Review Real-time Data with Flash Reports

It usually takes between two and six weeks for management to prepare financial statements that comply with the accounting rules. The process takes longer if an outside accountant reviews or audits your reports. Timely information is critical to making informed business decisions and pivoting as needed if results fall short of expectations. That’s why proactive managers often turn to flash reports for more timely insights.

The benefits

Flash reports typically provide a snapshot of key financial figures, such as cash balances, receivables aging, collections and payroll. Some metrics might be tracked daily, such as sales, shipments and deposits. This is especially critical during seasonal peaks, when undergoing major changes or when your business is struggling to make ends meet.

Effective flash reports are simple and comparative. Those that take longer than an hour to prepare or use more than one sheet of paper are too complex to maintain. Comparative flash reports may help identify patterns from week to week — or deviations from the budget that may need corrective action.

The limitations

Flash reports also can identify problems and weaknesses. But they have limitations that management should recognize to avoid misuse.

Most importantly, flash reports provide a rough measure of performance and are seldom 100% accurate. It’s also common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles.

Companies generally only use flash reports internally. They’re rarely shared with creditors and franchisors, unless required in bankruptcy or by a franchise agreement. A lender also may ask for flash reports if a business fails to meet liquidity, profitability and leverage covenants.

If shared flash reports deviate from what’s subsequently reported on financial statements that comply with U.S. Generally Accepted Accounting Principles (GAAP), it may raise a red flag with stakeholders. For instance, they may wonder if you exaggerated results on flash reports or your accounting team is simply untrained in financial reporting matters. If you need to share flash reports, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and haven’t been prepared in accordance with GAAP.

What’s right for your organization?

There’s no one-size-fits-all format for flash reports. For example, billable hours are more relevant to law firms and machine utilization rates are more relevant to manufacturers. Contact us for help customizing your flash reports to incorporate the key metrics that are most relevant for your industry. We can also answer questions about any reporting concerns you may be facing today.

Get ready: The upcoming presidential and congressional elections may significantly alter the tax landscape for businesses in the United States. The reason has to do with a tax law that’s scheduled to expire in about 17 months and how politicians in Washington would like to handle it.

How we got here

The Tax Cuts and Jobs Act (TCJA), which generally took effect in 2018, made extensive changes to small business taxes. Many of its provisions are set to expire on December 31, 2025.

As we get closer to the law sunsetting, you may be concerned about the future federal tax bill of your business. The impact isn’t clear because the Democrats and Republicans have different views about how to approach the various provisions in the TCJA.

Corporate and pass-through business rates

The TCJA cut the maximum corporate tax rate from 35% to 21%. It also lowered rates for individual taxpayers involved in noncorporate pass-through entities, including S corporations and partnerships, as well as from sole proprietorships. The highest rate today is 37%, down from 39.6% before the TCJA became effective.

But while the individual rate cuts expire in 2025, the law made the corporate tax cut “permanent.” (In other words, there’s no scheduled expiration date. However, tax legislation could still raise or lower the corporate tax rate.)

In addition to lowering rates, the TCJA affects tax law in many other ways. For small business owners, one of the most significant changes is the potential expiration of the Section 199A qualified business income (QBI) deduction. This is the write-off for up to 20% of QBI from noncorporate entities.

Another of the expiring TCJA business provisions is the gradual phaseout of first-year bonus depreciation. Under the TCJA,100% bonus depreciation was available for qualified new and used property that was placed in service in calendar year 2022. It was reduced to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027.

Potential Outcomes

The outcome of the presidential election in three months, as well as the balance of power in Congress, will determine the TCJA’s future. Here are four potential outcomes:

All of the TCJA provisions scheduled to expire will actually expire at the end of 2025.
All of the TCJA provisions scheduled to expire will be extended past 2025 (or made permanent).
Some TCJA provisions will be allowed to expire, while others will be extended (or made permanent).
Some or all of the temporary TCJA provisions will expire — and new laws will be enacted that provide different tax breaks and/or different tax rates.

How your tax bill will be affected in 2026 will partially depend on which one of these outcomes actually happens and whether your tax bill went down or up when the TCJA became effective years ago. That was based on a number of factors including your business income, your filing status, where you live (the SALT limitation negatively affects taxpayers in certain states), and whether you have children or other dependents.

Your tax situation will also be affected by who wins the presidential election and who controls Congress because Democrats and Republicans have competing visions about how to proceed. Keep in mind that tax proposals can become law only if tax legislation passes both houses of Congress and is signed by the President (or there are enough votes in Congress to override a presidential veto).

Look to the future

As the TCJA provisions get closer to expiring, and the election gets settled, it’s important to know what might change and what tax-wise moves you can make if the law does change. We can answer any questions you have and you can count on us to keep you informed about the latest news.

Yeo & Yeo is pleased to welcome Madi Moreau, CPA, to the firm as a manager.

“We are excited to welcome Madi to the firm,” says David Jewell, Principal and Tax & Consulting Service Line Leader. “We are confident that she will bring valuable insights and leadership to our engagements, and we look forward to the positive impact she will have on our clients and the firm.”

Moreau brings more than ten years of experience in both private and public accounting. She specializes in tax planning and preparation for corporations, pass-through entities, and individuals, with a focus on the real estate industry. She has served many clients throughout her career, providing business advisory services, preparation and analysis of financial statements, and guidance for regulatory compliance. She holds a Master of Business Administration in forensic accounting from the University of South Florida. Moreau is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants. In the community, she has volunteered for Ronald McDonald House Charities. She is based in Yeo & Yeo’s Flint office.

“Joining Yeo & Yeo is an incredible opportunity. I look forward to building lasting relationships and helping clients navigate challenges and achieve long-term success,” Moreau said.

Yeo & Yeo is pleased to announce the promotion of Kelly Brown, CPA, MST, to senior manager.

In speaking on her promotion, Brown said, “I am excited to take this next step in my career and embrace more leadership opportunities. As our clients at Yeo & Yeo continue to grow their businesses and cross state lines, I enjoy the challenge of addressing their tax questions and finding solutions to meet their unique needs.”

Brown specializes in State and Local Tax (SALT) income tax returns and related filings for C-corporations, S-corporations, partnerships, and individuals. As co-leader of Yeo & Yeo’s State and Local Tax Services Group, she leads projects involving nexus determinations, taxability analyses, identifying and quantifying state modifications and determining proper state apportionment. She holds a Master of Science in Taxation from Walsh College and, with her advanced education in complex tax topics, assists the firm’s individual and business clients as they face a challenging tax environment. Brown has participated in several episodes of Yeo & Yeo’s Everyday Business Podcast, providing insight on topics ranging from sales tax to overall tax strategies and multistate nexus tax exposure.

Brown is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants and has served on the Michigan Tax Conferences’ Planning Tax Force. In 2019, she was among five finalists nationwide for the Sales Tax Institute’s Sales Tax Nerd Award, which recognizes professionals who demonstrate a dedicated passion and commitment to learning about indirect tax. She joined Yeo & Yeo in 2016 and is based in the firm’s Saginaw office. In the community, Brown serves as a 4-H volunteer.

Dave Jewell, managing principal and the firm’s Tax & Consulting Service Line leader, praised Brown’s expertise and value to the team, stating, “Kelly’s in-depth knowledge of state and local taxes has been invaluable to our clients and our firm. We are thrilled to see her advance to senior manager, a role in which she will undoubtedly continue to excel.”

The Michigan Supreme Court ruled on the case that challenged the handling of two 2018 ballot proposals – one raising the minimum wage, including that of tipped employees, and the other enacting paid leave benefits for full-time, part-time and seasonal employees.

The Justices found the actions of the Michigan lawmakers unconstitutional. This decision cannot be appealed.

Beginning February 21, 2025:

Under the Improved Workforce Opportunity Wage Act (IWOWA), Michigan’s $10.33 minimum wage will likely climb above $12 next year and continue to rise through 2028, depending on the state’s inflation calculations. The lower minimum wage for tipped workers – now $3.93 – will be completely phased out over the next four years.
Under the Earned Sick Time Act (ESTA), all Michigan employers, regardless of the number of employees, must provide all their employees with paid medical leave.

Small employers who are currently exempt from providing paid medical leave should think about how the new law will impact their payroll costs and plan to include new policies in employee handbooks. All employers should review their current paid time off policies and wage schedules well before the effective date.

Watch for more guidance from Yeo & Yeo regarding implementing the paid medical leave benefits.

Yeo & Yeo CPAs & Advisors, a leading Michigan-based accounting and advisory firm, has merged in Berger, Ghersi & LaDuke PLC (BGL) of Bloomfield Hills, Mich., effective July 1, 2024, extending Yeo & Yeo’s presence in the Southeast Michigan region.

“We are excited to welcome BGL’s professionals to the Yeo & Yeo team,” said David Youngstrom, Yeo & Yeo’s President & CEO. “Together, our firms have a combined 140 years of dedicated service, and we share a deep commitment to building strong relationships and providing close personal attention to our clients.”

For more than 40 years, BGL has built a solid reputation for delivering accounting, audit, tax, and consulting services to individuals and businesses. BGL has extensive expertise in services for the real estate industry, high-end tax planning and preparation, and retirement plan audits. The firm specializes in peer reviews, a service that will be new to Yeo & Yeo.

BGL partners Alan LaDuke, CPA, MST, David Berger, CPA, and James McAuliffe, CPA, MST, have joined Yeo & Yeo’s principal group. Alongside them, a skilled team of nine accounting and administrative professionals also joined Yeo & Yeo and will continue to provide exceptional value to clients and maintain the high standards both firms are known for.

“We are pleased to have found a partner in Yeo & Yeo that shares our values and commitment to helping clients succeed,” said Alan LaDuke, Principal at BGL. “As the accounting industry evolves and becomes more complex, this merger will allow us to stay at the forefront and present greater opportunities to enhance the experiences of our team and our clients.”

Looking ahead, Yeo & Yeo plans to establish a new, larger office location in Southeast Michigan to unite the talent of professionals from Yeo & Yeo’s current Auburn Hills office and the BGL firm.

“Combining our offices will allow us to leverage the strengths of both teams, creating a more dynamic environment that ultimately benefits our clients through improved efficiency and collaboration,” said Youngstrom.

Yeo & Yeo was founded more than 100 years ago and has since grown from a family-owned business with roots in Saginaw to more than 225 employees in nine locations across Michigan. With four companies and over 20 specialty teams, Yeo & Yeo remains dedicated to meeting clients’ unique needs and helping them thrive.

Getting divorced and dividing up assets is no easy matter. At least you can sell a house, a car or certain other possessions and distribute the proceeds to the two ex-spouses according to ownership rights under the law. But liquidating other types of property, such as assets in a qualified retirement plan, can be more complicated.

Using a qualified domestic relations order (QDRO) may provide for the transfer of assets in a qualified retirement plan to a nonparticipant spouse without incurring dire tax consequences. This can help you preserve more of your retirement account savings for your estate.

How a QDRO works

A QDRO provides a relatively straightforward means of accommodating a transfer of qualified retirement plan assets. A court with jurisdiction or another appropriate authority issues the QDRO. Essentially, the QDRO establishes that one spouse has a claim to some of the other spouse’s retirement plan accounts.

Typically, the QDRO will state either a dollar amount or a percentage of assets that belongs to the spouse of the participant, called the “alternate payee” in legal parlance. It also specifies the number of payments to be made (or the length of time for which the terms apply).

A QDRO may be used for qualified plans covered by the Employee Retirement Income Security Act (ERISA), including 401(k) plans, traditional pension plans and various other plans. In contrast, IRA funds, which aren’t covered by ERISA, generally are disbursed according to the terms of the divorce agreement.

With an approved QDRO in place, the alternate payee doesn’t owe any penalty tax on distributions. Thus, you can arrange a lump-sum distribution or series of periodic payments penalty-free according to the order, regardless of your age.

A QDRO must provide certain information. This includes the names and addresses of both the plan participant and the alternate payee; the dollar amount or percentage of assets being transferred to the alternate payee; and other vital details such as the amount, form and frequency of payments. If required information is omitted, a judge won’t sign off on the order. Rely on your legal and financial advisors to ensure that all formalities are met.

After a QDRO is approved by the judge, there’s still more work to do. The alternate payee must submit it to the administrator of the retirement plan. Every plan governed by ERISA must follow the authorized process for QDRO filings.

Available payment options

Assuming QDROs are allowed by the plan, the alternate payee will have payment options to consider. For starters, he or she can take a lump-sum distribution of the full amount. However, this may result in a higher overall tax liability than if the payments were spread out. Or, the alternate payee can arrange to receive regular payments just like the plan participant, thereby reducing the total tax hit.

Another option is to roll over the assets into another plan or IRA. If the usual requirements are met — for example, the rollover is completed within 60 days — no current tax is owed for the year of the transfer.

Finally, the alternate payee may leave the money where it is. If permitted by the plan, additional contributions to the account may be made in the future.

Accurate financial statements are essential to making informed business decisions. So, managers and other stakeholders may express concern when a company restates its financial results. Before jumping to premature conclusions, however, it’s important to dig deeper to evaluate what happened.

Uptick in restatements

In June 2024, the Center for Audit Quality (CAQ) reported a recent uptick in financial restatements by public companies. The report, “Financial Restatement Trends in the United States: 2013–2022,” delves into a ten-year study by research firm Audit Analytics. It found that the number of restatements in 2022 had increased by 11% from the previous year.

More alarming is a trend toward more “Big R” restatements. Big Rs indicate that the company’s previously filed financial reports were deemed unreliable by the company or its auditors. Although most restatements are due to minor technical issues, the proportion of total restatements that were Big Rs rose to 38% in 2022, up from 25% in 2021. The 2022 figure is also up from 28% in 2013 (the peak year for restatements in the study) — and it’s the third consecutive year that the proportion of Big Rs has increased.

However, the CAQ report states, “It is too early to tell if the increase in restatements toward the end of the sample period is a true inflection point or simply a brief disruption of the previous downward trend.” Overall, financial restatements have decreased from 858 in 2013 to 402 in 2022.

Reasons for restatement

The Financial Accounting Standards Board defines a restatement as a revision of a previously issued financial statement to correct an error. Whether they’re publicly traded or privately held, businesses may reissue their financial statements for several “mundane” reasons. For instance, management might have misinterpreted the accounting standards, requiring the company’s external accountant to adjust the numbers. Or they simply may have made minor mistakes and need to correct them.

Common reasons for restatements include:

Recognition errors (for example, when accounting for leases or reporting compensation expense from backdated stock options),
Income statement and balance sheet misclassifications (for instance, a company may need to shift cash flows between investing, financing and operating on the statement of cash flows),
Mistakes reporting equity transactions (such as improper accounting for business combinations and convertible securities),
Valuation errors related to common stock issuances,
Preferred stock errors, and
The complex rules related to acquisitions, investments, revenue recognition and tax accounting.

Often, restatements happen when the company’s financial statements are subjected to a higher level of scrutiny. For example, restatements may occur when a private company converts from compiled financial statements to audited financial statements or decides to file for an initial public offering. They also may be needed when the owner brings in additional internal (or external) accounting expertise, such as a new controller or audit firm.

Material restatements often go hand-in-hand with material weakness in internal controls over financial reporting. In rare cases, a financial restatement also can be a sign of incompetence — or even fraud. Such restatements may signal problems that require corrective actions. However, the CAQ report found that only 3% of all restatements and 7% of Big Rs involved fraud over the 10-year period.

We can help

The restatement process can be time consuming and costly. Regular communication with interested parties — including lenders and shareholders — can help businesses overcome the negative stigma associated with restatements. Management also needs to reassure employees, customers and suppliers that the company is in sound financial shape to ensure their continued support.

Accounting and tax rules are continuously updated and revised. So, your in-house accounting team may need help understanding the evolving accounting and tax rules to minimize the risk of restatements, as well as help them effectively manage the restatement process. We can help you stay atop the latest rules, reinforce your internal controls and issue reports that conform to current Generally Accepted Accounting Principles.

Most businesses have websites today. Despite their widespread use, the IRS hasn’t issued formal guidance on when website costs can be deducted.

But there are established rules that generally apply to the deductibility of business expenses and provide business taxpayers launching a website with some guidance about proper treatment. In addition, businesses can turn to IRS guidance on software costs. Here are some answers to questions you may have.

What are the tax differences between hardware and software?

Let’s start with the hardware you may need to operate a website. The costs fall under the standard rules for depreciable equipment. Specifically, for 2024, once these assets are operating, you can deduct 60% of the cost in the first year they’re placed in service. This favorable treatment is allowed under the first-year bonus depreciation break.

Note: The bonus depreciation rate was 100% for property placed in service in 2022 and was reduced to 80% in 2023, 60% in 2024 and it will continue to decrease until it’s fully phased out in 2027 (unless Congress acts to extend or increase it).

Alternatively, you may be able to deduct all or most of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2024, the maximum Sec. 179 deduction is $1.22 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount ($3.05 million in 2024) of qualified property is placed in service during the year.

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

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

Was the software developed internally?

If, instead of being purchased, the website is designed in-house by the taxpayer launching it (or designed by a contractor who isn’t at risk if the software doesn’t perform), bonus depreciation applies to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either:

Deduct the development costs in the year paid or incurred, or
Choose one of several alternative amortization periods over which to deduct the costs.

Generally, the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

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

What if you pay a third party?

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

What about expenses before business begins?

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

We can help

We can determine the appropriate tax treatment of website costs. Contact us if you want more information.

The IRS has published new regulations relevant to taxpayers subject to the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. The final regs, which take effect in 2025, require many beneficiaries to take annual RMDs in the 10 years following the deceased’s death.

SECURE Act ended stretch IRAs

The genesis of the new regs dates back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. One of the many changes in that tax law was the elimination of so-called “stretch IRAs.”

Previously, all beneficiaries of inherited IRAs could stretch RMDs over their entire life expectancies. Younger heirs in particular benefited by taking smaller distributions for decades, deferring taxes while the accounts grew. These heirs also could pass on the IRAs to later generations, deferring the taxes even longer.

The SECURE Act created limitations on which heirs can stretch IRAs. These limits are intended to force beneficiaries to take distributions and expedite the collection of taxes. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) are permitted to stretch out payments over their life expectancies. The following heirs are considered eligible for this favorable treatment:

Surviving spouses,
Children younger than “the age of majority,”
Individuals with disabilities,
Chronically ill individuals, and
Individuals who are no more than 10 years younger than the account owner.

All other heirs (known as designated beneficiaries) are required to take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) of his or her RMDs.

Note: In 2023, under another law, the age at which account owners must begin taking RMDs increased from 72 to 73, pushing the RBD date to April 1 of the year after the account owner turns 73. The age is slated to jump to 75 in 2033.

Proposed regs muddied the waters

In February 2022, the IRS issued proposed regs addressing the 10-year rule — and they brought some bad news for many affected heirs. The proposed regs provided that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. A lump-sum distribution at the end of 10 years wouldn’t be allowed.

The IRS soon heard from confused taxpayers who had recently inherited IRAs or defined contribution plans and didn’t know when they were required to start taking RMDs. Beneficiaries could have been hit with a penalty based on the amounts that should have been distributed but weren’t. This penalty was 50% before 2023 but was lowered to 25% starting in 2023 (or 10% if a corrective distribution was made in a timely manner). The plans themselves could have been disqualified for failing to make RMDs.

As a result, the IRS issued a series of waivers on enforcement of the 10-year rule. With the release of the final regulations, the waivers will come to an end after 2024.

Final regs settle the matter

The IRS reviewed comments on the proposed regs suggesting that if the deceased began taking RMDs before death, the designated beneficiaries shouldn’t be required to continue the annual distributions as long as the remaining account balance is fully distributed within 10 years of death. The final regs instead require these beneficiaries to continue receiving annual distributions.

If the deceased hadn’t begun taking his or her RMDs, though, the 10-year rule is somewhat different. While the account has to be fully liquidated under the same timeline, no annual distributions are required. That gives beneficiaries more opportunity for tax planning.

To illustrate, let’s say that a designated beneficiary inherited an IRA in 2021 from a family member who had begun to take RMDs. Under the waivers, the beneficiary needn’t take RMDs for 2022 through 2024. The beneficiary must, however, take annual RMDs for 2025 through 2030, with the account fully distributed by the end of 2031. Had the deceased not started taking RMDs however, the beneficiary would have the flexibility to not take any distributions in 2025 through 2030. So long as the account was fully liquidated by the end of 2031, the beneficiary would be in compliance.

Additional proposed regs

The IRS released another set of proposed regs regarding other RMD-related changes made by SECURE 2.0, including the age when individuals born in 1959 must begin taking RMDs. Under the proposed regs, the “applicable age” for them would be 73 years.

They also include rules addressing:

The purchase of an annuity with part of an employee’s defined contribution plan account,
Distributions from designated Roth accounts,
Corrective distributions,
Spousal elections after a participant’s death,
Divorce after the purchase of a qualifying longevity annuity contract, and
Outright distributions to a trust beneficiary.

The proposed regs would take effect in 2025.

Timing matters

It’s important to realize that even though RMDs from an inherited IRA aren’t yet required, that doesn’t mean a beneficiary shouldn’t take distributions. If you’ve inherited an IRA or a defined contribution plan and are unsure of whether you should be taking RMDs, contact us. We’d be pleased to help you determine the best course of action for your tax situation.

Starting a nonprofit organization can be a daunting prospect. You see a need in your community and want to do what you can to help. You know it’s possible to start a nonprofit, but the unfamiliar territory may hold you back. Let’s take a closer look at the steps that will allow you to get on your way to fulfilling your mission.

Choose your name

The first step in starting an organization is choosing your entity name. In Michigan, you can search for a business entity by name to see if your desired name is available.

SS-4

Once you have chosen an available name, you’re ready to file Form SS-4, Application for Employer Identification Number with the IRS. You may or may not have employees, but this is the number that the IRS will use to identify you going forward. It is possible to file the SS-4 online and get your EIN in a matter of minutes. Find out more here.

When filing the SS-4, it is important to choose Corporation, Church or church-controlled organization, or Other nonprofit organization (and specify trust or association) as the type of entity because the IRS requires that an organization be one of these types to qualify for exempt status.

Articles of Incorporation

At this point, you’re ready to file your Articles of Incorporation with the State of Michigan Department of Licensing and Regulatory Affairs. This is a critical step in the process of becoming a nonprofit. It’s imperative that you include the proper wording required by the IRS:

The articles must limit your organization’s purposes to those described in IRS Section 501(c)(3).

Charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children and animals.
The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
Example: High School Scholarship Endowment is a nonprofit corporation and shall be operated exclusively for educational and charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code or the corresponding section of any future federal tax code. Specifically, the purpose of the organization is to assist the school district for outstanding graduates to offset costs of higher education.

The articles must not specifically authorize activities, other than as an insubstantial part of your activities, that do not further your exempt purpose. In other words, the articles prohibit the organization from engaging in unrelated activities. In the following example, we have taken that a step further by prohibiting the earnings of the corporation from being used to benefit the individuals, restricting the organization from engaging in political campaign activities, and restricting the undertakings to those that further the exempt purpose.

Example: Notwithstanding any other provision of these Articles, no director, officer, employee, member, or representative of this corporation shall take any action or carry on any activity by or on behalf of the corporation not permitted to be taken or carried on by an organization exempt under Section 501(c)(3) of the Internal Revenue Code as it now exists or may be amended, or by any organization contributions to which are deductible under Section 170(c)(2) of such Code and Regulations as it now exists or may be amended. No part of the net earnings of the corporation shall inure to the benefit or be distributable to any director, officer, member, or other private person, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in these Articles of Incorporation. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office.

Finally, the articles must permanently dedicate organization assets to the exempt purpose.

Example: Upon termination or dissolution of the corporation, any assets lawfully available for distribution shall be distributed for one or more qualifying exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to state or local government, for a public purpose.

Board, Bylaws, and Conflict of Interest

After filing the articles of incorporation with the State of Michigan, your next step is to choose a board of directors who then adopt bylaws and a conflict of interest policy. While the IRS does not require that your organization have bylaws and a conflict of interest policy, adopting them is a best practice. If you have them, you’ll be required to attach them to Form 1023 when you file it. If you don’t have them, you’ll have to explain how your officers, directors, or trustees are selected and how you will manage conflicts of interest. The Form 1023 instructions provide an example of a conflict of interest policy that can be your starting point. We recommend consulting an attorney to assist you in preparing your bylaws.

Apply for exemption

Now it is time to prepare and file your application with the IRS to obtain tax-exempt status. You may qualify to file 1023-EZ, which will save you time and money in the application process. To find out if you’re eligible, read the instructions and answer the questions in the Eligibility Worksheet found at the end of the instructions https://www.irs.gov/pub/irs-pdf/i1023ez.pdf. If you’re able to file the 1023-EZ, you’ll have to register at https://www.pay.gov/ to file and pay online.

To prepare the full Form 1023, you will also have to register at https://www.pay.gov to file and pay online. Be sure to include all required additional documentation and answer all applicable questions. We suggest you consult a professional at this point to review your prepared Form 1023 and answer any further questions you have. Be sure to include the user fee with your application. Once the Form 1023, supporting documentation, and user fee are submitted, you can start operating as if your application is already approved. Donations made to you during this time will be tax deductible as long as your application is approved. If it’s not approved, then they won’t be. If your year end occurs during this time, you are required to file a Form 990 series return or file for an extension, by the due date.

There are certain organizations that are not required to file Form 1023. Contributions to the following organizations are tax deductible. Although these organizations don’t have to apply for exemption, they may choose to. If they do, they are required to file annual information returns, as discussed later.

Churches, including synagogues, temples and mosques
Integrated auxiliaries of churches and conventions or associations of churches
Any organization that has annual gross receipts that are normally not more than $5,000

Sales tax

Although nonprofit organizations are exempt from income tax on activities related to their exempt purpose, they may still be liable for sales tax. We suggest you consult a professional to help determine the requirements for your organization’s specific activities. In general, nonprofit organizations are exempt from paying sales tax on their purchases if the purchase of tangible personal property is used or consumed primarily in carrying out their exempt purpose. They are not exempt if it is unrelated. One important aspect here is regarding fundraising. Fundraising is not a charitable activity, even though the organization uses the income generated to accomplish their exempt purpose. Because fundraising is not a charitable activity, transactions that would normally be taxable for sales tax are still taxable. So, a gala fundraising event will still have to pay sales tax to the facility where it’s held. If the organization conducts a silent or live auction at the gala, they are required to collect and remit sales tax on the tangible personal property sold.

Another consideration regarding sales tax: The State of Michigan has a special rule for 501(c)(3), 501(c)(4), schools, churches, hospitals, parent cooperative preschools, and nonprofit organizations with an exemption ruling letter. Those entities with total sales at retail of $25,000 or less can claim exemption from sales tax on the first $10,000 of sales. The exemption does not apply if the nonprofit already specifically collected the sales tax; all sales tax collected must be remitted. But if the nonprofit was going to do algebra to determine what amount of the gross price was sales tax versus sales price, they do not need to remit taxes on the first $10,000 as long as they keep total sales at retail below $25,000. Once $25,000 is met, all retail sales are taxable (subject to standard sales tax rules).So, for example, your organization sells t-shirts and you charge $10 for the t-shirt, plus tax, so the customer pays you $10.60. Regardless of whether your total sales are less than $25,000, you are required to remit the $0.60 to the state because you collected it. If, instead, you charge $10 for the t-shirt and the customer pays you only $10, and your total sales for the year are less than $25,000, then you do not have to pay any sales tax on the first $10,000. If you charge the $10 and get paid the $10 and your sales do end up being more than $25,000, you will have to back into how much sales tax was included in the $10 and pay it to the state.

Nonprofit organizations must register for Michigan Taxes before selling tangible personal property, regardless of whether or not an exemption will apply. Register online at https://www.michigan.gov/uia. You can also register for Michigan Treasury Online, which will allow you to file and pay the required monthly, quarterly, and annual sales, use and withholding tax forms: https://mto.treasury.michigan.gov/.

License to solicit

Michigan law requires organizations to register with the Department of Attorney General if they solicit and receive charitable contributions in Michigan. To register, an Initial Solicitation Form, with attachments, must be filed. There is no fee to register. For faster processing, the Charitable Trust Section accepts registrations by email or e-filing. Your license expires seven months after the end of your fiscal year, and the Renewal Solicitation Form is due 30 days before that expiration. So if you are a calendar year end, that means that your renewal is due July 1, and your previous license expires July 31.

The financial information included in your form will also determine if you are required to have audited or reviewed financial statements. If contributions, plus net fundraising and gaming activity, less governmental grants, is between $300,000 and $550,000, then reviewed financial statements are required. If over $550,000, then audited financial statements are required.

Annual filings

To maintain their exempt status, organizations must stay current on filing a 990-Series return annually. If gross receipts are normally $50,000 or less, the organization is eligible to file Form 990-N e-Postcard. This filing requires only a few pieces of information. If gross receipts are less than $200,000 and total assets are less than $500,000, an organization would be eligible to file Form 990-EZ. Gross receipts or assets equal to or above those thresholds must file Form 990. Returns are due on the 15th day of the 5th month following the end of your fiscal year. This means May 15 for calendar year filers and November 15 for June fiscal year filers. Organizations that choose to file an annual information return above what they’re required to file, must file a complete return; they cannot fill it out partially.

Conclusion

Though it may seem daunting at first, the steps provided here will help you start your nonprofit organization. They will also ensure that your nonprofit starts out in conformity with the rules that are most important for compliance with federal and Michigan authorities.

Employers tend to spend a lot of time strategizing ways to improve their products or services, or perhaps innovate new ones. Meanwhile, strategies for the human resources (HR) department may get devised and rolled out in a more haphazard or reactionary fashion.

Given the importance of strong hiring, onboarding and performance management practices in today’s employment environment, carefully planning your organization’s HR moves is highly advisable. One way to increase the likelihood that they’ll pay off is by first performing a strengths, weaknesses, opportunities and threats (SWOT) analysis.

Strengths and weaknesses

Generally, in the context of a SWOT analysis, strengths are competitive advantages or core competencies that generate value, such as a strong sales force or exceptional quality of products or services.

Conversely, weaknesses are factors that limit an organization’s performance. These are often revealed in comparison with competitors. Examples include a negative brand image because of a recent controversy or an inferior reputation for customer service.

However, you can apply a SWOT analysis to more specific aspects of your operations — including HR. Think about your HR department’s core competencies, such as:

Filling open positions,
Administering benefits, and
Supporting employees with specific needs or those in crisis.

What does it do well and in what areas could it improve?

Opportunities and threats

The third and fourth factors in a SWOT analysis are opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the organization acts on them. Threats are external factors that could inhibit operational performance or undermine strategic goals.

When differentiating strengths from opportunities, or weaknesses from threats, ask yourself whether something would be an issue if your organization didn’t exist. If the answer is yes, the issue is external and, therefore, an opportunity or threat. Examples include changes in demographics or government regulations.

Putting it to use

Your organization can benefit from applying a SWOT analysis to its HR initiatives in various ways. It all depends on the specific factors you identify.

Let’s say you determine, by benchmarking yourself against similar organizations, that “time to hire” is a strength. This typically means that your HR staff is skilled at placing targeted, effectively worded ads; working well with recruiters; and interacting in a timely, efficient and positive manner with applicants.

A strong hiring process is undoubtedly a competitive advantage. If hiring is a weakness, however, you could be headed toward an employment crisis if you lose too many employees — particularly coupled with the skilled labor shortages in some industries.

Opportunities and threats are important from an HR perspective as well. For example, if your organization decides to strengthen employee retention through expanded benefits, you’ll need to discuss the opportunities and challenges this will pose to your HR staff. By investing in their training and upskilling, you can strengthen HR competencies while providing a better benefits package to employees.

And, unfortunately, there’s no shortage of external threats. An aggressive competitor may begin poaching your employees, which will put added stress on your HR department. Evolving tax regulations and compliance requirements for health and retirement benefits can also catch HR staffs off-guard and put an employer in a precarious position. Watch out for regulatory changes in your industry, too.

Strategize carefully

Your HR department may seem to exist on an island with a somewhat different mission from your organization as a whole. But how it interacts with job candidates, helps manage employees’ performance and communicates about benefits — just to name a few things — has a huge impact on your success. Be sure to strategize carefully.

When the leadership teams of many companies engage in strategic planning, they may be inclined to play it safe. And that’s understandable; sticking to strengths and slow, measured growth are often safe pathways to success.

But substantial growth — and, in some industries, just staying competitive — calls for innovation. That’s why, as your business looks to the future, be sure you’re creating an environment where you and your employees can innovate in ways big or small.

Encourage ideas

It’s sometimes assumed that innovation requires limitless resources or is solely the province of those in technical or research roles. But every department, from accounting to human resources, can come up with ways to work more efficiently or even devise a game-changing product or service concept.

Developing an innovative business culture typically calls for actively encouraging employees to come up with ideas and explore their feasibility without fear of making mistakes. As part of your strategic plan every year, challenge staff to identify problems, ask questions, and seek out solutions and answers. In addition, build and maintain a strong structure for innovation. Doing so includes:

Establishing policies that promote research and development,
Incorporating discussions about innovation into performance reviews,
Allowing some or all employees to occasionally shift from their usual responsibilities to focus on innovative processes or new product or service ideas, and
Allocating funds to innovation in the company budget.

Ideas can come from other sources, too. For example, what do your customers complain about or ask for? Customer feedback can be an excellent source of innovative concepts. Encourage employees to engage in conversations with customers about what new products or services they may be looking for, as well as about ways to improve your current ones.

Hold brainstorming sessions

Innovation is rarely a straight shot. Outrageous, seemingly unworkable ideas may be the genesis of concepts that ultimately prove both viable and profitable. Employees need to be confident they can propose ideas without fear of ridicule or adverse employment actions. One way to make this happen is through regularly scheduled strategic innovation brainstorming sessions. The goal of these meetings is to help staff get comfortable suggesting bold ideas without censoring themselves or harshly criticizing others. Make it clear to participants that there are no bad ideas.

Be sure to include employees from throughout the business. People tend to feel comfortable with co-workers they know well and work with regularly, but “echo chambers” may develop that limit the feasibility of ideas. Staff members from other departments are often able to provide different perspectives. They can help employees with ideas question their assumptions and view concepts from different angles. In other words, when pursuing prospective innovations, it’s helpful to assemble cross-functional teams that can cover more ground.

Find your next breakthrough

Waiting around for the next big breakthrough in your business or industry to fall in your lap is a huge gamble. By making room for innovation in your strategic planning, you’ll increase the likelihood that you’ll find it.

While many facets of the economy have improved this year, the rising cost of living and other economic factors have caused many businesses to close their doors. If this is your situation, we can help you, including taking care of various tax responsibilities.

To start with, a business must file a final federal income tax return and some other related forms for the year it closes its doors. The type of return that must be filed depends on the type of business you have. For example:

Sole Proprietors will need to file the usual Schedule C, “Profit or Loss from Business,” with their individual returns for the year they close their businesses. They may also need to report self-employment tax.
Partnerships must file Form 1065, “U.S. Return of Partnership Income,” for the year they close. They also must report capital gains and losses on Schedule D. They indicate that this is the final return and do the same on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
All Corporations need to file Form 966, “Corporate Dissolution or Liquidation,” if they adopt a resolution or plan to dissolve an entity or liquidate any of its stock.
C Corporations must file Form 1120, “U.S. Corporate Income Tax Return,” for the year they close. They report capital gains and losses on Schedule D and indicate this is the final return.
S Corporations need to file Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. They report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
All Businesses may need to be filed other tax forms to report sales of business property and asset acquisitions if they sell the business.

Tying up loose ends with workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

You may face more obligations

If your business has a retirement plan for employees, you’ll generally need to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met when terminating a plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

You also must cancel your Employer Identification Number (EIN) and close your IRS business account. In addition, you need to keep business records for a certain amount of time.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these responsibilities and get answers to any questions.

The Inflation Reduction Act provided the IRS with billions of dollars of additional funding to reduce the so-called “tax gap” between what taxpayers owe and what they actually pay. The tax agency has already launched numerous initiatives aimed at this goal, including several business-related compliance campaigns. Let’s take a closer look at three of the most significant recent targets.

Abusive pass-through practices

The IRS has accelerated its enforcement efforts against partnerships and other pass-through entities, which it claims have been overlooked for more than a decade. According to the IRS, while tax filings for pass-through entities have jumped by 70% since 2010, audit rates for them fell from 3.8% in 2010 to 0.1% in 2019.

To remedy this, the tax agency is creating a new office that will focus exclusively on partnerships, S corporations, and trusts and estates. That’s in addition to a special work group focused on pass-throughs, including complex partnerships, in its Large Business and International Division.

The IRS also launched a new regulatory initiative to prevent basis-shifting, which it calls “a major tax loophole exploited by large, complex partnerships.” Basis-shifting occurs when a single business with many related-party entities enters a series of transactions to maximize deductions and minimize taxes. For example, a partnership might transfer tax basis from property that doesn’t generate tax deductions (stock or land) to property that does (equipment).

The end game, the IRS says, is to take abusive deductions or reduce gains when the asset is sold, effectively making taxable income vanish. The IRS claims these “shell games” cost the federal government billions of dollars annually. To combat the losses, it plans on issuing regulations that:

Eliminate the inappropriate tax benefits created from basis-shifting between related parties, and
Prohibit partnership basis-shifting among members of a consolidated group.

Proposed regulations released in June 2024 would require the reporting of certain basis-shifting transactions. The IRS has also issued a Revenue Ruling that provides that certain related-party partnership transactions involving basis-shifting lack economic substance — a sign it intends to challenge the transactions.

Improper Employee Retention Tax Credit claims

The IRS crackdown on ineligible Employee Retention Tax Credit (ERTC) claims came to light in July 2023, when the tax agency announced that it was shifting its ERTC review focus to compliance concerns. It began intensified audits and criminal investigations of both promoters and businesses that filed or were filing suspect claims.

Two months later, the IRS instituted a moratorium on processing claims submitted after September 14, 2023. The moves came in response to what the tax agency described as a flood of illegitimate claims largely driven by fraudulent promoters.

The moratorium gave the IRS time to review more than 1 million ERTC claims totaling more than $86 billion. The review found that 10% to 20% of claims have clear signs of being erroneous and another 60% to 70% of claims reveal an unacceptable level of risk. Tens of thousands of the former group have been or will be denied, and the IRS will perform additional analysis of the latter group.

The IRS continued to process claims made before September 14, 2023, during its review period. As of late June, it had processed 28,000 claims worth $2.2 billion and rejected more than 14,000 claims worth more than $1 billion. Review of claims filed for 2020 uncovered more than 22,000 improper claims, resulting in $572 million in assessments against taxpayers. These figures could be even higher when the IRS turns its attention to the 2021 tax year because the maximum per-employee credit amount was $7,000 per quarter that year. It was $5,000 for the 2020 tax year.

With more than 1.4 million ERTC claims still unprocessed, concerned businesses may want to take advantage of the IRS’s Withdrawal Program. The program is available to eligible employers that filed a ERTC claim but haven’t yet received, cashed or deposited a refund. The IRS will treat withdrawn claims as if they were never filed, so taxpayers aren’t at risk of liability for repayment, penalties or interest.

The IRS also may reopen its now-closed Voluntary Disclosure Program for employers that claimed and received the credit but weren’t entitled to it. A decision is expected this summer.

Personal use of corporate jets

In February 2024, the IRS unveiled a new audit initiative scrutinizing the personal use of corporate aircraft. The Tax Cuts and Jobs Act provides a generous bonus depreciation provision that prompted numerous businesses to buy corporate jets. These aircraft, however, are often used for both business and personal reasons, triggering some complicated tax implications.

Businesses generally can claim a deduction for expenses related to maintaining a corporate jet if it’s used for business purposes. Deductible expenses include depreciation, pilot wages, interest, insurance and hangar fees. The amount of the deduction for aircraft travel on a business’s tax return can reach into the tens of millions of dollars.

Corporate jets, however, are frequently used for both business and personal reasons by a company’s executives, shareholders and partners, as well as their family and friends. The personal use generally results in income inclusion for the individuals and can limit a business’s ability to deduct costs related to that travel.

Notably, personal use includes not only taking the jet for purely personal purposes (for example, to attend a concert in another city) but also bringing family members or other guests along on a trip that’s otherwise for a business purpose. That’s because the purpose of a trip is determined on a passenger-by-passenger basis.

The new audit initiative includes audits of aircraft usage by large corporations and partnerships (and also high-income taxpayers). The exams will focus on whether jet usage is properly allocated between business and personal reasons. While the initial plans called for dozens of audits, the IRS indicated that the number could increase based on the results and as it continues to add new examiners.

Protect yourself

An aggressive and well-funded IRS makes tax compliance more important than ever. We can help businesses minimize their tax bills while staying on the right side of the law.

Owning and running a company tends to test one’s patience. You wait for strategies to play out. You wait for materials, supplies or equipment to arrive. You wait for key positions to be filled. But, when it comes to sales, how patient should you be? A widely used metric called “sales velocity” can help you decide.

Four-point formula

In a nutshell, sales velocity tells you how quickly deals move through the various stages of your sales cycle to fruition, where revenue is generated.

Putting a number to sales velocity can enable you to benchmark it internally going forward, typically with the goal of speeding it up. Or you may even be able to find industry standards, so you can benchmark your number against those of other similar companies.

So, how do you calculate it? The most widely used formula for sales velocity comprises four components measured over a predetermined period:

Number of qualified opportunities (leads that meet certain criteria),
Average deal value in dollars,
Win rate (percentage of opportunities converted to actual sales), and
Sales cycle length in months.

The formula is then expressed as:

Sales Velocity = Opportunities × Deal Value × Win Rate / Sales Cycle Length.

How often you should assess sales velocity depends on your strategic goals. If you really want to improve it, calculate the formula quarterly so you can see how quickly or slowly deals are moving over a year or more. If you’re approaching the subject from more of a curiosity standpoint, you might calculate it annually or semi-annually.

Common challenges

When businesses begin calculating and tracking sales velocity, they run into a variety of common challenges.

First, you might have trouble locating or trusting the four data points included in the formula. If you’re not tracking them regularly, or the information you have is inconsistent or contradictory, you won’t get much benefit from the metric.

In such situations, you’ll probably need to reassess and improve how your business gathers sales data. Make sure you have the right software for your company size and type, and that everyone is using it regularly and properly.

Assuming your data is solid, you might eventually be able to diagnose your business with other typical maladies related to suboptimal sales velocity. One example: lack of alignment between marketing and sales. If the marketing department is focused on certain features or solutions related to your products or services, but your sales staff must constantly readjust the expectations of prospects and customers, closing deals can take much longer.

Other times, sales velocity can reveal issues with the quality or volume of qualified opportunities. It all starts with your leads; bad or shaky ones usually take much longer to turn into qualified opportunities. And even if they do, the criteria used to classify leads as qualified opportunities may be flawed. Also, sometimes businesses overfocus on volume of leads and opportunities. If you’re chasing too many prospects, your sales cycle will tend to take much longer to play out.

Last, there’s the most obvious problem: Your sales processes are too complicated! Sales velocity can often be increased by simplifying workflows, reducing unnecessary steps and redundancies, improving internal or external communication (or both), and upskilling salespeople.

Sweet spot

Although it’s tempting to want to make your sales cycle as short as possible, you don’t want to rush things recklessly. The optimal goal of sales velocity is to find your sweet spot and then make continuous improvements and adjustments to stay there. Our firm can help you gather, organize and analyze your sales data.

With a median loss of $766,000, financial misstatement schemes are the costliest type of fraud, according to “Occupational Fraud 2024: A Report to the Nations,” a study published by the Association of Certified Fraud Examiners. Fortunately, auditors and forensic accountants may be able to detect financial statement fraud by testing journal entries for errors and irregularities. Here’s what they look for and how these tests work.

Suspicious entries

Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, provides valuable audit guidance that can be applied when investigating fraudulent financial statements. It notes that “material misstatements of financial statements due to fraud often involve the manipulation of the financial reporting by … recording inappropriate or unauthorized journal entries throughout the year or at period end.”

Financial misstatement comes in many forms. For example, out-of-period revenue can be recorded to inflate revenue — or checks can be held to hide current period expenses and boost earnings. Accounts payable can be understated by recording post-closing journal entries to income. Or expenses can be reclassified to reserves and intercompany accounts, thereby increasing earnings.

To detect these types of scams, SAS 99 requires financial statement auditors to:

Learn about the entity’s financial reporting process and controls over journal entries and other entries,
Identify and select journal entries and other adjustments for testing,
Determine the timing of the testing,
Compare journal entries to original source documents, such as invoices and purchase orders, and
Interview individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries or other adjustments.

Forensic accountants also follow audit guidelines when investigating allegations of financial misstatement. And financial statement auditors may call on these professionals when they notice significant irregularities in a company’s financial records.

Testing procedures

AICPA Practice Alert 2003-02, Journal Entries and Other Adjustments, identifies several common denominators among fraudulent journal entries. Auditors will ask for access to the company’s accounting system to test journal entries made during the period for signs of fraud.

Specifically, they tend to scrutinize entries made:

To unrelated, unusual or seldom-used accounts,
By individuals who typically don’t normally make journal entries,
At the end of the period or as post-closing entries that have little or no explanation or description,
Before or during the preparation of the financial statements without account numbers, and
To accounts that contain transactions that are complex or unusual in nature and that have significant estimates and period-end adjustments.

Other red flags include adjustments for intercompany transfers and entries for amounts made just below the individual’s approval threshold or containing large, round dollar amounts.

Getting professional help

Financial misstatement can be costly. But your organization can take steps to minimize its risk. External financial statement audits, surprise audits and forensic accounting investigations can help identify vulnerabilities and unearth anomalies. Contact us for more information, including how we use computer-assisted audit techniques to review accounting transactions.

Social media gets blamed for a lot these days — sometimes for good reason. Recently, the IRS issued a warning to individual and business taxpayers to beware of false claims about various federal tax breaks that appear on social media platforms. The common denominator of such claims is that they involve legitimate tax provisions for which most taxpayers don’t qualify. If you claim these breaks erroneously, it could delay a refund, require time-wasting correspondence and paperwork, and even result in penalties and criminal prosecution.

Abusing legitimate tax breaks

Intentionally fraudulent or even honestly inaccurate tax advice can come from many sources. These days, a lot of people put faith in social media “influencers,” who may not be qualified to dispense financial advice. According to the IRS, thousands of taxpayers submitted falsified returns during the 2023 filing season, many claiming they relied on advice from social media.

The tax agency is particularly concerned about bogus claims and filings involving:

The Fuel Tax Credit. Generally, only off-highway (non-fuel) businesses and farms can claim this credit. To file Form 4136, Credit for Federal Tax Paid on Fuels, you need to have a business purpose and qualifying business activity. Social media promoters and other fraudsters might try to convince you otherwise, and might even offer to sell you fictitious documents, including fuel receipts.

The Sick and Family Leave Credit. This credit was made available to employers and certain self-employed taxpayers during the pandemic in 2020 and 2021 but was no longer effective after 2021. Nevertheless, many people who weren’t eligible claimed it on 2022 and 2023 tax returns. Some claimed the credit for household workers they didn’t have and never paid.

Clean energy tax credits. The IRS has received returns that improperly claim clean energy credits made available by the Inflation Reduction Act (IRA). The returns might claim credits that offset income tax from sources including wages, Social Security and retirement account withdrawals. One particular scam involves an IRA provision that enables taxpayers to purchase federal income tax credits from investments in clean energy. Before claiming such credits, ensure that you are indeed eligible for them.

Trust and verify

The best way to avoid making serious tax mistakes is to arm yourself with accurate information from us and the IRS. Also, it’s important to work with qualified and experienced tax professionals when preparing tax returns and making strategic plans to reduce your tax burden.

In addition, be careful when using social media. If someone sends you an unsolicited friend request (even if you share a real-life friend), investigate thoroughly before accepting the invitation. And ignore suspicious messages and tax advice that seems “too good to be true.” Most social media platforms should enable you to block these unwanted posts and shady users.

Friends vs. foes

Whether you’re concerned about your individual or business taxes, it pays to remain skeptical of unsolicited tax advice. Although social media can be an important forum for communicating and connecting, users need to differentiate between friends and foes.

Are you buying a business that will have one or more co-owners? Or do you already own one fitting that description? If so, consider installing a buy-sell agreement. A well-drafted agreement can do these valuable things:

Transform your business ownership interest into a more liquid asset,
Prevent unwanted ownership changes, and
Avoid hassles with the IRS.

Agreement basics

There are two basic types of buy-sell agreements: Cross-purchase agreements and redemption agreements (sometimes called liquidation agreements).

A cross-purchase agreement is a contract between you and the other co-owners. Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners if a triggering event, such as a death or disability, occurs.

A redemption agreement is a contract between the business entity and its co-owners (including you). Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the entity if a triggering event occurs.

Triggering events

You and the other co-owners specify the triggering events you want to include in your agreement. You’ll certainly want to include obvious events like death, disability and attainment of a stated retirement age. You can also include other events that you deem appropriate, such as divorce.

Valuation and payment terms

Make sure your buy-sell agreement stipulates an acceptable method for valuing the business ownership interests. Common valuation methods include using a fixed per-share price, an appraised fair market value figure, or a formula that sets the selling price as a multiple of earnings or cash flow.

Also ensure the agreement specifies how amounts will be paid out to withdrawing co-owners or their heirs under various triggering events.

Life insurance to fund the agreement

The death of a co-owner is perhaps the most common, and catastrophic, triggering event. You can use life insurance policies to form the financial backbone of your buy-sell agreement.

In the simplest case of a cross-purchase agreement between two co-owners, each co-owner purchases a life insurance policy on the other. If one co-owner dies, the surviving co-owner collects the insurance death benefit proceeds and uses them to buy out the deceased co-owner’s interest from the estate, surviving spouse or other heir(s). The insurance death benefit proceeds are free of any federal income tax, so long as the surviving co-owner is the original purchaser of the policy on the other co-owner.

However, a seemingly simple cross-purchase arrangement between more than two co-owners can get complicated, because each co-owner must buy life insurance policies on all the other co-owners. In this scenario, you may want to use a trust or partnership to buy and maintain one policy on each co-owner. Then, if a co-owner dies, the trust or partnership collects the death benefit proceeds tax-free and distributes the cash to the remaining co-owners. They then use the money to fund their buyout obligations under the cross-purchase agreement.

To fund a redemption buy-sell agreement, the business entity itself buys policies on the lives of all co-owners and then uses the death benefit proceeds buy out deceased co-owners.

Specify in your agreement that any buyout that isn’t funded with insurance death benefit proceeds will be paid out under a multi-year installment payment arrangement. This gives you (and any remaining co-owners) some breathing room to come up with the cash needed to fulfill your buyout obligation.

Create certainty for heirs

If you’re like many business co-owners, the value of your share of the business comprises a big percentage of your estate. Having a buy-sell agreement ensures that your ownership interest can be sold by your heir(s) under terms that you approved when you set it up. Also, the price set by a properly drafted agreement establishes the value of your ownership interest for federal estate tax purposes, thus avoiding possible IRS hassles.

As a co-owner of a valuable business, having a well-drafted buy-sell agreement in place is pretty much a no-brainer. It provides financial protection to you and your heir(s) as well as to your co-owners and their heirs. The agreement also avoids hassles with the IRS over estate taxes.

Buy-sell agreements aren’t DIY projects. Contact us about setting one up.

If your organization is having a tough time finding the right person to fill a key role, it might be time to set aside the resumés and pick up your organizational chart. Many employers become so consumed with posting job ads and conducting interviews that they overlook the potential of their own in-house talent. Let’s review some of the upsides of internal hires, as well as some of the inevitable risks.

Cost-effective approach

Two of the biggest upsides to promoting employees to open positions are efficiency and cost-effectiveness. (For the purposes of this article, we’re assuming internal hires are promotions. In some cases, they may be lateral moves.)

It’s usually faster and easier to identify and meet with employees than to find and schedule interviews with outside candidates. And promoting internally is generally less expensive because you save on the costs of finding, recruiting and hiring. These costs include advertising on job boards and engaging with recruiters. Plus, internal hires won’t need onboarding and may require less training, depending on the position.

In addition, promoting employees can help boost morale and improve retention. One reason some employees leave their jobs is because they don’t see opportunities for advancement. Staff members might be less likely to feel this way if they see colleagues promoted to higher positions.

Another benefit is the level of familiarity you have with your employees. An external applicant’s resumé might look impressive, and the interviews could go great, but the individual’s personality might clash with your organizational culture once work begins. Or the person’s actual skill level might not match up to what was presented. You should already have documented records of internal candidates’ skill sets and performance histories.

Risks to consider

Naturally, for many positions, promoting employees isn’t risk-free. Some employees simply aren’t cut out to be managers, supervisors or to fill other “high stakes” roles. For example, a star salesperson might thrive out in the world selling but flounder when asked to sit in an office and manage a sales team.

Indeed, shifting more emphasis to internal promotions shouldn’t mean giving up on outside hires. The greater job market still offers a much larger pool of candidates. And new employees could provide fresh perspectives, innovative ideas, new skills and insightful experiences that might lead to more efficient processes and improved organizational performance.

Furthermore, recruiting outside candidates avoids the unhealthy competition that may arise when employees vie against each other for higher positions. Resentment often occurs among those ultimately passed over for promotion who now must report to someone who used to be their peer. For these reasons, it’s critical to carefully choose which positions to open to internal hires.

The right balance

Hiring internally is no silver bullet. For starters, if you promote an employee to a new position, you’ll need to fill that person’s former job! Then again, it does tend to be easier to fill lower-level positions than upper-level ones.

The bottom line is to ensure your approach to hiring is flexible and isn’t turning a blind eye to the cost- and time-efficiencies of internal hires. We can help you assess your hiring costs, compensation structure and other factors that play into staffing decisions.