2018 Yellow Book Changes Effective for June 30, 2020, Year-ends

You may have heard about changes to the Yellow Book rules for your 2020 year-end and wondered what that will mean to you. For the most part, it means increased documentation that your auditor must contend with. The largest impact to you is related to the nonattest services that your auditor may help you with. For example, does your auditor assist you with the journal entries necessary to record some of the components of your district-wide financial statements, such as fixed assets, long-term debt, net pension liability, or other post-employment benefits? The answer is likely yes for many school districts.

The new Yellow Book rules state that independence would be impaired if the auditor performs the following services:

Determining or changing journal entries, account codes, or classifications for transactions, or other accounting records for the entity, without obtaining management approval;
Authorizing or approving the entity’s transactions; and
Preparing or making changes to source documents without management approval.

If your auditor is helping you calculate adjustments and determine account codes to post adjustments to, you may see an increased level of approvals required by your auditor for such entries. Hopefully, your auditor was providing the information to you previously for approval, but under these new rules, management’s approval is crucial to your auditor remaining independent.

Also, if an auditor assists in preparing your financial statements, it is a threat to independence, and adequate safeguards need to be in place to address that threat. This was true under previous independence rules as well, but a good reminder is that ultimately the financial statements are the responsibility of the school district’s management. Someone from the district should closely review the financial statements to make sure they can take an appropriate level of responsibility.

Auditors are also required to look at the cause of any findings identified to determine what sort of control deficiencies may be present. Now would be a good time to revisit last year’s audit results and look at what sort of findings you may have had, or what types of management comments your auditors may have suggested as areas for improvement. Taking the time now to make sure you have followed your corrective action plan or addressed any of the management comments that were made will help set you up for a more successful audit.

One other change in the rules is the requirement for auditors to report abuse and waste if either are identified. This is anticipated to be a very subjective addition to the rules. Waste is defined as the act of using or expending resources carelessly, extravagantly, or to no purpose. The background on this is that the Government Accountability Office is looking for reporting of instances where funds are mismanaged. Be mindful as your grants are ending, if you have unspent grant dollars, to watch what you are spending the funds on. There should be a purpose for those funds and not extravagant use of those dollars.

If you made large gifts to your children, grandchildren or other heirs last year, it’s important to determine whether you’re required to file a 2019 gift tax return. And in some cases, even if it’s not required to file one, it may be beneficial to do so anyway.

Who must file?

Generally, you must file a gift tax return for 2019 if, during the tax year, you made gifts:

That exceeded the $15,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
That you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion,
That exceeded the $155,000 annual exclusion for gifts to a noncitizen spouse,
To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2019,
Of future interests — such as remainder interests in a trust — regardless of the amount, or
Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.4 million for 2019). As you can see, some transfers require a return even if you don’t owe tax.

Who might want to file?

No gift tax return is required if your gifts for 2019 consisted solely of gifts that are tax-free because they qualify as:

Annual exclusion gifts,
Present interest gifts to a U.S. citizen spouse,
Educational or medical expenses paid directly to a school or health care provider, or
Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

April 15 deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2019 returns, it’s April 15, 2020 — or October 15, 2020, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2019 gift tax return, contact us.

Rental real estate, if managed well, can provide income and tax breaks. But watch out. Problems can arise even with good tenants. Knowing the sources of trouble can help you steer clear of unnecessary problems. Here are six mistakes landlords can make:

Inadequate or illegal screening. Don’t let a fear of empty units cause you to shortcut the screening process. Before accepting renters, check their credit and rental history, verify income, and contact personal references.

Also, keep in mind that federal law allows landlords to screen potential tenants, but not on the basis of race, religion, sex, ethnicity, or disability. Some states and localities also prohibit discrimination based on marital status, children, age, and sexual orientation. To avoid discrimination claims, find out the laws in your area and treat all prospective renters with the same respect.
Not putting everything in writing. Obviously, you need a written agreement reviewed by a real estate attorney. Be sure it includes the issues within the law that are important to you. Examples: Who pays for utilities? Are pets and sub-lets allowed? What is the fee charged for late rent?
Mishandling security deposits. Check for specific state laws concerning security deposits. In many states, these laws are strict, and failing to follow them may result in costly damages.
Being unresponsive or hostile. Some tenants can be demanding, but it’s good policy to always respond and fix problems. Keep a record of tenants’ requests and the repairs made. Failing to take care of problems can increase aggravation. It can also cause tenants to call local authorities, such as the health inspector, or pursue their legal remedies, which in most states, are tenant-friendly.
Not reacting promptly when rent doesn’t come in. Call or notify tenants after a few days if they don’t pay the rent. Depending on the laws in your state, follow the procedures allowed as soon as possible. When it comes to getting the money you are owed and keeping rental units filled, it is critical to act quickly when tenants don’t pay the rent.
Not understanding the tax laws related to rental property. Owning rental real estate can result in some valuable tax breaks. For example, if you qualify, you may be able to use losses to offset other highly-taxed income, such as salary and dividends. When you sell the property, you may be able to defer or reduce the tax owed on the capital gain. However, the rules involving rental real estate are complex. Landlords often have many questions including:

- What expenses can I deduct and when can I claim them?
- How is depreciation calculated?
- What is the best way to sell the property for tax purposes? Do I qualify for a Section 1031 Exchange?
- Am I involved in a passive real estate activity?
- Do I have to pay tax on security deposits?

Contact us for help answering these and other tax questions related to rental real estate. We can’t help you deal with barking dogs and late-night complaints from tenants, but we can help ensure you get all the tax breaks you deserve.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Zaher Basha, CPA, CM&AA, has received the Certified Merger & Acquisition Advisor (CM&AA) credential.

Zaher Basha The CM&AA credential is issued by the Alliance of Merger & Acquisition Advisors and demonstrates excellence in middle-market corporate finance, tax, advisory, growth strategies, and transaction services. Basha’s expertise will benefit the firm’s clients through all aspects of the merger and acquisition process, from due diligence and financial modeling to business valuation, negotiations and transaction closing.

Basha is a manager in the Auburn Hills office. His areas of expertise include tax planning and preparation, business advisory services, business valuation, and mergers and acquisitions, with an emphasis on the healthcare industry. He is a member of the firm’s Healthcare Services Group and the Business Valuation and Litigation Support Services Group.

Basha is a member of the Michigan Association of Certified Public Accountants’ Healthcare Task Force, the Auburn Hills Chamber of Commerce and the Troy Chamber of Commerce. In the community, he serves as treasurer of the Foundation for Justice & Development and the Syrian American Rescue Network. He also volunteers for Women for Humanity and The Syria Institute and participates in Making Strides Against Cancer walks annually.

In December, Basha was honored with Yeo & Yeo’s prestigious Spirit of Yeo award, recognizing an individual within the firm who exemplifies the attributes of the organization’s mission and core values.

Take a moment and think about all of the security features that are used to keep your organization’s network safe. Passwords and firewalls help keep the bad guys away from your vital information. But all of these security measures don’t mean a thing if someone clicks on a malware link inside an email.

As phishing attacks have grown, so too has the emphasis on Cybersecurity. One tool that many organizations have begun to deploy is security awareness training as a way to educate employees. Having knowledge of malware and phishing is as important as having proper antivirus and firewall protection.

How does security awareness training work?

A security awareness training provider will begin the training process with an email exposure check that shows which email addresses within an organization’s domain are being exposed to spear-phishing attacks on the Internet. This service looks deep into websites, Word, Excel and PDF files that are on the Internet. By performing these tests, business owners and managers can see which employees are the most susceptible to phishing emails. Training modules soon follow to teach employees what to look for.

Statistics show that it works

Security awareness training helps turn your employees into your organization’s first firewall. Through training, employees become the best defense you can have. We aggregated the numbers and the overall Phish-prone percentage dropped from an average of 15.9 percent to an amazing 1.2 percent in just 12 months. The combination of web-based training and frequently simulated phishing attacks really works.

The focus on Cybersecurity has increased in importance because the occurrences of malware and phishing are now a global epidemic. According to Symantec, $2.3 billion is spent globally on ransomware prevention and recovery. In 2015 alone, 430 million new unique pieces of malware were discovered and over 80 million records were exposed. All industries are vulnerable as hackers continue to expand their target industries and areas.

It’s important to remember that everyone is a target of phishing attacks. These attacks happen every day, but the good news is they can be prevented. Proper training is great a great way to prevent attacks, but equally important is having a proper backup and disaster recovery plan in place. Nothing is bullet-proof in IT, but being prepared for any circumstance can help save money and downtime in the event of a disaster.

For more information about security awareness training for your organization, contact your Yeo & Yeo advisor or Jeff McCulloch, President of Yeo & Yeo Technology, jefmcc@yeoandyeo.com or 800.607.1446.

Do you conduct your business as a sole proprietorship or as a wholly owned limited liability company (LLC)? If so, you’re subject to both income tax and self-employment tax. There may be a way to reduce tax by using an S corporation.

Self-employment tax basics

The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($137,700 for 2020) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.

Similarly, if you conduct your business as a partnership in which you’re a general partner, in addition to income tax you are subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.

An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.

Salary must be reasonable

However, be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.

There’s no simple formula regarding what is considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.

Converting from a C to an S corp

There can be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when appreciated assets held by the C corporation at the time of the conversion are subsequently disposed of. However, there may be ways to minimize its impact.

As explained above, an S corporation isn’t normally subject to tax, but when a C corporation converts to S corporation status, the tax law imposes a tax at the highest corporate rate (21%) on the net built-in gains of the corporation. The idea is to prevent the use of an S election to escape tax at the corporate level on the appreciation that occurred while the corporation was a C corporation. This tax is imposed when the built-in gains are recognized (in other words, when the appreciated assets are sold or otherwise disposed of) during the five-year period after the S election takes effect (referred to as the “recognition period”).

Consider all issues

Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, including the built-in gains tax and how much the business should pay you as compensation.

Married couples often wonder whether they should file joint or separate tax returns. The answer depends on your individual tax situation.

It generally depends on which filing status results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. This means that the IRS can come after either of you to collect the full amount.

Although there are provisions in the law that offer relief, they have limitations. Therefore, even if a joint return results in less tax, you may want to file separately if you want to only be responsible for your own tax.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately can save $2,512.50 for 2020.

Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when people save tax by filing separately. For example:

One spouse has significant medical expenses. For 2019 and 2020, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.

Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. You also can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.

Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return but zero on separate return (or $25,000 if the spouses didn’t live together for the whole year).

No hard and fast rules

The decision you make on your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately. Contact us to prepare your return or if you have any questions.

Yeo & Yeo CPAs & Business Consultants is proud to announce the promotion of two associates effective January 1, 2020.

Ashley Rabie, CPA, Ann Arbor, was promoted to Manager and transferred to the firm’s Ann Arbor office. She specializes in business consulting services with an emphasis on the healthcare and retail sectors. Rabie joined the firm in 2014 and provides financial statement compilation services, business tax planning and preparation, and accounting system advisory services. She is a QuickBooks Certified ProAdvisor and a member of the firm’s Healthcare Services Group and the Client Accounting Software Team. She holds a Bachelor of Business Administration, majoring in accounting, from Saginaw Valley State University

In the community, Rabie is a member and former treasurer of Women in Leadership – Great Lakes Bay Region. She looks forward to becoming more involved in her new community in Ann Arbor.

Chelsea Meyer, CPA, Kalamazoo, was promoted to Manager. She specializes in tax planning and preparation for individuals, businesses, trusts and estates. She also provides compilations of financial statements and financial reviews for businesses, with an emphasis on the death care industry. Meyer is a QuickBooks Certified ProAdvisor and a member of the firm’s Client Accounting Software Team, assisting clients with improving efficiency in their accounting systems.

Meyer has been with Yeo & Yeo since 2013. She holds a Bachelor of Business Administration in accounting and a Master of Science in Accounting from Grand Valley State University.

Revenue and receipts are an important cycle in any nonprofit organization’s day-to-day business. This is how the nonprofit receives the funds it needs, whether in the form of contributions or exchange revenue, to continue to fulfill its programs and mission. Yet, does your nonprofit have effective internal controls in place for processing revenue and receipts? In this Nonprofit Quick Tip, let’s look at internal controls for receipts.

A nonprofit’s biggest nightmare is becoming a top story in the news for fraud or inappropriate use of funds. Incoming funds are one of the areas most susceptible to fraud and errors. A strong internal control environment can help deter fraud and errors and keep revenue coming in uninterrupted.

So how do you protect your organization when it comes to receipts? Like any internal control matters, you must think about how someone could steal or make an error in the process. Then, you implement controls to help strengthen those identified weaknesses.

All nonprofit organizations should implement a few simple controls regarding receipts.

Someone who is not performing the general ledger accounting should open the mail and make a receipts listing. Also, it’s a good practice to stamp any incoming checks immediately as “for deposit only.”
The individual collecting the receipts should not be the person depositing them. This segregation helps ensure that all receipts coming in make it to the bank.
The receipt listings created when opening the mail should be compared to the general ledger and deposit slips to ensure everything was deposited and recorded.
Receipts on hand should be kept in a secured location, such as a safe, to which a limited number of people have access.
Making deposits timely is also a good practice.

Read more in-depth internal controls recommendations in our blog article, Internal Controls: Segregation of Duties in Small Nonprofits.

Most governmental finance managers are aware of the Government Finance Officers Association (GFOA) Certificate of Achievement for Excellence in Financial Reporting Program, and most governments choose to participate or not participate based on historical patterns – either to continue a long-standing series of Certificate awards, or to not participate in the program at all. Program participation, according to statistics on GFOA’s website, is more heavily weighted toward larger governments than smaller ones, but many smaller entities choose to participate. Will your local unit be the next to enter the program?

Many of us have seen the rows of award plaques on the wall of longtime program participants and understand the motivation to keep that pattern going into the future, but participation in the program is not really about the actual awards. The Comprehensive Annual Financial Report contains additional information that is not required by generally accepted accounting standards (GAAP) that allows a governmental unit to demonstrate enhanced transparency, full disclosure, and a level of competency in financial reporting that sets program participants apart from nonparticipants. This additional information is helpful to citizens, regulators, creditors, and others as they try to understand a government’s financial position and activity by analyzing the annual Comprehensive Annual Financial Report.

The Comprehensive Annual Financial Report is broken down into three sections – the Introductory Section, the Financial Section, and the Statistical Section. A standard GAAP financial statement is comprised of the Basic Financial Statements as well as some Required and Other supplementary information which would generally correlate to the Financial Section of a Comprehensive Annual Financial Report. All that being understood, though, what are the most significant additional items that are included in a Comprehensive Annual Financial Report that most governments are not currently preparing? Those would be:

A Letter of Transmittal included in the Introductory Section
Additional budgetary comparison schedules included in the Financial Section
Inclusion of the Statistical Section

The Letter of Transmittal is written by the government and signed by the chief financial officer. It is generally three to four pages in length and discusses overall information about the governmental unit such as the reporting entity and services provided, governmental structure and the local economy, local points of pride, significant ongoing or upcoming projects, information on the external audit, as well as awards and acknowledgments. We generally find that the Letter of Transmittal, once it is written, is updated annually with a minimal amount of effort by the governmental unit. Writing it from scratch for the first year is generally the biggest challenge.

The second significant addition is that a Comprehensive Annual Financial Report requires presentation of budgetary comparisons for all budgeted funds, as opposed to a GAAP financial statement that requires budgetary comparisons only for the general fund and major special revenue funds. If your auditor drafts the annual financial statements, adding these additional budgetary comparisons should be a straightforward task.

The final additional item is probably the most significant one, which is the inclusion of the Statistical Section in the Comprehensive Annual Financial Report. The Statistical Section contents are defined by Governmental Accounting Standards Board (GASB) Statement No. 44. GASB 44 requires information to be presented generally for the last ten years regarding financial trends, revenue capacity, debt capacity, demographic and economic information, and operating information.

The financial trend information is easily derived from current or past audited financial statements, so it is readily available.
Information on revenue capacity speaks to the ability of a local unit to generate own-source revenues by providing schedules on the revenue base, rates, and principal revenue payers. This information is generally available in-house or from the local County Treasurer or Equalization department.
Debt capacity information includes ratios of outstanding debt, direct and overlapping debt, debt limitations, and pledged-revenue coverage. That information is generally obtained from federal census records, internal information, and debt issues of other nearby governmental units.
Demographic and economic statistics would encompass readily available information on population, personal income, unemployment rates, and the like, as well as information on principal employers that may require reaching out to an economic growth department or commission or similar entity.
Finally, operating information would list the number of government employees by function over time, present operating indicators specific to each government, as well as capital asset information – all of which should be available in-house.

It is important to note that when a Comprehensive Annual Financial Report is presented, the independent auditors do not audit the Introductory or Statistical sections. The independent auditor’s report will delineate what information is audited and what is not.

Submitting a Comprehensive Annual Financial Report to the GFOA for entry into the program involves filling out an application and paying a fee that increases based on population. Once the Comprehensive Annual Financial Report is submitted, the GFOA will assign the report to a reviewer. Comprehensive Annual Financial Report reviewers are volunteers who handle the actual review on behalf of the GFOA (two Yeo & Yeo Principals are Comprehensive Annual Financial Report reviewers) and provide comments and pass/fail grades on various aspects of the report back to the local unit based on their review. Those comments are generally helpful reminders to include something that may have been missed, a request for clarification in a certain area, or to address a deficiency that the reviewer has identified. The comments, with responses from the local unit, are sent back to the GFOA with the subsequent year’s application.

Does the Comprehensive Annual Financial Report program sound like it may be something of benefit to your governmental unit? Please don’t hesitate to reach out to your Yeo & Yeo professional – we are here to help!

Accounting for capital assets generally is not on a school district’s radar for day-to-day accounting. Usually, capital asset workpapers are completed at the end of the audit. Because they are presented only at a district-wide level, they are frequently overlooked. However, these assets are often one of the largest amounts on the financial statements. Proper accounting for capital assets is important to ensure that this balance is accurate and represents actual assets held by the school district.

Managing the capital asset listings

Capital asset listings are generally very large and may contain items from the formation of the school district. Additions during the year are identified through items coded to a capital outlay object code (6000). These transactions should be reviewed to determine which of them exceeds the school district’s capitalization policy and should be added to the listing to begin depreciation. The Michigan Public School Accounting Manual (Bulletin 1022) provides major class codes for land, building and additions, site improvements, equipment and furniture, vehicles other than buses, school buses, educational media and textbooks, construction in process, and other capital assets.

Capital asset disposal

While additions are straightforward to identify, disposals are not as simple. Many times, the disposal of a capital asset does not result in the school district receiving proceeds; therefore, items may be removed, and the business office will not know about the transaction. Capital asset policies should be established to define proper disposal procedures. The business office must communicate the policies throughout the school district to ensure that all information is properly reported.

A physical inventory of assets purchased in whole or in part under a federal award must undergo a physical inventory a least once every two years. The school district may want to consider performing a full capital asset inventory at this time. Procedures usually include the tagging of equipment with barcodes and updating asset valuations to ensure the listing is as accurate as possible.

Capture as much identifying information as possible

What type of information should be on the listing? As much identifying information as possible! To help combat the disposal issue noted above, assets should be easily distinguishable. The description should include the location, serial number, date added, original invoice information, etc.

If the equipment was purchased with federal funds, the school district is required to include the following in the property records:

a description of the property
a serial number or other identification number
the source of funding for the property (including the FAIN)
who holds the title
the acquisition date
cost of the property
percentage of federal participation in the project costs for the federal award under which the property was acquired
the location, use, and condition of the property
any ultimate disposition data including the date of disposal and sale price of the property (2 CFR 200.313(d)(1))

Clear, enforced policies are vital

Clear policies should be established and enforced by the school district to ensure that the balance is accurate. Review throughout the year can help eliminate any year-end headaches and make updating the records much less of an administrative burden. Yeo & Yeo has several solutions to assist in the proper maintenance of the capital asset listing and we would be happy to help.

One option business owners choose for succession planning is an employee stock ownership plan (ESOP). ESOPs can empower and retain employees as well as provide tax savings, but careful consideration needs to be given to how and when these plans are valued. The value of the privately held stock is subject to standards put in place by both the Internal Revenue Service and the Department of Labor. Both organizations have employed fair market value as the standard value, otherwise known as the price the stock would trade for on the open market.

ESOPs require valuations at different times and for different reasons. A company that is considering starting an ESOP would want to have a valuation performed before they go through the steps of establishing an ESOP so they will know an approximate value of the company and can compare this option to other alternatives they are considering.

A valuation would also need to be done anytime the ESOP is engaging in a security transaction to verify that the transaction is occurring at fair market value. The IRS does not allow a company to take a deduction for an ESOP contribution unless the ESOP has received shares worth the amount of the deduction.

Finally, a valuation needs to be performed each year to determine the value of stock that is owned by employees. If a plan participant, beneficiary, or retired employee would like to sell their stock, they would sell the stock back to the trustee at the price per share during this time.

Valuations for an ESOP are different from the average valuation in that they require additional analysis and disclosures. They also must satisfy Department of Labor requirements. It is important to make sure that when engaging in these types of transactions, you are working with a valuation analyst who is aware of these additional requirements to make sure your plan is compliant.

An array of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2020. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2020 at $137,700 (up from $132,900 for 2019).

Deductions

Section 179 expensing:
- Limit: $1.04 million (up from $1.02 million for 2019)
- Phaseout: $2.59 million (up from $2.55 million)

Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
- Married filing jointly: $326,600 (up from $321,400)
- Married filing separately: $163,300 (up from $160,725)
- Other filers: $163,300 (up from $160,700)

Retirement plans

Employee contributions to 401(k) plans: $19,500 (up from $19,000)
Catch-up contributions to 401(k) plans: $6,500 (up from $6,000)
Employee contributions to SIMPLEs: $13,500 (up from $13,000)
Catch-up contributions to SIMPLEs: $3,000 (no change)
Combined employer/employee contributions to defined contribution plans (not including catch-ups): $57,000 (up from $56,000)
Maximum compensation used to determine contributions: $285,000 (up from $280,000)
Annual benefit for defined benefit plans: $230,000 (up from $225,000)
Compensation defining a highly compensated employee: $130,000 (up from $125,000)
Compensation defining a “key” employee: $185,000 (up from $180,000)

Other employee benefits

Qualified transportation fringe-benefits employee income exclusion: $270 per month (up from $265)
Health Savings Account contributions:
- Individual coverage: $3,550 (up from $3,500)
- Family coverage: $7,100 (up from $7,000)
- Catch-up contribution: $1,000 (no change)
Flexible Spending Account contributions:
- Health care: $2,750 (up from $2,700)
- Dependent care: $5,000 (no change)

These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.

Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

Tax basics

If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

What’s considered a sale

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares.

Determining the basis of shares

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis.

First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2015.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.

As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

Covering tax, accounting, technology, financial and advisory topics relevant to you and your business, Yeo & Yeo’s podcast is hosted by industry and subject matter professionals, where we go beyond the beans.

On episode four of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by Terrie Chronowski, Tax Supervisor in our Saginaw office. Her expertise lies in all things related to individual income tax. Another guest is Jeff McCulloch, President of Yeo & Yeo Technology. Jeff shares some tips from an IT security standpoint, and how taxpayers can best protect personal information.

Listen in as David, Terrie, and Jeff discuss all things security that you should consider this tax season and beyond.

How do taxpayers most often find out that their identity or social security number has been compromised, and what should you do if your Social Security number is stolen and being used? (2:15)
How can you protect your information from a technology perspective? (7:18)
Should you use free public Wi-Fi? (15:17)
Information we share with our clients to keep them secure. (19:45)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

DISCLAIMER
The information provided in this podcast is believed to be valid and accurate on the date it was first published. The views, information, or opinions expressed during the podcast reflect the views of the speakers. This podcast does not constitute tax, accounting, legal or other business advice, or an advisor-client relationship. Before making any decision or taking action, consult with a professional regarding your specific circumstances.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

On episode three of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by Kelly Brown, a tax manager in our Saginaw office. Listen in as David and Kelly discuss the tax code credits and deductions and how you can strategize around education expenses.

Review the American Opportunity Tax Credit and the Lifetime Learning Credit. (2:05)
Strategy for tax credits and how parents can shift tax breaks to their children. (6:22)
Review of college savings programs and their benefits. (9:12)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

On episode two of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by Andrew Matuzak, tax manager in the firm’s Saginaw office. Listen in as David and Andrew discuss the new SECURE Act and the extensions taxpayers need to know about.

SECURE Act changes taxpayers will face. (2:16)
When will the SECURE Act changes take effect? (4:50)
Rules for Stretch IRAs. (5:34)
Appropriations bill extensions, key deductions, and credits. (6:30)
Planning strategies for new Appropriations bill provisions. (8:49)
Tax credits that are available for small businesses because of the SECURE Act. (10:50)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be listened to on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

Many people who launch small businesses start out as sole proprietors. Here are nine tax rules and considerations involved in operating as that entity.

1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.

2. Report income and expenses on Schedule C of Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”

3. Pay self-employment taxes. For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

4. Make quarterly estimated tax payments. For 2019, these are due April 15, June 15, September 15 and January 15, 2021.

5. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.

6. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

7. Keep complete records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.

8. If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.

9. Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.

Seek assistance

If you want additional information regarding the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements, please contact us.