Treasury Warns of New Collections Scam

Scammers are Attempting to Collect Past-due Tax Debts with Fake Letters

Michigan taxpayers with past-due tax debts should be aware of a new scam making the rounds through the U.S. Postal Service, according to the Michigan Department of Treasury.

In the scheme, taxpayers are sent what appears to be a government-looking letter about an overdue tax bill, asking the taxpayer to immediately call a toll-free number to resolve a tax debt or face asset seizure. The correspondence appears credible to the taxpayer because it uses specific personal facts about the outstanding tax debt pulled directly from publicly available information. The scammer’s letter attempts to lure the taxpayer into a situation where they could make a payment to a criminal.

Taxpayers who receive a letter from a scammer or have questions about their state debts should call Treasury’s Collections Service Center at 1-866-218-7224. A customer service representative can log the scam, verify outstanding state debts and provide flexible payment options. To learn more about Michigan’s taxes and the collections process, go to www.michigan.gov/taxes or follow the state Treasury Department on Twitter at @MITreasury.

Scams at this time of year are surging, from tax-related schemes to holiday phishing attempts. Yeo & Yeo shares key practices that can help you prevent falling victim to such scams.

Do not click on suspicious links or attachments in an email or call a number sent via email, mail, text or phone message 100c. Instead, go through an independent source such as an online google search to go to the company’s website for contact information and verification.
Do not reveal personal or company information until you have safely verified the source.
Keep computers and mobile devices secure by keeping all software updated and password protecting all access.
Stay abreast of current scams by signing up for free scam alerts from the Federal Trade Commission at ftc.gov/scams.

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2019. 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.

January 31

File 2018 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
Provide copies of 2018 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
File 2018 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2018 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

February 28

File 2018 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 1.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2018 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2018 contributions to pension and profit-sharing plans.

The familiar W-4 Employee’s Withholding Allowance Certificate hasn’t undergone many significant changes in recent years.

However, as the Tax Cuts and Jobs Act (TCJA) completely overhauled the tax rules for individuals, the IRS has been hard at work revising the W-4. This past summer, the agency released a couple of drafts of the new version and its accompanying instructions, and invited comments from the public.

Recently, however, the IRS announced it’s postponing the application of the new version until 2020 while it works out some kinks. “Launching the redesigned form in 2020 will allow the Treasury and the IRS to properly implement changes to the withholding system and ensure taxpayers have a positive and simplified experience,” said U.S. Secretary of the Treasury Steven T. Mnuchin.

While we wait, here’s an overview of the evolution of this new form.

Individual Tax Changes

The TCJA has brought about a slew of tax changes. Among the key provisions affecting individuals are:

1. Most individual tax rates have been lowered and tax brackets adjusted. While the lowest rate remains at 10%, the top rate is reduced from 39.6% to 37%. In addition, the method for indexing future tax bracket adjustments has been changed, which generally is expected to result in smaller inflation-based increases.

2. Personal exemptions, including those for qualified dependents, have been eliminated. This may be offset somewhat for certain families by an increase in the Child Tax Credit (CTC), which has been doubled to $2,000. Of that amount, $1,400 is refundable.

3. Some itemized deductions have been scaled back and others eliminated. For instance, the deduction for state and local tax payments is limited to $10,000 annually. No deduction is allowed for miscellaneous expenses, including unreimbursed employee business expenses.

Because of these and other related changes, millions of employees who previously itemized deductions may be claiming the standard deduction. This standard deduction generally is effective for 2018 and is scheduled to expire December 31, 2025.

Highlights of W-4 Drafts

Tax simplification was one of the initial objectives when Congress tackled tax reform legislation. As a result, the W-4 the IRS initially proposed was only two pages long, half its previous length. The accompanying instructions, however, were 11 pages. Previously, the instructions were incorporated into the four-page W-4 document.

The draft W-4 contains no place to list the number of allowances claimed. What’s more, some historical components — including the Personal Allowances Worksheet, the Two-Earners/Multiple Jobs Worksheet — have disappeared.

Instead of featuring the number of allowances, the IRS added lines for the optional reporting of:

non-wage income that isn’t subject to withholding,
expected bonuses,
itemized deductions,
credits like the CTC, and
wages of other household members.

Thus, withholding is tied directly to the calculation for individual income tax liability, rather than the number of allowances. Although this may be a more accurate method, it’s also more complicated on the front end.

Some critics maintain that employees may not be comfortable with sharing this information with employers. The American Institute of Certified Public Accountants (AICPA) has strongly objected to the proposal.

On the flip side, the IRS has made it clear that employers and employees will have the option of continuing to use the current W-4s. This reflects the agency’s goal to make the system “backwards compatible.” So, employees don’t have to file a new form and employers can rely on the ones they have on file.

Questions and Confusion

The new W-4 drafts seem to raise as many questions as they provide answers. Employers remain confused about certain aspects, such as if the new and old forms will co-exist in the same payroll system. Also, because the new withholding approach is tied to tax liability calculations, employees may be inclined to re-file W-4s whenever they get a pay raise. Other changes in circumstances might require frequent updates.

Bottom line: Due to the new format and the extra calculations, it may be more complicated for employees to figure out their withholding accurately.

An important issue in personal injury and economic damages cases is whether the plaintiff will owe taxes on the settlement proceeds or an amount awarded by the court.

Injured parties who are unexpectedly hit with a hefty tax bill might not be made “whole” again, as demonstrated by this recent U.S. Tax Court case. (Zinger v. Commissioner, T.C. No. 2018-33, July 2, 2018.)

Employee Battles Army

In 2011, Nicole Zinger worked for the U.S. Army. One night, she was in a car accident on her drive home from work. Zinger’s injuries required physical therapy and her supervisor allowed her to classify the time she spends on treatments as sick time. That supervisor was reassigned in late 2011.

Zinger’s new supervisor was unaware of her accident and he was stricter regarding time-off requests. After a two-week vacation, Zinger’s grandmother fell ill and eventually died, requiring Zinger to take additional time off. When Zinger returned to work from her bereavement leave, her desk had been moved, isolating her from coworkers.

Zinger alleged that she often felt “belittled and personally attacked” by her new supervisor. She testified that, because of her interactions with the supervisor, “her heart began racing, she experienced shortness of breath, and she felt as though she might be having a heart attack.”

In May 2012, Zinger’s blood test revealed an elevated white blood cell count and she was placed on medical leave to determine her condition. When she returned to work she received a memorandum of reprimand from her supervisor for “discourteous behavior toward a supervisor.” Zinger subsequently filed a formal written grievance to dispute her supervisor’s memorandum. Her grievance listed Zinger’s medical issues and conditions, including “chest pains, shortness of breaths, hypertension due to stress, high blood pressure, and high white blood cell count.”

In June, Zinger took another medical leave to undergo additional testing. Her doctor identified her condition as anxiety, panic attacks and hypothyroidism. Her treatment included medication, rest and a stress-free environment. When Zinger returned to work in August she had lost her computer access and security clearance. She was required to sit at a desk with little work to perform.

Shortly thereafter, the U.S. Equal Employment Opportunity Commission (EEOC) began an investigation to determine whether Zinger was discriminated against based on sex and whether she was subjected to a hostile work environment. As a result, Zinger was placed on administrative leave while the EEOC conducted its investigation.

In January 2013, Zinger settled her EEOC complaint with the Army for $20,000. Pursuant to the settlement agreement, she resigned from federal service. The agreement didn’t refer to Zinger’s formal written grievance. It also didn’t identify any of her personal injuries or sickness.

Complex Tax Issues

Based on the nature of Zinger’s claims against the Army, she and her husband didn’t report the settlement proceeds on her 2013 federal income tax return.

The IRS issued a notice of deficiency for the unreported settlement. The Tax Court turned to the settlement agreement to determine how to classify the settlement proceeds. The agreement indicated that its purpose was to settle the taxpayer’s EEOC complaint. The EEOC statement of claims neither references any injuries or sickness nor allocates the $20,000 settlement payment as compensation to Zinger for any injuries or sickness.

Instead, the statement of claims explicitly states that the EEOC was investigating whether Zinger had been subjected to a hostile work environment or was discriminated against on the basis of sex. Therefore, the agreement suggests that the Army didn’t intend to compensate Zinger for injuries or sickness.

Because the settlement agreement didn’t reference 1) the taxpayer’s physical injuries, 2) her written grievance against the Army, or 3) the EEOC complaint that listed her physical injuries, the court determined that the taxpayer didn’t meet the required burden of proof. Therefore, the payment received pursuant to the settlement agreement wasn’t excludable from the Zingers’ gross income for 2013.

Lesson Learned

This case shows the importance of detailed settlement agreements. A defendant may not want to admit wrongdoing. But what’s spelled in a settlement agreement provides evidence to prove whether the proceeds meet the requirements to be excluded from gross income. In this case, an ambiguous settlement agreement proved costly to the taxpayer.

Before settling a dispute, discuss potential tax issues with a financial expert to minimize the risk of IRS scrutiny.

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of Alex Wilson, CPA to manager. Along with his promotion, Wilson has transferred to Yeo & Yeo’s Alma office from Saginaw. Alex is a key member of the Firm’s agribusiness and construction service groups.

In addition to his role with Yeo & Yeo’s MAS division, Wilson is a member of the firm’s Agribusiness Services Group and the Construction Services Group. Wilson’s areas of expertise include business advisory services, strategic tax planning and Affordable Care Act reporting. He is also a member of the Leading Edge Alliance’s Young Professionals Steering Committee.

In addition to his role within Yeo & Yeo’s Management Advisory Services department, Wilson serves as a member of the MICPA Agribusiness Task Force, and the Leading Edge Alliance’s Young Professionals Steering Committee. At Yeo & Yeo, Wilson leads the Yeo Young Professionals group and serves as an advisor for the firm’s Career Advocacy Team.

In the community, Wilson volunteers with the Special Olympics Michigan and Central Michigan University’s Accounting Advisory Council.

The holiday season is fast approaching. It’s the time when people traditionally make gifts to charities. Generally, year-end donations increase the charitable deduction you can claim on the personal tax return you’ll file the next year. But 2018 is different from most previous tax years.

From 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) nearly doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. The TCJA also reduces or eliminates several itemized deductions.

As a result, millions of taxpayers who previously itemized deductions will instead claim the standard deduction for 2018, thereby eliminating the tax benefit from their charitable donations. Does it make more sense for you to itemize deductions or to take the standard deduction on your 2018 return? The answer to this question will determine your overall strategy for the rest of the year.

For those who will continue to itemize, it’s important to be creative at year end. Here are five ways to maximize the tax savings from your donations.

1. Bunch Donations

You can “bunch” donations in the tax years that you plan to itemize deductions, thereby exceeding the standard deduction amount. That way, you can reap tax rewards for your generosity by making donations that you can write off as itemized deductions.

If you expect to itemize deductions for 2018, consider increasing your charitable gift-giving at year end. You can generally deduct the full amount of cash contributions made this year, up to 60% of your adjusted gross income (AGI). Prior to the TCJA, the limit was 50% of AGI. Any excess is carried over for up to five years.

If you expect to claim the standard deduction for 2018, you might consider postponing large charitable gifts to 2019 or beyond, when you may be itemizing deductions. That way, you can still derive tax benefits for your donations.

2. Gift Property with Low Tax Basis

If you donate appreciated property to charity, your current deduction for those contributions is limited to 30% of your AGI. Any excess may be carried over for up to five years.

The value of the donation depends on how long you’ve owned the property. If you’ve owned donated property for more than a year, it would have qualified for a long-term gain had you sold it instead of donating it. In this situation, you can deduct its full fair market value on the date of the donation. However, if a sale of the donated property would have resulted in a short-term gain, you can deduct only your basis (generally, your initial cost).

Therefore, it makes sense to donate property with a low basis that you’ve owned longer than one year. For instance, suppose you acquired artwork for $5,000 in 2016 that’s now worth $15,000. If you donate the artwork to a charity in 2018, you can deduct $15,000. The appreciation in value from the date of acquisition to the date of the donation ($10,000) will never be taxed.

Conversely, you might decide to hold onto high-basis property, rather than donating it. Similarly, don’t donate low-basis property you have owned less than a year. Keep it until you qualify for a deduction based on the property’s full fair market value.

3. Set Up a Donor-Advised Fund

With a donor-advised fund, you can earmark money for future charitable gifts while qualifying for a tax deduction on your tax return. The money is invested and grows until it’s distributed to the designated charitable recipients.

Typically, a sponsoring financial institution manages the fund. It usually requires an initial minimum deposit of at least $1,000. In addition, you may have to pay annual fees to cover administrative and other expenses.

A donor-advised fund allows you to choose the qualified charitable organizations that will benefit from your generosity. Your recommendations are reviewed by staffers who verify that the charity is eligible to receive deductible contributions. Once the grant is approved, the money is sent to the specified charity, indicating that you’ve donated to the organization. Alternatively, gifts may be made anonymously.

The usual tax rules for charitable contributions apply. For instance, under the TCJA, current deductions to a donor-advised fund, when combined with other cash donations, are limited to 60% of AGI, with a five-year carryover for any excess.

4. Establish a Charitable Trust

A charitable remainder trust (CRT) can generate tax benefits in a year in which you expect to itemize deductions. How does it work? The CRT pays out income at regular intervals to the designated income beneficiary or beneficiaries (typically, you, your spouse or both). The trust terminates upon your death or a specified term of years. Then the remainder goes to the charity. The main tax benefits are as follows:

You can claim a charitable deduction based on the value of the remainder interest.

There’s no capital gains tax due on the value of any appreciated property transferred to the trust. The appreciation in value remains untaxed forever.

The property is removed from your taxable estate.

A CRT can be structured as a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). In either event, the term of the trust can’t exceed 20 years. With a CRAT, the payment must be a fixed amount equal to at least 5% of the initial value of the trust property, while a CRUT requires payment of a fixed percentage of not less than 5% of trust assets.

5. Transfer Funds from Your IRA

People age 70½ or older can choose to transfer funds directly from an IRA to a qualified charitable organization. Although the contribution isn’t deductible, it’s not subject to income tax, either. But because the donated IRA money would otherwise be taxed when you withdraw it, this treatment equates to a 100% deduction for the amount donated to charity.

The maximum amount you can transfer each year is $100,000. If your spouse has one or more IRAs set up in his or her own name and is also age 70½ or older, your spouse is entitled to a separate $100,000 annual limit.

To qualify for this tax break, the distribution must go directly from the IRA trustee to the charitable organization. In other words, the funds cannot pass through your hands on the way to the charity.

The transfer also counts as a required minimum distribution (RMD). Taxpayers age 70½ or older are required to take RMDs from their IRAs every year. So, you can effectively replace taxable RMDs with tax-free transfers to charity.

Act Now

There’s still time in 2018 to make moves that can cut your tax bill. Contact your tax advisor to review your personal situation and help modify your charitable giving strategy based on today’s tax law. If itemizing deductions is part of your tax plan for 2018, that could be a good reason to be especially generous this holiday season.

Prepaying property taxes related to the current year but due the following year has long been one of the most popular and effective year-end tax-planning strategies. But does it still make sense in 2018?

The answer, for some people, is yes — accelerating this expense will increase their itemized deductions, reducing their tax bills. But for many, particularly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.

What’s changed?

The TCJA made two changes that affect the viability of this strategy. First, it nearly doubled the standard deduction to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for singles and married couples filing separately, so fewer taxpayers will itemize. Second, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes.

For property tax prepayment to make sense, two things must happen:

You must itemize (that is, your itemized deductions must exceed the standard deduction), and
Your other SALT expenses for the year must be less than $10,000.

If you don’t itemize, or you’ve already used up your $10,000 limit (on income or sales taxes or on previous property tax installments), accelerating your next property tax installment will provide no benefit.

Example

Joe and Mary, a married couple filing jointly, have incurred $5,000 in state income taxes, $5,000 in property taxes, $18,000 in qualified mortgage interest, and $4,000 in charitable donations, for itemized deductions totaling $32,000. Their next installment of 2018 property taxes, $5,000, is due in the spring of 2019. They’ve already reached the $10,000 SALT limit, so prepaying property taxes won’t reduce their tax bill.

Now suppose they live in a state with no income tax. In that case, prepayment would potentially make sense because it would be within the SALT limit and would increase their 2018 itemized deductions.

Look before you leap

Before you prepay property taxes, review your situation carefully to be sure it will provide a tax benefit. And keep in mind that, just because prepayment will increase your 2018 itemized deductions, it doesn’t necessarily mean that’s the best strategy. For example, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a greater benefit over the two-year period.

For help determining whether prepaying property taxes makes sense for you this year, contact us. We can also suggest other year-end tips for reducing your taxes.

In September 2018, the Michigan legislature enacted an Earned Sick Time Act as well as increases in the minimum wage.

It is anticipated that both measures will take effect in March 2019, but it is expected that legislators will make significant adjustments before year-end.

Yeo & Yeo wants to keep you informed of the current status and will communicate changes as they become available.

Earned Sick Time Act

Under the new Earned Sick Time Act, Michigan workers will accrue one hour of paid sick leave for every 30 hours worked, capping out at 72 hours per year for larger businesses and 40 hours per year for small businesses.

Minimum Wage and Wages for Tipped Workers

The One Fair Wage Act involves a minimum wage increase to $10 in March 2019 and $12 by 2022. As written, the new law slowly brings minimum wage for tipped workers up to the same level as the regular minimum wage.

The holiday season is a great time for businesses to show their appreciation for employees and customers by giving them gifts or hosting holiday parties. Before you begin shopping or sending out invitations, though, it’s a good idea to find out whether the expense is tax deductible and whether it’s taxable to the recipient. Here’s a brief review of the rules.

Gifts to customers

When you make gifts to customers, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you need not include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift-wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as pens or stress balls imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (a gift basket for all to share, for example) as long as they’re “reasonable.”

Gifts to employees

Generally anything of value that you transfer to an employee is included in the employee’s taxable income (and, therefore, subject to income and payroll taxes) and deductible by you. But there’s an exception for noncash gifts that constitute “de minimis fringe benefits.”

These are items so small in value and given so infrequently that it would be administratively impracticable to account for them. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.

De minimis fringe benefits are not included in an employee’s taxable income yet are still deductible by you. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Keep in mind that cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.

Holiday parties

The Tax Cuts and Jobs Act reduced certain deductions for business-related meals and eliminated the deduction for business entertainment altogether. There’s an exception, however, for certain recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludible from recipients’ income) provided they’re primarily for the benefit of non-highly-compensated employees and their families. If customers also attend, holiday parties may be partially deductible.

Gifts that give back

If you’re thinking about giving holiday gifts to employees or customers or throwing a holiday party, contact us. With a little tax planning, you may receive a gift of your own from Uncle Sam.

Will you be age 50 or older on December 31? Are you still working? Are you already contributing to your 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE) up to the regular annual limit? Then you may want to make “catch-up” contributions by the end of the year. Increasing your retirement plan contributions can be particularly advantageous if your itemized deductions for 2018 will be smaller than in the past because of changes under the Tax Cuts and Jobs Act (TCJA).

Catching up

Catch-up contributions are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. They were designed to help taxpayers who didn’t save much for retirement earlier in their careers to “catch up.” But there’s no rule that limits catch-up contributions to such taxpayers.

So catch-up contributions can be a great option for anyone who is old enough to be eligible, has been maxing out their regular contribution limit and has sufficient earned income to contribute more. The contributions are generally pretax (except in the case of Roth accounts), so they can reduce your taxable income for the year.

More benefits now?

This additional reduction to taxable income might be especially beneficial in 2018 if in the past you had significant itemized deductions that now will be reduced or eliminated by the TCJA. For example, the TCJA eliminates miscellaneous itemized deductions subject to the 2% of adjusted gross income floor — such as unreimbursed employee expenses (including home-off expenses) and certain professional and investment fees.

If, say, in 2018 you have $5,000 of expenses that in the past would have qualified as miscellaneous itemized deductions, an additional $5,000 catch-up contribution can make up for the loss of those deductions. Plus, you benefit from adding to your retirement nest egg and potential tax-deferred growth.

Other deductions that are reduced or eliminated include state and local taxes, mortgage and home equity interest expenses, casualty and theft losses, and moving expenses. If these changes affect you, catch-up contributions can help make up for your reduced deductions.

2018 contribution limits

Under 2018 401(k) limits, if you’re age 50 or older and you have reached the $18,500 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,500. If your employer offers a SIMPLE instead, your regular contribution maxes out at $12,500 in 2018. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.

But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. Also keep in mind that additional rules and limits apply.

Additional options

Catch-up contributions are also available for IRAs, but the deadline for 2018 contributions is later: April 15, 2019. And whether your traditional IRA contributions will be deductible depends on your income and whether you or your spouse participates in an employer-sponsored retirement plan. Please contact us for more information about catch-up contributions and other year-end tax planning strategies.

Under the Tax Cuts and Jobs Act (TCJA), many more businesses are now eligible to use the cash method of accounting for federal tax purposes. The cash method offers greater tax-planning flexibility, allowing some businesses to defer taxable income. Newly eligible businesses should determine whether the cash method would be advantageous and, if so, consider switching methods.

What’s changed?

Previously, the cash method was unavailable to certain businesses, including:

C corporations — as well as partnerships (or limited liability companies taxed as partnerships) with C corporation partners — whose average annual gross receipts for the previous three tax years exceeded $5 million, and
Businesses required to account for inventories, whose average annual gross receipts for the previous three tax years exceeded $1 million ($10 million for certain industries).

In addition, construction companies whose average annual gross receipts for the previous three tax years exceeded $10 million were required to use the percentage-of-completion method (PCM) to account for taxable income from long-term contracts (except for certain home construction contracts). Generally, the PCM method is less favorable, from a tax perspective, than the completed-contract method.

The TCJA raised all of these thresholds to $25 million, beginning with the 2018 tax year. In other words, if your business’s average gross receipts for the previous three tax years is $25 million or less, you generally now will be eligible for the cash method, regardless of how your business is structured, your industry or whether you have inventories. And construction firms under the threshold need not use PCM for jobs expected to be completed within two years.

You’re also eligible for streamlined inventory accounting rules. And you’re exempt from the complex uniform capitalization rules, which require certain expenses to be capitalized as inventory costs.

Should you switch?

If you’re eligible to switch to the cash method, you need to determine whether it’s the right method for you. Usually, if a business’s receivables exceed its payables, the cash method will allow more income to be deferred than will the accrual method. (Note, however, that the TCJA has a provision that limits the cash method’s advantages for businesses that prepare audited financial statements or file their financial statements with certain government entities.) It’s also important to consider the costs of switching, which may include maintaining two sets of books.

The IRS has established procedures for obtaining automatic consent to such a change, beginning with the 2018 tax year, by filing Form 3115 with your tax return. Contact us to learn more.

If most of your money is tied up in your business, retirement can be a challenge. So if you haven’t already set up a tax-advantaged retirement plan, consider doing so this year. There’s still time to set one up and make contributions that will be deductible on your 2018 tax return!

More benefits

Not only are contributions tax deductible, but retirement plan funds can grow tax-deferred. If you might be subject to the 3.8% net investment income tax (NIIT), setting up and contributing to a retirement plan may be particularly beneficial because retirement plan contributions can reduce your modified adjusted gross income and thus help you reduce or avoid the NIIT.

If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements. But this can help you attract and retain good employees.

And if you have 100 or fewer employees, you may be eligible for a credit for setting up a plan. The credit is for 50% of start-up costs, up to $500. Remember, credits reduce your tax liability dollar-for-dollar, unlike deductions, which only reduce the amount of income subject to tax.

3 options to consider

Many types of retirement plans are available, but here are three of the most attractive to business owners trying to build up their own retirement savings:

1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2018 contributions as late as the due date of your 2018 tax return, including extensions — provided your plan exists on Dec. 31, 2018. For 2018, the maximum contribution is $55,000, or $61,000 if you are age 50 or older and your plan includes a 401(k) arrangement.

2. Simplified Employee Pension (SEP). This is also a defined contribution plan, and it provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2019 and still make deductible 2018 contributions as late as the due date of your 2018 income tax return, including extensions. In addition, a SEP is easy to administer. For 2018, the maximum SEP contribution is $55,000.

3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2018 is generally $220,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit.

You can make deductible 2018 defined benefit plan contributions until your tax return due date, including extensions, provided your plan exists on Dec. 31, 2018. Be aware that employer contributions generally are required.

Sound good?

If the benefits of setting up a retirement plan sound good, contact us. We can provide more information and help you choose the best retirement plan for your particular situation.

As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid surprise capital gains

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit.

Seller beware

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think beyond just taxes

Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.

But taxes are still an important factor to consider. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

“Donate to my nonprofit because 95% of our money goes towards programs.”

“Don’t donate to their nonprofit because 25% of their money goes to administration.”

These are common phrases heard when talking about nonprofits and charitable giving. What you may not know is that these phrases are referencing functional expenses. Functional expenses refer to the classification of expenses between program, management and general and fundraising. Additional subsets of the three main categories could also be shown.

There is a perception that management and general costs are “bad;” however, they can be seen as a positive.

Having a ‘healthy’ amount of overhead can show that the organization has the resources to effectively manage a grant or handle a donor’s request to ensure that funds are spent on a particular program or focus area.
If you are properly tracking the overhead costs, you may be able to negotiate a higher indirect cost rate with grantors.
Having almost all of your costs allocated to program may make an informed financial statement reader question if the cost allocations are incorrect or purposefully misleading; what else in the financial statements could be skewed?
If you have too little in management and general and fundraising, that may show the board that additional funding needs to be allotted to accounting and development functions to alleviate burden on the staff or help to maintain smooth operations.

All 501(c)3 organizations are required to show the functional expense classifications in their IRS Form 990, which is public information through guidestar.org. Additionally, many nonprofits show the allocations in their financial statements. Under the new FASB ASU 2016-14 Non-Profit Financial Reporting and Disclosures, all nonprofits will be required to show expenses by their natural and functional categories in a formal statement of functional expenses or a footnote in a grid format. Significant emphasis will be placed on the footnote disclosures about how the allocations were comprised and allocated. The new standard also provides additional guidance on what falls into each category, that may be different from how you are classifying now.

Costs can be allocated directly or based on an indirect allocation. Direct costs are fairly simple to allocate. As an example, program staff salaries are program, legal fees are likely administration, and event costs are fundraising. Note that supervision of program staff by a CEO and tasks like preparing grant billings, while related to a program, are considered management and general for the financial statements.

The difficulty is allocating expenses that cross categories or relate to the organization as a whole. The two main ways of allocating such costs are time studies and square footage analysis.

A time study is a period spent recording where an employee spends their time. Staff should select a “normal” week and track the time spent on each activity. Initially, an organization may do a quarterly time study and then scale back to an annual study after a thorough analysis has been performed.
A square footage study should be utilized for occupancy and overhead related items. Unless there are changes to the size or utilization of space, the square footage analysis can be utilized year after year. It is important to document your considerations of allocations, not only for footnote disclosure purposes but also as a potential audit consideration.

Properly stating the functional allocations is extremely important. As mentioned, donors and grantors may be looking at the allocations when making funding decisions. It could also be used as a tool to make adjustments to the budget.

Are we not spending enough on fundraising and adding costs to the category that could potentially lead to additional contribution revenue?
Is there a program that has high costs but does not add value to the organization’s mission?

While nonprofits want to spend 100 percent of their time on their mission, it is important to remember that nonprofits are still businesses and have certain supporting service costs related to running the organization. To be a well-managed organization or fundraise for contributions, a certain level of non-program costs are incurred.

Additional information about functional expense allocations, including guidance under the new FASB guidelines, can be found in our whitepaper, Functional Expense Allocation for Nonprofits After FASB ASU 2016-14.

During a nonprofit’s day-to-day operations, various instances will require a credit card to be used, including payment for travel and emergency purposes, and for convenience in running programs smoothly. Additionally, many organizations are looking at credit cards to enroll in auto-pay and receive various rewards that benefit the organization.

Ensure that your nonprofit has adopted and is staying up to date with its credit card policy. Following are a few things to consider:

- Who should have a credit card? – Is it just the Executive Director? Program staff? Try to strike a balance between having too many credit cards, yet still providing easy access for those who need to use one.
- What should be bought on a credit card? – Travel, business meals, emergency supplies and online bill-pay are reasonable. However, avoid making unnecessary small purchases that would be better managed in bulk.
- What are the limits? – Set reasonable limits for each credit card. Monitor use to ensure that the limits are ‘right-sized.’
- How will the cards be secured? – Ensure that any shared cards are locked away, and establish a procedure for revoking a card once an employee leaves. Do not use a debit card as that allows a fraudster to have unlimited access to your bank account.
- What type of support is needed for the purchases? – All items must have a detailed receipt (including meals). How will staff be held liable for missing documentation? What are the repercussions of multiple instances of missing support? Is there a limit for not needing a receipt?
  - A simple tip is to take a photo of receipts and then email them to the appropriate staff collecting receipts.
- Who is approving purchases? – If a card is shared, there should be some sort of check in/out process, and purchases should be approved in advance. All statements should be reviewed and approved by management. No one should review their own statement, which may mean that a board member reviews the Executive Director’s purchases.

Check Out Our eBook on Creating Policies for Your Nonprofit

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Recently I attended the Michigan Association of CPAs Agribusiness Conference and came away with several items to share. The agribusiness industry is going through many changes, some tied to tax reform, and some based on economic and weather changes. The presenters shared their thoughts on the status of the industry in general and, while their opinions are not concrete, the fact that they had consistent views made their opinions more credible.

Industry Outlook

Taken in whole, 2018 appears to be a down year. While some areas are producing crops at near-record yields, the economic strains on the market are going to limit profitability somewhat. For example, China is the largest importer of soybeans from the United States, and with tariffs and lack of movement with new trade deals being made, trading was down 97 percent through October between the U.S. and China.

However, one point that was made clear was that the numbers being reported are not that far removed from the norm of pre-2012 when the agribusiness sector hit quite a boom for three to five years. These outputs, across many commodities, are returning to what the rolling average was before.

Michigan PA 116

The Farmland Preservation Program has received more resources and overhauled its system for reporting and processing PA 116 agreements. A few key reminders to consider:

Several counties were recoded, so it is important to ensure you have the correct County Code on all of your agreements. This will also help expedite the return processing on the back end, resulting in more timely refunds.

Regarding splitting and/or transferring parcels and agreements, please make sure that you, the local assessor, and the Preservation office are all on the same page with altering any agreement. If handled improperly, it could result in an agreement being disallowed, triggering repayment of previously received credits.

Tax Reform Issues

The Tax Cuts and Jobs Act brings several key changes in preparing tax returns for agribusinesses. First, for all pass-through entities, there is a new deduction that will reduce taxable income by up to 20 percent for the owner/shareholder. Also, if the owner deals with cooperatives and receives flow-through deductions (formerly known as DPAD), additional calculations need to be made.

It is strongly recommended that you contact your CPA to ensure that you are getting the best tax advice for your agribusiness operation.

Fraud in some form is happening in almost all school districts. Fraud is most prevalent where there is cash or small inventory items. Examples include ticket sales at athletic games or concessions stands, food items in the cafeteria, and even office supplies. Fraud at a higher level is also common. This could happen by creating fake bank documentation or ghost employees, embezzling from student accounts, or getting kickbacks from vendors that are related parties.

The best way to ensure your district is shielded against fraudulent situations is to implement strong internal controls. Consider these five ways to safeguard your assets through controls over the business office and other decentralized cash collections. Also, learn why employees commit fraud, the red flags to watch for, and the most common ways fraud is perpetrated.

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

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

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

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

Yeo & Yeo is pleased to provide 2019 Tax Planning Calendars and other helpful tax planning resources.

What are the due dates for next year’s tax filings? When are the various tax payments due?

The 2019 Tax Calendar for Business and the 2019 Tax Calendar for Individuals and Trusts are valuable tools to help you plan for the deadlines.

What can you do now – before year-end – to save tax dollars?

Yeo & Yeo’s 2018 Year-end Tax Planning Checklist of action items may help you or your business save tax dollars. Please review the checklist and contact us soon if you would like help with deciding which tax-saving moves to make.

For more extensive information, visit Yeo & Yeo’s Tax Guide Online.

The Michigan Attorney General’s office recently completed an investigation regarding concerns of allegedly deceptive language used in a nonprofit organization’s solicitation materials.

The main issue, in summary, was that the language used in the solicitation materials stated that a very high percentage “of all donations go directly to programs” for charitable purposes. The organization that was investigated receives a large amount of gifts-in-kind each year. These gifts, per Generally Accepted Accounting Principles, are required to be recorded on the financial statements as revenue with an offsetting expense. Therefore, due largely to the amount of gifts in kind that were recorded, the organization had a very high program expense ratio.

The issue raised by the Attorney General was that the phrase used in the solicitation materials (noted above) misrepresented the true program percentage of cash donations. Potential donors would reasonably expect that a very high percentage of their cash donation would be directly used for programs, when in reality the actual percentage was much lower. In other words, a potential donor’s cash donation would be used to fund significantly more fundraising and administrative costs than was represented by the statement in the solicitation materials. The Attorney General concluded that the statement was misleading.

Similarly, other language was questioned as well, such as making a statement that a certain dollar amount was able to provide a specific, significant benefit for charitable purposes. This was also deemed to be misleading since the donor would reasonably expect that their dollar would go directly to funding this benefit, but the organization did not restrict the donations received to procuring this benefit.

In the end a settlement was reached, which included fines in excess of a quarter million dollars. While the organization has maintained that there was no intention to deceive, this example illustrates the need to carefully choose the language used in solicitation materials. As nonprofit organizations prepare solicitation materials for the upcoming holiday season and beyond, Yeo & Yeo encourages those with in-kind donations to review the language used and ensure the appeal does not misrepresent the organization’s program expense ratio specific to cash donations, or the intended use of potential donations.

Please contact your Yeo & Yeo Principal or Nonprofit Services Group member if you would like assistance.