Take a Balanced Approach to Retirement and Estate Planning Using a Split Annuity

If you’re approaching retirement or have already retired, one of the biggest challenges is balancing the need to maintain your standard of living with your desire to preserve as much wealth as possible for your loved ones. This balance can be difficult to achieve, especially when retirement can last decades. One strategy to consider is the split annuity, which creates a current income stream while preserving wealth for the future.

ABCs of an annuity

An annuity is a tax-advantaged investment contract, usually with an insurance company or other financial services provider. You pay either a lump sum or annual premiums, and in exchange, the provider makes periodic payments to you for a term of years or for life.

For purposes of the split annuity strategy discussed below, we’ll focus on “fixed” annuities, which generally provide a guaranteed minimum rate of return. Other types of annuities include “variable” and “equity-indexed,” which may offer greater upside potential but also involve greater risk.

Annuities can be immediate or deferred. As the names suggest, with an immediate annuity, payouts begin right away, while a deferred annuity is designed to begin payouts at a specified date in the future.

From a tax perspective, annuity earnings are tax-deferred — that is, they grow tax-free until they’re paid out or withdrawn. A portion of each payment is subject to ordinary income tax, and a portion is treated as a tax-free return of principal (premiums). The ability to accumulate earnings on a tax-deferred basis allows deferred annuities to grow more quickly than comparable taxable accounts, which helps make up for their usually modest interest rates.

Annuities offer some flexibility to withdraw or reallocate the funds should your circumstances change. But keep in mind that — depending on how much you withdraw and when — you may be subject to surrender or early withdrawal charges.

Split annuity strategy

A split annuity may sound like a single product, but in fact it simply refers to two (or more) annuities, usually funded with a single investment. In a typical split annuity strategy, you use a portion of the funds to purchase an immediate annuity that makes fixed payments to you for a specified term (10 years, for example). The remaining funds are applied to a deferred annuity that begins paying out at the end of the initial annuity period.

Ideally, at the end of the immediate annuity term, the deferred annuity will have accumulated enough earnings so that its value is equal to your original investment. In other words, if the split annuity is designed properly, you’ll enjoy a fixed income stream for a term of years while preserving your principal.

At the end of the term, you can reevaluate your options. For example, you might start receiving payments from the deferred annuity, withdraw some or all its cash value, or reinvest the funds in another split annuity or another investment vehicle.

If you’re interested in learning more about a split annuity, please contact us. We’d be pleased to help you determine if this strategy is right for your situation.

Under IRS regulations regarding electronic consents and elections, if a signature must be witnessed by a retirement plan representative or notary public, it must be witnessed “in the physical presence” of the representative or notary — unless guidance has provided an alternative procedure.

Recently, in Notice 2022-27, the IRS extended, through the end of 2022, its temporary relief from the physical presence requirement. This is good news for businesses that sponsor a qualified retirement plan.

Requirements for relief

The physical presence requirement is imposed under IRS regulations regarding electronic consents and elections for certain retirement plans — including 401(k) plans. Originally granted in the early days of the COVID-19 pandemic, the relief initially applied for 2020 and has been extended twice since then, most recently through June 30, 2022.

As set forth in the IRS notice granting the original relief, the physical presence requirement is deemed satisfied for signatures witnessed by a notary public if the electronic system for remote notarization:

Uses live audio-video technology, and
Is consistent with state law requirements for a notary public.

For signatures witnessed remotely by a plan representative, the physical presence requirement is deemed satisfied if the electronic system uses live audio-video technology and meets four requirements:

Live presentation of photo ID,
Direct interaction,
Same-day transmission, and
A signed acknowledgement by the representative.

The relief has now been extended through December 31, 2022, subject to the same conditions. According to the IRS, a further extension of the relief beyond the end of 2022 isn’t expected to be necessary. The tax agency is currently reviewing comments received in connection with the initial relief and subsequent extensions to determine whether to retain or permanently modify the physical presence requirement. Any modification would be proposed through the regulatory process, which would include the opportunity for further comment.

An appreciable move

Given that the return to in-person business interactions has happened in fits and starts, this extension is likely to be appreciated by employers that sponsor retirement plans and their participants. Although many 401(k) plans are designed to limit or eliminate the need for spousal consents, those that offer annuity forms of distribution are subject to the spousal consent rules. And some 401(k) plans must require spousal consent if a married participant wants to name a non-spouse as primary beneficiary. Contact us for more information.

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of four professionals.

James Edwards III, CPA, has been promoted to Senior Manager. Edwards leads the firm’s Client Accounting Software Team and is a member of the Manufacturing Services Group. His areas of expertise include tax planning and preparation and business advisory services with an emphasis on the manufacturing sector and for-profit entities. Edwards holds a Master of Science in Accounting from Grand Valley State University. He is a 2021 Leadership A2Y graduate. In the community, he serves as treasurer of the Ann Arbor Track Club and is a member of the Ann Arbor Area Community Foundation Network of Professional Advisors. He is based in the firm’s Ann Arbor office.

Steven Treece, CPA, has been promoted to Senior Manager. He is a member of the firm’s Agribusiness Services Group. His areas of expertise include tax planning and preparation, payroll tax consulting and business advisory services. Treece holds a Bachelor of Business Administration in Accounting from the University of Michigan. In the community, he serves on the board of the Rotary Club of Burton and is a committee chairperson for the Old Newsboys of Flint. He is based in the firm’s Flint office.

Kyle Richardson, CPA, has been promoted to Manager. He is a member of the firm’s Yeo Young Professionals Group and serves as the Yeo Young Professionals Service Chair for the Yeo & Yeo Foundation. He graduated from Walsh College, where he earned a Bachelor of Accountancy. His areas of specialization include business advisory services, and tax planning and preparation with an emphasis on trusts and estates. In the community, he volunteers for the American Cancer Society. He is based in the firm’s Auburn Hills office.

Marc Roedel, CPA, has been promoted to Manager. He holds a Master of Business Administration from the DeVos Graduate School of Management. His areas of expertise include business consulting, financial reporting and tax planning with an emphasis on the manufacturing and construction sectors. He is a member of the Home Builders Association of Saginaw. In the community, Roedel serves as treasurer of the Great Lakes Bay Manufacturers Association and as a committee member for Messiah Lutheran Church. He is based in the firm’s Saginaw office.

Although merger and acquisition activity has been down in 2022, according to various reports, there are still companies being bought and sold. 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). 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 current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income than it would have years ago. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

Under current law, individual federal tax rates are reduced from years ago and 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, 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. Assets. 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 your tax advisor for details.

What buyers and sellers want

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 issues, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Get professional advice

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 in your situation.

Fraud risk assessments have been shown to prevent occupational fraud and limit losses for victimized organizations. These tools have become more prevalent in recent years, according to “Occupational Fraud 2022: A Report to the Nations” published by the Association of Certified Fraud Examiners (ACFE). But although almost 50% of businesses perform fraud assessments, many owners and managers may be unaware of the value of these procedures and how the assessment process works.

When and why?

Fraud risk assessments generally are conducted by internal auditors, either on a standalone basis or as part of a comprehensive enterprise risk management program. You may want to conduct assessments annually or whenever there have been major organizational changes or disruptions.

The COVID-19 pandemic, when many businesses closed temporarily and many employees started working from home, may provide the impetus to conduct a fresh fraud risk assessment. For example, workers could have used unsecured Wi-Fi connections to log in to your network while working from home, your accounting department may have temporarily stopped rotating duties or employees tasked with overseeing certain antifraud activities may have left your organization.

Getting started

Typically, a fraud risk assessment starts in the areas where fraud is most likely to happen — such as accounts payable, purchasing and IT. But it’s important not to stop there. If you close a door in only one department, those bent on fraud will find openings elsewhere.

You must review your organization’s internal controls in the same way a dishonest employee would — as opportunities that pose relatively little risk of exposure. Employees might exploit weak internal controls via:

Fraudulent financial reporting, such as improper revenue recognition and overstatement of assets,
Misappropriation of assets, including embezzlement or theft,
Improper expenditures, such as bribes, and
Fraudulently obtained revenue and assets, including tax fraud.

Some schemes, such as payroll or purchasing fraud, can involve external people in addition to employees. Fraud may be limited or widespread and affect everything from individual accounts to entity-wide processes. So your business’s controls should address all levels — including owners and executives — every department and all types of fraud.

Digging in

Interviewing key executives and managers is critical. They’ll provide you with a first glimpse of potential risk areas. Perhaps more important, these conversations will help you judge whether company leaders are setting the ethical “tone at the top” that’s integral to fraud prevention.

Next, identify the number and names of employees who handle or review accounting functions. How many, for example, reconcile bank statements or are authorized to make bank deposits? Spreading accounting and banking duties across multiple employees — or shouldering some of the review processes yourself — provides segregation and oversight that are essential to deterring fraud. If segregation of accounting duties was suspended during the COVID-19 lockdown and never reinstated, make sure you activate it immediately. A combination of job rotation and mandatory vacation has been shown to reduce fraud losses in victimized organizations by 54%, making it the most effective antifraud control.

Also consider your company’s key performance indicators. Fraud risks, for example, can show up in the performance of sales goals or in inventory management. And review antifraud spending. Compliance training, internal controls monitoring and ongoing risk reviews should be included in your business’s budget.

Too important

The final step is to adjust your controls (and, possibly, introduce new ones) to address any fraud risks you’ve discovered. What if your small business doesn’t have the internal resources to conduct a fraud risk assessment? (Only 17% of businesses with fewer than 100 employees perform risk assessments.) If so, engage a professional fraud expert to do the job. It’s too important a tool to leave in the box.

The labor shortage in the manufacturing sector has been well documented. As of October 2021, the number of workers in the industry had declined by almost 400,000 from pre-pandemic levels. According to the National Association of Manufacturers, nearly 2.1 million manufacturing jobs could be open by 2030.

Will this worker shortage adversely affect your manufacturing company, or has it already done so? You don’t have to sit idly by while the labor gap continues to grow. One way to entice more workers is by offering an impressive slate of employee benefits. Doing so can help you attract and retain top talent.

Enhance your employee benefits package

Compensation has always been vital to virtually any job offer, and that hasn’t changed. But increasingly, job candidates are focusing on employee benefits that may be available to them.

Notably, certain employee benefits are tax-exempt to participating employees, making them particularly attractive. This includes, but isn’t limited to, the following benefits that could convince an applicant to come on board:

Health insurance. The premiums paid by an employer under a health insurance plan are tax-free to employees — and deductible by the employer — if the plan is open to all eligible workers. Similarly, employer reimbursements for medical expenses generally are tax-free to employees as are contributions to Health Savings Accounts.

Qualified retirement plans. Like health insurance, this is a major employee benefit that often makes or breaks a job offer. Generally, the benefits provided under qualified plans, like a 401(k) plan, are currently exempt from tax and can grow without any tax erosion until withdrawals are made. Contributions are subject to generous annual limits, including potential matching contributions to a 401(k) plan by an employer. But strict nondiscrimination requirements must be met.

Group-term life insurance. This is a prized perk for workers in the manufacturing field even though there’s a tax price attached to “excess” coverage. Only the first $50,000 of coverage under a group-term life insurance plan is tax-free. For instance, if a worker earning $80,000 is covered at three times his or her annual pay, the employee owes tax on $190,000 of coverage ($240,000 − $50,000). The tax, which is computed using an IRS table based on the insured’s age, is generally relatively small.

Dependent care assistance plans. The first $5,000 of dependent care assistance paid by an employer under a written plan is tax-free to employees. To qualify, the dependent must be under age 13, physically or mentally unable to care for him- or herself, or a spouse who’s physically or mentally incapable of self-care. The amount of the exclusion can’t exceed the earned income of a single employee or the earned income of the lower-paid spouse if the employee is married.

Educational assistance plans. A company can provide tax-free payments of up to $5,250 annually for college or grad school tuition, books, fees, and supplies under an educational assistance plan. The courses covered under the plan don’t have to be related to the job.

Employee discounts. A manufacturing company can provide tax-free discounts to employees on its products. Note that the discount percentage can’t exceed the gross profit percentage of the price at which the product is offered to regular customers.

Build a positive corporate culture

Last, but not least, strive to create a work environment that makes a favorable first (and lasting) impression. Employees spend a lot of time on the job and you want them to feel at ease among coworkers and supervisors alike. Project a positive attitude that will carry over to others. Conversely, a toxic workplace could lead to even more turnover and early retirements.

If your manufacturing company is currently hiring, take the time to review your employee benefits package. We can help explain the tax consequences of various options if you’d like to expand your offerings.

Here’s a not-so-fun fact: The generation-skipping transfer (GST) tax is among the harshest and most complex in the tax code. So, if you’re planning to share some of your wealth with your grandchildren or great grandchildren — or if your estate plan is likely to benefit these generations — it’s critical to consider and plan for the GST tax.

GST tax explained

The GST tax is a flat, 40% tax on transfers to “skip persons,” including grandchildren, family members more than a generation below you, nonfamily members more than 37½ years younger than you and certain trusts (if all of their beneficiaries are skip persons). GST tax applies to gifts or bequests directly to a skip person (a “direct skip”) and to certain transfers by trusts to skip persons. Gifts that fall within the annual gift tax exclusion (currently, $16,000 per recipient; $32,000 for gifts split by married couples), either outright or to qualifying “direct skip trusts,” are shielded from GST tax.

Why GST tax can be confusing

Even though the GST tax enjoys an annual inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption (currently, $12.06 million), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

The tax code contains automatic allocation rules designed to prevent you from inadvertently losing the exemption, but it can be dangerous to rely on these rules. In some cases, the exemption isn’t automatically allocated to transfers that may trigger costly GST tax. And in others, the exemption is automatically allocated to transfers that are unlikely to need its protection, wasting those exemption amounts.

Nonetheless, the automatic allocation rules generally work well, ensuring that your exemption is allocated in the most tax-advantageous manner. But, as mentioned, in some cases, they can lead to undesirable results. For example, suppose you establish a trust for your children, with the remainder passing to your grandchildren. You assume the automatic allocation rules will shield the trust from GST tax. But the trust gives one of your children a general power of appointment over 50% of the trust assets, disqualifying it from GST trust status. Unless you affirmatively allocate your exemption to the trust, distributions or other transfers to your grandchildren will be subject to GST tax.

If you wish to make substantial gifts, either outright or in trust, to your grandchildren or other skip persons, be sure to carefully allocate your GST tax exemption. We can help you devise a strategy that leverages the exemption and minimizes your GST tax liability.

Like many businesses, yours has probably jumped aboard the cloud computing bandwagon … or “skywagon” as the case may be. How’s that going? Some business owners pay little to no attention to a cloud provider once the service is in place. Others realize, perhaps years later, that they’re not particularly satisfied with the costs, features and cybersecurity measures of their cloud vendors.

Given the value of the data and documents that you store in the cloud, it’s a good idea to occasionally review your provider and determine whether you’re still making a good investment.

Are you getting these benefits?

As you’re likely aware, cloud computing providers offer a secure network of third-party servers that you, the customer, can access online. Thus, rather than relying on your own computers or servers, you can remotely store, process, manage and share documents and data. You might also have access to various software. Here are the benefits that you should be enjoying:

Lower costs. Cloud customers typically pay a monthly subscription fee or are billed based on actual usage. Reputable providers regularly upgrade their offerings and provide free security patches.

Scalability. You should be able to scale up or down as your data storage or processing needs change. For example, you might generate more data during seasonal peaks.

Convenience. Cloud services shouldn’t be limited to certain geographic areas or within restricted time frames. You should be able to access your documents and data from anywhere, anytime and on any device.

Many of today’s cloud providers also allow businesses to share documents and data with vendors to facilitate production and streamline workflow, as well as to provide some level of access to authorized advisors or other parties such as lenders.

How secure are you?

Serious concerns about cybersecurity in every industry have caused many business owners to “do a double take” when it comes to cloud computing. So, first and foremost, when evaluating your provider or shopping for a new one, verify basic security features. These include firewalls, authorization restrictions and data encryption. Also investigate:

How frequently the cloud is updated,
Whether data is backed up in multiple locations around the country,
Whether the service has experienced any data breaches recently,
How quickly the provider has responded to security threats, and
Whether you can retrieve your data in a nonproprietary format should the service go out of business.

Reputable providers offer continuous data backup and disaster recovery capabilities, so you shouldn’t have to worry about losing important records because of a physical server failure or a lost or broken hard drive. But, beware, the language of your service agreement might leave you ultimately responsible for any data breach. Consider negotiating restitution clauses into your contract.

Regular reassessment

Cloud services are just like any other technology investment — the features and security risks will evolve over time and call for regular reassessment. Let us assist you in weighing the costs, risks and advantages of your cloud provider.

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. 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.

August 1

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)
File a 2021 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

If a calendar-year C corporation, pay the third installment of 2022 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic six-month extension:
- File a 2021 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2021 to certain employer-sponsored retirement plans.

Small-sized manufacturers may enjoy several tax advantages allowing them to reduce tax bills, defer taxes and simplify the reporting process. Federal tax rules used to generally define a “small business” as one with average annual gross receipts of $5 million or less ($1 million or $10 million in some cases) for the three preceding tax years. The Tax Cuts and Jobs Act (TCJA) increased the threshold to $25 million for tax years beginning after 2017.

The increased threshold expands eligibility for small business tax benefits to a greater number of manufacturers. It also simplifies tax compliance by establishing a uniform definition of “small business.” Previously, different thresholds applied depending on the tax accounting rules involved, as well as a company’s industry and whether it carried inventories.

Small business benefits

Potential benefits of small business status include:

Use of the cash accounting method. Eligible manufacturers that pass the gross receipts test are eligible to use the cash method of accounting for tax purposes. The cash method allows a business greater control over the recognition taxable income during a year.

Avoidance of inventory accounting requirements. Eligible manufacturers need not account for inventories, which can be complex, time consuming and expensive.

Relief from uniform capitalization rules. Eligible manufacturers are exempt from these rules, which require companies to capitalize rather than expense certain overhead costs, adding complexity to the tax reporting process and potentially increasing their tax liability.

Eligibility for the completed contract method. Eligible manufacturers can use the completed contract method, rather than the percentage-of-completion method, to account for long-term contracts expected to be completed within two years. This allows them to defer tax until a contract is substantially complete.

Full deductibility of business interest. The TCJA generally capped deductions for net business interest expense at 30% of adjusted taxable income. Eligible manufacturers are exempt from this limit.

Related entities’ receipts included. When determining your manufacturing company’s gross receipts, you must include not only your own receipts, but also those earned by certain related entities, such as other members of a parent-subsidiary group, a brother-sister group or combined group under common control.

See the small picture

If your manufacturing company’s average gross receipts are $25 million or less, contact us to find out whether the business is eligible for small business tax benefits. If you are, we can determine whether it would be worthwhile to change accounting methods to take advantage of these benefits. If the business is not, there may be planning opportunities to qualify for these benefits in the future.

“Thanks, but no thanks.” If you expect to receive an inheritance from a family member, you might want to use a qualified disclaimer to refuse the bequest. As a result, the assets will bypass your estate and go directly to the next beneficiary in line. It’s as if the successor beneficiary, not you, had been named as the beneficiary in the first place.

Why would you ever look this proverbial gift horse in the mouth? Frequently, using a qualified disclaimer will save gift and estate tax, while redirecting funds to where they ultimately would have gone anyway. This estate planning tool is designed to benefit the entire family. Be aware that a disclaimer doesn’t have to be an “all or nothing” decision. It’s possible to disclaim only certain assets, or only a portion of a particular asset, which would otherwise be received.

Reasons for using a disclaimer

Federal estate tax laws are fairly rigid, but a qualified disclaimer offers some unique flexibility to a forward-thinking beneficiary. Consider these possible reasons from an estate planning perspective:

Gift and estate tax savings. This is often cited as the main incentive for using a qualified disclaimer. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to nonspouse beneficiaries, such as your children and grandchildren, may be covered by the federal gift and estate tax exemption. For 2022, the exemption amount is an inflation-adjusted $12.06 million.

Generation-skipping transfer (GST) tax. Disclaimers may also be useful in planning for the GST tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is an inflation-adjusted $12.06 million for 2022.

If GST tax liability is a concern, you may wish to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.

Charitable deductions. In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance, but using a disclaimer can provide a deduction because the assets will pass directly to the charity.

Before making a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, talk to us to better determine if it’s the right move for you.

Is your business hiring? Many companies are — in fact, an employment report released by the U.S. Department of Labor earlier this month revealed that nonfarm payrolls increased by 390,000 in May, and the unemployment rate held steady at 3.6%.

As the job market continues to feel the impact of “the Great Resignation,” the competition for talent remains fierce. One area of the hiring pool that many businesses overlook is older workers. If your company still has open positions, consider the possibility of filling them with workers age 55 and up.

Strengths to look for

Although it’s true that many Baby Boomers have retired, and a few members of Generation X might soon be joining them, plenty of older workers remain available to provide value to the right company.

They offer many benefits. For starters, they’ve lived and worked through many economic ups and downs, so the word “budget” tends to keenly resonate with them. In addition, many are well connected in their fields and can reach out to helpful resources right away. Seasoned workers tend to be self-motivated and need little supervision, too.

How to welcome them

Adding older employees to a workforce predominantly staffed by Gen Xers, Millennials and perhaps members of Generation Z (currently the youngest group) can present challenges to your company culture. However, there are ways to welcome older workers while easing the transition for everyone.

First, ensure internal communications emphasize inclusivity. If you’re concerned that your existing culture might hinder the onboarding process for older workers, begin addressing the potential obstacles before hiring anyone, if possible. Reassure current employees that you’ll continue to value their contributions and empower their career paths.

Second, consider involving other staff members in the hiring process. For example, you could ask those who will work directly with a new hire to sit in on the initial job interviews. You’ll likely experience less resistance if an older employee’s co-workers are involved from the beginning. Just be sure that every participant understands proper interviewing techniques to avoid legal problems.

Third, as appropriate and feasible, offer training to managers who might suddenly find themselves supervising employees with many more years of work experience. Learning to listen to an older worker’s suggestions while sticking to the company’s strategic objectives and operational procedures isn’t always easy.

Finally, consider a mentorship program. Bringing in new employees of a different age group is an opportune time to investigate the potential benefits of mentoring. By pairing newly hired older workers with younger staff members, you could see both groups learn from each other — and the business grow as a result.

A welcome addition

Older workers are often a welcome addition to many companies — and not just as full-time employees. They tend to fit in well as part- or flex-time workers as well. Need help? We can assist you in assessing this idea or other ways to improve the cost-effectiveness of your hiring efforts.

Business owners are aware that the price of gas is historically high, which has made their vehicle costs soar. The average nationwide price of a gallon of unleaded regular gas on June 17 was $5, compared with $3.08 a year earlier, according to the AAA Gas Prices website. A gallon of diesel averaged $5.78 a gallon, compared with $3.21 a year earlier.

Fortunately, the IRS is providing some relief. The tax agency announced an increase in the optional standard mileage rate for the last six months of 2022. Taxpayers may use the optional cents-per-mile rate to calculate the deductible costs of operating a vehicle for business.

For the second half of 2022 (July 1–December 31), the standard mileage rate for business travel will be 62.5 cents per mile, up from 58.5 cents per mile for the first half of the year (January 1–June 30). There are different standard mileage rates for charitable and medical driving.

Special situation

Raising the standard mileage rate in the middle of the year is unusual. Normally, the IRS updates the mileage rates once a year at the end of the year for the next calendar year. However, the tax agency explained that “in recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022.” But while the move is uncommon, it’s not without precedent. The standard mileage rate was increased for the last six months of 2011 and 2008 after gas prices rose significantly.

While fuel costs are a significant factor in the mileage figure, the IRS notes that “other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.”

Two options

The optional standard mileage rate is one of two methods a business can use to compute the deductible costs of operating an automobile for business puroses. Taxpayers also have the option of calculating the actual costs of using their vehicles rather than using the standard mileage rate. This may include expenses such as gas, oil, tires, insurance, repairs, licenses, vehicle registration fees and a depreciation allowance for the vehicle.

From a tax standpoint, you may get a larger deduction by tracking the actual expense method than you would with the standard mileage rate. But many taxpayers don’t want to spend time tracking actual costs. Be aware that there are rules that may prevent you from using one method or the other. For example, if a business wants to use the standard mileage rate for a car it leases, the business must use this rate for the entire lease period. Consult with us about your particular circumstances to determine the best course of action.

If most of your employees have worked from home since the start of the pandemic or are only gradually transitioning back to onsite work, your office may be emptier than in pre-COVID days. This can make theft easier. “Creepers” can gain access to offices or other physical facilities via unlocked doors and social engineering techniques and steal whatever they can get their hands on. They may even engage in corporate espionage and network hacking.

Common schemes

In a common creeper scheme, individuals pose as employees. They might enter a normally locked office by chatting with employees outside the building, then follow them through the door. If questioned, they could claim they left their badges at home. When the coast is clear, they steal purses, mobile devices and other valuables left on desks or in unsecured drawers.

Or creepers employed by rival companies could enter an office after hours with a stolen keycard or through an unlocked door. They might wear office-appropriate clothing and move confidently. That way, if building security or someone else questions them, they’re better able to pretend they have every right to be in the office. They may steal confidential information, such as printouts of sales numbers or blueprints of new products, or even hack into a business’s IT network.

In other cases, creepers use uniforms and props such as mops, toolboxes and clipboards to pose as cleaners and maintenance workers. They may wear stolen or forged ID badges, assuming that no one will examine them too closely — and they’re usually right.

Taking proactive steps

To protect your business and its employees’ property, keep all doors locked, even during work hours. Issue keycards and photo-ID badges to workers and instruct them to be on the lookout for possible intruders. They shouldn’t automatically assume, for example, that someone wearing coveralls and carrying a ladder is authorized to be there. And they shouldn’t unlock the door for anyone — even if that person seems like an employee — unless they know for certain he or she is.

If workers are uncomfortable approaching a possible intruder, they should immediately report the person to your office manager or building security. The stranger in question may well be an authorized visitor, but it’s better to be safe than sorry. Also ask employees to report the presence of former employees. They may claim they’re visiting old coworkers, but in reality, they may have been recruited to carry out corporate espionage.

Even if you don’t keep high-value inventory or electronics on the premises, install security cameras. And instruct employees to lock up purses, wallets, keys and mobile phones whenever they leave their workspaces — even if it’s only for a few minutes. All computers should be password-protected.

Employees are the best defense

Even if your office or physical facility is fully staffed, criminals can find ways to infiltrate the space by blending in with the crowd. Regularly warn employees about suspicious signs. They can be your best defense. Contact us for help preventing fraud and other forms of theft.

Recent supply shortages may cause unexpected problems for some businesses that use the last-in, first-out (LIFO) method for their inventory. Here’s an overview of what’s happening so you won’t be blindsided by the effects of so-called “LIFO liquidation.”

Inventory reporting methods

Retailers generally record inventory when it’s received and title transfers to the company. Then, it moves to cost of goods sold when the product ships and title transfers to the customer. You have choices when it comes to reporting inventory costs. Three popular methods are:

1. Specific identification. When a company’s inventory is one of a kind, such as artwork or custom jewelry, it may be appropriate to use the specific-identification method. Here, each item is reported at historic cost and that amount is generally carried on the books until the specific item is sold.

2. First-in, first-out (FIFO). Under this method, the first units entered into inventory are the first ones presumed sold. This method assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older — and often lower — prices.

3. LIFO. Under this method, the last units entered are the first presumed sold. Using LIFO usually causes the low-cost items to remain in inventory. Higher cost of sales generates lower pretax earnings as long as inventory keeps growing.

Downside of LIFO method

LIFO works as a tax deferral strategy, as long as costs and inventory levels are rising. But there’s a potential downside to using LIFO: The tax benefits may unexpectedly reverse if a company that’s using LIFO reduces its ending inventory to a level below the beginning inventory balance. As higher inventory costs are used up, the company will need to start dipping into lower-cost layers of inventory, triggering taxes on “phantom income” that the LIFO method previously has allowed the company to defer. This is commonly known as LIFO liquidation.

For more information

Accounting for inventory is one of the more complicated parts of U.S. Generally Accepted Accounting Principles. Fortunately, we can help evaluate the optimal reporting method for your business and discuss any concerns you may have regarding LIFO liquidation in today’s volatile marketplace.

Many popular retirement and health care plans must comply with the Employee Retirement Income Security Act (ERISA). Employers that sponsor one could one day receive a request from the U.S. Department of Labor (DOL) for plan-related documents. Such a request usually initiates a DOL civil investigation, often referred to as an “audit.”

If this happens to your organization, address the inquiry immediately. Failure to provide requested documents to the DOL can lead to a penalty assessment, and a prompt and cordial response can establish a positive rapport with the investigator. DOL audits generally follow a predictable path:

Initial document request. Generally, a plan sponsor learns of an audit when it receives a letter or phone call from the DOL’s Employee Benefits Security Administration (EBSA) advising “plan officials” of the investigation and requesting a detailed list of documents. The investigation may be general in nature or target a specific issue.

On-site review and interviews. The investigator may arrange to visit the plan sponsor’s offices and could request additional documents for review during the visit, such as payroll and claims processing records. Often, the investigator will gather relevant information by interviewing one or more individuals responsible for the plan. (Note: During the COVID-19 pandemic, some investigations have been conducted virtually.)

Investigation findings. If the investigator finds no ERISA violations, EBSA will send a closing letter stating that the investigation is complete, and no further action is contemplated. If the investigator does find violations, EBSA will issue a voluntary compliance notice letter identifying the violations and inviting plan officials to voluntarily make corrections.

Correction and settlement. Whenever possible, EBSA seeks voluntary compliance through full correction of identified violations and restoration of plan losses. After negotiating a corrective action with plan officials, the agency will issue a detailed settlement agreement.

A typical agreement requires evidence of the correction and provides that, if EBSA determines that the agreement’s terms have been fulfilled, no further enforcement action will be taken regarding the specified violations. When voluntary compliance isn’t achieved, EBSA may refer a case to DOL attorneys for litigation. Some situations are inappropriate for voluntary correction, such as those involving fraud, criminal misconduct, or severe or repeated fiduciary violations.

Fiduciary violations. ERISA imposes a mandatory 20% penalty on any amounts recovered from a fiduciary or other person for a fiduciary breach, including amounts recovered under a settlement agreement. Generally, EBSA assesses the penalty in a separate letter, though the penalty may be addressed in the settlement agreement.

Closing letter following correction. After EBSA confirms that corrective action has been completed and any penalties have been paid, it will send a closing letter indicating that compliance was achieved.

These steps could be completed in a matter of weeks or take a year or more, depending on the:

Complexity of the plan design,
Issues identified in the investigation,
Availability of documents and individuals for interviews,
Degree of cooperation between plan officials and EBSA, and
Number of potential violations.

In the event of a DOL audit, our firm can provide support throughout the process.

Does your college-aged child have a basic estate plan? In more cases than not, the answer is “no.” The good news is that the summer months are the perfect time to enlist the help of an estate planning advisor to create a plan, as your child will be available to sign the documents before heading to school in the fall.

Here are the four critical estate planning documents college-bound students should have:

Will. Although your child is still in his or her upper teens or early twenties, he or she isn’t too young to have a will drawn up. The will specifies the disposition of his or her assets and can tie up other loose ends of the estate.
Health care power of attorney. With a health care power of attorney, your child appoints someone to act as his or her proxy or surrogate for health care decisions. Typically, a parent is designated as the attorney-in-fact for this purpose.
HIPAA authorization. To accompany the health care power of attorney, Health Insurance Portability and Accountability Act (HIPAA) authorization gives health care providers the ability to share information about your child’s medical condition with you and your spouse. Absent a HIPAA authorization, making health care decisions could be more difficult.
Financial power of attorney. This legal document enables you and your spouse to conduct financial activities on your child’s behalf. A “durable” power of attorney, which is the most common form, continues in the event that your child becomes incapacitated.

If you and your child are ready to create a basic estate plan, please don’t hesitate to contact us. We’d be pleased to help give your family the peace of mind that comes with having an estate plan.

Accounts payable is a critical area of concern for every business. However, as a back-office function, it doesn’t always get the attention it deserves. Once in place, accounts payable processes tend to get taken for granted. Following are some tips and best practices for improving your company’s approach.

Be strategic

Too often, businesses take a reactive approach to payables, simply delaying payments as long as possible to improve short-term cash flow. But this approach can backfire if it puts you on bad terms with vendors.

Poor vendor relationships can affect delivery times, service quality and payment terms. A proactive, strategic approach to payables can help you strike a balance between optimizing short-term cash flow and getting along well with vendors.

It’s also critical to explore the potential benefits of early payment discounts, volume discounts or other incentives that can eventually improve cash flow. That doesn’t mean you should accept every available discount. Obviously, the decision hinges on whether the long-term benefits of the discount outweigh the immediate cost of, for example, paying early or buying in bulk.

Strengthen selection and review

Implement policies, procedures and systems to ensure that you properly vet vendors and negotiate the best possible prices and payment terms. Create preferred vendor lists so staff members follow established procedures and don’t engage in “maverick” buying — that is, purchasing from unauthorized vendors.

Review vendor contracts regularly, too. Create and maintain a database of key contractual terms that’s readily accessible to everyone. With an understanding of payment terms and other important contractual provisions, employees can use it to double-check vendor compliance and avoid errors that can result in overpayments or duplicate payments.

Leverage technology

Automating accounts payable with the right software offers many benefits. For one thing, an automated, paperless system can increase efficiency, reduce costs and speed up invoice processing. And, of course, the ability to pay invoices electronically makes it easier to take advantage of available discounts.

In addition, automation can provide greater visibility of payables and better control over payments. For instance, cloud-based systems provide immediate access to account information, allowing you to review and approve invoices from anywhere at any time. The best automated systems also contain security controls that help prevent and detect fraud and errors.

Naturally, there’s an upfront cost to buying good accounts payable software and training your staff to use it. You’ll need to find a solution that suits your company’s size, needs and technological sophistication. You’ll also incur ongoing costs to maintain the system and keep it updated.

Pay attention to payables

Don’t underestimate the impact of accounts payable on the financial performance of your business. Taking a “continuous improvement” approach can enhance cash flow and boost profitability. Let us help you devise strategies for the optimal tracking and handling of outgoing payments.

If your manufacturing company is like many others in the industry, you’re having difficulty finding top-notch new hires to expand your workforce as well as to replace employees who are retiring or quitting. At the same time, you’d like to reduce your tax liability for 2022.

Practical solution: Kill two birds with one stone by hiring workers from certain “target” groups. This move can help close the skilled labor gap, and you may qualify for a tax credit — the Work Opportunity Tax Credit (WOTC) — at the same time. What’s more, if your company employs certain teenagers during the next few months, it may be in line for a special “summertime” version of the WOTC.

WOTC rules and the target groups

The WOTC is designed to encourage employers like manufacturers to hire workers from several disadvantaged groups. Generally, the credit equals 40% of a worker’s first-year wages of up to $6,000, for a maximum credit of $2,400 per qualified worker. However, the WOTC may be larger in certain situations. For instance, it may be claimed for the first $24,000 of wages paid to certain disabled veterans, for a maximum credit of $9,600 per qualified worker.

There’s no limit on the number of credits a manufacturer can claim. For example, let’s say that you hire 10 eligible workers to ramp up operations this year. As a result, you may be able to claim a total credit of $24,000 if each eligible employee is paid at least $6,000 in wages in 2022.

Each employee must complete at least 120 hours of service. The credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of the business (such as a maid working in the employer’s home). In addition, the credit generally can’t be claimed for employees who’ve previously worked for the employer.

The WOTC has expired and been reinstated multiple times in the past, mostly for only a year or two. But in 2021 it was extended for five years, through 2025.

The list of target groups eligible for the WOTC has remained relatively stable in recent years with just a couple of tweaks. Currently, it covers the following groups:

Qualified IV-A Temporary Assistance for Needy Families recipients,
Qualified veterans (including disabled veterans),
Ex-felons,
Designated Community Residents,
Vocational rehabilitation referrals,
Supplemental Nutrition Assistance Program recipients,
Supplemental Security Income recipients,
Long-term family assistance recipients, and
Qualified long-term unemployment recipients.

Calculating the credit

A manufacturer can count $6,000 of first-year wages per employee beginning from the employee’s start date. This amount increases to $10,000 for long-term family assistance recipients and $12,000, $14,000 or $24,000 for certain veterans. If the employee completed at least 120 hours but less than 400 hours of service, the wages are multiplied by 25%. If the employee completed 400 or more hours, all the wages are multiplied by 40%.

Thus, as previously noted, the maximum credit available for first-year wages generally is $2,400, but it can be as high as $9,600 for certain veterans. In addition, for long-term family assistance recipients, a 50% credit may be available for up to $10,000 of second-year wages, resulting in a total maximum credit over two years of $9,000 per qualified worker ($10,000 × 40% plus $10,000 × 50%).

3 key limits

Be aware that three key limits apply to employers claiming the WOTC:

No income tax deduction is allowed for the portion of wages equal to the amount of the credit determined for the tax year.
Other employment-related credits generally are reduced with respect to an employee for whom a WOTC credit is allowed.
The credit is subject to the overall limitations on the amount of business credits that can be taken in any tax year. (However, a one-year carryback and 20-year carryforward of unused business credits is allowed.)

Because of these limits, there may be times when a manufacturer might elect not to have the WOTC apply. Also, other rules may prohibit the credit or require an allocation of the credit under certain circumstances.

Basking in a summertime WOTC

There’s still time to take advantage of a special version of the WOTC for hiring certain disadvantaged youths during the summer months. The summertime WOTC is available if you employ individuals who are age 16 or 17 and reside in an empowerment zone, enterprise community or renewal community.

Under this version of the WOTC, only wages paid for services performed between May 1 and September 15 can be counted. The credit amount generally equals 25% of a worker’s qualified first-year wages up to $3,000, for a maximum credit of $750 per worker.

However, the summertime credit increases to 40% of a worker’s first-year wages up to $3,000 if the youth works 400 hours or more. In this case, the maximum credit per qualified worker is $1,200. Be aware that if your company employed the youth prior to this summer, you can’t claim the credit for that worker.

Contact us for details

It’s important to be aware that your manufacturing company must comply with a complex certification process before it can claim a WOTC. We can help you coordinate these activities as well as answer any questions.

How often does your company generate a full set of financial statements? It’s common for smaller businesses to issue only year-end financials, but interim reporting can be helpful, particularly in times of uncertainty. Given today’s geopolitical risks, mounting inflation and rising costs, it’s wise to perform a midyear check-in to monitor your year-to-date performance. Based on the results, you can then pivot to take advantage of emerging opportunities and minimize unexpected threats.

Appreciate the diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that have been struggling during the pandemic.

For example, you might compare year-to-date revenue for 2022 against your annual budget. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing. It’s also important to track costs during an inflationary market. If your business is starting to lose money, you might need to consider 1) raising prices or 2) cutting discretionary spending. For instance, you might need to temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. A low stock of key inventory items might foreshadow delayed shipments and customer complaints, signaling an urgent need to find alternative suppliers. Or, if your company is drawing heavily on its line of credit, your operations might not be generating sufficient cash flow.

Recognize potential shortcomings

When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might result from informal accounting practices that are common midyear (but are corrected by you or your CPA before year-end statements are issued).

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

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

Proceed with caution

Contact us to help with your interim reporting needs. We can fix any shortcomings by performing additional procedures on interim financials prepared in-house — or by preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.