How Employers Can Address the Unpredictability of Health Care Benefits Costs

If your organization has struggled to accurately forecast and manage the costs of its health care benefits, you’re not alone. Global HR consultancy Mercer released a report in May entitled The CFO perspective on health, which surveyed the CFOs and other finance/accounting employees with health budget oversight at 80 employers between February and March of this year.

Of those respondents with 500 or more employees, 72% said their health care benefits costs were less predictable than other expenses. What’s more, 67% reported that health care benefits costs are a “significant” or “very significant” concern in comparison with other operating expenses.

2 critical factors

So, it’s fairly clear that those in leadership positions at many, if not most, employers are well aware of the challenge of containing these costs. But how do you do it?

The precise answer depends on the defining characteristics of your organization. But, in general, managing health care benefits costs can be made easier by learning more about two critical factors: your workforce and the health care benefits marketplace.

Starting with the first point, your optimal plan design should be driven by the size, demographics and needs of your workforce. Rather than relying on vendor-provided materials, actively manage communications with employees regarding their health care and wellness-related benefits. Determine which offerings are truly valued and which ones aren’t.

If you haven’t already, explore the feasibility of a wellness program to promote healthier diet and lifestyle choices. Invest in employee education so your plan participants can make more cost-effective health care decisions. Many employers in recent years have turned to high-deductible health plans coupled with Health Savings Accounts to shift some of the cost burden to employees.

As you study your plan design, keep in mind that good data matters. Employers can apply analytics to just about everything these days — including health care coverage. Measure the financial impacts of gaps between benefits offered and those employees actually use. Then, appropriately adjust your plan design to close these costly gaps.

Potential contributors

The second point — that is, the health care benefits marketplace — can be challenging to get a handle on. There are a wide variety of providers, plans and programs out there. Many companies engage a consultant to provide an independent return-on-investment analysis of an existing benefits package and suggest some cost-effective adjustments. Doing so will entail some expense, but an external expert’s perspective could help you save money in the long run.

Another service that a consultant may be able to provide is an audit of medical claims payments and pharmacy benefits management services. Mistakes happen — and fraud is always a possibility. By re-evaluating claims and pharmacy services, you can identify whether you’re losing money to inaccuracies or even wrongdoing.

Regarding pharmacy benefits, as the old saying goes, “Everything is negotiable.” The next time your pharmacy coverage contract comes up for renewal, have an honest discussion with your vendor rep about whether you can get a better deal. If not, it may be time to meet with one or more of the provider’s competitors.

The more you know 

The truth is many employers are concerned about the unpredictability and rising nature of health care benefits costs. Gathering data points about your workforce and getting a strong grasp of the current state of the marketplace are good ways to begin addressing the problem. For help identifying, quantifying and analyzing your organization’s costs in this area, contact us.

© 2024

When it comes to digital assets, it’s important to know that, unlike many assets, they leave little to no “paper trail.” Thus, unless your estate plan specifically provides for them, it may be difficult for your family to access these assets — or even know that they exist. Let’s take a look at how to properly address digital assets in your estate plan.

Inventory your assets

Make a comprehensive list of all your digital assets, together with website addresses, usernames, passwords and account numbers. These assets may include:

  • Email accounts,
  • Social media accounts,
  • Digital photo, video, music and book collections,
  • Online banking and brokerage accounts, and
  • Online reward programs and points, such as credit card rewards or frequent flyer miles.

Be sure to provide instructions for accessing them, particularly if they’re password protected or encrypted. Store the list in a secure location and be sure your family knows where to find it. Consider using an online password management solution to simplify the process.

Authorize access

Providing your representatives with login credentials to access your digital assets is critical, but it’s likely not enough. They’ll also need legal consent to gain entrance to and manage your accounts.

Absent such consent, they may violate federal or state data privacy laws or, in the case of financial accounts, even be guilty of theft or misappropriation. It’s unlikely that the authorities would prosecute your representatives for unauthorized access to your accounts, but it’s advisable to ensure they have explicit authority rather than rely on their possession of your login credentials.

Follow federal laws

For digital assets that you own, such as bank and investment accounts, your estate plan can provide for the transfer of assets to your heirs. But many types of digital assets — including email and social media accounts, as well as certain music and book collections — are licensed rather than owned. These assets generally are governed by terms of service agreements (TOSAs), which typically provide that the licenses are nontransferable and terminate on your death.

Fortunately, there are laws that govern access to digital assets in the event of your death or incapacity. Most states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which provides a three-tier framework for accessing and managing your digital assets:

  1. The act gives priority to providers’ online tools for handling the accounts of customers who die or become incapacitated. For example, Google provides an “Inactive Account Manager,” which allows you to designate someone to access and manage your account. Similarly, Facebook allows users to determine whether their accounts will be deleted or memorialized when they die and to designate a “legacy contact” to maintain their memorial pages.
  2. If the online provider doesn’t offer such tools, or if you don’t use them, then access to digital assets is governed by provisions in your will, trust, power of attorney or other estate planning document.
  3. If you don’t grant authority to your representatives in your estate plan, then access to digital assets is governed by the provider’s TOSA.

To ensure that your loved ones have access to your digital assets, use providers’ online tools or include explicit authority in your estate plan. If you have questions on how to properly address your digital assets in your estate plan, please contact us.

© 2024

The next quarterly estimated tax payment deadline is June 17 for individuals and businesses, so it’s a good time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum amount of estimated tax without triggering the penalty for underpayment of estimated tax.

Four possible options

The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under one of the following four methods:

  • Current year method. Under this option, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of four installment due dates. The corporate due dates are generally April 15, June 15, September 15 and December 15. If a due date falls on a Saturday, Sunday or legal holiday, the payment is due the following business day.
  • Preceding year method. Under this option, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the return for the preceding tax year by each of four installment due dates. (Note, however, that for 2022, certain corporations can only use the preceding year method to determine their first required installment payment. This restriction is placed on corporations with taxable income of $1 million or more in any of the last three tax years.) In addition, this method isn’t available to corporations with a tax return that was for less than 12 months or a corporation that didn’t file a preceding tax year return that showed some tax liability.
  • Annualized income method. Under this option, a corporation can avoid the estimated tax underpayment penalty if it pays its “annualized tax” in quarterly installments. The annualized tax is computed on the basis of the corporation’s taxable income for the months in the tax year ending before the due date of the installment and assumes income will be received at the same rate over the full year.
  • Seasonal income method. Under this option, corporations with recurring seasonal patterns of taxable income can annualize income by assuming income earned in the current year is earned in the same pattern as in preceding years. There’s a somewhat complicated mathematical test that corporations must pass in order to establish that they meet the threshold and therefore qualify to use this method. If you think your corporation might qualify for this method, don’t hesitate to ask for our assistance in determining if it does.

Also, note that a corporation can switch among the four methods during a given tax year.

We can examine whether your corporation’s tax bill can be reduced. If you’d like to discuss this matter further, contact us.

© 2024

Reliable financial reporting is key to any company’s success. Here’s why your business should at least consider investing in audited financial statements.

Weighing the differences

Most businesses maintain an in-house accounting system to manage their financials. The documents your staff prepares through your in-house accounting system are called “internally prepared financial statements.”

In many cases, internal financials are perfectly functional for the day-to-day operational needs of a small business. But they usually don’t follow every reporting standard prescribed under U.S. Generally Accepted Accounting Principles (GAAP).

When an external CPA audits your financial statements, he or she will examine various accounting documents to check whether you’re following GAAP and, afterward, offer an opinion on your statements. If the auditor issues an “unqualified” opinion, he or she agrees with the methods your in-house team used to prepare your financial statements.

If a “qualified” opinion is issued, it usually means the auditor has identified one or more GAAP reporting methods that your company hasn’t followed. This doesn’t mean your financial statements are inaccurate; it just signifies that you didn’t prepare them according to GAAP. (There may be other reasons for a qualified opinion as well.)

Looking at both sides

Who cares whether you’re in compliance with GAAP? Lenders, investors and other external stakeholders do. For example, banks may require you provide audited financial statements before they’ll approve loans, and sureties usually require them for bonding purposes. Some governmental agencies also require companies to provide audited statements to bid on contracts.

You may even save money. Small businesses with audited statements typically receive lower interest rates on loans than companies without audited statements. In addition, because of the extra steps an external auditor takes, audited financial statements are more likely than internally prepared statements to be free of reporting mistakes, such as data entry errors. For example, if your balance sheet shows that you bought a piece of equipment for $100,000, your auditor will double-check that figure by looking at original receipts.

Although audited financial statements can provide the benefits mentioned, they’re not something your business should leap into without foresight. In addition to requiring a financial investment, an outside audit will ask you and your employees to invest a substantial amount of time and energy toward its completion. You’ll need to gather and provide extensive documentation and even submit to interviews.

What’s right for your business?

If external stakeholders don’t require your company to provide audited financial statements, your CPA offers other lower-cost options, such as compiled or reviewed statements, which can help you gain insight into your company’s financial health. Contact us to determine what’s appropriate for your situation. If you decide you want an external audit of your financial statements, we’ll discuss timelines and responsibilities before fieldwork begins.

© 2024

One of the types of occupational fraud schemes that became more costly for employers since the beginning of the COVID-19 pandemic in 2020 is expense reimbursement fraud. According to the Association of Certified Fraud Examiners’ (ACFE’s) latest report, this type of employee scheme now ranks fourth after corruption, billing schemes and noncash fraud.

Although the $50,000 median loss of expense reimbursement scams is less than that of some other frauds, it’s also very commonly perpetrated. According to software company Emburse, nearly 25% of 1,000 workers surveyed admitted to passing off personal purchases as work-related buys. If you let internal controls slip a bit during the pandemic and you’re seeing more exaggerated or falsified expense reports, it’s time to reinforce your fraud deterrents.

How they do it

Employees often cheat on their reimbursement reports by inventing expenses. They might, for example, stick your company with the bill for a lavish dinner with friends or expense hotel costs accrued while extending a business trip for leisure. Employees may also exaggerate the amount of legitimate expenses by, say, claiming larger service tips than they actually paid.

Other common reimbursement fraud schemes include submitting bills for trips that were never taken (such as canceled airline tickets or refunded hotel registration), claims for items employees didn’t purchase, inflated mileage totals and bills for nonreimbursable expenses, such as alcohol or leisure activity tickets. Some employees are habitual cheaters who stock up on blank receipts from cab companies and restaurants to submit with their phony expense reports.

How to stop them

Larger organizations (with more than 100 employees) are actually more likely to suffer from reimbursement fraud than smaller ones, according to the ACFE. However, any employer without strictly adhered to submission and approval rules can become a victim.

To prevent employees from cheating your expense reimbursement system:

  • Develop a policy for expense reimbursement that, for example, requires original receipts and documentation for expenses over a certain amount. Mandate that every employee read and sign the policy.
  • Make supervisors accountable for approving and verifying expenses. They should scrutinize suspicious items and any reports containing multiple expenses that fall just below the amount requiring documentation.
  • Regularly verify that employee credit card charges (if applicable) haven’t been canceled and that balances are being paid in full.
  • Establish a confidential fraud hotline if you haven’t already. Employees who know about cheating colleagues may not report them unless they have an anonymous mechanism to do so.

Make sure managers and executives are held to the same rules as other employees. And if you find that an employee has been submitting false claims, take action. This may include termination of employment and criminal charges. Consult with your attorney.

Vulnerable industries

Finally, organizations in certain industries are more likely to suffer losses from expense reimbursement schemes. According to the ACFE report, these include the construction, manufacturing, health care, education and not-for-profit sectors. For suggestions on preventing and detecting reimbursement fraud, contact us.

© 2024

The IRS recently released guidance providing the 2025 inflation-adjusted amounts for Health Savings Accounts (HSAs). These amounts are adjusted each year, based on inflation, and the adjustments are announced earlier in the year than other inflation-adjusted amounts, which allows employers to get ready for the next year.

Fundamentals of HSAs

An HSA is a trust created or organized exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high-deductible health plan (HDHP). In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for 2025

In Revenue Procedure 2024-25, the IRS released the 2025 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limits. For calendar year 2025, the annual contribution limit for an individual with self-only coverage under an HDHP will be $4,300. For an individual with family coverage, the amount will be $8,550. These are up from $4,150 and $8,300, respectively, in 2024.

In addition, for both 2024 and 2025, there’s a $1,000 catch-up contribution amount for those who are age 55 or older by the end of the tax year.

High-deductible health plan limits. For calendar year 2025, an HDHP will be a health plan with an annual deductible that isn’t less than $1,650 for self-only coverage or $3,300 for family coverage (these amounts are $1,600 and $3,200 for 2024). In addition, annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) won’t be able to exceed $8,300 for self-only coverage or $16,600 for family coverage (up from $8,050 and $16,100, respectively, for 2024).

Heath Reimbursement Arrangements

The IRS also announced an inflation-adjusted amount for Health Reimbursement Arrangements (HRAs). An HRA must receive contributions from an eligible individual (employers can’t contribute). Contributions aren’t included in income, and HRA reimbursements used to pay eligible medical expenses aren’t taxed. In 2025, the maximum amount that may be made newly available for the plan year for an excepted benefit HRA will be $2,150 (up from $2,100 in 2024).

Collect the benefits

There are a variety of benefits to HSAs that employers and employees appreciate. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Many employers find it to be a fringe benefit that attracts and retains employees. If you have questions about HSAs at your business, contact us.

© 2024

Four antifraud controls are associated with at least a 50% reduction in both fraud loss and duration, according to “Occupational Fraud 2024: A Report to the Nations” published by the Association of Certified Fraud Examiners (ACFE). They are financial statement audits, reporting hotlines, surprise audits and proactive data analysis. However, the ACFE study also found that two of these — surprise audits and proactive data analysis — are among the least commonly implemented controls. Here’s how your organization might benefit from conducting periodic surprise audits.

Financial statement audits vs. surprise audits

Business owners and managers often dismiss the need for surprise audits, mistakenly assuming their annual financial statement audits provide sufficient coverage to detect and deter fraud among their employees. But financial statement audits shouldn’t be relied upon as an organization’s primary antifraud mechanism.

By comparison, a surprise audit more closely examines the company’s internal controls that are intended to prevent and detect fraud. Such audits aim to identify any weaknesses that could make assets vulnerable and determine whether anyone has already exploited those weaknesses to misappropriate assets.

Auditors usually focus on particularly high-risk areas, such as cash, inventory, receivables and sales. They show up unexpectedly, usually when the owners suspect foul play, or randomly as part of the company’s antifraud policies. In addition, an auditor might follow a different process or schedule than during an annual financial statement audit. For example, instead of beginning audit procedures with cash, the auditor might first scrutinize receivables or vendor invoices during a surprise audit.

The element of surprise is critical because most fraud perpetrators are constantly on guard. Announcing an upcoming audit or performing procedures in a predictable order gives wrongdoers time to cover their tracks by shredding (or creating false) documents, altering records or financial statements, or hiding evidence.

Big benefits

The 2024 ACFE study demonstrates the primary advantages of surprise audits: lower financial losses and reduced duration of schemes. The median loss for organizations that conduct surprise audits is $75,000, compared with a median loss of $200,000 for those organizations that don’t conduct them — a 63% difference. This discrepancy is no surprise in light of how much longer fraud schemes go undetected in organizations that fail to conduct surprise audits. The median duration in those organizations is 18 months, compared with only nine months for organizations that perform surprise audits.

Surprise audits can have a strong deterrent effect, too. Companies should state in their fraud policies that random tests will be conducted to ensure internal controls aren’t being circumvented. If this isn’t enough to deter would-be thieves or convince current perpetrators to abandon their schemes, simply seeing guilty co-workers get swept up in a surprise audit should help.

Despite these benefits, the 2024 ACFE study found that less than half (42%) of the victim-organizations reported performing surprise audits. Moreover, only 17% of companies with fewer than 100 employees have implemented this antifraud control (compared to 49% of those with 100 or more employees).

We can help

Your organization can’t afford to be lax in its antifraud controls. The ACFE estimates that occupational fraud costs the typical organization 5% of its revenue annually, and the median loss caused by fraud is a whopping $145,000. If your organization doesn’t already conduct surprise audits, contact us to discuss how they can be used to fortify its defenses against occupational theft and financial misstatement.

© 2024

As artificial intelligence (AI) continues to integrate itself into many workplaces, the U.S. Department of Labor (DOL) has been busy addressing the technology’s many implications.

In fact, the agency recently issued two sets of guidance that employers should be aware of. One discusses the legal compliance impact of AI, and the other suggests best practices for protecting workers’ well-being as AI-powered systems and processes are rolled out.

FLSA, FMLA, etc.

On April 29, DOL administrator Jessica Looman distributed a Field Assistance Bulletin (No. 2024-1) to Wage and Hour Division staff that outlines how various federal labor laws apply to employers’ use of AI. The memo warns that “without responsible human oversight, the use of [AI] technologies may pose potential compliance challenges with respect to federal labor standards.”

Of particular interest are the specifics Looman provides regarding the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). Regarding the FLSA, for example, the memo warns that employers can’t dock employees’ pay based on activity or productivity metrics calculated by AI systems.

Nor can employers use AI (or other systems) to take adverse actions against employees who engage in protected activities. Looman gives an example of using “automated worker surveillance systems to detect, target, or monitor workers whom the employer suspects have filed a complaint” with the DOL.

When it comes to the FMLA, employers must be on guard for the possibility that AI-powered systems could:

  • Wrongfully deny employees’ qualified leave under the act,
  • Miscalculate rightfully earned paid time off, or
  • Demand too much information from employees requesting leave.

The memo also warns: “Systems used to track leave use may not be used to target FMLA leave users for retaliation or discourage the use of such leave.”

In addition, the guidance covers the Providing Urgent Maternal Protections for Nursing Mothers Act (commonly referred to as the PUMP Act) and the Employee Polygraph Protection Act. To read the full text of the bulletin, click here.

8 key principles

On May 23, the DOL published a document on its website entitled Artificial Intelligence and Worker Well-being: Principles for Developers and Employers. The guidance, which is based on “input from workers, unions, researchers, academics, employers, and developers, among others,” sets forth eight principles applicable to the development and deployment of AI in the workplace. The principles recommend that AI should be:

  1. Centered on worker empowerment (that is, employees should be informed and involved in its development, training and use),
  2. Ethically developed to protect workers,
  3. Established under clear governance and human oversight,
  4. Transparent in how it’s used for both job applicants and employees,
  5. Compliant with laws regarding workers’ right to organize and other rights and protections,
  6. Used to enable employees to improve job quality,
  7. Introduced into the workplace with appropriate support and upskilling, and
  8. Managed with the responsible use of employees’ sensitive data.

Per the guidance, “The Principles are applicable to all sectors and intended to be mutually reinforcing, though not all Principles will apply to the same extent in every industry or workplace.” To read the full text, click here.

More guidance ahead?

Both sets of guidance were prompted by an executive order issued by President Biden in October 2023 on the “safe, secure, and trustworthy” use of AI. Employers can likely expect further guidance to be issued on the federal and state levels as the impact of AI on various industries and workplaces in general becomes clearer. 

© 2024

Health Savings Accounts (HSAs) allow eligible individuals to lower their out-of-pocket health care costs and federal tax bills. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if you’re eligible.

Not only can an HSA be a powerful tool for financing health care expenses, it can also supplement your other retirement savings vehicles. Plus, it offers estate planning benefits to boot.

HSAs by the numbers

Similar to a traditional IRA or 401(k) plan, an HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. (Withdrawals for nonqualified expenses are taxable and, if you’re under 65, subject to a penalty.)

An HSA must be coupled with a high-deductible health plan (HDHP). For 2024, an HDHP is a plan with a minimum deductible of $1,600 ($3,200 for family coverage) and maximum out-of-pocket expenses of $8,050 ($16,100 for family coverage).

Be aware that, to contribute to an HSA, you must not be enrolled in Medicare or covered by any non-HDHP insurance (a spouse’s plan, for example). For 2024, the annual contribution limit for HSAs is $4,150 for individuals with self-only coverage and $8,300 for individuals with family coverage.

If you’re 55 or older, you can add another $1,000 annually. Typically, contributions are made by individuals, but some employers contribute to employees’ accounts.

Cost-saving benefits

HSAs can lower health care costs in two ways: 1) by reducing your insurance expense (HDHP premiums are substantially lower than those of other plans) and 2) allowing you to pay qualified expenses with pretax dollars.

In addition, any funds remaining in an HSA may be carried over from year to year and invested, growing on a tax-deferred basis indefinitely. This is a huge advantage over health care Flexible Spending Accounts, where the funds must be spent or forfeited (although some employers permit employees to carry over up to $500 per year). When you turn 65, you can withdraw funds penalty-free for any purpose (although funds that aren’t used for qualified medical expenses are taxable).

To the extent that HSA funds aren’t used to pay for qualified medical expenses, they’re treated much like those in an IRA or a 401(k) plan.

Estate planning benefits

Unlike traditional IRA and 401(k) plan accounts, with HSAs you don’t need to take required minimum distributions once you reach age 73. Besides funds used to pay qualified medical expenses, the account balance continues to grow on a tax-deferred basis indefinitely, providing additional assets for your heirs. The tax implications of inheriting an HSA differ substantially depending on who receives it, so it’s important to consider your beneficiary designation.

If you name your spouse as beneficiary, the inherited HSA will be treated as his or her own HSA. That means your spouse can allow the account to continue growing and withdraw funds tax-free for his or her own qualified medical expenses.

If you name your child or someone else other than your spouse as beneficiary, the HSA terminates and your beneficiary is taxed on the account’s fair market value. It’s possible to designate your estate as beneficiary, but in most cases that’s not the best choice. A non-spouse beneficiary other than your estate can avoid taxes on any qualified medical expenses that you incurred prior to death, paid with HSA funds within one year after death.

Contact us for more information regarding HSAs.

© 2024

This webinar has concluded. Additional resources are provided below.

Yeo & Yeo’s payroll specialists and a U.S. Department of Labor representative hosted a webinar on the latest Department of Labor (DOL) Wage and Hour Division developments. The DOL has finalized a rule impacting overtime exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act (FLSA). This new rule raises the minimum salary needed for employees to qualify for exemption. The initial increase takes effect July 1, 2024, and will automatically adjust every three years based on a specific formula.

This webinar focused on the following key topics:

  • FLSA executive, administrative, and professional exemptions, including learned and creative professionals
  • Minimum salary levels and effective dates
  • The primary duties test
  • Highly compensated employees (HCE) test
  • Nondiscretionary payments to meet salary thresholds
  • Definition of “paid” on a salary
  • What actions should you take now to prepare?

Additional Resources:

Webinar Presenters:

Christine Porras, CPP – Yeo & Yeo, Payroll Supervisor

Rose Sharman – Yeo & Yeo, Outsourced Business Operations Manager

Mildred Kress – U.S. Department of Labor, Community Outreach & Resource Planning

 

We are delighted to spotlight Kyle Richardson, CPA, one of the recipients of the Tomorrow’s 20 award from the Auburn Hills Chamber of Commerce. This award recognizes emerging leaders who exemplify outstanding leadership, innovation, and commitment to community service. 

Kyle, can you tell us about your journey leading up to receiving the Tomorrow’s 20 Award?

My journey to receiving the Tomorrow’s 20 Award has been shaped by a strong sense of duty and a pursuit of excellence, cultivated during my time serving in the United States Army. Stationed in Afghanistan, I was privileged to earn commendations for heroism and meritorious service, experiences that instilled in me a deep commitment to leadership and helping others. 

Your involvement with various organizations is impressive. Could you share some insights into your leadership roles?

I was fortunate to assume leadership roles in various organizations that have allowed me to use what I have learned to help others. As the former president of the Walsh College Student Veteran Organization and the Walsh College Accounting and Taxation Student Organization, I was privileged to guide and empower fellow students, leveraging my experiences to support their academic and professional growth. As the former president of the Yeo & Yeo Young Professionals group, I worked closely with my colleagues to organize events and activities to give back to the communities where we live, work, and play.

What drives your passion for giving back?

My passion for giving back is deeply rooted in the power of community and collective action. I am driven to make a difference in the lives of others, leveraging my skills and resources to uplift those in need and contribute to the greater good. Whether volunteering with the American Cancer Society to support cancer research and patient care, engaging in meaningful initiatives at Woodside Bible Church, or supporting The Bottomless Toy Chest, I am continually inspired by the profound impact that acts of service can have on individuals and communities.

Winning the Tomorrow’s 20 Award is a significant achievement. How do you feel about receiving this honor?

Winning the Tomorrow’s 20 Award is an incredibly humbling experience. It is inspiring to be recognized alongside other emerging leaders who share a commitment to service and excellence. This award is a testament to my passion for community service and professional growth. It reaffirms my belief in the power of leadership and collective action to effect positive change and motivates me to continue striving for excellence and making meaningful contributions to my community and beyond.

Kyle Richardson epitomizes the qualities of tomorrow’s leaders through his unwavering commitment to service, exemplary leadership, and forward-thinking mindset. His dedication and contributions have left a lasting mark on those around him, inspiring others to follow his example and actively shape a brighter future for all. We extend our congratulations to Kyle on this well-deserved achievement and eagerly anticipate the continued impact of his leadership and service in the years to come.

Businesses have long been advised to engage in active dialogues with their customers and prospects. The problem was, historically, these interactions tended to take a long time. Maybe you sent out a customer survey and waited weeks or months to gather the data. Or perhaps you launched a product or service and then waited anxiously for the online reviews to start popping up.

There’s now a much faster way of dialoguing with customers and prospects called “conversational marketing.” Although the approach isn’t something to undertake lightly, it could help you raise awareness of your brand and drive sales.

Concept and goal

The basic concept behind conversational marketing is to strike up real-time discussions with customers and prospects as soon as they contact you. You’re not looking to give them canned sales pitches. Instead, you want to establish authentic social connections — whether with individuals or with representatives of other organizations in a business-to-business context.

The overriding goal of conversational marketing is to accelerate and enhance engagement. Your aim is to interact with customers and prospects in a deeper, more meaningful way than, say, simply giving them a price list or rattling off the specifications of products or services.

In accomplishing this goal, you’ll increase the likelihood of gaining loyal customers who will generate steady or, better yet, increasing revenue for your business.

Commonly used channels

The nuts and bolts of conversational marketing lies in technology. If you decide to implement it, you’ll need to choose tech-based channels where your customers and prospects most actively contact you. Generally, these tend to be:

Your website. The two basic options you might deploy here are chatbots and live chat. Chatbots are computer programs, driven by artificial intelligence (AI), that can simulate conversations with visitors. They can either appear immediately or pop up after someone has spent a certain amount of time on a webpage. Today’s chatbots can answer simple questions, gather information about customers and prospects, and even qualify leads.

With live chat, you set up an instant messaging system staffed by actual humans. These reps need to be thoroughly trained on the principles and best practices of conversational marketing. Their initial goal isn’t necessarily to sell. They should first focus on getting to know visitors, learning about their interests and needs, and recommending suitable products or services.

Social media. More and more businesses are actively engaging followers in comments and direct messages on popular platforms such as Facebook, Instagram and Tik Tok. This can be a tricky approach because you want responses to be as natural and appropriately casual as possible. You don’t want to sound like a robot or give anyone the “hard sell.” Authenticity is key. You’ll need to carefully choose the platforms on which to be active and train employees to monitor those accounts, respond quickly and behave properly.

Text and email. If you allow customers and prospects to opt-in to texts and emails from your company, current AI technology can auto-respond to these messages to answer simple questions and get the conversation rolling. From there, staff can follow up with more personalized interactions.

A wider audience

Like many businesses, yours may have already been engaging in conversational marketing for years simply by establishing and building customer relationships. It’s just that today’s technology enables you to formalize this approach and reach a much wider audience. For help determining whether conversational marketing would be cost-effective for your company, contact us.

© 2024

Are you tired of juggling a multitude of passwords like a circus act? You’re not alone. According to a recent report, around 1 in 4 of us feel the same. But it’s not just the sheer number of passwords that’s causing headaches – it’s the security risks they pose.

Let’s face it, when it comes to setting passwords, most people aren’t cyber security professionals. From weak and easily guessable passwords to the cardinal sin of reusing passwords across multiple accounts, human error is everywhere.

Another study revealed that, on average, people use the same password for five different accounts. And don’t get us started on classics like ‘123456’… used on a mind-boggling 23 million breached accounts.

But here’s the thing: Cyber criminals don’t need any extra help. They’re already pros at cracking passwords, and our lax habits are like an open invitation to wreak havoc. And let’s not forget the staggering stats – a projected $434 billion loss to online payment fraud globally between 2024 and 2027, with 90% of data leaks attributed to stolen login details.

So, what’s the solution?

Password managers.

These are essential software tools that take the hassle out of password management by generating and storing complex, unique passwords for each account. No more ‘123456’ disasters. Just robust security.

And the best part? Password managers not only beef up your security defenses but they also streamline your digital life. With one-click logins and autofill features, you’ll wonder how you ever lived without one. And with the right password manager, you can rest easy knowing your sensitive data is under lock and key.

A password manager makes your life easier and business safer at the same time. Want to know which one we recommend? Get in touch.

Information used in this article was provided by our partners at MSP Marketing Edge.

After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:

  1. Buy the assets of the business, or
  2. Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership or LLC.

In this article, we’re going to focus on buying assets.

Asset purchase tax basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.

For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.

When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset purchase results with a pass-through entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset purchase results with a C corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%.

A tax-smart purchase price allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.

To the extent allowed, you want to allocate more of the price to:

  • Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
  • Assets that can be depreciated relatively quickly (such as furniture and equipment), and
  • Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.

You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.

You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.

Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase.

© 2024

Occupational fraud isn’t just a financial threat. It can potentially change a business’s reputation, culture and relationships. But before dealing with any larger ramifications of fraud, defrauded companies must first “clean up” the mess. This may include potentially terminating the perpetrator, taking civil action or referring the perpetrator to the police. Whatever a business chooses to do in the aftermath of a fraud incident, swift action is paramount and internal controls must be addressed.

How do victims react?

In its Occupational Fraud 2024: A Report to the Nations, the Association of Certified Fraud Examiners (ACFE) reveals that when organizations uncover fraud, 67% choose to terminate the individuals involved. In 57% of cases, companies refer fraud perpetrators to law enforcement. Of those, 45% result in the perpetrator pleading guilty or no contest, while 27% are convicted at trial. In 14% of referred cases, law enforcement declines to prosecute.

When fraud comes to light, the role of legal counsel is critical. If your organization discovers fraud, be sure to notify your attorney before launching any investigation. Attorneys can provide guidance on how to handle potential suspects, including whether to suspend or terminate them from work, how to notify them of your decision and what to communicate with other workers.

Also consider engaging a forensic accountant. This fraud expert can help analyze records and data, identify suspects, interview witnesses, recover financial losses and collect evidence that will hold up in court (if applicable). Keep in mind that you may want to let your attorney hire the forensic accountant.

Whether your company or a fraud expert conducts the investigation, it typically will involve several steps. These include gathering and reviewing relevant documents (including digital files), interviewing possible perpetrators and their coworkers, and preparing a comprehensive investigative report. Your business also must — with legal input — decide whether it plans to pursue criminal or civil charges against those involved.

How can you mitigate losses?

Note that recovering financial losses from fraud isn’t necessarily straightforward. The ACFE found that 57% of organizations recovered nothing, 30% made a partial recovery and only 13% recovered all losses related to fraud.

Such figures only highlight the need for robust internal controls to mitigate losses in the first place. For example, the ACFE reports that if surprise audits aren’t used by an organization, the median loss if fraud occurs is $200,000. But if surprise audits are used and a business suffers a fraud incident, its median loss is only $75,000 — a 63% reduction. Obviously, following this approach to risk reduction acknowledges that internal controls aren’t always foolproof. However, when controls are deployed — particularly if your company has several layers of protection — they can reduce median losses significantly and possibly prevent fraud altogether.

In addition to surprise audits, these controls are associated with faster detection of schemes and at least a 50% reduction in financial losses:

  • Management review,
  • Routine financial statement audits,
  • Availability of an anonymous fraud tipline,
  • Fraud training for managers,
  • A written antifraud policy, and
  • Proactive data monitoring.

In 32% of fraud incidents, the most common factor is a lack of internal controls. In an additional 19% of cases, managers and others override existing controls. So controls must not only exist, they also must be rigorously followed.

How should you address risk?

If an employee commits fraud, what your company decides to do will depend on the extent of the fraud, the available evidence and many other factors. So that you’ll hopefully never have to make such difficult decisions, take steps now to ensure your internal controls address your organization’s risks. Contact us for help.

© 2024

Audit committees act as gatekeepers over the accounting and financial reporting processes, including the effectiveness of the company’s control environment. However, as the regulatory landscape becomes increasingly complex and organizations face evolving risks, the scope of an audit committee’s responsibilities may extend beyond traditional financial reporting.

Top-of-mind list

In March 2024, a survey entitled “Audit Committee Practices Report: Common Threads Across Audit Committees” was published by Deloitte and the Center for Audit Quality, an affiliate of the American Institute of Certified Public Accountants. The survey analyzed 266 responses, including many from people who served on audit committees of public companies.

Respondents identified the following five priorities over the next 12 months:

1. Cybersecurity. This was listed as a top-three concern by a majority (69%) of audit committee members surveyed. The focus on cybersecurity is, in part, caused by a new regulation from the U.S. Securities and Exchange Commission. It requires public companies to 1) report material cybersecurity incidents, 2) disclose cybersecurity risk management and strategy, and 3) explain their board and management oversight processes. Surprisingly, only 24% of respondents said their audit committees had sufficient levels of expertise in this area. So additional resources may be needed to hire external cybersecurity advisors or invest in educational programs to bridge the knowledge gap.

2. Enterprise risk management (ERM). Nearly half (48%) of respondents listed ERM as a top-three concern. This refers to the processes an organization uses to identify, monitor and assess enterprise-wide risks. Audit committees have been tasked with ERM for many years, but extra attention may be warranted as new threats emerge. Examples include pandemics, large natural and climate-related disasters, and global conflicts. It’s important for audit committees to evaluate whether their organizations’ ERM processes can handle new threats efficiently and effectively. 

3. Finance and internal audit talent. More than one-third (37%) of respondents put this concern on their top-three list. Audit committees frequently work closely with in-house finance and internal audit teams. While most respondents (89%) agree or strongly agree that their internal auditors possess high-level understandings of the companies’ operations, there may be opportunities to upskill in-house staff and use artificial intelligence (AI) to streamline routine tasks, eliminate redundancies and identify opportunities to operate more efficiently. Audit committees should oversee succession planning for finance and internal audit teams, particularly if their companies’ CFOs are planning to soon retire.

4. Compliance with laws and regulations. More than one-third (36%) of respondents are focused on the heightened complexity of the regulatory environment. Compliance issues are especially prevalent in heavily regulated industries, such as banking, food services and aviation.

5. Finance transformation. Listed as a top-three concern by 33% of respondents, finance transformation refers to revamping the finance department to better align with the company’s overall strategy. It may entail changes to the department’s operating model, staffing, processes and accounting systems. The goals are to simplify, streamline and optimize the organization’s finance function. Audit committees can help finance teams implement transformation initiatives by understanding the human and technological resources needed. Many are considering possible AI solutions, for example, to expedite closing the books at the end of the reporting period, improve financial planning and detect impending risks.

Collaborative approach

External auditors communicate frequently with audit committees about top concerns, emerging risks, impending regulations and other matters, so they can help each other in performing their respective roles. Contact us. We design audit procedures, draft financial statement disclosures and provide guidance to help address the challenges audit committees face today.

© 2024

Various survey results have been rolling in, and the message for employers is relatively clear: Employees want support in maintaining their wellness — particularly when it comes to mental health.

Employers seem to be responding in kind. Many are ramping up their “well-being” benefits to retain valued staff members and draw strong job candidates. This marks a change in the competitive landscape for talent that every organization, including yours, should consider.

Lots of data

Among the most telling reports is MetLife’s Employee Benefit Trends Study 2024. The insurance giant combined responses from two surveys — one of 2,595 employee benefits decision-makers and influencers and another of 2,809 full-time employees — and found that 92% of employees want more “consistent care” from their employers.

This very high percentage echoes the results of the 2023 Workplace Wellness Survey by the Employee Benefit Research Institute and Greenwald Research. It found that, of 1,505 full- and part-time employees surveyed, 78% agreed that employers are responsible for ensuring staff members are “mentally healthy and emotionally well.”

As mentioned, many employers are actively trying to address these concerns. At the beginning of this year, the Integrated Benefits Institute, a nonprofit benefits research organization, released the results of a survey that found 51% of responding employers said “employee satisfaction” was their top organizational goal — that’s 10% more than the second most important goal of cost mitigation / revenue generation.

In response to this goal or a similar one, many employers are enhancing their employee benefits. The CHRO Confidence Index, which is researched and published by The Conference Board, a global nonprofit think tank and business membership organization, regularly takes the pulse of its member Chief Human Resources Officers (CHROs). In the February 2024 edition, 42% of responding CHROs reported planning to offer new benefits this year. Of those, 20% identified well-being benefits that will involve mental health initiatives.

Benefits to consider

So, what are well-being benefits? They’re generally considered those that augment an employer-sponsored health care plan and help support mental health as well as physical and financial wellness. Here are just a few to consider:

An Employee Assistance Program (EAP). This is a voluntary and confidential work-based intervention program designed to help employees and their dependent family members deal with issues that may be affecting their mental health and job performance. EAPs can help participants deal with issues such as workplace stress, grief, depression, marriage/family problems, psychological disorders, financial troubles, and alcohol and drug dependency.

Revised paid time off (PTO) policies. Many employers are finding that the old “X number of vacation days and X number of sick days” approach lacks the flexibility employees need to care for themselves. Your staff may appreciate a bank of PTO that can be used for any purpose, without question. Some employers are also adding “mental health days” to their lists of organizational holidays.

Trainings related to mental health or financial literacy. Employers are often well-positioned to teach groups of people to lessen behaviors that hurt mental health and emphasize behaviors that improve it.

For example, stress management programs can train workers to recognize strenuous situations and better cope with them. Meanwhile, financial literacy programs may help employees better understand topics such as debt management and investing. In turn, this can lower their stress levels.

A diverse menu 

For many employers, particularly midsize and larger ones, the days of offering up some paid time off, health insurance and a retirement plan are over. Employees increasingly expect a wide and diverse menu of fringe benefits that address multiple facets of their lives. Contact us for help analyzing your benefits costs and choosing cost-effective offerings.

© 2024

Interim financial reporting is essential to running a successful business. When reviewing midyear financial reports, however, you should recognize their potential shortcomings. These reports might not be as reliable as year-end financials, unless a CPA prepares them or performs agreed-upon procedures on specific accounts.

Realize the diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Reviewing interim results is particularly important if your business fell short of its financial objectives in 2023.

For example, you might compare year-to-date revenue for 2024 against 1) the same time period for 2023, or 2) your annual budget for 2024. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new marketing campaign or adjust your pricing.

You can also review your gross margin [(revenue – cost of goods sold) ÷ revenue]. If your margin is slipping compared to 2023 or industry benchmarks, find out what’s going wrong and take corrective actions. 

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. Or, if your company is drawing heavily on its line of credit, operations might not be generating sufficient cash flow.

Proceed with caution 

If your company’s interim financials seem out of whack, don’t panic. Some anomalies may not necessarily be related to problems in your daily business operations. Instead, they might be caused by informal accounting practices that are common midyear (but are corrected by your CPA at year end). Remember that unlike year-end reports, interim reports for private companies are seldom subject to external audit or rigorous internal accounting scrutiny.

For example, some controllers might loosely interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude major year-end expenses, such as profit sharing and shareholder bonuses. As a result, interim financial statements tend to paint a rosier picture of a company’s performance than its year-end report may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, the controller’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked controllers may lack time or personnel to evaluate whether the interim balance contains any bad debts adequately.

Finish the year strong

It’s hard to believe that 2024 is almost half over! Once your staff generates your business’s midyear financial reports, contact us for help interpreting them. We can help you detect and correct potential problems. We also can help remedy any shortcomings by performing additional testing procedures on your interim financials — or preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.

© 2024

Michigan’s cannabis industry has been on an unprecedented trajectory, marked by remarkable milestones, significant challenges, and abundant opportunities. As we dive into the trends, challenges, and opportunities shaping this dynamic landscape, it becomes evident that while the industry is flourishing, it also grapples with complexities that demand innovative solutions and strategic foresight.

Trends

  • Michigan’s cannabis industry soared to new heights in 2023, surpassing a staggering $3 billion in total sales. This milestone, equivalent to approximately $300 per person in the state, signifies a remarkable 30% growth from the $2.3 billion recorded in 2022 (MJBizDaily, 2023). Such exponential growth emphasizes the robust demand and evolving consumer preferences within the market.
  • A driver of this growth has been the surge in adult-use cannabis sales, evidenced by a compelling 15.7% year-over-year increase in March 2024. However, medical cannabis sales faced a significant decline of 79.1% (MJBizDaily, 2023). This shift illustrates a fundamental transformation in consumer behavior, with recreational cannabis gaining prominence over its medicinal counterpart.
  • The increase in the number of retail stores further exemplifies the industry’s expansion, with an additional 120 stores opening their doors in 2023, bringing the statewide total to 750 (MLive, 2024). Nonetheless, amidst this increase lies a nuanced challenge, as some communities have opposed the establishment of recreational cannabis sales, reflecting ongoing societal attitudes toward legalization (Freep, 2024).
  • Moreover, pricing dynamics have proven volatile, with adult-use flower prices experiencing a 1.3% sequential decline alongside a 4.4% year-over-year increase (MJBizDaily, 2023). This fluctuation underscores the imperative for cannabis businesses to maintain a keen vigilance over pricing strategies to navigate the evolving market landscape effectively.

Challenges

  • While Michigan’s cannabis industry experiences success, it faces many challenges that threaten its stability and viability. Foremost among these challenges is the issue of oversupply, leading to a downward price spiral and putting pressure on retailers’ margins. The resulting business failures and industry consolidation highlight the urgent need for strategic interventions to address supply and demand imbalances (Freep, 2024).
  • Compounding this challenge is the Cannabis Regulatory Agency’s (CRA) heightened enforcement efforts, which have intensified its scrutiny of businesses failing to adhere to regulatory frameworks. Infractions related to financial reporting and the infiltration of illicit markets are mainly targeted, underscoring the imperative for stringent compliance measures within the industry (MLive, 2024).
  • Access to capital emerges as another challenge confronting cannabis businesses, fueled by the industry’s legal intricacies and the lack of banking services. The inherent risk associated with cannabis ventures discourages traditional financial institutions from providing support, further worsening the capital crunch within the industry (Freep, 2024).
  • Additionally, the conflict of interest in the private lab testing system presents a pressing challenge, with allegations of altered results undermining the integrity of quality assurance processes. The need for the CRA to establish its reference lab underscores the importance of restoring trust and transparency within the testing ecosystem (MLive, 2024).

Opportunities

The sustained growth in adult-use cannabis sales, evidenced by a 33.3% increase in 2023, unveils a fertile ground for businesses to expand their footprint and seize market share (MJBizDaily, 2023).

The legalization of cannabis has changed the real estate market, with more demand for properties dedicated to cultivation, processing, and retail. This demand presents a lucrative opportunity for property owners and investors to capitalize on the cannabis industry (AlphaRoot, 2022).

Moreover, cannabis tourism has emerged as a trend, attracting visitors from neighboring states and beyond. This influx of tourists improves the state’s economy and presents an opportunity for businesses to cater to the unique needs and preferences of cannabis enthusiasts, thereby diversifying revenue streams (AlphaRoot, 2022).

The commitment of the CRA to foster transparency, communication, and industry support is good for both regulators and businesses. Working together helps cannabis businesses follow the rules and navigate the regulation maze in a supportive environment. (MLive, 2024).

In summary, Michigan’s cannabis industry is at a crucial point, balancing between substantial growth and significant challenges. Stakeholders need to understand current trends, address challenges with creativity, and capitalize on available opportunities. With focused efforts and careful planning, Michigan’s cannabis industry has the potential to achieve sustained growth and success in the future.

References

AlphaRoot. (2022). The economic impact of cannabis in Michigan. Retrieved from https://alpharoot.com/insights/the-economic-impact-of-cannabis-in-michigan/

Freep. (2024, February 9). Michigan recreational cannabis outlook: Sales up, business failures possible. Retrieved from https://www.freep.com/story/news/marijuana/2024/02/09/michigan-recreational-cannabis-outlook-sales-business-failures-2024/72354109007/

MJBizDaily. (2023). Michigan total marijuana sales reach $3 billion in 2023. Retrieved from https://mjbizdaily.com/michigan-total-marijuana-sales-reach-3-billion-in-2023/

MLive. (2024, January 15). Michigan marijuana sales surpass $3 billion in 2023 but face possible slowdown. Retrieved from https://www.mlive.com/cannabis/2024/01/michigan-marijuana-sales-surpass-3-billion-in-2023-but-face-possible-slowdown.html

Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure:

  • Some third-party debt (owed to outside lenders), and/or
  • Some owner debt.

Tax rate considerations

Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest.

On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations.

Third-party debt

The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money.

Even when shareholders can afford to cover the entire cost with their own money, tax considerations may make doing so inadvisable. That’s because a shareholder generally can’t withdraw all or part of a corporate equity investment without worrying about the threat of double taxation. This occurs when the corporation pays tax on its profits and the shareholders pay tax again when the profits are distributed as dividends.

When third-party debt is used in a corporation’s capital structure, it becomes less likely that shareholders will need to be paid taxable dividends because they’ll have less money tied up in the business. The corporate cash flow can be used to pay off the corporate debt, at which point the shareholders will own 100% of the corporation with a smaller investment on their part.

Owner debt

If your entire interest in a successful C corporation is in the form of equity, double taxation can arise if you want to withdraw some of your investment. But if you include owner debt (money you loan to the corporation) in the capital structure, you have a built-in mechanism for withdrawing that part of your investment tax-free. That’s because the loan principal repayments made to you are tax-free. Of course, you must include the interest payments in your taxable income. But the corporation will get an offsetting interest expense deduction — unless an interest expense limitation rule applies, which is unlikely for a small to medium-sized company.

An unfavorable TCJA change imposed a limit on interest deductions for affected businesses. However, for 2024, a corporation with average annual gross receipts of $30 million or less for the three previous tax years is exempt from the limit.

An example to illustrate

Let’s say you plan to use your solely owned C corporation to buy the assets of an existing business. You plan to fund the entire $5 million cost with your own money — in a $2 million contribution to the corporation’s capital (a stock investment), plus a $3 million loan to the corporation.

This capital structure allows you to recover $3 million of your investment as tax-free repayments of corporate debt principal. The interest payments allow you to receive additional cash from the corporation. The interest is taxable to you but can be deducted by the corporation, as long as the limitation explained earlier doesn’t apply.

This illustrates the potential federal income tax advantages of including debt in the capital structure of a C corporation. Contact us to explain the relevant details and project the tax savings.

© 2024