Manager Spotlight: Get to Know James Edwards

James Edwards III, CPA, was recently promoted to senior manager. James said about his promotion, “I am proud of the accomplishment and grateful for my mentors in the firm who helped me along the way. I am excited to continue building my expertise, and I look forward to the next chapter of my career at Yeo & Yeo.”

Let’s learn about James and what makes his career meaningful and enjoyable.

Tell me about your career path.

Yeo & Yeo was my first professional job out of college. As I gained experience, the assignments became more challenging. Looking back, I realize that each new responsibility helped build my skill set to further assist others in the firm and advance my career. I had to learn a lot at first, and I worked hard to become effective at bookkeeping and tax preparation. Once I had enough knowledge, I could help train new staff accountants and began reviewing work, billing clients and developing a book of business of my own. I’ve enjoyed taking on new responsibilities and challenges throughout my time at Yeo & Yeo.

What advice would you give to an aspiring accountant progressing in their career?

All aspiring accountants should develop their communication skills. Working with clients, we interact with many individuals in various contexts every day. We need to provide understandable answers to complex client questions, update team members on project statuses, give feedback on staff performance and much more. If you can communicate effectively with clients and colleagues, it will open many doors as you progress in your career.

What makes being an accountant fun?

Working on different clients and assignments every day makes accounting fun. No two days are alike from a work standpoint. One day, I could be preparing a tax return, and the next, I could be helping a client with a new business endeavor. I really enjoy the work variety, interacting with clients and helping them maintain and grow their businesses.

James leads the firm’s Client Accounting Software Team and is a member of the Manufacturing Services Group. His areas of expertise include tax planning and preparation, and business advisory services with an emphasis on the manufacturing sector and for-profit entities. Edwards holds a Master of Science in accounting from Grand Valley State University. He is a 2021 Leadership A2Y graduate. In the community, he serves as treasurer of the Ann Arbor Track Club and is a member of the Ann Arbor Area Community Foundation Network of Professional Advisors. He is based in the firm’s Ann Arbor office.

A business or individual might be able to dispose of appreciated real property without being taxed on the gain by exchanging it rather than selling it. You can defer tax on your gain through a “like-kind” or Section 1031 exchange.

A like-kind exchange is a swap of real property held for investment or for productive use in your trade or business for like-kind investment real property or business real property. For these purposes, “like-kind” is very broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale. If you’re unsure whether the property involved in your exchange is eligible for a like-kind exchange, contact us to discuss the matter.

Here’s how the tax rules work

If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still have to report the exchange on a form that is attached to your tax return.

However, the properties often aren’t equal in value, so some cash or other (non-like-kind) property is thrown into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.

Here’s an example

Let’s say you exchange land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain: the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000, which is your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note: No matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.

If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to him or her giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Like-kind exchanges can be complex but they’re a good tax-deferred way to dispose of investment or trade or business assets. We can answer any additional questions you have or assist with the transaction.

What happens if two or more individuals in your organization collude to commit fraud? According to the Association of Certified Fraud Examiners’ (ACFE’s) 2022 Report to the Nations, fraud losses rise precipitously. The median loss for a scheme involving just one perpetrator is $57,000, but when two or more perpetrators are involved, the median loss skyrockets to $145,000. When three or more thieves work together, it soars to $219,000.

Unfortunately, collusion schemes are common — they make up approximately 58% of all fraud incidents. So these five steps are recommended:

Enforce internal controls. Colluding thieves usually either ignore internal controls or take steps to hide noncompliance. For example, a colluding manager might override controls to allow another employee to commit expense reimbursement or payroll fraud. To prevent such scenarios, ensure controls function as they were designed. If an employee fails to comply with a control, does it raise a red flag? Are controls regularly reviewed for compliance and efficacy?
Conduct surprise audits. When employees know unexpected audits are a possibility, they’re generally less likely to attempt fraud. Surprise audits focusing on your company’s vulnerabilities (such as inventory or cash-on-hand) should be conducted by outside fraud professionals. Keep the time and place confidential to only those who need to be in the loop. That way, a colluding manager is less likely to be able to warn fellow thieves or falsify an audit’s results.
Pay attention to relationships. Obviously, you want employees to get along and even be friends. But do any workplace relationships seem suspicious — for example, does a nonaccounting worker spend an unusual amount of time in an accounting staffer’s office with the door closed? Also scrutinize any employee relationship with a vendor that seems too chummy. When vetting vendors, ensure their personal information, such as addresses, don’t match those of any employees.
Monitor electronic communications. In partnership with your legal counsel, ensure you have the right to monitor employee communications, such as email or instant messages shared on your network. Investigate employees if their communications lapse into unintelligible code, appear unrelated to their primary roles or appear to violate your company’s policies and procedures.
Implement a job rotation program. When employees rotate positions, it’s harder for fraud perpetrators to hide criminal activity. If someone is resistant to participating in a job rotation plan, you might want to look closer at that employee’s work for red flags. Along the same lines, require everyone to take vacations. Employees who continually avoid time off or only want certain individuals to cover their work while they’re out generally deserve attention.

You can further impede criminally minded employees from working together by making all workers sign a code of conduct and by modeling ethical conduct. If you need help strengthening controls or suspect employees are colluding in fraud, contact us.

Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death. To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return (Form 706). The return is due nine months after death, with a six-month extension option.

Unfortunately, estates that aren’t otherwise required to file a return (typically because they don’t meet the filing threshold) often miss this deadline. The IRS recently revised its rules for obtaining an extension to elect portability beyond the original nine-months after death (plus six-month extension) timeframe.

What’s new?

In 2017, the IRS issued Revenue Procedure 2017-34, making it easier (and cheaper) for estates to obtain an extension of time to file a portability election. The procedure grants an automatic extension, provided:

The deceased was a U.S. citizen or resident,
The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline, and
The executor files a complete and properly prepared estate tax return within two years of the date of death.

Since the 2017 ruling, the IRS has had to issue numerous private letter rulings granting an extension of time to elect portability in situations where the deceased’s estate wasn’t required to file an estate tax return and the time for obtaining relief under the simplified method (two years of the date of death) had expired. According to the IRS, these requests placed a significant burden on the agency’s resources.

The IRS has now issued Revenue Procedure 2022-32. Under the new procedure, an extension request must be made on or before the fifth anniversary of the deceased’s death (an increase of three years). This method, which doesn’t require a user fee, should be used in lieu of the private letter ruling process. (The fee for requesting a private letter ruling from the IRS can cost hundreds or thousands of dollars.)

Don’t miss the revised deadline

If your spouse predeceases you and you’d benefit from portability, be sure that his or her estate files a portability election by the fifth anniversary of the date of death. Contact us with any questions you have regarding portability.

Your organization’s leadership team no doubt contains a wealth of experience, knowledge and bright ideas. But it might not have all the answers — and, more important, you and your fellow leaders could be unaware of one or more growing problems.

The good news is your employees may very well hold the operational improvement solutions you’re looking for — or don’t even realize you need. However, you might have to offer an incentive to get them to speak up.

Gaining insights

Here’s a fictitious example that illustrates the kinds of insights you could gain. Let’s say, in March, Employer X lost two major accounts. The sales manager blamed it on poor quality control. The production manager blamed it on an executive decision to switch to a cheaper supplier. Meanwhile, the marketing manager thought the company’s prices were too high compared with what competitors were charging.

Tired of the blame game, ownership decided to survey frontline workers and customer service reps about ways to improve customer retention. Sure enough, these employees had some practical suggestions based on their daily observations and interactions.

After carefully choosing, crafting and implementing several of the ideas, things got better. First, Employer X was able to eliminate multiple bottlenecks in production, streamlining its workflow without compromising quality control.

Also, after one employee mentioned having a good rapport with a vendor while at a previous job, the business contacted the supplier and ended up negotiating a long-term contract. The new deal involved receiving raw materials on a just-in-time basis, which lowered inventory costs and improved Employer X’s gross margin.

Perhaps most important, leadership received a fraud tip: A salesperson noted that a disgruntled former colleague had more than likely stolen customer lists on the way out and taken them to an unethical competitor. So, ownership contacted an attorney about investigating the breach and implemented stronger controls to better protect valuable proprietary data.

Offering cash incentives

How can you motivate your employees to speak up? Some employers have implemented cash reward programs to incentivize workers to come up with value-added suggestions. When putting together such an initiative, consider these guidelines:

State your strategic goals. You don’t want to be inundated with complaints. Clarify that you’re looking for ideas for meeting achievable objectives that add long-term value.

Establish measurable benchmarks. Tie rewards to financial results, such as cost savings or revenue growth. For example, if a suggestion saves the company $40,000, a 2% reward is $800.

Say thanks and recognize winners. Openly express your gratitude to everyone who contributes ideas. Emphasize that, even if you decided not to act on a suggestion, you gave it due consideration.

Announce the winners at a companywide meeting or awards ceremony. In addition, publish the names of winners and descriptions of their suggestions on your internal website or via a widely distributed email. Doing so demonstrates that the program is authentic and important to your organization.

Broaden your perspective

Whether a high-ranking executive or newly hired entry-level worker, everyone wants to have a voice and be heard. By encouraging employees to contribute improvement solutions, you’ll broaden your leadership team’s perspective, empower workers and better guard against unforeseen risks. Contact us for help assessing the cost-effectiveness of an operational improvement program.

Kyle Richardson, CPA, was recently promoted to manager. Kyle said about his promotion, “I am humbled at the opportunity for this next chapter of my career. I could not be where I am today without the team surrounding me. I appreciate my colleagues and the clients I get to serve. I am excited to continue being the best teammate and resource for our clients that I can be.”

Let’s learn about Kyle and the path that shaped his rewarding career.

Tell me about your career path.

I started at Yeo & Yeo in January 2018. I had a slightly different career path than most. Out of high school, I joined the active-duty Army. After serving four years, I went to college and entered public accounting here. During my time at Yeo, I have continued to use my life experiences to learn and grow as a public accountant.

You have been a key member of the firm’s Young Professionals group. How has that experience shaped your career?

I have been very fortunate to serve on the Yeo Young Professionals (YPs) since early in my career. It has allowed me to appreciate the hard work young professionals go through to progress. I feel young professionals are the workhorses of the business world, and I hope to be able to advocate for them well beyond my time as a young professional.

Our Young Professionals team is planning a firm-wide service project to support the ACS Making Strides this year. It’s great that the firm encourages and supports these types of efforts, and it’s a lot of fun for our YPs to work on something beyond their daily scope of work that is so impactful.

What advice would you give to an aspiring accountant progressing in their career?

The same advice I was given from someone I look up to – be a sponge. Absorb all the information and expertise from those around you. If you remain open-minded, you will continue learning new things daily.

What makes being an accountant fun?

I enjoy being able to problem-solve. As you progress through your career, you are faced with more challenging circumstances that require creative thinking to solve. It is truly enjoyable to look at a client’s needs and find multiple solutions to serve them.

Kyle is a member of the firm’s Yeo Young Professionals group and serves as the Yeo Young Professionals service chair for the Yeo & Yeo Foundation. He graduated from Walsh College, where he earned a Bachelor of Accountancy. His areas of specialization include business advisory services, and tax planning and preparation with an emphasis on trusts and estates. In the community, he volunteers for the American Cancer Society. He is based in the firm’s Auburn Hills office.

Like a slowly gathering storm, inflation has gone from dark clouds on the horizon to a noticeable downpour on both the U.S. and global economies. Is it time for business owners to panic?

Not at all. As of this writing, a full-blown recession is possible but not an absolute certainty. And the impact of inflation itself will vary depending on your industry and the financial strength of your company. Here are some important points to keep in mind during this difficult time.

Government response

For starters, don’t expect any dramatic moves by the federal government. Some smaller steps, however, have been taken.

For instance, the Federal Reserve has raised interest rates to “pump the brakes” on the U.S. economy. And the IRS recently announced an increase in the optional standard mileage rate tax deduction for the last six months of 2022 (July 1 through December 31). The rate for business travel is now 62.5 cents per mile — up from 58.5 cents per mile for the first half of 2022.

This is notable because the IRS usually adjusts mileage rates only once annually at year-end. The tax agency explained: “in recognition of recent gasoline price increases, [we’ve] made this special adjustment for the final months of 2022.”

Otherwise, major tax relief this year is highly unlikely. Some tax breaks are inflation-adjusted — for example, the Section 179 depreciation deduction. However, these amounts were calculated at the end of 2021, so they probably won’t keep up with 2022 inflation. What’s more, many other parts of the tax code aren’t indexed for inflation.

Strategic moves

So, what can you do? First, approach price increases thoughtfully. When inflation strikes, raising your prices might seem unavoidable. After all, if suppliers are charging you more, your profit margin narrows — and the risk of a cash flow crisis goes way up. Just be sure to adjust prices carefully with a close eye on the competition.

Second, take a hard look at your budget and see whether you can reduce or eliminate nonessential expenses. Inflationary times lead many business owners to try to run their companies as leanly as possible. In fact, if you can cut enough costs, you might not need to raise prices much, if at all — a competitive advantage in today’s environment.

Last, consider the bold strategy of taking a growth-oriented approach in response to inflation. That’s right; if you’re in a strong enough cash position, your business could increase its investments in marketing and production to generate more revenue and outpace price escalations. This is a “high risk, high reward” move, however.

Optimal moves

Again, the optimal moves for your company will depend on a multitude of factors related to your industry, size, mission and market. One thing’s for sure: Inflation to some degree is inevitable. Let’s hope it doesn’t get out of control. We can help you generate, organize and analyze the financial information you need to make sound business decisions.

The updated lease accounting standard is currently in effect for private companies. After several postponements during the pandemic, the Financial Accounting Standards Board (FASB) voted unanimously to move forward with the changes. That means private companies and private not-for-profit entities that follow U.S. Generally Accepted Accounting Principles (GAAP) must adopt the new standard for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Surprisingly, some organizations still haven’t completed the implementation process, however. (Note: The updated accounting rules for long-term leases took effect for public companies in 2019.)

In a nutshell

Under the updated guidance, organizations must report both operating and finance leases on their balance sheets (with the exception of short-term leases with terms of 12 months or less). Previously, operating leases didn’t have to be recorded on the balance sheet.

This means lessees must now record a “right-to-use” asset and a corresponding liability for lease payments over the expected term. Generally, the asset and liability are based on the present value of minimum payments expected to be made under the lease, with certain adjustments. The updated guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows related to leases.

How will these changes affect your organization’s financial statements? The effects vary, but if you have significant operating leases for buildings, equipment, vehicles, technology and other assets, adopting the updated standard will immediately increase your company’s assets and liabilities, making it appear to be more leveraged than before. This can cause technical violations of loan covenants that limit your debt or require you to maintain certain debt ratios. You might want to forewarn your lenders if you expect major changes to your year-end financial results under the updated guidance.

A major undertaking

Based on our experiences with organizations that have already implemented the updated lease standard, the biggest challenge will be to locate all of your leases and extract the data necessary. Leases generally aren’t standardized, so reviewing them and gathering the required data — including lease terms, payment schedules, end-of-term options and incentives — can be a time-consuming, manual task.

Another challenge will be identifying leasing arrangements that must be accounted for under the updated standard but aren’t found in traditional lease agreements. If an agreement gives you the right to control an identified asset for a period of time in exchange for payment, then it may be considered a lease under the updated guidance. For example, leases may be “embedded” in service, supply, transportation or information technology agreements. With embedded leases, you’ll need to separate the contract’s lease and nonlease components for reporting purposes.

Leverage external resources

Organizations with significant leasing arrangements might want to consider purchasing lease accounting software to automate the process of managing and tracking their leases and calculating their lease-related assets and liabilities. If you haven’t yet started the implementation process, we can help you evaluate software options and get your accounting records and systems up to speed. Contact us for more information.

If you’re approaching retirement or have already retired, one of the biggest challenges is balancing the need to maintain your standard of living with your desire to preserve as much wealth as possible for your loved ones. This balance can be difficult to achieve, especially when retirement can last decades. One strategy to consider is the split annuity, which creates a current income stream while preserving wealth for the future.

ABCs of an annuity

An annuity is a tax-advantaged investment contract, usually with an insurance company or other financial services provider. You pay either a lump sum or annual premiums, and in exchange, the provider makes periodic payments to you for a term of years or for life.

For purposes of the split annuity strategy discussed below, we’ll focus on “fixed” annuities, which generally provide a guaranteed minimum rate of return. Other types of annuities include “variable” and “equity-indexed,” which may offer greater upside potential but also involve greater risk.

Annuities can be immediate or deferred. As the names suggest, with an immediate annuity, payouts begin right away, while a deferred annuity is designed to begin payouts at a specified date in the future.

From a tax perspective, annuity earnings are tax-deferred — that is, they grow tax-free until they’re paid out or withdrawn. A portion of each payment is subject to ordinary income tax, and a portion is treated as a tax-free return of principal (premiums). The ability to accumulate earnings on a tax-deferred basis allows deferred annuities to grow more quickly than comparable taxable accounts, which helps make up for their usually modest interest rates.

Annuities offer some flexibility to withdraw or reallocate the funds should your circumstances change. But keep in mind that — depending on how much you withdraw and when — you may be subject to surrender or early withdrawal charges.

Split annuity strategy

A split annuity may sound like a single product, but in fact it simply refers to two (or more) annuities, usually funded with a single investment. In a typical split annuity strategy, you use a portion of the funds to purchase an immediate annuity that makes fixed payments to you for a specified term (10 years, for example). The remaining funds are applied to a deferred annuity that begins paying out at the end of the initial annuity period.

Ideally, at the end of the immediate annuity term, the deferred annuity will have accumulated enough earnings so that its value is equal to your original investment. In other words, if the split annuity is designed properly, you’ll enjoy a fixed income stream for a term of years while preserving your principal.

At the end of the term, you can reevaluate your options. For example, you might start receiving payments from the deferred annuity, withdraw some or all its cash value, or reinvest the funds in another split annuity or another investment vehicle.

If you’re interested in learning more about a split annuity, please contact us. We’d be pleased to help you determine if this strategy is right for your situation.

Under IRS regulations regarding electronic consents and elections, if a signature must be witnessed by a retirement plan representative or notary public, it must be witnessed “in the physical presence” of the representative or notary — unless guidance has provided an alternative procedure.

Recently, in Notice 2022-27, the IRS extended, through the end of 2022, its temporary relief from the physical presence requirement. This is good news for businesses that sponsor a qualified retirement plan.

Requirements for relief

The physical presence requirement is imposed under IRS regulations regarding electronic consents and elections for certain retirement plans — including 401(k) plans. Originally granted in the early days of the COVID-19 pandemic, the relief initially applied for 2020 and has been extended twice since then, most recently through June 30, 2022.

As set forth in the IRS notice granting the original relief, the physical presence requirement is deemed satisfied for signatures witnessed by a notary public if the electronic system for remote notarization:

Uses live audio-video technology, and
Is consistent with state law requirements for a notary public.

For signatures witnessed remotely by a plan representative, the physical presence requirement is deemed satisfied if the electronic system uses live audio-video technology and meets four requirements:

Live presentation of photo ID,
Direct interaction,
Same-day transmission, and
A signed acknowledgement by the representative.

The relief has now been extended through December 31, 2022, subject to the same conditions. According to the IRS, a further extension of the relief beyond the end of 2022 isn’t expected to be necessary. The tax agency is currently reviewing comments received in connection with the initial relief and subsequent extensions to determine whether to retain or permanently modify the physical presence requirement. Any modification would be proposed through the regulatory process, which would include the opportunity for further comment.

An appreciable move

Given that the return to in-person business interactions has happened in fits and starts, this extension is likely to be appreciated by employers that sponsor retirement plans and their participants. Although many 401(k) plans are designed to limit or eliminate the need for spousal consents, those that offer annuity forms of distribution are subject to the spousal consent rules. And some 401(k) plans must require spousal consent if a married participant wants to name a non-spouse as primary beneficiary. Contact us for more information.

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of four professionals.

James Edwards III, CPA, has been promoted to Senior Manager. Edwards leads the firm’s Client Accounting Software Team and is a member of the Manufacturing Services Group. His areas of expertise include tax planning and preparation and business advisory services with an emphasis on the manufacturing sector and for-profit entities. Edwards holds a Master of Science in Accounting from Grand Valley State University. He is a 2021 Leadership A2Y graduate. In the community, he serves as treasurer of the Ann Arbor Track Club and is a member of the Ann Arbor Area Community Foundation Network of Professional Advisors. He is based in the firm’s Ann Arbor office.

Steven Treece, CPA, has been promoted to Senior Manager. He is a member of the firm’s Agribusiness Services Group. His areas of expertise include tax planning and preparation, payroll tax consulting and business advisory services. Treece holds a Bachelor of Business Administration in Accounting from the University of Michigan. In the community, he serves on the board of the Rotary Club of Burton and is a committee chairperson for the Old Newsboys of Flint. He is based in the firm’s Flint office.

Kyle Richardson, CPA, has been promoted to Manager. He is a member of the firm’s Yeo Young Professionals Group and serves as the Yeo Young Professionals Service Chair for the Yeo & Yeo Foundation. He graduated from Walsh College, where he earned a Bachelor of Accountancy. His areas of specialization include business advisory services, and tax planning and preparation with an emphasis on trusts and estates. In the community, he volunteers for the American Cancer Society. He is based in the firm’s Auburn Hills office.

Marc Roedel, CPA, has been promoted to Manager. He holds a Master of Business Administration from the DeVos Graduate School of Management. His areas of expertise include business consulting, financial reporting and tax planning with an emphasis on the manufacturing and construction sectors. He is a member of the Home Builders Association of Saginaw. In the community, Roedel serves as treasurer of the Great Lakes Bay Manufacturers Association and as a committee member for Messiah Lutheran Church. He is based in the firm’s Saginaw office.

Although merger and acquisition activity has been down in 2022, according to various reports, there are still companies being bought and sold. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. assets

From a tax standpoint, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income than it would have years ago. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

Under current law, individual federal tax rates are reduced from years ago and may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask your tax advisor for details.

What buyers and sellers want

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Keep in mind that other issues, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Get professional advice

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed in your situation.

Fraud risk assessments have been shown to prevent occupational fraud and limit losses for victimized organizations. These tools have become more prevalent in recent years, according to “Occupational Fraud 2022: A Report to the Nations” published by the Association of Certified Fraud Examiners (ACFE). But although almost 50% of businesses perform fraud assessments, many owners and managers may be unaware of the value of these procedures and how the assessment process works.

When and why?

Fraud risk assessments generally are conducted by internal auditors, either on a standalone basis or as part of a comprehensive enterprise risk management program. You may want to conduct assessments annually or whenever there have been major organizational changes or disruptions.

The COVID-19 pandemic, when many businesses closed temporarily and many employees started working from home, may provide the impetus to conduct a fresh fraud risk assessment. For example, workers could have used unsecured Wi-Fi connections to log in to your network while working from home, your accounting department may have temporarily stopped rotating duties or employees tasked with overseeing certain antifraud activities may have left your organization.

Getting started

Typically, a fraud risk assessment starts in the areas where fraud is most likely to happen — such as accounts payable, purchasing and IT. But it’s important not to stop there. If you close a door in only one department, those bent on fraud will find openings elsewhere.

You must review your organization’s internal controls in the same way a dishonest employee would — as opportunities that pose relatively little risk of exposure. Employees might exploit weak internal controls via:

Fraudulent financial reporting, such as improper revenue recognition and overstatement of assets,
Misappropriation of assets, including embezzlement or theft,
Improper expenditures, such as bribes, and
Fraudulently obtained revenue and assets, including tax fraud.

Some schemes, such as payroll or purchasing fraud, can involve external people in addition to employees. Fraud may be limited or widespread and affect everything from individual accounts to entity-wide processes. So your business’s controls should address all levels — including owners and executives — every department and all types of fraud.

Digging in

Interviewing key executives and managers is critical. They’ll provide you with a first glimpse of potential risk areas. Perhaps more important, these conversations will help you judge whether company leaders are setting the ethical “tone at the top” that’s integral to fraud prevention.

Next, identify the number and names of employees who handle or review accounting functions. How many, for example, reconcile bank statements or are authorized to make bank deposits? Spreading accounting and banking duties across multiple employees — or shouldering some of the review processes yourself — provides segregation and oversight that are essential to deterring fraud. If segregation of accounting duties was suspended during the COVID-19 lockdown and never reinstated, make sure you activate it immediately. A combination of job rotation and mandatory vacation has been shown to reduce fraud losses in victimized organizations by 54%, making it the most effective antifraud control.

Also consider your company’s key performance indicators. Fraud risks, for example, can show up in the performance of sales goals or in inventory management. And review antifraud spending. Compliance training, internal controls monitoring and ongoing risk reviews should be included in your business’s budget.

Too important

The final step is to adjust your controls (and, possibly, introduce new ones) to address any fraud risks you’ve discovered. What if your small business doesn’t have the internal resources to conduct a fraud risk assessment? (Only 17% of businesses with fewer than 100 employees perform risk assessments.) If so, engage a professional fraud expert to do the job. It’s too important a tool to leave in the box.

The labor shortage in the manufacturing sector has been well documented. As of October 2021, the number of workers in the industry had declined by almost 400,000 from pre-pandemic levels. According to the National Association of Manufacturers, nearly 2.1 million manufacturing jobs could be open by 2030.

Will this worker shortage adversely affect your manufacturing company, or has it already done so? You don’t have to sit idly by while the labor gap continues to grow. One way to entice more workers is by offering an impressive slate of employee benefits. Doing so can help you attract and retain top talent.

Enhance your employee benefits package

Compensation has always been vital to virtually any job offer, and that hasn’t changed. But increasingly, job candidates are focusing on employee benefits that may be available to them.

Notably, certain employee benefits are tax-exempt to participating employees, making them particularly attractive. This includes, but isn’t limited to, the following benefits that could convince an applicant to come on board:

Health insurance. The premiums paid by an employer under a health insurance plan are tax-free to employees — and deductible by the employer — if the plan is open to all eligible workers. Similarly, employer reimbursements for medical expenses generally are tax-free to employees as are contributions to Health Savings Accounts.

Qualified retirement plans. Like health insurance, this is a major employee benefit that often makes or breaks a job offer. Generally, the benefits provided under qualified plans, like a 401(k) plan, are currently exempt from tax and can grow without any tax erosion until withdrawals are made. Contributions are subject to generous annual limits, including potential matching contributions to a 401(k) plan by an employer. But strict nondiscrimination requirements must be met.

Group-term life insurance. This is a prized perk for workers in the manufacturing field even though there’s a tax price attached to “excess” coverage. Only the first $50,000 of coverage under a group-term life insurance plan is tax-free. For instance, if a worker earning $80,000 is covered at three times his or her annual pay, the employee owes tax on $190,000 of coverage ($240,000 − $50,000). The tax, which is computed using an IRS table based on the insured’s age, is generally relatively small.

Dependent care assistance plans. The first $5,000 of dependent care assistance paid by an employer under a written plan is tax-free to employees. To qualify, the dependent must be under age 13, physically or mentally unable to care for him- or herself, or a spouse who’s physically or mentally incapable of self-care. The amount of the exclusion can’t exceed the earned income of a single employee or the earned income of the lower-paid spouse if the employee is married.

Educational assistance plans. A company can provide tax-free payments of up to $5,250 annually for college or grad school tuition, books, fees, and supplies under an educational assistance plan. The courses covered under the plan don’t have to be related to the job.

Employee discounts. A manufacturing company can provide tax-free discounts to employees on its products. Note that the discount percentage can’t exceed the gross profit percentage of the price at which the product is offered to regular customers.

Build a positive corporate culture

Last, but not least, strive to create a work environment that makes a favorable first (and lasting) impression. Employees spend a lot of time on the job and you want them to feel at ease among coworkers and supervisors alike. Project a positive attitude that will carry over to others. Conversely, a toxic workplace could lead to even more turnover and early retirements.

If your manufacturing company is currently hiring, take the time to review your employee benefits package. We can help explain the tax consequences of various options if you’d like to expand your offerings.

Here’s a not-so-fun fact: The generation-skipping transfer (GST) tax is among the harshest and most complex in the tax code. So, if you’re planning to share some of your wealth with your grandchildren or great grandchildren — or if your estate plan is likely to benefit these generations — it’s critical to consider and plan for the GST tax.

GST tax explained

The GST tax is a flat, 40% tax on transfers to “skip persons,” including grandchildren, family members more than a generation below you, nonfamily members more than 37½ years younger than you and certain trusts (if all of their beneficiaries are skip persons). GST tax applies to gifts or bequests directly to a skip person (a “direct skip”) and to certain transfers by trusts to skip persons. Gifts that fall within the annual gift tax exclusion (currently, $16,000 per recipient; $32,000 for gifts split by married couples), either outright or to qualifying “direct skip trusts,” are shielded from GST tax.

Why GST tax can be confusing

Even though the GST tax enjoys an annual inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption (currently, $12.06 million), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

The tax code contains automatic allocation rules designed to prevent you from inadvertently losing the exemption, but it can be dangerous to rely on these rules. In some cases, the exemption isn’t automatically allocated to transfers that may trigger costly GST tax. And in others, the exemption is automatically allocated to transfers that are unlikely to need its protection, wasting those exemption amounts.

Nonetheless, the automatic allocation rules generally work well, ensuring that your exemption is allocated in the most tax-advantageous manner. But, as mentioned, in some cases, they can lead to undesirable results. For example, suppose you establish a trust for your children, with the remainder passing to your grandchildren. You assume the automatic allocation rules will shield the trust from GST tax. But the trust gives one of your children a general power of appointment over 50% of the trust assets, disqualifying it from GST trust status. Unless you affirmatively allocate your exemption to the trust, distributions or other transfers to your grandchildren will be subject to GST tax.

If you wish to make substantial gifts, either outright or in trust, to your grandchildren or other skip persons, be sure to carefully allocate your GST tax exemption. We can help you devise a strategy that leverages the exemption and minimizes your GST tax liability.

Like many businesses, yours has probably jumped aboard the cloud computing bandwagon … or “skywagon” as the case may be. How’s that going? Some business owners pay little to no attention to a cloud provider once the service is in place. Others realize, perhaps years later, that they’re not particularly satisfied with the costs, features and cybersecurity measures of their cloud vendors.

Given the value of the data and documents that you store in the cloud, it’s a good idea to occasionally review your provider and determine whether you’re still making a good investment.

Are you getting these benefits?

As you’re likely aware, cloud computing providers offer a secure network of third-party servers that you, the customer, can access online. Thus, rather than relying on your own computers or servers, you can remotely store, process, manage and share documents and data. You might also have access to various software. Here are the benefits that you should be enjoying:

Lower costs. Cloud customers typically pay a monthly subscription fee or are billed based on actual usage. Reputable providers regularly upgrade their offerings and provide free security patches.

Scalability. You should be able to scale up or down as your data storage or processing needs change. For example, you might generate more data during seasonal peaks.

Convenience. Cloud services shouldn’t be limited to certain geographic areas or within restricted time frames. You should be able to access your documents and data from anywhere, anytime and on any device.

Many of today’s cloud providers also allow businesses to share documents and data with vendors to facilitate production and streamline workflow, as well as to provide some level of access to authorized advisors or other parties such as lenders.

How secure are you?

Serious concerns about cybersecurity in every industry have caused many business owners to “do a double take” when it comes to cloud computing. So, first and foremost, when evaluating your provider or shopping for a new one, verify basic security features. These include firewalls, authorization restrictions and data encryption. Also investigate:

How frequently the cloud is updated,
Whether data is backed up in multiple locations around the country,
Whether the service has experienced any data breaches recently,
How quickly the provider has responded to security threats, and
Whether you can retrieve your data in a nonproprietary format should the service go out of business.

Reputable providers offer continuous data backup and disaster recovery capabilities, so you shouldn’t have to worry about losing important records because of a physical server failure or a lost or broken hard drive. But, beware, the language of your service agreement might leave you ultimately responsible for any data breach. Consider negotiating restitution clauses into your contract.

Regular reassessment

Cloud services are just like any other technology investment — the features and security risks will evolve over time and call for regular reassessment. Let us assist you in weighing the costs, risks and advantages of your cloud provider.

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

August 1

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)
File a 2021 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

If a calendar-year C corporation, pay the third installment of 2022 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic six-month extension:
- File a 2021 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2021 to certain employer-sponsored retirement plans.

Small-sized manufacturers may enjoy several tax advantages allowing them to reduce tax bills, defer taxes and simplify the reporting process. Federal tax rules used to generally define a “small business” as one with average annual gross receipts of $5 million or less ($1 million or $10 million in some cases) for the three preceding tax years. The Tax Cuts and Jobs Act (TCJA) increased the threshold to $25 million for tax years beginning after 2017.

The increased threshold expands eligibility for small business tax benefits to a greater number of manufacturers. It also simplifies tax compliance by establishing a uniform definition of “small business.” Previously, different thresholds applied depending on the tax accounting rules involved, as well as a company’s industry and whether it carried inventories.

Small business benefits

Potential benefits of small business status include:

Use of the cash accounting method. Eligible manufacturers that pass the gross receipts test are eligible to use the cash method of accounting for tax purposes. The cash method allows a business greater control over the recognition taxable income during a year.

Avoidance of inventory accounting requirements. Eligible manufacturers need not account for inventories, which can be complex, time consuming and expensive.

Relief from uniform capitalization rules. Eligible manufacturers are exempt from these rules, which require companies to capitalize rather than expense certain overhead costs, adding complexity to the tax reporting process and potentially increasing their tax liability.

Eligibility for the completed contract method. Eligible manufacturers can use the completed contract method, rather than the percentage-of-completion method, to account for long-term contracts expected to be completed within two years. This allows them to defer tax until a contract is substantially complete.

Full deductibility of business interest. The TCJA generally capped deductions for net business interest expense at 30% of adjusted taxable income. Eligible manufacturers are exempt from this limit.

Related entities’ receipts included. When determining your manufacturing company’s gross receipts, you must include not only your own receipts, but also those earned by certain related entities, such as other members of a parent-subsidiary group, a brother-sister group or combined group under common control.

See the small picture

If your manufacturing company’s average gross receipts are $25 million or less, contact us to find out whether the business is eligible for small business tax benefits. If you are, we can determine whether it would be worthwhile to change accounting methods to take advantage of these benefits. If the business is not, there may be planning opportunities to qualify for these benefits in the future.

“Thanks, but no thanks.” If you expect to receive an inheritance from a family member, you might want to use a qualified disclaimer to refuse the bequest. As a result, the assets will bypass your estate and go directly to the next beneficiary in line. It’s as if the successor beneficiary, not you, had been named as the beneficiary in the first place.

Why would you ever look this proverbial gift horse in the mouth? Frequently, using a qualified disclaimer will save gift and estate tax, while redirecting funds to where they ultimately would have gone anyway. This estate planning tool is designed to benefit the entire family. Be aware that a disclaimer doesn’t have to be an “all or nothing” decision. It’s possible to disclaim only certain assets, or only a portion of a particular asset, which would otherwise be received.

Reasons for using a disclaimer

Federal estate tax laws are fairly rigid, but a qualified disclaimer offers some unique flexibility to a forward-thinking beneficiary. Consider these possible reasons from an estate planning perspective:

Gift and estate tax savings. This is often cited as the main incentive for using a qualified disclaimer. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to nonspouse beneficiaries, such as your children and grandchildren, may be covered by the federal gift and estate tax exemption. For 2022, the exemption amount is an inflation-adjusted $12.06 million.

Generation-skipping transfer (GST) tax. Disclaimers may also be useful in planning for the GST tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is an inflation-adjusted $12.06 million for 2022.

If GST tax liability is a concern, you may wish to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.

Charitable deductions. In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance, but using a disclaimer can provide a deduction because the assets will pass directly to the charity.

Before making a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, talk to us to better determine if it’s the right move for you.

Is your business hiring? Many companies are — in fact, an employment report released by the U.S. Department of Labor earlier this month revealed that nonfarm payrolls increased by 390,000 in May, and the unemployment rate held steady at 3.6%.

As the job market continues to feel the impact of “the Great Resignation,” the competition for talent remains fierce. One area of the hiring pool that many businesses overlook is older workers. If your company still has open positions, consider the possibility of filling them with workers age 55 and up.

Strengths to look for

Although it’s true that many Baby Boomers have retired, and a few members of Generation X might soon be joining them, plenty of older workers remain available to provide value to the right company.

They offer many benefits. For starters, they’ve lived and worked through many economic ups and downs, so the word “budget” tends to keenly resonate with them. In addition, many are well connected in their fields and can reach out to helpful resources right away. Seasoned workers tend to be self-motivated and need little supervision, too.

How to welcome them

Adding older employees to a workforce predominantly staffed by Gen Xers, Millennials and perhaps members of Generation Z (currently the youngest group) can present challenges to your company culture. However, there are ways to welcome older workers while easing the transition for everyone.

First, ensure internal communications emphasize inclusivity. If you’re concerned that your existing culture might hinder the onboarding process for older workers, begin addressing the potential obstacles before hiring anyone, if possible. Reassure current employees that you’ll continue to value their contributions and empower their career paths.

Second, consider involving other staff members in the hiring process. For example, you could ask those who will work directly with a new hire to sit in on the initial job interviews. You’ll likely experience less resistance if an older employee’s co-workers are involved from the beginning. Just be sure that every participant understands proper interviewing techniques to avoid legal problems.

Third, as appropriate and feasible, offer training to managers who might suddenly find themselves supervising employees with many more years of work experience. Learning to listen to an older worker’s suggestions while sticking to the company’s strategic objectives and operational procedures isn’t always easy.

Finally, consider a mentorship program. Bringing in new employees of a different age group is an opportune time to investigate the potential benefits of mentoring. By pairing newly hired older workers with younger staff members, you could see both groups learn from each other — and the business grow as a result.

A welcome addition

Older workers are often a welcome addition to many companies — and not just as full-time employees. They tend to fit in well as part- or flex-time workers as well. Need help? We can assist you in assessing this idea or other ways to improve the cost-effectiveness of your hiring efforts.