Breaking News for Individual Taxpayers

The House has released a tax bill.

This bill contains sweeping changes for both businesses and individuals. Most provisions are effective for tax years beginning after 2017.

What happens from here? The Senate will introduce its version of the bill. The Joint Committee will be charged with hammering out the differences and producing a bill to be voted on by both chambers.

Yeo & Yeo will monitor the activity as it unfolds. Follow us on social media and continue to check our blog for late-breaking news and updated information about the tax bills.

Overview of proposed changes impacting individual taxpayers

Changes in Tax Rates. The current seven individual tax rates would be reduced to four (12%, 25%, 35% and 39.6%), and applicable at the following levels:

12% – applies to the first $45,000 of taxable income for single filers and $90,000 for joint filers.
25% – applies to taxable income over $45,000 for single filers and $90,000 for joint filers.
35% – applies to taxable income over $200,000 for single filers and $260,000 for joint filers.
39.6% – rate applies to taxable income over $500,000 for single filers and $1 million for joint filers.

Capital Gains and Dividends. Net capital gains and dividends would continue to be taxed at their current 0%, 15% and 20% rates, and would also continue to be subject to 3.8% net investment income tax.

Taxation of Pass-through Income. The proposal contains a complex set of rules governing the tax rate applicable to income from S corporations, partnerships, LLCs and sole proprietorships.

Passive Activities. Income from passive activities qualify for the 25% tax rate.

Nonpassive Activities. In order to prevent abuse, active businesses will use a default 70%-30% allocation ratio. 70% will be taxed at ordinary individual rates with 30% qualifying for the 25% rate. For personal services, like doctors, lawyers, accountants, and financial advisors, all income is presumed to be earned income and subject to ordinary individual rates. An alternate calculation will be available.

Itemized deductions.

Medical expenses would no longer be deductible.
State and local income tax expenses are no longer deductible.
Real estate taxes may be deducted, but limited to $10,000.
Mortgage interest expense is deductible on a principal residence only, with an indebtedness cap of $500,000 for new mortgages after November 2, 2017.
No deduction for home equity loans would be allowed going forward.
The limitation for charitable contributions increases from 50% of AGI to 60%.
The deduction for personal casualty losses would be eliminated, as would most miscellaneous itemized deductions.

Other changes. The following additional changes are outlined in the proposed bill:

Increase in the standard deduction to $24,400 for joint filers, and $12,200 for single filers.
Elimination of personal exemptions.
Elimination of the “Pease” limitation on itemized deductions.
Repeal of the alternative minimum tax.
Retention of the estate tax through 2023, with a doubled basic exemption to $10 million. After 2023, the estate tax and generation-skipping tax would be repealed (but the step-up in basis provision would remain).
Increase in the child tax credit from $1,000 to $1,600, with a new $300 credit available for non-child dependents and taxpayers themselves.
Elimination of the ability to deduct the payment of alimony (with receiving spouse no longer having to include in income).

Phase-outs. Certain tax benefits would be phased out for higher income taxpayers. The benefit of the new 12% individual tax bracket would be phased out for single taxpayers with adjusted gross income over $1,000,000 and joint filers with income over $1,200,000. The phase-out for the child tax credit and new family tax credit would increase for single filers from $75,000 to $115,000 and for joint filers from $110,000 to $230,000.

Education. A number of changes were made to education provisions. First, the American Opportunity Tax Credit, Hope Scholarship Credit, and Lifetime Learning Credit would be combined into one American Opportunity Tax Credit (AOTC). The new AOTC provides for a 100% credit for the first $2,000 of qualified expenses, and a 25% credit for the next $2,000 of expenses, for the first four year of post-secondary education. The new AOTC also provides for a credit for a fifth year of post-secondary education at half the rate of the first four years.

The bill also eliminates new contributions to Coverdell education savings accounts, and expands 529 plans to allow unborn children to be designated as beneficiaries. It also covers expenses for apprenticeship programs and up to $10,000 of elementary and high school expenses.

Other education provisions that were repealed include:

Above-the-line deduction for student loan interest expense.
Above-the-line deduction for qualified tuition and related expenses.
Exclusion from income of employer-provided education assistance.

If you have questions, please contact a member of Yeo & Yeo’s Tax Services Group or your local Yeo & Yeo office.

With Veterans Day on November 11, it’s an especially good time to think about the sacrifices veterans have made for us and how we can support them. One way businesses can support veterans is to hire them. The Work Opportunity tax credit (WOTC) can help businesses do just that, but it may not be available for hires made after this year.

As released by the Ways and Means Committee of the U.S. House of Representatives on November 2, the Tax Cuts and Jobs Act would eliminate the WOTC for hires after December 31, 2017. So you may want to consider hiring qualifying veterans before year end.

The WOTC up close

You can claim the WOTC for a portion of wages paid to a new hire from a qualifying target group. Among the target groups are eligible veterans who receive benefits under the Supplemental Nutrition Assistance Program (commonly known as “food stamps”), who have a service-related disability or who have been unemployed for at least four weeks. The maximum credit depends in part on which of these factors apply:

Food stamp recipient or short-term unemployed (at least 4 weeks but less than 6 months): $2,400
Disabled: $4,800
Long-term unemployed (at least 6 months): $5,600
Disabled and long-term unemployed: $9,600

The amount of the credit also depends on the wages paid to the veteran and the number of hours the veteran worked during the first year of employment.

You aren’t subject to a limit on the number of eligible veterans you can hire. For example, if you hire 10 disabled long-term-unemployed veterans, the credit can be as much as $96,000.

Other considerations

Before claiming the WOTC, you generally must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you.

Also be aware that veterans aren’t the only target groups from which you can hire and claim the WOTC. But in many cases hiring a veteran will provided the biggest credit. Plus, research assembled by the Institute for Veterans and Military Families at Syracuse University suggests that the skills and traits of people with a successful military employment track record make for particularly good civilian employees.

Looking ahead

It’s still uncertain whether the WOTC will be repealed. The House bill likely will be revised as lawmakers negotiate on tax reform, and it’s also possible Congress will be unable to pass tax legislation this year. Under current law, the WOTC is scheduled to be available through 2019.

But if you’re looking to hire this year, hiring veterans is worth considering for both tax and nontax reasons. Contact us for more information on the WOTC or on other year-end tax planning strategies in light of possible tax law changes.

Does your small business engage in qualified research activities? If so, you may be eligible for a research tax credit that you can use to offset your federal payroll tax bill.

This relatively new privilege allows the research credit to benefit small businesses that may not generate enough taxable income to use the credit to offset their federal income tax bills, such as those that are still in the unprofitable start-up phase where they owe little or no federal income tax.

QSB status

Under the Protecting Americans from Tax Hikes Act of 2015, a qualified small business (QSB) can elect to use up to $250,000 of its research credit to reduce the Social Security tax portion of its federal payroll tax bills. Under the old rules, businesses could use the credit to offset only their federal income tax bills. However, many small businesses owe little or no federal income tax, especially small start-ups that tend to incur significant research expenses.

For the purposes of the research credit, a QSB is generally defined as a business with:

Gross receipts of less than $5 million for the current tax year, and
No gross receipts for any taxable year preceding the five-taxable-year period ending with the current tax year.

The allowable payroll tax reduction credit can’t exceed the employer portion of the Social Security tax liability imposed for any calendar quarter. Any excess credit can be carried forward to the next calendar quarter, subject to the Social Security tax limitation for that quarter.

Research activities that qualify

To be eligible for the research credit, a business must have engaged in “qualified” research activities. To be considered “qualified,” activities must meet the following four-factor test:

The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business.
There must be an intention to eliminate uncertainty.
There must be a process of experimentation. In other words, there must be a trial-and-error process.
The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.

Expenses that qualify for the credit include wages for time spent engaging in supporting, supervising or performing qualified research, supplies consumed in the process of experimentation, and 65% of any contracted outside research expenses.

Complex rules

The ability to use the research credit to reduce payroll tax is a welcome change for eligible small businesses, but the rules are complex and we’ve only touched on the basics here. We can help you determine whether you qualify and, if you do, assist you with making the election for your business and filing payroll tax returns to take advantage of the new privilege.

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

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

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

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

Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether real estate is occupied by your business or rented out, here’s how you can maximize your deductions.

Segregate personal property from buildings

Generally, buildings and improvements to them must be depreciated over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). But personal property, such as furniture and equipment, generally can be depreciated over much shorter periods. Plus, for the tax year such assets are acquired and put into service, they may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million).

If you can identify and document the items that are personal property, the depreciation deductions for those items generally can be taken more quickly. In some cases, items you’d expect to be considered parts of the building actually can qualify as personal property. For example, depending on the circumstances, lighting, wall and floor coverings, and even plumbing and electrical systems, may qualify.

Carve out improvements from land

As noted above, the cost of land isn’t depreciable. But the cost of improvements to land is depreciable. Separating out land improvement costs from the land itself by identifying and documenting those improvements can provide depreciation deductions. Common examples include landscaping, roads, and, in some cases, grading and clearing.

Convert land into a deductible asset

Because land isn’t depreciable, you may want to consider real estate investment alternatives that don’t involve traditional ownership. Such options can allow you to enjoy tax deductions for land costs that provide a similar tax benefit to depreciation deductions. For example, you can lease land long-term. Rent you pay under such a “ground lease” is deductible.

Another option is to purchase an “estate-for-years,” under which you own the land for a set period and an unrelated party owns the interest in the land that begins when your estate-for-years ends. You can deduct the cost of the estate-for-years over its duration.

More limits and considerations

There are additional limits and considerations involved in these strategies. Also keep in mind that tax reform legislation could affect these techniques. For example, immediate deductions could become more widely available for many costs that currently must be depreciated. If you’d like to learn more about saving income taxes with business real estate, please contact us.

On October 30, 2017, the State of Michigan will launch a new website for businesses to file, pay, and request documentation regarding their annual filing with the Corporations Division. The new website will be the Corporations Online Filing System (COFS) at www.michigan.gov/corporations

(this link will be active beginning October 30). The Michigan-ELF website that many taxpayers used in the past to electronically submit their annual report will be discontinued on October 26 at 5:00 p.m.

What changes should you watch for? On October 16, the State of Michigan mailed a notice to all active businesses, announcing the new website and access information. Included in the notice:

New Entity ID – The entity ID is your identification number with the State of Michigan Department of Licensing and Regulatory Affairs only; this does not change or impact your federal EIN.

Customer ID (CID) and PIN – Similar to a user login and password, these will be the credentials used to connect to the online filing system and enable a user to submit documents on behalf of the business.

At this time there is no requirement for you to file and pay online. The State will continue to accept annual filings by mail, in person, or online through COFS.

Please click here to review frequently asked questions regarding this change.

If you have questions, please contact a member of Yeo & Yeo’s Tax Services Group or your local Yeo & Yeo office.

The Michigan Department of Transportation (MDOT) no longer requires performance audits to be completed and submitted to the department for each recipient of ACT 51 funds. Any costs incurred by municipalities related to these performance audits can be submitted to MDOT for reimbursement.

Invoices and fees paid for the performance audit and supporting documentation should be submitted to the attention of Patrick McCarthy by email at mccarthyp@michigan.gov.

If you have questions, please contact a member of Yeo & Yeo’s Government Services Group or your local Yeo & Yeo office.

Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.

Timing strategies for businesses

Here are two timing strategies that can help businesses defer taxes:

1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

Potential impact of tax reform

These deferral strategies could be particularly powerful if tax legislation is signed into law this year that reflects the nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27.

Among other things, the framework calls for reduced tax rates for corporations and flow-through entities as well as the elimination of many business deductions. If such changes were to go into effect in 2018, there could be a significant incentive for businesses to defer income to 2018 and accelerate deductible expenses into 2017.

But if you think you’ll be in a higher tax bracket next year (such as if your business is having a bad year in 2017 but the outlook is much brighter for 2018 and you don’t expect that tax rates will go down), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but might save you tax over the two-year period.

Be prepared

Because of tax law uncertainty, in 2017 you may want to wait until closer to the end of the year to implement some of your year-end tax planning strategies. But you need to be ready to act quickly if tax legislation is signed into law. So keep an eye on developments in Washington and contact us to discuss the best strategies for you this year based on your particular situation.

Health savings accounts (a.k.a. HSAs) are becoming more and more common in the workplace. With an HSA, both the qualifying employee and the employer can contribute to the employee’s HSA. HSAs have many appealing elements – three of those attributes are:

1)When a qualifying individual contributes to his or her HSA, the employee will be able to take an above-the-line deduction for the contribution on his or her individual income tax return.

2)When an employer contributes to an employee’s HSA, the employer can take a business deduction for the amount of their contribution and the employee does not have to report the contribution as taxable income.

3)All withdrawals used to cover qualified medical expenses are tax-free.

With the items listed above, it looks like it is a win-win situation for the employer and employee, right? The answer is yes unless the employee is a greater than 2 percent shareholder of the company.

Greater than 2 percent shareholders of an S Corporation have different requirements when it comes to an HSA. Any contribution made by the employer to the HSA of a greater than 2 percent shareholder must be included as taxable income on the shareholder’s W-2, but are not subject to employment taxes. To help offset the impact of including the company’s contribution as taxable wages, the shareholder can take an above-the-line tax deduction on their personal income tax return equal to the contribution.

Please contact me if you have questions regarding HSA contributions or would like additional information about HSAs.

Many business owners have heard of the Section 179 deduction in relation to capital assets that are purchased. However, special rules are in effect regarding Section 179 as it relates to the purchase of vehicles. Read on to see if your vehicle purchase will qualify for the Section 179 deduction.

For a majority of passenger vehicles that are used primarily for business, total depreciation allowed in a year, including Section 179, is limited to $11,160. For trucks and vans, the deduction is limited to $11,560 per year. As with any rule, however, there are exceptions.

A $25,000 deduction is allowed by businesses who purchase a vehicle that has a gross vehicle weight of over 6,000 lbs. but not over 14,000 lbs.

A full deduction equal to 100 percent of the total cost is allowed for businesses in certain industries. If you are in the ambulatory industry and purchase an ambulance, you can deduct 100 percent of the cost in the first year using Section 179. This same rule applies to businesses that utilize a hearse in their normal course of business, i.e., funeral homes. Taxis and transport vans are a few additional examples where 100 percent of the cost can be deducted using Section 179.

It is always best to consult your accountant when you are thinking about purchasing a capital asset, especially vehicles, to ensure you have a correct understanding of the deduction for which you will qualify.

In January 2017, the Governmental Accounting Standards Board (GASB) issued the final standard on identifying and reporting fiduciary activities under Statement No. 84.

The statement identifies four fiduciary funds that should be reported: 1) pension (and other employee benefit) trust funds, 2) investment trust funds, 3) private-purpose trust funds, and 4) custodial funds. Custodial funds generally should report fiduciary activities that are not held in a trust or equivalent arrangement that meets the specific criteria.

The majority of school district financial statements include fiduciary funds that typically include scholarship funds, trust funds, and student activity funds.

The statement establishes criteria to help school districts identify fiduciary activities and how those activities should be reported.

The statement focuses on two criteria for identifying fiduciary activities:

Is the school district controlling the assets of the fiduciary activity?
Who are the beneficiaries with whom fiduciary relationships exist?

Based on the above criteria, if you determine that your school district has fiduciary activities, then you will report a fiduciary fund in the basic financial statements.

School districts will present two financial statements for the fiduciary fund

A statement of fiduciary net position
A statement of changes in net fiduciary position.

The statement of changes in net fiduciary position is a new statement that is required for all fiduciary activities. Previously, it was only required to be presented for school districts with trust funds.

In past years, school districts recorded an asset and a corresponding liability for the various student activity funds. Under the new guidance, school districts will report all additions and deductions for the activity funds for the fiscal year, as well as an asset and net position for the fund at the end of the year.

The statement is effective for reporting periods beginning after December 15, 2018. This means for school districts the statement is effective for fiscal years ending June 20, 2020. This statement will have an impact on the reporting of fiduciary funds for all school districts. You have plenty of time to plan, identify your fiduciary activities and set up new chart of account numbers in order to start the year of implementation properly.

If you have questions or need assistance, please contact your local Yeo & Yeo professional.

How do I know if I’ve outgrown QuickBooks?

No matter what industry your business operates in, it is likely that you can only use QuickBooks for so long. It’s a great solution for a lot of companies. However, many companies get to a point where QuickBooks is not the best solution anymore. How do you know if your company has reached that point? Some of the common indicators include:

You find yourself and your accounting staff doing more and more in Excel.
You use other systems and solutions to track information and import summary information.
- i.e., you do payroll in-house, but use something other than Intuit Payroll.
- You track and pay invoices and bills in outside systems.
You are entering the same data in multiple systems/places.
You have more users than login credentials.

What are my options?

You have determined that your company may do better using a different accounting solution. Now, what should you do? Numerous accounting software options are available – here are some of the more popular options for construction industry users and some of their benefits:

ComputerEase
- Offers flexible billing options
- Tracks retainages
- Customized reporting
sage 100c MasterBuilder
- Accurately create bids
- Export estimates from bids for budgets, proposals, purchase orders and subcontracts
- Offers a project center to see all project management details in one space
Foundation
- Integrated job costing
- Manage documents related to project management
- Mobile timecards for payroll
Before choosing any software, you should evaluate where the redundancies are in your current system, what you want your accounting system to be able to do, and your price range.

Software selection is an important decision. Being able to use the available features to their fullest potential can help to increase productivity, generate complete income and expense information, and provide the most useful information for strategic decision-making during the year.

The professionals of Yeo & Yeo’s Computer Accounting Solutions team understand the challenges that construction companies face when using financial accounting software programs. When you are ready to consider new software, we can assist you in evaluating your needs, selecting and implementing many of the top-rated financial accounting software packages. For assistance, please contact your local Yeo & Yeo office.

In today’s rough-and-tumble world of mergers and acquisitions (M&As), buyers need to get to know business sellers and their executives, test their representations about asset condition and financial performance, and screen for common fraud schemes. Here’s why.

Whose side are they on?

Without adequate M&A due diligence, unwary buyers could fall victim to false representations by sellers that never pan out after the deal closes. Or they may inherit a hornet’s nest of white-collar crime and embezzlement by employees.

Even if a company has internal controls in place, owners and executives can override them. These individuals have access to financial statements, and may have incentives — such as to receive bonuses for exceeding certain growth targets — to falsify them.

So it’s essential to perform background checks on your acquisition target’s owners and C-suite executives. A thorough check can uncover past involvement in criminal embezzlement, theft, forgery and other types of fraud, as well as involvement in civil Litigation Support. It could also reveal falsified items on their resumés and other pertinent personal claims.

How “creative” is the business?

Financial statements should also be scoured for misstatements. Some owners may use “creative” accounting techniques to artificially inflate a company’s value. They might, for example:

Prebook revenues,
Leave stale receivables on the books,
Record phantom inventory,
Defer expense recognition, or
Lend money to major customers so they can make large purchases that will inflate sales numbers.

Owners might also hide liabilities, falsify transactions with related parties, overvalue receivables and securities, and overstate inventories to boost the selling price.

Tip of the iceberg

Unfortunately, this is just the tip of the iceberg when it comes to fraud schemes that could diminish the value of your acquisition. In addition to performing financial and legal due diligence, be sure to tour your target’s facilities and interview management for insight into the company’s culture. For help conducting due diligence, please contact us.

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

This short (< 25 questions) survey asks about manufacturing companies’ performance this year, managers’ expectations for next year, and the strategies that high-performing manufacturers find most effective. Individual responses will be kept strictly confidential. The survey closes on October 30. In January, the resulting aggregate report will be available on Yeo & Yeo’s website, providing insightful industry data as manufacturing companies plan for 2018.

The leader of Yeo & Yeo’s Manufacturing Services Group, Amy Buben, says, “Small and medium-size manufacturers rely on their trusted advisors and each other more than ever. Last year’s survey results were valuable for companies to compare their operation with others and see the trends. We expect that this year’s survey results will be even more beneficial, giving insight into the strategies that manufacturers are planning for 2018.”

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

Click here to participate in Yeo & Yeo’s 2017 National Manufacturing Outlook Survey.

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

Read, U.S. Manufacturers Expect Revenue Growth in 2017 According to Manufacturing Outlook Survey, for the results of the 2016 survey.

If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)

For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2017. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250.

Fortunately, there are ways spouse-owned businesses can lower their combined SE tax hit. Here are two.

1. Establish that you don’t have a spouse-owned partnership

While the IRS creates the impression that involvement by both spouses in an unincorporated business automatically creates a partnership for federal tax purposes, in many cases, it will have a tough time making the argument — especially when:

The spouses have no discernible partnership agreement, and
The business hasn’t been represented as a partnership to third parties, such as banks and customers.

If you can establish that your business is a sole proprietorship (or a single-member LLC treated as a sole proprietorship for tax purposes), only the spouse who is considered the proprietor owes SE tax.

Let’s assume the same facts as in the previous example, except that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2017, the SE tax bill is $23,023 [($127,200 × 15.3%) + ($122,800 × 2.9%)]. That’s much less than the combined SE tax bill from the first example ($38,250).

2. Establish that you don’t have a 50/50 spouse-owned partnership

Even if you do have a spouse-owned partnership, it’s not a given that it’s a 50/50 one. Your business might more properly be characterized as owned, say, 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.

Let’s assume the same facts as in the first example, except that your business is an 80/20 spouse-owned partnership. In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000. For 2017, the SE tax bill for the 80% spouse is $21,573 [($127,200 × 15.3%) + ($72,800 × 2.9%)], and the SE tax bill for the 20% spouse is $7,650 ($50,000 × 15.3%). The combined total SE tax bill is only $29,223 ($21,573 + $7,650).

More-complicated strategies are also available. Contact us to learn more about how you can reduce your spouse-owned business’s SE taxes.

A tried-and-true tax-saving strategy for investors is to sell assets at a loss to offset gains that have been realized during the year. So if you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year end to offset your gains. This can reduce your 2017 tax liability.

But what if you expect an investment that would produce a loss if sold now to not only recover but thrive in the future? Or perhaps you simply want to minimize the impact on your asset allocation. You might think you can simply sell the investment at a loss and then immediately buy it back. Not so fast: You need to beware of the wash sale rule.

The rule up close

The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.

Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Achieving your goals

Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:

Sell the security and immediately buy shares of a security of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.
Sell the security and wait 31 days to repurchase the same security.
Before selling the security, purchase additional shares of that security equal to the number you want to sell at a loss. Then wait 31 days to sell the original portion.

If you have a bond that would generate a loss if sold, you can do a bond swap, where you sell a bond, take a loss and then immediately buy another bond of similar quality and duration from a different issuer. Generally, the wash sale rule doesn’t apply because the bonds aren’t considered substantially identical. Thus, you can achieve a tax loss with virtually no change in economic position.

For more ideas on saving taxes on your investments, please contact us.

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

“This is an exciting achievement that recognizes Yeo & Yeo’s commitment to the health and well-being of our employees,” said Thomas E. Hollerback, president and CEO of Yeo & Yeo. “The focus is to help employees make real changes in their health and lifestyle behaviors at home and in the workplace.”

Yeo & Yeo supports wellness for its employees by paying a large portion of healthcare premiums, helping to keep costs low for employees. The firm has a high percentage of participation in its wellness plan and healthcare premium reduction incentive. Another initiative is the firm’s Fitbit Fitness Program. Themed, monthly challenges for individuals and teams, along with prizes and friendly competition, have resulted in a high level of participation. New this year, Yeo & Yeo introduced an Ergonomic Standing Desk option for employees, for a healthier work environment. The firm also provides free flu shots.

Nominees were evaluated by using an assessment, created and administered by SynBella, the nation’s leading wellness provider. Criteria for selection included wellness programs and policies, culture and awareness, leadership, participation and incentives, communication and measurement, among others. A total of 527 companies and organizations were nominated for the award. Of those organizations, 241 completed the entire selection process, and 123 winners were chosen.

Yeo & Yeo will be honored at a symposium and awards celebration on October 20 at The Henry in Dearborn. The program is co-presented by MichBusiness, Michigan Food and Beverage Association, and Corp! magazine. Winners will be featured in the November issue of Corp! magazine.

Business owners may not be able to set aside as much as they’d like in tax-advantaged retirement plans. Typically, they’re older and more highly compensated than their employees, but restrictions on contributions to 401(k) and profit-sharing plans can hamper retirement-planning efforts. One solution may be a cash balance plan.

Defined benefit plan with a twist

The two most popular qualified retirement plans — 401(k) and profit-sharing plans — are defined contribution plans. These plans specify the amount that goes into an employee’s retirement account today, typically a percentage of compensation or a specific dollar amount.

In contrast, a cash balance plan is a defined benefit plan, which specifies the amount a participant will receive in retirement. But unlike traditional defined benefit plans, such as pensions, cash balance plans express those benefits in the form of a 401(k)-style account balance, rather than a formula tied to years of service and salary history.

The plan allocates annual “pay credits” and “interest credits” to hypothetical employee accounts. This allows participants to earn benefits more uniformly over their careers, and provides a clearer picture of benefits than a traditional pension plan.

Greater savings for owners

A cash balance plan offers significant advantages for business owners — particularly those who are behind on their retirement saving and whose employees are younger and lower-paid. In 2017, the IRS limits employer contributions and employee deferrals to defined contribution plans to $54,000 ($60,000 for employees age 50 or older). And nondiscrimination rules, which prevent a plan from unfairly favoring highly compensated employees (HCEs), can reduce an owner’s contributions even further.

But cash balance plans aren’t bound by these limits. Instead, as defined benefit plans, they’re subject to a cap on annual benefit payouts in retirement (currently, $215,000), and the nondiscrimination rules require that only benefits for HCEs and non-HCEs be comparable.

Contributions may be as high as necessary to fund those benefits. Therefore, a company may make sizable contributions on behalf of owner/employees approaching retirement (often as much as three or four times defined contribution limits), and relatively smaller contributions on behalf of younger, lower-paid employees.

There are some potential risks. The most notable one is that, unlike with profit-sharing plans, you can’t reduce or suspend contributions during difficult years. So, before implementing a cash balance plan, it’s critical to ensure that your company’s cash flow will be steady enough to meet its funding obligations.

Right for you?

Although cash balance plans can be more expensive than defined contribution plans, they’re a great way to turbocharge your retirement savings. We can help you decide whether one might be right for you.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Alan D. Panter, CPA, has joined the firm as audit principal based in the firm’s Auburn Hills office, and as a member of Yeo & Yeo’s Education Services Group and Government Services Group.

Most recently Panter was a principal at Abraham & Gaffney, P.C. Three staff accountants from Abraham & Gaffney who specialize in audit services also joined Yeo & Yeo’s Auburn Hills office.

“Alan brings a wealth of experience in serving the Audit & Assurance needs of government and education entities,” says David Youngstrom, Principal and Yeo & Yeo’s Assurance Service Line Leader. “With double-digit growth in governmental audits this past year and a growing client base, Alan and his team are a welcome addition to the Assurance Service Line.”

Panter has 28 years of experience working in Big 4 and corporate accounting, including five years’ experience in financial software for government entities. His areas of specialization include audit and consulting services for local government entities, education and nonprofit organizations. He also performs single audits and audits of employee benefit plans, with expertise in internal controls.

“I am excited about the depth of services that Yeo & Yeo provides and to be a part of this talented team. I look forward to extending additional resources to my existing client base, and contributing to the firm’s continued growth in southeast Michigan,” says Panter.

Panter is a member of the Michigan Government Finance Officers Association, Michigan School Business Officials, and Central Michigan School Business Officials.

Whether you are new to the construction industry or have been working in it for years, you have probably realized that understanding and getting the proper surety coverage can be overwhelming. Surety bonds are a risk mitigation insurance that helps insure those involved in a contract through all phases of the project, from the bidding process all the way through performance and final payment. With the many different types of surety bonds, it is important to identify the type of bond that is necessary for your phase of the project and to mitigate your company’s exposure and ensure you have a high level of coverage if some portion of the contract fails.

In order to be successful in anything, it is important to surround yourself with a strong team and to have the right people in the right place to set yourself up for success. This applies not only to your organization, but with professionals who help support your efforts and objectives (bonding agent, CPA, attorney, etc.). Your bonding agent is vital in keeping you informed of the different types of bonds, ensuring that your company is properly covered and that you are aware of your level of risk if a situation should surface.

While all of this may seem easy enough, your company’s bonding capacity and bonding rate is only as good as the surety’s analysis of your business. A surety is backing your company to follow through on your obligations and as a result they need to be comfortable with that decision. The surety is looking for long-term survival and stability of a company. Some factors used for analysis include analyzing the contractor’s experience, the organization’s management team and employee group and, most importantly, the company financials.

Financial stability plays a significant role in your bonding limitations. Numerous ratios and other metrics are used to analyze your financial data; however, the primary areas analyzed are the company’s equity, debt, and liquidity. Sureties focus on the strength of equity in comparison with levels of debt and the amount of backlog being carried. A contractor’s ability to operate their business without dependence on outside financing is ideal for a surety and results in the greatest level of support. Liquidity is vital in any business, but especially in the construction industry. Rarely in other industries are companies expected to front large sums of money for customers for 60 to 90 days and on top of that they hold back 10 percent retainage. However, this is the norm in the construction world. In order to operate under these circumstances, surety companies evaluate the company’s liquid assets and working capital. These amounts are compared to the remaining costs to complete their backlog projects in order to determine the company’s ability to meet their short-term needs.

Most sureties require financials statements to be audited, reviewed, or at the very least compiled by a CPA. Bonding rates and bonding capacity are directly related to the surety’s level of comfort with the company including the quality of their financial data. Accurate, detailed, and timely financial information is essential. Having up-to-date work in progress (WIP) and job costing allows a project manager the ability to correct problems in a timely manner and prevents projects from sliding. Accurate estimating and WIP analysis when compared to the final contract will build confidence and trust in your financial data. It is important to choose a CPA who understands the construction industry and the unique aspects of construction accounting in order to put the best foot forward with the surety company. With a good understanding of the surety’s perspective and the right team in place to support your organization, you can set your business up for long-term success.

If you have questions or need assistance with strategically positioning your company for bonding, please contact Yeo & Yeo’s Construction Services Group.