Interview with Rose Sharman

From time to time, owners of closely held businesses might need to advance their companies money to bridge a temporary downturn or provide funds for an expansion or another major purchase. How should those advances be classified under U.S. Generally Accepted Accounting Principles (GAAP)? Depending on the facts and circumstances of the transaction, an advance may be reported as debt or additional paid-in capital.

What are the deciding factors?

When classifying a shareholder advance, it’s important to consider the economic substance of the transaction over its form. The accounting rules lay out the following issues to evaluate when reporting these transactions:

Intent to repay. Open-ended understandings between related parties about repayment imply that an advance is a form of equity. For example, an advance may be classified as a capital contribution if it was extended to save the business from imminent failure and no attempts at repayment have ever been made.

Terms of the advance. An advance is more likely to be treated as bona fide debt if the parties have signed a written promissory note that bears reasonable interest, has a fixed maturity date and a history of periodic loan repayments, and includes some form of collateral. However, if an advance is subordinate to bank debt and other creditors, it’s more likely to qualify as equity.

Ability to repay. This includes the company’s historic and future debt service capacity, as well as its credit standing and ability to secure other forms of financing. The stronger these factors are, the more appropriate it may be to classify the advance as debt.

Third-party reporting. Consistently treating an advance as debt (or equity) on tax returns can provide additional insight into its proper classification.

With shareholder advances, disclosures are key. Under GAAP, you’re required to describe any related-party transactions, including the magnitude and specific line items in the financial statements that are affected. Numerous related-party transactions may necessitate the use of a tabular format to make the footnotes to the financial statements more reader friendly.

Why does it matter?

The proper classification of shareholder advances is especially important when a company has unsecured bank loans or more than one shareholder. It’s also relevant for tax purposes, because advances that are classified as debt typically require imputed interest charges. However, the tax rules don’t always align with GAAP.

To further complicate matters, shareholders sometimes forgive loans or convert them to equity. Reporting these types of transactions can become complex when the fair value of the equity differs from the carrying value of the debt.

Get it right

There isn’t a one-size-fits-all solution for classifying shareholder advances. We can help you address the challenges of reporting these transactions and adequately disclose the details in your financial statements.

© 2023

One might assume the term “trust fund recovery penalty” has something to do with estate planning. It’s important for business owners and executives to know better.

In point of fact, the trust fund recovery penalty relates to payroll taxes. The IRS uses it to hold accountable “responsible persons” who willfully withhold income and payroll taxes from employees’ wages and fail to remit those taxes to the federal government.

A matter of trust

The trust fund recovery penalty applies to employees’ share of payroll taxes, including withheld federal income taxes and the employee share of Social Security and Medicare taxes.

These monies are considered trust funds because they’re the property of the federal government, held in trust by the employer. The penalty amount is 100% of the unpaid taxes plus interest — it essentially serves as an alternative tax-collection method.

A responsible person

The trust fund recovery penalty is particularly dangerous because it can ensnare persons who ordinarily are protected against personal liability for business debts. As stated in the tax code, the penalty provides that:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

The IRS and courts take a broad view of who may be a responsible person under this provision. It has been interpreted to include a range of individuals, within or outside the business, who possess significant control or influence over the company’s finances.

Whether someone is a responsible person depends on the facts and circumstances of the case, but factors that may support that conclusion include ownership interest, title, check-signing authority, control over bank accounts or payment of debts, hiring and firing authority, control over payroll, and power to make federal tax deposits.

Thus, responsible persons may include shareholders, partners and members of a limited liability company; officers; other employees; and directors. Responsible “persons” can also be payroll service providers and professional employer organizations, including individuals employed by those entities. Outside advisors may be deemed responsible persons as well.

Important note: If several responsible persons are identified, each may be held liable for the full amount of the penalty assessed.

Willful failure

As noted in the quote above, failure to pay trust fund taxes must be willful to trigger the trust fund recovery penalty. The IRS interprets this term broadly to include not only intentional acts, but also reckless disregard of obvious or known risks that taxes won’t be paid. The courts have described various scenarios that reflect a reckless disregard, including:

• Relying on statements of a person in control of finances, despite circumstances showing that this person was known to be unreliable,
• Failing to investigate or correct mismanagement after receiving notice that taxes weren’t paid, and
• Knowing that the company is in financial trouble but continuing to pay other creditors without making reasonable inquiry into the status of payroll taxes.

Simply put, delegating the handling of payroll taxes to a certain individual or outside provider may not be enough to avoid liability.

Risky circumstances

Few business owners or executives wake up one morning and decide to disregard payroll taxes. However, circumstances can develop that put you at risk. We’d be happy to explain the rules further and help you stay in compliance.

© 2023

Manufacturing 4.0, sometimes called “Industry 4.0,” refers to the digitalization of manufacturing. That means the integration of traditional manufacturing processes and practices with cutting-edge “smart” technology.

How might Manufacturing 4.0 benefit your manufacturing company? According to companies that have already adopted some or all of its technologies and practices, Manufacturing 4.0 can enhance productivity and quality, improve efficiency, minimize costs, and increase workplace safety.

Building blocks of Manufacturing 4.0

Manufacturing 4.0 leverages the latest technological developments, including the Industrial Internet of Things (IIoT), artificial intelligence, blockchain, machine learning, automation, robotics, virtual reality, advanced data analytics and additive manufacturing, such as three-dimensional (3D) printing.

Manufacturers that make the most of these technologies to create smart factories can gain a competitive advantage. Indeed, this became evident during the pandemic and the subsequent supply chain challenges. Manufacturers that had adopted technologies that streamlined and automated the supply chain and allowed them to monitor and operate Internet-connected devices had a definite advantage.

Potential benefits

Industry 4.0’s integration of people, machines and data creates virtually limitless opportunities to improve manufacturing operations. Examples include:

Enhanced productivity. At one time, workers would wait for machines or equipment to break down before repairing or servicing them. This reactive approach led to significant downtime and lost productivity. In response, many manufacturers shifted to a preventive approach, replacing parts or performing maintenance according to a predetermined schedule (for example, every 1,000 hours of machine operation).

A smart factory takes advantage of predictive maintenance: Wireless sensors embedded in manufacturing equipment can alert a technician when service is needed — even if the technician is off-site. It may even be possible, using robotics and artificial intelligence, to teach machines to fix themselves.

Supply chain and logistics flexibility. By taking advantage of interconnected supply chains, manufacturers can track materials and products throughout the process, obtain information about changing conditions (such as weather delays, natural disasters, health risks and political unrest) and make adjustments in real time.

Workplace safety. Manufacturing 4.0 can improve factory safety in several ways. For example, sensors similar to those that notify you of the need for maintenance or repairs can also alert you to potentially dangerous conditions. They can provide warnings or even shut or slow down equipment if a worker enters a hazardous area. Plus, the ability to monitor and operate machinery or equipment remotely minimizes workers’ exposure to risks of injury or, in the case of a pandemic, infection.

Cost savings. Adopting Manufacturing 4.0 technologies can reduce costs in many ways. For example:

• Robotics and automation can reduce labor costs and allow the factory to operate 24/7,
• Real-time monitoring and quality control can reduce product returns and eliminate waste,
• Predictive maintenance can minimize costly repairs and downtime, and
• Remote monitoring can reduce accidents and injuries, which reduces costs.

Finally, technologies such as 3D printing can reduce costs by streamlining the manufacturing process and shortening delivery times.

Gauge your readiness

If you’ve yet to take the plunge into Manufacturing 4.0, be sure to gauge just how ready your company is. For example, is your current technology infrastructure able to handle the data storage and processing requirements of today’s smart factory? Is your company’s culture amenable to the type of change needed to make the transition? Are you prepared to shift your workforce to the more highly skilled labor required to oversee a smart factory? Are you ready to adapt your product development processes to a more automated environment?

If you answered “yes” to these questions, it may be time to explore the competitive advantages and other benefits Manufacturing 4.0 has to offer. We’re here to help you with analyzing the financial aspects of adopting Manufacturing 4.0.

© 2023

Ever wonder how IRS examiners know about different industries so they can audit various businesses? They generally do research about specific industries and issues on tax returns by using IRS Audit Techniques Guides (ATGs). A little-known fact is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries, such as construction, aerospace, art galleries, architecture and veterinary medicine. Other guides address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Issues unique to certain taxpayers

IRS auditors need to examine all different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an IRS auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

Updates and revisions

Some guides were written several years ago and others are relatively new. There isn’t a guide for every industry. Here are some of the guide titles that have been revised or added in recent years:

• Entertainment Audit Technique Guide (March 2023), which covers income and expenses for performers, producers, directors, technicians and others in the film and recording industries, as well as in live performances;
• Capitalization of Tangible Property Audit Technique Guide (September 2022), which addresses potential tax issues involved in capital expenditures and dispositions of property.
• Oil and Gas Audit Technique Guide (February 2023), which explains the complex tax issues involved in the exploration, development and production of crude oil and natural gas;
• Cost Segregation Audit Technique Guide (June 2022), which provides IRS examiners with an understanding of why and how cost segregation studies are performed in order for businesses to claim refunds related to depreciation deductions.
• Attorneys Audit Technique Guide (January 2022), which covers issues including retainers, contingent fees, client trust accounts, travel expenses and more;
• Child Care Provider Audit Technique Guide (January 2022), which enables IRS examiners to audit businesses that provide care in homes or day care centers; and
• Retail Audit Technique Guide (March 2021), which details tax issues unique to businesses that purchase items from a supplier or wholesaler and resell them at a profit.

Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website.

© 2023

Every fall, CPAs are busy preparing for audit season, which generally runs from January to April each year. This includes meeting with clients, assigning staff and scheduling fieldwork.

Likewise, organizations with calendar year ends should prepare for audit fieldwork. A little prep work this fall can help facilitate the process, minimize adjustments and surprises, and add more value to the audit process. Here are four ways to gear up for your audit.

1. Disclose operational changes

Internal and external changes may bring opportunities and risks that could affect your auditor’s procedures. So it’s important to identify all recent developments of importance and discuss them with your auditor before fieldwork begins.

Examples of noteworthy internal events or transactions include:

• Major asset acquisitions or divestitures,
• New or expanded product lines,
• Relocation or a new lease for commercial space,
• Application for new debt (or refinanced debt),
• Addition (or retirement) of owners and other key employees,
• Losses and business interruptions from natural disasters, fraud or cyberattacks,
• Acquisition (or loss) of a key customer or supplier, and
• A change in accounting software.

Your auditor will also want to hear about external changes, such as pending lawsuits and tax audits, new sources of competition, and new regulations. When in doubt, tell your auditor.

2. Ask questions about gray areas

All transactions for the year should be entered into your accounting system before the start of fieldwork. But your accounting personnel might not know exactly how to report certain items. There have been several major changes to the federal tax code and U.S. Generally Accepted Accounting Principles (GAAP) in recent years.

If your staff is uncertain how to account for a particular transaction or when a new rule goes into effect, it’s a good idea to ask for help before closing the books at year end. Doing so will help minimize inquiries and the need to make adjusting journal entries during fieldwork.

3. Review last year’s audit

Start by looking at last year’s adjusting journal entries and management points. You should have taken steps to correct whatever problems were found last year. For example, if your controller forgot to record accrued payroll and vacation last year, double-check that accruals have been done for 2023. Likewise, if your auditor suggested that you needed stronger internal controls over purchasing, you could make last-minute changes before year end, such as segregating ordering and vendor payment duties between two employees or cross-checking vendor vs. employee addresses.

You should also anticipate requests for documentation and inquiries from auditors. Chances are you’ll create many of these schedules — such as accounts receivable aging reports and fixed asset listings — when you reconcile your general ledger. Consider compiling an audit binder before the start of fieldwork to expedite the process. It also helps to designate an internal liaison to field the audit team’s inquiries. Often, this is the company’s CFO or controller, but it can be anyone who’s knowledgeable about the company’s operations and accounting systems.

In addition, each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and defend any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves or percentage of completion.

4. Adopt a positive frame of mind

Some in-house accounting personnel see audit fieldwork as a painstaking disruption to their daily operations. They may begrudge having to explain their business operations and accounting procedures to outsiders who will highlight mistakes and weaknesses in financial reporting.

Although no one likes to be questioned or critiqued, audits shouldn’t be adversarial. Your external auditor is a resource that can provide assurance about your financial reporting to lenders and investors, offer fresh insights and accounting expertise, and recommend ways to strengthen internal controls and minimize risks. Financial statement audits should be seen as a learning opportunity and an investment in your organization’s future.

Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but also engenders a partnership between in-house and external accounting resources.

© 2023

For employers, sponsoring a qualified retirement plan isn’t easy. Staying up to date on the constantly changing guidance and rules issued by federal agencies such as the U.S. Department of Labor (DOL) and IRS is a challenge. An independent retirement plan auditor can help your organization fulfill its compliance requirements and potentially reduce the risks of plan administration.

An audit’s purpose

Qualified retirement plans include traditional pensions, 401(k)s, 403(b)s and some profit-sharing plans. The primary purpose of an audit is to ensure that the plan is operating in compliance with applicable laws as well as the most recent regulations and guidance set forth by the DOL and IRS. An independent audit also reassures stakeholders that your plan’s financial statements offer reliable information.

The Employee Retirement Income Security Act (ERISA) requires annual audits of plans with 100 or more eligible participants at the beginning of the plan year. ERISA also requires plan administrators to follow U.S. Generally Accepted Accounting Principles when creating plan financial statements.

Engaging an auditor

It’s important to choose your auditor carefully. You’ll of course want to consider the prospective auditor’s professional qualifications, experience and licensing. But you must also ensure that the auditor you engage doesn’t have any financial interests in the retirement plan or plan administrator that could bias the audit. For example, the DOL doesn’t view a plan auditor as independent if that person also maintains the plan’s financial records.

The American Institute of Certified Public Accountants offers guidance on creating a request for proposal (RFP) for a qualified plan audit. An effective RFP describes the scope of the engagement — including its objectives, special considerations and expected schedule.

 Risks abound

Unqualified auditors can provide bad information and leave employers vulnerable to unchecked plan failures. This could lead to a DOL investigation and financial penalties. Contact us for more information about properly conducted retirement plan audits.

© 2023

The Internal Revenue Service is reminding nonprofits to complete Form 8822-B, Change of Address or Responsible Party – Business, timely. Many systems for e-filing Form 990 will remind you of this form when you e-file this year. The form is used in two scenarios: 1) a change of address and 2) a change of responsible party. In each case, the information is to be updated with the IRS within 60 days of the change.

Change of address

There are two ways to accomplish a change of address with the IRS, so the applicable way will likely be based on when the change occurs.

1. If you are filing Form 990, 990-EZ, 990-N, or 990-PF within 60 days of the change of address, you can update the address via the series 990 form and mark the box for change of address; this will fulfill the requirement to update the address with the IRS.
2. If you are not filing a series 990 form within 60 days of the change of address, Form 8822-B needs to be completed and filed with the IRS to ensure the IRS has the appropriate address for the nonprofit. Simply fill out the type of return it applies to, if the business location is changing, the business name, employer identification number, old mailing address, new mailing address, and new business location.

Change of responsible party

When an Employer Identification Number is originally requested from the IRS, a responsible party from the nonprofit is listed on the request form. When there is a change to that responsible party, the IRS needs to be informed. The responsible party is generally needed when the IRS is dealing with a potential identity theft issue on a return. Forms 990-EZ and 990-PF have no mechanism to report who the responsible party is. Even the 990-N and 990 themselves that ask for the principal officer (which is the responsible party) do not have a mechanism on the form to indicate it is changed; therefore, it does not change the IRS business master file. Form 8822-B must be filed to update the IRS’s records of who the responsible party is.

The responsible party is the person who exercises ultimate effective control over the entity. For nonprofits, this must be an individual, not an entity, and it is generally the same as the principal officer. The principal officer has the ultimate responsibility for implementing the decisions of the organization’s governing body and, therefore, is most likely the equivalent of the president of the board of directors. The AICPA issued an article that indicates in cases where the entity has paid staff, the highest-ranking paid staff, such as the CEO or Executive Director, may meet the definition of responsible party and be included on the form.

When changing the responsible party, the type of return, entity name, entity employer identification number, and responsible party name are required. In addition, the responsible party’s social security number is also required. Because the timing of when the return is due does not align with the series 990 deadlines, there is no easy way for the IRS to see who the responsible party is, so if you are reporting a new responsible party’s name on Form 8822-B, the social security number is necessary. No public record of this form is available, so the social security number will be available only to the IRS.

Requesting CPA assistance

Your CPA will not automatically complete this return as part of the Form 990 series returns. You will need to specifically request this form be filed and provide the information to your CPA.

If your company sells products or services to other businesses, you’re probably familiar with the challenge of growing your sales numbers. At times, you might even struggle to maintain them. One way to put yourself in a better position to succeed is to diversify your approaches, so you’re not limited to a single method by which salespeople interact with customers.

Have you ever considered value-based sales? Under this method, sales reps act as sort of business consultants, working closely with customers or prospects to identify specific needs or solve certain problems. The objective is to provide as much value as possible from the sales that result. This approach has its risks but, under the right circumstances, it can pay off.

What is value?

Before embarking on a value-based sales initiative, you’ll need to identify what kinds of value you may be able to provide. This can’t be a fuzzy concept; sales reps should be able to put dollars and cents to their value-based sales propositions or at least build a compelling case. Value generally takes four forms:

1. Dollars gained; your product or service will lead to an increase in revenue for the subject based on a reasonable financial projection,
2. Dollars saved; your product or service will demonstrably save the customer or prospect money,
3. Risk reduced; your product or service will address and help minimize one or more identifiable threats to the business in question, and
4. Qualitative; if you can’t make a case for one of the other three value types, you may still be able to argue that your product or service improves the quality of the subject’s operations in some way.

At least one of these four types of value will be the ultimate objective when salespeople engage customers or prospects. However, to identify that objective, your sales team will need to put in considerable effort.

How does the process work?

Perhaps the biggest downside of a value-based sales approach is that it’s labor-intensive. As opposed to, say, making cold calls with a product or service list and a series of talking points, your salespeople will need to do a “deep dive” into targeted businesses. They’ll need to learn details such as each company’s mission, history, management structure, financial status, strengths and weaknesses.

Then, when interacting with customers or prospects, they’ll need to focus on education — both their own and the subject’s. In other words, a sales rep will need to ask the right questions to learn as much as possible about the customer’s or prospect’s business needs and challenges. Meanwhile, the salesperson will need to act much like a consultant, informing the subject about industry trends, potential solutions and perhaps how comparable companies have overcome similar issues.

As you can see, value-based sales is more about relationship building and knowledge sharing than straight selling. Because of this, it can be a gamble. Some sales reps may spend extensive time and effort with a customer or prospect, even helping that business in certain ways, only to reap little to no sales revenue. On the other hand, when the approach works well, your company may be able to build a dynamic, long-lasting relationship with a lucrative customer.

Are there such sales in your pipeline?

If value-based sales sounds like something that could benefit your business, discuss it with your leadership team and sales staff. You’ll likely want to review your sales pipeline and determine which customers or prospects would be good fits for the approach. Contact us for help tracking, organizing and analyzing your sales numbers.

© 2023

The executor’s role is critical to the administration of your estate and the achievement of your estate planning objectives. So your first instinct may be to name a trusted family member as executor. However, that might not be the best choice.

Duties of an executor

Your executor has a variety of important duties, including:

• Arranging for probate of your will (if necessary) and obtaining court approval to administer your estate,
• Taking inventory of — and collecting, recovering or maintaining — your assets, including life insurance proceeds and retirement plan benefits,
• Obtaining valuations of your assets,
• Preparing a schedule of assets and liabilities,
• Arranging for the safekeeping of personal property,
• Contacting your beneficiaries to advise them of their entitlements under your will,
• Paying any debts incurred by you or your estate and handling creditors’ claims,
• Defending your will in the event of litigation,
• Filing tax returns on behalf of your estate, and
• Distributing your assets among your beneficiaries according to the terms of your will.

Family members may lack the skills and time to handle all of these tasks on their own. They’re entitled, of course, to hire accountants, attorneys, financial planners and other advisors — at the estate’s expense — for assistance. But even with professional help, serving as executor is a big job that requires a substantial time commitment during an already stressful period. Plus, if your executor is also a beneficiary of your will, other beneficiaries may view that as a conflict of interest.

Other candidates

So, what are your options? One is to name a trusted advisor, such as an accountant or lawyer, as executor. Another is to appoint an advisor and a family member as co-executors. The advisor would handle most of the executor’s day-to-day responsibilities, while your family member would oversee the process and ensure that the advisor acts in your family’s best interests.

If you have questions about choosing the right executor of your estate, please contact us.

© 2023

Supply chain disruptions have provided a stark lesson on the weaknesses of traditional budgeting and forecasting methods. Under the best of circumstances, it’s difficult for manufacturers to forecast their performance over the coming year. When market conditions (not to mention economic conditions) are prone to change suddenly and unexpectedly, a traditional static forecast can quickly become obsolete. That’s why many manufacturers are turning to a rolling forecast model.

Static vs. rolling

The problem with static forecasts is that management tends to view them as once-a-year events. After the annual budget is set, managers may not compare actual to forecasted performance until year end. Even if they do recognize midyear that changed conditions have caused the company to fall short of its goals, they may not have the wherewithal to revise the budget.

With a rolling forecast, rather than setting a one-year budget and forgetting about it, management revisits the budget periodically. The review periods can be quarterly or monthly, for example, and certain numbers can be adjusted to reflect changing circumstances.

Rolling benefits

Benefits of rolling forecasts include:

Improved accuracy. By comparing actual to forecasted performance more frequently, and updating the numbers in real time, your forecasts become much more reliable and valuable as a planning tool.

Increased agility. Updating your forecasts regularly allows you to spot trends early and make necessary adjustments for unexpected events or evolving market conditions before it’s too late.

Contingency planning. Some manufacturing processes rely heavily on a particular raw material or component part. Creating “what if” scenarios can allow you to see how a sudden price increase or part shortage might affect your performance. You can then put contingency plans in place to mitigate the impact.

Automate the process

You may be concerned that switching to rolling forecasts will make the budgeting process more costly and time consuming. But once rolling forecast processes are implemented, most manufacturers find that they’re less disruptive than a once-a-year budgeting process. Budgeting and forecasting software is available to automate the processes. Contact us to determine if a rolling forecast is right for your manufacturing business.

© 2023

Yeo & Yeo, a leading Michigan-based accounting and advisory firm, has been named one of Michigan’s Best and Brightest in Wellness for the tenth consecutive year. The program highlights companies and organizations that promote a culture of wellness, as well as those that plan, implement, and evaluate efforts in employee wellness.

“The Best and Brightest is a powerful community of elite leaders who share ideas and best practices, and have proven they are employers of choice when it comes to wellness and well-being,” said Jennifer Kluge, President and CEO of the Best and Brightest programs.

Wellness at Yeo & Yeo extends beyond health benefits. Highlighting the importance of overall well-being, the firm focuses on supporting its people and creating an environment where they can thrive.

“Investing in the overall health of our employees is something we take pride in,” said Dave Youngstrom, President & CEO of Yeo & Yeo. “At Yeo & Yeo, we believe that a healthy workforce, both physically and mentally, is the foundation for providing exceptional service to our clients. We are honored to receive recognition for our longstanding commitment to our staff’s well-being.”

Yeo & Yeo supports wellness for its employees by paying a large portion of healthcare premiums, helping to keep costs low for employees. The firm has a high percentage of participation in its wellness plan and healthcare premium reduction incentive. The firm offers free health screenings for healthcare participants and flu shots at no cost. An Employee Assistance Program provides confidential guidance and resources to support work‐life balance. The firm also provides a flexible work environment that includes hybrid and remote work capabilities, as well as initiatives like half-day summer Fridays.

Winning companies of Michigan’s 2023 Best and Brightest Companies in Wellness are assessed by an independent research firm, which reviewed several key measures relative to other nationally recognized winners. The categories applicants were scored on included compensation, benefits, and employee solutions; creative wellness and well-being solutions, employee enrichment, engagement, and retention; employee education and development; and recruitment and selection.

Yeo & Yeo and the other winning companies were honored at the Best and Brightest Summit on September 27 and 28.

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2023. 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.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.

Monday, October 2

• The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Monday, October 16

• If a calendar-year C corporation that filed an automatic six-month extension:
  • File a 2022 income tax return (Form 1120) and pay any tax, interest and penalties due.
  • Make contributions for 2022 to certain employer-sponsored retirement plans.
  • Establish and contribute to a SEP for 2022, if an automatic six-month extension was filed.

Tuesday, October 31

• Report income tax withholding and FICA taxes for third quarter 2023 (Form 941) and pay any tax due. (See exception below under “November 13.”)

Monday, November 13

• Report income tax withholding and FICA taxes for third quarter 2023 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Friday, December 15

• If a calendar-year C corporation, pay the fourth installment of 2023 estimated income taxes.

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

© 2023

 Yeo & Yeo is pleased to announce that Chris Sheridan, CPA, CVA, has been elected to the Stevens Center for Family Business (SCFB) Executive Council as a sponsor firm representative. This appointment recognizes Chris’s experience as a business advisor and underscores his commitment to advancing the success of family-owned companies.

As part of the Saginaw Valley State University College of Business & Management, the SCFB accomplishes its mission through outreach to family businesses in the Great Lakes Bay Region, academic education about family businesses, and research to expand the body of knowledge about the characteristics and best practices of family businesses. Using national professionals as well as local business leaders, the SCFB provides events, networking opportunities, peer groups, sponsor workshops, and many other activities and resources whereby members can learn about family business best practices. Yeo & Yeo has been involved in the SCFB since its inception, with Lloyd Yeo among the founding board members.

“Being entrusted with the responsibility to carry forward Yeo & Yeo’s legacy of support for family businesses is an honor and a privilege,” said Sheridan. “Throughout my career, I’ve witnessed firsthand the impact that family businesses have on our communities and economy. Joining the Stevens Center for Family Business Executive Council is a remarkable opportunity to contribute to an organization that shares my passion for nurturing these enterprises through generations.”

Sheridan is a senior manager within Yeo & Yeo’s Consulting Service Line. He leads the firm’s Business Valuation and Litigation Support Services Group while also contributing his knowledge as a member of the Manufacturing Services Group. Sheridan’s specialized skills include business valuation and litigation support, serving as an expert witness, providing business consultancy, and fraud investigation and prevention. As a Certified Valuation Analyst (CVA), Sheridan provides attorneys and business owners with defensible and objective business valuation services. Notably, he has been recognized as a “40 Under Forty” honoree by the National Association of Certified Valuators and Analysts / Consultants Training Institute.

Sheridan is a member of the National Association of Certified Valuators and Analysts, the American Institute of Certified Public Accountants, the Michigan Association of Certified Public Accountants’ Manufacturing Task Force, and the Michigan Manufacturers Association. In the community, he serves as a board member for the Great Lakes Bay Economic Club, Bay Future, and the Montessori Children’s House of Bay City.

“Chris possesses a well-established reputation as a respected figure within the business valuation and litigation support sector,” remarked Pete Bender, leader of Yeo & Yeo Wealth Management and a former member of the SCFB Executive Council. “With his capacity for strategic vision and a wealth of advisory background, his commitment to delivering actionable insights and fostering meaningful connections can undoubtedly enrich the Stevens Center’s initiatives.”

In recent years, merger and acquisition activity has been strong in many industries. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. assets

From a tax standpoint, a transaction can basically be structured in two ways:

1. Stock (or ownership interest) sale. A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The now-permanent 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The TCJA’s reduced individual federal tax rates may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.

2. Asset sale. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask us if this would be beneficial in your situation.

Buyer vs. seller preferences

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Keep in mind that other areas, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Professional advice is critical

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed.

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On September 6, the Financial Accounting Standards Board (FASB) unanimously voted to finalize new accounting rules on cryptocurrency assets — less than five months after the proposed standard was issued for public comment. Here’s what companies that hold these assets should know.

Need for change

The updated guidance is the first explicit accounting standard on crypto assets in U.S. Generally Accepted Accounting Principles (GAAP). It’s designed to help companies more accurately reflect the economics of such assets. The standard comes at a time of heightened regulatory scrutiny following a series of scandals and bankruptcies in the crypto sector. Volatility in the trillion-dollar crypto sector has caused practitioners to press the FASB to develop accounting rules.

Under current practice, cryptocurrency tokens are accounted for as intangible assets and reported on the balance sheet at historical cost. Those assets are deemed to be impaired when the price falls below historical cost. Impairment is based on the lowest observable value within a given reporting period, causing organizations to continuously monitor the value of these assets. If an asset’s price subsequently recovers, however, impairment losses can never be recovered.

Limited scope

The new standard will apply to well-known crypto assets that trade in active markets, such as Bitcoin and Ethereum. It will also be used for other types of crypto assets that don’t trade nearly as frequently (or perhaps at all). The guidance covers crypto assets that:

• Are fungible,
• Are deemed to be intangible (which excludes securities and fiat currencies),
• Don’t provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets,
• Are created or reside on a distributed ledger based on technology that’s similar to blockchain technology,
• Are secured through cryptography, and
• Aren’t created or issued by the reporting entity or its related parties.

The term “fungible” is typically used for commodities or currencies. It refers to an item that can be freely traded or replaced with something of equal value. This condition is specifically designed to exclude non-fungible tokens (NFTs) from the scope of the new rules. In general, financial statement users have told the FASB that they don’t observe companies and nonprofit entities holding material amounts of NFTs, which may come in the form of art, music, in-game items, video clips and more.

Key requirements

The new rules will require crypto assets within the scope of the standard to be measured at fair value at the end of the reporting period. In addition, changes in value recognized in each reporting period will be reported as gains or losses in comprehensive income. Fair value represents the price that will be received if the company were to sell the crypto asset in an orderly transaction to a willing and knowledgeable buyer.

Under the guidance, companies will present crypto assets separately from other intangible assets on the balance sheet because they have different measurement requirements. Crypto assets will be more prominently displayed, providing investors with clear and transparent information about their fair value.

The guidance also calls for detailed disclosures on crypto holdings. For example, disclosures for Bitcoin will include the number of tokens held, the fair value and the cost basis. Organizations also must disclose information about restrictions in crypto holdings, what it would take to lift any restrictions and changes in those holdings.

Coming soon

The final standard will be published in the fourth quarter of 2023. It will go into effect for fiscal years beginning after December 15, 2024, including interim periods within those years, for all entities. Early adoption is permitted. Contact us to help understand how this guidance applies to your organization.

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The Internal Revenue Service (IRS) has stopped processing new claims for the Employee Retention Credit (ERC), a pandemic-era tax break for small businesses. The IRS is increasingly alarmed about small business owners being scammed by unscrupulous actors, and growing evidence of questionable ERC claims pouring in. Aggressive marketing to ineligible applicants has created unacceptable risks to businesses and the tax system.

The ERC program will be paused through at least the end of 2023, allowing the IRS to add more safeguards to prevent future abuse and protect businesses from predatory tactics.

Business owners considering applying for the credit should review the ERC guidelines and talk with a trusted tax professional, not a promoter looking to take a large percentage of the refund.

Payouts for existing claims will continue during the moratorium period, but at a slower pace due to stricter compliance reviews. Processing times could be delayed from the standard 90 days to 180 days or longer.

The IRS will provide details later about how a taxpayer can withdraw an ERC claim, an option that will be available to the filers of more than 600,000 claims awaiting IRS review. This withdrawal option will allow the taxpayers to avoid possible repayment issues and keep them from having to pay contingency fees to promoters, the IRS says.

The IRS also is working out details of the settlement initiative that will allow taxpayers to repay a claim that they erroneously received and avoid penalties and future compliance action.

For more information, see the official statement from the IRS.

Please contact your Yeo & Yeo tax professional for guidance on proceeding with ERC claims.

It’s not uncommon for employees to grumble about having to attend too many meetings. Sometimes they have a point; an excessive number of meetings can become a problem at some companies. However, there’s one kind of meeting that business owners and their leadership teams should never scrimp on: strategic planning.

That doesn’t mean you need to have one every week, or even every month. But regularly scheduled strategic planning meetings are critical for establishing, reviewing and, if necessary, adjusting your company’s short- and long-term objectives. Here are four best practices for running effective meetings:

1. Set a focused agenda. Every meeting should have an agenda that’s relevant to strategic planning — and only strategic planning. Allocate an appropriate amount of time for each item so that the meeting is neither too long nor too short.

Before the meeting, distribute a document showing who’ll be presenting on each agenda topic. The idea is to create a “no surprises” atmosphere in which attendees know what to expect and can thereby think about the topics in advance and bring their best ideas and feedback.

2. Lay down rules as necessary. Depending on your company’s culture, you may want to state some upfront rules — either in writing beforehand or by announcement at the beginning of the meeting. Address the importance of timely attendance, professional decorum and constructive criticism. Emphasize that there are no dumb questions or bad ideas.

Every business may not need to do this, but meetings that become hostile or chaotic with personal conflicts or “side chatter” can undermine the efficacy of strategic planning. Also consider whether to identify conflict resolution methods that participants must agree to follow if particularly heated arguments arise.

3. Name (or engage) a facilitator. A facilitator should oversee the meeting. This individual is ultimately responsible for starting and ending on time, transitioning from one agenda item to the next, and enforcing the stated rules. Ideally, a facilitator also needs to be good at motivating participation from everyone and encouraging a positive, productive atmosphere.

If no one at your company feels up to the task, you could engage an outside consultant. Although you’ll need to vet the person carefully and weigh the financial cost, a skilled professional facilitator can make a big difference.

4. Keep minutes. Recording the minutes of every strategic planning meeting is essential. An official record will document what took place and which decisions, if any, were made. It will also serve as a log of potentially valuable ideas or future agenda items.

In addition, accurate meeting minutes curtail miscommunications and prevent memory lapses of what was said and by whom. If no record is kept, people’s memories may differ about the conclusions reached, and disagreements could arise about where your business is striving to go.

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In December 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act. Among other things, the sweeping new law made some significant changes to so-called catch-up contributions, with implications for both employers and employees.

With the new catch-up provisions scheduled to kick in after 2023, many retirement plan sponsors have been struggling to institute the necessary processes and procedures to comply. In recognition of taxpayer concerns, the IRS recently provided some relief in Notice 2023-62. In addition to extending the deadline, the new guidance corrects a technical error in SECURE 2.0 that had left taxpayers and their advisors confused about the continued availability of catch-up contributions for employees.

The new requirements

Tax law allows taxpayers age 50 or older to make catch-up contributions to their 401(k) plans and similar retirement accounts. The permissible amount is adjusted annually for inflation. For 2023, you can contribute an additional $7,500 over the current $22,500 annual 401(k) contribution limit. The contributions are allowed regardless of a taxpayer’s income level.

Under the existing rules, all eligible taxpayers can choose whether to make their contributions on a pre-tax basis or a Roth after-tax basis (assuming the employer allows the Roth option). Section 603 of SECURE 2.0, however, mandates that any catch-up contributions made by higher-income participants in 401(k), 403(b) or 457(b) retirement plans must be designated as after-tax Roth contributions.

Higher-income participants are those whose prior-year Social Security wages exceeded $145,000 (the threshold will be adjusted for inflation going forward). In addition, a plan that allows higher-income participants to make such catch-up contributions also must allow other participants age 50 or older to make their catch-up contributions on an after-tax Roth basis. The law provides that these requirements are effective for tax years beginning after December 31, 2023.

The imminent effective date had plan sponsors and payroll providers worried, due to multiple administrative hurdles. For example, sponsors must develop processes to identify higher-income plan participants — they generally haven’t had the need to calculate employees’ Social Security wages previously — and provide that information to their plan administrators. Sponsors also must institute procedures to restrict catch-up contributions to Roth contributions and communicate the changes to their employees.

The challenges are even greater for employers that don’t already have Roth contribution features in their traditional retirement plans. They have to choose between amending their plans to allow such contributions, which can take months to process and implement, or eliminating the ability to make catch-up contributions for all employees.

The IRS guidance

In Notice 2023-62, the IRS acknowledges the concerns related to the original effective date for the new requirements. In response, it has created an “administrative transition period,” extending the effective date to January 1, 2026. In other words, employers can allow catch-up contributions that aren’t designated as Roth contributions after December 31, 2023, and until January 1, 2026, without violating SECURE 2.0. And plans without Roth features may allow catch-up contributions during this period.

The guidance also addresses a drafting error in SECURE 2.0 that led to some questions about whether the law eliminated the ability of taxpayers to make catch-up contributions after 2023. The IRS made clear that plan participants age 50 or older can continue to make catch-up contributions in 2024 and beyond.

After-tax vs. pre-tax

Unlike pre-tax contributions, after-tax contributions don’t reduce your current-year taxable income, but they grow tax-free. This is a significant advantage if you expect to be subject to a higher income tax rate in retirement than you are at the time of your contributions.

You generally can withdraw “qualified distributions” without paying tax as long as you’ve held the account for at least five years. Qualified distributions are those made:

• On account of disability,
• On or after death, or
• After you reach age 59½.

You may be able to reap other savings from after-tax contributions, as well. For example, lower taxable income in retirement can reduce the amount you must pay for Medicare premiums and the tax rate on your Social Security benefits.

But you could have reasons to reduce your current taxable income with pre-tax contributions. For example, doing so could increase the amount of your Child Tax Credit, which phases out at certain income thresholds, as well as the amount of financial aid your children can obtain for higher education.

Note: Roth 401(k) contributions are currently subject to annual required minimum distributions (RMDs), like traditional 401(k)s. Beginning in 2024, though, designated Roth 401(k) contributions won’t be subject to RMDs until the death of the owner.

Potential future guidance

The IRS also used Notice 2023-62 to preview some additional guidance regarding Section 603 that’s “under consideration.” After taking into account any comments received, the IRS stated it is considering releasing future guidance concerning multi-employer plans and other out-of-the-ordinary situations.

Don’t delay

The IRS’s extension of the effective date for the Section 603 requirements is good news for employers and employees alike. As noted, though, the requisite changes to achieve compliance will take some time and effort to put into place. Plan sponsors would be wise to start sooner rather than later.

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