Saving Tax on Restricted Stock Awards with the Sec. 83(b) Election

Today many employees receive stock-based compensation from their employer as part of their compensation and benefits package. The tax consequences of such compensation can be complex — subject to ordinary-income, capital gains, employment and other taxes. But if you receive restricted stock awards, you might have a tax-saving opportunity in the form of the Section 83(b) election.

Convert ordinary income to long-term capital gains

Restricted stock is stock your employer grants you subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk (that is, it’s vested) or you sell it.

At that time, you pay taxes on the stock’s fair market value (FMV) at your ordinary-income rate. The FMV will be considered FICA income, so it also could trigger or increase your exposure to the additional 0.9% Medicare tax.

But you can instead make a Sec. 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.

The Sec. 83(b) election can be beneficial if the income at the grant date is negligible or the stock is likely to appreciate significantly. With ordinary-income rates now especially low under the Tax Cuts and Jobs Act (TCJA), it might be a good time to recognize such income.

Weigh the potential disadvantages

There are some potential disadvantages, however:

You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax. But if your company is in the earlier stages of development, the income recognized may be relatively small.
Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value. However, you’d have a capital loss in those situations.
When you sell the shares, any gain will be included in net investment income and could trigger or increase your liability for the 3.8% net investment income tax.

It’s complicated

As you can see, tax planning for restricted stock is complicated. Let us know if you’ve recently been awarded restricted stock or expect to be awarded such stock this year. We can help you determine whether the Sec. 83(b) election makes sense in your specific situation.

It’s not uncommon for businesses to sometimes generate tax losses. But the losses that can be deducted are limited by tax law in some situations. The Tax Cuts and Jobs Act (TCJA) further restricts the amount of losses that sole proprietors, partners, S corporation shareholders and, typically, limited liability company (LLC) members can currently deduct — beginning in 2018. This could negatively impact owners of start-ups and businesses facing adverse conditions.

Before the TCJA

Under pre-TCJA law, an individual taxpayer’s business losses could usually be fully deducted in the tax year when they arose unless:

The passive activity loss (PAL) rules or some other provision of tax law limited that favorable outcome, or
The business loss was so large that it exceeded taxable income from other sources, creating a net operating loss (NOL).

After the TCJA

The TCJA temporarily changes the rules for deducting an individual taxpayer’s business losses. If your pass-through business generates a tax loss for a tax year beginning in 2018 through 2025, you can’t deduct an “excess business loss” in the current year. An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of:

Your aggregate business income and gains for the tax year, and
$250,000 ($500,000 if you’re a married taxpayer filing jointly).

The excess business loss is carried over to the following tax year and can be deducted under the rules for NOLs.

For business losses passed through to individuals from S corporations, partnerships and LLCs treated as partnerships for tax purposes, the new excess business loss limitation rules apply at the owner level. In other words, each owner’s allocable share of business income, gain, deduction or loss is passed through to the owner and reported on the owner’s personal federal income tax return for the owner’s tax year that includes the end of the entity’s tax year.

Keep in mind that the new loss limitation rules apply after applying the PAL rules. So, if the PAL rules disallow your business or rental activity loss, you don’t get to the new loss limitation rules.

Expecting a business loss?

The rationale underlying the new loss limitation rules is to restrict the ability of individual taxpayers to use current-year business losses to offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains.

The practical impact is that your allowable current-year business losses can’t offset more than $250,000 of income from such other sources (or more than $500,000 for joint filers). The requirement that excess business losses be carried forward as an NOL forces you to wait at least one year to get any tax benefit from those excess losses.

If you’re expecting your business to generate a tax loss in 2018, contact us to determine whether you’ll be affected by the new loss limitation rules. We can also provide more information about the PAL and NOL rules.

If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring your child may make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).

How it works

By shifting some of your business earnings to a child as wages for services performed, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done must be legitimate and the child’s wages must be reasonable.

Here’s an example: A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who’s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn’t have any other earnings.

The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350.

The father can save an additional $2,035 in taxes if he keeps his daughter on the payroll as a part-time employee into the fall and pays her an additional $5,500. She can shelter the additional income from tax by making a tax-deductible contribution to her own traditional IRA.

Family taxes will be cut even if an employee-child’s earnings exceed his or her standard deduction and IRA deduction. Why? The unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Avoiding the “kiddie tax”

TCJA changes to the “kiddie tax” also make income-shifting through hiring your child (rather than, say, giving him or her income-producing investments) more appealing. The kiddie tax generally applies to children under age 19 and to full-time students under age 24. Before 2018, the unearned income of a child subject to the kiddie tax was generally taxed at the parents’ tax rate.

The TCJA makes the kiddie tax harsher. For 2018-2025, a child’s unearned income will be taxed according to the tax brackets used for trusts and estates, which for 2018 are taxed at the highest rate of 37% once taxable income reaches $12,500. In contrast, for a married couple filing jointly, the 37% rate doesn’t kick in until their taxable income tops $600,000. In other words, children’s unearned income often will be taxed at higher rates than their parents’ income.

But the kiddie tax doesn’t apply to earned income.

Other tax considerations

If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Contact us to learn more about the tax rules surrounding hiring your child, how the kiddie tax works or other family-related tax-saving strategies.

The Tax Cuts and Jobs Act (TCJA) introduced a flat 21% federal income tax rate for C corporations for tax years beginning in 2018 and beyond. Under prior law, profitable C corporations paid up to 35%. This change has caused many business owners to ask: What’s the optimal choice of entity for my start-up business?

Choosing the Optimal Business Structure

Under prior tax law, conventional wisdom was that most small and midsize businesses should be set up as sole proprietorships, or so-called “pass-through entities,” including:

Single-member limited liability companies (LLCs) treated as sole proprietorships for tax purposes,
Partnerships,
LLCs treated as partnerships for tax purposes, and
S corporations.

View our Tax Reform Pass-through Deduction Flowchart.

The big reason that pass-through entities were popular was that income from C corporations is potentially taxed twice. First, the C corporation pays entity-level income tax. And then, corporate shareholders pay tax on dividends and capital gains. The use of pass-through entities avoids the double taxation issue, because there’s no federal income tax at the entity level.

Although C corporations are still potentially subject to double taxation under the TCJA, the new 21% corporate federal income tax rate helps level the playing field between C corporations and pass-through entities.

This issue is further complicated by another provision of the TCJA that allows noncorporate owners of pass-through entities to take a deduction of up to 20% on qualified business income (QBI). (See “QBI Deductions for Pass-Through Businesses” at right.)

There’s no universal “right” answer when deciding how to structure your business to minimize taxes. The answer depends on your business’s unique situation and your situation as an owner. Here are three common scenarios and choice-of-entity implications to help you decide what’s right for your start-up venture.

1. Business Generates Tax Losses

If your business consistently generates losses, there’s no tax advantage to operating as a C corporation. Losses from C corporations can’t be deducted by their owners. So, it probably makes sense to operate as a pass-through entity. Then, the losses will pass through to your personal tax return (on Schedule C, E, or F, depending on the type of entity you choose).

2. Business Distributes All Profits to Owners

Let’s suppose your business is profitable and pays out all of its income to the owners. Here are the implications of operating as a C corporation vs. a pass-through entity under this scenario.

Results with a C corporation. After paying the flat 21% federal income tax rate at the corporate level, the corporation pays out all of its after-tax profits to its shareholders as taxable dividends eligible for the 20% maximum federal rate.

So, the maximum combined effective federal income tax rate on the business’s profits — including the 3.8% net investment income tax (NIIT) on dividends received by shareholders — is 39.8%. That equals 21% for the corporate level tax, plus the personal level tax rate on the dividends, which are reduced by the corporate level tax [(20% + 3.8%) x (100% – 20%)]. While you would still have double taxation here, the 39.8% rate is lower than it would have been under prior law.

Results with a pass-through entity. For a pass-through entity that pays out all of its profits to its owners, the maximum effective federal income tax rate on the venture’s profits is 40.8%. That equals the highest federal income tax rate for individuals (37%), plus 3.8% for the NIIT or 3.8% for the Medicare tax portion of the self-employment (SE) tax (whichever applies). This example assumes that, if the SE tax applies, the additional 0.9% Medicare tax on high earners increases the rate for the Medicare tax portion of the SE tax to 3.8%.

If you can claim the full 20% QBI deduction, the maximum federal income tax rate is reduced to 33.4%. That equals the highest federal income tax rate for individuals on passed-through income reduced to reflect the QBI deduction [37% x (100% – 20%)], plus 3.8% for the NIIT or 3.8% for the Medicare tax portion of the SE tax (whichever applies). However, the QBI deduction is allowed only for 2018 through 2025, unless Congress extends it.

In this scenario, operating as a pass-through entity is probably the way to go if significant QBI deductions are available. If not, it’s basically a toss-up. But operating as a C corporation may be simpler from a tax perspective.

3. Business Retains All Profits to Finance Growth

Let’s suppose your business is profitable, but it socks away all of its profits to fund future growth strategies. Here are the implications of operating as a C corporation vs. a pass-through entity under this scenario.

Results with a C corporation. In this example, we’re going to assume that retained profits increase the value of the corporation’s stock dollar-for-dollar, and that shareholders eventually sell the shares and pay federal income tax at the maximum 20% rate for long-term capital gains.

The maximum effective combined federal income tax rate on the venture’s profits is 39.8%. That equals 21% for the corporate level tax, plus the personal level tax on gain that is reduced to reflect the 21% corporate tax [(20% + 3.8%) x (100% – 21%)]. While you would still have double taxation here, the 39.8% rate is better than it would have been under prior law. Plus, shareholder-level tax on stock sale gains is deferred until the stock is sold.

If the corporation is a qualified small business corporation (QSBC), the 100% gain exclusion may be available for stock sale gains. If so, the maximum combined effective federal income tax rate on the venture’s profits can be as low as 21%. Ask your tax advisor if your venture is eligible for QSBC status.

Results with a pass-through entity. Under similar assumptions for a pass-through entity, the maximum effective federal income tax rate on the venture’s profits is 40.8%. That equals the highest federal income tax rate for individuals (37%), plus 3.8% for the NIIT or 3.8% for the Medicare tax portion of the SE tax (whichever applies). That’s slightly higher than the 39.8% rate that applies with the C corporation option.

However, here’s the key difference: For a pass-through entity, all taxes are due in the year that income is reported. With a C corporation, the shareholder-level tax on stock sale gains are deferred until the shares are sold.

If you can claim the full 20% QBI deduction, the maximum effective rate for a pass-through entity is reduced to 33.4%. That equals the highest federal income tax rate for individuals on passed-through income that is reduced to reflect the QBI deduction [37% x (100% – 20%)], plus 3.8% for the NIIT or 3.8% for the Medicare tax portion of the SE tax (whichever applies). However, the QBI deduction is allowed only for 2018 through 2025, unless Congress extends it.

In this scenario, operating as a C corporation is probably the way to go if the corporation is a QSBC. If QSBC status is unavailable, operating as a C corporation is still probably preferred — unless significant QBI deductions would be available at the owner level. If you expect to be eligible for the full 20% QBI deduction, pass-through entity status might be preferred. Discuss this issue with your tax advisor to evaluate all of the pros and cons.

Other Related Issues to Consider

Business owners can use a variety of strategies to help lower their tax bills, and those strategies may vary depending on the type of entity you choose. Before deciding on the optimal business structure for your start-up, here are some other issues to consider.

Deductions for capital expenditures. For the next few years, C corporations and pass-through entities will be able to deduct 100% of the cost of many types of fixed assets, thanks to the TCJA’s generous Section 179 rules, which are permanent, and the 100% first-year bonus depreciation deduction, which is generally available for qualifying property placed in service between September 28, 2017, and December 31, 2022.

These changes under the new tax law may significantly reduce the federal income tax hit on a capital-intensive business over the next few years. However, reducing pass-through income with these favorable first-year depreciation rules will also reduce allowable QBI deductions.

Deductions for “reasonable” compensation. Closely held C corporations have historically sought to avoid double taxation by paying shareholder-employees as much as possible in deductible salaries, bonuses and fringe benefits. However, salaries, bonuses and benefits must represent reasonable compensation for the work performed.

For 2018 through 2025, this strategy is a bit more attractive because the TCJA’s rate reductions for individual taxpayers mean that most shareholder-employees will pay less tax on salaries and bonuses. In addition, any taxable income left in the corporation for tax years beginning in 2018 and beyond will be taxed at only 21%. Finally, C corporations can provide shareholder-employees with some tax-free fringe benefits that aren’t available to pass-through entity owners.

S corporations have historically tried to do the reverse. That is, they’ve attempted to minimize salaries paid to shareholder-employees to reduce Social Security and Medicare taxes. The IRS is aware of this strategy, so it’s important to pay S corporation shareholder-employees reasonable salaries to avoid IRS challenges.

The TCJA makes this strategy even more attractive for many businesses, because it maximizes the amount of S corporation income that’s potentially eligible for the QBI deduction. Guaranteed payments to partners (including LLC members treated as partners for tax purposes) and reasonable salaries paid to S corporation shareholder-employees do not count as QBI. But S corporation net income (after deducting salaries paid to shareholder-employees) does qualify as QBI.

Appreciating assets. If your business owns real estate, certain intangibles and other assets that are likely to appreciate, it’s still generally inadvisable to hold them in a C corporation. Why? If the assets are eventually sold for substantial profits, it may be impossible to get the profits out of the corporation without double taxation.

In contrast, if appreciating assets are held by a pass-through entity, gains on sale will be taxed only once at the owner level. The maximum rate will generally be 23.8% or 28.8% for real estate gains attributable to depreciation.

Spin-offs. A major upside for pass-through entities is the QBI deduction. But the disallowance rule for service businesses may wipe out QBI deductions for certain types of businesses, such as medical practices and law firms, that are set up as pass-through entities.

However, a spin-off might allow you to take a partial QBI deduction. How? If you can spin off operations that don’t involve the delivery of specified services into a separate pass-through entity, income from the spin-off may qualify for the QBI deduction.

The IRS hasn’t yet issued guidance on this strategy. Plus, the QBI deduction is scheduled to expire after 2025, unless Congress extends it. So, making big changes to create QBI deductions may not be worth the trouble. Talk to your tax advisor before attempting a spin-off.

Need Help?

The TCJA has far-reaching effects on business taxpayers. Contact your tax advisor to discuss how your business should be set up on opening day to lower its tax bill over the long run.

For simplicity, this article focuses on start-ups. If you own an existing business and wonder whether your current business structure still makes sense, many of the same principles apply. But the tax rules and expense for converting from one type of entity to another add another layer of complexity. Discuss your concerns with a tax pro who can help you with the ins and outs of making a change.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Christopher M. Sheridan, CPA, has achieved the Certified Valuation Analyst (CVA) credential, awarded by the National Association of Certified Valuators and Analysts (NACVA).

“This is a great achievement for Chris as a professional,” says David Schaeffer, Managing Principal of Yeo & Yeo’s Saginaw office. “He joins our growing business valuation group of three CVAs across the firm.”

A CVA is the premier accreditation for CPAs. Adding a CVA designation along with Chris’ efforts as a member of Yeo & Yeo’s Litigation Support , Valuation and Fraud & Forensics Services Group, allows him the ability to provide sound and reliable business valuation services for attorneys and successful business owners. Yeo & Yeo provides business valuations for privately held businesses and business owners as part of success planning, and as part of business strategy to more efficient business growth.

Chris is a senior accountant and a member of Yeo & Yeo’s Manufacturing Services Group. He holds additional memberships with the MICPA’s Manufacturing Task Force, the Great Lakes Bay Manufacturers Association, the Michigan Manufacturers Association and the National Association of Certified Valuators and Analysts.

In many parts of the country, summer is peak season for selling a home. If you’re planning to put your home on the market soon, you’re probably thinking about things like how quickly it will sell and how much you’ll get for it. But don’t neglect to consider the tax consequences.

Home sale gain exclusion

The U.S. House of Representatives’ original version of the Tax Cuts and Jobs Act included a provision tightening the rules for the home sale gain exclusion. Fortunately, that provision didn’t make it into the final version that was signed into law.

As a result, if you’re selling your principal residence, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

To qualify for the exclusion, you must meet certain tests. For example, you generally must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. (Gain allocable to a period of “nonqualified” use generally isn’t excludable.) In addition, you can’t use the exclusion more than once every two years.

More tax considerations

Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are some additional tax considerations when selling a home:

Tax basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.

Losses. A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes. If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

A big investment

Your home is likely one of your biggest investments, so it’s important to consider the tax consequences before selling it. If you’re planning to put your home on the market, we can help you assess the potential tax impact. Contact us to learn more.

Audits have a stigma that leads people to believe that audits (and the auditors) are only a requirement to check off the annual business cycle. Hopefully, you have a great relationship with your auditor that allows the audit process to go smoothly. Once the financial statements have been released, the audit submitted to the State, and the Board or Council presentation completed, you’re ready to kick those auditors to the curb and tackle the next priority. We can hardly blame you! However, auditors have much more potential than just completing the annual audit that you could harness to benefit your organization year round.

Risk-Based Auditing

First, our audit teams take a risk-based approach to developing and customizing each client’s audit. What does that mean? We gather historical and current information about the organization, interview employees, members of management and members of the Board or Council, and then use that information to brainstorm possible ways things could go wrong in your organization. After our brainstorming session, the customized audit plan is developed accordingly. The audit plan can incorporate areas where the organization could benefit from further efficiency, or areas where management or the Board or Council has additional concerns. Here are some examples:

If the organization routinely has issues with getting all employees to timely submit credit card receipts, we can focus attention to this area. Our testing will likely result in a recommendation that provides management with leverage for initiating change. If management can say the auditors are looking at an area, employees are more likely to comply.
If bank accounts aren’t being reconciled as timely throughout the year as the manager would like, he/she can ask the auditor to review the reconciliation completion dates without having to be the bad guy.

These and many other areas of organizations can be improved by being an active participant in your audit.

Institutional Knowledge

Second, auditors have a significant amount of institutional knowledge. Many of my clients have been with me more than five years and I know their organization well, maybe better than most within their organization. When moving into the future, take advantage of that historical knowledge. Auditors can help with long-term analysis, in some cases projections of where the organization is heading, and can help your organization avoid taking a path that was already traveled which resulted in a less than desirable outcome. Helping the organization move in the right direction makes everyone feel like a winner.

Credibility

Another area in which auditors can be used is to gain creditability. For example, when there are new members of management or new members of the Finance Committee, those new members are trying to get up to speed, and in some cases challenge the establishment while having little to no history of the organization. Auditors can explain the hurdles that were faced, describe how the organization has grown and dealt with issues in the past, and work to support the qualifications and work of members of management. In some cases, we have even provided Board or Council training related to financial statements or internal controls. Auditors are generally well respected and knowledgeable; use that to your advantage.

Interim Help

Lastly, when an organization experiences turnover in management and staff, or there are large projects that no one has time to complete, your auditor might be the answer. As previously mentioned, in many cases auditors know your organization and internal controls better than most in your organization. With that knowledge, auditors can help you design controls to cover the organization in the interim and can even do certain types of projects that don’t include management functions. Sometimes this can keep the organization from falling woefully behind while they look to replace lost team members, or help move projects off of the to-do list and keep the organization moving forward.

These ideas are just the tip of the iceberg. The main point is that we are your auditors all year long, not just at the time of the audit. We want to hear from our clients and are always willing to go the extra mile to help out when we can.

When it comes to financial statements, you can engage your CPA to perform varying levels of service, from a compilation, to a review, to an audit. Learn the situations when each may be appropriate for your nonprofit.

To first understand what level of service is most appropriate for your situation, you need to understand the differences among the three.

A compilation is the most basic of the three levels of financial statement services your CPA can perform. In a compilation, your CPA is required to read the financial statements and consider whether those financial statements are free of obvious material misstatements based on the reporting framework presented (for example, generally accepted accounting principles, U.S. GAAP). The CPA, however, is not required to provide any assurance on the financial statements and therefore does not verify the accuracy or completeness of the information or obtain any evidence supporting the financial statement line items.

A review, on the other hand, is a level of service where the CPA provides a limited assurance on the accuracy of the financial statements. In a review, the CPA obtains an understanding of an organization’s operations and accounting practices and principally relies on applying analytical procedures and inquiries of management to determine if any material modifications should be made to the financial statements. This ensures that the financial statements are presented in accordance with the reporting framework presented (for example, U.S. GAAP).

An audit is the highest level of independent assurance that can be obtained on an organization’s financial statements. During an audit, your CPA obtains an understanding of internal controls, assesses fraud risks and corroborates amounts and disclosures included in your financial statements. The intent is to issue an opinion to provide reasonable (but not absolute) assurance on the accuracy of the financial statements in accordance with the reporting framework presented. Additionally, as part of the audit, your CPA will communicate any deficiencies identified in internal controls.

Although an audit is the most comprehensive level of service and the highest level of independent assurance you can obtain on your financial statements, it does not mean it is always the best option for an organization. In some cases, especially for smaller organizations, an audit will likely be cost prohibitive and result in more service than what an organization needs.

In Michigan, to comply with the state’s solicitation requirements, nonprofits are required to undergo an annual audit when they receive more than $525,000 in contributions (excluding any government grants). They are required to have a review performed when contributions (excluding any government grants) are between $275,000 and $525,000. Beyond these requirements, certain grantors or donors may impose audit or review requirements as a condition of receiving their funding. This is frequently the case for organizations that receive federal grants over particular dollar thresholds.

Outside of these circumstances, there is not a one-size-fits-all answer to determine the level of assurance needed on an organization’s financial statements. Each organization’s situation, including number of funding sources, complexity of operations, level of monitoring, and accounting practices, should be taken into account when determining the level of service to have performed on the financial statements. Lastly, just because you have one level of service performed one year does not mean you can’t have a different level of service in another. It is a common practice in the association industry (where there are frequently no outside requirements to undergo an audit) to have an audit performed every three years, with a review performed in the off years.

For a more in-depth information about financial statement services, refer to Yeo & Yeo’s Guide to Financial Statement Services: Compilation, Review and Audit.

If you have questions about what level of service is right for your organization, your Yeo & Yeo advisor would be pleased to help guide you and your nonprofit board through the decision-making process.

Many of the manufacturers we speak with express their concern about finding younger talent – or sometimes just available talent – in the manufacturing workforce. Since the recession a few years back, most manufacturing plants have been running leaner, and the manufacturing job force has not been appealing for the younger generation. Also, our culture promotes the mindset that the only way to be successful in a career is to attend college and earn a degree rather than learn a skilled trade. These circumstances have left a huge void in the manufacturing workforce, especially in the need for younger talent. Most manufacturers are concerned that when their machinists retire, they won’t have replacements in place who are educated enough to perform the same tasks.

Delta College and Mid Michigan Community College have addressed this problem head-on by creating an accelerated CNC program to train and prepare applicants with the proper knowledge and skills to excel in this field. The program addresses the two major problems in regards to this topic by attracting the younger generations and offering a viable solution to those who do not want to obtain the traditional college degree.

One great thing about this program is that it is local. Most of the graduates are local residents who plan to find a job locally. The colleges are an excellent resource to find trained talent who want to enter the manufacturing workforce. The students will already have the training and expertise to start working immediately, with a background that could propel them into more advanced machining.

If you are experiencing similar issues with finding younger, trained talent, look no further than our back yard!

A conflict of interest policy is essential to have in place for both governance (board of directors) and management to mitigate personal interests from competing with those of the nonprofit. Such a policy is so significant that it is one of only a handful of policies the IRS requires organizations to report on their Form 990, whether or not the policy has been adopted.

A conflict of interest policy should be written and should identify the organization’s process to identify conflicts of interest, as well as the process to oversee any conflicts of interest. A typical component of a conflict of interest policy is the annual completion of a conflict of interest disclosure form, and review of the forms at a board meeting.

Now is as good a time as any to ensure your nonprofit has adopted and is staying up to date with its conflict of interest policy.

Check Out Our eBook on Creating Policies for Your Nonprofit

Download eBook

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Brian Dixon, CPA, has achieved the Advanced Single Audit Certification from the American Institute of CPAs (AICPA).

The certification is reserved for auditors with a minimum of seven years of experience planning, performing, reviewing, and reporting single audits in accordance with the latest Uniform Guidance requirements. The Advanced Single Audit exam covers topics such as internal controls over compliance, compliance testing, and audit sampling, among others.

Dixon is a Principal and leads the firm’s Audit Services Group. He has over 20 years of accounting and audit experience with specialization in the nonprofit and healthcare sectors, and proven expertise in single audits of federal awards.

Yeo & Yeo is an industry leader serving Governments, Nonprofit and Education entities throughout Michigan.

Learn more about the IRS resources in our article, IRS Encourages ‘Paycheck Checkup’ for Taxpayers to Check Their Withholding.

More considerations

Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if:

You get married or divorced,
You add or lose a dependent,
You purchase a home,
You start or lose a job, or
Your investment income changes significantly.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly payments are due.)

The TCJA and your tax situation

If you rely solely on the new withholding tables, you could run the risk of significantly underwithholding your federal income taxes. As a result, you might face an unexpectedly high tax bill when you file your 2018 tax return next year. Contact us for help determining whether you should adjust your withholding. We can also answer any questions you have about how the TCJA may affect your particular situation.

2018 Essential Services Assessment (ESA) statements have been generated and are now available to all taxpayers whose Combined Document (Form 5278) information was forwarded to the Department by the local assessor. ESA statements may be accessed via Michigan Treasury Online (MTO) at https://mto.treasury.michigan.gov.

For instructions on accessing and navigating MTO and submitting electronic ESA payments, please visit the ESA website at www.michigan.gov/esa. If, after reviewing the information available, taxpayers or assessors have questions regarding EMPP or ESA, please feel free to contact the ESA unit at ESAQuestions@michigan.gov or 517-241-0310.

With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

Many variables

A tremendous number of variables affect your overall tax liability for the year. Looking at these variables early in the year can give you more opportunities to reduce your 2018 tax bill.

For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn’t be just a year-end activity.

Certainty vs. uncertainty

Last year, planning early was a challenge because it was uncertain whether tax reform legislation would be signed into law, when it would go into effect and what it would include. This year, the TCJA tax reform legislation is in place, with most of the provisions affecting individuals in effect for 2018–2025. And additional major tax law changes aren’t expected in 2018. So there’s no need to hold off on tax planning.

But while there’s more certainty about the tax law that will be in effect this year and next, there’s still much uncertainty on exactly what the impact of the TCJA changes will be on each taxpayer. The new law generally reduces individual tax rates, and it expands some tax breaks. However, it reduces or eliminates many other breaks.

The total impact of these changes is what will ultimately determine which tax strategies will make sense for you this year, such as the best way to time income and expenses. You may need to deviate from strategies that worked for you in previous years and implement some new strategies.

Getting started sooner will help ensure you don’t take actions that you think will save taxes but that actually will be costly under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities.

Now and throughout the year

To get started on your 2018 tax planning, contact us. We can help you determine how the TCJA affects you and what strategies you should implement now and throughout the year to minimize your tax liability.

Now that small businesses and their owners have filed their 2017 income tax returns (or filed for an extension), it’s a good time to review some of the provisions of the Tax Cuts and Jobs Act (TCJA) that may significantly impact their taxes for 2018 and beyond. Generally, the changes apply to tax years beginning after December 31, 2017, and are permanent, unless otherwise noted.

Corporate taxation

Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
Replacement of the flat personal service corporation (PSC) rate of 35% with a flat rate of 21%
Repeal of the 20% corporate alternative minimum tax (AMT)

Pass-through taxation

Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
New 20% qualified business income deduction for owners — through 2025
Changes to many other tax breaks for individuals — generally through 2025

New or expanded tax breaks

Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million (these amounts will be indexed for inflation after 2018)
New tax credit for employer-paid family and medical leave — through 2019

Reduced or eliminated tax breaks

New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
New limits on net operating loss (NOL) deductions
Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
New rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
New limitations on excessive employee compensation
New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Don’t wait to start 2018 tax planning

This is only a sampling of some of the most significant TCJA changes that will affect small businesses and their owners beginning this year, and additional rules and limits apply. The combined impact of these changes should inform which tax strategies you and your business implement in 2018, such as how to time income and expenses to your tax advantage. The sooner you begin the tax planning process, the more tax-saving opportunities will be open to you. So don’t wait to start; contact us today.

You may have breathed a sigh of relief after filing your 2017 income tax return (or requesting an extension). But if your office is strewn with reams of paper consisting of years’ worth of tax returns, receipts, canceled checks and other financial records (or your computer desktop is filled with a multitude of digital tax-related files), you probably want to get rid of what you can. Follow these retention guidelines as you clean up.

General rules

Retain records that support items shown on your tax return at least until the statute of limitations runs out — generally three years from the due date of the return or the date you filed, whichever is later. That means you can now potentially throw out records for the 2014 tax year if you filed the return for that year by the regular filing deadline. But some records should be kept longer.

For example, there’s no statute of limitations if you fail to file a tax return or file a fraudulent one. So you’ll generally want to keep copies of your returns themselves permanently, so you can show that you did file a legitimate return.

Also bear in mind that, if you understate your adjusted gross income by more than 25%, the statute of limitations period is six years.

Some specifics for businesses

Records substantiating costs and deductions associated with business property are necessary to determine the basis and any gain or loss when the property is sold. According to IRS guidelines, you should keep these for as long as you own the property, plus seven years.

The IRS recommends keeping employee records for three years after an employee has been terminated. In addition, you should maintain records that support employee earnings for at least four years. (This timeframe generally will cover varying state and federal requirements.) Also keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.

For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations period.

Regulations for sales tax returns vary by state. Check the rules for the states where you file sales tax returns. Retention periods typically range from three to six years.

When in doubt, don’t throw it out

It’s easy to accumulate a mountain of paperwork (physical or digital) from years of filing tax returns. If you’re unsure whether you should retain a document, a good rule of thumb is to hold on to it for at least six years or, for property-related records, at least seven years after you dispose of the property. But, again, you should keep tax returns themselves permanently, and other rules or guidelines might apply in certain situations. Please contact us with any questions.