You Won the Election, But Do You Know the Compliance Challenges Ahead?

Newly elected local government officials face many challenges. Often, they do not realize their role in ensuring that the accounting and required filings are completed not only completely and accurately, but timely as well. We understand that you may need assistance in identifying resources to aid your transition, and a heads-up on key deadlines. Following are explanations of commonly misunderstood or unknown items that will help you on your new journey. For future efficiency, save the websites as favorites in your web browser as you’ll likely visit them often. If you need assistance with complying in any of these areas, don’t hesitate to reach out.

1.Uniform Chart of Accounts

A uniform chart of accounts is required to be used in local governments’ accounting systems. Early implementation of the most recent version is recommended. A due date for some time in 2019 will be issued at a later date.

Michigan Department of Treasury Uniform Chart of Accounts for Local Units of Government

2.Accounting Procedures Manual

The Accounting Procedures Manual was developed to assist local government officials in applying accounting procedures in their local units of government.

Michigan Department of Treasury Accounting Procedures Manual

3.Uniform Budget Manual

The Uniform Budget Manual provides local governments with the provisions of the budget act, provides recommendations for compliance, suggested timelines, and sample budgets. Budgets must be approved before the start of a fiscal year, and budget amendments must be approved before the end of a fiscal year. Refer to the manual and your local unit’s internal policies for further information.

Michigan Department of Treasury Uniform Budget Manual

4.Audit

Local units with a population of 4,000 or more are required to have an audit every year, which is due no later than six months after the local unit’s fiscal year end. An annual audit is required for charter townships, regardless of population. Local units with a population less than 4,000 are required to have an audit every other year. This does not mean that the smaller units cannot have an audit every year; the Department of Treasury strongly recommends an audit every year.

5.Michigan Form F-65

Local units must file Form F-65 every year regardless of the unit’s population or fiscal year end. Primary units are the only governments required to submit the F-65. Primary units include counties, townships, cities and villages.

Instructions for Preparing Form F-65

6.Public Act 51

Recipients of Michigan Transportation Funds are required to report their annual earnings and expenditures to the Michigan Department of Transportation (MDOT). The report is due not more than 120 days after the end of a local unit’s fiscal year.

Instructions for Preparing the Act 51

7.Pension and Retiree healthcare Reports (PA 202)

Local units of government that offer or provide retirement pension benefits and retirement health benefits are required to report additional information related to these plans no later than six months after the end of the local unit’s fiscal year. If your local unit of government does not offer a retirement pension system or retirement healthcare system, no action is required.

Local Retirement Reporting Information

8.Qualifying Statement

Qualifying Statements are due annually no later than six months after the local unit’s fiscal year end.

Click here to file

Qualifying Statement General Instructions
Qualifying Statement Bulletin 6

If you have questions, contact your local Yeo & Yeo professional.

Have you ever contemplated purchasing a second home? Have you wondered about renting out the home to cover some of the costs? Consider how the following pros and cons will affect your tax situation.

Usually, when you own a second home, the only expenses that are deductible are mortgage interest and property taxes which are deducted on Schedule A of your Form 1040. One of the perks to renting out your second home is that you have the opportunity to deduct expenses that normally would not be deductible, such as utilities, homeowners insurance, and minor repairs (i.e., painting, replacing a small appliance such as a microwave, etc.).

However, to benefit from the additional costs, you must pay close attention to the personal-use days of the home. In order for a second residence to be considered a rental property, making the usually non-deductible tax deductible, the home must be rented for more than 14 days (at fair rental value) and personal use can be no more than 14 days or 10 percent of the number of days the home is rented, whichever is greater.

The fair rental value will vary depending upon the location and condition of the dwelling. Refer to the U.S. Department of Housing and Urban Development (HUD) Fair Market Rents Documentation System. This website can help you determine the fair rental value of your home.

The IRS deems personal use to be any day that the home is used by:

1. You or any other person who has an interest in it, unless a fair rental price is charged
2. A member of your family
3. Anyone who is charged less than fair value rental

When the personal use days are restricted to the 14 days or less than 10 percent of total days rented, whichever is greater, the owner reports 100 percent of all expenses directly related to rental activity on Schedule E of Form 1040 along with a portion of expenses not directly related to the rental activity (i.e., property taxes, mortgage interest, etc.). As the owner, you also can depreciate the home, thus reducing the rental income even more. However, this could affect the treatment of any gain or loss on a future sale, so it is something that should be discussed with a tax professional before electing to do so.

Many aspects must be considered when thinking about renting your second home. It is always best to get advice from a tax professional before making final decisions. Please contact me if you would like additional information.

The Tax Cuts and Jobs Act (TCJA) has enhanced two depreciation-related breaks that are popular year-end tax planning tools for businesses. To take advantage of these breaks, you must purchase qualifying assets and place them in service by the end of the tax year. That means there’s still time to reduce your 2018 tax liability with these breaks, but you need to act soon.

Section 179 expensing

Sec. 179 expensing is valuable because it allows businesses to deduct up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. Sec. 179 expensing can be used for assets such as equipment, furniture and software. Beginning in 2018, the TCJA expanded the list of qualifying assets to include qualified improvement property, certain property used primarily to furnish lodging and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.

The maximum Sec. 179 deduction for 2018 is $1 million, up from $510,000 for 2017. The deduction begins to phase out dollar-for-dollar for 2018 when total asset acquisitions for the tax year exceed $2.5 million, up from $2.03 million for 2017.

100% bonus depreciation

For qualified assets that your business places in service in 2018, the TCJA allows you to claim 100% first-year bonus depreciation • compared to 50% in 2017. This break is available when buying computer systems, software, machinery, equipment and office furniture. The TCJA has expanded eligible assets to include used assets; previously, only new assets were eligible.

However, due to a TCJA drafting error, qualified improvement property will be eligible only if a technical correction is issued. Also be aware that, under the TCJA, certain businesses aren’t eligible for bonus depreciation in 2018, such as real estate businesses that elect to deduct 100% of their business interest and auto dealerships with floor plan financing (if the dealership has average annual gross receipts of more than $25 million for the three previous tax years).

Traditional, powerful strategy

Keep in mind that Sec. 179 expensing and bonus depreciation can also be used for business vehicles. So purchasing vehicles before year end could reduce your 2018 tax liability. But, depending on the type of vehicle, additional limits may apply.

Investing in business assets is a traditional and powerful year-end tax planning strategy, and it might make even more sense in 2018 because of the TCJA enhancements to Sec. 179 expensing and bonus depreciation. If you have questions about these breaks or other ways to maximize your depreciation deductions, please contact us.

© 2018

When are the new sales tax rules effective and are you required to follow the old rules prior to the effective date?

Previously, 501(c)(3) and 501(c)(4) organizations in Michigan that had less than $5,000 of taxable sales in a calendar year were not required to collect and remit sales tax. The previous law caused issues for organizations who were close to that threshold because it was not an exemption of the first $5,000, but all or nothing. If they were over $5,000, they owed sales tax on all of the sales. If they were under, they owed sales tax on none of it.

The new law states that the first $10,000 of taxable sales for fundraising purposes are exempt as long as total sales for the calendar year are less than $25,000. This change took effect September 26, 2018, according to Michigan Compiled Law (MCL) 205.54o. We anticipate receiving further guidance from the State of Michigan as well as updates to forms and instructions.

Prior to the effective date of September 26, 2018, the old law would technically still apply.

Whether the organization wants to follow the new rules for the entire year should be based on risk tolerance. Keep in mind, if sales tax was expressly collected, it must be remitted; no options. If the organization was not expressly collecting it, and had not yet remitted it, then there is a risk choice to make. Technically if you went over $5,000 before 9/28, there should be tax paid in on everything prior to 9/28, and then no tax thereafter for the remaining amount of the $10,000 (assuming the organization is under the $25,000 in sales).

Example: $6,000 in sales prior to 9/28, $5,000 after. First $6,000 was before 9/28 and fell under old rules, so all $6,000 would have tax; the next $4,000 is non-taxable; the last $1,000 is taxable.

If you hadn’t already paid the tax on $6,000, that’s $360; what’s the chance the state comes after the organization for that? The organization could just remit tax on the last $1,000. We do not believe that is legally the correct answer, but there is an element of what risk the organization is ok with.

Yeo & Yeo, a leading Michigan Accounting firm, is pleased to recognize Talent Manager Cara Newby as the recipient of the 2018 Leading Edge Alliance (LEA) Edge Award for Unique Ability of a Non-accounting Professional. The recognition was announced at this year’s LEA Global Conference in San Diego, and this new award category recognizes a non-accounting professional for outstanding service to their organization.

Yeo & Yeo nominated Cara for successfully driving several recruiting and retention initiatives in less than 18 months to include the launch of a Summer Leadership Program, implementation of an Applicant Tracking System (ATS), development of an online-based New Employee Orientation program, aiding in the creation of firm-wide Career Maps, overhauling the firm’s onboarding and mentor program, and streamlining several processes resulting in increased efficiency throughout the firm.

This was in addition to day-to-day duties that included the review of over 7,000 incoming applications, conducting over 360 phone interviews, onboarding 60 new hires (seasonal and permanent), attending numerous career fairs and facilitating many presentations and trainings in the past year. Her motivation in fulfilling so many initiatives is driven through the goals set forth under the firm’s Career Advocacy Cornerstone and the Career Advocacy Team, of which Cara is a member.

“Cara is an energetic and passionate professional dedicated to proactively leading the firm’s recruitment and retention efforts and exceeding goals,” says Thomas Hollerback, President and CEO. “She’s made a significant impact as the firm’s first-ever Talent Manager.”

When not in the office, you will find Cara volunteering and participating in numerous nonprofit events throughout our communities.

This is the fifth Edge Award for Yeo & Yeo, including awards for Outstanding Diversity and Innovation, Process Improvement, and Cultural & HR Innovation.

Many people choose to pass assets to the next generation during life, whether to reduce the size of their taxable estate, to help out family members or simply to see their loved ones enjoy the gifts. If you’re considering lifetime gifts, be aware that which assets you give can produce substantially different tax consequences.

Multiple types of taxes

Federal gift and estate taxes generally apply at a rate of 40% to transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2018, it’s $11.18 million (twice that for married couples with proper estate planning strategies in place).

Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption is scheduled to drop back to an inflation-adjusted $5 million in 2026.

Minimizing estate tax

If your estate is large enough that estate tax is a concern, consider gifting property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.

If estate tax isn’t a concern, your family may be better off tax-wise if you hold on to the property and let it appreciate in your hands. At your death, the property’s value for income tax purposes will be “stepped up” to fair market value. This means that, if your heirs sell the property, they won’t have to pay any income tax on the appreciation that occurred during your life.

Even if estate tax is a concern, you should compare the potential estate tax savings from gifting the property now to the potential income tax savings for your heirs if you hold on to the property.

Minimizing your beneficiary’s income tax

You can save income tax for your heirs by gifting property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.

On the other hand, hold on to property that has already appreciated significantly so that your heirs can enjoy the step-up in basis at your death. If they sell the property shortly after your death, before it’s had time to appreciate much more, they’ll owe no or minimal income tax on the sale.

Minimizing your own income tax

Don’t gift property that’s declined in value. A better option is generally to sell the property so you can take the tax loss. You can then gift the sale proceeds.

Capital losses can offset capital gains, and up to $3,000 of losses can offset other types of income, such as from salary, bonuses or retirement plan distributions. Excess losses can be carried forward until death.

Choose gifts wisely

No matter your current net worth, it’s important to choose gifts wisely. Please contact us to discuss the gift, estate and income tax consequences of any gifts you’d like to make.

© 2018

AJ Licht, CPA and Christopher Sheridan, CPA provide a comprehensive overview of the new revenue recognition standards and how they will impact the way you recognize revenue going forward.

This webinar has concluded.

Discussions about internal controls often center on mitigation of risk, fraud and unforeseen cost. Yet, internal controls – when thoughtfully designed and diligently implemented – can increase organizational efficiency and save you money. Below are three ways that internal controls can boost efficiency and reduce costs for your organization.

• Utilize non-accounting staff – Often organizations believe it would be more efficient and easier to have one employee issue receipts, record, and deposit funds. However, we know that segregation of duties is an important step in internal controls. Being able to utilize administrative staff to perform certain duties, such as cash deposits or cash receipts, that are currently performed by accounting staff will help maintain the segregation of duties and save money. Another option is to have your board and committee members who are considered “financial professionals” perform review processes normally performed by the chief financial officer, if that skill set does not exist at the staff level.
• Risk assessment – By having a strong risk assessment process and plan, organizations can identify specific areas that present the highest risk, and design controls to assess those risks. By focusing on controls related to high-risk areas, organizations can direct those limited resources to address the highest risk areas, and work to limit or reduce controls in those areas not considered to be as risky. Having the proper controls in place over financial reporting is key for decision making. Assessing the risk within financial reporting is important for accurate, timely, and complete information to help plan, monitor, and report financial information.
• Understand your software capabilities – Many times organizations can increase the effectiveness and possibly reduce the cost of internal controls by relying on preventative controls and less on detective controls. One way to do this is by knowing and understanding the capabilities of your software. Most accounting and software packages have controls built into the systems and should be utilized rather than having individuals perform manual controls, which are subject to human error. Some functions that are currently being performed by staff may exist as automated steps that are currently embedded in your accounting package. Another way to increase efficiency is by using an import/export feature to automatically transfer data from one system to another to avoid the re-entry of data.

A successful system of internal controls is not built overnight. It is an ongoing process that often changes and requires consistent monitoring to understand the inner workings of an organization. Many organizations summarize internal control systems in manuals, so employees can easily refer to the organization’s policies.

Please contact Yeo & Yeo for questions regarding internal controls, internal control studies or fraud detection.

It’s astonishing how quickly business needs have changed! Not so long ago, business owners were able to manage their day-to-day accounting functions, “keep the books,” and then engage their CPA to produce that annual tax return, compile those pesky payroll tax forms, put together the financial statements needed for the bank, or audit their financial statements. Sometimes the CPA would come in to discuss that occasional tax planning need.

Technology advancements have enabled business managers to automate many of these functions to a certain extent and drive the business toward more paperless processes overall. While this has helped with daily financial tasks, proactive, intelligent insight is something technology by itself can never deliver.In some instances, technology can even lead to less business insight.

Client needs have evolved

Those of us in the accounting profession were all too happy to mold our client service lines around these traditional needs, settling in on the three main, standard service lines of accounting, auditing and tax. Unfortunately (or fortunately for those CPAs nimble enough to change and take advantage), our client needs have transformed to something much greater, threatening to disrupt the traditional CPA-client relationship.

For most businesses, the rapid pace of change on all levels has intensified their competition. The challenge of recruiting and retaining talent, and the need for faster, more effective data to provide financial clarity have converged on businesses. Business managers are looking for that trusted, proactive advisor to help them make sense of it all – now more than ever before.

Frankly, these needs have our clients asking (and sometimes demanding) more from us. Much more. A service that requires a transformative approach. A service that requires expertise to be provided quickly, proactively and at a much higher level of strategic insight. The exciting thing about all of this is that we are the only profession that is uniquely qualified to deliver if we can step back, really listen and interpret our client’s true needs, assess and refine what our skills can bring to the table and then retool our technology, processes and data intelligence to fulfill those needs.

How can CPAs provide high-level insight?

To make this happen, accounting professionals looking to step to the plate in this arena have found that they need to be more engaged with their clients’ workflow architecture. More willing to “get their hands dirty” to change or be a part of client systems if necessary, and more willing to be “financial systems architects” that enable data to flow in such a manner that regularly produces higher level insight. In the past, the only way to accomplish that was to be at our client’s place of business. Effective, certainly – but not scalable. In steps the magic ingredient: technology!

By leveraging technology and harnessing its power by designing rapid data workflow streams that produce clear, impactful, proactive insight – coupled with a trusted advisor to interpret this insight – accounting professionals can fulfill the need.

Outsourced accounting is part of the solution

Future-oriented accounting firms have realized that a fundamental starting point should be to design outsourced accounting functions that can be brought under the traditional brick and mortar of an accounting firm. When the outsourced workflow is designed with a view toward automation and scale – but with the ultimate end product not only taking the place of in-house bookkeeping tasks but even more importantly the production of high-level strategic insight – the service is a real game-changer!

Managing human resource demands can be overwhelming when you have limited personnel. Small businesses are finding that outsourcing some of their HR functions gives them more time to focus on business growth and other opportunities.

When deciding which human resources tasks to outsource, here are four areas to consider.

Payroll

Payroll processing is one of the most popular HR functions for an organization to outsource. Outsourcing to a provider that specializes in preparing payroll will not only save time and money but also reduce risk by ensuring tax and reporting compliance.

Recruiting

Finding the right talent for your organization has become increasingly harder. With unemployment at its lowest point in nearly two decades, qualified candidates are not staying on the market for long. Permitting an outside firm to manage job postings and recruit qualified candidates can save valuable time and allow your HR department to focus on more pressing responsibilities.

Background Checks

To complete the recruiting process quickly, it is tempting to take shortcuts. No matter how well the candidate may have interviewed or how impressive their resume may be, it is always a good idea to take the time to perform a background check. Pre-employment screening can help eliminate candidates who are not the right fit and can save you time and money associated with terminating them in the long run.

Creating and Maintaining Employee Handbooks and Policy Manuals

Employment laws and regulations change frequently, so it is essential for your organization to maintain an up-to-date employee handbook. Creating such a document can be tedious, so finding an organization that is familiar with developing handbooks and policy manuals can be very advantageous. Your handbook should serve as an introduction for new employees to best practices, procedures, and company culture, all while aligning those elements with employment laws.

By outsourcing the things that consume valuable time, your HR department will be able to maximize its resources and focus on the areas of human resource management that they do best.

Often, small business owners are unsure about whether to record an expenditure as a repairs and maintenance expense or as a capital improvement. Numerous court cases have addressed amounts paid to improve and restore property and whether to classify them as capital expenditures or as ordinary repairs and maintenance.

Use the following guidelines to decipher how to allocate the expenditures between the two different classifications.

Record an expenditure as repairs and maintenance expense if the repair/improvement:

• Repairs property to restore the regular operating condition
• Restores property to its previous condition
• Preserves property through routine maintenance, or is an incidental repair

Record an expenditure as a capital improvement (this in accordance with the Internal Revenue Service [IRS] regulations) if the repair/improvement constitutes one of the following:

• Adds value to the property
• Adapts property to a new and different use
• Improves efficiency, capacity or productivity
• Fixes a defect or design flaw
• Restores property to a “like new” condition
• Prolongs the useful life of the property

In addition to following these rules, the company has the option to elect the De Minimis Safe Harbor rule. This election eliminates the burden of determining whether every small transaction made for the improvement of property or equipment purchased is to be expensed or capitalized. As of January 1, 2016, the IRS increased the threshold for this election from $500 to $2,500 per invoice or item for taxpayers without Audited Financial Statements (AFS). If the company has AFS, they may use this safe harbor rule to deduct amounts paid for tangible property up to $5,000 per invoice or item. For example, if the company purchases a computer for $3,000, they are only able to automatically expense this computer if they have AFS; otherwise, it must be capitalized as an asset, as it is over the $2,500 threshold.

To use the De Minimis rules, the taxpayer must have a written policy in place at the beginning of the tax year and use those same capitalization procedures on their AFS.

If you have questions regarding whether to expense or capitalize, or about the De Minimis Safe Harbor election, contact one of Yeo & Yeo’s tax professionals.

One of the biggest financial challenges that small business owners face is supervision of cash flow. Managing cash flow is of the utmost importance, and incorrect management of your cash flow could result in significant cash flow gaps and can put a healthy company out of business.

A cash flow gap transpires when your business expenses (cash outflows) are due before revenue is received (cash inflows). This does not mean that you cannot afford the expenditures; it is simply a timing difference in which the cash is not yet available to pay your bills. Cash flow gaps can affect small business owners in several ways. Here are a few tips that can help you avoid deficiencies in your cash flow management.

1. Have a broad frame of mind

Always ask how this purchase will affect your cash flow. Analyze the costs and benefits of each transaction. Do you have enough cash on hand or credit to access? Do not follow through with the transaction unless you have favorable terms.

2. Create a forecasted budget and compare it to costs incurred

Create these on a weekly or monthly basis, while accumulating into an annual budget. This budget will show where the cash is flowing and prompt opportunities to shrink cash outflows. Including a variance in the budget (the difference between actual and forecast) will show you over or under budgeted revenues and expenses. From there, adjust the budget to focus on areas of improvement.

3. Stay conservative with timing

Do you expect to be paid in 5 days? Budget it as 10. Issue an invoice for 20 days? Expect to receive that money in 30 days. By establishing that buffer, you will have the ability to better manage your expectations, as to avoid a cash flow gap.

4. Maximize cash inflows and shrink cash outflows

This is especially important if the company has a project that is unusually large or complex. At that point, consider requesting a security deposit of half the amount owed and always pursue opportunities to bill additional amounts if products/services need modification, or are not specified in the original contract. Pursue ways to make payment simple for a customer through automated bill pay or payment schedules. Offer options to receive upfront cash for future costs to secure future sales and aid with inventory replenish scheduling. Lastly, decide whether or not to offer layaway programs or pre-payment plans as an alternative to sale and payment plans.

Business owners need to stay on top of bills owed and ensure payments are accurate and timely. Set up automated payments, but ensure the proper amount is being deducted. Some other cost-saving approaches include: repairing equipment rather than replacing it, buying used instead of new, delaying upgrades as necessary, and negotiating goods and services.

5. Build a cash reserve

Determine what you can reserve in a week, divide it by five business days and pay yourself that amount per day. Having this cash reserve could be used as a way to face cash flow gaps if they occur.

6. Make conscious decisions when it comes to administrative costs

There are two options for accounting: in-house or outsourced. Is your in-house accounting work shorting quality? Would it be more beneficial to rely on the professionals? Outsourced accounting does not necessarily imply it is more expensive, but it does point toward quality, timely and accurate work. If the decision is made to outsource, the only heavy lifting would be to obtain the financial information for the accountant to process.

Cash flow is the lifeblood of any business and those who can efficiently manage their cash flow will find that it can improve other aspects of their organization. For more information or questions, contact one of Yeo & Yeo’s consulting professionals.

Wednesday, November 7, 2018
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For most businesses, it can be challenging to navigate the ever-changing IRS tax laws. Some of the most confusing laws pertain to self-employed income reporting and the related requirements for issuing Form 1099-MISC.

Form 1099-MISC is issued to a subcontractor or business and reports the income they received for services performed during the year. It is important to note that only services performed, not goods purchased, are included on Form 1099-MISC.

Employees vs. Subcontractors

The first step – before an individual performs any services for your business – is to make the distinction between an employee and a subcontractor. The IRS’s general rule is as follows: if you control the when, how, and what in regards to an individual’s duties and pay structure, they are considered an employee.

• If it is determined that the individual is an employee, you will issue them a W-2 for wages (instead of a 1099-MISC) and should be collecting and remitting payroll taxes on their behalf.  
• If instead it is determined that the individual is a subcontractor, you will issue a 1099-MISC for their services based on the information below. Refer to the IRS website, Independent Contractor (Self-Employed) or Employee?

If you are still unsure whether an individual should be classified as an employee or a subcontractor, consider using IRS Form SS-8. An employer can submit this form to the IRS for an official determination regarding whether or not an individual is an employee or a subcontractor. The downfall of this solution is that it will take at least six months to receive such a determination. If a six-month waiting period to determine a classification is not feasible, consider contacting a trusted CPA firm or tax professional for their expertise.

1099-MISC Requirements

Following are general guidelines for determining if a 1099-MISC should be issued to either an individual or business:

• They are not an employee
• They have performed a service
• The compensation received for the service they performed exceeds $600
  A few examples of services are:
  • Subcontract labor
  • Rent
  • Prizes and awards
  • Crop insurance proceeds
  • Medical and healthcare payments
  • Payments to an attorney
• Royalties or broker payments that exceed $10

There are some exceptions to the above guidelines. For example, if a business is incorporated, then a 1099-MISC should not be issued to them regardless of the amount paid for services. It is a good practice to send all potential 1099-MISC recipients a Form W-9 to acquire the information needed to properly file the required 1099-MISC forms. Form W-9 is used to request a taxpayer identification number and certifications along with contact information. This form should be requested at the time the service is performed and can be prepared and stored either electronically or on paper.

1099-MISC forms are required to be sent to the IRS and the individual or business who provided the services no later than January 31 for the previous calendar year. This deadline is intended to ensure that the 1099-MISC recipient ultimately reports the income they received for services provided on their annual income tax returns.

For information on where to file or how to electronically file your forms 1099-MISC, refer to the IRS instructions on information reporting (General Instructions for Certain Information Returns).

Form 1099-MISC can be complicated. For more information, please contact one of our advisors.

The Management’s Discussion and Analysis (MD&A) was first introduced when Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governmentswas issued. It has been in effect for all state and local governments since 2003 or earlier. Although this statement set forth the requirements for the MD&A, it also changed many other aspects of financial reporting.

The requirements of the MD&A are straightforward.

• It must provide an objective analysis of the government based on the current year’s operations or other known facts.
• Comparisons must be made of the current year’s balances and activity to the prior year’s balances and activity with a focus on whether the overall financial health of the government has improved or deteriorated. Although these comparisons are on the government-wide information, the government must provide an analysis of significant changes in the funds as well as significant budget variances.
• The government must also report capital asset and long-term debt activity.
• The last component to the MD&A is management’s future outlook, which should describe current circumstances that are expected to have a significant impact on the government’s monetary position.

Turn a good MD&A into a great MD&A

In many cases, governments begrudgingly prepare an MD&A template to be compliant with GASB Statement No. 34 and roll that template forward year after year. While the template is likely sufficient, an MD&A can be the focal point of your financial statements! When effectively prepared, it has the opportunity to present all of the most significant and relevant financial data to users of the financial statements and can typically be accomplished in less than 15 pages. As a CPA who presents financial statements to governing bodies, I always recommend that the governing body at least read the MD&A.

Consider enhancing your MD&A. When was the last time that you or your auditor didn’t just update the charts and figures? Do you believe that a user unfamiliar with your financial statements, or other financial conditions, could read your MD&A as a summary of your government and have a clear and objective position of the financial health of your government?

If you answered no, consider some of the following tips to improve your MD&A:

• Make the goal of your MD&A to be a complete summary of your financial statements, such that users could feel comfortable only reading the MD&A.
• Use easily understood terms, so that taxpayers and financial analysts alike can understand your MD&A.
• Use charts and pictures – and add some color.
• Focus on reasons why the balances and activities of the year have changed compared to the past, rather than the magnitude of the change.
• If your government presents a transmittal letter, avoid duplicating information with the MD&A.
• Make page references to the financial statements and footnotes to the financial statements.
• Discuss current accomplishments of the government.
• Focus on the primary government.
• Avoid boilerplate templates.
• Attempt to answer questions that users of the financial statements typically pose.

The value of a great MD&A

A great MD&A is valued by users of the financial statement because it allows users to spend less time to gain an understanding of the monetary position of a government. It can help citizens and the members of the governing body understand the financial statements with a summarized presentation. It can answer questions before they’re asked.

For more information, refer to GASB Statement No. 34.

If you would like additional assistance with your MD&A, please contact your Yeo & Yeo professional.

Many employers mistakenly believe that the misclassification of employees as independent contractors doesn’t really matter, so long as the contractors satisfy all of their tax obligations. This couldn’t be further from the truth. Improper classification of workers comes at a high cost, and both federal and state authorities have been cracking down on the practice in recent years.

Advantages of independent contractor status

It’s no surprise why employers prefer to treat workers as independent contractors. If a worker is legitimately treated as a contractor, the employer avoids a variety of financial obligations associated with employees, including withholding federal income taxes, paying the employer’s share of FICA taxes (and withholding the employee’s share), and paying federal unemployment taxes (FUTA).

The employer may also avoid obligations under state law, including withholding state income taxes, paying state unemployment taxes, paying or withholding state disability insurance contributions, and furnishing workers’ compensation insurance. (However, some states may require employers to provide workers’ comp to contractors or pay unemployment tax on amounts paid to contractors in certain situations.) Also, contractors aren’t entitled to employee benefits, minimum wages, overtime and other rights enjoyed by employees.

Why it matters

There’s a common misconception that the IRS and state tax authorities don’t care about worker classification so long as they’re receiving all the taxes they’re owed. After all, independent contractors are responsible for the taxes that otherwise would be paid by the employer. But the government does care, for several reasons:

• Employers are less likely to default on their tax obligations.
• It’s much easier to collect taxes from a single employer than from many independent contractors.
• Even if all taxes are collected, the government also wants to maximize unemployment contributions.
• The U.S. Department of Labor, state labor departments and other employment security agencies have an interest in expanding the class of workers entitled to employee benefits, wage-and-hour protections, and workers’ comp coverage.

The consequences of misclassification can be harsh. If the IRS determines that contractors should have been classified as employees, it may require the employer to pay back taxes (including the employees’ share of unpaid payroll and income taxes), plus penalties and interest. And if the employer lacks the resources to pay these liabilities, the IRS can collect from “responsible persons,” including certain executives, partners or managers. And keep in mind that federal and state tax authorities can impose penalties on employers who misclassify workers even if all their contractors satisfy their tax obligations.

How to protect yourself

If your business uses independent contractors, conduct an assessment to determine whether they constitute employees under federal and state law. In making this determination, the IRS examines a variety of factors that reflect the level of behavioral and financial control you have over a worker, as well as the nature of your relationship.

For example, workers are more likely to be considered contractors if they control how and when the work is done, cover their own expenses, invest in their own facilities and tools, make their services available to the relevant market, and can realize profits or incur losses. The IRS also considers the parties’ written agreements, any benefits provided to the worker and the permanency of the relationship.

Be proactive

Given the steep price of misclassification, be proactive when it comes to employee vs. contractor status. If you’re concerned about potential liability, discuss options with your tax advisor and consider participating in voluntary classification settlement programs. These programs allow you to resolve these issues with the IRS or other government agencies at the lowest possible cost.

© 2017

My annual audit is done. Now what? Many year-end deadlines and reporting requirements need to be carried out after your audit is completed.

November 1 is the deadline to submit the Michigan Department of Education (MDE) audit package.

The audit package includes:

• 1.MDE Required Reporting Package
• Data Collection Form (DCF)
• Audited financial statements
• A Summary Schedule of Prior Audit Findings
• Auditor’s reports
• A corrective action plan to resolve the current and prior audit findings
• 2.Management letter, if issued by auditors
• 3.AU 260 letter – The Auditor’s Communication with Those Charged with Governance
• 4.Single Audit (if expending more than $750,000 in federal funds)

Adhere to these submission guidelines:

• The audit package must be submitted electronically and without any type of security or password protection.
• The electronic file must be in PDF format created from an electronic source. Scanned documents will not be accepted.
• All of the above items, except the DCF, must be included in one PDF document.

The district or the district’s auditor should notify the MDE when the audit has been certified at the Federal Audit Clearinghouse. The MDE auditor will retrieve the DCF from the Federal Audit Clearinghouse’s website. The MDE has size, naming and submission requirements on its website on the Guidance on Electronic Filing of Financial Statement Audits page.

For additional information and details, refer to Section B – Report Distribution in the Michigan School Auditing Manual. Also, the MDE released an Accounting & Auditing Alert for FY 2017-2018 that highlighted the Mandatory Electronic Filing of School District Audits.

Data Collection Form submission

The Data Collection Form (DCF) is submitted to the Federal Audit Clearinghouse via their website. The DCF is a submission of a school district’s federal expenditures and findings. The DCF is prepared in cooperation with your auditors and must be certified by both the district and auditors for submission before November 1. For additional information about the DCF, refer to the Federal Audit Clearinghouse’s Internet Data Entry System Instructions.

Finance Information Data submission

The Center for Educational Performance and Information also has a November 1 deadline for all school districts to submit the Finance Information Data (FID). The FID includes the school district’s financial information. The electronic submission must comply with the Michigan Public School Accounting Manual Chart of Accounts. Please see the Center for Educational Performance and Information page for details. They also have an FID User Guide to help you through the process.

Please contact your local Yeo & Yeo auditor if you have questions or need additional information about year-end financial submissions.

For nonprofit organizations, expense reimbursement fraud schemes are the third most common type of fraud according to the Association of Certified Fraud Examiners’ 2018 Report to the Nations on Occupational Fraud and Abuse. These schemes were present in 29 percent of the reported fraud cases.

With employees more mobile than ever, how can your organization protect itself? The first step is to develop a travel and expense reimbursement policy. This policy dictates which expenses will be reimbursed, how employees should request reimbursement, and who will approve the expenses. The policy should also address situations of noncompliance and disciplinary measures that will be taken in the occurrence of fraud.

While trust is a crucial element in the workplace, it cannot replace essential internal controls like the approval process. It is imperative that the policy be in writing and that it is fully communicated to employees. It’s also important that those who are approving the reimbursements know which details they must check and why, if the approval is to be meaningful and effective. Furthermore, to discourage and detect potential fraud or error, analyze cost trends by employee and type on a monthly basis.

New Online System

Beginning October 1, 2018, a new system is accessible on the Michigan Department of Treasury’s website for both reporting unclaimed property and filing to receive unclaimed property.

• Business and individuals can search for unclaimed property in their name and submit validation information online to claim the unclaimed property.
• Holders of unclaimed property can file reports and make payments electronically.

The new electronic filing system allows for ease in reporting. Access the new system at https://unclaimedproperty.michigan.gov/.

Zero Balance Reporting

As reported in an earlier Yeo & Yeo eNewsletter, when the 2018 Reporting Manual was issued in April, the Michigan Department of Treasury removed the requirement to file a zero balance situation, where a business does not have any old outstanding checks that would meet the requirement to escheat the funds to the State. The Treasury still recommends that entities file a zero balance report to maintain a history of reporting. If this describes your situation, and you have not reported, you can find Form 2011 on the website and upload it.

Deadlines for reporting

• Current rules require the unclaimed property to be identified as of March 31 of each year and reported to the State on or before July 1.
• Once properties have been identified, organizations must prepare and mail due diligence letters to the property owners by April 15.
• By May 15, organizations must determine which property owners have not responded to the due diligence letters.
• Then, starting on June 1, organizations should begin preparing the annual unclaimed property report.

Property that has reached its applicable dormancy period as of March 31 must be remitted with and reported on Michigan State Form 2011, Michigan Holder Transmittal for Annual Report of Unclaimed Property, and the appropriate annual reporting form (there are separate forms for cash and safe deposit boxes, and for securities). If the holder (business or government entity) has more than ten items to report, they must use electronic media for the annual report. The due date for this filing was July 1 (or the next business day if the 1^st is on the weekend).

Penalties for failing to report

Fines and penalties may be assessed for organizations who fail to submit reports. Fines may be imposed of $100 per day for each day that the report is withheld, or the required duties outlined in the previous paragraph are not performed, not to exceed $5,000. Also, a 25 percent penalty on the value of the property that should have been paid or delivered may be assessed in addition to interest charged from the date that the property should have been delivered to the State of Michigan.

Voluntary Disclosure

Entities that would like to avoid penalties and interest charges on property that they are delinquent in reporting can become compliant by filing a Michigan Unclaimed Property Voluntary Disclosure Agreement (From 4869). If approved, then the holder will be notified of the obligation to complete and submit the proper reports for the current reporting year and four previous reporting years, and should remain current in reporting going forward. The instructions and form are all available in the 2018 reporting manual.

The Tax Cuts and Jobs Act (TCJA) is expected to cause some challenges for most in the nonprofit industry. While several significant tax law changes took effect in 2018, you should know and understand four of them now.

Two of the provisions that are most likely to affect your nonprofit organization are changes in unrelated business taxable income (UBTI).

Also, Revenue Procedure 2018-38 changed the rules regarding Schedule B – Schedule of Contributors, and a recent change in Michigan law applies to sales tax for 501(c)(3) and 501(c)(4) exempt organizations.

Let’s take a closer look at these four specific changes and how they may impact your nonprofit organization’s reporting and tax obligations.

Losses in one trade or business can no longer offset income in another trade or business.

Previously, the gain or loss from any unrelated trade or business regularly conducted were netted together to determine UBTI. If, for example, an organization conducts unrelated business A for a profit, and the organization also conducts unrelated business B and had a loss, the previous rules allowed the organization to net the activity from A and B. The income from A would be reduced by the deficit from B in calculating UBTI.

The new rules no longer allow the two to net. The income from A will be reported and the deficit from B will create a net operating loss to carry forward and only be applied to future UBTI generated by B. The specific deduction of $1,000 in computing UBTI is maintained but is not considered in determining the separate UBTI calculation of each separate trade or business.

This new rule applies to tax years beginning after December 31, 2017. Any net operating loss from tax years beginning before January 1, 2018, can be carried forward and applied to any income in subsequent years, regardless of which trade or business created it.

Organizations must carefully consider if their activities constitute more than one distinct trade or business and report accordingly going forward. Interim guidance suggests the NAICS code will be used to determine the unrelated trade or business. It is likely that the overall tax burden will increase for exempt organizations, since gains from one unrelated trade or business can no longer be offset by the shortfall from another unrelated trade or business.

Certain qualified transportation fringe benefits must be reported as unrelated business income.

Previously, when organizations provided employees with transportation fringe benefits, employees did not have to add those amounts to their taxable income, and the nonprofits included it in routine expenses. (For-profit entities could deduct these expenses from their taxable income). Under the new provision, the amounts paid for such benefits will be included in UBTI, effective for amounts paid or incurred after December 31, 2017. For-profit entities will no longer be able to deduct these costs. The effect is that for-profit entities and nonprofit organizations will be treated the same, both paying tax on these fringe benefits provided to their employees.

Qualified transportation fringe benefits include a parking garage where employees park for free, commuter transportation, and transit passes. If a parking garage is also used by nonemployees, the organization will need to allocate the cost of providing the parking to determine the amount to include in UBTI. The IRS indicated that these benefits cannot be shifted to taxable compensation for the employees so that they are deductible by the organization. The IRS updated Publication 15-B, Employer’s Tax Guide to Fringe Benefits, to reflect these changes. This change could mean that more nonprofit organizations will be required to file Form 990-T.

Schedule B is now required only for 501(c)(3) exempt organizations.

Revenue Procedure 2018-38, released on July 16, 2018, modifies the requirements to file Schedule B – Schedule of Contributors with Form 990 or 990-EZ. Schedule B is used to report names, addresses and amounts of substantial contributors to exempt organizations. This requirement now applies only to 501(c)(3) charitable organizations; previously it affected all 501(c) organizations.

Several reasons for this change include:

• The IRS is required to make annual returns available to the public. It cannot disclose the names and addresses of contributors but must include the contribution information. This meant the IRS was spending resources to redact that information from returns when making it available to the public.
• Exempt organizations faced increased time and resources to provide the information to the IRS and also redact it when complying with public disclosure requirements.
• There is a risk that the information could inadvertently be disclosed to the public.

Affected organizations must continue to maintain this information in their records and be able to provide it to the IRS under examination. The change is effective for taxable years ending on or after December 31, 2018.

Michigan law changed the rules for 501(c)(3) and 501(c)(4) organizations that collect sales tax.

Previously, 501(c)(3) and 501(c)(4) organizations in Michigan that had less than $5,000 of taxable sales in a calendar year were not required to collect and remit sales tax. The previous law caused issues for organizations who were close to that threshold because it was not an exemption of the first $5,000, but all or nothing. If they were over $5,000, they owed sales tax on all of the sales. If they were under, they owed sales tax on none of it.

The new law states that the first $10,000 of taxable sales for fundraising purposes are exempt as long as total sales for the calendar year are less than $25,000. This change took effect September 26, 2018, according to Michigan Compiled Law (MCL) 205.54o. We anticipate receiving further guidance from the State of Michigan as well as updates to forms and instructions.

If you have questions or concerns about how any of these changes affect your organization’s tax and reporting responsibilities, contact a member of Yeo & Yeo’s Nonprofit Services Group.