Old Invoices, New Rules: Tap Into the Power of the AR Aging Report

For many businesses, accounts receivable (AR) are more than just a line item on the balance sheet. This account provides a key indicator of potential cash flow, customer relationships and overall financial health. So proactive AR management is critical. The AR aging report has long been a cornerstone of expediting collections and reducing credit risk, but it’s taken on greater significance with the implementation of new accounting rules for recognizing credit losses.

Digging deeper into receivables

The AR aging report provides a structured breakdown of all outstanding customer invoices. Rather than simply listing balances owed, it categorizes AR based on how long each invoice has remained unpaid. The following time-based “aging buckets” are typically used:

0 to 30 days (current),
31 to 60 days,
61 to 90 days, and
Over 90 days.

This breakdown helps management evaluate trends in customer payment behavior, identify chronic late payers and assess how credit policies are performing. The information can be used to prioritize collection efforts and determine when receivables should be written off. Management also might use it to modify overall credit practices (for instance, offering early-bird discounts or electronic payment methods to encourage faster payments) or tighten credit policies for certain slow-paying accounts.

Optimizing cash flows

By revealing how long invoices have been unpaid and identifying customer payment trends, the AR aging report helps businesses forecast future cash receipts. This can help management more accurately:

Budget operating expenses,
Determine the need for short-term borrowing or credit lines, and
Plan investments or capital expenditures.

For instance, if a business sees that 40% of its receivables are older than 60 days, management can anticipate cash shortages in the next cycle and act preemptively. They may decide to delay certain discretionary expenditures or reevaluate vendor payment terms to maintain liquidity.

Using aging buckets to estimate write-offs

Starting in 2023, private entities that follow U.S. Generally Accepted Accounting Principles (GAAP) are required to implement new accounting rules for reporting credit losses on financial assets, including trade receivables. (The rules went into effect for most public companies in 2021.) The updated guidance requires companies to estimate an allowance for credit losses based on current expected credit losses (CECL) at each reporting date. The net amount reported on the balance sheet equals the amount expected to be collected. The CECL model essentially requires companies to estimate write-offs sooner than in the past.

Under prior accounting rules, a credit loss wasn’t recognized until it was probable the loss had been incurred, regardless of whether an expectation of credit loss existed beforehand. Under the CECL model, a loss allowance must be estimated based on historical information, current conditions, and reasonable and supportable forecasts. This estimate is often derived using historical default rates from aging buckets and adjusted for current and forecasted economic conditions. AR aging reports provide the historical and current data necessary to project the probability of default for various customer segments and invoice-age groups.

Estimated credit losses are recorded on the income statement as bad debt expense, directly reducing net income. Financial statement footnotes may also include detailed aging data and descriptions of how the loss estimate was developed, particularly if receivables represent a significant portion of the company’s assets.

It’s important to note that the Financial Accounting Standards Board is currently working on proposed guidance that, if approved, would allow private entities to use simpler assumptions to estimate credit losses on short-term receivables. However, regardless of whether the proposed simplification measures are approved, the AR aging report remains an essential tool. It helps quantify expected losses with or without complex forecasting.

A strategic management tool

QuickBooks® and many other accounting software platforms can generate real-time, customizable AR aging reports that integrate with customer relationship management systems for seamless tracking and follow-up.

If you’re unsure whether your current processes are CECL-compliant or you need assistance leveraging aging data to strengthen collections, credit policies and budgeting decisions, we’re here to help. Contact us to maximize the potential of your receivables data.

For employers, overtime pay has long been a tricky issue. On the one hand, needing employees to put in extra hours may indicate a productive organization providing in-demand products or services. On the other hand, soaring amounts of overtime pay can make payroll harder to manage and be a major drag on cash flow. Let’s review some basics of how to keep your oversight strong.

Current rules

Under the Fair Labor Standards Act, nonexempt, hourly employees generally must earn overtime pay for the hours they work that exceed 40 hours within a workweek. A workweek doesn’t need to be a calendar week — it could be, for instance, from Wednesday to Tuesday.

As of this writing, to be exempt from overtime and minimum wage pay regulations, most employees need to be paid at least $684 per week or $35,568 annually. Contrary to popular belief, overtime eligibility isn’t determined by job title — even some salaried employees can qualify.

Currently, staff members paid a salary (or fee) of $107,432 or more annually are generally exempt from overtime if they receive at least $684 per week and perform at least one duty of an executive, administrative or professional employee as defined by the U.S. Department of Labor (DOL). However, workers paid a salary below that “highly compensated employee threshold” are generally eligible for overtime pay.

Calculation complications

Overtime wages need to be at least 1.5 times an employee’s regular rate of pay. Employers may apply nondiscretionary bonuses and incentive payments, such as those tied to sales metrics, to satisfy up to 10% of the standard salary threshold for exempt employees. These types of payments must be made at least quarterly.

Watch out for state regulations. When both federal and state rules are in play, employees are entitled to overtime compensation at whichever standard will compensate them at the highest pay rate.

Management strategies

Most organizations want to manage overtime for budgetary reasons. However, another important factor to consider is that employees who’ve been on the job for too many hours may be more error-prone and more likely to jeopardize their safety or that of others. In addition, though some employees appreciate the extra income from overtime work, others may prefer a better work-life balance. The latter group might eventually decide to quit if they’re pushed into overtime too often.

The good news is there are various overtime management strategies available. First, examine the factors driving overtime. Are employees stretched too thinly? If so, it may be time to consider adding staff. Similarly, if production or project timelines are overly optimistic, you may need to adjust fulfillment schedules.

Also, cross-train workers to the extent possible. Overtime is often necessary when only one employee knows how to do certain things. Instructing others on critical functions can mitigate the need to rely on key employees.

Leverage technology, too. Carefully chosen and implemented software can allow you to track overtime hours and pay by location or department to identify areas where such payroll costs appear outside the norm.

In addition, automating processes can cut down on manual or repetitive tasks, giving employees more time to perform their jobs during regular hours. Moreover, the right tech can support efficient scheduling and production processes, ensuring staff are on the job only when needed.

Changes always possible

As you may recall, the rules for overtime pay briefly changed last year under the Biden administration. However, a federal court vacated those rules in November.

Technically, the 2024 proposed rules are still under appeal by the DOL, but it’s unlikely they’ll be revived under the second Trump administration. That doesn’t mean the overtime rules can’t change in some other way, though. In fact, President Trump has proposed eliminating tax on overtime, which may be part of upcoming legislation. Contact us for help managing all your payroll costs, including overtime pay.

When it comes to estate planning, married couples often assume that simply naming each other in their wills or designating each other as beneficiaries is sufficient. However, unintended consequences can result if you and your spouse fail to properly coordinate your estate plans.

Examples include conflicting provisions, unexpected tax consequences or assets passing in ways that don’t align with your shared wishes. Coordinated estate planning can help ensure that both your and your spouse’s documents and strategies work together harmoniously, protecting your legacies and the financial well-being of your loved ones.

Boost tax efficiency

One of the primary benefits of coordinating estate plans is tax efficiency. By working together, you and your spouse can take full advantage of the marital deduction and applicable gift and estate tax exemptions. This can help minimize the overall tax burden on both estates.

Coordination becomes especially important if you have a blended family, where children from previous relationships are involved, or in situations with complex assets like business interests or multiple properties. Clear and consistent planning that factors in tax consequences can help ensure that all beneficiaries are treated fairly and that your intentions are honored.

Streamline administration

Another benefit of coordinated planning is it helps streamline the administration of the estate. If one spouse becomes incapacitated or passes away, a well-integrated plan can reduce the administrative burden on the surviving spouse, avoid disputes and accelerate the transfer of assets.

Coordinating plans also allow you and your spouse to make joint decisions about health care directives, powers of attorney and guardianship of minor children, ensuring that both of your wishes are respected and consistently documented.

Follow your state’s law

Keep in mind that state law generally governs estate matters. Therefore, state law determines if your property is community property, separate property or tenancy by the entirety.

For instance, California is a community property state. That generally means that half of what you own is your spouse’s property and vice versa, though there are some exceptions.

Be proactive

Married spouses who coordinate their estate plans can avoid pitfalls and maximize the benefits of thoughtful planning. Taking these steps proactively can strengthen your and your spouse’s financial security and shared legacy. We can help ensure that all elements of your plans are aligned and up to date.

The Tax Cuts and Jobs Act (TCJA) significantly limited the types of theft losses that are deductible on federal income taxes. But a recent “advice memo” (CCA 202511015) from the IRS’s Office of Chief Counsel suggests more victims of fraudulent scams may be able to claim a theft loss deduction than previously understood.

Casualty loss deduction basics

The federal tax code generally allows individuals to deduct the following types of losses, if they weren’t compensated for them by insurance or otherwise:

Losses incurred in a business,
Losses incurred in a transaction entered into for profit (but not connected to a business), or
Losses not connected to a business or a transaction entered into for profit, which arise from a casualty or theft loss (known as personal casualty or theft losses).

A variety of fraud schemes may fall under the third category.

To deduct a theft loss, the taxpayer/victim generally must establish that:

The loss resulted from conduct that’s deemed theft under applicable state law, and
The taxpayer has no reasonable prospect of recovery of the loss.

From 2018 through 2025, though, the TCJA allows the deduction of personal casualty or theft losses only to the extent of personal casualty gains (for example, an insurance payout for stolen property or a destroyed home) except for losses attributable to a federally declared disaster. As a result, taxpayers who are fraud victims generally qualify for the deduction only if the loss was incurred in a transaction entered into for profit. That would exclude the victims of scams where no profit motive exists. The loss of the deduction can compound the cost of scams for such victims.

The IRS analysis

The IRS Chief Counsel Advice memo considers several types of actual scams and whether the requisite profit motive was involved to entitle the victims to a deduction. In each scenario listed below, the scam was illegal theft with little or no prospect of recovery:

Compromised account scam. The scammer contacted the victim, claiming to be a fraud specialist at the victim’s financial institution. The victim was induced to authorize distributions from IRA and non-IRA accounts that were allegedly compromised and transfer all the funds to new investment accounts. The scammer immediately transferred the money to an overseas account.

The IRS Chief Counsel found that the distributions and transfers were made to safeguard and reinvest all the funds in new accounts in the same manner as before the distributions. The losses, therefore, were incurred in a transaction entered into for profit and were deductible.

“Pig butchering” investment scam. This crime is so named because it’s intended to get every last dollar by “fattening up” the victim with fake returns, thereby encouraging larger investments. The victim here was induced to invest in cryptocurrencies through a website. After some successful investments, the victim withdrew funds from IRA and non-IRA accounts and transferred them to the website. After the balance grew significantly, the victim decided to liquidate the investment but couldn’t withdraw funds from the website.

The Chief Counsel determined that the victim transferred the funds for investment purposes. So the transaction was entered into for profit and the losses were deductible.

Phishing scam. The victim received an email from the scammer claiming that his accounts had been compromised. The email, which contained an official-looking letterhead and was signed by a “fraud protection analyst,” directed the victim to call the analyst at a provided number.

When the victim called, the scammer directed the victim to click a link in the email, giving the scammer access to the victim’s computer. Then, the victim was instructed to log in to IRA and non-IRA accounts, which allowed the scammer to grab the username and password. The scammer used this information to distribute all the account funds to an overseas account.

Because the victim didn’t authorize the distributions, the IRS weighed whether the stolen property (securities held in investment accounts) was connected to the victim’s business, invested in for profit or held as general personal property. The Chief Counsel found that the theft of property while invested established that the victim’s loss was incurred in a transaction entered into for profit and was deductible.

Romance scam. The scammer developed a virtual romantic relationship with the victim. Shortly afterwards, the scammer persuaded the victim to send money to help with supposed medical bills. The victim authorized distributions from IRA and non-IRA accounts to a personal bank account and then transferred the money to the scammer’s overseas account. The scammer stopped responding to the victim’s messages.

The Chief Counsel concluded this loss wasn’t deductible. The victim didn’t intend to invest or reinvest any of the distributed funds so there was no profit motive. In this case, the losses were nondeductible.

Note: If the scammer had directed the victim to a fraudulent investment scheme, the results likely would’ve been different. The analysis, in that situation, would mirror that of the pig butchering scheme.

Kidnapping scam. The victim was convinced that his grandson had been kidnapped. He authorized distributions from IRA and non-IRA accounts and directed the funds to an overseas account provided by the scammer.

The victim’s motive wasn’t to invest the distributed funds but to transfer them to a kidnapper. Unfortunately, these losses were also nondeductible.

What’s next?

It’s uncertain whether the TCJA’s theft loss limit will be extended beyond 2025. In the meantime, though, some scam victims may qualify to amend their tax returns and claim the loss deduction. Contact us if you need assistance or have questions about your situation.

In recent years, interest rates have increased and credit has tightened. Under these conditions, which are expected to persist in the coming months, securing a commercial loan can be challenging for businesses of all sizes. Whether you want to expand, stabilize your cash flow or simply build a financial cushion, being loan-ready is more critical — and more complicated — than it’s been in the past.

Here are some steps to help increase the odds that a bank will approve your company’s loan application.

Provide GAAP financial statements

Banks aren’t just looking for strong numbers in today’s cautious lending environment. They also want transparency and consistency. That’s why financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP) are essential.

GAAP financials give lenders a clear, apples-to-apples view of your business’s performance. GAAP requires accrual-basis accounting. On the income statement, this means sales are recorded when they’re earned, and expenses are reported when they’re incurred — regardless of when cash actually changes hands. A GAAP balance sheet may include accounts receivable, accounts payable, prepaid assets and accrued expenses. These accounts paint a complete, reliable picture of your business’s financial position.

If your financials aren’t already prepared in accordance with GAAP, it’s worth investing the time (and potentially enlisting outside help) to get them there before you apply for financing. GAAP financials could make all the difference.

Understand how your financial results stack up

Lenders use your financial statements to calculate key ratios and compare your business against industry benchmarks and its historical performance. Some ratios underwriters may scrutinize include:

Profit margin (net income divided by sales),
Receivables turnover (annual sales divided by average receivables balance),
Inventory turnover (annual cost of goods sold divided by average inventory balance),
Payables turnover (annual cost of goods sold divided by average payables balance),
Current ratio (current assets divided by current liabilities),
Debt-to-equity ratio (total debt divided by total owners’ equity), and
Times interest earned ratio (earnings before interest expense and taxes divided by interest expense).

Your business will stand out if its financial performance reflects solid asset management, profitability and growth prospects. If there are red flags — such as low profits, aging receivables or high debt levels — have a detailed explanation and an improvement plan.

Prepare for comprehensive due diligence procedures

Today’s lenders want a complete picture of your business operations, leadership and future strategy. Be prepared for in-depth due diligence, including:

Facility tours to assess your operations firsthand,
Interviews with your leadership team,
Reviews of marketing materials, pricing strategies, and key customer or supplier contracts, and
Discussions about any discrepancies between your financial statements and tax returns.

Underwriters don’t just like to see that you’re currently profitable; they also want assurance that you’re building a resilient, well-run business that can repay the loans.

Additionally, you’ll need to explain how the loan funds will be used. Having a clear, realistic plan — whether it’s to expand your operations, invest in new equipment, increase headcount or manage seasonal cash flow — can significantly boost your credibility. Vague or overly ambitious plans can sink your application, even if your financials look strong.

Let’s get you loan-ready

Securing a loan requires more than filling out a few forms. You need a clear financial story, reliable financial records and a forward-looking business plan. We can help you apply for a business loan to position your business for success, even in tough times. Contact us to get the ball rolling.

On April 2, the Michigan Department of Treasury published guidance (Notice Regarding New Research and Development Credit) on the state’s new tax credit for eligible research and development (R&D) expenses and confirmed that it plans to issue a revenue administrative bulletin on the topic.

The guidance follows the January enactment of two bills (House Bills 5100 (Public Act 186 of 2024) and 5101 (Public Act 187 of 2024)) that together created the R&D credit (see our related Alert for high-level provisions and some history on Michigan R&D credits).

Application and Administration

The refundable credit applies to R&D activities beginning January 1, 2025, regardless of the taxpayer’s year-end.

The guidance specifies that for R&D expenses incurred during the 2025 calendar year, all claimants with tax years beginning in 2025, including calendar- and fiscal-year corporate income tax (CIT) payers and flow-through entities, must submit their tentative claims no later than April 1, 2026.
A tentative claim must be timely filed to claim the R&D credit, and Treasury will not accept tentative claims after the statutory deadline. Because tentative claims will be used in any required proration calculation, they should be made using actual — not estimated — expenses.

If the total amount of tentative claims exceeds the credit limit, Treasury must notify businesses of the adjustment. Neither HB 5100 nor HB 5101 specified when or how Treasury must provide that information.

The guidance states that Treasury will publish a general notice on its website notifying taxpayers whether adjustments to tentative claims are required for the calendar year and any amounts thereof. That notice will specify “whether proration is required for each type of claimant and will not contain taxpayer-specific information” [emphasis added]. According to the guidance, Treasury anticipates publishing the general notice before the annual return deadline for CIT filers (that is, April 30).

Once Treasury has published the notice, taxpayers will be eligible to claim the credit, adjusted as necessary, on their annual returns filed after the end of their tax years.

Qualifying R&D Expenses

Qualifying R&D expenses are those expenses defined in Internal Revenue Code Section 41(b) but incurred in Michigan.

The guidance confirms that the new credit looks only to IRC Section 41, noting that in determining their state credits, taxpayers should not apply any IRC provisions, federal regulations, or federal concepts other than those that may be applicable under the Michigan Income Tax Act.

Qualifying expenses are calculated per calendar year regardless of the taxpayer’s tax year-end.

The guidance clarifies that Treasury will develop an optional method for fiscal-year filers to convert their fiscal-year R&D expenses into calendar-year expenses for base-amount years before 2025. Additional information about that method will be published in future Treasury guidance.

Credit Amounts and Limits

The bills generally define an authorized business as a specified taxpayer that has incurred qualifying R&D expenses over the base amount during the calendar year ending with or during the tax year for which a credit is being claimed. Only authorized businesses with R&D expenses exceeding the base amount during a calendar year will be eligible for a credit in that year.

The base amount is defined as the average annual amount of qualifying R&D expenses incurred during the three calendar years immediately preceding the calendar year ending with or during the tax year for which a credit is being claimed. If an authorized business did not have previously qualifying R&D expenses, it has a base amount of zero. If an authorized business did not have qualifying R&D expenses in the three immediately preceding calendar years, the average annual amount is based on the number of calendar years during which the business incurred qualifying R&D expenses.

Qualifying taxpayers with at least 250 employees are eligible for a credit of 3% on expenses up to the base amount and 10% on excess expenses, with a maximum credit of $2 million per year. Qualifying taxpayers with fewer than 250 employees are eligible for a credit of 3% on expenses up to the base amount and 15% on excess expenses, with a maximum credit of $250,000 per year.

The guidance indicates that Treasury plans to explain how to count the number of employees for the unadjusted credit calculation. It notes that MCL Section 206.605(3) defines an employee as “an employee as defined in [IRC] Section 3401(c)…. A person from whom an employer is required to withhold for federal income tax purposes is prima facie considered an employee.”

The maximum amount of credit available across all authorized businesses per calendar year is $100 million. If total refund claims exceed that, the amount of credit allowed will be prorated across all taxpayers that applied for the credit using the applicable method provided in the bills.

Provisions for Corporations and Flow-Throughs

Corporate Entities

For corporate purposes, a taxpayer is a corporation or unitary business group (see MCL Section 206.611(5)).

The guidance confirms a CIT payer that is a unitary business group would make all calculations (e.g., number of employees, total expenses, base amount, maximum credit amount, and any applicable proration) at the group level.

Flow-Through Entities

To be an eligible flow-through entity, the entity must be subject to Michigan income tax withholding on employees and, for the tax year, must not be a disregarded entity, taxed as a C corporation for federal income tax purposes, or subject to the Michigan Business Tax (MBT) Act. An eligible flow-through entity will take the credit on its annual withholding return for the tax year in which its tentative claim was filed.

The guidance provides some favorable relief for flow-through entities related to periodic withholding payments, allowing for a reduction once the tentative claim adjustment notice is published.

To illustrate that point, the guidance provides an example using R&D expenses incurred in calendar year 2025. It says a flow-through entity filing a withholding tax return would claim the credit with its 2026 withholding tax return (due February 28, 2027) and could begin to reduce its 2026 periodic withholding payments as soon as Treasury issues its tentative claim adjustment notice for 2025 expenses.

The credit is allowable only for flow-through entities and may not be passed on to owners.

Insights

Unlike the federal credit (and credits in most states), the measure of qualifying R&D expenses is made on a calendar-year basis for all taxpayers, regardless of tax year-end. Thus, authorized businesses with fiscal year-ends will require some additional analysis.
The guidance says Treasury anticipates publishing any required proration, allowing taxpayers to claim the credit, by April 30. However, given the uncertainty, corporate taxpayers that have timely filed might want to extend their return due dates to avoid having to file amended returns to claim refunds.
The new credit includes unusual treatment of taxpayers that have little or no R&D expenses. If a taxpayer had no R&D expenses in the last three years, the legislation states that the base amount is zero. If, for example, a taxpayer had R&D expenses in only one year during the base period (e.g., $100,000 in 2024), then the legislation states that the expenses in the single year will be the taxpayer’s base amount (e.g., $100,000) instead of taking an average of the last three years (e.g., $0 + $0 + $100,000 / 3). That unusual approach seems to be a drafting error, with the drafter possibly imagining a situation in which a taxpayer was not in existence for the three years in the base period. If the taxpayer did not exist throughout the base period, then it would be appropriate to divide by the number of years of existence. If the taxpayer existed for the last three years, then it is counterintuitive that the taxpayer would not get to divide its R&D expenses for the last three years by three.
While the guidance confirms that taxpayer names and credit amounts will be included on a report to the legislature and governor, it also specifically mentions that the published adjusted credit notice will not contain taxpayer-specific information, providing some clarity on public release of details by taxpayer.
Because the credit is available only on a CIT return for corporations, and the statute for flow-through entities specifically excludes those filing under the MBT Act, no taxpayers filing the MBT because of a certificated credit election are eligible for the new R&D credit.
Even if a federal R&D credit has not previously been claimed, taxpayers should consider re-evaluating the potential benefit available related to their R&D activities in Michigan, especially given the credit’s refundable nature.
Additional Treasury guidance is expected in the form of a revenue administrative bulletin, as well as forms and instructions for administering the new credit.

It’s not uncommon for an estate plan to contain multiple trusts. They can enable you to hold assets for and transfer them to beneficiaries, avoid probate, and possibly reduce estate tax exposure. When drafting a trust, you must appoint a trustee. This can be an individual or a financial institution.

Before choosing a trustee, know that the job comes with many responsibilities — from keeping careful records and making smart investment choices to staying fair and keeping beneficiaries informed. A trustee must always put the beneficiaries’ interests first and handle everything with care, honesty and good judgment.

What are a trustee’s tasks?

Trustees have significant legal responsibilities, primarily related to administering the trust on behalf of beneficiaries according to the terms of the trust document. However, the role can require many different types of tasks. For example, even if a tax professional is engaged to prepare tax returns, the trustee is responsible for ensuring that they’re completed correctly and filed on time.

One of the more challenging trustee duties is to accurately account for investments and distributions. When funds are distributed to cover a beneficiary’s education expenses, for example, the trustee should record both the distribution and the expenses covered. Beneficiaries are allowed to request an accounting of the transactions at any time.

The trustee needs to invest assets within the trust reasonably, prudently and for the long-term sake of beneficiaries. And trustees must avoid conflicts of interest — that is, they can’t act for personal gain when managing the trust. For instance, trustees typically can’t purchase assets from the trust. The trustee probably would prefer a lower purchase price, which would run counter to the best interests of the trust’s beneficiaries.

Finally, trustees must be impartial. They may need to decide between competing interests while still acting within the terms of the trust document. An example of competing interests might be when a trust is designed to provide current income to a first beneficiary during his or her lifetime, after which the assets pass to a second beneficiary. Although the first beneficiary would probably prefer that the trust’s assets be invested in income-producing securities, the second would likely prefer growth investments.

What qualities should you look for?

Several qualities help make someone an effective trustee, including:

A solid understanding of tax and trust law,
Investment management experience,
Bookkeeping skills,
Integrity and honesty, and
The ability to work with all beneficiaries objectively and impartially.

And because some trusts continue for generations, trustees may need to be available for an extended period. For this reason, many people name a financial institution or professional advisor, rather than a friend or family member, as trustee.

Consider all your options

Naming a trustee is an important decision, as this person or institution will be responsible for carrying out the terms outlined in the trust documents. We can help you weigh the options available to you.

In the Spring 2025 issue of MICIA magazine, Michael Rolka, CPA, CGFM, Principal at Yeo & Yeo CPAs & Advisors, is featured in the “Ask the Professionals” section. His insights into Annual Financial Statement (AFS) preparation for cannabis businesses highlight the importance of compliance and strategic financial management. Below are key points from his interview:

5 Questions with Michael Rolka, CPA, CGFM

1. How do cannabis businesses determine if they must submit an AFS report?

Cannabis businesses can verify their next AFS due date through the Accela Citizens Access Portal (ACA). The Cannabis Regulatory Agency (CRA) sends email reminders from CRA-AFS@michigan.gov six months before the report is due, specifying the due date, reporting period, and licenses to be included. Generally, medical marijuana and adult-use licensees must file a financial statement every three years, or a shorter time-period as determined by the CRA.

2. What are the key requirements for preparing an AFS report, and how can Yeo & Yeo help?

The AFS report must be conducted by an independent CPA licensed in Michigan, performed according to attestation engagement standards, and submitted as an Excel document using the official CRA form. The CPA and CPA firm must be actively licensed and registered in Peer Review before completing the AFS Report. Yeo & Yeo meets all CRA requirements for performing AFS reports, making them an ideal partner for navigating the complexities of AFS reporting and ensuring full compliance.

3. What are the penalties for non-compliance with AFS reporting requirements?

The CRA Disciplinary Guidelines (updated August 2, 2024) outline a $10,000 penalty for violations under rules 20 and 27701 concerning the failure to transmit financial statements to the agency. However, the guidelines emphasize that the CRA makes each determination on a case-by-case basis and that the final resolution “may deviate from that referenced in the guidelines,” potentially involving measures beyond fines such as “the suspension, revocation, restriction, or refusal to renew a license; and/or other terms to address the violation.”

4. How can a well-prepared AFS report benefit my business beyond CRA compliance?

A well-prepared AFS offers benefits beyond compliance. It may give the company confidence that its recordkeeping and policies are appropriate. This information serves as a foundation for strategic planning, allowing you to identify areas for cost reduction, revenue growth opportunities, and operational efficiencies. Alternatively, the process of preparing for an AFS can also uncover operational inefficiencies, leading to better overall business management. This can help reduce the risk of fraud and identify potential financial irregularities early on.

5. How can I get additional value from my required AFS report by leveraging it for investor and lender relations?

A comprehensive AFS report, while required for compliance, can be a powerful tool for enhancing investor and lender relations. By sharing this detailed financial statement, you demonstrate transparency and professionalism, which are crucial when seeking investment or loans. The AFS provides potential investors or lenders with a clear, CRA-compliant picture of your business’s financial position, potentially improving your access to capital. You can use the AFS report to showcase your commitment to regulatory compliance and financial best practices, building trust with stakeholders. During negotiations with potential investors or lenders, you can reference specific data points from your AFS report to support your business case, growth projections, and financial stability. This can strengthen your position and potentially lead to more favorable terms or increased funding opportunities.

At Yeo & Yeo, we pride ourselves on being more than just accountants; we are our clients’ partners in success. We build customized, right-sized relationships that help our cannabis clients remain compliant, organized, and growing. Whether your goals involve vertical integration, preparing for mergers and acquisitions, adding licenses, or opening a new location, Yeo & Yeo ensures you have the information to make data-driven decisions.

If you need assistance with AFS reporting, strategic planning, or accessing capital, Yeo & Yeo’s team is dedicated to helping you succeed. Contact us to meet with one of our experienced cannabis advisors. Yeo & Yeo is here to support you every step of the way.

Yeo & Yeo CPAs & Advisors is proud to announce that Dave Youngstrom, CPA, President & CEO, and Ali Barnes, CPA, CGFM, Managing Principal of our Alma office, have been named to the 2025 Forbes list of Best-in-State CPAs. This list recognizes CPAs nationwide for their expertise, innovation, thought leadership, experience, and service to the community and profession.

As President & CEO, Dave Youngstrom leads Yeo & Yeo’s five companies with a strategic vision rooted in people-first values. He joined the firm in 1995, was named principal in 2007, and became President & CEO in January 2022. Dave has played a key role in shaping Yeo & Yeo’s culture and is committed to growing the firm in ways that create meaningful opportunities for our people while addressing the evolving needs of our clients. He has been recognized as a leader beyond the firm, receiving the Saginaw Valley State University Distinguished Alumni Award, the Martin P. Luthy Award for outstanding Jaycee Chapter President, and the Harry S. Lund Award for outstanding United Way Volunteer.

Ali Barnes is a trusted advisor to government entities, school districts, and for-profit companies across Michigan. She brings specialized expertise in assurance and consulting services, and is known for her client-focused approach and the care she brings to every engagement. She leads the firm’s Assurance Technical Team and is a member of the firm’s Quality Assurance Committee, Government Services Group, and Employee Benefit Plan Services Group. Beyond Yeo & Yeo, Ali gives back by serving as president and finance committee member of the Gratiot County Community Foundation and as board treasurer of the Alma Police Athletic League.

“It’s an honor to be recognized alongside Ali on Forbes’ Best-in-State CPAs list,” said Youngstrom. “This recognition reflects the trust we’ve earned and the incredible team that makes it all possible.”

At Yeo & Yeo, we believe our people, clients, and communities are the foundation of everything we do—and the reason we continue to be honored among the “best of the best” in our industry. We are proud to be named an Inside Public Accounting Best of the Best Firm, an Accounting Today Regional Leader and Firm to Watch, and a Best and Brightest Company to Work For in both West Michigan and Metro Detroit.

We congratulate Dave and Ali on this well-deserved recognition. View the full Forbes Best-in-State CPAs list here: https://www.forbes.com/lists/best-in-state-cpas.

Your business can set up an educational assistance plan that can give each eligible employee up to $5,250 in annual federal-income-tax-free and federal-payroll-tax-free benefits. These tax-favored plans are called Section 127 plans after the tax code section that allows them.

Plan basics

Sec. 127 plans can cover the cost of almost anything that constitutes education, including graduate coursework. It doesn’t matter if the education is job-related or not. However, you can choose to specify that your Sec. 127 plan will only cover job-related education. Your business can deduct payments made under the Sec. 127 plan as employee compensation expenses.

To qualify for this favorable tax treatment, the education must be for a participating employee — not the employee’s spouse or dependent. Also, the plan generally can’t cover courses involving sports, games or hobbies.

If the employee is a related party, such as an employee-child of the owner, some additional restrictions apply that are explained below.

Plan specifics

Your Sec. 127 plan:

Must be a written plan for the exclusive benefit of your employees.
Must benefit employees who qualify under a classification scheme set up by your business that doesn’t discriminate in favor of highly compensated employees or employees who are dependents of highly compensated employees.
Can’t offer employees the choice between tax-free educational assistance and other taxable compensation, like wages. That means the plan benefits can’t be included as an option in a cafeteria benefit program.
Doesn’t have to be prefunded. Your business can pay or reimburse qualifying expenses as they’re incurred by an employee.
Must give employees reasonable notification about the availability of the plan and its terms.
Can’t funnel over 5% of the annual benefits to more-than-5% owners or their spouses or dependents.

Payments to benefit your employee-child

You might think a Sec. 127 plan isn’t available to employees who happen to be children of business owners. Thankfully, there’s a loophole for any child who’s:

Age 21 or older and a legitimate employee of the business,
Not a dependent of the business owner, and
Not a more-than-5% direct or indirect owner.

Avoid the 5% ownership rule

To avoid having your employee-child become disqualified under the rules cited above, he or she can’t be a more-than-5% owner of your business. This includes actual ownership (via stock in your corporation that the child directly owns) plus any attributed (indirect) ownership in the business under the ownership attribution rules summarized below.

Ownership in your C or S corporation business is attributed to your employee-child if he or she: 1) owns options to acquire more than 5% of the stock in your corporation, 2) is a more-than-5% partner in a partnership that owns stock in your corporation, or 3) is a more-than-5% shareholder in another corporation that owns stock in your corporation. Also, a child under age 21 is considered to own any stock owned directly or indirectly by a parent. However, there’s no parental attribution if the child is age 21 or older.

Ownership attribution for an unincorporated business

What about an unincorporated business? You still have to worry about ownership being attributed to your employee-child under rules analogous to the rules for corporations. This includes businesses that operate as sole proprietorships, single-member LLCs treated as sole proprietorships for tax purposes, multi-member LLCs treated as partnerships for tax purposes or partnerships.

Payments for student loans

Through the end of 2025, a Sec. 127 plan can also make tax-free payments to cover principal and interest on any qualified education loan taken out by a participating employee. The payments are subject to the $5,250 annual limit, including any other payments in that year to cover eligible education expenses.

Talent retention

Establishing a Sec. 127 educational assistance plan can be a good way to attract and retain talented employees. As a bonus, the plan can potentially cover your employee-child. Contact us if you have questions or want more information.

Onboarding is more than just paperwork; it’s an opportunity to set the right tone for every new employee’s experience in your workplace. The process’s primary objectives are to welcome new hires, help them understand their roles, and provide them with the knowledge and tools to connect with the organization and succeed at their jobs.

Done right, onboarding increases employee engagement, improves retention and boosts productivity. Doing it wrong — or not at all — leaves many employers back at square one, having to hire all over again. Here are six best practices to consider:

1. Start before day one. An optimal onboarding process begins well before the first day of employment. As soon as candidates accept your job offers, express how happy you are to have them. Then, tell them about your onboarding process. For many new hires, just knowing onboarding will happen is reassuring.

Right before a new employee’s first day, send a welcome email with key details — such as where to park (if working on-site) and who’ll be the individual’s first contact. As appropriate and feasible, provide digital access to employment forms and training materials so new hires can get a head start. Ensure that all forms and documentation are current and relevant to the position.

2. Make day one count. The old cliché holds true: You never get a second chance to make a good first impression. A positive first-day experience should begin with a human touch. Appoint a specific person, often the supervisor, to warmly welcome the new employee and graciously guide the person through a structured agenda.

If the position is on-site, require the new hire’s workspace to be available and fully functional. For remote jobs, make sure new employees have the necessary technology and access. In either case, their onboarding first contact should introduce them to their teams and other key colleagues. Emphasize an organized and personalized approach.

3. Assign a peer mentor. The importance of the supervisor’s role can’t be overstated. However, many employers have found success in assigning an experienced peer-level employee to each new hire to serve as a mentor. Doing so can help new employees navigate the more informal or “unwritten” aspects of your workplace. This promotes enthusiastic learning and social integration. One risk to this strategy is that peer mentors may pass along bad habits or misinformation, so it’s important to vet them carefully.

4. Provide professionally developed training. For many positions, day one will be spent on welcoming and orientation. Training should begin thereafter. For best results, ensure that you’ve developed training programs mindfully and under rigorous professional standards. It might be tempting to “generalize” training or even assume that employees will figure things out on their own. However, failing to train new hires adequately can leave them feeling confused and unsupported.

5. Ask for feedback and act on it when appropriate. Many employers assume their onboarding processes are just fine — until someone speaks up. Often, it’s a former employee posting on an employer review website. Onboarding, like any important operational function, needs to improve continuously.

Train supervisors to check in with new hires throughout the process, which should generally take about one to two weeks. Teach supervisors to exercise active listening and ask insightful questions. If you use peer mentors, ask for their thoughts on how onboarding went for their mentees. Use all this feedback to refine your process and really customize it to your organization’s mission.

6. Prioritize it and invest strategically. Widening out the lens a bit, work with your leadership team to address your organization’s approach to onboarding. It’s critical to prioritize onboarding appropriately and invest in it strategically.

That doesn’t mean throwing money at the problem. Instead, target ways to improve onboarding. It can pay off in more loyal, productive employees and a high-performance workplace culture. Contact us for help analyzing the costs vs. benefits of upgrading your onboarding process and aligning it with your strategic goals.

Under U.S. Generally Accepted Accounting Principles (GAAP), property, plant and equipment (PPE) assets aren’t immediately expensed. Instead, they’re capitalized on your company’s balance sheet and gradually depreciated over their useful lives. While that sounds easy enough, subtle nuances may trip up small businesses. Here are some tips to help get it right.

Capitalize the full cost

PPE is reported on the balance sheet at historical cost. You should capitalize all costs incurred during an asset’s construction or acquisition that can be directly traced to preparing the asset for service. Historical costs include the amount of cash or cash equivalents paid for an asset, as well as the expenses incurred to relocate the asset and bring it to working condition. Examples of capitalizable costs include:

The purchase price,
Sales tax,
Shipping, and
Installation costs.

Additionally, you must capitalize any costs incurred to replace PPE or enhance its productivity. However, you can expense repairs and maintenance costs as incurred.

GAAP doesn’t prescribe a dollar threshold for when to capitalize an asset. Instead, management can establish a capitalization threshold for efficiency, provided it doesn’t materially misstate the financial statements. Assets that fall below management’s threshold can be expensed immediately.

Determine the asset’s useful life

An asset’s useful life is the estimated period it contributes to your company’s operations and cash flow. To determine this, consider:

The asset’s expected use,
Any legal or contractual time constraints,
The entity’s historical experience with similar assets, and
Obsolescence or other economic factors.

Getting this estimate right is crucial. It affects your depreciation schedule — and your company’s reported profits.

What happens if a PPE asset is sold, damaged or otherwise impaired? Under GAAP, you must remove it from the balance sheet and recognize any resulting gain or loss on the income statement.

Select the right depreciation method

Depreciation is meant to allocate the cost of an asset (less any salvage value) over the period that it’s in use. Four common depreciation methods under GAAP are:

Straight-line,
Sum-of-the-years-digits,
Units-of-production, and
Declining-balance.

For simplicity, some small businesses deviate from GAAP by using the same depreciation method for tax and financial statement purposes. In this situation, the company would issue tax-basis financial statements that would disclose that they haven’t been prepared in accordance with GAAP. The IRS prescribes specific recovery periods for different categories of PPE and provides accelerated depreciation methods.

Under current tax law, instead of using the standard Modified Accelerated Cost Recovery System (MACRS) depreciation method, certain entities may choose to immediately deduct a qualified PPE purchase under Section 179 or the bonus depreciation program. This treatment minimizes taxable income in the years the asset is placed in service.

However, it may have some unintended consequences for financial reporting purposes. Using accelerated depreciation methods may create a large spread between the asset’s book value and fair market value. Assets contributing to future business operations may have no value on your balance sheet. First-year depreciation write-offs may also artificially reduce profits in the year of acquisition, making it hard to compare a company’s performance over time or against competitors. In years when your business makes significant PPE investments, these effects may raise red flags to lenders or investors.

We can help

PPE reporting involves judgment calls that can impact your financials and tax strategy. Our team can help you navigate these nuances, ensure compliance with the accounting rules and align your PPE strategy with broader financial goals.

Suppose you’re thinking about setting up a retirement plan for yourself and your employees. However, you’re concerned about the financial commitment and administrative burdens involved. There are a couple of options to consider. Let’s take a look at a Simplified Employee Pension (SEP) and a Savings Incentive Match Plan for Employees (SIMPLE).

SEPs offer easy implementation

SEPs are intended to be an attractive alternative to “qualified” retirement plans, particularly for small businesses. The appealing features include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.

If you don’t already have a qualified retirement plan, you can set up a SEP just by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on your employees’ behalf. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are received, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS approved. The maximum amount of deductible contributions you can make to an employee’s SEP-IRA in 2025, and that he or she can exclude from income, is the lesser of 25% of compensation or $70,000. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s contributions to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

You’ll have to meet other requirements to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens associated with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination rules aren’t required for SEPs. And employers aren’t required to file annual reports with the IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE plans meet IRS requirements

Another option for a business with 100 or fewer employees is a Savings Incentive Match Plan for Employees (SIMPLE). Under these plans, a SIMPLE IRA is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a SIMPLE 401(k) plan, with similar features to a SIMPLE IRA plan, and avoid the otherwise complex nondiscrimination test for traditional 401(k) plans.

For 2025, SIMPLE deferrals are allowed for up to $16,500 plus an additional $3,500 catch-up contribution for employees age 50 or older.

Unique advantages

As you can see, SEP and SIMPLE plans offer unique advantages for small business owners and their employees. Neither plan requires annual filings with the IRS. Contact us for more information or to discuss any other aspect of your retirement planning.

Annual fraud risk assessments can be very effective in finding obvious fraud threats and documenting internal controls that are in place to minimize them. However, these assessments can overlook evolving and behavioral risks that could cause significant financial losses if bad actors exploit them. You can help boost the power of your risk-reduction program by actively looking for potential blind spots.

Here are several examples of possible threats and how you can mitigate them:

Performance pressure. Unrealistic performance targets that employees can’t achieve legitimately may create a “win at all costs” culture that encourages cheating. This is particularly true if you tie compensation to overly aggressive goals. You can reduce this risk by ensuring performance metrics include integrity-related measures. In addition, performance outliers should be analyzed, and employees should be required to detail how they met their stretch goals.

Cultural shortcomings. Low utilization of confidential fraud hotlines and whistleblower channels can indicate cultural problems. For example, your workers may not trust that their tips will be taken seriously or worry they’ll be subject to retaliation. So track all tips your business receives (via anonymous mechanisms, direct reporting to managers and other methods), including how they’re investigated and their ultimate resolution. While maintaining confidentiality, communicate such resolutions to employees to promote confidence in your system.

Poor tone at the top. Not every executive models ethical behavior. For instance, a company leader might routinely override internal controls or ignore safety precautions. In such cases, workers may resent executive “privilege,” and some could use their grievances to justify fraud. Your business’s policies must apply equally to all employees, including executives. It’s critical to demand integrity of your executives and to thoroughly investigate complaints about them. Executives found to be culpable of serious infractions must suffer consequences.

Accepted noncompliance. When minor policy exceptions become commonplace, standards across an entire organization can gradually erode. At that point, workers may regard compliance as an obstacle to overcome, rather than a mechanism to protect their employer and fellow employees. Reduce such risk by tracking policy compliance, noting the exceptions and monitoring trends. Also, regularly retrain workers on compliance procedures and any acceptable rationalizations for overriding them.

The bottom line: Take steps now to address any policy pitfalls or employee behavior that might promote unethical or criminal activity. For most businesses, the best defense is proactive leadership, transparency, well-designed incentives and demonstrated respect for honesty and following rules. We can help you develop internal controls that address your company’s most significant risks.

Wellness programs are a firmly established way for employers to educate employees about physical, mental and emotional well-being while providing ways to engage in healthful behaviors. These programs typically include:

Physical health initiatives (such as fitness challenges and gym access),
Nutrition and lifestyle support (such as dietary consultations and smoking cessation classes), and
Mental and emotional initiatives (such as an employee assistance program and stress management seminars).

Although results are far from guaranteed, a well-implemented wellness program can improve an organization’s financial performance by boosting morale and engagement, reducing absenteeism, and increasing productivity. However, there are risks to consider — not the least of which is compliance.

The big five

Various federal laws may apply to a wellness program. Five of the most important are the:

Employee Retirement Income Security Act,
Consolidated Omnibus Budget Reconciliation Act,
Health Insurance Portability and Accountability Act,
Americans with Disabilities Act, and
Genetic Information Nondiscrimination Act.

It’s critical to know whether and how these laws affect your organization’s specific program design and administration. Be sure to consult a qualified attorney.

Other impactful laws

Believe it or not, beyond those five laws, there are others to consider. These include:

The Age Discrimination in Employment Act (ADEA). The ADEA prohibits employers from discriminating against employees and job applicants because of age in relation to employment and the compensation, terms, conditions or privileges thereof — including benefits. The ADEA’s protections apply to people who are age 40 or older and could affect wellness programs that decrease incentives, impose surcharges, or otherwise discriminate against these employees or groups of employees.

Title VII of the Civil Rights Act. A wellness program that makes distinctions based on race, color, sex (including pregnancy), religion or national origin would likely violate Title VII. Also, historically, the Equal Employment Opportunity Commission has taken the position that sexual orientation is inherently a “sex-based consideration,” and that an allegation of discrimination based on sexual orientation is an allegation of sex discrimination under Title VII.

The Fair Labor Standards Act (FLSA). The FLSA requires that covered, nonexempt employees be paid at least time and one-half the employee’s regular pay rate for time worked over 40 hours in a workweek. As employers promote participation in their wellness programs — particularly when health risk assessments are involved — they must carefully review whether the program could be considered mandatory. If it is, time spent completing the program may be deemed compensable under the FLSA.

The Internal Revenue Code. Although health benefits provided under a wellness program (such as diagnostic tests) are likely to be tax-free, rewards for participating in these programs might be taxable.

For example, plan premium subsidies or employer contributions to health Flexible Spending Accounts, Health Reimbursement Arrangements or Health Savings Accounts can be excluded from an employee’s income. Moreover, they aren’t subject to wage withholding or employment taxes if applicable nondiscrimination requirements are satisfied.

However, other rewards such as cash or cash equivalents — for instance, gift cards or gift certificates — are includible in employees’ income and subject to wage withholding and employment taxes.

Exceptions possible

Bear in mind that certain exceptions may apply to some of the laws we’ve mentioned. These are particularly worth exploring for smaller employers.

As mentioned, work closely with a qualified attorney when designing and administering your wellness program. Contact us for help assessing the costs and tax impact of such a program, whether it’s theoretical or already up and running.

If you’re considering making asset transfers to your grandchildren or great grandchildren, be sure your estate plan addresses the federal generation-skipping transfer (GST) tax. This tax ensures that large estates can’t bypass a round of taxation that would normally apply if assets were transferred from parent to child, and then from child to grandchild.

Because of the complexity and potential tax liability, careful estate planning is essential when considering generation-skipping transfers. Trusts are often used as a strategic vehicle to allocate the GST tax exemption amount effectively and ensure that assets pass tax-efficiently to younger generations.

ABCs of the GST tax

The GST tax applies at a flat 40% rate — in addition to otherwise applicable gift and estate taxes — to transfers that skip a generation. “Skip persons” include your grandchildren, other relatives who are more than one generation below you and unrelated people who are more than 37½ years younger than you. There’s an exception, however, for a grandchild whose parent (your child) predeceases you. In that case, the grandchild moves up a generation and is no longer considered a skip person.

Even though the GST tax enjoys an annual inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption (currently, $13.99 million), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

3 transfer types trigger GST tax

There are three types of transfers that may trigger the GST tax:

A direct skip — a transfer directly to a skip person that is subject to federal gift and estate tax,
A taxable distribution — a distribution from a trust to a skip person, or
A taxable termination — such as when you establish a trust for your children, the last child beneficiary dies and the trust assets pass to your grandchildren.

The GST tax doesn’t apply to transfers to which you allocate your GST tax exemption. In addition, the GST tax annual exclusion — which is similar to the gift tax annual exclusion — allows you to transfer up to $19,000 per year (for 2025) to any number of skip persons without triggering GST tax or using up any of your GST tax exemption.

Transfers to a trust qualify for the annual GST tax exclusion only if the trust 1) is established for a single beneficiary who’s a grandchild or other skip person, and 2) provides that no portion of its income or principal may be distributed to (or for the benefit of) anyone other than that beneficiary. Additionally, if the trust doesn’t terminate before the beneficiary dies, any remaining assets will be included in the beneficiary’s gross estate.

If you wish to make substantial gifts, either outright or in trust, to your grandchildren or other skip persons, allocate your GST tax exemption carefully. Turn to us for answers regarding the GST tax.

Many balance sheet items are reported at historical cost. However, current accounting standards require organizations that follow U.S. Generally Accepted Accounting Principles (GAAP) to report certain assets and liabilities at “fair value.” This shift aims to enhance transparency and reflect an entity’s current financial position more accurately. However, estimating fair value can involve significant judgment and subjectivity, especially when observable market data is unavailable.

Defining fair value

Under GAAP, fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Examples of assets that may be reported at fair value are asset retirement obligations, derivatives and intangible assets acquired in a business combination.

Accounting Standards Codification Topic 820, Fair Value Measurement, explains how companies should estimate fair value using available, quantifiable market-based data. It provides the following three-tier valuation hierarchy for valuation inputs:

Quoted prices in active markets for identical assets or liabilities,
Inputs other than quoted prices that are observable, such as prices for similar assets in active markets or identical assets in inactive markets, and
Nonpublic information and management’s estimates.

Fair value measurements, especially those based on the third level of inputs, may involve significant judgment, making them susceptible to misstatement. Therefore, these estimates usually require more auditor focus.

Additionally, fair value measurements require detailed footnote disclosures about the valuation techniques, inputs and assumptions used. These disclosures help financial statement users understand how fair value was determined and evaluate its impact on earnings, financial position and risk exposure.

Auditing estimates

To substantively test fair value measurements, external auditors evaluate the reasonableness and consistency of management’s assumptions. They also assess whether the underlying data is complete, accurate and relevant. Using management’s assumptions (or alternate assumptions), auditors may develop an independent estimate to compare to what’s reported on the internally prepared financial statements.

Another way auditors test the reasonableness of fair value estimates is by reviewing subsequent events that occur after the balance sheet date but before the audit report is issued. For example, ABC Co., a calendar-year entity, acquired a competitor in October 2024 and allocated $500,000 of the purchase price to a trademark. With no active market for trademarks, management used the relief-from-royalty method to estimate its fair value. On February 1, 2025, ABC licensed the trademark to a third party. The company’s external auditor compared the licensing terms to management’s assumptions and found the royalty rates aligned. As a result, no further audit procedures were needed to support the fair value estimate.

In today’s uncertain marketplace, accounting estimates may face increased scrutiny from auditors. Measuring fair value is outside the comfort zone of most in-house accounting personnel. Outside appraisal professionals can provide objective, market-based evidence to support the fair value of assets and liabilities.

We’re here to help

Fair value is one of the gray areas in financial reporting. Approach fair value estimates with diligence, documentation and, where necessary, third-party support. Contact us for guidance on complying with the complex fair value measurement and disclosure rules.

Yeo & Yeo’s Education Services Group professionals are pleased to present several sessions during the April 29 – May 1 MSBO Conference & Exhibit Show at the Amway Grand Plaza and DeVos Place in Grand Rapids.

We are excited to share our insights to help districts navigate the complexities of school financial management. We look forward to seeing you there and working together to support MSBO and the broader education community.

Tuesday, April 29

Accounting and Auditing Update – 9:20-10:00 a.m.
- Jennifer Watkins, CPA, Yeo & Yeo Principal, shares insights on the latest accounting pronouncements, including the complicated MPSERS funding, and preparing for this audit season.

Cash Management – 9:20-10:00 a.m.
- Kristi Krafft-Bellsky, CPA, Yeo & Yeo Principal, joins Michael Barry, MILAF+/PFM Asset Management, and Mary Beth Rogers, Clarkston Community Schools, to help you master cash management, including fund balance reports, legal compliance, and identifying and dealing with fraud.

Thursday, May 1

School Nutrition Program Financial Reporting and Auditing Considerations – 8:20-9:20 a.m.
- Kristi Krafft-Bellsky, CPA, Yeo & Yeo Principal, joins Michelle Needham, MDE, to help you learn about the main compliance and audit issues in the food service fund and how to navigate them.
Allowable Expenditures – 8:20-9:20 a.m.
- Jacob Walter, Yeo & Yeo Senior Accountant, Dana L. Abrahams or Jeremy S. Motz, Clark Hill PLC, share insights on reviewing guidelines for allowable expenditures.
Year-End and Annual Reporting & Contractor vs. Employee Relationships – 9:40-10:40 a.m.
- Jennifer Watkins, CPA, Yeo & Yeo Principal, shares how to understand the basics of required year-end reporting, including processing Form 1099.
Frequently Found Audit Issues – 1:15-1:45 p.m.
- Jennifer Watkins, CPA, Yeo & Yeo Principal, joins Joselito Quintero and Gloria Jean Suggitt, MDE, to help you understand common audit findings, including compliance and internal controls issues.

Visit our booth!

Stop by Yeo & Yeo’s booth #401 and enter our prize drawing! Our K-12 Education Services Group members welcome the opportunity to hear about challenges your district may be facing and share helpful insights. Hope to see you there!

Register and learn more about the MSBO Conference sessions.

A strong board of directors provides financial guidance, develops long-term priorities, and appoints executives to run the operation. Ultimately, they work to ensure that the organization utilizes its resources appropriately. To accomplish these goals, directors must have the appropriate knowledge, skills, and abilities. While each director will bring their own set of strengths to the table, board members must understand their responsibilities and obligations.

Consider implementing consistent training efforts for board members to ensure that your board has the knowledge required to guide the organization toward its mission. Providing training for board members allows them to:

Start on the same page – Providing board orientation training allows you to set expectations and explain responsibilities. When board members know what to expect and what is expected of them at the outset, you’ll have more success getting what you need from an actively engaged board.
Make better-educated decisions – Most nonprofit board members are volunteers from the community who join the board to make a difference. Although they have good intentions, they may not have the fundamental knowledge to make educated decisions on finances or policies. Training board members equips them with the tools to make decisions that positively impact your organization.
Protect the organization – Nonprofits are held to a high standard of government regulation. As public charities, they are exempt from federal corporate taxes and may have access to public funding. Training your board on compliance requirements, like filing Form 990, protects the organization’s public charity status and keeps it running as intended.
Stay on top of industry changes – Rules and regulations are continually changing. Training helps keep board members up to date on shifts in legislation that can impact how your organization operates.
Understand policies and procedures – Policies provide guidance and protect the organization from legal challenges, ensure compliance with regulations and funding agencies, and set the tone for ethical and transparent conduct by employees. The policies you have in place will be effective only if the board is trained on their significance.

Members of your community agree to become board members because they believe in the organization’s mission and want to make a difference. It’s up to you to supply them with the information and training they need to understand their responsibilities, make informed decisions, and succeed in their roles.

Enhance your board’s impact – register for Yeo & Yeo’s free Nonprofit Board Training!

Gain the knowledge and tools to make informed decisions, ensure compliance, and drive your organization’s mission forward.

President Trump’s “Liberation Day” announcement of global tariffs caught businesses, as well as foreign countries and worldwide financial markets, off guard. While the president has long endorsed the imposition of tariffs, many businesses expected him to take a targeted approach. Instead, Trump rolled out a baseline tariff on all imports to the United States and higher tariffs on certain countries, including some of the largest U.S. trading partners. (On April 9, Trump announced a 90-day pause on some reciprocal tariffs, with a 10% baseline tariff remaining in effect for most countries and a 145% tariff on imports from China.)

The tariff plan sent businesses, both large and small, scrambling. Even companies accustomed to dealing with tariffs have been shaken because this round is so much more extensive and seemingly subject to change than those in the past.

Proponents of tariffs say they can be used as a negotiating tool to get other countries to lower their tariffs on U.S. imports, thereby leveling the global trade playing field. They also argue that if foreign companies relocate to the United States, it’ll create jobs for Americans, fuel construction industry growth and provide additional tax revenue.

Since more changes are expected as countries and industries negotiate with the administration for reduced rates and exemptions, some degree of uncertainty is likely to prevail for at least the short term. In the meantime, businesses have several areas they should focus on to reduce the tariff hit to their bottom lines.

1. Financial forecasting

No business should decide how to address tariff repercussions until they’ve conducted a comprehensive financial analysis to understand how U.S. and retaliatory tariffs will affect costs. You might find, for example, that your business needs to postpone impending plans for capital asset purchases or expansion.

Modeling, or scenario planning, is often helpful during unpredictable periods. Begin by identifying all the countries involved in your supply chain, whether you deal with them directly or through your suppliers, and the applicable tariffs, whether you’re importing or exporting goods.

You can then develop a model that projects how different sourcing scenarios might play out. The model should compare not only the costs of foreign vs. domestic options but also the resulting impact on your pricing, labor costs, cash flow and, ultimately, profitability. This information can allow you to build contingency plans to help reduce the odds of being caught flat-footed as new developments unfurl.

Modeling can provide valuable guidance if you’re considering reshoring your operations. Of course, reshoring isn’t a small endeavor. Moreover, U.S. infrastructure may not be adequate for your business needs.

Manufacturers also should note the shortage of domestic manufacturing workers. According to pre-tariff analysis from the National Association of Manufacturers, the U.S. manufacturing industry could require some 3.8 million jobs by 2033, and more than 1.9 million may go unfilled.

2. Pricing

Perhaps the most obvious tactic for companies incurring higher costs due to tariffs is to pass the increases along to their customers. It’s not that simple, though.

Before you raise your prices, you must take into account factors such as your competitors’ pricing and how higher prices might affect demand. The latter is especially critical for price-sensitive consumer goods where even a small price jump could undermine demand.

Consumers have already been cutting back on spending based on rising fears of inflation and a possible recession. Price increases, therefore, are better thought of as a single component in a more balanced approach.

3. Foreign Trade Zones

You may be able to take advantage of Foreign Trade Zones (FTZs) to minimize your tariff exposure. In these designated areas near U.S. ports of entry, a company can move goods in and out of the country for operations (including assembly, manufacturing and processing) but pay reduced or no tariffs.

Tariffs are paid when the goods are transferred from an FTZ into the United States for consumption. While in the zone, though, goods aren’t subject to tariffs. And, if the goods are exported, no tariff applies.

Note: Trump already has narrowed some of the potential benefits of FTZs, so avoid making them a cornerstone of your tariff strategy.

4. Internal operations

If your company’s suppliers are in high-tariff countries, you can look into switching to lower-cost suppliers in countries that have negotiated lower tariffs.

You may not be able to escape higher costs stemming from tariffs, but you can take steps to cut other costs by streamlining operations. For example, you could invest in technologies to improve efficiency or trim worker hours and employee benefits. You also should try to renegotiate contracts with suppliers and vendors, even if those relationships aren’t affected by tariffs. Such measures might make it less necessary to hike your prices.

You can control your overall costs as well by breaking down departmental silos so the logistics or procurement department isn’t making tariff-related decisions without input from others. Your finance and tax departments need to weigh in to achieve the optimal cost structures.

5. Tax planning

Maximizing your federal and state tax credits is paramount in financially challenging times. Technology investments, for example, may qualify for Section 179 expensing and bonus depreciation (which may return to 100% in the first year under the upcoming tax package being negotiated in Congress). Certain sectors may benefit from the Sec. 45X Advanced Manufacturing Production Credit or the Sec. 48D Advanced Manufacturing Investment Credit. Several states also offer tax credits for job creation, among other tax incentives.

This may be a wise time to consider changing your inventory accounting method, if possible. The last-in, first-out (LIFO) method assumes that you use your most recently purchased materials first. The cost of the newer, pricier items is charged first to the cost of goods sold, boosting it and cutting both your income and taxes. Bear in mind, though, that LIFO isn’t permitted under the International Financial Reporting Standards and is more burdensome than the first-in, first-out method.

6. Compliance

Regardless of the exact percentages of U.S. and retaliatory tariffs, you can count on tighter scrutiny of your compliance with the associated rules and requirements. These probably will become more complicated than they’ve been in the past.

For example, expect greater documentation requirements and shifting rules for identifying an item’s country of origin. The higher compliance burden alone will ramp up your costs — but the costs of noncompliance could be far greater.

Stay vigilant

The tariff landscape is rapidly evolving. You need to monitor the actions by the Trump administration, the responses of other countries and how they affect your business operations. You may have to pivot as needed to keep costs low (by reshoring or switching to suppliers in low-tariff countries). If you don’t have the requisite financial expertise on staff to keep up with it all, we can help. Contact us today about how to plan ahead — and stay ahead of the changes.