Take Advantage of the Rehabilitation Tax Credit When Altering or Adding to Business Space

If your business occupies substantial space and needs to increase or move from that space in the future, you should keep the rehabilitation tax credit in mind. This is especially true if you favor historic buildings.

The credit is equal to 20% of the qualified rehabilitation expenditures (QREs) for a qualified rehabilitated building that’s also a certified historic structure. A qualified rehabilitated building is a depreciable building that has been placed in service before the beginning of the rehabilitation and is used, after rehabilitation, in business or for the production of income (and not held primarily for sale). Additionally, the building must be “substantially” rehabilitated, which generally requires that the QREs for the rehabilitation exceed the greater of $5,000 or the adjusted basis of the existing building.

A QRE is any amount chargeable to capital and incurred in connection with the rehabilitation (including reconstruction) of a qualified rehabilitated building. QREs must be for real property (but not land) and can’t include building enlargement or acquisition costs.

The 20% credit is allocated ratably to each year in the five-year period beginning in the tax year in which the qualified rehabilitated building is placed in service. Thus, the credit allowed in each year of the five-year period is 4% (20% divided by 5) of the QREs with respect to the building. The credit is allowed against both regular federal income tax and alternative minimum tax.

The Tax Cuts and Jobs Act, which was signed at the end of 2017, made some changes to the credit. Specifically, the law:

Requires taxpayers to take the 20% credit ratably over five years instead of in the year they placed the building into service
Eliminated the 10% rehabilitation credit for pre-1936 buildings

Contact us to discuss the technical aspects of the rehabilitation credit. There may also be other federal tax benefits available for the space you’re contemplating. For example, various tax benefits might be available depending on your preferences as to how a building’s energy needs will be met and where the building is located. In addition, there may be state or local tax and non-tax subsidies available.

Getting beyond these preliminary considerations, we can work with you and construction professionals to determine whether a specific available “old” building can be the subject of a rehabilitation that’s both tax-credit-compliant and practical to use. And, if you do find a building that you decide you’ll buy (or lease) and rehabilitate, we can help you monitor project costs and substantiate the compliance of the project with the requirements of the credit and any other tax benefits.

The SECURE 2.0 Act, enacted at the end of 2022, expands on the retirement plan improvements made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). In general, SECURE 2.0 gives employees the opportunity to save more and save longer for retirement, at a lower tax cost.

In some cases, the new law imposes additional requirements on manufacturers (and other employers) that may add to the cost of providing a 401(k) plan or other defined contribution plan. Other provisions are optional. But both the required and optional provisions can help you use your company’s retirement plan to retain and attract quality employees in light of the current tight labor market. And if you’re a smaller manufacturer without a 401(k) plan in place yet, you may be eligible for a tax break that has become even more valuable.

New requirements

Here are two significant requirements that will go into effect after 2024:

Automatic enrollment. For new 401(k) plans adopted after 2024, generally, the plan must provide automatic enrollment to eligible employees. Employees could still opt out. If an employee doesn’t opt out, employee deferrals ranging from 3% to 10% will be made, subject to escalation provisions.

Part-time workers. Building on changes in the first SECURE Act, the new law requires companies to include more part-time employees in their 401(k) plans. Effective for plan years beginning after 2024, part-timers are eligible to contribute if they’ve completed at least 500 hours of service for two consecutive years (and are at least age 21), down from three years of service. Vesting is based on completion of 500 hours of service in a year.

Optional enhancements

Here are some optional ways SECURE 2.0 allows you to enhance your company’s 401(k) plan:

Matching employer contributions. SECURE 2.0 allows companies to designate any matching contributions, as well as fully vested employer nonelective contributions, as after-tax contributions to a Roth account. This provision is now in effect. With a Roth account, future distributions made to retired employees are generally exempt from federal income tax. This can be attractive to employees with incomes that are too high for them to be eligible to contribute to Roth IRAs or who are concerned about owing income tax on distributions during retirement.

Student loan repayments. Under the new law, manufacturers may choose to provide a matching contribution to 401(k) accounts of their employees based on their student loan obligations. This provision takes effect in 2024. Thus, employees may be encouraged to save for retirement even while they’re still paying off their student loans. This is a low-cost incentive that manufacturers can use to help attract and retain employees who may be burdened with student loan debt.

Emergency withdrawals. For distributions made after 2023, a manufacturer can amend its 401(k) plan to allow participants to withdraw up to $1,000 for personal emergency expenses. These are unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The plan administrator may rely on the employee’s certification for this purpose.

A valuable credit

Under the first SECURE Act, a manufacturer with 100 or fewer employees could claim a credit for three years equal to 50% of the administrative costs of starting a 401(k) plan, up to a maximum of $5,000. Beginning in 2023, companies with 50 or fewer employees can now qualify for a credit equal to 100% of the costs, up to $5,000.

The 100% credit is phased out for a business with 51 to 100 employees. An additional credit of up to $1,000 per employee is available for employer contributions for employees earning less than $100,000.

Other enhancements

Here are two more provisions manufacturers should be aware of:

Cash-out limit. If a plan participant is terminated from employment — whether he or she retired, quit or was fired — a manufacturer may “cash out” the ex-employee’s interest if it’s below a specified level. Previously, the limit was $5,000. SECURE 2.0 increases the cash-out limit to $7,000, beginning in 2024.

Catch-up contributions. Currently, 401(k) participants who are age 50 or older can make an extra “catch-up contribution,” subject to an annual limit ($7,500 in 2023). Beginning in 2025, SECURE 2.0 increases the limit for those age 60 through 63 to the greater of $10,000 or 150% of the regular catch-up contribution limit, indexed for inflation after 2025. One catch: For any participant with wages in the prior year exceeding $145,000, any age-based catch-up contributions must be made to a Roth account, beginning in 2024.

Learn more

Bear in mind that this is only an overview of key changes that may apply to your manufacturing company’s 401(k) plan. Other provisions may affect your company. If you have questions regarding the new law, please contact us.

In January, the Biden administration issued a policy statement indicating its intent to extend the COVID-19 national emergency (NE) and public health emergency (PHE) declarations to May 11, 2023, and then end both emergencies on that date. However, in a Joint Resolution, Congress passed and the President signed legislation ending the COVID-19 NE on April 10.

The Centers for Medicare & Medicaid Services has clarified that the legislation ending the NE doesn’t affect the PHE. This is germane for employers that sponsor group health plans because the end of the PHE may affect the administration of those plans. In fact, the U.S. Department of Labor (DOL), the U.S. Department of Health and Human Services, and the IRS recently issued frequently asked questions (FAQs) addressing how group health plans and insurers will be affected. Here are some highlights.

Diagnostic testing

Coverage requirements for COVID-19 diagnostic testing won’t apply to items or services furnished after the end of the PHE. Over-the-counter tests are considered “furnished” on the date of purchase.

For testing services, plan sponsors should look to the earliest date on which a service was provided to determine whether the service was furnished during the PHE. For example, if a health care provider collects a specimen to perform COVID-19 testing on the last day of the PHE, but the laboratory analysis occurs on a later date, both the collection and analysis should be treated as furnished during the PHE.

Plans that continue to cover diagnostic testing — including over-the-counter tests — after the PHE may choose to impose cost-sharing, prior authorization or other medical management requirements. Plans will no longer be required to reimburse out-of-network testing providers the cash price listed on their websites. Likewise, providers won’t be required to post their cash prices, though they’re encouraged to do so for at least 90 days beyond the PHE to enable claims processing for tests furnished before the end of the PHE.

Participant notification

Plan sponsors are encouraged to notify participants and beneficiaries of any changes to the terms of coverage for the diagnosis or treatment of COVID-19 because of the end of the PHE.

Generally, material modifications that would affect the content of the summary of benefits and coverage, and that don’t occur in connection with a renewal of coverage, must be disclosed no later than 60 days before the modification’s effective date. However, some plans have increased benefits or reduced cost-sharing for:

The diagnosis or treatment of COVID-19, and
Telehealth or remote care services.

If these plans revoke such changes when the PHE ends, they’ll be deemed to have satisfied their obligation to provide advance notice of the material modification if they:

Previously notified participants of the general duration of the increased benefits (such as, that they applied only during the PHE), or
Notify participants reasonably in advance of the reversal.

The FAQs clarify that previous notices satisfy the advance notice requirement only if provided during the current plan year. Do note, however, that the Employee Retirement Income Security Act requires that a summary of material modification be furnished no later than 60 days after adoption of a material reduction in a group health plan’s covered services or benefits.

Preventive services and vaccines

Non-grandfathered plans must continue to cover, without cost-sharing, qualifying preventive services related to COVID-19 — including vaccines. The coverage must be provided within 15 business days after a recommendation is made by the U.S. Preventive Services Task Force or Advisory Committee on Immunization Practices.

After the PHE ends, a plan isn’t required to cover vaccines from an out-of-network provider if the plan has a network of providers. A plan may impose cost-sharing if such coverage is provided. If a plan has no provider in its network who can provide a qualifying preventive service, the plan must cover the service out-of-network without cost-sharing.

A long way

In a recent blog post, Lisa M. Gomez of the DOL observed, “We have come a long way from the time of businesses being closed and mandatory quarantine periods.” So true, though challenges will remain for plan sponsors nevertheless. Please contact us for help managing the costs of your organization’s health care benefits.

The Inflation Reduction Act (IRA) extended and expanded the Section 30D Clean Vehicle (CV) Credit, previously known as the Electric Vehicle (EV) Credit. The credit now covers “clean vehicles,” which include plug-in hybrids, hydrogen fuel cell cars and EVs.

On April 17, 2023, the IRS will publish proposed regulations to clarify how a CV can qualify for the credit. The proposed regs effectively limit the number of currently available models that qualify, due to strict sourcing requirements that will apply to CVs that buyers take delivery of on or after April 18, 2023. The federal government is taking steps to help taxpayers identify eligible vehicles.

The previous EV Credit

The Sec. 30D EV Credit has been available since 2008. Prior to the IRA, it started at $2,500, with a maximum credit of $7,500. (Note that the EV Credit remains available for qualifying vehicles placed in service on or before April 17, 2023.)

It was also subject to a cap based on the number of qualifying vehicles a manufacturer had produced. Because of this cap, some popular EVs — including those made by Tesla, Toyota and General Motors — were no longer eligible for the EV Credit.

The extended and expanded CV Credit

The CV Credit continues to top out at $7,500, but the IRA splits it into two parts, based on satisfying new sourcing requirements for both critical minerals and battery components. Vehicles that meet only one of the two requirements are eligible for a $3,750 credit.

Specifically, an “applicable percentage” of the value of the critical minerals contained in the battery must be extracted or processed in the United States or a country with which it has a free trade agreement, or be recycled in North America. Similarly, an applicable percentage of the value of the battery components must be manufactured or assembled in North America. The IRA increases the applicable percentage for both requirements every year starting in 2023, with initial percentages of 40% for critical minerals and 50% for battery components.

The IRA includes price restrictions, too. Vans, pickup trucks and SUVs with a manufacturer’s suggested retail price (MSRP) of more than $80,000 don’t qualify for the credit, nor do automobiles with an MSRP higher than $55,000. Qualified vehicles also must undergo final assembly in North America.

The credit also is subject to income limitations. It’s not available to taxpayers with a modified adjusted gross income (MAGI) over:

$150,000 for single filers,
$300,000, for joint filers, or
$225,000, for head of household filers.

In addition, the credit isn’t allowed for vehicles with any critical minerals (after 2025) or battery components (after 2024) from a “foreign entity of concern.” The IRA doesn’t define this term, but the IRS and U.S. Department of Treasury have stated that future guidance will address this provision.

The credit isn’t refundable and can’t be carried forward if it’s claimed as a personal credit. It can, however, be carried forward if claimed as a general business credit. If a taxpayer uses a qualified vehicle for both personal and business use, and the business use is less than 50% of the total use for a tax year, the credit must be apportioned accordingly.

Relevant proposed regs

The sourcing requirements are intended to reduce manufacturers’ reliance on suppliers in countries such as China. As a result, many of the proposed regs are of greater interest to manufacturers than consumers. They spell out, for example, processes for determining the percentages of value of critical minerals and of battery components. They also explain how to identify countries with which the United States has a free trade agreement.

But the proposed regs also include several provisions with useful information for taxpayers. For example, the regs define MSRP as the sum of 1) the MSRP for a vehicle and 2) the MSRP for each accessory or item of optional equipment that’s physically attached to the vehicle at the time of delivery to the dealer. This information is found on the label affixed to the vehicle’s windshield or side window. So adding optional equipment can result in losing out on the CV Credit in some cases.

As far as the “final assembly in North America” requirement, the proposed regs provide that taxpayers can rely on the final assembly point reported on the label affixed to the vehicle. Alternatively, they can rely on the vehicle’s plant of manufacture reported in the vehicle identification number. North America refers to the United States, Canada and Mexico.

The proposed regs also discuss the treatment of the credit when a vehicle has multiple owners. They state that only one taxpayer can claim the credit; no allocation or prorating is permitted. In the case of married taxpayers filing jointly, either spouse may be identified as the owner claiming the credit on the seller’s report.

If a partnership or S corporation places an eligible CV into service, the credit is allocated among the partners or shareholders. They can claim their portion on their individual tax returns.

The proposed regs also clarify the MAGI limit. The credit isn’t available for any taxable year if the lesser of 1) the taxpayer’s MAGI for the year or 2) the taxpayer’s MAGI for the preceding year exceeds the applicable threshold. If a taxpayer’s filing status changes (for example, from single to married) during this two-year period, the MAGI limit is satisfied if the MAGI doesn’t exceed the threshold amount in either year based on the applicable filing status for that year.

The MAGI limit doesn’t apply to taxpayers other than individuals. If a qualified vehicle is placed in service by a partnership or S corporation, though, the limit will apply to partners or shareholders who claim their portion of the credit.

In the market for a CV?

While the IRS has promised additional guidance on the CV Credit, taxpayers interested in taking advantage of the credit needn’t wait. The U.S. Department of Energy has created a website that includes a list of eligible clean vehicles. The list will be regularly updated as manufacturers provide information on their vehicles that qualify for the credit. For additional information from the IRS, visit: https://bit.ly/3mkTubh. If you have questions regarding the CV Credit, please don’t hesitate to contact us.

No matter how diligently you prepare, your estate plan can quickly be derailed if you or a loved one requires long-term home health care or an extended stay at an assisted living facility or nursing home. Long-term care (LTC) expenses aren’t covered by traditional health insurance policies or Medicare. So it’s important to have a plan to finance these costs, either by setting aside some of your savings or purchasing insurance. Let’s take a closer look at three options.

1) LTC insurance

An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing, toileting, transferring (getting in and out of a bed or chair) and maintaining continence.

LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. To qualify, a policy must:

Be guaranteed renewable and noncancelable regardless of health,
Not delay coverage of pre-existing conditions more than six months,
Not condition eligibility on prior hospitalization,
Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment and that this condition has lasted or is expected to last at least 90 days.

It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium tax deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income (AGI), so some people may not have enough medical expenses to benefit from this advantage. It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.

2) Hybrid insurance

Also known as “asset-based” policies, hybrid policies combine LTC benefits with whole life insurance or annuity benefits. These policies have advantages over standalone LTC policies.

For example, their health-based underwriting requirements typically are less stringent and their premiums are usually guaranteed — that is, they won’t increase over time. Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.

3) Employer-provided plans

Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees.

Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals. And premium payments are excluded from employees’ wages for income and payroll tax purposes.

Think long term

Given the potential magnitude of LTC expenses, the earlier you begin planning, the better. We can help you review your options and analyze the relative benefits and risks.

As a business owner, you’ll likely need to have your company appraised at some point. An appraisal is essential in the event of a business sale, merger or acquisition. It’s also important when creating or updating a buy-sell agreement or doing estate planning. You can even use a business valuation to help kickstart or support strategic planning.

A good way to prepare for the appraisal process, or just maintain a clear big-picture view of your company, is to learn some basic valuation terminology. Here are five terms you should know:

1. Fair market value. This is a term you may associate with selling a car, but it applies to businesses — and their respective assets — as well. In a valuation context, “fair market value” has a long definition:

The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

2. Fair value. Often confused with fair market value, fair value is a separate term — defined by state law and/or legal precedent — that may be used when valuing business interests in shareholder disputes or marital dissolution cases. Typically, a valuator uses fair market value as the starting point for fair value, but certain adjustments are made in the interest of fairness to the parties.

For example, dissenting shareholder litigation often involves minority shareholders who are “squeezed out” by a merger or other transaction. Unlike the “hypothetical, willing” participants contemplated under the definition of fair market value, dissenting shareholders are neither hypothetical nor willing. The fair value standard helps prevent controlling shareholders from taking advantage of minority shareholders by forcing them to accept a discounted price.

3. Going concern value. This valuation term often comes into play with buy-sell agreements and in divorce cases. Going concern value is the estimated worth of a company that’s expected to continue operating in the future. The intangible elements of going concern often include factors such as having a trained workforce; an operational plant; and the necessary licenses, systems and procedures in place to continue operating.

4. Valuation premium. Sometimes, because of certain factors, an appraiser must increase the estimate of a company’s value to arrive at the appropriate basis or standard of value. The additional amount is commonly referred to as a “premium.” For example, a control premium might apply to a business interest that possesses the requisite power to direct the management and policies of the subject company.

5. Valuation discount. In some cases, it’s appropriate for an appraiser to reduce the value estimate of a business based on specified circumstances. The reduction amount is commonly referred to as a “discount.” For instance, a discount for lack of marketability is an amount or percentage deducted from the value of an ownership interest to reflect that interest’s inability to be converted to cash quickly and at minimal cost.

The IRS has released proposed regulations that provide guidance for manufacturers on the implementation of the Advanced Manufacturing Investment Credit. The credit, created by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, encourages manufacturers to invest in semiconductor manufacturing property. Among other things, the regs address the eligibility requirements and provide key definitions that clarify the credit.

The credit in a nutshell

The Advanced Manufacturing Investment Credit, codified as Section 48D of the Internal Revenue Code, is generally equal to 25% of an eligible taxpayer’s qualified investment in an advanced manufacturing facility. Specifically, the facility must have a primary purpose of manufacturing finished semiconductors or finished semiconductor manufacturing equipment.

A taxpayer’s qualified investment is its basis in any qualified property that’s 1) integral to the operation of the advanced manufacturing facility, and 2) placed in service during the tax year (after Dec. 31, 2022). The credit is effectively refundable, because taxpayers can opt to receive it as an elective payment, which will be treated as a payment against equal tax liability.

Eligible taxpayers

An eligible taxpayer is one that 1) isn’t a “foreign entity of concern” (China, Russia, North Korea and Iran), and 2) hasn’t made an “applicable transaction” during the tax year. An applicable transaction is any significant transaction involving the material expansion of semiconductor manufacturing capacity in any foreign entity of concern.

Under the regs, a significant transaction is:

A transaction whose value is $100,000 or more, or
A series of transactions in which the aggregate value is $100,000 or more.

Notably, the proposed regulations provide for a recapture of the Sec. 48D credit if a taxpayer engages in an applicable transaction with a foreign entity of concern within 10 years of placing in service the property that qualifies for the credit. The IRS can recapture the credit from the taxpayer that claimed it, as well as members of affiliated groups and partnerships and S corporations that have made a direct pay election.

Critical definitions

According to the proposed regs, property is “integral” to the manufacturing of semiconductors or semiconductor manufacturing equipment if it’s used directly in the manufacturing operation and is essential to the completeness of the manufacturing operation. Materials, supplies or other inventory items that are transformed into a finished product aren’t considered integral.

The term “semiconductor” is narrowly defined as an integrated electronic device or system most commonly manufactured with materials such as silicon, using processes such as lithography, deposition and etching. This definition excludes various semiconductor components. It specifically includes analog and digital electronics; power electronics; and photonics for memory, processing, sensing, actuation and communications applications. Semiconductor manufacturing equipment is equipment integral to the making of semiconductors and subsystems that enable or are incorporated into the manufacturing equipment.

A research or storage facility can qualify as integral if used in connection with the manufacturing of semiconductors or semiconductor manufacturing equipment. But a research facility that doesn’t manufacture any type of semiconductors or semiconductor manufacturing equipment doesn’t qualify.

Qualified property also doesn’t include buildings or portions of buildings used for offices, administrative services or other services unrelated to manufacturing. The regs identify several functions (for example, human resources, sales, payroll, and accounting and legal services) that are unrelated to manufacturing. While the list includes “security services,” it excludes cybersecurity operations from that term.

The primary purpose requirement

Under the regs, the determination of whether a facility’s primary purpose is manufacturing finished semiconductors or finished semiconductor equipment is made based on all the facts and circumstances. The regs list several relevant factors, including the facility’s design and the possession of permits or licenses needed to manufacture such products. Facilities that manufacture materials or chemicals that are supplied to an advanced manufacturing facility don’t meet the primary purpose requirement themselves.

An example in the regs concludes that the primary purpose requirement is satisfied where 75% of the property’s output is dedicated to semiconductor manufacture. The regs don’t explicitly include a so-called 75% test, though.

Stay tuned

The areas discussed above represent just a sampling of the proposed regs, and the IRS requested comments on several areas, including the scope of the definition of a semiconductor. However, manufacturers can rely on the proposed regs if they follow them in their entirety and in a consistent manner. Contact us if you have questions about the Advanced Manufacturing Investment Credit.

Yeo & Yeo’s Education Services Group professionals are pleased to present five sessions during the April 25-27 MSBO Conference & Exhibit Show at Amway Grand Plaza and DeVos Place, Grand Rapids. We invite you to join us to gain new insights into managing your Michigan school.

Wednesday, April 26

How to Prepare for a Headache-Free Audit – 9:20-10:20 a.m.
- Presenter: Michael Evrard
GASB Update: Statement 96 and Beyond – 10:40-11:40 a.m.
- Presenter: Kristi Krafft-Bellsky
Allowable Expenses – 10:40-11:40 a.m.
- Presenters: Jessica Rolfe and Dana Abrahams from Clark Hill PLC

Thursday, April 27

Frequently Found Audit Issues (MDE vs. Auditor Perspective) – 8:20-9:20 a.m.
- Presenters: Jennifer Watkins and Gloria Suggitt from MDE
Fraud Prevention – 2:00-2:30 p.m.
- Presenter: Jennifer Watkins

We encourage you to visit our booth #700 for one-on-one conversations with our education professionals. Hope to see you there!

If you’re thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved, there are a couple of options to consider. Let’s take a look at a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

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

SEP involves easy setup

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

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $66,000 for 2023. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

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

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

SIMPLE Plans

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

For 2023, SIMPLE deferrals are up to $15,500 plus an additional $3,500 catch-up contributions for employees ages 50 and older.

On March 27, 2023, the Financial Accounting Standards Board (FASB) published narrowly drawn amendments to the lease accounting rules. The updated guidance clarifies issues that are relevant to rental agreements between businesses that have the same owner.

Written vs. verbal leases

Accounting Standards Update (ASU) No. 2023-01, Leases (Topic 842) Common Control Arrangements, explains how related business entities that are controlled by the same owner determine whether a lease exists. Specifically, it provides an optional practical expedient to private companies and not-for-profit organizations that aren’t conduit bond obligors. (A practical expedient is an accounting workaround that allows a company to use a simpler route to get to the same outcome.) The guidance settles questions about how to approach verbal common control leases and whether legal counsel is required to determine the terms and conditions of a lease.

The practical expedient is applicable only for written leases. Under the updated guidance, a private company electing the practical expedient must use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, how to account for it. In the case of a lease agreement that’s verbal — as is often the case between private entities under common control — the company must document the existing unwritten terms before applying the lease accounting rules.

The lessee isn’t required to determine whether written terms and conditions are enforceable when applying the practical expedient. In addition, companies are allowed to apply the practical expedient on an arrangement-by-arrangement basis.

Leasehold improvements

The accounting rules related to certain leasehold improvements have also changed for both public and private organizations under ASU 2023-01. Examples of leasehold improvements include installing carpet, painting and building out the space for the lessee’s needs. For example, a salon might install sinks and plumbing fixtures, a chemical manufacturer might need ventilation for its production process and an eco-friendly restaurant might design a rooftop garden to attract patrons.

The amendments require lessees to amortize leasehold improvements over the improvements’ useful lives to the common control group — regardless of the lease term. When the lessee no longer controls that underlying asset, the transfer of those improvements must be accounted for through equity or net asset. The improvements remain subject to the impairment requirements of Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment.

Implementation guidance

ASU No. 2023-01 is an amendment to ASC Topic 842, Leases, which was issued in 2016. This standard requires the full effect of entities’ long-term lease obligations to be reported on the balance sheet. It went into effect for public entities in 2019 and for private entities in 2022.

The new-and-improved rules will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that haven’t yet been made available for issuance. If a company adopts the amendments in an interim period, the company must adopt them as of the beginning of the fiscal year that includes that interim period.

If your company decides to adopt ASU 2023-01 concurrently with the adoption of Topic 842, you should use the same transition approach as that standard. If your company adopts the rules in a subsequent period, you can do so either retrospectively or prospectively.

For more information

Does your company rent property from a related party? We can help you report these arrangements in accordance with the updated guidance. Our accounting pros understand how to determine whether a common control lease exists and how to report leasehold improvements and other fixes that have been made to rented property.

Qualified educational assistance programs, sometimes referred to as “tuition reimbursement programs,” are a relatively popular employee benefit. Employers can use one to provide up to $5,250 per employee per year as a tax-free fringe benefit for undergraduate, graduate and continuing education courses.

However, a commonly asked question is: Can employers also use such programs to help employees repay outstanding student loans — say, from college?

Important points

The short answer is yes. Under the loan repayment provision of Internal Revenue Code Section 127, a qualified educational assistance program can be used to help employees repay certain student loans. But this benefit is available only for a limited time and other restrictions apply. Here are some important points to consider:

Expiration date. The loan repayment provision will expire at the end of 2025, unless Congress extends it.

Eligible loans. Loan repayment benefits can be used to pay principal, interest or both on any qualified education loan incurred by an employee for the employee’s education. For this purpose, the term “qualified education loan” has the same meaning as it has for the federal income tax deduction on education loan interest. This covers most loans for students who are or have been enrolled at least half-time in a degree program at an accredited post-secondary institution.

Method of payment. Employers may choose to pay the lenders directly or reimburse the employees. Direct payments may offer greater assurance that the funds are being properly used. Employers offering reimbursements should adopt substantiation procedures that reasonably assure qualifying loan payments are made.

Amount limitation. Student loan repayment assistance will be combined with any other educational assistance when applying the $5,250 aggregate annual limit on educational assistance benefits. Consequently, payments for any other types of educational assistance offered will reduce the nontaxable amount available to employees for student loan repayments.

Nondiscrimination. If an employer doesn’t make the same benefits available to all employees, it will need to demonstrate that benefit eligibility doesn’t discriminate in favor of highly compensated employees. Whether or not all employees can participate equally in it, an educational assistance program must limit benefits so that not more than 5% of the benefits paid during a year are paid to those who own more than 5% of the organization.

Documentation. New qualified educational assistance programs must be put in writing. Doing so entails preparing and adopting a document that describes all program features, including student loan repayment assistance. An employer will need to amend an existing program document to add student loan repayment benefits, unless the program already authorizes any type of educational assistance within the meaning of Sec. 127.

Notification. Eligible employees must be given reasonable notification of the program’s availability and terms.

A good fit

A qualified educational assistance program can be an excellent way to fund professional training and continuing education for employees. And, for a little while longer, it may also help attract and retain workers struggling to repay student loans. Our firm can assist you in determining whether one of these programs is a good fit for your organization.

Building flexibility into your estate plan using various strategies is generally advised. The reason is that life circumstances change over time, specifically evolving tax laws and family situations. One technique that provides flexibility is to provide your trustee with the ability to decant a trust.

Define “decanting”

One definition of decanting is to pour wine or another liquid from one vessel into another. In the estate planning world, it means “pouring” assets from one trust into another with modified terms. The rationale underlying decanting is that, if a trustee has discretionary power to distribute trust assets among the beneficiaries, it follows that he or she has the power to distribute those assets to another trust.

Depending on the trust’s language and the provisions of applicable state law, decanting may allow the trustee to:

Correct errors or clarify trust language,
Move the trust to a state with more favorable tax or asset protection laws,
Take advantage of new tax laws,
Remove beneficiaries,
Change the number of trustees or alter their powers,
Add or enhance spendthrift language to protect the trust assets from creditors’ claims, or
Move funds to a special needs trust for a disabled beneficiary.

Unlike assets transferred at death, assets that are transferred to a trust don’t receive a stepped-up basis, so they can subject the beneficiaries to capital gains tax on any appreciation in value. One potential solution is to use decanting.

Decanting can authorize the trustee to confer a general power of appointment over the assets to the trust’s grantor. This would cause the assets to be included in the grantor’s estate and, therefore, to be eligible for a stepped-up basis.

Follow your state’s laws

Many states have decanting statutes, and in some states, decanting is authorized by common law. Either way, it’s critical to understand your state’s requirements. For example, in some states, the trustee must notify the beneficiaries or even obtain their consent to decanting.

Even if decanting is permitted, there may be limitations on its uses. Some states, for example, prohibit the use of decanting to eliminate beneficiaries or add a power of appointment, and most states won’t allow the addition of a new beneficiary. If your state doesn’t authorize decanting, or if its decanting laws don’t allow you to accomplish your objectives, it may be possible to move the trust to a state whose laws meet your needs.

Beware of tax implications

One of the risks associated with decanting is uncertainty over its tax implications. Let’s say a beneficiary’s interest is reduced. Has he or she made a taxable gift? Does it depend on whether the beneficiary has consented to the decanting? If the trust language authorizes decanting, must the trust be treated as a grantor trust? Does such language jeopardize the trust’s eligibility for the marital deduction? Does distribution of assets from one trust to another trigger capital gains or other income tax consequences to the trust or its beneficiaries?

Decanting can breathe new life into an irrevocable trust. We’d be pleased to help you better understand the pros and cons of decanting a trust.

Summer is around the corner so you may be thinking about hiring young people at your small business. At the same time, you may have children looking to earn extra spending money. You can save family income and payroll taxes by putting your child on the payroll. It’s a win-win!

Here are four tax advantages.

1. Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $13,850 standard deduction for 2023 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

2. Claiming income tax withholding exemption

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,250 for 2023 (and includes more than $400 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

3. Saving Social Security tax

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

4. Saving for retirement

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $66,000 for 2023).

Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

Employers that offer a 401(k) plan should generally encourage participants to invest as much as they can and not touch the money until retirement. However, there may be instances when employees feel they need to access their plan funds before reaching retirement age.

In some of those cases, participants may qualify for a 401(k) hardship distribution. These differ from plan loans in that hardship distributions don’t need to be repaid — though they’re still subject to income taxes and a 10% penalty if under the age of 59½. Plan administrators must approve a hardship distribution under the current standard.

The previous standard

Generally, for distributions made before 2020, plans could use either of two standards for determining whether a hardship distribution was necessary: a safe-harbor standard or a non–safe-harbor standard. The safe-harbor standard:

Required a participant to first obtain all currently available distributions and plan loans, and
Prohibited elective deferrals and after-tax contributions to plans maintained by the plan sponsor for at least six months after the hardship distribution.

The non–safe-harbor standard was nominally a determination based on all relevant facts and circumstances. However, IRS regulations allowed an employer to rely on a participant’s representation that the emergency financial need couldn’t reasonably be met by certain specified means — such as liquidation of assets, loans and other plan distributions. Approval was also contingent on the plan sponsor having no contrary knowledge of the participant’s ability to pay.

The current rules

For distributions made on or after January 1, 2020, there’s only one relatively simple standard. It imposes two requirements to establish that a distribution is necessary:

Employees must obtain any other currently available distributions under the plan and any other deferred-compensation plan, whether qualified or nonqualified, maintained by the employer, including dividends from an employee stock ownership plan, and
Employees must represent in writing, which includes electronic mediums and other IRS-approved formats, that they have insufficient cash or other liquid assets reasonably available to satisfy the financial need.

Cash and other liquid assets aren’t “reasonably available” if they’re earmarked for payment of another obligation in the near future, such as rent or a mortgage. A plan administrator can’t accept an employee’s representation if the administrator has actual knowledge contrary to the representation.

Additional conditions

A 401(k) plan can impose only the minimum conditions described above or it can impose additional conditions if, for example, the plan sponsor is particularly concerned about preserving accounts solely for retirement. Additional conditions could include requiring that employees first take all nontaxable loans available under the employer’s plans.

For distributions made on or after January 1, 2020, however, additional conditions can’t include a required suspension of elective contributions or employee after-tax contributions under the rules for qualified plans — which include 401(k)s — and certain other retirement plans.

Administrative challenges

There’s no doubt that 401(k) plans are a valuable employee benefit that can help attract and retain employees. However, one of their challenges is managing the administrative requirements, including the current standard for hardship distributions. Contact us for help understanding all the tax and information-reporting rules applicable to retirement benefits.

What do you do with your financial statements after your CPA delivers them? If you’re like most business owners and managers, you breathe a sigh of relief that they’re finished, file them away and go back to running the business. But financial statements can be a useful tool to help improve business operations in the future.

Eye on profitability

The income statement is a good starting point for using your financials to analyze performance and remedy inefficiencies and anomalies. Here are four ratios you can compute from income statement data:

1. Gross profit margin. This is calculated by dividing profit after direct costs by revenue. It’s a widely used ratio, measuring a company’s ability to cover the direct cost of sales.

2. Net profit margin. This is calculated by dividing net income by revenue. If the margin is rising, the company must be doing something right. Often, this ratio is computed on a pretax basis to accommodate for differences in tax rates.

3. Return on assets. This is calculated by dividing net income by the company’s total assets. The return shows how efficiently management is using its assets.

4. Return on equity. This is calculated by dividing net profits by shareholders’ equity. The resulting figure tells how well the shareholders’ investment is performing compared to competing investment vehicles.

Profitability ratios can be used to compare your company’s performance over time and against industry norms.

Connecting the dots

If your company’s profitability ratios have deteriorated compared to last year or industry norms, it’s important to find the cause. If the whole industry is suffering, the decline is likely part of a macroeconomic trend. If the industry is healthy, yet your company’s margins are falling, it’s time to determine the cause and then take corrective measures.

Depending on the source of the problem, you might need to cut costs, lay off unproductive workers, automate certain business functions, eliminate unprofitable segments or product lines, raise prices — or possibly even investigate for fraud. For instance, a hypothetical manufacturer might discover that the reason its gross margin has fallen is rising materials costs because its procurement manager is colluding with a supplier in a kickback scam.

Contact us

Today’s uncertain, inflationary markets are putting the squeeze on profits in many sectors. But don’t accept that excuse without first investigating further. Your income statement provides critical clues into what’s happening at your company.

Examine the main components — gross revenue, cost of sales, and selling and administrative costs — to assess if specific line items have fallen due to company-specific or industrywide trends. Also, monitor comparable public companies, trade publications and the internet for information. We can help you determine possible causes and brainstorm ways to unplug your profit drains.

No matter how much effort you’ve invested in crafting an estate plan, your will, trusts and other official documents may not be enough. Consider also drafting a “road map.” Essentially, it’s an informal letter that guides your family in executing your plan according to your wishes.

What to address

Among other things, your road map may include:

A list of important contacts, including your estate planning attorney, accountant, insurance agent and financial advisors,
The location of your will, living and other trusts, tax returns and records, powers of attorney, insurance policies, deeds, and automobile titles,
A personal financial statement that lists stocks, bonds, real estate, bank accounts, retirement plans, vehicles and other assets, as well as information about mortgages, credit cards, and other debts,
An inventory of digital assets — such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, and social media accounts — including login credentials or a description of arrangements made to provide your representative with access,
Computer passwords and home security system codes,
Safe combinations and the location of any safety deposit boxes and keys, and
The location of family heirlooms or other valuable personal property.

If you’ve preplanned your funeral, include information about the arrangements. If you haven’t preplanned it, consider explaining your burial wishes in the road map.

Communicate your motives

Use the road map to explain your reasoning behind certain estate planning decisions. Doing so can go a long way toward easing disputes over your estate after you’re gone.

For example, perhaps you’re distributing your assets unequally, distributing specific assets to specific heirs or placing certain restrictions on an heir’s entitlement to trust distributions. There are many good reasons for these strategies, but it’s important for your family to understand your motives to avoid hurt feelings.

Finally, like other estate planning documents, your road map won’t be effective unless your family knows where to find it, so consider leaving it with a trusted advisor. Contact us if you’d like help drafting an estate planning road map.

The Michigan treasury department has confirmed that a tax cut triggered by the state’s budget surplus will go into effect for 2023.

The income tax will decrease from 4.25% to 4.05%, the lowest income tax rate since 2007. It will amount to $650 million going back to Michigan residents. For an unmarried filer with no children making about $52,500 a year, the state’s median income for workers in 2021, it means a reduction of about $95 over the next year. The average taxpayer, the Michigan Department of Treasury said in a release, will save about $50.

The tax change will be effective as of January 1, 2023. Withholding in paychecks will remain the same. When Michiganders file their 2023 state income taxes in 2024, they will see the rate adjustment in the form of less tax owed or a larger refund.

The tax cut is the result of a 2015 law that required the rate to go into effect if Michigan’s general fund grew faster than the rate of inflation beginning in 2023. The state’s massive budget surplus triggered the tax cut. Lawmakers will need to determine if the cut will be temporary for one year, or a permanent reduction.

If you’ve been following the news lately, you’ve surely heard or read about the sudden rise in concern about the banking industry. Although the story is still unfolding, an important lesson for business owners is already clear: You’ve got to be constantly on guard against the many risks to your company’s financial solvency.

One way that banks are advised to guard against catastrophic failure is to regularly perform “stress testing.” Doing so entails using various analytical techniques to determine whether and how the institution would be affected by specified financial developments or events.

But this advice isn’t necessarily restricted to banks. Businesses can use stress testing as well to get a better sense of how they should respond to a given threat.

Identify major risks

To get started on a basic stress-testing initiative, you’ll generally need to identify four types of risk to your company:

Operational risks, which cover the day-to-day workings of the business and can include dealing with the impact of a disaster arising from natural causes, human error or intentional wrongdoing,
Financial risks, which involve how the company manages its finances and protects itself from fraud,
Compliance risks, which relate to issues that might attract the attention of government regulators, and
Strategic risks, which refer to the business’s grasp of its own market as well as its ability to respond to changes in customer preferences.

When examining threats in each category, be as specific as possible. No detail or technicality is too small to factor into your assessment.

Meet with your team

Once you’ve identified the pertinent risks in each category, meet with your leadership team and professional advisors to improve your collective understanding of each threat. Even more important, discuss the anticipated financial impact of the identified risks and your company’s ability to absorb or adjust to the projected negative effects.

The ultimate objective is to develop a game plan to mitigate every identified risk. For example, if your business operates in an area prone to natural disasters, such as earthquakes or wildfires, you obviously need an evacuation and disaster recovery plan in place.

But other situations aren’t so obvious. For instance, if your company relies heavily on a key person, you should develop a viable succession plan and consider buying insurance in case that person unexpectedly dies or becomes disabled.

Focus on continuous improvement

Risk management is a continuous improvement process. New threats may emerge, old ones may fade — and even the best-laid plans tend go awry when left untended. Meet with your leadership team at least annually to conduct stress testing and assess the most current threats to your company. Contact us for help gathering and organizing relevant financial data and developing accurate projections.

Every manufacturer is different, so the right cash flow strategies depend on your situation. Let’s take a closer look at several areas where you may find ways to improve your cash flow.

Cash flow projections

You can’t manage cash flow unless you monitor and measure it. In good times, the income statement usually receives top billing. But in uncertain times, the balance sheet should play a more prominent role. While the income statement is a good gauge of past performance, the balance sheet provides a clearer picture of your current assets and liabilities and the amount of cash you’ll need in the coming weeks and months.

Project cash flow under best-case, worst-case and most-likely scenarios and have contingency plans in place for each. Monitor your actual results regularly to spot negative cash flow trends early and address them quickly. We can help you create a monitoring process.

Customers

Collecting from customers is key to maintaining strong cash flow, so it’s critical to evaluate and manage your customer base. If your manufacturing company is heavily concentrated in a handful of customers, consider options for growing that base, such as expanding into new markets, developing new products, or exploring new marketing techniques. Concentration risks generally happen when one customer represents more than 10% of your transactions.

Also, be sure to evaluate customers’ credit risk. Have their businesses been negatively affected by the pandemic and the resulting economic turmoil? How has this impacted their ability to pay?

Receivables

Examine ways to convert receivables into cash more quickly. Start by ensuring that invoices are issued on a timely basis. Also, provide customers with regular reminders before their payments are due. Consider offering discounts for early payment. Ask for deposits for custom jobs and milestone payments for long-term projects.

Another way to gain some stability in this area is through accounts receivable factoring. Factoring simply means selling receivables to a financial institution or other third party (the “factor”) at a discount. You obtain quick access to cash or a line of credit, and the factor takes responsibility for collecting receivables from your customers.

Before you go this route, be sure to consider the pros and cons. Pros include immediate access to cash and avoidance of many of the headaches associated with collecting from customers. Cons include the expense — factoring fees can be higher than interest rates on commercial loans — and potential customer confusion.

Vendors and suppliers

A concentrated supplier base can be just as damaging to a manufacturer’s cash flow as a concentrated customer base. The failure of a major supplier can hinder your ability to fulfill orders or meet demand. Consider ways you can build a more diversified supplier base.

Contact your vendors and suppliers to coordinate the timing of payments. They may be willing to offer extended payment terms or early payment discounts.

Inventory

Managing inventory can be a delicate balancing act. On one hand, reducing stock levels of raw materials or inventories of finished goods can help boost cash flow. On the other hand, increasing certain inventory levels can help mitigate supply chain risks and avoid raw material shortages.

Focused inventory management can help you strike a balance between conserving cash and meeting customer demand. To free up cash and reduce storage costs, consider liquidating obsolete or slow-moving inventory.

Overall efficiency

Don’t overlook the potential impact of efficiency improvements on cash flow. Look for opportunities to streamline processes by redesigning the factory layout, optimizing workflows or taking advantage of automation.

Also consider opportunities for cutting or eliminating expenses, either temporarily or permanently. Examples include reducing spending on nonessential travel, leasing equipment instead of buying it, reducing work hours, shifting work from temporary to existing permanent staff and delaying capital expenditures.

An ongoing priority

Managing your cash flow is critical during both good times and bad. We can help you monitor your cash flow and assesses its health.