Tax-Free Fringe Benefits Help Small Businesses and Their Employees

In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options.

Insurance

Businesses can provide their employees with various types of insurance on a tax-free basis. Here are some of the most common:

Health insurance. If you maintain a healthcare plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but may be deductible on a limited basis as an itemized deduction.

Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income.

Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance can’t be provided through a cafeteria plan.

Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 are taxable to the extent they exceed the employee’s coverage contributions.

Other types of tax-advantaged benefits

Insurance isn’t the only type of tax-free benefit you can provide — but the tax treatment of certain benefits has changed under the Tax Cuts and Jobs Act:

Dependent care assistance. You can provide employees with tax-free dependent care assistance up to $5,000 for 2018 though a dependent care Flexible Spending Account (FSA), also known as a Dependent Care Assistance Program (DCAP).

Adoption assistance. For employees who’re adopting children, you can offer an employee adoption assistance program. Employees can exclude from their taxable income up to $13,810 of adoption benefits in 2018.

Educational assistance. You can help employees on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance and qualified scholarships.

Moving expense reimbursement. Before the TCJA, if you reimbursed employees for qualifying job-related moving expenses, the reimbursement could be excluded from the employee’s income. The TCJA suspends this break for 2018 through 2025. However, such reimbursements may still be deductible by your business.

Transportation benefits. Qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling, are tax-free to recipient employees. However, the TCJA suspends through 2025 the business deduction for providing such benefits. It also suspends the tax-free benefit of up to $20 a month for bicycle commuting.

Varying tax treatment

As you can see, the tax treatment of fringe benefits varies. Contact us for more information.

Businesses that acquire, construct or substantially improve a building — or did so in previous years — should consider a cost segregation study. It may allow you to accelerate depreciation deductions, thus reducing taxes and boosting cash flow. And the potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA).

Real property vs. tangible personal property

IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you’ll depreciate a building’s structural components — such as walls, windows, HVAC systems, elevators, plumbing and wiring — along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, businesses allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for instance — the distinction between real and personal property is obvious. But often the line between the two is less clear. Items that appear to be part of a building may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.

Depreciation break enhancements

Last year’s TCJA enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing. Sec. 179 allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).

Assess the potential savings

Cost segregation studies may yield substantial benefits, but they’re not right for every business. To find out whether a study would be worthwhile for yours, contact us for help assessing the potential tax savings.

If you’re age 70½ or older, you can make direct contributions — up to $100,000 annually — from your IRA to qualified charitable organizations without owing any income tax on the distributions. This break may be especially beneficial now because of Tax Cuts and Jobs Act (TCJA) changes that affect who can benefit from the itemized deduction for charitable donations.

Counts toward your RMD

A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (Deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.)

So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid to you.

Doesn’t require itemizing

You might be able to achieve a similar tax result from taking the RMD and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation.

And, with the TCJA’s near doubling of the standard deduction, fewer taxpayers will benefit from itemizing. Itemizing saves tax only when itemized deductions exceed the standard deduction. For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households, and $24,000 for married couples filing jointly.

Doesn’t have other deduction downsides

Even if you have enough other itemized deductions to exceed your standard deduction, taking your RMD and contributing that amount to charity has two more possible downsides.

First, the reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.

Second, if your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 60% of your adjusted gross income for the year. (The TCJA raised this limit from 50%, but if the cash donation is to a private nonoperating foundation, the limit is only 30%.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.

A charitable IRA rollover avoids these potential negative tax consequences.

Have questions?

The considerations involved in deciding whether to make a direct IRA rollover have changed in light of the TCJA. So contact us to go over your particular situation and determine what’s right for you.

Yeo & Yeo CPAs & Business Consultants is asking manufacturing company owners and managers to participate in the third Yeo & Yeo / Leading Edge Alliance (LEA) National Manufacturing Outlook Survey. The survey results will provide valuable benchmarking data for manufacturers.

This short (< 25 questions) survey asks about manufacturing companies’ performance this year, managers’ expectations for next year, and the strategies that high-performing manufacturers find most effective. Individual responses will be kept strictly confidential. The survey closes on October 31. In January, the resulting aggregate report will be available on Yeo & Yeo’s website, providing insightful industry data as manufacturing companies plan for 2019.

The leader of Yeo & Yeo’s Manufacturing Services Group, Amy Buben, says, “Michigan ranks No. 4 in total manufacturing jobs, so it is crucial that our manufacturers remain competitive and profitable. The survey results help manufacturers compare their operation with others, and get a greater awareness of the industry’s priorities and challenges, as well as trends in revenue and spending.”

Also, by completing the survey, participants will be entered for a chance to win one of five $300 Visa or Mastercard gift cards.

Click here to take the survey.

This project is in partnership with LEA Global and is being conducted in association with leading accounting firms across the country. Please contact Yeo & Yeo if you have questions or concerns.

Our affiliate, Yeo & Yeo Technology, will be sharing cyber tips, tricks and best practices all month long, as October is Cybersecurity Awareness Month. Learn more about about how you can be more Cyber Aware by reading their latest blog post and be on the look out for more content from YYTECH all month long!

Cybersecurity Statistics

Companies will spend $1 trillion on cybersecurity in the next five years.

43% of cyber attacks target small businesses.

An average of 3,809,448 records are stolen from breaches every day.

The total cost for cyber crime committed globally has reached $100 billion.

*csoonline.com

For investors, fall is a good time to review year-to-date gains and losses. Not only can it help you assess your financial health, but it also can help you determine whether to buy or sell investments before year end to save taxes. This year, you also need to keep in mind the impact of the Tax Cuts and Jobs Act (TCJA). While the TCJA didn’t change long-term capital gains rates, it did change the tax brackets for long-term capital gains and qualified dividends.

For 2018 through 2025, these brackets are no longer linked to the ordinary-income tax brackets for individuals. So, for example, you could be subject to the top long-term capital gains rate even if you aren’t subject to the top ordinary-income tax rate.

Old rules

For the last several years, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets were tied to the ordinary-income rate brackets.

Specifically, if the long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed. If they fell within the 25%, 28%, 33% or 35% ordinary-income brackets, they were taxed at 15%. And, if they fell within the maximum 39.6% ordinary-income bracket, they were taxed at the maximum 20% rate.

In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT). It kicked in when modified adjusted gross income exceeded $200,000 for singles and heads of households and $250,000 for married couples filing jointly. So, many people actually paid 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) on their long-term capital gains and qualified dividends.

New rules

The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets. Here are the 2018 brackets:

Singles:

0%: $0 – $38,600
15%: $38,601 – $425,800
20%: $425,801 and up

Heads of households:

0%: $0 – $51,700
15%: $51,701 – $452,400
20%: $452,401 and up

Married couples filing jointly:

0%: $0 – $77,200
15%: $77,201 – $479,000
20%: $479,001 and up

For 2018, the top ordinary-income rate of 37%, which also applies to short-term capital gains and nonqualified dividends, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. (Both the long-term capital gains brackets and the ordinary-income brackets will be indexed for inflation for 2019 through 2025.) The new tax law also retains the 3.8% NIIT and its $200,000 and $250,000 thresholds.

More thresholds, more complexity

With more tax rate thresholds to keep in mind, year-end tax planning for investments is especially complicated in 2018. If you have questions, please contact us.

Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data.

How it works

In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.

For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to claim refunds.

The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.

Red flags

There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:

Your business doesn’t receive expected or routine mailings from the IRS,
You receive an IRS notice that doesn’t relate to anything your business submitted, that’s about fictitious employees or that’s related to a defunct, closed or dormant business after all account balances have been paid,
The IRS rejects an e-filed return or an extension-to-file request, saying it already has a return with that identification number — or the IRS accepts it as an amended return,
You receive an IRS letter stating that more than one tax return has been filed in your business’s name, or
You receive a notice from the IRS that you have a balance due when you haven’t yet filed a return.

Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your Employer Identification Number.

Prevention tips

Businesses should take steps such as the following to protect their own information as well as that of their employees:

Provide training to accounting, human resources and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails.
Use secure methods to send W-2 forms to employees.
Implement risk management strategies designed to flag suspicious communications.

Of course identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us.

Effective September 26, 2018, the State of Michigan changed the rules for certain nonprofits collecting sales tax on fundraising sales. Many nonprofits will find that this change makes the budgetary issues experienced with the previous rule significantly less burdensome.

The old rule stated that if less than $5,000 of sales were made, the nonprofit could elect not to collect and not to remit sales tax on those sales. However, as soon as $5,000 in sales were made, sales tax would need to be remitted on every dollar of taxable sales. This caused budgetary issues with smaller nonprofits, since there was uncertainty at times if the organization would be under the $5,000 threshold.
The new rule is still based on calendar year sales, and still applies to only certain nonprofits, generally those exempt under 501(c)(3) or 501(c)(4) of the IRS code. The rule now states that sales of the first $10,000 of tangible personal property in a calendar year for fundraising purposes are exempt from sales tax as long as the nonprofit has aggregate sales at retail in the calendar year of less than $25,000.

Considerations for Planning and Budgeting

The amount of nontaxable fundraising sales has doubled from $5,000 to $10,000. Previously it was all or nothing for the exemption, and now it is truly an exemption for the first $10,000 sold. However, there are still planning and budgeting issues to consider because once aggregate sales at retail hit $25,000, there is no exemption.

A conservative way to plan is that if the organization believes during the budget process that sales will be $10,000 or less, do not charge sales tax. Then, as things change during the course of the year, if sales exceed $10,000, start to charge sales tax on those exceeding $10,000. The likelihood that the nonprofit’s budgeted sales will be less than $10,000, and actual sales will be $25,000 or more, should be remote if budgeting is based on expected activities.

This change gives the nonprofit more leeway in their budgeting and helps avoid having to remit sales tax that was never collected. If the nonprofit chooses to collect sales tax when it is exempt, it likely needs to remit that amount to the state. The forms and documentation on the State of Michigan’s website have not yet been updated for this change in Michigan Compiled Laws (MCL 205.54o).

If you have questions or concerns about your sales tax responsibilities going forward with the new rule, contact a member of Yeo & Yeo’s Nonprofit Services Group.

For the fifth consecutive year, Yeo & Yeo CPAs & Business Consultants has been selected as one of Michigan’s Best and Brightest in Wellness. The program highlights companies, schools, and organizations that promote a culture of wellness, as well as those that plan, implement and evaluate efforts in employee wellness to make their business and their community a healthier place to live and work.

“Over the last five years, we have seen incredible improvement in the overall health of our employees,” said Thomas E. Hollerback, president and CEO of Yeo & Yeo. “This award is an exciting achievement for Yeo & Yeo, and our commitment to the health of our employees goes hand in hand with their results and accomplishments.”

Best and Brightest in Wellness 2018 Yeo & Yeo supports wellness for its employees by paying a large portion of healthcare premiums, helping to keep costs low for employees. The firm has a high percentage of participation in its wellness plan and healthcare premium reduction incentive. Another initiative is the firm’s Fitbit Fitness Program. Themed, monthly challenges for individuals and teams, along with prizes and friendly competition, have resulted in a high level of participation. Yeo & Yeo also offers an Ergonomic Standing Desk option for employees, for a healthier work environment. The firm facilitates convenient onsite health screenings for healthcare participants at each of its eight office locations, offers onsite flu shots at no cost, and provides an Employee Assistance Program that offers confidential guidance and resources designed to support work‐life balance.

Nominees were evaluated by using an assessment created and administered by SynBella, the nation’s leading wellness provider. Criteria for selection included wellness programs and policies, culture and awareness, leadership, participation and incentives, communication and measurement, among others. A total of 429 companies and organizations were nominated for the award. Of those organizations, 220 completed the entire selection process, and 97 winners were chosen.

Yeo & Yeo will be honored at a symposium and awards celebration on October 5 at The Henry Hotel in Dearborn.

If you’re charitably inclined and you collect art, appreciated artwork can make one of the best charitable gifts from a tax perspective. In general, donating appreciated property is doubly beneficial because you can both enjoy a valuable tax deduction and avoid the capital gains taxes you’d owe if you sold the property. The extra benefit from donating artwork comes from the fact that the top long-term capital gains rate for art and other “collectibles” is 28%, as opposed to 20% for most other appreciated property.

Requirements

The first thing to keep in mind if you’re considering a donation of artwork is that you must itemize deductions to deduct charitable contributions. Now that the Tax Cuts and Jobs Act has nearly doubled the standard deduction and put tighter limits on many itemized deductions (but not the charitable deduction), many taxpayers who have itemized in the past will no longer benefit from itemizing.

For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for married couples filing jointly. Your total itemized deductions must exceed the applicable standard deduction for you to enjoy a tax benefit from donating artwork.

Something else to be aware of is that most artwork donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal.

IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

Finally, note that, if you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.

Maximizing your deduction

The charity you choose and how the charity will use the artwork can have a significant impact on your tax deduction. Donations of artwork to a public charity, such as a museum or university with public charity status, can entitle you to deduct the artwork’s full fair market value. If you donate art to a private foundation, however, your deduction will be limited to your cost.

For your donation to a public charity to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. If, for example, you donate a painting to a museum for display or to a university’s art history department for use in its research, you’ll satisfy the related-use rule. But if you donate it to, say, a children’s hospital to auction off at its annual fundraising gala, you won’t satisfy the rule.

Plan carefully

Donating artwork is a great way to share enjoyment of the work with others. But to reap the maximum tax benefit, too, you must plan your gift carefully and follow all of the applicable rules. Contact us to learn more.

Join Yeo & Yeo’s David Jewell, CPA, and Tammy Moncrief, CPA, as they provide a comprehensive overview of the business tax changes under tax reform.

This webinar has concluded.

In recent news, the Trump administration stated that a $6 billion bailout has been planned for farmers who have become collateral damage in the current “trade wars” between the U.S. and certain other countries. The U.S. Department of Agriculture said that of the $6 billion payments to begin September 4, 2018, under the Market Facilitation Program, aid of roughly $4.7 billion will be dedicated to agricultural producers of certain commodities that have been targeted by these other countries in retaliation of tariffs that the U.S. placed on steel, aluminum, and technological imports. These commodities include soybeans, corn, cotton, dairy, hog, sorghum, and wheat. The remainder of the $6 billion will be in the form of federal government purchases of other agricultural commodities, and costs related to developing new foreign markets for agricultural products.

The Market Facilitation Program (MFP) was established under the Commodity Credit Corporation (CCC). The program considers various factors such as the severity of the trade disruption and the length of time needed to adjust to new trade patterns to determine the applicable payment rate to use for producers who offer any of the commodities mentioned above. Initial MFP payments will be calculated by multiplying the previously determined rate by 50 percent of the producer’s total 2018 production. If the CCC declares that a second MFP payment will be made, then the remaining 50 percent of the producer’s output will be multiplied by a newly determined rate and additional funds will be designated accordingly.

The following chart illustrates the initial payment rates for the given commodities.

Commodity	Initial Payment Rate	Estimated Total Initial Payment
Cotton	$0.06 / lb.	$276,900
Corn	$0.01 / bu.	$96,000
Dairy (milk)	$0.12 / cwt.	$127,400
Pork (hogs)	$8.00 / head	$290,300
Soybeans	$1.65 / bu.	$3,629,700
Sorghum	$0.86 / bu.	$156,800
Wheat	$0.14 / bu.	$119,200
Total		$4,696,300

So, who will qualify to receive assistance from this program? Payments will be limited to eligible applicants who are actively engaged in farming and have adjusted gross income of less than $900,000 for the tax years 2014-2016. Total payment amounts will not exceed $125,000 per individual or legal entity.

Individuals or entities who may qualify for this program can apply after their current harvest is 100 percent complete and they can accurately report their total 2018 production. Applications are currently available online at www.farmers.gov/mfp along with other information. The applications can be submitted online, in person, or by email, fax, or mail.

Yeo & Yeo’s Agribusiness Services Group will continue to monitor the tariff battles. We are watching the opportunities available for farmers to offset market declines. If you have questions, reach out to your Yeo & Yeo advisor or me.

If your organization receives federal funds, it is required to have a written purchasing policy that is at least as restrictive as the Uniform Guidance. Although there were several different postponements for the new rules, they are effective at a minimum for the first fiscal year that begins on or after December 26, 2016.To comply with the Uniform Guidance, five methods of purchasing must be included in this policy. The federal criteria are described below, but if an organization’s policy is more restrictive, that policy must be followed.

Micro-purchases

The first method of purchasing is the micro-purchase method. It is important to look and see exactly how the threshold is listed in your purchasing policy. If there is a dollar amount listed, that is the dollar amount that must be followed. If it is listed as a cross-reference to 2 CFR 200 or 48 CFR 2.1, that amount must be followed. The current maximum threshold allowed is $10,000, based on an OMB memo. However, references to 2 CFR 200 or 48 CFR 2.1 are still at $3,500. To use this method, the aggregate dollar amount of the purchase cannot be more than the threshold ($10,000 being the maximum.) This allows the organization to simply find a vendor, determine the price and, if it appears reasonable, make the purchase. Obviously, this takes the least amount of documentation.

Uniform Guidance says that to the extent practical, these purchases should be made with different vendors. If you have an approved vendor list, start with that list. You should try to purchase the first purchase from ABC, and the second purchase from XYZ so that multiple vendors have a chance. If you know that ABC is cheaper for this product you can, but do not have to, select it; this method is about spreading the purchases around and not about finding the lowest price.

Small purchases

The second method of purchasing is the small purchases. It is important to look and see exactly how the threshold is listed in your purchasing policy. If there is a dollar amount listed, that is the dollar amount that must be followed. If it is listed as a cross reference to 2 CFR 200 or 48 CFR 2.1, that amount must be followed. The current maximum threshold allowed is $250,000, based on an OMB memo. However, references to 2 CFR 200 or 48 CFR 2.1 are still at $150,000. To use this method, the aggregate dollar amount of the purchase cannot be more than the threshold ($250,000 being the maximum). In this case, the organization must obtain price or rate quotations from an “adequate number of qualified sources. “Typically this is interpreted as three or more sources. These price rates or quotes do not have to be formal bids; this could be calling the vendor and asking the cost or searching online. The important thing is that the vendors and the prices must be documented. Document the reasoning why the particular vendor is chosen.

Sealed bids

The third method of purchasing is sealed bids or formal advertising. This works for firm, fixed-price contracts (lump sum or unit price). It is awarded to the responsible bidder whose bid, conforming to all the material terms and conditions of the invitation for bid, is the lowest price. For this method to be used, you have to expect that two or more responsible bidders will compete. You have to have sufficiently detailed specifications so that the bidders know what they are bidding on. The bids have to be advertised publicly and they must be opened at the time and place prescribed in the bid request. The lowest price that is responsive and responsible must be selected. If a vendor does not meet the specifications listed, they should be rejected. If you otherwise have reason to believe the vendor is not responsible, you can reject the bid. Any reasons for rejection must be documented. The advertising of the bid request must be documented in the procurement files. All of the bids received must be documented in the procurement file.

Competitive proposal

The fourth method of purchasing is by competitive proposal. This is typically used for fixed price or cost-reimbursement contracts. Requests for proposals must be publicized (similar to sealed bids). However, the criteria used to evaluate the bids will not be solely dollar amounts, so the evaluation factors and their relative importance must be publicized as well. Proposals must be solicited from an adequate number of qualified sources. There must be a written method for evaluating the technical aspects of the proposal. The contracts must be awarded to the responsible firm whose proposal is “most advantageous” to the program, which includes price and other factors. If architectural or engineering services are being procured, price does not have to be considered in the procurement selection. The proposal request, method of evaluation, proposal responses, evaluation of proposals, and final results should all be kept in the procurement file.

Noncompetitive proposal

The fifth method of purchasing is the most restricted method, noncompetitive proposals. This is procurement where the organization goes to one source and procures the good, without other sources bidding or having a chance to bid. This is only allowed for one of four reasons.

First, if the item is only available from a single source, then you obviously cannot get bids from other sources. However, this availability should be limited due to the nature of the item itself and not because the specifications were drawn so narrowly that only one entity could provide it (such as a specific VIN for a car).
The second time it is allowed is when there is a public exigency or emergency that will not permit a delay resulting from competitive solicitation. For example, the first floor of the hospital is flooded, we have to get the water out of it immediately so the hospital can function and service patients.
The third time is when the awarding or sub-awarding agency has expressly authorized the purchase in a written request.
The last time when noncompetitive proposals would be appropriate is when you tried another method and could not get more than one source to respond back to your request.

If you receive federal funds, you need to ensure your purchasing policy is up to date. Consider updating the micro-purchase threshold and small purchase threshold if you have not already done so. Make certain that each procurement has the appropriate documentation to justify why the method was chosen and that the policies were followed. In cases other than micro-purchases, this documentation includes how the vendor was selected; if the lowest bid was not selected, the reasons need to be clearly documented.

Many business owners use a calendar year as their company’s tax year. It’s intuitive and aligns with most owners’ personal returns, making it about as simple as anything involving taxes can be. But for businesses whose primary operating season doesn’t fall neatly within a single calendar year, choosing a fiscal year end can make more sense.

The ins and outs

A calendar year, as you would expect, covers 12 consecutive months, beginning January 1 and ending December 31. Flow-through businesses (such as partnerships, limited liability companies and S corporations) using a calendar year generally must file their tax returns by March 15. The deadline for calendar-year C corporations is generally April 15.

A fiscal year consists of 12 consecutive months that don’t begin on January 1 or end on December 31 — for example, July 1 of the current year through June 30 of the following year. A fiscal year also can include periods of 52 to 53 weeks. These might not end on the last day of a month, but instead might end on the same day each year, such as the last Friday in March.

Flow-through entities using a fiscal year file their return by the 15th day of the third month following the close of their fiscal year. So, if their fiscal year ends on March 31, they would need to file their return by June 15. Fiscal-year C corporations generally must file their return by the 15th day of the fourth month following the fiscal year close. Companies that adopt a fiscal year also must use the same time period in maintaining their books and reporting income and expenses.

Determining which tax year is better

A business owner chooses the company’s tax year when filing its first tax return. Simply paying estimated taxes, filing for an extension or submitting an application for an employer identification number won’t count as having adopted a tax year.

Although just about any business can choose to use a calendar year as its tax year, the IRS requires some businesses to do so. Businesses that don’t keep books and have no annual accounting period must use a calendar year. Most sole proprietorships also are required to use a calendar year. To the IRS, sole proprietorships lack distinct identities apart from their proprietors, who as individuals typically use a calendar year when filing their returns.

Individuals who file their first tax return using a calendar year and later become sole proprietors, partners in a partnership or shareholders in an S corporation generally must continue to use a calendar year, unless they receive approval from the IRS to change it. Gaining such approval might be necessary if, for instance, the majority of partners use a fiscal year.

When a fiscal year makes sense

While a calendar year end is simple and more common, a fiscal year can present a more accurate picture of a company’s performance. This often is the case with seasonal businesses. For example, many snowplowing companies make the bulk of their revenue between November and March. Splitting the revenue between December and January to adhere to a calendar year end would make obtaining a solid picture of the company’s performance over a single season difficult.

In addition, if many businesses within an industry use a fiscal year end, a company that wants to compare its performance to the performance of its peers probably will achieve a more accurate comparison if it’s also using the same fiscal year.

Short tax years

A short tax year is, just as its name indicates, a year with fewer than 12 months. A business might end up with a short tax year when it begins operations midyear or switches its tax year.

In either case, the business still needs to file a tax return for this period. But the way the tax is calculated varies. Suppose a business begins operations on May 1 — in other words, midyear — but is using a calendar year. Its first tax return will cover the period from May 1 through December 31.

If the short tax year is a result of the fact that the company is changing its tax year, its income tax typically will be based on its annualized income and expenses. But the company might be able to use a relief procedure, described in Section 443(b)(2) of the Internal Revenue Code, to reduce its tax bill.

It can make a difference

Companies that change their legal structure or operations may find it makes sense to also change their tax year. They’ll need to obtain permission from the IRS and submit Form 1128, “Application to Adopt, Change or Retain a Tax Year.”

Although choosing a tax year may seem like a minor administrative matter, it can have an impact on how and when a company pays taxes. Your tax advisor can help you determine whether a calendar or a fiscal year makes more sense for your business.

Do you own a closely held company? Are you approaching retirement age? If so, you may be struggling to balance conflicting goals for your business. An employee stock ownership plan (ESOP) may help.

A look at the problem

Business owners often need to tap at least some of the value of their business to fund their retirement. At the same time, they may wish to preserve their company for their children, employees and community.

Further complicating matters is that there can be tax advantages to transferring ownership to the next generation as early as possible. Yet owners aren’t always prepared to walk away from their company when it makes the best sense from a tax perspective.

Possible solution

Enter the ESOP. This tool can provide a tax-efficient exit strategy that allows you to remain in control until you’re fully ready to retire. A note of caution: ESOPs are available only to corporations. So if your business is organized as a sole proprietorship, partnership or limited liability company (LLC), you’ll have to convert it into corporate form (a potentially complicated proposition) to take advantage of this strategy.

An ESOP is a type of qualified retirement plan. But instead of investing in publicly traded stocks, bonds and mutual funds, an ESOP is designed to invest primarily in your company’s stock. Like other qualified plans, it’s subject to rules and restrictions, including contribution limits and coverage requirements. Unlike other plans, however, ESOPs must obtain annual independent appraisals of their stock.

When employees become eligible for benefits, they receive the vested portion of their ESOP account balance in the form of stock or cash. If your company is closely held, employees who receive stock must be given a “put option” — the right to sell the stock back to the company during specified time windows at fair market value.

Count the benefits

The advantages for owners are significant. By selling some of your company stock to an ESOP, you achieve greater liquidity, diversification and financial security. What’s more, if your company is a C corporation and the ESOP acquires at least 30 percent of its stock, you can defer any taxable capital gains on the sale by reinvesting the proceeds in certain qualified securities.

Giving up ownership, however, doesn’t mean giving up control — at least not right away. You can continue to serve as your company’s CEO and, as a trustee of the ESOP trust, vote on most corporate decisions.

ESOPs also make sense from an estate planning perspective. Selling shares to your company’s plan provides you with liquid assets to distribute to children or other family members who aren’t involved in the business. At the same time, you can hold on to enough stock to transfer control of the business to those who are involved.

Business boon

By tying the value of the ESOP to your company’s stock, you give employees a powerful incentive to work hard for the business’s future. Company contributions to the ESOP that are used to acquire your stock are tax-deductible, and the company can even borrow the funds it needs — essentially allowing it to deduct both interest and principal payments on the loan.

If your company is structured as an S corporation, the ESOP’s allocable share of its income is exempt from federal income taxes. (A similar exemption is available in most states.) This means that an S corporation owned 100 percent by an ESOP can avoid federal income taxes — and often state income taxes — altogether. However, keep in mind that S corporation ESOPs present certain tax disadvantages as well, such as preventing owners from deferring gains on shares sold to the ESOP.

Consider the costs

Despite the benefits, ESOP costs can add up — including the expense of annual appraisals, stock repurchase obligations, loan payments and qualified plan administration. Weigh such costs with your advisors before adopting this strategy. In addition, tax reform could potentially affect ESOP and estate planning strategies. So be sure to consult your tax advisor.

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Nonprofits are unique in that they sometimes obtain cash (or other assets) without providing an exchange of commensurate value. Accountants know that as contribution revenue. Sometimes it is hard to determine if a transaction is contribution or exchange revenue, or how to account for it, especially in cases involving government grants and contributions. ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, explains clearly when revenue is exchange versus contribution.

The first step in determining the accounting is determining who is paying the money and who, if anyone, is getting goods or services from the transaction.

If the nonprofit gets funds from a payor and provides that payor direct, commensurate value in return, that is an exchange transaction. An example would be when you purchase a training class from your membership organization; you are paying the value of what you are receiving.
If the nonprofit gets funds from a payor and no value is paid out to anyone at that time, that is clearly a contribution.
If the nonprofit gets funds from a payor, such as the federal government, with the purpose of the nonprofit providing the goods and services to a third party, the general public or a subsegment thereof, that is also a contribution. When the general public, or someone other than the payor, receives the goods or services, it is a contribution.

Sometimes transactions include both a contribution and an exchange portion. For example, many zoos, museums, etc. have membership structures where for a certain amount you can get a family membership which provides unlimited entrances to the establishment for a year. However, there is another membership level where the cost is more than the family membership, and the “additional benefits” are really just getting your name published as being a higher class of member or a donor. In these instances, we may need to bifurcate the revenue. We need to determine what value is actually received for a membership, potentially that could be the cost of the regular family membership. The value received for the membership is exchange revenue, and the additional amount paid is a contribution. This is common when there are multiple levels of memberships, in sponsorship agreements, fundraising events, and many other places. Once you know what portion is contribution revenue and what portion is exchange revenue, you can start accounting for it.

The exchange revenue portion is relatively easy to account for. The revenue is recognized when, or as, the goods and services (performance obligations) are transferred. This is the same accounting used by for-profits. Any money collected before the goods or services are transferred is deferred revenue (a liability). If the goods or services are provided before the cash changes hands, an account receivable is recorded at the time the goods or services transfer hands. All exchange revenue amounts are unrestricted (without donor restrictions) because no donor is involved. Under the new revenue recognition standards, significant disclosures, including the total amount of exchange revenue, will be required.

The contribution accounting isn’t quite so straightforward. We know that it is contribution revenue, but we need to determine if it is conditional or unconditional.

Conditional revenue

If the contribution transaction has both a right of return (or right of release) and a barrier, then the contribution is conditional and no revenue is recognized until the conditions are met. A right of return or right of release means the contributor can request the funds be returned or doesn’t have to pay the nonprofit the funds unless the barrier is met. The barriers are measurable performance-related barriers, stipulations related to the purpose of the agreement (not administrative reporting tasks) or limited discretion by the recipient (such as having allowable cost requirements narrower than what the organization or program as a whole could do).
If the contribution is conditional, revenue is not recorded until it becomes unconditional (the contributor no longer has a right of return or right of release because the barrier has been met). If money is received before the contribution becomes unconditional, it is recorded as a liability (advance or deferred revenue). There are also disclosures required for conditional contributions.

Unconditional revenue

If the contribution is unconditional, it gets recorded as revenue as soon as the contribution is made, regardless of whether it is yet collected. It is recorded at the present value of future cash flows. That means not only short-term contributions receivable, but also long-term ones, get recorded. If an organization promises unconditionally to give the nonprofit $100,000 per year for five years, the present value of the full $500,000 is recorded as revenue and a contribution receivable in the year the promise is made!
You also have to determine if there are donor restrictions as to the use of the funds. If the funds are to support a specific time period or a specific program (which is narrower in scope than the mission), they get recorded as with donor restrictions.
If there is a multi-year contribution receivable, there is an implied time restriction that the amounts are not to be used until the year in which they are to be received, so that would be recorded as with donor restrictions.
If the amounts are to be invested in perpetuity and only the income used, that would also be recorded as with donor restrictions.
Note that many of the conditional contributions from the federal government are also labeled with donor restrictions; they can be used only for certain programs. However, the condition and the restriction may both be satisfied at the same time.

In summary, all exchange revenue is considered without donor restriction, because there is no donor. All cash collected for exchange revenue before the money is earned is a liability (deferred revenue). Exchange revenue never results in net assets with donor restrictions, as there is no donor.

Contribution revenue, once unconditional, can be with donor restrictions or without donor restrictions. Contribution revenue is recorded as soon as it becomes revenue, and not when the corresponding expenses are paid. If the contribution revenue is with donor restrictions, the release from restriction will be recorded when the expenses have been made that release the restriction. Contribution revenue is only deferred revenue (liability) if it is a conditional contribution and the conditions have not yet been met.

This distinction will become more important in the coming years as the revenue recognition standards, and the related disclosure requirement to say how much revenue is from contracts (exchange), get implemented.

Businesses that acquire, construct or substantially improve a building — or did so in previous years — should consider a cost segregation study. These studies combine accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. This may allow you to accelerate depreciation deductions, thus reducing taxes and boosting cash flow. And the potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA).

The basics

IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you’ll depreciate a building’s structural components — such as walls, windows, HVAC systems, elevators, plumbing and wiring — along with the building. Personal property — such as equipment, machinery, furniture and fixtures —is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment. For example, let’s say you acquire a nonresidential commercial building for $5 million on January 1. If the entire purchase price is allocated to 39-year real property, you’re entitled to claim $123,050 (2.461% of $5 million) in depreciation deductions the first year. A cost segregation study may reveal that you can allocate $1 million in costs to five-year property eligible for accelerated depreciation. Reallocating the purchase price increases your first-year depreciation deductions to $298,440 ($4 million × 2.461%, plus $1 million × 20%).

A cost segregation study can assist you in making partial asset disposition elections and deducting removal costs under the recently issued final tangible property regulations. Consult with your tax advisor about the possible interplay that may prove beneficial depending on your situation.

Impact of the TCJA

Look-back studies

If your business invested in depreciable buildings or improvements in previous years, it’s not too late to take advantage of a cost segregation study. A “look-back” cost segregation study allows you to claim missed deductions back to 1987.

To claim these tax benefits, file Form 3115,“Application for Change in Accounting Method,” with the IRS and claim a one-time “catch-up” deduction on your current year’s return. There’s no need to amend previous years’ returns.

Property and sales tax considerations

You can also use cost segregation studies to support the property tax or sales tax treatment of certain items. For example, you might use a study to document the cost of tax-exempt property. Many states exempt property used in manufacturing, for example.

A word of caution: Certain property may be treated differently for income tax and property tax purposes, and reporting mistakes can lead to double taxation. Suppose your state has a personal property tax and that you reclassify certain building components as personal property for income tax purposes based on a cost segregation study. If you report these items to the state as taxable personal property, but state law treats them as part of the real estate for real property tax purposes, they may be taxed twice: once as personal property and once as real property.

To avoid this result, be sure you have systems in place to track the costs of these items separately for income tax and property tax purposes.

Is it right for you?

Cost segregation studies may yield substantial benefits, but they’re not right for every business. To find out whether a study would be worthwhile, ask your tax advisor to do an initial evaluation to assess the potential tax savings.

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Does your business reimburse employees’ work-related travel expenses? If you do, you know that it can help you attract and retain employees. If you don’t, you might want to start, because changes under the Tax Cuts and Jobs Act (TCJA) make such reimbursements even more attractive to employees. Travel reimbursements also come with tax benefits, but only if you follow a method that passes muster with the IRS.

The TCJA’s impact

Before the TCJA, unreimbursed work-related travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to benefit from the deduction because either they didn’t itemize deductions or they didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.

For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions and have enough expenses that they would exceed the floor won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees.

The potential tax benefits

Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals. But, under the TCJA, entertainment expenses are no longer deductible.

To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance.

Reimbursing actual expenses

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

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

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

Keeping it simple

With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems.

What’s right for your business?

To learn more about business travel expense deductions and reimbursements post-TCJA, contact us. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you.

Yeo & Yeo’s Payroll Services Group would like to make you aware of important payroll updates that will affect you and your employees.

IRS Releases Draft of 2019 Form W-4

The proposed 2019 Form W-4 reflects major changes. At this time, all current employees’ W-4 forms are still valid. However, all new employees hired after December 31, 2018, and all employees filing exempt in 2018, will need to use the new 2019 Form W-4 form beginning January 1, 2019.

I-9 Compliance Crackdown – How to Be Prepared for an I-9 Audit

As a part of the government’s comprehensive effort to combat unauthorized immigration, the Immigration and Customs Enforcement (ICE) Homeland Security Investigations’ audits of Form I-9 have increased by more than 65 percent and are expected to continue to rise. Any employer can be investigated.

Social Security Administration Sending ‘No Match’ Notices

The Social Security Administration (SSA) has begun mailing notifications to businesses and third parties who submitted 2017 W-2 forms that contained name and Social Security number (SSN) combinations that did not match the SSA records.

Have questions? Contact the payroll professionals at Yeo & Yeo.