Prerequisites: GASB financial statement knowledge
Advance Preparation: None
Business Managers, Assistant Superintendents of Business/Operations, CFO, Finance Directors, and others in the finance arena for school districts
Refund Policy: There is no fee associated with this webinar.
Yeo & Yeo CPE FAQ

PRESENTER:
Jennifer Watkins, CPA, Principal
Education Services Group
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While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers. Here are five deductions you may see shrink or disappear when you file your 2018 income tax return:

1. State and local tax deduction. For 2018 through 2025, your total itemized deduction for all state and local taxes combined — including property tax — is limited to $10,000 ($5,000 if you’re married and filing separately). You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.

2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. For 2018 through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with some limited exceptions.

3. Home equity debt interest deduction. Before the TCJA, an itemized deduction could be claimed for interest on up to $100,000 of home equity debt used for any purpose, such as to pay off credit cards (for which interest isn’t deductible). The TCJA effectively limits the home equity interest deduction for 2018 through 2025 to debt that would qualify for the home mortgage interest deduction.

4. Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018 through 2025. If you’re an employee and work from home, this includes the home office deduction. (Business owners and the self-employed may still be able to claim a home office deduction against their business or self-employment income.)

5. Personal casualty and theft loss deduction. For 2018 through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.

Be aware that additional rules and limits apply to many of these deductions. Also keep in mind that the TCJA nearly doubles the standard deduction. The combination of a much larger standard deduction and the reduction or elimination of many itemized deductions means that, even if itemizing has typically benefited you in the past, you might be better off taking the standard deduction when you file your 2018 return. Please contact us with any questions you have.

Nonprofits have strict compliance rules for what they can – or, more correctly, cannot – do related to lobbying and political expenditures. Although these terms seem to complement one another, they are in fact distinct from each other, and the layman’s understanding of the terms is not the same as the IRS’s definitions in most cases.

Worse yet, having a wrong understanding of these terms can cause a nonprofit to be subject to more income tax than they should be, or to subject themselves to an IRS audit. Therefore, it is imperative to understand the differences in these activities, and how they impact various tax-exempt designations, to eliminate confusion and ensure your organization complies with the intentions of the IRS.

Read Yeo & Yeo’s eBook, Lobbying and Political Expenditures for Nonprofits to learn more:

What is lobbying?
Considerations in making a 501(h) election
Political expenditures: 501(c)(3) vs. Non-501(c)(3)

Litigation Support is the process of providing consultation and support services to attorneys regarding current and pending cases. Below I have outlined six examples of how CPAs can bring value to attorneys when they are assisting their clients.

1.Lost Profits – If a company experiences a loss such as a fire or other damage, and is then out of business (or a portion of their business) for some time, interruption needs to be valued. Insurance companies can be very particular when determining a calculation of lost profits. An experienced CPA can prepare a fully supported calculation of lost profits that can be compared with the insurance companies’ calculation. The additional calculation of value in Litigation Support could make a case for a substantial increase in the insurance proceeds, which ultimately would benefit the attorney’s client.

2.Breach of Contract – If a former employee fails to comply with a company’s non-solicitation agreement and begins convincing clients to move their business to his/her new employer, damages must be calculated. Knowledgeable CPAs can calculate the damages associated with the breach and work with attorneys to successfully sue the former employee and their new employer to pay for the damages caused.

3.Wrongful Death – In the unfortunate case of accidents in the workplace that result in death, CPAs can help. They can represent insurance companies, perform calculations about the economic impact of the accident and ultimately help family members receive reparations during this difficult time.

4.Divorce Engagements / Family Law – When assisting attorneys with divorce cases, a CPA’s involvement can extend far beyond preparing a valuation of the family business. CPAs can work with clients to identify marital assets and allocate the assets and liabilities among the parties. With the help of Forensics Professionals, CPAs can assist in finding hidden assets, as well. CPAs can also work with either spouse to invest their money appropriately and ensure that it doesn’t run out in the future.

5.Employee Theft – Fraud and embezzlement cases continue to increase every year. Experienced CPAs can navigate through the multitude of papers and reports to provide a detailed, credible analysis of the amount of loss. They can also provide internal control studies to help reduce the possibility of future employee theft.

6.Tax Effect – With each of the above instances, and whenever damages are considered or money changes hands, there are tax consequences for both sides. CPAs can work with attorneys in drafting a settlement with the best possible tax outcome for their clients.

The competency, experience and qualifications of the CPA are extremely important in Litigation Support engagements. Juries and judges have a high expectation of CPAs and an even higher expectation of specialists. Be sure to choose a CPA that is accustomed to Litigation Support and cross-examination.

When Yeo & Yeo’s Litigation Support Services Group is referred to an attorney’s client for a specific reason, we often find that, because of our unique qualifications and experience, we can provide assistance well beyond the standard calculations of damages. A CPA’s involvement throughout your case can include:

Assisting in preparing interrogatories and request for production of documents
Researching and analyzing financial issues
Understanding the tax effects of various outcomes
Assisting in preparation for depositions and trial
Providing expert witness testimony

The value of a CPA in litigation support can be invaluable if their expertise is applied appropriately. The examples above help portray a small amount of the breadth and depth of what our Litigation Support Services Group can offer you in order to secure the best possible outcome for your clients. Make Yeo & Yeo your first call when you have a new litigation support case – we can help and guide you through all of the opportunities and resources we have available to help you and your client be successful.

The Michigan Department of Licensing and Regulatory Affairs (LARA) has released posters for the Paid Medical Leave Act (PMLA) and Workforce Opportunity Wage Act which go into effect March 29, 2019. LARA also issued Frequently Asked Questions (FAQs) about the PMLA.

In December, Governor Rick Snyder signed into law the Paid Medical Leave Act, formerly known as “Earned Sick Time Act,” and Public Act 368 of 2018 amending the Improved Workforce Opportunity Wage Act, both of which affect most Michigan businesses.

The Workforce Opportunity Wage Act raises the minimum wage to $9.45 effective March 29, 2019. The minimum wage rate will increase every January 1 thereafter until it reaches $12.05 in 2030. The required poster summarizes the general requirements of the Act. Employers are required to display workplace posters in a conspicuous and accessible place. Visit Michigan.gov to download and print the poster, or directly access the poster here.

LARA also released FAQs about the PMLA, also located on the Michigan.gov website. Read the FAQs here.

For detailed highlights of the PMLA and minimum wage, please read Yeo & Yeo’s prior blog post in December here.

Yeo & Yeo will continue to keep you informed should additional information be released about PMLA. Please contact Yeo & Yeo if you have questions or need assistance with implementing these laws into your payroll process.

In January 2017, the Governmental Accounting Standards Board issued Statement No. 84 Fiduciary Activities (GASB 84). For school districts, the Statement is effective for fiscal years ending in 2020. GASB 84 defines and clarifies fiduciary activities and establishes criteria for identifying those activities with a focus on whether a government is controlling the assets and the beneficiaries with whom the relationship exists.

The webinar has concluded.