3 Areas of Focus for Companies Looking to Control Costs

Controlling costs is fundamental for every business. But where and how to address this challenge can change over time based on various economic and logistical factors.

Earlier this year, global consultancy Boston Consulting Group published a report entitled The CEO’s Guide to Costs and Growth. Within it were the results of a survey of 600 C-suite executives that found, among other things, cost management was a top priority for respondents heading into 2024. According to the survey, three of the top categories for cost-cutting initiatives were:

1. Supply chain / manufacturing. Not every company incurs manufacturing costs, but most have a supply chain. Costs and delays in this area soared during the pandemic because of global disruptions and backups. Since then, some sense of normalcy has returned, though that doesn’t mean managing supply chain costs has become easy.

Many companies find that most of their spending is done with just a few vendors. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing.

It also pays to really know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.

2. Labor/nonlabor overhead. Controlling labor costs is tricky in today’s environment. Many industries are facing skilled labor shortages, meaning businesses would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, it’s critical to monitor these costs and prevent overspending.

A logical first step in managing labor costs is to know how much you’re spending. And the answer isn’t as simple as looking at the total gross wages you pay out every month or year. You need to know the actual and total amount of these costs. Fortunately, there’s a metric for that. Labor burden rate reflects the additional costs that companies incur beyond gross wages. These generally include expenses such as payroll taxes, workers’ compensation insurance and fringe benefits. Knowing your labor burden rate can enable you to truly “right-size” your workforce.

Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you’ll obviously incur costs when outsourcing, the time and labor cost that it saves you could end up a net gain. Carefully chosen and implemented technology upgrades can provide similar results.

3. Marketing/sales. Much like labor, strong marketing and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment.

Again, choosing and monitoring the right metrics can prove useful here. The optimal ones tend to vary by industry and company type, but some of the most widely used for marketing purposes include lead conversion rate, click-through rate for online ads and cost per lead. Popular sales metrics include total revenue, year-over-year growth and average customer lifetime value.

Whether it’s sales metrics, labor burden rate or supply chain management, getting objective, professional advice can help you and your leadership team obtain an accurate picture of what’s going on with your costs and target feasible solutions. Please consider our firm for assistance.

Effectively managing a 401(k) plan is a significant responsibility for employers, not only to benefit their employees but also to comply with regulatory requirements. One critical aspect of this responsibility is ensuring that all participant disclosures are properly communicated. Here’s what employers need to know about 401(k) participant disclosures.

Key Disclosures Required

Summary Plan Description (SPD): The SPD is the primary document that describes the plan’s provisions, including eligibility requirements, benefits, participant rights, and the plan’s claims and appeals process. It must be provided within 90 days of an employee becoming a plan participant or within 120 days of the plan becoming subject to ERISA.
Summary of Material Modifications (SMM): Whenever the plan undergoes significant changes, such as amendments or modifications, participants must receive an SMM within 210 days after the end of the plan year in which the change was made.
Summary Annual Report (SAR): The SAR is a summary of the plan’s financial status, including information from the plan’s annual report (Form 5500). This must be furnished to participants within nine months after the end of the plan year or two months after Form 5500 is filed.
Individual Benefit Statements: These statements provide participants with information on their account balances and vested benefits. Participants should receive these statements quarterly if their plan allows for participant-directed investments or annually otherwise.
Fee Disclosures: Employers must disclose information about the 401(k) plan fees, including plan administration fees, individual service fees, and investment fees. These disclosures must be provided annually, with any changes communicated at least 30 days in advance.

Timing and Delivery Requirements

The timing and method of delivering these disclosures are critical. Employers can distribute disclosures electronically if participants can effectively access them and are notified of their significance. However, paper disclosures must be provided for those without electronic access.

Best Practices for Compliance

Develop a Disclosure Calendar. A calendar outlining when each disclosure must be provided can help ensure timely distribution. Using a disclosure calendar reduces the risk of missing deadlines and helps maintain regulatory compliance.
Use Clear and Understandable Language. Disclosures should be written in plain language to ensure participants can easily understand the information. Avoiding technical jargon can improve comprehension and participant engagement.
Maintain Accurate Records. Keeping detailed records of all disclosures and their distribution dates is essential. This documentation can be crucial if the plan is audited or disputes arise.
Regularly Review and Update Procedures. Laws and regulations can change, so it’s important for employers to review their disclosure procedures and update them as necessary. Staying informed about regulatory changes can help avoid compliance issues.

Proper management of 401(k) participant disclosures is crucial for both regulatory compliance and participant satisfaction. Partnering with a qualified 401(k) provider can help employers navigate requirements and avoid penalties. Yeo & Yeo CPAs & Advisors can help. Get in touch.

Source: https://www.employeefiduciary.com/blog/401k-participant-disclosures-what-employers-need-to-know

Yeo & Yeo is proud to announce that Bill Stec has received the Don Hunt Service Award from the Michigan Career Educator & Employer Alliance. This award recognizes a member of the Michigan Co-op and/or Internship community for significant contributions to promoting and sustaining the cooperative education and internship philosophy in Michigan.

“Winning the Don Hunt Service Award is a tremendous honor that underscores the importance of collaborative efforts in education and employment,” Stec said. “I am proud to be part of a community that is committed to providing valuable opportunities for students and helping them build successful careers.”

Bill Stec is the Manager of Recruitment & Campus Relations at Yeo & Yeo. He develops and executes strategic talent management initiatives to recruit the best candidates, engage and retain current employees, and drive a high-performance culture across all Yeo & Yeo offices. With over seven years of experience in college career services, he understands the challenges of navigating career choices and employment opportunities.

Recognized for his passion and dedication, Bill was selected as the 2019 Michigan Career Services Professional of the Year. In 2021, he was honored as a RUBY Award recipient for his impact in the Great Lakes Bay Region. He is the past President of the Michigan Career Educator & Employer Alliance and just completed a term as Vice President of employers for the organization. He is actively involved in Saginaw, Bay City, and Midland’s Chambers of Commerce. Bill is also a member of the National Association of Colleges and Employers and the Valley Society for Human Resource Management.

“Bill’s exceptional leadership in recruitment and campus relations has profoundly strengthened our organization,” said Yeo & Yeo President & CEO Dave Youngstrom. “This award is a testament to his passion for career development and the positive impact he has made on our firm and the broader Michigan community.”

If you’re selling property used in your trade or business, you should understand the tax implications. There are many complex rules that can potentially apply. To simplify this discussion, let’s assume that the property you want to sell is land or depreciable property used in your business, and has been held by you for more than a year.

Note: There are different rules for property held primarily for sale to customers in the ordinary course of business, intellectual property, low-income housing, property that involves farming or livestock, and other types of property.

Basic rules

Under tax law, your gains and losses from sales of business property are netted against each other. The tax treatment is as follows:

If the netting of gains and losses results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. Long-term capital gain treatment is generally more favorable than ordinary income treatment.
If the netting of gains and losses results in a net loss, that loss is fully deductible against ordinary income. (In other words, none of the rules that limit the deductibility of capital losses apply.)

The availability of long-term capital gain treatment for business property net gain is limited by “recapture” rules. Under these rules, amounts are treated as ordinary income, rather than capital gain, because of previous ordinary loss or deduction treatment.

There’s a special recapture rule that applies only to business property. Under this rule, to the extent you’ve had a business property net loss within the previous five years, any business property net gain is treated as ordinary income instead of long-term capital gain.

Different types of property

Under the Internal Revenue Code, different provisions address different types of property. For example:

Section 1245 property. This consists of all depreciable personal property, whether tangible or intangible, and certain depreciable real property (usually real property that performs specific functions). If you sell Section 1245 property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset.
Section 1250 property. In general, this consists of buildings and their structural components. If you sell Section 1250 property that’s placed in service after 1986, none of the long-term capital gain attributable to depreciation deductions will be subject to depreciation recapture. However, for most noncorporate taxpayers, the gain attributable to depreciation deductions, to the extent it doesn’t exceed business property net gain, will (as reduced by the business property recapture rule above) be taxed at a rate of no more than 28.8% (25% plus the 3.8% net investment income tax) rather than the maximum 23.8% rate (20% plus the 3.8% net investment income tax) that generally applies to long-term capital gains of noncorporate taxpayers.

Other rules apply to, respectively, Section 1250 property that you placed in service before 1987 but after 1980 and Section 1250 property that you placed in service before 1981.

As you can see, even with the simple assumptions in this article, the tax treatment of the sale of business assets can be complex. Contact us if you’d like to determine the tax implications of transactions, or if you have any additional questions.

Traditional and Roth IRAs can be powerful estate planning tools. With a “self-directed” IRA, you may be able to amp up the benefits of these tools by enabling them to hold alternative investments that offer potentially greater returns.

However, self-directed IRAs may present pitfalls that can lead to unfavorable tax consequences. Therefore, you need to handle these vehicles with care.

Alternative investments

Unlike traditional IRAs, which typically offer a limited menu of stocks, bonds and mutual funds, self-directed IRAs can hold a variety of alternative investments that may offer the potential to earn higher returns. The investments can include real estate, closely held business interests, commodities and precious metals. Bear in mind that they can’t hold certain assets, including S corporation stock, insurance contracts and collectibles (such as art or coin collections).

From an estate planning perspective, self-directed IRAs have considerable appeal. Imagine transferring real estate or closely held stock with substantial earnings potential to a traditional or Roth IRA and allowing it to grow on a tax-deferred or tax-free basis for the benefit of your heirs.

Risks and tax traps

Before taking action, it’s critical to understand the significant risks and tax traps involved with self-directed IRAs. For example:

The prohibited transaction rules restrict dealings between an IRA and disqualified persons, including you, close family members, businesses that you control and your advisors. This makes it difficult, if not impossible, for you or your family to manage, work for, or have financial dealings with business or real estate interests held by the IRA without undoing the IRA’s tax benefits and triggering penalties.
IRAs that invest in operating companies may generate unrelated business income taxes, which are payable currently out of an IRA’s funds.
IRAs that invest in debt-financed property may generate unrelated debt-financed income, creating a current tax liability.

Proceed with caution

If you’re considering a self-directed IRA, determine the types of assets in which you’d like to invest and carefully weigh the potential benefits against the risks. Contact us with any questions.

When companies reach the point where they’re ready to sponsor a qualified retirement plan, the first one that may come to mind is the 401(k). But there are other, lesser-used options that could suit the distinctive needs of some business owners. Case in point: the 412(e)(3) plan.

Nuts and bolts

Unlike 401(k)s, which are defined contribution plans, 412(e)(3) plans are defined benefit plans. This means they provide fixed benefits under a formula based on factors such as each participant’s compensation, age and years of service.

For 2024, the annual benefit provided by 412(e)(3)s can’t exceed the lesser of 100% of a participant’s highest three-year average compensation or $275,000. As with other defined benefit plans, 412(e)(3)s are funded only by employers. They don’t accept participant contributions.

But unlike other defined benefit plans, which are funded through a variety of investments, 412(e)(3)s are funded with annuity contracts and insurance. In fact, the IRS refers to them as “fully insured” plans. The name “412(e)(3)” refers to Section 412(e)(3) of the Internal Revenue Code, which authorizes the plan type’s qualified status.

Under Sec. 412(e)(3), defined benefit plans funded with annuity contracts and insurance aren’t subject to minimum funding requirements — so long as certain conditions are met. Companies sponsoring these plans don’t have to make annual actuarial calculations or mandatory contributions. However, they risk penalties if a plan’s insurer doesn’t satisfy certain obligations. In other words, the plan needs to be safely insured.

Potential benefits

Some professionals advise relatively older business owners who want to maximize retirement savings in a short period to consider 412(e)(3)s because of the way defined benefit plans differ from defined contribution plans. That is, business owners who sponsor and participate in defined benefit plans can take a bigger share of the pie — particularly if they have few, if any, highly compensated employees. Meanwhile, they can also enjoy substantial tax deductions for plan contributions.

In addition, 412(e)(3)s may be more attractive than other defined benefit plans for some small business owners. Although they tend to sacrifice potentially higher investment returns, these plans offer greater flexibility by using potentially lower-risk and easy-to-administer annuity contracts and insurance. They might also appeal to closely held business owners who want to maximize tax-deductible contributions to a retirement plan in the early years of ownership.

As is the case with all defined benefit plans, however, sponsors must have the financial stability to support their plans indefinitely. So, 412(e)(3)s usually aren’t appropriate for start-ups.

Administrative requirements

Tax-favored treatment for 412(e)(3)s isn’t automatic. These plans must meet various requirements as spelled out in the tax code.

For example, as mentioned, 412(e)(3)s must be funded exclusively by the purchase of annuity contracts or a combination of annuity contracts and insurance. Sponsors must buy the contracts and/or insurance from insurers licensed by at least one of the 50 states or the District of Columbia.

Also, the contracts must provide for level annual (or more frequent) premium payments starting on the date each participant joins the plan. Premium payments need to end no later than the normal retirement age of a participant — or by the date the individual ceases participation in the plan, if earlier.

These are just a couple examples of the rules involved. It’s critical to fully understand all the requirements before sponsoring a plan.

An intriguing possibility

A 412(e)(3) plan may be an under-the-radar choice for some businesses under the right circumstances. For help choosing the best plan for your company, contact us.

July marks the halfway point of the year and is generally an ideal time for manufacturers to assess their tax situation and plan appropriate strategies for reducing their 2024 tax liability. Bearing in mind that every company’s situation is unique, here are seven tax-reduction moves to consider.

1. Purchase new or used equipment

Under the Section 179 expensing deduction, your manufacturing company can deduct the full cost of qualified new or used equipment — such as milling or drilling machines — placed in service during the tax year, up to a limit of $1.22 million for 2024. If the cost of equipment and other eligible assets exceeds an annual threshold, the maximum Sec. 179 expensing deduction is reduced on a dollar-for-dollar basis. For 2024, the threshold is $3.05 million. Also be aware that Sec. 179 expensing can’t exceed net taxable income from business activities.

Fortunately, if you aren’t able to fully deduct your 2024 equipment investments with Sec. 179 expensing, new or used equipment may also qualify for first-year bonus depreciation. For 2024, it’s 60% of the cost of qualified assets. Any remaining costs can still be recovered over time by regular depreciation deductions subject to the usual rules.

2. Conduct research and development

Investing in technology today can increase output and streamline operations in the future. One potential tax-saving option is to determine whether your manufacturing company’s research and experimentation expenditures qualify for the research credit (commonly referred to as the “research and development,” or “R&D,” credit).

The research credit generally equals 20% of the qualified expenses above a base amount. Alternatively, you can elect to use a simplified 14% credit. Note that R&D expenses must be amortized over a five-year period.

3. Save tax dollars by “going green”

The Inflation Reduction Act (IRA) introduced and expanded several clean air tax incentives for expenditures by domestic manufacturers. They include:

A new production tax credit for energy-saving property with solar and wind energy components.
The revival of the advanced energy project credit. Generally, this credit is 30% of the cost of constructing, refitting or expanding a manufacturing facility with qualified property.
The extension of the solar investment tax credit (ITC). The IRA expanded the 30% ITC to include energy conservation technologies; fuel cells, microturbines or energy storage systems and components; and energy-saving property with solar, wind, water, geothermal or other renewable source components.

Manufacturers can also benefit from a credit for electric vehicles (EVs) comparable to the EV credit available to individual taxpayers.

4. Cue the QBI deduction

Owners of manufacturing companies structured as pass-through entities can benefit from the Section 199A deduction based on their qualified business income (QBI). The deduction is generally equal to 20% of QBI.

But if a taxpayer’s income exceeds the applicable threshold, additional limits begin to apply. For example, the deduction generally can’t exceed the greater of the owner’s share of:

50% of the amount of W-2 wages paid to employees during the tax year, or
25% of W-2 wages plus 2.5% of the cost (not reduced by depreciation taken) of qualified property owned by the business.

For this purpose, “qualified property” is tangible property (including real estate) owned and used by the company for production of QBI during the tax year.

5. Ramp up accessibility accommodations

A manufacturing company may be entitled to tax benefits for making its facility more accessible to disabled employees. The disabled access credit is available to manufacturers that in the prior tax year had gross receipts of $1 million or less or no more than 30 full-time employees. It’s effectively equal to 50% of the first $10,000 of qualified expenses for a maximum of $5,000. The credit can be claimed, for example, for removing structural barriers or providing accommodations to hearing-impaired individuals.

A manufacturer of any size can deduct up to $15,000 of the costs of removing architectural and transportation barriers to benefit disabled employees. The qualified costs include making accommodations to parking lots, building ramps, and installing water fountains and restrooms that are accessible to people in wheelchairs. Normally, these costs must be capitalized.

Manufacturers can claim both the credit and the deduction in the same tax year (but not for the same expenses).

6. Take aim at targeted jobs credits

In today’s tight labor market, consider widening your search for job candidates and, in doing so, possibly qualify for a tax credit. For example, a manufacturer can claim the Work Opportunity Tax Credit (WOTC) if it hires a worker from one of several “target” disadvantaged groups. Generally, the WOTC is equal to 40% of the first $6,000 of first-year wages, for a maximum $2,400 per worker. But it can be higher in some cases.

The WOTC has expired and been reinstated multiple times. It was recently extended through 2025.

7. Repair your facility

Perhaps your manufacturing company needs to replace broken windows or repair a leaky roof. The tax law allows you to deduct the full cost of repairs. Consider taking care of these minor nuisances before the end-of-the-year crunch.

Conversely, the cost of capital improvements must be depreciated over time. Distinguishing between repairs and improvements can be difficult. Fortunately, some IRS safe harbors can help: 1) the routine maintenance safe harbor, 2) the small business safe harbor or 3) the de minimis safe harbor.

No time like the present

July has arrived. We can help you determine the midyear actions that will be most beneficial to your manufacturing company.

Whether your company acquires businesses that own real estate or you invest in real estate directly, fraud poses an ever-present threat. Buying and selling real estate is complicated, and it’s relatively easy for crooks to manipulate the process.

To help mitigate real estate fraud threats, thorough due diligence is essential. Staying current on common schemes and red flags also may enable you to identify risky transactions before you put down any money.

5 schemes

First, be aware of these five common real estate fraud schemes:

Fake documents. Every real estate transaction requires extensive documentation. To make an acquisition more enticing, sellers could fake rent rolls, financial statements or other documents that indicate an asset’s profitability. Additionally, sellers might doctor environmental impact reports to, for example, hide the existence of toxic chemicals.
“Optimistic” appraisals. Although most lenders will require an independent appraisal, some sellers may secure inflated real estate appraisals to justify a higher price. Or they may alter the date and valuation associated with an older appraisal to convince buyers to forgo a new one.
Flipping to inflate value. Sellers could inflate a property’s value by paying straw buyers to take ownership of it at inflated prices. At an agreed-upon date, the seller buys back the property, generating another sales transaction associated with the building.
Short-selling and buybacks. Shady sellers might use straw buyers to take out a loan to purchase a property and then default on it. The original sellers then offer to repurchase the property from the lender — usually at a rock-bottom price. Then the sellers make cosmetic improvements to the property and sell to unsuspecting buyers.
Falsified financial statements. Some business owners may inflate the value of real estate holdings in financial statements to make the overall company more attractive to potential acquirers. This can include overvaluing properties, omitting liabilities and inventing nonexistent entities and transactions.

Red flags

To succeed, real estate fraudsters need to manipulate or conceal an asset’s actual value. So look out for these red flags when buying real estate:

Missing, altered or unsigned documents,
A seller who’s overly anxious about finalizing the deal and even suggests taking due diligence shortcuts,
Real estate assets that have changed hands frequently for no apparent business reason,
Difficult-to-locate ownership records or records that show complex ownership structures,
Property descriptions that are inconsistent with inspection reports and public records,
Renovations that seem superficial or shoddy, and
Undisclosed or inaccurately disclosed liens, encumbrances and judgments.

Also be wary if a seller requests additional payments outside the closing process — including payments to unknown third parties.

Inherently complicated

Even valid real estate transactions can raise red flags that, upon closer inspection, aren’t, in fact, signs of fraud. Robust due diligence, a healthy degree of skepticism, and guidance from a real estate attorney and experienced financial advisors can help your business buy property with confidence.

If there’s one thing most employers have in common, it’s meetings. That’s right, these ubiquitous gatherings of invited participants are commonplace occurrences at workplaces, whether real or virtual, far and wide.

But there’s trouble afoot. Earlier this year, global software developer Atlassian surveyed 5,000 knowledge workers on four continents. Of those respondents, 78% said they must attend so many meetings that it negatively affects their productivity, and 77% reported that they’re often in meetings that conclude with the immediate need to schedule another meeting!

Has your organization ever addressed how to best handle meetings? Perhaps the best way to optimize their frequency and prevent them from lowering productivity is to run meetings in a manner that inspires participation and focuses on results. Assuming you’re the meeting leader, here are some best practices to keep in mind.

Motivating participants

Meetings often fail because attendees feel more like spectators than participants. They’re less likely to zone out if they have some say in the purpose and content of the gathering. So, before each session, touch base with those involved and use their feedback to create a clear agenda of what you’ll be discussing.

Another common problem with meetings occurs when someone leads the meeting, but no one owns it. Speak with conviction and express positivity, if not passion, for the subject matter. If others will be delivering presentations during a meeting, encourage them beforehand to do the same.

Mixing it up

To the extent possible, keep meetings short. Cover what needs to be covered but ensure you’re concentrating only on what’s important. Go in armed with easy-to-follow notes so you’ll stay on track and won’t forget anything. The latter point is particularly important because overlooked subjects often lead to those hasty follow-up meetings mentioned in the survey results.

In addition, if the contingent of attendees is large enough, consider having employees break out into smaller groups to focus on specific points. Then call the meeting back to order to discuss each group’s ideas. By mixing it up in such creative ways, you’ll keep attendees more engaged.

Telling a story

Many potential distractions can inhibit the value of any given meeting. If it’s held in the morning, for example, the busy day ahead may preoccupy participants’ thoughts. If it’s an afternoon meeting, they might grow anxious about their commutes home or after-work obligations. And if the meeting is held virtually, there’s no denying the ease with which participants can sneak peeks at their smartphones to check emails, texts and social media.

How do you break through? People appreciate storytellers. Think about how you can use this technique to find a more relaxed and engaging way to speak to everyone in the room. Devise a narrative that will grab attendees’ attention and keep them in suspense for a little bit. Then deliver a conclusion that will inspire them to work toward achieving the actionable items raised.

Recognizing the possibility

For most employers, occasional or even relatively frequent meetings are a necessity. How often to hold them, however, depends on many factors, including your organization’s mission and the specific needs of its respective departments. Just be sure you’re recognizing the possibility that those with the power to call meetings are doing so too frequently. An employee survey can help you find out.

From there, it may be worth your while to invest in leadership training that teaches managers, supervisors and others to run meetings with efficiency and measurable results in mind. Contact us for help analyzing your organization’s productivity and identifying all the costs associated with holding more effective meetings.

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 15

Employers should deposit Social Security, Medicare and withheld income taxes for June if the monthly deposit rule applies. They should also deposit nonpayroll withheld income tax for June if the monthly deposit rule applies.

July 31

Report income tax withholding and FICA taxes for second quarter 2024 (Form 941) and pay any tax due. (See the exception below, under “August 12.”)
File a 2023 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 12

Report income tax withholding and FICA taxes for second quarter 2024 (Form 941), if you deposited on time and in full all the associated taxes due.

September 16

If a calendar-year C corporation, pay the third installment of 2024 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic six-month extension:
- File a 2023 income tax return (Form 1120-S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2023 to certain employer-sponsored retirement plans.

Employers should deposit Social Security, Medicare and withheld income taxes for August if the monthly deposit rule applies. They should also deposit nonpayroll withheld income tax for August if the monthly deposit rule applies.

School nutrition programs play a crucial role in providing meals to students. However, managing these programs involves tracking, financial reporting, and meeting audit requirements to ensure compliance with federal and state regulations. This article will explore key compliance and audit considerations for school nutrition programs.

Internal Controls and Compliance

Maintaining robust internal controls is essential for compliance. Organizations should establish strong internal controls to mitigate risks, ensuring compliance through systematic processes rather than relying on chance. Your auditors will conduct comprehensive sample tests to verify compliance with allowable costs, eligibility, and procurement procedures, including disbursements, payroll, and indirect cost calculations.

It is recommended to review your controls periodically to avoid surprises when your auditors conduct their tests. Additionally, keep detailed records of procedures, invoices, timesheets, meal counts, and other relevant documents to substantiate compliance.

Allowable Cost Principles

School districts must ensure funds are used solely for allowable operating and administrative costs. Consider the following:

Direct Costs: Verify that the controls properly identify which costs are specifically related to the nutrition program. Auditors will test disbursements and payroll to confirm they are directly related to the program and not a component of indirect costs.
Indirect Costs: Verify calculations and that transfers out of the food service fund comply with regulations.

Eligibility Requirements

Retaining proper documentation of eligibility determination and testing of eligibility are critical. Verify the accuracy of eligibility determinations and procedures during the annual certification/application process, and ensure accurate procedures for direct certification reports.

Procurement, Suspension, and Debarment

Adhere to purchasing policies aligned with federal compliance requirements. Your auditors will test policies and procedures for compliance, including disbursements.

Reporting

Accurate and timely reporting is crucial. Ensure accurate claims are submitted promptly for reimbursement requests, and ensure compliance with regulations to verify free and reduced-price applications.

Navigating Audit Findings

When audit findings occur, consider the following:

Single Audit Report: Provides reports on financial statements, internal control over financial reporting, and compliance with major programs. A description of any material noncompliance, internal control deficiencies, or material weaknesses will be included within this report if the district is over the federal award threshold requiring a single audit.
Corrective Action Plans: Lists management’s plans to address deficiencies, including explanations, responsible parties, and completion dates.
Responding to MDE Requests: Proactively address requests from the Michigan Department of Education (MDE) if internal controls, policies, or procedures need to be updated or additional information is requested.

Annual Financial Reporting Requirements

Adhere to the following for annual financial reporting:

Financial Information Database (FID): Local Education Agencies, Intermediate School Districts, and Public-School Academies must report using proper coding to avoid issues with submitting the FID.
Consistent Method for Recording: Utilize the Michigan Public School Accounting Manual for consistent financial accounting.

Ensuring Successful Management of Your School Nutrition Programs

Managing the financial aspects of school nutrition programs can be complex but essential for compliance and program success. By maintaining robust internal controls, accurate documentation, and proactive responses to audit findings, districts can ensure the continued success of these vital programs.

A single audit is required if a school district has $750,000 or more in federal expenditures for fiscal years ending June 30, 2024. This audit ensures compliance with federal regulations and provides transparency regarding the use of federal funds. This article will delve into the essential components of a single audit, emphasizing the Schedule of Expenditures of Federal Awards (SEFA) and best practices for grant compliance.

Schedule of Expenditures of Federal Awards (SEFA)

The SEFA serves as a critical document in the single audit process. It provides a comprehensive overview of federal financial assistance received by the district. Here are the key elements to include in your SEFA:

1. Award Details:

List all federal financial assistance, including grants, loan guarantees, and direct appropriations.
Specify the approved grant amount, Assistance Listing Number (AL), and project number or source code.

2. Expenditure/Revenue Information:

Include prior years’ cumulative actual expenditures from federal sources.
Document the current year’s cash or payment-in-kind received from federal sources.
Record current year actual expenditures from federal sources.
Report beginning and ending inventory and accrued or unearned revenue as of July 1, 2023, and June 30, 2024.
Make necessary adjustments to ensure accuracy.

Ensuring Grant Compliance

To maintain compliance, follow these guidelines:

Classification by program. Categorize grants by program and identify the federal department administering each program. Clearly state whether a grant is direct or flow-through, along with the flow-through agency (if applicable).
Ensure accurate totals: Total by the federal awarding agency, i.e., the United States Department of Education, program, assistance listing, and clusters.
Cluster identification: Ensure clusters are properly identified and totaled.
SEFA notes. Add accounting policies to the notes section of the SEFA. Address any differences between the district’s SEFA and the Grant Auditors Report (GAR), and provide a reconciliation for differences between federal expenditures per SEFA and financial statement federal revenue.

Checking Your SEFA

To ensure accuracy in your SEFA, consider the following checks:

Prior Year Check: Verify that the prior year’s accrued/unearned revenue and cumulative expenditures of current-year grants align with the prior year’s SEFA.
Accounts Receivable Calculation: Calculate the fiscal year accounts receivable (accrued/unearned revenue) by adding prior year accounts receivable to the difference between year expenditures and receipts.
Consistency with Financial Statements: Confirm that total federal expenditures per SEFA match total Federal Revenue per Financial Statements.

Schedule of Findings and Questioned Costs

If there are findings in your SEFA, each finding must include the reference number, federal program information, criteria or specific requirement, a condition found, cause/effect, questioned costs, management’s response, and a corrective action plan (CAP).

A CAP should be written on school district letterhead, be specific and action-oriented, and include steps, target dates, and contact information. If necessary, note dates for returning funds to the Michigan Department of Education. If there were prior year findings, each must be reviewed, and the current standing of the finding must be included in the report.

Ensuring a Successful Audit

A single audit is a critical process for organizations that receive federal funding, ensuring compliance with regulations and promoting transparency in the use of federal funds. The SEFA is a crucial component, providing a comprehensive overview of the federal financial assistance received by the organization. Organizations can successfully undergo a single audit by thoroughly preparing the SEFA, properly reporting findings, and maintaining quality control.

Ensuring compliance, accurate reporting, and effective fund management are critical to maintaining your school district’s financial health and accountability. Here, we outline some frequently encountered audit issues and provide guidance on how to address them effectively.

Key Areas of Focus:

1. Audit Submission Deadlines and Responsibilities. Timely audit submission is crucial. Audits are typically required to be submitted to the relevant state or federal education departments by a specified deadline each year. The deadline for Michigan school districts is November 1. Missing these deadlines can result in penalties, such as the withholding of state aid payments. To avoid delays, districts should confirm that their auditors have submitted the audit on time and keep track of submission receipts.

2. Understanding Financial Reports. Accurate interpretation of financial reports, such as the Grant Auditor Report (GAR) and Processed Allocation Logs (PAL reports), is essential. These reports track grants and commodity entitlements. Your auditor must verify that final statements are accurately reported on the Schedule of Expenditures of Federal Awards (SEFA) and ensure compliance with federal guidelines.

3. Managing Food Service Fund Balances. Proper management of food service fund balances is important. Excess fund balances should be monitored and managed according to regulatory requirements. The allowable fund balance can be calculated by subtracting capital outlay from total program costs, dividing by nine months, and multiplying by three months. Regular review of the fund balance can help identify and address any potential issues early. If the fund balance is over the allowable limit at the end of the fiscal year, the district can work with the Michigan Department of Education (MDE) Nutritional Services division on a spend-down plan.

4. Compliance with the Davis-Bacon Act for Federal Funds. The Davis-Bacon Act requires that prevailing wage rates be paid for contracts over $2,000 involving laborers and mechanics. This includes payments for minor remodeling, renovation or construction contracts. Compliance with this act is especially relevant for projects funded by federal programs like the Elementary and Secondary School Emergency Relief (ESSER) funds. Your auditor must ensure that contracts include required clauses and that contractors submit certified payrolls weekly. Noncompliance can lead to significant deficiencies or material weaknesses and may necessitate repayment of funds.

5. Reporting Fraud, Illegal Acts, and Abuse. Your auditor is obligated to report any known or likely fraud, illegal acts, or violations that materially affect government funds’ financial statements. This includes notifying relevant governance bodies and external regulatory agencies. Effective and timely reporting helps maintain transparency and accountability within the education sector.

6. Compliance with the Uniform Budgeting and Accounting Act. Adhering to the Uniform Budgeting and Accounting Act (UBAA), or its equivalent in various jurisdictions, is mandatory. School districts are required to approve budgets for general funds and all special revenue funds. The original budget must be approved prior to the beginning of the fiscal year (7/1), while the final amended budget must be approved prior to the end of the fiscal year (6/30). Any variance that impacts the budgeted ending fund balance can trigger follow-up actions from oversight bodies. Your auditor should review final approved budgets, identify violations, and assess the severity of noncompliance, ranging from minor issues to material weaknesses.

7. Importance of Corrective Action Plans. Corrective Action Plans (CAPs) are essential for addressing audit findings. According to the Uniform Guidance, CAPs should be separate documents detailing the planned actions to address each finding, the anticipated completion dates, and the responsible contact persons. Reviewing prior CAPs ensures that progress is being made and corrections are implemented within the appropriate timeline.

Take a Proactive Approach

Educational institutions can maintain financial integrity and transparency by ensuring timely submissions, accurate reporting, proper fund management, and strict compliance with regulations. Regular audits and corrective actions help meet regulatory requirements and contribute to the overall effectiveness and trustworthiness of your school district’s financial management.

Yeo & Yeo CPAs & Advisors, a leading Michigan-based accounting and advisory firm, has been named one of Metro Detroit’s Best and Brightest Companies to Work For for the thirteenth consecutive year.

The Best and Brightest programs recognize organizations for their commitment to excellence in human resources practices and employee engagement. It celebrates companies that go above and beyond to foster a positive work environment, nurture talent, and empower employees to thrive.

Yeo & Yeo’s culture is one of learning, growth, and purpose. Their award-winning CPA certification bonus program, wellness initiatives, and flexible hybrid and remote work options exemplify the firm’s investment in its team. Yeo & Yeo’s career maps are designed to meet employees where they are and help provide a clear path for growth and development. They have partnered with Boon Health to offer employees complimentary professional and personal coaching. Prioritizing employee appreciation, the firm hosts many company-wide events and promotes work-life integration through initiatives like half-day summer Fridays.

“We are truly honored to be named one of the Best and Brightest Companies to work for,” said Thomas O’Sullivan, managing principal of the firm’s Ann Arbor office. “This achievement is a testament to the dedication and expertise of our people, who are the driving force behind our success.”

Tammy Moncrief, managing principal of the Auburn Hills office, adds, “We are committed to creating a culture that attracts and retains talented, passionate professionals. We wouldn’t be where we are today without our people, and we are incredibly grateful for everything they do for our clients, communities, and one another.”

Receiving Metro Detroit’s Best and Brightest award is a significant milestone in a year of notable achievements for Yeo & Yeo. This year, the firm was also honored with the Outstanding Business Award from Saginaw Valley State University, recognized by Accounting Today as a Regional Leader and a Firm to Watch, and named one of West Michigan’s Best and Brightest Companies to Work For.

The Metro Detroit Best and Brightest companies will be honored on Thursday, November 7, 2024, at The Henry in Dearborn, Michigan.

The Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act — signed into law in 2022 — provides generous tax incentives to increase domestic production of semiconductors, also known as chips. More specifically, the CHIPS Act created a temporary Advanced Manufacturing Investment Credit for investments in semiconductor manufacturing property. The IRS recently issued final regulations, including some changes related to the election to treat the credit as a federal tax payment.

Credit overview

Codified in Section 48D of the Internal Revenue Code, the credit generally equals 25% of the qualified investment related to an advanced manufacturing facility — that is, a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. A manufacturer’s qualified investment equals its basis in any qualified property placed in service during the taxable year.

For pass-through entities, such as partnerships or S corporations, the qualified investment is calculated based on the partner’s or shareholder’s pro rata basis in the property. Accordingly, manufacturing partnerships and S corporations with qualifying property may pass through a portion of the qualified basis to taxpayers who can then claim a credit (subject to any limits at the partner or shareholder level).

Qualified property is tangible property that:

Qualifies for depreciation or amortization,
Is constructed, reconstructed or erected by the taxpayer or acquired by the taxpayer if the original use of the property begins with the taxpayer, and
Is integral to the operation of the advanced manufacturing facility.

It also can include a building, a portion of a building (other than a portion used for functions unrelated to manufacturing, such as administrative services) and certain structural components of a building.

Claiming the credit

A manufacturer can claim the Sec. 48D credit for qualified property placed in service after December 31, 2022, for which construction begins before January 1, 2027. If construction began before the CHIPS Act was enacted, though, only the portion of the basis attributable to construction begun after enactment is eligible.

Generally, the credit is claimed in the tax year that the qualified property is placed in service for federal tax purposes. Therefore, the property must be ready and available for its assigned function. For example, if a manufacturer begins construction related to qualified property in 2024 but doesn’t place it in service until 2025, the credit is claimed on the company’s 2025 federal tax return.

However, applicable entities can choose to make a “direct pay” election to treat the credit as a payment against their federal income tax liability. First, this direct payment will offset any tax liability of the entity and then any excess is refundable.

Final regs: 3 areas of focus

The final regs modify certain provisions in the proposed regs and provide an interim rule for determining a partner’s distributive share of the tax-exempt income. The final regs are effective and applicable as of April 22, 2024.

Here are three specific areas the final regs focus on:

Direct-pay election. Prior to the final regs, there was confusion as to the timing of the direct-pay election option for the Sec. 48D credit. Specifically, under the proposed regs, it wasn’t clear if a manufacturer should be treated as having made the election upon completing the registration requirements established by the IRS.

The final regs clarify that each qualified investment must have its own registration number. However, the election is made on the manufacturer’s tax return. A caveat: This election is irrevocable.

Double benefit rule. The IRS and the U.S. Department of Treasury expressed concerns that entities may derive duplicate benefits for expenditures. Thus, the regulations feature several provisions designed to deny double tax benefits for the same expenses, including correlation with the general business credit. Accordingly, the final regs include a comprehensive five-step process to be used to determine the allowable credit amount that may be elected. These complex issues are best left to your tax advisor.
Pass-through entities. The final regs provide more flexibility for pass-through entities. In recognition of previous agreements regarding the allocation of tax-exempt income, the final regs include an interim rule for a written binding partnership agreement entered into after December 31, 2021, and before June 22, 2023, if the partnership was formed for the purpose of owning and operating an advanced manufacturing facility or qualified property. Under the interim rule, a partner’s distributive share of the direct payment is determined based on more favorable allocation rules.

Have questions?

The IRS’s final regs provide some needed clarity regarding the Sec. 48D credit for manufacturers under the CHIPS Act. If you have questions regarding the Sec. 48D credit, contact us.

The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act was signed into law in December 2022, bringing more than 90 changes to retirement plan and tax laws. Many of its provisions are little known and were written to roll out over several years rather than immediately taking effect.

Here are several important changes that went into effect in 2024:

Pension-Linked Emergency Savings Accounts (PLESAs). More than half of U.S. adults would turn to borrowing when confronted by an emergency expense of $1,000 or more, according to a Bankrate survey — a figure that has held steady for years. In response, SECURE 2.0 contains provisions related to emergency access to retirement savings, including PLESAs. PLESAs are defined contribution plans designed to encourage workers to save for financial emergencies.

Beginning this year, employers can offer PLESAs linked to employees’ retirement accounts, with the PLESA treated as a Roth, or after-tax, account. Non-highly-compensated employees can be automatically enrolled with a deferral of up to 3% of compensation but no more than $2,500 annually (indexed for inflation) — or less if the employer chooses. Employees can make qualified withdrawals tax- and penalty-free. Employers must allow at least one withdrawal per month, with no fee for the first four per year.

Starter 401(k) plans. SECURE 2.0 creates a new kind of retirement plan for employers not already sponsoring a qualified retirement plan, called a starter 401(k). Employers must automatically enroll all employees at a deferral rate of at least 3% of compensation but no more than 15%. The maximum annual deferral is $6,000 (indexed for inflation), plus the annual IRA catch-up contribution of $1,000 for those age 50 or older. No actual deferral percentage (ADP) or top-heavy testing of the plan is required, reducing the compliance and cost burden for employers.

Employers can impose age and service eligibility requirements, and employees may elect out. Employees also can choose to contribute at a different level. Employer contributions aren’t allowed, so less record keeping is required.

Top-heavy rules. Defined contribution plans that are considered “top-heavy” must make nonelective minimum contributions equal to 3% of a participant’s compensation. This can represent a significant expense for small employers. Top-heavy plans are those where the aggregate of accounts for key employees exceeds 60% of the aggregate accounts for non-key employees.

Starting in 2024, employers can perform the top-heavy test separately on excludable employees (those who are under age 21 and have less than a year of service) and non-excludable employees. The goal is to eliminate the incentive for employers to exclude employees from the plan to avoid the minimum contribution obligation.

SIMPLE IRAs. SECURE 2.0 boosts the annual Savings Incentive Match Plans for Employees (SIMPLE) IRA and SIMPLE 401(k) deferral limit and the catch-up limit to 110% of the 2024 contribution limits (indexed for inflation) for employers with 25 or fewer employees. Employers with 26 to 100 employees can offer the higher deferral limits if they provide a 4% matching contribution or a 3% employer contribution.

Employers now can make additional contributions to each employee in the plan, as well. Additional contributions must be made in a uniform manner and can’t exceed the lesser of up to 10% of compensation or $5,000 (indexed for inflation) per employee.

Early withdrawal exceptions. SECURE 2.0 allows penalty-free early withdrawals from qualified retirement plans for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Employees have three years to repay such withdrawals; no additional emergency withdrawals are permitted during the three-year repayment period, except to the extent that any previous withdrawals within that period have been repaid. The withdrawals are otherwise limited to once per year.

Victims of domestic abuse by a spouse or partner also are exempt from early withdrawal penalties for the lesser of $10,000 (indexed for inflation) or 50% of their vested account balances. The law’s detailed definition of domestic abuse includes abuse of a participant’s child or another family member living in the same household. Withdrawals can be repaid over a three-year period, and participants can recover income taxes paid on repaid distributions.

Note: An early withdrawal penalty exception for terminally ill individuals took effect in 2023.

Employer-provided student loan relief. Younger employees with large amounts of student debt have sometimes missed out on their employer’s matching contributions to retirement plans. SECURE 2.0 tackles this catch-22 by allowing these employees to receive matching contributions based on their qualified student loan payments. Employers can make matching contributions to 401(k) plans or SIMPLE IRAs. Note that contributions based on student loan payments must be made available to all match-eligible employees.

Section 529 plan rollovers. Beginning this year, owners of certain 529 plans can transfer unused funds intended for qualified education expenses directly to the plan beneficiary’s Roth IRA without incurring any federal tax or the 10% penalty for nonqualified withdrawals.

A beneficiary’s rollover amount is limited to a lifetime maximum of $35,000, and rollovers are subject to the applicable Roth IRA annual contribution limit. Rollover amounts can’t include contributions made to the plan in the previous five years, and the 529 account must have been maintained for at least 15 years.

Required minimum distributions (RMDs). Designated Roth 401(k) and 403(b) plans provided by employers have been subject to annual RMDs in the same way that traditional 401(k)s are. As of 2024, though, the plans aren’t subject to RMDs until the death of the owner.

Act now

Many employers need to amend their plans due to changes related to SECURE 2.0. Fortunately, they generally have until the end of 2025 to make these amendments as long as they comply by the law’s deadlines. Contact us for additional details.

When it comes to expense reporting, having rigorous financial controls is critical to operating a profitable business. You should monitor expenditures incurred by employees on behalf of the company. This enables your organization to track spending, control costs and maintain accurate financial records.

Establishing and adhering to strong policies, using technology correctly and complying with tax regulations are important ways to ensure accurate expense reports. Here are six tips to help your organization get a better handle on the expense management process.

1. Establish formal expense reporting policies. It’s important to define allowable expenses and set spending limits for every employee. You should also stipulate the required documentation to accompany each expense reimbursement request. Communicate the policy to employees and have them acknowledge their compliance with every expense request they submit.

2. Set deadlines for submission. Employees need to submit expense reimbursement requests in a timely manner. Regular submissions make it easier for employees to track and remember expenses. It also provides them with quicker reimbursements for out-of-pocket expenses.

3. Encourage or require the use of credit or debit cards. Card transactions offer many benefits over cash payments. For instance, they create electronic transaction records and detailed statements for substantiation. Card usage also makes it easier for employees to separate their business and personal expenses, ensuring a more accurate and efficient expense reporting process. Many credit card companies offer potential rewards or cash back that the cardholder (either the employee or the business owner) can later redeem.

4. Require documentation and substantiation. Employees should keep itemized receipts, including paper and digital receipts, and record the business purpose for each expense. For business meetings, this should include the purpose and the people who attended. Mileage logs must include similar details, such as the purpose of each trip and who traveled in the vehicle.

5. Leverage technology. Expense reporting software can automate the receipt capture and expense categorization process and integrate with accounting reporting solutions. This streamlines the reporting process by reducing the paperwork an employee must manage and minimizing the need for manual data entry. It also improves accuracy in expense reporting and enhances compliance.

6. Audit your reporting processes. Careful review of expense reimbursement requests can help identify compliance violations and detect potential fraud. Auditing transactions can also ensure sufficient documentation exists to comply with state and federal tax regulations.

An effective expense reimbursement process depends on policies, technology and oversight. By adopting best practices, organizations can create a robust and efficient reporting process that promotes financial transparency and compliance. Contact us for help reviewing your existing expense reporting process and suggesting ways to improve it.

For employers looking to safeguard their organizations from fraud, payroll is among the most obvious targets they must protect. That’s where the money is, after all. Payroll can stand out as a bright red bullseye for criminals if not carefully guarded.

How bright? In its Occupational Fraud 2024: A Report to the Nations, the Association of Certified Fraud Examiners found that 15% of all occupational fraud schemes in the United States and Canada involve payroll. The report also revealed that, once these crimes are underway, they typically last 18 months before they’re detected, and the average loss is $2,800 a month.

Clearly, the stakes are high. What’s worse, payroll fraud can happen in many ways. Here are five of its most common forms:

1. Workers’ compensation insurance fraud. Employees who are legitimately injured on the job generally are entitled to receive workers’ comp benefits. But some employees fabricate injuries and make fraudulent claims. Crimes of this nature can elevate your insurance premiums and cause substantial out-of-pocket losses for self-insured employers.

To help prevent fraud, establish detailed policies and procedures for handling workers’ comp claims — including how to report injuries. Installing surveillance cameras to capture any workplace injuries may also help.

2. Buddy punching. This term is used to describe when one employee improperly punches a time clock for another employee to inflate hours on a time sheet. It usually means lower productivity and indicates a general culture of dishonesty. Time-tracking apps may help curtail buddy punching to some extent, but employees can still share login credentials and devices to cheat.

Be sure to create, distribute and enforce clear rules about recording time worked. If buddy punching becomes a recurring issue, require workers to verify their identities with ID cards, face recognition or fingerprints. Be sure supervisors are carefully reviewing time sheets and noting suspicious behavior.

3. Bonus and commission fraud. Many employers offer bonuses or commissions for meeting sales goals or other benchmarks. These can be valuable incentives that drive productivity. Unfortunately, they can also tempt dishonest employees to fudge the numbers. The temptation can be particularly great in stressful environments where competition is fierce and goals are tough to achieve.

Providing a level playing field and making goals achievable generally helps tamp down the kind of resentment and desperation that may lead employees to commit this type of fraud. Also, monitor bonuses and commissions paid every payroll period. If any amount seems unusual or excessive, investigate it.

4. Ghost employees. Accounting department staffers, or anyone with access to payroll records, can create “ghost” (nonexistent) employees and start issuing paychecks to them. The checks typically are deposited in accounts set up by the perpetrators. Although these criminals usually invent names for their fictitious employees, they sometimes use identities of former employees to collect wages illegally.

Regularly review payroll records to ensure there aren’t any ghosts on the books. One red flag to look for is unfamiliar names that share personal information with other employees, such as having the same home address or phone number.

5. Expense reimbursement fraud. This is an especially common form of wrongdoing. Some employees may not even think that falsifying expenses for business trips is unethical because they believe “everyone does it.” If you don’t have a detailed expense reimbursement policy that requires, for example, employees to substantiate claims with receipts and obtain manager sign off, establish one immediately.

Expense reimbursement fraud is serious and may get employers — not just their employees — in trouble with taxing authorities. Stay apprised of the latest IRS rules on reimbursing employees’ expenses. We can answer any questions you have about those rules or any aspect of payroll fraud prevention.

One of the goals in creating a comprehensive estate plan is to maintain family harmony after your death. Typically, with an estate plan in place, you have the peace of mind that your declarations will be carried out, as required by law. However, if someone is found to have exerted “undue influence” over your final decisions, a family member may challenge your will.

Defining “undue influence”

Undue influence is an act of persuasion that overcomes the free will and judgment of another person. It’s important to recognize that a certain level of influence is permissible, so long as it doesn’t rise to the level of “undue” influence. For example, there’s nothing inherently wrong with a son who encourages his father to leave him the family vacation home. But if the father was in a vulnerable position — perhaps he was ill or frail and the son was his caregiver — a court might find that he was susceptible to undue influence and that the son improperly influenced him to change his will.

To help avoid undue influence claims and ensure that your wishes are carried out:

Use a revocable trust. Rather than relying on a will alone, create a revocable, or “living,” trust. These trusts don’t go through probate, so they’re more difficult and costly to challenge.

Establish competency. Claims of undue influence often go hand in hand with challenges on grounds of lack of testamentary capacity. Be sure to create your estate plan while you’re in good mental and physical health. Have a physician examine you at or near the time you execute your will and other estate planning documents to ascertain that you’re mentally competent. Establishing that you are “of sound mind and body” when you sign your will can go a long way toward combating an undue influence claim.

Avoid the appearance of undue influence. If you reward someone who’s in a position to influence you, take steps to avoid the appearance of undue influence. Suppose, for example, that you plan to leave a substantial sum to a close friend who acts as your primary caregiver. To avoid a challenge, prepare your will independently — that is, under conditions that are free from interference by all beneficiaries. People who’ll benefit under your estate plan, including family members, shouldn’t be present when you meet with your attorney. Nor should they serve as witnesses — or even be present — when you sign your will and other estate planning documents.

Talk with your family. If you plan to disinherit certain family members, give them reduced shares or give substantial sums to nonfamily members, meet with your family to explain your reasoning. If that’s not possible, state the reasons in your will or include a separate letter expressing your wishes. Family members are less likely to challenge your plan if they understand the rationale behind it.

To deter challenges to your plan, consider including a no-contest clause, which provides that, if a beneficiary challenges your will or trust unsuccessfully, he or she will receive nothing. Keep in mind, however, that you should generally leave something to people who are likely to challenge your plan; otherwise, they have nothing to lose by contesting it.

Fortifying your estate plan

If you have questions regarding undue influence, contact us. We’d be pleased to review your circumstances and help determine if revisions to your estate plan are needed.

Every type of company needs to devise a philosophy, strategy and various policies regarding compensation. Family businesses, however, face additional challenges — largely because they employ both family and nonfamily staff.

If your company is family-owned, you’ve probably encountered some puzzling difficulties in this area. The good news is solutions can be found.

Perspectives to consider

Compensation issues in family businesses are often two-pronged because they can arise both 1) within the family and 2) between family and nonfamily employees. Salary inequities among siblings, for example, can breed resentment and fighting. However, simply paying them all the same salary can also create problems if one works harder and contributes more than the others.

Second, family business owners may feel it’s their prerogative to pay working family members more than their nonfamily counterparts — even if they’re performing the same job. Although owners naturally have the best interests of their loved ones at heart, these decisions may inadvertently lower morale among essential nonfamily employees and risk losing them.

Nonfamily staff may tolerate some preferential treatment for family employees, but they could become disgruntled over untenable differences. For instance, nonfamily employees often reach a breaking point when they feel working family members are underperforming and getting away with it, or when they believe family employees are behaving counterproductively or unethically.

Ideas to ponder

Effectively addressing compensation in a family business calls for a clear, objective understanding of the company’s distinctive traits, culture and strategic goals. A healthy dash of creativity helps, too. There’s no one right way of handling the matter. But there are some commonly used strategies that may be helpful in determining compensation for the two major groups involved.

When it comes to family employees, think beyond salary. Many family businesses intentionally keep salaries for these individuals low and make up the difference in equity. Because working family members are generally in the company for the long haul, they’ll receive increasing benefits as their equity shares grow in value. But you also must ensure their compensation is adequate to meet their lifestyle needs and keep up with inflation.

Incentives are usually a key motivator for family employees. You might consider a combination of short-term rewards paid annually to encourage ongoing accomplishments and long-term rewards to keep them driving the business forward.

On the other hand, nonfamily employees typically recognize that their opportunities for advancement and ownership are generally more limited in a family business. So, higher salaries and a strong benefits package can be important to attracting and retaining top talent.

Another way to keep key nonfamily staff satisfied is by giving them significant financial benefits for staying with the company long term. There are various arrangements to consider, including phantom stock or nonqualified deferred compensation plans.

You can do it

If your family business has been operating for a while, overhauling its approach to compensation may seem overwhelming. Just know that there are ways to tackle the challenges objectively and analytically to arrive at an overall strategy that’s reasonable and equitable for everyone. Our firm can help you identify and quantify all the factors involved.