Business Website Costs: How to Handle Them for Tax Purposes

The business use of websites is widespread. But surprisingly, the IRS hasn’t yet issued formal guidance on when Internet website costs can be deducted.

Fortunately, established rules that generally apply to the deductibility of business costs, and IRS guidance that applies to software costs, provide business taxpayers launching a website with some guidance as to the proper treatment of the costs.

Hardware or software?

Let’s start with the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2020, the maximum Sec. 179 deduction is $1.04 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2020 is $2.59 million.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Was the software developed internally?

An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.

A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.

If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.

Are you paying a third party?

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

What about before business begins?

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

Need Help?

We can determine the appropriate treatment of website costs for federal income tax purposes. Contact us if you have questions or want more information.

Evaluate if outsourced services are right for your business.

These days, accounting and finance professionals are in high demand, and that reality has made it increasingly difficult for small and midsize businesses to attract and retain qualified professionals.

More and more, small and midsize businesses are turning to outsourced accounting and small business services providers to fill this need.

Many people are currently working from home to help prevent the spread of the novel coronavirus (COVID-19). Your external auditors are no exception. Fortunately, in recent years, most audit firms have been investing in technology and training to facilitate remote audit procedures and were already working in a paperless environment. These efforts have helped enhance flexibility and minimize disruptions to business operations. But auditors haven’t faced a situation where everything might have to be done remotely — until now.

Re-engineering the audit process
Traditionally, audit fieldwork has involved a team of auditors camping out for weeks (or even months) in a conference room at the organization being audited. Thanks to technological advances — including cloud storage, smart devices, teleconferencing, and secure data-sharing platforms — audit firms have been gradually expanding their use of remote audit procedures.

But remote auditing still isn’t ideal for everything. Auditing Standards must still be complied with before issuing the auditors’ report. The American Institute of Certified Public Accountants (AICPA) identified the following aspects of audit work that may present challenges when done remotely:

Internal controls testing. Auditing standards require auditors to gain an understanding of internal controls. This is an understanding of how employees process transactions, plus testing to determine whether controls are adequately designed and effective. If employees now work from home, your organization’s control environment and risks may have changed from prior periods.
Inventory observations. Auditors usually visit the actual facilities to observe physical inventory counting procedures and compare independent test counts to the organization’s accounting records. Stay-at-home policies during the pandemic (whether government-imposed or organization-imposed) may prevent both external auditors and personnel from conducting physical counts. A possible solution to this may be using a GoPro camera or warehouse security camera to focus on a specific area or item.
Management inquiries. Auditors are trained to observe body language and judge the dynamics between coworkers as they interview personnel to assess fraud risks. When possible, it’s best to perform fraud discussions in person. However, making these inquiries through a virtual meeting platform can work well, given the current situation.

Moving to a remote audit format requires flexibility, including a willingness to embrace the technology needed to exchange, review and analyze relevant documents. You can facilitate this transition by encouraging your Administrators to take the following actions:

Be responsive to electronic requests. Answer all remote requests from your auditors promptly. This will help the auditors move along in their process, almost as if they were right around the corner in a conference room. If a key employee will be out of the office for an extended period, give the audit team the contact information for the key person’s backup.

Ensure privacy controls. With remote auditing, there will be a significant increase in the amount of information transported back and forth. Auditors will need to work with their clients to verify they have a secure method to do this. With a secure portal, the organization can provide the appropriate employees with access and authorization to share audit-related data from your organization’s systems. Administrators should work with IT specialists to address any security concerns they may have about sharing data with the remote auditors. It is also helpful if the administrator creates a “view only” login that auditors can utilize to access their system. This decreases the number of requests for general ledger detail, supporting invoices, pay rates, etc.

Track audit progress. Administrators should ask the engagement partner to explain how the firm will track the performance of its remote auditors and communicate the team’s progress to in-house accounting personnel. Consider having a pre-audit planning meeting that includes the audit engagement team and the key contacts at the organization to help set expectations for this new process and ease some of the fears the administrators may have. Also consider scheduling quick, daily check-in calls with the in-charge auditor and key employees at the organization to discuss open items and follow-up questions.

Ready or not
Communication is key in this new remote auditing world we are facing. Contact Yeo & Yeo to discuss ways to manage remote auditing challenges and continue to report your company’s financial results in a timely, transparent manner.

Today, many banks are working with struggling borrowers on loan modifications. Recent guidance from the Financial Accounting Standards Board (FASB) confirms that short-term modifications due to the COVID-19 pandemic won’t be subject to the complex accounting rules for troubled debt restructurings (TDRs). Here are the details.

Accounting for TDRs

Under Accounting Standards Codification (ASC) Topic 310-40, Receivables — Troubled Debt Restructurings by Creditors, a debt restructuring is considered a TDR if:

The borrower is troubled, and
The creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession it wouldn’t otherwise consider.

Banks generally must account for TDRs as impaired loans. Impairment is typically measured using the discounted cash flow method. Under this method, the bank calculates impairment as the decline in the present value of future cash flows resulting from the modification, discounted at the original loan’s contractual interest rate. This calculation may be further complicated if the contractual rate is variable.

Under U.S. Generally Accepted Accounting Principles (GAAP), examples of loan modifications that may be classified as a TDR include:

A reduction of the stated interest rate for the remaining original life of the debt,
An extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk,
A reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, and
A reduction of accrued interest.

The concession to a troubled borrower may include a restructuring of the loan terms to alleviate the burden of the borrower’s near-term cash requirements, such as a modification of terms to reduce or defer cash payments to help the borrower attempt to improve its financial condition.

Recent guidance

Earlier this year, the FASB confirmed that short-term modifications made in good faith to borrowers experiencing short-term operational or financial problems as a result of COVID-19 won’t automatically be considered TDRs if the borrower was current on making payments before the relief. Borrowers are considered current if they’re less than 30 days past due on their contractual payments at the time a modification program is implemented.

The relief applies to short-term modifications from:

Payment deferrals,
Extensions of repayment terms,
Fee waivers, and
Other payment delays that are insignificant compared to the amount due from the borrower or to the original maturity/duration of the debt.

In addition, loan modifications or deferral programs mandated by a federal or state government in response to COVID-19, such as financial institutions being required to suspend mortgage payments for a period of time, won’t be within the scope of ASC Topic 310-40.

For more information

The COVID-19 pandemic is an unprecedented situation that continues to present challenges to creditors and borrowers alike. Contact your CPA for help accounting for loan modifications and measuring impairment, if necessary.

COVID-19 has changed our lives in many ways, and some of the changes have tax implications. Here is basic information about two common situations.

1. Working from home.

Many employees have been told not to come into their workplaces due to the pandemic. If you’re an employee who “telecommutes” — that is, you work at home, and communicate with your employer mainly by telephone, videoconferencing, email, etc. — you should know about the strict rules that govern whether you can deduct your home office expenses.

Unfortunately, employee home office expenses aren’t currently deductible, even if your employer requires you to work from home. Employee business expense deductions (including the expenses an employee incurs to maintain a home office) are miscellaneous itemized deductions and are disallowed from 2018 through 2025 under the Tax Cuts and Jobs Act.

However, if you’re self-employed and work out of an office in your home, you can be eligible to claim home office deductions for your related expenses if you satisfy the strict rules.

2. Collecting unemployment

Millions of Americans have lost their jobs due to COVID-19 and are collecting unemployment benefits. Some of these people don’t know that these benefits are taxable and must be reported on their federal income tax returns for the tax year they were received. Taxable benefits include the special unemployment compensation authorized under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

In order to avoid a surprise tax bill when filing a 2020 income tax return next year, unemployment recipients can have taxes withheld from their benefits now. Under federal law, recipients can opt to have 10% withheld from their benefits to cover part or all their tax liability. To do this, complete Form W4-V, Voluntary Withholding Request, and give it to the agency paying benefits. Do not send it to the IRS.

We can help

We can assist you with advice about whether you qualify for home office deductions, and how much of these expenses you can deduct. We can also answer any questions you have about the taxation of unemployment benefits as well as any other tax issues that you encounter as a result of COVID-19.

To say that most small to midsize businesses have at least considered taking out a loan this year would probably be an understatement. The economic impact of the COVID-19 pandemic has lowered many companies’ revenue but may have also opened opportunities for others to expand or pivot into more profitable areas.

If your company needs working capital to grow, rather than simply survive, you might want to consider a mezzanine loan. These arrangements offer relatively quick access to substantial funding but with risks that you should fully understand before signing on the dotted line.

Equity on the table

Mezzanine financing works by layering a junior loan on top of a senior (or primary) loan. It combines aspects of senior secured debt from a bank and equity-based financing obtained from direct investors. Sources of mezzanine financing can include private equity groups, mutual funds, insurance companies and buyout firms.

Unlike bank loans, mezzanine debt typically is unsecured by the borrower’s assets or has liens subordinate to other lenders. So, the cost of obtaining financing is higher than that of a senior loan.

However, the cost generally is lower than what’s required to acquire funding purely from equity investment. Yet most mezzanine instruments do enable the lender to participate in the borrowing company’s success — or failure. Generally, the lower your interest rate, the more equity you must offer.

Flexibility at a price

The primary advantage of mezzanine financing is that it can provide capital when you can’t obtain it elsewhere or can’t qualify for the amount you’re looking for. That’s why it’s often referred to as a “bridge” to undertaking ambitious objectives such as a business acquisition or desirable piece of commercial property. But mezzanine loans aren’t necessarily an option of last resort; many companies prefer their flexibility when it comes to negotiating terms.

Naturally, there are drawbacks to consider. In addition to having higher interest rates, mezzanine financing carries with it several other potential disadvantages. Loan covenants can be restrictive. And though some lenders are relatively hands-off, they may retain the right to a significant say in company operations — particularly if you don’t repay the loan in a timely manner.

If you default on the loan, the lender may either sell its stake in your company or transfer that equity to another entity. This means you could suddenly find yourself with a co-owner who you’ve never met or intended to work with.

Mezzanine financing can also make an M&A deal more complicated. It introduces an extra interested party to the negotiation table and can make an already tricky deal that much harder.

Explore all options

Generally, mezzanine loans are best suited for businesses with clear and even aggressive growth plans. Our firm can help you fully explore the tax, financial and strategic implications of any lending arrangement, so you can make the right decision.

Yeo & Yeo CPAs & Business Consultants has been named one of Metropolitan Detroit’s Best and Brightest Companies to Work For by MichBusiness for the ninth consecutive year.

“We are very proud of our dedicated employees and our positive work environment. I am happy to see our employees are reporting that they are engaged and enriched through their work,” said Thomas O’Sullivan, managing principal of the Ann Arbor office.

Yeo & Yeo offers rewarding careers for individuals who have the desire and drive to grow as leaders in the accounting profession. More than 200 employees in offices throughout Michigan, including locations in Ann Arbor, Auburn Hills and Southgate, take pride in the firm’s reputation for personal service, commitment to clients and community support. Yeo & Yeo has a culture of developing future leaders through its in-house training department, professional development training and formal mentoring while sustaining a family-friendly work environment. The firm also offers an award-winning CPA certification bonus program. Yeo & Yeo’s professionals benefit from collaboration across offices and teams and have access to advisors and resources that help them succeed.

“We know that 2020 has been a challenging year for many Michigan businesses and I am proud of Yeo & Yeo and the employees who made this award possible,” said Tammy Moncrief, managing principal of the Auburn Hills office.

The annual competition is a program of MichBusiness and recognizes organizations that display a commitment to excellence in their human resource practices and employee enrichment. Companies in counties as far north as Midland, Bay and Saginaw, as far west as Clinton, Ingham and Jackson, and those in the entire Thumb and Metropolitan Detroit regions were eligible to participate.

Yeo & Yeo and the other winning companies will be honored at MichBusiness’s digital conference and awards celebration on October 27.

Given the uncertainty and disruption in today’s economic environment, it’s easy for some nonprofit organizations and their boards to let annual policy reviews slip through the cracks.

However, these are the times when policy and procedure review is most critical. Maintaining up-to-date policies and procedures helps ensure a smooth transition in the event of unexpected employee turnover, it helps minimize risks and establishes employer expectations.

The best practice is to review documented policies and procedures annually. A great way to proactively address this is to work it into the board policy or annual calendar to ensure it gets done.

Items to consider annually:

Have there been changes to laws or regulations?
Have there been changes to employee positions or organizational structure?
Have there been instances during the year of policy violation that need to be addressed?
Are current policies and procedures overly burdensome or redundant?
Have there been changes to operations (such as work-from-home)?

Once these items have been considered, it’s time to review and update policies and procedures. It is a good idea to consult both internally, with management, supervisors, and others within the organization impacted by the changes, as well as externally with professionals such as CPAs or legal counsel when necessary.

The changing landscape of how local units of government are being funded during the COVID-19 pandemic requires an advanced understanding of the requirements set forth by funding agencies. Governmental entities that historically haven’t received federal funding are now receiving it through various programs and grants. Understanding the requirements set forth by grantors and properly managing the flow of federal dollars is crucial to maintaining compliance. The following are a few areas to consider when managing federal awards.

1. Understand the Requirements of the Specific Award
While there are overarching guidelines to follow when using federal funding, each award may have unique requirements. Read the grant award documents to ensure an understanding of the conditions. If requirements are unclear, obtain a better understanding from the grantor as soon as possible to ensure the grant is being administered in the manner intended.

Sometimes the grantor itself will be unsure of how to interpret the application of a law or regulation that relates to the grant. Should the grantor be unable to provide further guidance, make sure the local unit of government documents the assumptions used when interpreting a requirement and how it was applied. When possible, obtain in writing from the grantor its agreement, or at least acknowledgment, of the assumptions used.

2. Advance Funding vs. Reimbursement Basis
Some grants allow for the payment of funds to a grantee before expenditures are incurred. Other grants are on the reimbursement basis, which requires grantees to incur expenditures and then subsequently request reimbursement from the grantor. Understanding which method is allowed is necessary to ensure compliance with the grant, properly account for grant receipts, and manage cash flow.

If funds are received before incurring allowable expenditures, the receipt should be recorded as a liability until the time allowable expenditures are incurred.

3. Allowable Expenditures
The purpose of grant awards can vary significantly. Expenditures can mean anything from wages and related benefits to goods or services purchased from vendors, to recouping indirect expenses. 2 CFR 200 defines expenditures as charges made by a nonfederal entity to a project or program for which a federal award was received. The costs may be reported on a cash or accrual basis as long as the methodology is disclosed and is consistently applied.

Grants may consider indirect costs to be allowable expenditures. The de minimus indirect cost rate is 10%; however, not all grants allow for this rate to be used. Consult the award documents or budget to aid in determining what is allowable for your entity.

Grant award documents, the related federal compliance supplement, and approved grant budgets typically outline the definition of allowable expenditures. Consulting with the grantor is often the best first step when the allowability of an expenditure is unclear.

4. Reporting Requirements
Most federal grants have reporting requirements. The type of conditions can vary depending on whether the award is a direct award or if the recipient is a subrecipient. Reports may be required monthly, quarterly or annually. Some grants only require reporting when cash reimbursement is requested. Grants may have specific forms that need to be used or may require submission of information via an online platform. Review the grant award requirements to ensure information is being reported timely and in the manner requested.

Managing federal awards can be complex. Obtaining an understanding of the requirements of each award up front, as well as throughout the life of the award, will aid the local unit of government in meeting the applicable compliance requirements.

No matter where your unit of government is in the consideration of, application for or use of federal awards, reach out to a member of Yeo & Yeo’s Government Services Group if you have questions or need further insight.

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2020. 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.

Thursday, October 15

If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2019 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2019 to certain employer-sponsored retirement plans.

Monday, November 2

Report income tax withholding and FICA taxes for third quarter 2020 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Tuesday, November 10

Report income tax withholding and FICA taxes for third quarter 2020 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Tuesday, December 15

If a calendar-year C corporation, pay the fourth installment of 2020 estimated income taxes.

Thursday, December 31

Establish a retirement plan for 2020 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).

The IRS acknowledges delays in processing and posting certain content to the IRS Tax Exempt Organization Search tool due to COVID-19:

IRS determination letters issued March 2020 and later
Paper-filed 990-series returns received April 2020 and later

From March 26 through all of April, the IRS stopped handling their mail due to COVID-19 safety concerns causing a backlog of processing all mailed correspondence, including mailed Form 990 returns as well as mailed tax payments.

Waiting for important paperwork for your organization can be difficult, creating the urge to want to ask the IRS for answers. The IRS requested filers not to contact them about the status of their returns during this time. Applications for tax exemption and filed Form 990 series returns are being worked on; however, there will be a delay in posting on the Tax Exempt Organization Search tool on IRS.gov.

If your 990 return was paper filed, the answer is not to resubmit electronically as this would cause a doubling up on filings. It is best to be patient and allow time for the IRS to catch-up.

Recently, the IRS mandated that tax-exempt organizations file Form 990 electronically. Mandatory online tax filing will be kicking in for most organizations in 2021 and will be in full effect for all organizations by 2022.

For more information on IRS COVID-19 mission-critical functions and delays, please visit the IRS website at: https://www.irs.gov/newsroom/irs-operations-during-covid-19-mission-critical-functions-continue.

Numerous taxpayers who made tax payments well in advance of the July 15 deadline are finding that their checks have not yet cleared and many have received notices indicating a balance is still due.

The IRS recently acknowledged that the agency is behind in processing items mailed and that includes certain tax payments that could be in the backlog of unopened mail at IRS service centers. The IRS has updated guidance on its website to provide relief for taxpayers with uncashed checks and possibly checks that result in being dishonored by their bank:

Pending Check Payments and Payment Notices: If a taxpayer mailed a check (either with or without a tax return), it may still be unopened in the backlog of mail the IRS is processing due to COVID-19. Any payments will be posted as the date we received them rather than the date the agency processed them. To avoid penalties and interest, taxpayers should not cancel their checks and should ensure funds continue to be available so the IRS can process them.

To provide fair and equitable treatment, the IRS is providing relief from bad check penalties for dishonored checks the agency received between March 1 and July 15 due to delays in this IRS processing. However, interest and penalties may still apply.

Due to high call volumes, the IRS suggests waiting to contact the agency about any unprocessed paper payments still pending. See www.irs.gov/payments for options to make payments other than by mail.

If you made your payment on or before July 15 and received a notice, or your check has still not cleared, do not cancel your original check or send a second check to pay the balance due with the notice. The agency is working to catch up on the backlog and is ensuring payments will be posted the date received with no penalties applied provided payment was filed on time (by July 15) and payment was made in full. The IRS asks for patience and to refrain from contacting the agency at this time.

In the future, you can help the IRS process payments more efficiently by making your payments one of the following ways:

Make your payments electronically through IRS Direct Pay for Individuals or the Electronic Federal Tax Payment System (EFTPS) for other taxpayers.
Have your balance due and estimated tax payments initiated electronically through ACH debit when you file your return.

If you must pay by check:

Make sure to include your SSN (or EIN) on the check, the tax year, and the form number.
Send check payments certified mail with return receipt requested to document timely payment.

For more information on this and IRS operations during COVID-19, please visit the IRS website at: https://www.irs.gov/newsroom/irs-operations-during-covid-19-mission-critical-functions-continue

You’d be hard-pressed to find a business that doesn’t value its customers, but tough times put many things into perspective. As companies have adjusted to operating during the COVID-19 pandemic and the resulting economic fallout, prioritizing customer service has become more important than ever.

Without a strong base of loyal buyers, and a concerted effort to win over more market share, your business could very well see diminished profit margins and an escalated risk of being surpassed by competitors. Here are some foundational ways to strengthen customer service during these difficult and uncertain times.

Get management involved

As is the case for many things in business, success starts at the top. Encourage your management team and fellow owners (if any) to regularly interact with customers. Doing so cements customer relationships and communicates to employees that cultivating these contacts is part of your company culture and a foundation of its profitability.

Moving down the organizational chart, cultivate customer-service heroes. Post articles about the latest customer service achievements on your internal website or distribute companywide emails celebrating successes. Champion these heroes in meetings. Public praise turns ordinary employees into stars and encourages future service excellence.

Just be sure to empower employees to make timely decisions. Don’t just talk about catering to customers unless your staff can really take the initiative to act accordingly.

Systemize your responsiveness

Like everyone in today’s data-driven world, customers want immediate information. So, strive to provide instant or at least timely feedback to customers with a highly visible, technologically advanced response system. This will let customers know that their input matters and you’ll reward them for speaking up.

The specifics of this system will depend on the size, shape and specialty of the business itself. It should encompass the right combination of instant, electronic responses to customer inquiries along with phone calls and, where appropriate, face-to-face (or direct virtual) interactions that reinforce how much you value their business.

Continue to adjust

By now, you’ve likely implemented a few adjustments to serving your customers during the COVID-19 pandemic. Many businesses have done so, with common measures including:

Explaining what you’re doing to cope with the crisis,
Being more flexible with payment plans and deadlines, and
Exercising greater patience and empathy.

As the months go on, don’t rest on your laurels. Continually reassess your approach to customer service and make adjustments that suit the changing circumstances of not only the pandemic, but also your industry and local economy. Seize opportunities to help customers and watch out for mistakes that could hurt your company’s reputation and revenue.

Don’t give up

This year has put everyone under unforeseen amounts of stress and, in turn, providing world-class customer services has become even more difficult. Keep at it — your extra efforts now could lay the groundwork for a much stronger customer base in the future. Our firm can help you assess your customer service and calculate its impact on revenue and profitability.

The IRS has provided guidance to employers regarding the recent presidential action to allow employers to defer the withholding, deposit and payment of certain payroll tax obligations.

The three-page guidance in Notice 2020-65 was issued to implement President Trump’s executive memorandum signed on August 8.

Private employers still have questions and concerns about whether, and how, to implement the optional deferral. The President’s action only defers the employee’s share of Social Security taxes; it doesn’t forgive them, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability. (The payroll services provider for federal employers announced that federal employees will have their taxes deferred.)

Deferral basics

President Trump issued the memorandum in light of the COVID-19 crisis. He directed the U.S. Secretary of the Treasury to use his authority under the tax code to defer the withholding, deposit and payment of certain payroll tax obligations.

For purposes of the Notice, “applicable wages” means wages or compensation paid to an employee on a pay date beginning September 1, 2020, and ending December 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000, or the equivalent amount with respect to other pay periods.

The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

“If necessary,” the guidance states, an employer “may make arrangements to collect the total applicable taxes” from an employee. But it doesn’t specify how.

Be aware that under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

Many employers opting out

Several business groups have stated that their members won’t participate in the deferral. For example, the U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral “unworkable.”

The Chamber is concerned that employees will get a temporary increase in their paychecks this year, followed by a decrease in take-home pay in early 2021. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group explained.

Businesses are also worried about having to collect the taxes from employees who may quit or be terminated before April 30, 2021. And since some employees are asking questions about the deferral, many employers are also putting together communications to inform their staff members about whether they’re going to participate. If so, they’re informing employees what it will mean for next year’s paychecks.

How to proceed

Wouldn’t it be great if your employees worked as if they owned the company? An employee stock ownership plan (ESOP) could make this a reality.

Under an ESOP, employee participants take part ownership of the business through a retirement savings arrangement. Meanwhile, the business and its existing owner(s) can benefit from some tax breaks, an extra-motivated workforce and a clearer path to a smooth succession.

How they work

To implement an ESOP, you establish a trust fund and either:

Contribute shares of stock or money to buy the stock (an “unleveraged” ESOP), or
Borrow funds to initially buy the stock, and then contribute cash to the plan to enable it to repay the loan (a “leveraged” ESOP).

The shares in the trust are allocated to individual employees’ accounts, often using a formula based on their respective compensation. The business must formally adopt the plan and submit plan documents to the IRS, along with certain forms.

Tax impact

Among the biggest benefits of an ESOP is that contributions to qualified retirement plans (including ESOPs) are typically tax-deductible for employers. However, employer contributions to all defined contribution plans, including ESOPs, are generally limited to 25% of covered payroll. But C corporations with leveraged ESOPs can deduct contributions used to pay interest on the loans. That is, the interest isn’t counted toward the 25% limit.

Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C corporations, so long as they’re reasonable. Dividends voluntarily reinvested by employees in company stock in the ESOP also are usually deductible by the business. (Employees, however, should review the tax implications of dividends.)

In another potential benefit, shareholders in some closely held C corporations can sell stock to the ESOP and defer federal income taxes on any gains from the sales, with several stipulations. One is that the ESOP must own at least 30% of the company’s stock immediately after the sale. In addition, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic operation corporations within a set period.

Finally, when a business owner is ready to retire or otherwise depart the company, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares or have the ESOP borrow money to buy the shares.

Risks to consider

An ESOP’s tax impact for entity types other than C corporations varies somewhat from what we’ve discussed here. And while these plans do offer many potential benefits, they also present risks such as complexity of setup and administration and a strain on cash flow in some situations. Please contact us to discuss further. We can help you determine whether an ESOP would make sense for your business.

Best & Brightest in Wellness

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

“Investing in the overall health of our employees is something we take pride in,” said Thomas E. Hollerback, President & CEO of Yeo & Yeo. “This award is an exciting achievement for Yeo & Yeo, especially in this challenging year. Our continued commitment to the health of our employees goes hand in hand with their results and accomplishments.”

Yeo & Yeo supports wellness for its employees by paying a large portion of health care premiums, helping to keep costs low for employees. The firm has a high percentage of participation in its wellness plan and health care premium reduction incentive. The firm facilitates convenient onsite health screenings for health care participants at each of its office locations, offers onsite flu shots at no cost, and provides an Employee Assistance Program that offers confidential guidance and resources designed to support work‐life balance. Yeo & Yeo also offers an Ergonomic Standing Desk option for employees for a healthier work environment.

Criteria for selection included wellness programs and policies, culture and awareness, leadership, participation and incentives, communication and measurement, among others.

Yeo & Yeo will be honored at a virtual awards celebration on October 27.

The COVID-19 crisis is causing private companies to re-evaluate the type of financial statements they should generate for 2020. Some are considering downgrading to a lower level of assurance to reduce financial reporting costs — but a downgrade may compromise financial reporting quality and reliability. Others recognize the additional risks that work-from-home and COVID-19-related financial distress are causing, leading them to upgrade their assurance level to help prevent and detect potential fraud and financial misstatement schemes.

When deciding what’s appropriate for your company, it’s important to factor in the needs of creditors or investors, as well as the size, complexity and risk level of the organization. Some companies also worry that significant changes to U.S. Generally Accepted Accounting Principles (GAAP) and federal tax laws in recent years may be overwhelming internal accounting personnel — and additional guidance from external accountants is a welcome resource for them to rely on while implementing the changes.

In plain English, the term “assurance” refers to how confident (or assured) you are that your financial reports are reliable, timely and relevant. In order of increasing level of rigor, accountants generally offer various types of assurance services:

1. Compilations. These engagements provide no assurance that financial statements are free from material misstatement and conform with Generally Accepted Accounting Principles (GAAP). Instead, the CPA puts financial information that management generates in-house into a GAAP financial statement format. Footnote disclosures and cash flow information are optional and often omitted.

2. Reviews. Reviewed financial statements provide limited assurance that the statements are free from material misstatement and conform with GAAP. Here, the accountant applies analytical procedures to identify unusual items or trends in the financial statements. We inquire about these anomalies, as well as the company’s accounting policies and procedures.

Reviewed statements always include footnote disclosures and a statement of cash flows. But the accountant isn’t required to evaluate internal controls, verify information with third parties or physically inspect assets.

3. Audits. The most rigorous level of assurance is provided by an audit. It offers a reasonable level of assurance that the financial statements are free from material misstatement and conform with GAAP.

Yeo & Yeo can offer other services as alternatives or in conjunction with the above items:

1. Agreed Upon Procedures. Provide assurance of predetermined procedures designed by you and customized based on individual selective criteria centered on the company’s needs. It does not provide financial statement assurance and the report will be limited to the procedures identified in the engagement letter. Sample procedures could include verification of expenses, deposits, or other processes.

2. Internal Control System Study. Perform inquiries of management and related personnel to gain an understanding of the current components of internal control and the overall system of internal control. The study is customizable for your needs and may include:

- Perform inquiries of management and related personnel of each activity listed below to determine the financial process, accounting, financial reporting and internal controls currently in place. We will summarize our findings and give recommendations for improvements and/or further analysis where necessary.
  - Receipts
  - Disbursements
  - Payroll
  - Credit cards
- Review examples of cash receipts, disbursements, payroll, credit cards and supporting documentation to gain an understanding of policies and procedures and to determine whether policies are being followed.
- Review internal control policies and procedures and make suggestions or recommendations for improvement.
- Provide a report that summarizes our observations and provides suggestions for improvements.

The Securities and Exchange Commission requires public companies to have an annual audit. Larger private companies also may opt for this service to satisfy outside lenders and investors. Audited financial statements are the only type of report to include an express opinion about whether the financial statements are fairly presented and conform with GAAP.

Beyond the analytical and inquiry steps taken in a review, auditors perform “search and verification” procedures. They also review internal control systems, tailor audit programs for potential risks of material misstatement and report on control weaknesses when they deliver the audit report.

Time for a change?

Not every business needs audited financial statements, and audits don’t guarantee against fraud or financial misstatement. But the higher the level of assurance you choose, the more confidence you’ll have that the financial statements fairly present the company’s performance.

The IRS issued guidance that provides some explanation of how employers can defer withholding and remitting an employee’s share of Social Security tax when wages are below a certain amount. The guidance in Notice 2020-65 was issued to implement President Trump’s executive action signed in early August.

Employers can defer withholding, deposit and payment of an eligible employee’s share of Social Security taxes on wages paid from September 1, 2020, through December 31, 2020.
Employers must pay the deferred taxes during the period between January 1, 2021, and April 30, 2021.
Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021.

The guidance is brief, and private employers still have questions about whether, and how, to implement the deferral. This action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability.

Read more about the deferral provisions.

We are sharing the IRS guidance for payroll tax deferral that is available to us at this point. We realize that there are many unanswered questions about implementing it, if your company or organization chooses to do so, and we will keep you updated as more information becomes available.

On August 28, the IRS issued guidance that provides some explanation of how employers can defer withholding and remitting an employee’s share of Social Security tax when wages are below a certain amount. The guidance in Notice 2020-65 was issued to implement President Trump’s executive action signed in early August.

The guidance is brief, and private employers still have questions about whether, and how, to implement the deferral. The President’s action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability.

Tax deferral background

On August 8, President Trump signed a Presidential Memorandum that permits the deferral of the employee portion of Social Security taxes for certain employees due to the COVID-19 pandemic.

The memorandum directed Treasury Secretary Steven Mnuchin to defer withholding, deposit and payment of an eligible employee’s share of Social Security taxes (or the employee’s share of Railroad Retirement taxes) on wages or compensation paid from September 1, 2020, through December 31, 2020. It applies to employees whose wages or compensation, payable during any biweekly pay period, generally are less than $4,000, or the equivalent amount with respect to other pay periods. Amounts can be deferred without penalties, interest or additions to the tax.

Note: Under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New guidance

Issued on August 28, the three-page guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

The guidance states that “if necessary,” the employer “may make arrangements to collect the total applicable taxes” from an employee. This appears to answer one question that employers have about what happens if an employee leaves a job later this year or before the deferred taxes are due. However, no additional details are given on how an employer should make arrangements to collect unpaid tax.

Pushback from business groups

Before the guidance was issued, several business and payroll groups stated that their members would not implement the deferral. The U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral unworkable.

“If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging,” the letter states. “But under a simple deferral, employees would be stuck with a large tax bill in 2021. Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”

The National Payroll Reporting Consortium, a payroll services industry association, stated there are “substantial” computer programming changes that are needed to implement the deferral.

“Payroll systems are designed to apply a single Social Security tax rate for the full year, and to all employees equally,” the consortium explained. “Applying a different tax rate for part of the year, beginning in the middle of a quarter, and applying such a change to some employers but not others, and to some employees but not others, is quite complex. Not all employers and payroll systems will be able to make these complex changes by September 1.”

Going forward

You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide range of qualifying property. Here are five important points to be aware of when it comes to this powerful tax-saving tool.

1. Bonus depreciation is scheduled to phase out

Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless:

The taxpayer previously used the property and
The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:

Land improvements other than buildings, for example fencing and parking lots, and
“Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you&rsqu;ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.