3 Ways to Develop Manufacturing Leaders

Developing manufacturing leaders takes time and effort, but is critical to your success and the success of the industry. From an accounting and financial perspective, a few key answers come to mind, including cross-training, segregation of duties as related to fraud and internal controls, and succession planning.

Cross-training

Well-developed leaders are cross-trained in a vast array of tasks and duties in their field. They will also fill in where needed to complete the project. With multiple, high value, cross-trained leaders within your organization, the staffing requirements within a department are significantly decreased. Cross-training leaders also increases employee morale and helps reduce payroll costs through decreased employee turnover and training efforts.

Segregation of duties

Segregation of duties plays an essential role in any environment. Risks associated with employee fraud and error are particularly higher in the manufacturing industry. The well-developed leader within your organization will understand the importance of segregation of duties and take steps to implement the separation of duties as an internal control. This control makes risks associated with employee fraud and error manageable by the leader, through only allowing employee’s access or authority to certain parts of the manufacturing process. Imagine if one employee had the authority and control to purchase and receive materials, make entries in the accounting software and pay invoices. The risk of fraud would be significantly high for this organization because of the authority and power of the one employee to manipulate the process. When these duties are separated among employees as much as possible with the addition of proper oversight of a well-developed leader, it will allow the risk due to fraud or error to be significantly decreased.

Succession planning

Does your organization have a succession plan for the future? Who will fill your role when you take on a new role within the organization? What would happen if you retire or lose a key employee? These questions illustrate the importance of developing a well-trained leader within your organization – one who is cross-trained and understands the different functions of the organization. A developed leader from within may be the first step to an effective succession plan or filling an important role within the organization. The absence of a plan could be costly, leading to weakening employee morale, increased negativity internally and externally, or the ultimate failure of the business.

Well-developed leaders are the future of your manufacturing organization. They understand the importance of cross-training, segregating duties, and succession planning. The value of a leader developed from within your organization, their professional expertise, and knowledge of the organization and the industry as a whole is vital to your future. They will share your vision and have a vested interest in the organization. With a vested interest in the organization, they will plan for the future and provide growth for themselves as a leader and the whole organization.

Along with tax rate reductions and a new deduction for pass-through qualified business income, the new tax law brings the reduction or elimination of tax deductions for certain business expenses. Two expense areas where the Tax Cuts and Jobs Act (TCJA) changes the rules — and not to businesses’ benefit — are meals/entertainment and transportation. In effect, the reduced tax benefits will mean these expenses are more costly to a business’s bottom line.

Meals and entertainment

Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed.

Meal expenses incurred while traveling on business are still 50% deductible, but the 50% limit now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will no longer be deductible.

Transportation

The TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.

The new law also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits. Examples include parking allowances, mass transit passes and van pooling. These benefits are, however, still tax-free to recipient employees.

Transportation expenses for employee work-related travel away from home are still deductible (and tax-free to the employee), as long as they otherwise qualify for such tax treatment. (Note that, for 2018 through 2025, employees can’t deduct unreimbursed employee business expenses, such as travel expenses, as a miscellaneous itemized deduction.)

Assessing the impact

The TCJA’s changes to deductions for meals, entertainment and transportation expenses may affect your business’s budget. Depending on how much you typically spend on such expenses, you may want to consider changing some of your policies and/or benefits offerings in these areas. We’d be pleased to help you assess the impact on your business.

Working from home has become commonplace. But just because you have a home office space doesn’t mean you can deduct expenses associated with it. And for 2018, even fewer taxpayers will be eligible for a home office deduction.

Changes under the TCJA

For employees, home office expenses are a miscellaneous itemized deduction. For 2017, this means you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses (such as unreimbursed work-related travel, certain professional fees and investment expenses) exceed 2% of your adjusted gross income.

For 2018 through 2025, this means that, if you’re an employee, you won’t be able to deduct any home office expenses. Why? The Tax Cuts and Jobs Act (TCJA) suspends miscellaneous itemized deductions subject to the 2% floor for this period.

If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income. Therefore, the deduction will still be available to you for 2018 through 2025.

Other eligibility requirements

If you’re an employee, your use of your home office must be for your employer’s convenience, not just your own. If you’re self-employed, generally your home office must be your principal place of business, though there are exceptions.

Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom or your children do their homework there, you can’t deduct the expenses associated with that space.

2 deduction options

If you’re eligible, the home office deduction can be a valuable tax break. You have two options for the deduction:

Deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space. This requires calculating, allocating and substantiating actual expenses.
Take the “safe harbor” deduction. Only one simple calculation is necessary: $5 × the number of square feet of the office space. The safe harbor deduction is capped at $1,500 per year, based on a maximum of 300 square feet.

More rules and limits

Be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction on your 2017 return or would like to know if there’s anything additional you need to do to be eligible on your 2018 return, contact us.

With rising healthcare costs, claiming whatever tax breaks related to healthcare that you can is more important than ever. But there’s a threshold for deducting medical expenses that may be hard to meet. Fortunately, the Tax Cuts and Jobs Act (TCJA) has temporarily reduced the threshold.

What expenses are eligible?

Medical expenses may be deductible if they’re “qualified.” Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. Examples include payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices and prescription drugs.

Mileage driven for health-care-related purposes is also deductible at a rate of 17 cents per mile for 2017 and 18 cents per mile for 2018. Health insurance and long-term care insurance premiums can also qualify, with certain limits.

Expenses reimbursed by insurance or paid with funds from a tax-advantaged account such as a Health Savings Account or Flexible Spending Account can’t be deducted. Likewise, health insurance premiums aren’t deductible if they’re taken out of your paycheck pretax.

The AGI threshold

Before 2013, you could claim an itemized deduction for qualified unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). AGI includes all of your taxable income items reduced by certain “above-the-line” deductions, such as those for deductible IRA contributions and student loan interest.

As part of the Affordable Care Act, a higher deduction threshold of 10% of AGI went into effect in 2014 for most taxpayers and was scheduled to go into effect in 2017 for taxpayers age 65 or older. But under the TCJA, the 7.5%-of-AGI deduction threshold now applies to all taxpayers for 2017 and 2018.

However, this lower threshold is temporary. Beginning January 1, 2019, the 10% threshold will apply to all taxpayers, including those over age 65, unless Congress takes additional action.

Consider “bunching” expenses into 2018

Because the threshold is scheduled to increase to 10% in 2019, you might benefit from accelerating deductible medical expenses into 2018, to the extent they’re within your control.

However, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018, many taxpayers who’ve typically itemized may no longer benefit from itemizing.

Contact us if you have questions about what expenses are eligible and whether you can qualify for a deduction on your 2017 tax return. We can also help you determine whether bunching medical expenses into 2018 will likely save you tax.

With bonus depreciation, a business can recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Act (TCJA), signed into law in December, enhances bonus depreciation.

Typically, taking this break is beneficial. But in certain situations, your business might save more tax long-term by skipping it. That said, claiming bonus depreciation on your 2017 tax return may be particularly beneficial.

Pre- and post-TCJA

Before TCJA, bonus depreciation was 50% and qualified property included new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified improvement property.

The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.

But be aware that, under the TCJA, beginning in 2018 certain types of businesses may no longer be eligible for bonus depreciation. Examples include real estate businesses and auto dealerships, depending on the specific circumstances.

A good tax strategy • or not?

Generally, if you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation is likely a good tax strategy (though you should also factor in available Section 179 expensing). It will defer tax, which generally is beneficial.

On the other hand, if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax this year, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.

What to do on your 2017 return

The greater tax-saving power of deductions when rates are higher is why 2017 may be a particularly good year to take bonus depreciation. As you’re probably aware, the TCJA permanently replaces the graduated corporate tax rates of 15% to 35% with a flat corporate rate of 21% beginning with the 2018 tax year. It also reduces most individual rates, which benefits owners of pass-through entities such as S corporations, partnerships and, typically, limited liability companies, for tax years beginning in 2018 through 2025.

If your rate will be lower in 2018, there’s a greater likelihood that taking bonus depreciation for 2017 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years, especially if the asset meets the deadlines for 100% bonus depreciation.

If you’re unsure whether you should take bonus depreciation on your 2017 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.

After a meeting this week with Michigan School Business Officials, the 1022 Committee and state representatives, Yeo & Yeo’s Education Services Group is pleased to provide an update and recommendations for issuing and reporting the 3% refund of retiree healthcare fund contributions. Read the guidance and FAQ.

The guidance provided is based on the information currently available to us and is subject to change. Many of the issues depend on the initial treatment of the 3% retiree healthcare contributions. School districts will need to make decisions about what is best in their individual situation.

We will continue to keep you informed as we receive further updates.

Tax credits reduce tax liability dollar-for-dollar, potentially making them more valuable than deductions, which reduce only the amount of income subject to tax. Maximizing available credits is especially important now that the Tax Cuts and Jobs Act has reduced or eliminated some tax breaks for businesses. Two still-available tax credits are especially for small businesses that provide certain employee benefits.

1. Credit for paying healthcare coverage premiums

The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. Despite various congressional attempts to repeal the ACA in 2017, nearly all of its provisions remain intact, including this potentially valuable tax credit.

The maximum credit is 50% of group health coverage premiums paid by the employer, if it contributes at least 50% of the total premium or of a benchmark premium. For 2017, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $26,200 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,400.

The credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.) If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2017 may be a good idea. Why? It’s possible the credit will go away in the future if lawmakers in Washington continue to try to repeal or replace the ACA.

At this point, most likely any ACA repeal or replacement wouldn’t go into effect until 2019 (or possibly later). So if you claim the credit for 2017, you may also be able to claim it on your 2018 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.

2. Credit for starting a retirement plan

Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.

Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.

If you didn’t create a retirement plan in 2017, you might still have time to do so. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions. If you’d like to set up a different type of plan, consider doing so for 2018 so you can potentially take advantage of the retirement plan credit (and other tax benefits) when you file your 2018 return next year.

Determining eligibility

Keep in mind that additional rules and limits apply to these tax credits. We’d be happy to help you determine whether you’re eligible for these or other credits on your 2017 return and also plan for credits you might be able to claim on your 2018 return if you take appropriate actions this year.

President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. While the law does not simplify the tax code, it is expected to provide tax relief for most in agriculture.

93% of U.S. farmers pay income tax at the individual income tax level. Here are some of the highlights of individual tax changes that may impact farmers:

The new law imposes a new tax rate structure with seven tax brackets – 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed.
The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
Standard deduction almost doubled – $12,000 for individuals, $18,000 head of household, and $24,000 for married couples. The personal exemption is repealed.
Many farmers will no longer itemize due to the new standard deduction and the $10,000 tax cap referenced in the next bullet point.
State & local tax deduction – limited deduction up to $10,000 of property, sales or income taxes. This will be significant for some.
Medical expenses exceeding 7.5% of adjusted gross income are allowed as itemized deductions. This replaces the previously threshold of 10% of AGI.
Mortgage interest is now limited to interest paid on debt up to $750,000 in debt (compared with the previous limit of $1,000,000 in debt).
Boosts phase-out thresholds for itemized deductions. This will have less of an affect due to the $10,000 cap as well.
Child and family tax credit – the credit for children under 17 is increased to $2,000 per child. $1,400 of the credit is refundable even if no tax is owed. The law also establishes a $500 credit for dependents that are not qualifying children. Phase-out of the credit begins at $200,000 single and $400,000 married filing joint. These changes will eliminate any penalty that families with young children may have felt from the repeal of the personal exemptions.
Net operating losses (NOLs) can be carried forward indefinitely instead of 20 years in the old law, but are limited to 80 percent of income. NOLs can be carried back for two years instead of the five years as previously allowed for farms and ranches.
Alternative minimum tax (AMT) is not repealed for individuals but income thresholds at which the tax is calculated increased significantly. Farmers and individuals with higher income levels may benefit from this change.

While the individual tax changes will have some impact on producers, the business provisions of the law while have a much deeper impact.

C Corporations

The top corporate tax rate decreases from 34% to 21% effective January 1. Unlike the other changes in the law, this change is permanent. For farmers who operate as a C corporation and typically have less than $50,000 of taxable income, this is a 40% tax increase because the old corporate tax brackets are replaced with a flat tax rate regardless of taxable income. Under the old law, taxable income under $50,000 was taxed at a 15% corporate income tax rate. Large producers and agribusinesses that are incorporated will enjoy a significant reduction in corporate income taxes. Hopefully, the increased cash flow will spur additional capital investment, hiring and wage increases for many in the agriculture industry.

Pass-through entities (S Corporations, Partnerships, LLCs, Sole Proprietorships)

85% of U.S. farms are structured as pass-through entities. The law introduces a new 20% deduction for business income from pass-through entities. Business income includes payments from cooperatives, commodity wages and farmland rental income. The deduction is limited to taxpayers with joint income exceeding $315,000 or single filers exceeding $157,000. The limitation is the greater of 50% of wages paid or 25% of wages paid plus 2.5% of the depreciable business property. The deduction can be carried forward in loss situations.
With a 20% deduction for farm income, the top rate is 29.6%, which is only 8.6% higher than corporate rates. Unless you are in a 32% or higher tax bracket, net farm income will always be taxed lower than 21%. Dividends from the corporation are still subject to a top tax rate of 23.8%. Many flow-through entities get step-up in basis, only corporate stock gets a step-up. In Michigan, only C Corporations are subject to the Corporate Income Tax. In general, very few farmers would benefit from establishing a C Corporation.

Ag Cooperatives

Ag cooperatives and members lost the benefit of the Section 199 deduction, which the legislation repeals. The law establishes Section 199A which makes co-ops eligible for the pass-through deduction. Farmers will receive a 20% deduction on all payments from a farmer cooperative. The deduction cannot exceed the taxpayer’s taxable income for the year. Cooperatives will receive a 20% deduction on gross income less payments to patrons, limited to the greater of 50% of wages, or 25% of wages plus 2.5% of the cooperative’s investment in property. Changes will require extensive planning before year-end for farmer cooperatives.

General Business Tax Changes

Section 199 – the domestic production activities deduction is no more. This impacts farms that paid significant wages and farmers that are members of farm cooperatives. While this was a significant deduction for those that qualified, the new 20% deduction for pass-throughs will make up for it in many cases.
Farms can fully expense interest costs – up to $25 million in revenue can continue expensing interest. Businesses owned through trusts or estates would receive the same tax treatment as other kinds of businesses.
Meals are only 50% deductible for farmers who provide meals on-site.
New farming equipment and machinery is 5-year property. For property placed in service after Dec. 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer. Also, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.
Qualified leasehold improvement property placed in service after Dec. 31, 2017, is now generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease or placed in service more than three years after the date the building was first placed in service.Full expensing of new and used capital investments will be permitted through 2022 (100% bonus depreciation). After 2022, the 100% allowance would be phased down by 20% each year through 2027.
Section 179 expensing permanently doubles the amount eligible for special small business investment write-offs. The allowance only applies to new equipment and cannot exceed taxable business income. The Section 179 allowance is now $1 million, with the phase-out beginning at $2.5 million in purchases. Most farmers will not exceed these limits.
Like-kind exchanges – previously, Section 1031 exchanges were allowed for equipment and some livestock, including cattle, as well as real estate. The new law limits like-kind exchanges to real estate only. Personal property exchanges will be taxed but not subject to self-employment tax. You must purchase replacement property, which will be 100% deductible under bonus depreciation until 2023 and Section 179 may be available to cover any remaining balance.
Corporate Alternative Minimum Tax (AMT) is repealed.
Cash Accounting – the law expands the number of farm corporations and farm partnerships that can use the cash basis of accounting for tax purposes.
The tax bill maintains federal credits for wind and solar energy projects and keeps intact the terms of a previous agreement to phase out wind credits through 2019.
Tax break for citrus growers – citrus growers can immediately deduct replanting expenses even if they raise capital from investors to help cover the costs. This will help growers who need to replant diseased trees, such as those hit with a citrus greening disease that is ravaging Florida’s industry.
The measure also provides major tax breaks for wine and cider makers. The lower rates, however, expire after two years.

Estate Tax

Estate tax exemptions double – 40% tax on estates over $11.2 million for individuals and $22 million for couples. Stepped-up basis and the transfer of unused exemptions to the spouse is retained. The exemption will continue to be adjusted for inflation but would go back to the previous law in 2026.

So How Will Tax Reform Affect Agriculture?

The cut in the corporate tax rate and international tax rule changes are permanent to encourage long-range planning, but other business provisions sunset in as few as eight years. If these provisions expire, a large gap would appear between the new permanent 21% corporate tax rate and highest pass-through rate, which could reset near 40%.

Two individual tax provisions are permanent. One changes to a slower measure of inflation, which means thresholds for tax brackets increase at a slower pace, and leaves more households in higher brackets than they would be under previous law. The other ends the individual health insurance mandate and penalty. It remains to be seen what impact that will have on premium costs and the health insurance industry. Nearly everything else ends after eight years.

In the meantime, most Americans will have more money in their pockets due to the tax cuts. That could boost purchases, including food and other agricultural products. Individual investments should see gains as stock markets, for example, have already noted impressive gains since it became evident that tax reform would clear Congress. The big drop in the corporate tax rate is good for business growth, including an eventual boost in investments, jobs and worker wages. For farmers, it is a net gain, but how much remains to be seen.

Depreciation rules and immediate expensing are set for a longer period than businesses have seen for a long time. This should give them more confidence in the consistency of tax treatments and spur capital investment.

The increase in the estate tax exemptions will be a significant boost to succession planning for farmers who previously struggled to plan how to pass farms to the next generation. A much larger estate can now be passed on without the risk of having to liquidate farmland and other assets upon death. Again, the new exemption amount sunsets in 2025 unless Congress extends the existing law.

Farmers and the agribusiness industry should be cautiously optimistic about the new tax law. Planning with the help of experienced advisors and consultants will be paramount to successfully navigating these new waters.

Many workplace crimes are “inside jobs.” They can involve employees stealing cash, inventory, equipment or intellectual property, or they could include more sophisticated schemes such as bribery, kickbacks or payroll fraud.

Internal fraud investigations can pose numerous challenges. Here are five costly mistakes an organization can make when faced with the possibility that one of its employees or administrators is engaging in fraudulent behavior.

Making a Rush to Judgment.

The facts may appear to show clearly that the targeted individual has perpetrated internal fraud. However, regardless of how compelling the facts may be, your company must conduct an appropriately rigorous investigation.

Example: The internal audit department had evidence that the finance director had used city funds to pay personal expenses. The city terminated the finance director without any additional investigation because his supervisors felt the documentation showed a clear pattern of fraud. The finance director sued the city for wrongful termination. Since the city failed to complete a rigorous investigation, including an interview of the finance director, its legal counsel advised that the city settle the matter out of court.

Letting Word of an Investigation Get Out.

The existence of an internal fraud investigation should only be shared with those with a “need to know.” Divulging information beyond these individuals can doom an investigation to failure, especially if the targets are made aware of the fact that their actions are being scrutinized.

Example: A school district determined that a food service employee was stealing the credit card numbers used to pay for meals. The manager shared his suspicions with one of the other supervisors. Unfortunately, that supervisor was involved in the fraud. She notified the other perpetrator that management was hot on the trail. The employees destroyed numerous notebooks that allegedly contained detailed records about the theft and the credit card numbers stolen. Without this evidence, the district had to spend considerable time and effort building a case against those employees.

Proceeding Without Notifying Legal Counsel and HR Professionals.

Employees have certain rights and, if they are violated, it can directly affect the results of the investigation, and it can also create considerable legal risk for the school district. Before a formal internal fraud investigation is launched, both legal and human resource professionals should be briefed on the situation.

Example: An internal audit performed by the accounting supervisor of the school bookstore suspected that one of the employees was part of a group of shoplifters. The internal investigator contacted local police to share his suspicions. The police did not have a detective available right away to interview the suspect. However, the police faxed the district’s investigator a list of questions to ask. The investigator conducted an interview where she asked the employee all of the questions obtained from the police. Since the district’s investigator conducted the interview at the request of law enforcement, the employee should have been read his Miranda rights. (It is generally not required in a private investigation.) If the district’s investigator had consulted with legal counsel before conducting the interview, she would have been informed that any statements gathered during the interview violated the employee’s Miranda rights and most likely would be suppressed by a judge.

Failing to Maintain a Document Trail.

Even a simple fraud will likely involve documentary evidence. No matter how straightforward the fraud may appear at the time, it is critical that the investigation case files contain all relevant information compiled by the company during the investigation.

Example: An employee was terminated by a Township for stealing certain higher-priced supplies for his online side business. The employee filed a claim with Equal Employment Opportunity Commission alleging racial discrimination. The Township provided the EEOC a copy of its documents from the investigation. Unfortunately, several crucial pieces of evidence were missing from the files. In the absence of direct evidence demonstrating the employee’s guilt, the Township was subsequently fined by the EEOC.

Not Holding Leaders to the Same Standards.

A successful fraud investigation depends upon secrecy. If alleged fraudsters determine that your government is investigating them, they will probably attempt to destroy evidence, influence witnesses, or disappear with their ill-gotten gains. In some cases when leaders are suspected of fraud, the government handles them with kid gloves.

Example: A County was notified via its confidential hotline that the clerk had stolen frequent flier mile rewards for their personal use. The County Administrator expressed a great deal of skepticism and would only allow the investigation to proceed if multiple employees corroborated the allegations. Before confronting the clerk, the County interviewed a dozen employees. Not surprisingly, the clerk became aware of the investigation and created a plausible explanation for the use of the rewards. Without compelling evidence to support termination, the clerk remained employed and was even subsequently promoted.

Not only can special treatment of leaders result in significant financial losses from that individual, but it can also lead to subsequent losses from others in the government. If staff members become aware that leaders are permitted to get away with fraud while lower-level employees are held accountable, they are more likely to steal too.

The mistakes made in each of the investigations above were avoidable. Consult with your attorney and auditor to assist with internal fraud cases. By doing so, you dramatically improve the chances that you will conduct a successful investigation while helping to avoid these and other pitfalls.

The beginning of a new year is often when businesses analyze their inventory and consider writing off old or obsolete products. Manufacturing company owners should be aware that IRS regulations make the process of writing off inventory more complicated than simply expensing the value of the outdated product.

Essentially, there are two types of obsolete products: 1) finished goods, and 2) unusable raw materials and work-in-process inventory.

Finished Goods

For finished goods that may still potentially be sold, IRS rules state the inventory may be valued at a price of an actual offering of goods during a period ending not later than 30 days after the inventory date.

For example, on December 31, a manufacturer determines the market for one of its products, Widget A, has deteriorated. The prospects of the business selling its remaining units of Widget A for a profit are nonexistent. Widget A units cost $150 to produce, but the manufacturer determines the units can only be sold at a price of $100 each. To write off the $50 per unit loss in the current tax year, the manufacturer will have to offer Widget A for sale at a price of $100 per unit within 30 days.

Unusable Raw Materials and Work-in-Process Inventory

Unusable raw materials and work-in-process inventory may be written off without being offered for sale. However, the obsolete inventory should never be less than scrap value.

Expanding on the example above, the manufacturer had several unfinished units of Widget A recorded as work-in-process. The manufacturer may use a reasonable basis to determine the value of the unfinished units and record the loss without offering the units for sale. The value used to determine the loss may not be less than the value of the items if they were sold as scrap materials.

Raw materials that have been rendered unusable by obsolescence or poor quality may be written off using a reasonable basis. Once again, the new value may not be less than the scrap value of the materials.

Documentation is Key

While the process of writing off inventory seems cut-and-dried, it is important to remember that documentation of all the inventory and pricing is crucial. When writing off obsolete products, the burden of proof lies with the manufacturer to support the expense that recorded the change in the value of the outdated product.

Two types of simple documentation you will want to keep:

1.Copies of the offering price, such as a pricing sheet or website listing.
2.Documentation showing the dates offerings are made to ensure the sale date is within the 30-day period.

If you have questions regarding writing off obsolete inventory, please contact a member of Yeo & Yeo’s Manufacturing Services Group.

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The sweeping changes made by the 2017 Tax Cuts and Jobs Act impacts nearly all taxpayers. Nonprofit organizations are also affected by the legislation. Here’s how:

Changes the computation of unrelated business taxable income (UBTI) if an organization has more than one unrelated trade or business
Increases UBTI by the amount of certain fringe expenses for which a deduction is disallowed
Imposes a 21% excise tax on compensation over $1 million for the five highest paid employees
Imposes a 1.4% excise tax on net investment income of certain educational institutions
Modifies the rules for charitable contributions:

Repeals the special rule in Code Sec. 170(l) that provides a charitable deduction for the amount paid for the right to purchase tickets for athletic events;
Repeals the Code Sec. 170(f)(8)(D), effectively ensuring that donee organizations will not be allowed or required to report details of donations of $250 or more
Increases the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations to 60%;
Suspends the overall limitation on itemized deductions

Let’s take a closer look:

UBTI

Sec. 13702 of the Act amends Code Sec. 512(a). Previously, the gross receipts from any unrelated trade or business regularly conducted were netted together to determine UBTI. If, for example, an organization conducts unrelated business A for a profit, and the organization also conducts unrelated business B and gross income less cost of goods sold is a loss, the previous rules allowed the organization to net the activity from A and B. The income from A would be reduced by the loss from B in calculating UBTI. The new rules do not allow the two trades or businesses to net. The income from A will be reported and the loss from B will create a net operating loss to carry forward and only be applied to future UBTI generated by B. The specific deduction of $1,000 in computing UBTI is maintained, but is not included in determining the separate UBTI calculation of each unrelated trade or business.

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

Organizations must carefully consider if their activities constitute more than one unrelated trade or business and report accordingly going forward. It is likely that the overall tax burden will increase for exempt organizations, as gains from one unrelated trade or business can no longer be offset by the losses from another unrelated trade or business. Organizations should give careful consideration to restructuring or moving activities to taxable subsidiaries and consider all the possible implications.

In addition, UBTI is changed by Sec. 13703 of the Act. Previously, organizations could provide employees with transportation fringe benefits and on-premises gyms and other athletic facilities. Employees did not have to include those amounts in their taxable income and there was no tax effect for nonprofits (for-profit entities could deduct these expenses from their taxable income). Under the new provision, the amounts paid for such benefits will be included in unrelated business taxable income, effective for amounts paid or incurred after December 31, 2017. For-profit entities will no longer be able to deduct these costs. The effect is that for-profit entities and nonprofit organizations will be treated the same, both paying tax on these transportation fringe benefits and on-premises gyms and other athletic facilities provided to their employees.

With the overall reduction of the corporate tax rate to 21%, exempt organizations who already pay tax on UBTI could benefit from the lower tax rate.

Excise Tax

Sec. 13602 of the Act adds Code Sec. 4960. Currently, taxable employers face deduction limits regarding excess compensation. Until now, exempt organizations have not had comparable rules. The new provision subjects tax-exempt organizations to a 21% excise tax on the sum of:

1)the remuneration paid (other than any excess parachute payment) by an applicable tax-exempt organization for the taxable year with respect to employment of any covered employee in excess of $1 million, plus

2)any excess parachute payment paid by such an organization to any covered employee.

Remuneration is treated as paid when there is no substantial risk of forfeiture. It includes any remuneration paid by a related entity, but does not include amounts paid to a licensed medical professional (including a veterinarian) for the performance of medical or veterinary services.

An excess parachute payment is the excess amount of any parachute payment over the portion of the base amount. A parachute payment is any compensation paid to or for a covered employee if the payment is contingent on their separation from employment and the aggregate present value equals or exceeds three times the base amount. The base amount is the annualized includible compensation for the most recent five taxable years ending before the date of separation (see Section 280G(b)(3)).

An applicable tax-exempt organization includes an organization exempt under Section 501(a), an exempt farmers’ cooperative, a federal, state or local governmental entity with income excludable under Section 115, or a Section 527 political organization.

A covered employee includes the five highest compensated employees (including former employees) for the taxable year, or a covered employee for any previous taxable year beginning after December 31, 2016.

This provision will have a significant impact on covered organizations with highly compensated individuals. Such organizations need to assess the total compensation for their executives and closely monitor the amount and timing of compensation payments. It’s important to note that once an employee is a covered employee, they remain a covered employee. And, even if a covered employee’s compensation does not exceed $1 million, excise tax would apply to the excess parachute payment for such an employee. Impacted organizations will want to keep a close eye on additional details sure to develop.

Sec. 13701 of the Act adds Section 4968. Previously, the excise tax imposed by Code Sec. 4940 on the net investment income of private foundations did not apply to public charities, including colleges and universities that may have had substantial investment income. Going forward, certain private colleges and universities will be subject to a 1.4% excise tax on their net investment income. Institutions subject to the excise tax include 1)those with more than 500 daily average full-time students in the preceding taxable year and 2) those with an aggregate fair market value of assets (other than those assets which are used directly in carrying out the institution’s exempt purpose) of more than $500,000 per student at the end of the preceding tax year. In addition, assets and net investment income of related organizations would be treated as assets and net investment income of the institution. The new provision applies to taxable years beginning after December 31, 2017.

Charitable contributions

Sec. 13704 of the Act changes Code Sec. 170(l). Previously, individuals could deduct 80% of the amounts paid to colleges and universities which includes the right to purchase tickets for seating at an athletic event in an athletic stadium of such an institution. The changes disallow the deduction for the portion paid in exchange for the seating rights, effective for contributions made in taxable years beginning after December 31, 2017.

Sec. 13705 of the Act changes Code Sec. 170(f)(8). This section disallows a deduction for any contribution of $250 or more unless it is substantiated by a contemporaneous written acknowledgment. Previously this did not apply to a contribution if the donee organization filed a return which included the required information. This change ensures that there is no possibility of regulations that would allow or require charities to report details of donations of $250 or more.

Sec. 11023 of the Act changes Code Sec. 170(b)(1). Individuals may deduct charitable contributions limited to 50%, 30% or 20% of their adjusted gross income. The deduction class depends on the donee organization’s classification and the type of property. The new regulations increase the 50% limitation to 60% for cash contributions to public charities and certain private foundations. Amounts exceeding 60% of adjusted gross income can be carried forward for five years. This change may provide an incentive to donors to make significant gifts after December 31, 2017, and before January 1, 2026. This may help exempt organizations that are nervous about how the higher standard deduction for individuals will affect charitable giving in the future. Because the standard deduction is nearly doubled, fewer taxpayers will itemize and be able to see a tax benefit from charitable donations.

Indirectly affecting charitable contributions, Sec. 11046 of the Act suspends Code Sec. 68 for taxable years beginning after December 31, 2017, and before January 1, 2026. Previously, this section limited the overall itemized deductions for higher-income taxpayers. This may provide some taxpayers an incentive to donate larger amounts to exempt organizations.

Conclusion

Several changes included in the 2017 Tax Cuts and Jobs Act will directly impact nonprofits, and several will have an indirect impact. Changes to the calculation of UBTI include disallowing organizations to net profits and losses from more than one unrelated trade or business, as well as increasing UBTI by the amount of certain fringe expenses. Excise tax changes include imposing a 21% excise tax on compensation over $1 million for the five highest paid employees and imposing a 1.4% excise tax on net investment income of certain educational institutions.

The far-reaching tax law changes also impact charitable contributions by repealing the special rule that provides a charitable deduction for the amount paid for the right to purchase tickets for athletic events; ensuring that donee organizations will not be allowed or required to report details of donations of $250 or more; increasing the 50% limitation for cash contributions to public charities and certain private foundations to 60%; suspension of overall limitation on itemized deductions; and increasing the standard deduction.

Some of these changes will be easy for organizations to quantify but, for others, only time will tell. Exempt organizations should consult with their tax professional to determine exactly how their particular situation will be impacted and what actions they should take to mitigate their tax consequences. Organizations may also need to explore new ways to garner contributions from individual taxpayers. It’s imperative that exempt organizations keep up to date on additional regulations that are likely to result from these tax law changes.

President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. While the law does not simplify the tax code, it is expected to provide tax relief for most in agriculture.

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93% of U.S. farmers pay income tax at the individual income tax level. Here are some of the highlights of individual tax changes that may impact farmers:

The new law imposes a new tax rate structure with seven tax brackets – 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed.
The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
Standard deduction almost doubled – $12,000 for individuals, $18,000 head of household, and $24,000 for married couples. The personal exemption is repealed.
Many farmers will no longer itemize due to the new standard deduction and the $10,000 tax cap referenced in the next bullet point.
State & local tax deduction – limited deduction up to $10,000 of property, sales or income taxes. This will be significant for some.
Medical expenses exceeding 7.5% of adjusted gross income are allowed as itemized deductions. This replaces the previously threshold of 10% of AGI.
Mortgage interest is now limited to interest paid on debt up to $750,000 in debt (compared with the previous limit of $1,000,000 in debt).
Boosts phase-out thresholds for itemized deductions. This will have less of an affect due to the $10,000 cap as well.
Child and family tax credit – the credit for children under 17 is increased to $2,000 per child. $1,400 of the credit is refundable even if no tax is owed. The law also establishes a $500 credit for dependents that are not qualifying children. Phase-out of the credit begins at $200,000 single and $400,000 married filing joint. These changes will eliminate any penalty that families with young children may have felt from the repeal of the personal exemptions.
Net operating losses (NOLs) can be carried forward indefinitely instead of 20 years in the old law, but are limited to 80 percent of income. NOLs can be carried back for two years instead of the five years as previously allowed for farms and ranches.
Alternative minimum tax (AMT) is not repealed for individuals but income thresholds at which the tax is calculated increased significantly. Farmers and individuals with higher income levels may benefit from this change.

While the individual tax changes will have some impact on producers, the business provisions of the law while have a much deeper impact.

C Corporations

The top corporate tax rate decreases from 34% to 21% effective January 1. Unlike the other changes in the law, this change is permanent. For farmers who operate as a C corporation and typically have less than $50,000 of taxable income, this is a 40% tax increase because the old corporate tax brackets are replaced with a flat tax rate regardless of taxable income. Under the old law, taxable income under $50,000 was taxed at a 15% corporate income tax rate. Large producers and agribusinesses that are incorporated will enjoy a significant reduction in corporate income taxes. Hopefully, the increased cash flow will spur additional capital investment, hiring and wage increases for many in the agriculture industry.

Pass-through entities (S Corporations, Partnerships, LLCs, Sole Proprietorships)

85% of U.S. farms are structured as pass-through entities. The law introduces a new 20% deduction for business income from pass-through entities. Business income includes payments from cooperatives, commodity wages and farmland rental income. The deduction is limited to taxpayers with joint income exceeding $315,000 or single filers exceeding $157,000. The limitation is the greater of 50% of wages paid or 25% of wages paid plus 2.5% of the depreciable business property. The deduction can be carried forward in loss situations.
With a 20% deduction for farm income, the top rate is 29.6%, which is only 8.6% higher than corporate rates. Unless you are in a 32% or higher tax bracket, net farm income will always be taxed lower than 21%. Dividends from the corporation are still subject to a top tax rate of 23.8%. Many flow-through entities get step-up in basis, only corporate stock gets a step-up. In Michigan, only C Corporations are subject to the Corporate Income Tax. In general, very few farmers would benefit from establishing a C Corporation.

Ag Cooperatives

Ag cooperatives and members lost the benefit of the Section 199 deduction, which the legislation repeals. The law establishes Section 199A which makes co-ops eligible for the pass-through deduction. Farmers will receive a 20% deduction on all payments from a farmer cooperative. The deduction cannot exceed the taxpayer’s taxable income for the year. Cooperatives will receive a 20% deduction on gross income less payments to patrons, limited to the greater of 50% of wages, or 25% of wages plus 2.5% of the cooperative’s investment in property. Changes will require extensive planning before year-end for farmer cooperatives.

General Business Tax Changes

Section 199 – the domestic production activities deduction is no more. This impacts farms that paid significant wages and farmers that are members of farm cooperatives. While this was a significant deduction for those that qualified, the new 20% deduction for pass-throughs will make up for it in many cases.
Farms can fully expense interest costs – up to $25 million in revenue can continue expensing interest. Businesses owned through trusts or estates would receive the same tax treatment as other kinds of businesses.
Meals are only 50% deductible for farmers who provide meals on-site.
New farming equipment and machinery is 5-year property. For property placed in service after Dec. 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer. Also, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.
Qualified leasehold improvement property placed in service after Dec. 31, 2017, is now generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease or placed in service more than three years after the date the building was first placed in service.Full expensing of new and used capital investments will be permitted through 2022 (100% bonus depreciation). After 2022, the 100% allowance would be phased down by 20% each year through 2027.
Section 179 expensing permanently doubles the amount eligible for special small business investment write-offs. The allowance only applies to new equipment and cannot exceed taxable business income. The Section 179 allowance is now $1 million, with the phase-out beginning at $2.5 million in purchases. Most farmers will not exceed these limits.
Like-kind exchanges – previously, Section 1031 exchanges were allowed for equipment and some livestock, including cattle, as well as real estate. The new law limits like-kind exchanges to real estate only. Personal property exchanges will be taxed but not subject to self-employment tax. You must purchase replacement property, which will be 100% deductible under bonus depreciation until 2023 and Section 179 may be available to cover any remaining balance.
Corporate Alternative Minimum Tax (AMT) is repealed.
Cash Accounting – the law expands the number of farm corporations and farm partnerships that can use the cash basis of accounting for tax purposes.
The tax bill maintains federal credits for wind and solar energy projects and keeps intact the terms of a previous agreement to phase out wind credits through 2019.
Tax break for citrus growers – citrus growers can immediately deduct replanting expenses even if they raise capital from investors to help cover the costs. This will help growers who need to replant diseased trees, such as those hit with a citrus greening disease that is ravaging Florida’s industry.
The measure also provides major tax breaks for wine and cider makers. The lower rates, however, expire after two years.

Estate Tax

Estate tax exemptions double – 40% tax on estates over $11.2 million for individuals and $22 million for couples. Stepped-up basis and the transfer of unused exemptions to the spouse is retained. The exemption will continue to be adjusted for inflation but would go back to the previous law in 2026.

So How Will Tax Reform Affect Agriculture?

Yeo & Yeo, along with Michigan School Business Officials, the 1022 Committee, and various representatives of the State of Michigan met again regarding the 3% refunds last Friday. Many questions arose on reporting and issuance that we will answer to assist school districts with completing employee distributions and tax reporting. A few issues still need to be resolved, but we were able to get guidance to some key questions.

We still recommend that school districts wait for the written guidance that will be sent once finalized, but we have summarized several items below that will help districts plan and issue their distributions correctly.

Note: We receive new guidance on this daily. As meetings occur between the Office of Retirement Services (ORS), the 1022 Committee, MSBO, etc., certain guidance may change. We will send updates as we receive them and adjust the items below accordingly.

Frequently Asked Questions:

When will I receive the funds and how will I get the payment?

The payment is planned to be pushed out on January 22. It will be a separate deposit from the monthly State Aid amount.

What is the initial journal entry?

Once the money is received, initial accounting should be straightforward. Below is an example journal entry for the initial payment.

Debit – Cash
Credit – Liability

(It is recommended that the cash be placed in a non-interest bearing account.)

Will there be impact on revenue and expenditure accounts?

Revenue – No impact.

Expenditure – Maybe, depending on the treatment of the 3% refund. If the amount being received for previous wages (3% refund) was not initially taxed for FICA, districts will have an expenditure for FICA in the current year. The 1022 Committee is looking into a recommendation as to account number and allocation of this expenditure, taking into account the effect of other reporting and calculations, such as COE or indirect cost rates, etc.

Can we cut a check through Accounts Payable or does it have to go through payroll and be reported on a W-2?

For the majority of districts, the answer is no. However, if your district included the 3% refund in federal and state wages and included it for FICA wages then yes, you would return the payment through an Accounts Payable check with no follow-up in reporting (no 1099s or W-2s necessary for the wages piece).

Should we try to obtain a new W-4?

We recommend using the most current W-4 on file.

What should we do with the interest and how do we need to report it?

The interest will need to be paid out to each individual in addition to the 3% refund. As for the reporting, currently we do not see any reporting that will need to be done by the districts. Many issues have arisen in relation to the interest – at the most basic level, whose responsibility is the reporting in the first place? However, none of the interest payments to individuals are anticipated to be more than the $600 limit for either a 1099-Misc. or a 1099-Int (*limit for non-financial institutions). Therefore, the reporting of the funds should not be a requirement for your district.

Will there be W-2 reporting?

For the majority of districts, yes. If the district excluded the 3% refund for federal and state wages and included or excluded for FICA wages, then it must be reported on the W-2. It will depend on the district’s treatment of FICA as to what box (1, 3, and/or 5) on the W-2 the 3% refund will need to be reported in.

The FICA rate has changed since 2011, which one should we use?

We recommend using the current rate.

What should I tell my Board and my employees as to a timeline?

This is an individual district decision; however, we feel April 30, or 60 to 90 days past receipt, would be a good target. It is likely that most districts will first issue current employee checks, and then work on distributing the deceased and/or former employee payments next. A few items to consider that may affect your individual timeline are: # of employees who are no longer active, changes in district software, etc.

Is the 3% refund subject to retirement?

No, it is a refund of wages and has already been subject to retirement.

Do the one-year Unclaimed Property laws for payroll checks apply and when does the timeline start?

Yes, if you are unable to find contact information for a former employee, the unclaimed property rules do apply. The start of the one-year mark is from the date of last activity or when the funds are available to be issued to the individual.

Below are the links to other resources:

Yeo & Yeo will send updates as we receive them.

For further information see our article, FICA 3% Healthcare Contribution Refunds – Guidance for Distribution will be Forthcoming.

The IRS has just announced that it will begin accepting 2017 income tax returns on January 29. You may be more concerned about the April 17 filing deadline, or even the extended deadline of October 15 (if you file for an extension by April 17). After all, why go through the hassle of filing your return earlier than you have to?

But it can be a good idea to file as close to January 29 as possible: Doing so helps protect you from tax identity theft.

All-too-common scam

Here’s why early filing helps: In an all-too-common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

The IRS is working with the tax industry and states to improve safeguards to protect taxpayers from tax identity theft. But filing early may be your best defense.

W-2s and 1099s

Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2017 interest, dividend or reportable miscellaneous income payments.

If you don’t receive a W-2 or 1099, first contact the entity that should have issued it. If by mid-February you still haven’t received it, you can contact the IRS for help.

Earlier refunds

Of course, if you’ll be getting a refund, another good thing about filing early is that you’ll get your refund sooner. The IRS expects over 90% of refunds to be issued within 21 days.

E-filing and requesting a direct deposit refund generally will result in a quicker refund and also can be more secure. If you have questions about tax identity theft or would like help filing your 2017 return early, please contact us.

Although the drop of the corporate tax rate from a top rate of 35% to a flat rate of 21% may be one of the most talked about provisions of the Tax Cuts and Jobs Act (TCJA), C corporations aren’t the only type of entity significantly benefiting from the new law. Owners of noncorporate “pass-through” entities may see some major — albeit temporary — relief in the form of a new deduction for a portion of qualified business income (QBI).

A 20% deduction

For tax years beginning after December 31, 2017, and before January 1, 2026, the new deduction is available to individuals, estates and trusts that own interests in pass-through business entities. Such entities include sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). The deduction generally equals 20% of QBI, subject to restrictions that can apply if taxable income exceeds the applicable threshold — $157,500 or, if married filing jointly, $315,000.

QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.

The limitations

For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:

50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.

Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income.

Another restriction is that the QBI deduction generally isn’t available for income from specified service businesses. Examples include businesses that involve investment-type services and most professional practices (other than engineering and architecture).

The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

Careful planning required

Additional rules and limits apply to the QBI deduction, and careful planning will be necessary to gain maximum benefit. Please contact us for more details.

The recently passed tax reform bill, commonly referred to as the “Tax Cuts and Jobs Act” (TCJA), is the most expansive federal tax legislation since 1986. It includes a multitude of provisions that will have a major impact on businesses.

Here’s a look at some of the most significant changes. They generally apply to tax years beginning after December 31, 2017, except where noted.

Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
Repeal of the 20% corporate alternative minimum tax (AMT)
New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
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
Other enhancements to depreciation-related deductions
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
New tax credit for employer-paid family and medical leave — through 2019
New limitations on excessive employee compensation
New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Keep in mind that additional rules and limits apply to what we’ve covered here, and there are other TCJA provisions that may affect your business. Contact us for more details and to discuss what your business needs to do in light of these changes.

On December 20, Congress completed passage 100c of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.

The following is a brief overview of some of the most significant provisions. Except where noted, these changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026.

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%
Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately)
Elimination of personal exemptions
Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent
Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers)
Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
Elimination of the deduction for interest on home equity debt
Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
Elimination of the AGI-based reduction of certain itemized deductions
Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent
AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers
Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing)

Be aware that additional rules and limits apply. Also, there are many more changes in the TCJA that will impact individuals. If you have questions or would like to discuss how you might be affected, please contact us.

The Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.

Pre-TCJA bonus depreciation

Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50% first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.

In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.

TCJA expansion

The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.

Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80% for property placed in service in 2023, 60% in 2024, etc., until it would be fully eliminated in 2027.

For certain property with longer production periods, the reductions are delayed by one year. For example, 80% bonus depreciation would apply to long-production-period property placed in service in 2024.

Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Contact us for more information on this and other changes that will impact your business.

Yeo & Yeo CPAs & Business Consultants is pleased to jointly release the results of the second annual 2018 Leading Edge Alliance (LEA Global) National Manufacturing Outlook Survey.

The survey report contains the expectations and opinions of 450 manufacturing executives, especially those from the Midwest, who produce a wide variety of products including machining/industrial, automotive/transportation, construction, food and beverage, and other products.

Results from the survey include:

81% of manufacturers expect their revenue to grow in 2018; only 3% expect their revenue to decrease.
Manufacturers are more optimistic about the regional/local economy and the national economy than the global economy.
The top priority for 70% of manufacturers in 2018 is growing sales. Almost three-fourths of manufacturers expect to increase sales through organic growth within the U.S., while 44% expect to grow by developing new products or services.
More than half (55%) of manufacturers indicated that labor will be the greatest barrier to growth. Strategies to attract and retain talent will include increasing compensation packages and conducting internal training and apprenticeships.
Most manufacturers expect to invest 1%-5% of revenue in R&D during 2018.
Cybersecurity, by far, is the top technology focus for manufacturers. Beyond cybersecurity, almost 50% of manufacturers are also prioritizing predictive business analytics/big data and erp solution.
More manufacturers are exploring mergers/sales and acquisitions in 2018.

The good news is that manufacturers have a positive outlook about their own performance and that of the industry and economy as a whole in 2018. However, some hurdles may become more significant. Increased hiring will result in increased wage costs, technology development will not slow in the coming year, and tax reform will bring the need for different tax planning.

Manufacturing owners and managers should have ongoing conversations with all of their advisors, including their accounting and tax provider, about how to overcome these challenges and achieve their business goals.

“We understand the challenges facing the manufacturing industry, and we are committed to helping companies improve their operations and achieve growth. Especially now – when manufacturers need to find the best strategy to take advantage of tax reform – having a team of industry-experienced advisors providing manufacturers insight and answers is critically important,” says Yeo & Yeo Principal and Manufacturing Services Group leader Amy Buben.

Read the entire survey report, 2018 National Manufacturing Outlook and Insights – Planning for Potential and Seizing Opportunity, for in-depth information about the challenges the respondents face, the key strategies that the best-run manufacturers believe will be most effective, and the outlook for 2018.

On December 20, 2017, the Michigan Supreme Court ordered refunds, upholding a Court of Appeals ruling that a 2010 Michigan law violated contract clauses of the state and federal constitutions by involuntarily reducing pay for teachers and other school employees by 3% to fund retiree healthcare benefits.

The Office of Retirement Services (ORS) will release the detail of the amount your district will receive from the State. The detailed lists will contain the amount of payment, the amount of interest, the most recent address of the individual the refund is being issued to, and the social security number. The payment is expected to be made in a separate payment on the same day that districts receive their State Aid payment.

For more information, see the ORS FAQ.

The 1022 Committee is working with the Michigan School Business Officials, the Michigan Department of Education and the ORS to issue streamlined guidance for all districts. Yeo & Yeo is a member of the 1022 Committee and has been actively involved throughout the process. As of now, we recommend that once your district receives the payment, you should wait to issue payments to employees and/or former employees until the guidance is issued. We realize that you may be getting pressure from employees to make the payments, but it will be best if all school districts wait for the guidance and are consistent with the payouts and reporting. We anticipate that we will send an update on the guidance next week, with the actual written guidance coming out in 15 to 30 days.

Please contact your Yeo & Yeo representative with any specific questions.

3 Ways to Develop Manufacturing Leaders

President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. While the law does not simplify the tax code, it is expected to provide tax relief for most in agriculture.

While the individual tax changes will have some impact on producers, the business provisions of the law while have a much deeper impact.

So How Will Tax Reform Affect Agriculture?

Frequently Asked Questions:

For further information see our article, FICA 3% Healthcare Contribution Refunds – Guidance for Distribution will be Forthcoming.

Read our updated blog with tentative guidance on the FICA 3% Healthcare Contribution Refund.