Entrepreneurs and Taxes: How Expenses are Claimed on Tax Returns

While some businesses have closed since the start of the COVID-19 crisis, many new ventures have launched. Entrepreneurs have cited a number of reasons why they decided to start a business in the midst of a pandemic. For example, they had more time, wanted to take advantage of new opportunities or they needed money due to being laid off. Whatever the reason, if you’ve recently started a new business, or you’re contemplating starting one, be aware of the tax implications.

As you know, before you even open the doors in a start-up business, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. Keep in mind that the way you handle some of your initial expenses can make a large difference in your tax bill.

Essential tax points

When starting or planning a new enterprise, keep these factors in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the venture begins. Of course, $5,000 doesn’t go far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Types of expenses

Start-up expenses generally include all expenses that are incurred to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct for this year. You need to decide whether to take the election described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.

For employees, withholding is the amount of federal income tax withheld from your paycheck. The amount of income tax your employer withholds from your regular pay depends on two things:

The amount you earn.
The information you give your employer on Form W–4.

For help with your withholding, you may use the Tax Withholding Estimator. The Tax Withholding Estimator compares your income tax estimate to your current tax withholding and can help you decide if you need to change your withholding with your employer.

More details can be found on the IRS’s Frequently Asked Question pages.

Source: https://www.irs.gov/.

The IRS announced it is opening the 2021 individual income tax return filing season on January 24. (Business returns are already being accepted.) Even if you typically don’t file until much closer to the April deadline (or you file for an extension until October), consider filing earlier this year. Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

How tax identity theft occurs

In a tax identity theft scheme, a thief uses another individual’s personal information to file a bogus tax return early in the filing season and claim a fraudulent refund.

The actual taxpayer discovers the fraud when he or she files a return and is told by the IRS that it is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Note: You can still get your individual tax return prepared by us before January 24 if you have all the required documents. But processing of the return will begin after IRS systems open on that date.

Your W-2s and 1099s

To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2021 W-2 forms to employees and, generally, for businesses to issue Form 1099s to recipients for any 2021 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

Other benefits of filing early

In addition to protecting yourself from tax identity theft, another advantage of early filing is that, if you’re getting a refund, you’ll get it sooner. The IRS expects most refunds to be issued within 21 days. However, the IRS has been experiencing delays during the pandemic in processing some returns. Keep in mind that the time to receive a refund is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

If you were eligible for an Economic Impact Payment (EIP) or advance Child Tax Credit (CTC) payments, and you didn’t receive them or you didn’t receive the full amount due, filing early will help you to receive the money sooner. In 2021, the third round of EIPs were paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Advance CTC payments were made monthly in 2021 to eligible families from July through December. EIP and CTC payments due that weren’t made to eligible taxpayers can be claimed on your 2021 return.

We can help

Contact us If you have questions or would like an appointment to prepare your tax return. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

Forecasting key business metrics — such as sales demand, receivables, payables and working capital — can help you reduce excess inventory and other overhead, offer competitive prices, and keep your business on solid financial footing. Although historical financial statements are often the starting point for forecasts, you’ll need to do more than just multiply last year’s numbers by a projected growth rate, especially in today’s uncertain marketplace.

To help determine the right forecasting methods for your business, ask yourself these five questions.

1. How far into the future do you plan to forecast?

Forecasting is generally more accurate in the short term — the longer the time period, the more likely it is that customer demand or market trends will change. While quantitative methods, which rely on historical data, are typically the most accurate forecasting methods, they don’t work well for long-term predictions. If you’re planning to forecast over several years, try qualitative forecasting methods, which rely on expert opinions instead of company-specific data.

2. How steady is your demand?

Weather, sales promotions, safety concerns and other factors can cause sales to fluctuate. For example, if you sell ski supplies and apparel, chances are good your sales will dip in the summer.

If demand for your products varies, consider forecasting with a quantitative method, such as time-series decomposition, which examines historical data and allows you to adjust for market trends, seasonal trends and business cycles. You also may want to adopt forecasting software, which allows you to plug other variables into the equation, such as individual customers’ short-term buying plans.

3. How much data do you have?

Quantitative forecasting techniques require varying amounts of historical information. For instance, you’ll need about three years of data to use exponential smoothing, a simple yet fairly accurate method that compares historical averages with current demand.

If you want to forecast for something you don’t have data for, such as a new product, you might use qualitative forecasting. Alternatively, you could base your forecast on historical data for a similar product in your lineup.

4. Do you carry inventory?

If you stock standard inventory items for customers to purchase, rather than working on custom orders, forecasting is particularly critical for establishing accurate inventory levels and improving cash flow. For peak accuracy, take the average of multiple forecasting methods. To optimize inventory levels, consider forecasting demand by individual products as well as by geographic location.

5. How many products do you sell?

If you’re forecasting demand for a wide variety of products, consider a relatively simple technique, such as exponential smoothing. If you offer only one or two key products, it’s probably worth your time and effort to perform a more complex forecasting method for each one, such as a statistical regression model.

What’s right for your business?

Although these questions focus primarily on retailers, manufacturers and other businesses that sell products, service providers can ask similar questions to determine the optimal forecasting approach. Contact us to discuss the forecasting practices that make sense for your business.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Jamie Rivette, CPA, CGFM, will lead the firm’s Assurance Service Line, Taylor Diener, CPA, will lead the Education Services Group and Jennifer Tobias, CPA, will lead the Construction Services Group.

“We are excited that these talented professionals will lead our firm’s service line and teams,” said Dave Youngstrom, President & CEO. “They are all experienced professionals with tremendous leadership qualities who have shown a strong dedication to serving our clients.”

Jamie Rivette brings over 20 years of audit expertise to Yeo & Yeo. She is a Principal based in Yeo & Yeo’s Saginaw office and also leads the firm’s Government Services Group. Holding the Certified Government Financial Manager accreditation, Rivette is highly knowledgeable in governmental accounting, auditing, financial reporting, internal controls and budgeting. As assurance service line leader, Rivette will be responsible for the quality management and growth of Yeo & Yeo’s firm-wide audit and assurance practice.

Rivette serves on the Accounting and Auditing Standards Committee for the Michigan Government Finance Officers Association. In the community, she is treasurer of the Hemlock School Board of Education and a member of the Junior League Community Advisory Board.

Taylor Diener is a Senior Manager specializing in audits for school districts, nonprofits and for-profit businesses. She is a member of Michigan School Business Officials (MSBO) and has presented at MSBO annual conferences. She is based in the firm’s Saginaw office. Diener is also a frequent contributor to the Yeo & Yeo blog, providing audit and compliance insights for school districts and nonprofit organizations. In the community, she serves as treasurer of the PartnerShift Network.

Jennifer Tobias is a Principal in the Kalamazoo office. Her areas of expertise include tax planning and preparation, state and local tax research, agribusiness taxation and credits, and preparation of Prepaid Cemetery and Funeral Home Sales Act annual reports. She is a member of the HBA of West Michigan, the Construction Financial Management Association, the Michigan Funeral Directors Association’s Suppliers Sales Club and the Farm Financial Standards Council. In the community, Tobias serves as the 4-H Advisory Council co-treasurer and the Small Animal Sale clerk and committee treasurer for Barry County. She also volunteers for the Western Michigan Home Builders’ Charity Truck Pull and Home Expo.

Having the right technology is critical for any small business. You operate lean and focus on growth, so your investment in tech must be at the right time and for the right reasons. VoIP (voice over IP) adoption can deliver many advantages for you. The VoIP benefits for small businesses are substantial.

When will you know you’re ready to transition to VoIP?

1. You have remote workers

On the other hand, VoIP provides your team the ability to use their phones from anywhere. They can use a desktop or mobile app. As long as you have an internet connection, there’s no disturbance in availability. Accessibility without the literal cord is one of the most important benefits of VoIP for small businesses. It will enable you to grow and scale without being beholden to your office constraints.

2. You’re in hyper-growth mode

For companies thriving and hiring, you don’t want a phone system that can’t scale with ease. On-premises phones require a call to your provider, new hardware, and other hoops to jump through to add users.

When you’re in rapid growth mode, that slows down your new employee onboarding process. You need those employees to get up to speed fast, and VoIP lets you do that. The admin only needs to add the new person to the account. It takes a few minutes, and that’s it.

3. Your call volume is growing

If your company is witnessing substantial growth in call volume from customers, prospects, or partners, it’s time to consider the switch. Old systems don’t have the sophistication that VoIP has, which can use IVR (Interactive Voice Response).

IVR delivers the messages that play when anyone calls your main number. It provides callers with options on where to direct the call. It can also include standard information like your address, hours of operations, and more. By using IVR, you can manage your queue better.

4. Your call quality is worsening

If you’re constantly hearing static or finding calls drop, your service isn’t reliable. In addition, any downtime to your phone system likely translates to lost revenue.

VoIP phones are clear, no matter where you are. Further, they typically have a much higher uptime than other products. VoIP has high-definition audio so that you can expect high-quality sound from this type of solution.

5. Your call costs are increasing

On-premises phones are expensive to maintain and scale. You’re paying for on-site hardware and technician time. With VoIP, you’ll save tremendously on your phone costs. There’s no hardware to maintain, and technicians aren’t necessary to make changes or add new lines.

6. You’re adding a new location

As your business expands, your technology stack must be able to meet the needs of multiple locations. Continuing with traditional phones will require a significant investment to get things up and running. However, there are better ways to spend that money.

VoIP is a flexible technology that can encompass your entire organization, no matter the location. All you need to do is add the new lines. Managing more than one facility is already challenging; your phone system shouldn’t make things harder.

7. You want to integrate communications into one platform

VoIP is one part of a unified communications (UC) solution. If you want to consolidate voice, chat, video conferencing, and file sharing, you’ll need to adopt VoIP for phones. Integrating with a legacy phone system isn’t possible.

8. You have concerns about business continuity.

If a disaster strikes, old phone systems are dead. As a result, you may not be able to serve customers or communicate internally. One essential element to surviving such an ordeal is to maintain a working communication system.

With VoIP, you can still make and get calls on mobile phones. By accessing the app, you remain available to all stakeholders, suffering as little interruption as possible.

The Benefits of VoIP for Small Business Are Substantial

If any of these scenarios sound familiar, then it’s time to get serious about making the switch to VoIP. Doing so provides flexibility, cost savings, scalability, and more. Learn more about Yeo & Yeo Technology’s cloud-based VoIP phone system and collaboration platform, YeoVoice, powered by Elevate.

Information used in this article was provided by our partners at Intermedia.

While Congress didn’t pass the Build Back Better Act in 2021, there are still tax changes that may affect your tax situation for this year. That’s because some tax figures are adjusted annually for inflation.

If you’re like most people, you’re probably more concerned about your 2021 tax bill right now than you are about your 2022 tax situation. That’s understandable because your 2021 individual tax return is generally due to be filed by April 18 (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2022. Below are some Q&As about tax amounts for this year.

I have a 401(k) plan through my job. How much can I contribute to it?

For 2022, you can contribute up to $20,500 (up from $19,500 in 2021) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

How much can I contribute to an IRA for 2022?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, or up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch-up” contribution. (These amounts were the same for 2021.)

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2022, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,400 (up from $2,300 in 2021).

How much do I have to earn in 2022 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $147,000 for this year (up from $142,800 in 2021). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2022?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2022, the standard deduction amount is $25,900 for married couples filing jointly (up from $25,100). For single filers, the amount is $12,950 (up from $12,550) and for heads of households, it’s $19,400 (up from $18,800). If your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize.

If I don’t itemize, can I claim charitable deductions on my 2022 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to two COVID-19-relief laws, non-itemizers could claim a limited charitable contribution deduction for the past two years (for 2021, this deduction is $300 for single taxpayers and $600 for married couples filing jointly). Unfortunately, unless Congress acts to extend this tax break, it has expired for 2022.

How much can I give to one person without triggering a gift tax return in 2022?

The annual gift exclusion for 2022 is $16,000 (up from $15,000 in 2021). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

More to your tax picture

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions.

According to the Tax Policy Center, the federal estate tax impacts very few people. As the law currently stands, the lifetime exemption from federal gift or estate taxes for 2021 is $11.7 million per individual ($23.4 million for a married couple). For 2022, the amount will increase to $12.06 million per individual ($24.12 million for a married couple). What does this mean? Your estate is not taxable until the value exceeds these thresholds. However, that doesn’t mean you shouldn’t file an estate tax return.

What is portability, and how may it affect your estate?

Portability is a provision in federal estate tax law that allows a surviving spouse to use any of the unused estate and gift tax exemption after the deceased spouse’s death. This is called the deceased spousal unused exclusion (DSUE). In general, electing portability protects the surviving spouse from having to pay hefty estate tax bills should the surviving spouse’s estate exceed exemption thresholds. It is important to note that as the law currently stands, the current higher lifetime exemption amounts are slated to “sunset,” meaning it will go back to around $5 million effective January 1, 2026.

An example of the benefits of portability

Consider this example: John and Jill are a married couple. John dies in 2022 with an estate worth $2.06 million. This means that John has a $10 million unused lifetime exemption ($12.06 million – $2.06 million). If Jill elects portability, in 2022, she now has a lifetime exemption individually worth $22.06 million ($12.06 million + $10 million). Let’s say Jill makes it to the “sunset” date mentioned above; Jill still has a lifetime exemption amount of $15 million ($10 million carried over from John’s estate + $5 million of her own exemption). As you can see, the DSUE is preserved regardless of the current exemption (as the law currently stands). If Jill does not elect portability, she loses the unused amount of John’s exemption, and her estate becomes taxable at her lower threshold.

How can you make the portability election?

Make the election on Form 706, the same form you would use to file an estate tax return. To make the election, the estate tax return must be filed timely, that is, within nine months after the date of the decedent’s death. You are also allowed a six-month extension, so that is a maximum 15-month window. However, suppose there was no filing requirement for the decedent’s estate, and you were not aware of the portability election. In that case, you are still eligible to make the portability election under Rev. Proc 2017-34, which allows relief to elect portability up to the second anniversary of the decedent’s death.

Please contact our Yeo & Yeo professionals to discuss how portability may apply to your situation. Our professionals can help you navigate the election, especially in a tax environment with volatile tax law changes.

On January 6, 2022, the U.S. Department of Treasury issued the final rule for the State and Local Fiscal Recovery Funds (SLFRF) Program. The final rule created additional clarification, flexibility, and simplification of the program. The final rule takes effect on April 1, 2022. Until that date, the interim final rule is in effect; however, the final rule’s flexibility and simplification may be used even ahead of the effective date.

The final rule includes the following significant changes or clarifications from the interim final rule:

Calculation of revenue loss – recipients may elect an allowance of up to $10 million without performing a revenue loss calculation. For many government entities, the entire SLFRF award can be covered by this election. Governments may use the revenue loss allowance on any services the government traditionally provides, unless specifically prohibited by Treasury, allowing for maximum flexibility.
Clarifies what capital expenditures are allowable under the public health and economic impact provision.
Broadens the share of workers eligible for premium pay without written justification.
Expands the water, sewer, and infrastructure eligible uses.

Read the Treasury’s Overview of the Final Rule and the complete Final Rule.

Please contact a member of Yeo & Yeo’s Government Services Group if you need assistance.

Ineffective inventory management and reporting can result in bloated working capital and impaired business profits. In industries that rely on overseas suppliers, best practices for managing inventory may have recently changed. In today’s uncertain marketplace, it’s clearly a good idea to review your current approach and make adjustments as needed.

What’s the right reporting method?

Accurate recordkeeping is fundamental to effective inventory management. Generally, there are two primary inventory accounting methods for tax and financial accounting:

1. Last in, first out (LIFO). If you tend to retain inventory items (such as repair parts or durable goods) for long periods, LIFO may be your best choice. It allows you to allocate the most recent (and, therefore, higher) costs first, ideally maximizing your cost of goods sold and minimizing your taxable income.

2. First in, first out (FIFO). This refers to selling the oldest stock first. Generally, FIFO works best with dated goods, perishable items and collectibles. In an inflationary market, this approach usually results in higher income as older purchases with lower costs are included in cost of sales. (In a deflationary market, the opposite generally holds true.)

Of the two, FIFO is used more often. That’s because it more genuinely reflects the typical normal flow of goods and is easier to account for than LIFO, which can be highly complex and deals with inventory costs (not the actual inventory) that may be many years old.

Should your company change its approach?

If you’re dissatisfied with your company’s method, you may be able to change it. But doing so generally isn’t simple. Should a business wish to change its inventory accounting method for tax purposes, it needs to request permission from the IRS. And if it wishes to change for financial accounting purposes, it needs a valid reason. This is why changes in accounting for inventory aren’t routine.

Are you managing inventory efficiently?

For many companies — including retailers, manufacturers and contractors — inventory represents a significant item on the balance sheet. Excessive amounts of inventory can drain working capital (current assets minus current liabilities). This can prevent your company from pursuing value-added business endeavors, such as launching new products, purchasing machines or hiring new salespeople to generate additional revenue.

Conversely, lean (or just-in-time) inventory practices may reduce storage and security costs, freeing up cash, while allowing you to keep a closer, more analytical eye on what’s in stock. In some cases, you may need to upgrade your company’s existing inventory tracking and ordering systems. Newer ones can enable you to forecast demand and keep overstocking to a minimum. In appropriate cases, you can even share data with customers and suppliers to make supply and demand estimates more accurate.

However, there’s a limit to how “lean” a company can operate. During the pandemic, many companies have learned that carrying a reasonable amount of “safety stock” can help avert a supply chain crisis. Previous assumptions about optimal inventory levels and reorder points may need to be adjusted to reflect current supply chain risks.

We can help

The first step when reviewing your company’s inventory practices is to identify sources of inefficiencies. From there, you can figure out the best solutions. Contact us for guidance on inventory reporting methods and best practices in your industry.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Erin Flannery, CPA, CFE, has been accredited as a Certified Fraud Examiner (CFE). A CFE is a specialist educated and trained in preventing, detecting, and investigating fraud.

“The CFE credential is considered the mark of excellence for anti-fraud professionals,” said John Haag Sr., CPA/ABV, CVA, CFF, managing principal and Business Valuation and Litigation Support Services Group co-leader. “Erin’s achievement demonstrates our professionals’ commitment to expanding our level of expertise in providing fraud prevention, litigation support and consulting services for Michigan businesses.”

CFEs have a unique set of skills that combine knowledge of complex financial transactions with an understanding of methods, law and how to resolve allegations of fraud. To become a CFE, an individual must pass a rigorous test on the four major disciplines that comprise the fraud examination body of knowledge.

Certified Fraud Examiners can improve an organization’s financial health. These professionals often collaborate with law enforcement and may provide legal testimony. According to the Association of Certified Fraud Examiners, “Organizations employing CFEs uncover fraud 50% sooner than organizations without CFEs on staff.”

Flannery, a graduate of the University of Charleston, holds a Master of Forensic Accounting. She is a manager based in the Auburn Hills office and a member of the firm’s Business Valuation Services Group and the Trust & Estate Services Group. Her areas of expertise include forensic accounting, management advisory services, and tax planning and preparation services for the firm’s business, nonprofit and individual clients. In the community, she volunteers for the Grosse Pointe Animal Adoption Society.

They say we live in an on-demand world. Right now, many business owners are demanding one thing: more workers. Unfortunately, the labor market is somewhat less than forthcoming.

In the so-called “Great Resignation” of 2021, droves of people voluntarily left their jobs, and many aren’t rushing back to work. Neither are many of those who lost their jobs because of the pandemic. This is putting pressure on companies to do everything in their power to retain current employees and look as appealing as possible to the relatively few job seekers out there.

One element of a business that can make or break its employer brand is communications. When workers feel disconnected from ownership, it’s easy for them to listen to rumors and misinformation — and that can motivate them to walk out the door. Here are some ways you can step up your communications game in 2022.

Just ask

When business owners get caught off guard by workforce issues, the problem often is that they’re doing all the talking and little of the listening. The easiest way to find out what your employees are thinking is to just ask.

Putting a suggestion box in the break room, though it may sound old-fashioned, can pay off. Also consider using an online tool that allows employees to provide feedback anonymously.

Let employees vent their concerns and ask questions. Ownership or executive management could reply to queries with the broadest implications, while managers could handle questions specific to a given department or position. Share answers through companywide emails or make them a feature of an internal newsletter or blog.

At least once a year, hold a town hall with staff members to answer questions and discuss issues face to face. Even if the meeting must be held virtually, let employees see and hear the straight truth from you.

Manage your internal profile

Owners of large companies often engage PR consultants to help them manage not only their public images, but also the personas they convey to employees. If you own a small to midsize business, this expense may be unnecessary, but you should think about your internal profile and manage it like the critical asset that it is.

Be sure photographs and personal information used in internal communications are up to date. A profile pic of you from a decade or two ago says, “I don’t care enough to share who I am today.”

Although you should avoid getting up in employees’ business too often and disrupting operations, don’t let too much time go by between communications. Regularly tour each company department or facility, giving both managers and employees a chance to speak with you candidly. Sit in on meetings periodically; ask and answer questions. Employees will likely get a morale boost from seeing you take an active interest in their corner of the business.

In fact, for a potentially fun and insightful change of pace, set aside a day to learn about a specific company position. Shadow selected employees and let them explain what really goes into their jobs. Pose questions but stay out of the way. Clarify upfront that you’re not playing “gotcha” but trying to better understand how things get done and what improvements, if any, could be made.

Challenges ahead

Business owners face formidable challenges in the year ahead. One could say the power balance has shifted a bit from owners offering jobs to workers offering services. Being a strong, authentic and transparent communicator can give you a competitive advantage.

You may pay out a bundle in out-of-pocket medical costs each year. But can you deduct them on your tax return? It’s possible but not easy. Medical expenses can be claimed as a deduction only to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income. Plus, medical expenses are deductible only if you itemize, which means that your itemized deductions must exceed your standard deduction.

Qualifying costs include many items other than hospital and doctor bills. Here are some items to take into account in determining a possible deduction:

Insurance premiums. The cost of health insurance is a medical expense that can total thousands of dollars a year. Even if your employer provides you with coverage, you can deduct the portion of the premiums you pay. Long-term care insurance premiums also qualify, subject to dollar limits based on age.

Transportation. The cost of getting to and from medical treatment is an eligible expense. This includes taxi fares, public transportation or using your own car. Car costs can be calculated at 18 cents a mile for miles driven in 2022 (up from 16 cents in 2021), plus tolls and parking. Alternatively, you can deduct your actual costs, including gas and oil, but not general costs such as insurance, depreciation or maintenance.

Therapists and nurses. Services provided by individuals other than physicians can qualify if they relate to a medical condition and aren’t for general health. For example, the cost of physical therapy after knee surgery would qualify, but the costs of a personal trainer to tone you up wouldn’t. Also qualifying are amounts paid to a psychologist for medical care and certain long-term care services required by chronically ill individuals.

Eyeglasses, hearing aids, dental work and prescriptions. Deductible expenses include the cost of glasses, contacts, hearing aids and most dental work. Purely cosmetic expenses (such as tooth whitening) don’t qualify, but certain medically necessary cosmetic surgery is deductible. Prescription drugs qualify, but nonprescription drugs such as aspirin don’t even if a physician recommends them. Neither do amounts paid for treatments that are illegal under federal law (such as marijuana), even if permitted under state law.

Smoking-cessation programs. Amounts paid to participate in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible expenses. However, nonprescription gum and certain nicotine patches aren’t.

Weight-loss programs. A weight-loss program is a deductible expense if undertaken as treatment for a disease diagnosed by a physician. This can be obesity or another disease, such as hypertension, for which a doctor directs you to lose weight. It’s a good idea to get a written diagnosis. Deductible expenses include fees paid to join a program and attend meetings. However, the cost of low-calorie food that you eat in place of a regular diet isn’t deductible.

Dependents and others. You can deduct the medical expenses you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as a parent or grandparent, who would qualify as your dependent except that he or she has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them.

In summation, medical costs are fairly broadly defined for deduction purposes. We can assess if you qualify for a deduction or answer any questions you have.

We’ve all become a lot more flexible in business over the past couple of years. We’ve had no choice, right?

But while you and your team have become used to different working arrangements, has that flexibility moved over to your budget?

Here’s a great quote: “Budgets tell us what we can’t afford, but they don’t keep us from buying it.”

As you create your IT budget for 2022 – if that’s something you do in your business at this time of year – you may fall into the trap of trying to keep your expenses low.

But the sad fact is that, whether budgeted for or not, a ransomware attack or another critical incident will cost you a lot of money. As you may know, cyberattacks are rising at a rapid rate. And this year, we’ve seen some of the most significant incidents ever.

It’s crucial for you to do whatever you can to avoid an attack on your business and plan for what happens if you are attacked—having a solid plan in place can reduce the financial and reputational impact of a breach.

If you’re working with an IT support partner, getting them involved in your IT budgeting is a good idea. They’ll be able to give you an expert view on the right things to consider and include in your budget.

Information used in this article was provided by our partners at MSP Marketing Edge.

I’ve heard I can voice type on websites. Is that true?

Yes, if you’re using Microsoft Edge in Windows 10 or 11. Turn it on by pressing the Windows logo key + H.

How do I schedule appointments by email?

In Outlook, you can select Reply with Meeting in the Ribbon. This creates a new meeting request, with your email in the body of the meeting request.

I deal with clients in different countries. Is there an easy way to deal with time zones?

You can add multiple time zones in your Outlook calendar. Go to File > Options, click the Calendar tab and Time zones, tick ‘Show a different time zone’ and give it a name. Repeat as necessary.

Information used in this article was provided by our partners at MSP Marketing Edge.

Many employees — from retail workers to sales staffers involved in complex business-to-business transactions — receive part of their compensation from sales-related commissions. To attract and retain top talent, some companies even allow employees to earn unlimited commissions.

Unfortunately, some commission-compensated employees may be tempted to abuse this system by falsifying sales or rates. Fraud methods vary depending on an unethical salesperson’s employer and role. But companies need to be aware of the possibility of commission fraud and take steps to prevent it.

3 forms

Generally, commission fraud takes one of three forms:

Invention of sales. A retail employee enters a fake purchase at the point of sale (POS) to generate a commission. Or an employee involved in selling business services creates a fraudulent sales contract.
Overstatement of sales. Here, a worker alters internal sales reports or invoices or inflates sales captured via the company’s POS.
Inflation of commission rates. An employee changes a company’s commission records to reflect a higher pay rate. Employees who don’t have access to such records might collude with someone who does (such as an accounting staffer) to alter compensation rates.

More sophisticated schemes can involve collusion with customers and other outside parties.

Data-driven approach to detection

Regardless of the method used to commit commission fraud, these schemes create data and a document trail your business can use to detect abuse. For example, to uncover commission fraud in progress, you should regularly analyze commission expenses relative to your company’s sales. After accounting for timing differences, the volume of commission payments should correlate to sales revenue.

Also pay close attention to the total commission paid to each employee. Focus on outliers whose commission levels are significantly higher and analyze sales activity and the associated commission rates to ensure consistency. By creating benchmarks — based on commission sales by employee type, location and seniority — you can more easily detect fraud in subsequent periods. Randomly sampling sales associated with commissions and ensuring relevant documentation exists for each payment can be effective, too. You can contact individual customers to verify sales transactions by disguising your calls as customer satisfaction checks.

Commission schemes sometimes require cooperation with other employees and customers, which usually leaves an email trail. Consistent with your company’s policies and procedures, monitor employee email communications for evidence of wrongdoing.

Prevention processes

There are other processes your business can follow to prevent fraud from occurring in the first place. For example:

Formalize policies prohibiting it. State the consequences (for instance, termination and criminal charges) of committing commission fraud in your employee handbook. Also routinely stress your company’s commitment to detecting commission fraud and explain that management will regularly scrutinize individual payments for signs of malfeasance.

Minimize the potential for record tampering. To help prevent salespeople from accessing accounting records, rotate accounting staff assigned to recording commission payments. Segregation of all accounting duties is important to help prevent other fraud schemes from flourishing in your organization.

Set realistic sales goals. Although some employees commit fraud for personal enrichment, others cheat to meet their employer’s overly aggressive sales targets. Periodically solicit feedback from sales staff about their ability to meet objectives and pay close attention when salespeople complain or leave your company. If you encounter excessive frustration in meeting targets, make them more achievable.

Making manipulation difficult

When structured and managed correctly, a commission program can boost employee compensation and morale — and add to your company’s bottom line. But schemes to manipulate a company’s compensation structure often are all too simple for shady salespeople to commit. To make fraud much harder to perpetrate, you may need to step up data analysis and revamp your internal controls.

Many companies don’t have the internal resources to conduct this type of analysis and don’t know how to fix controls that aren’t working. That’s where a CPA or forensic accounting specialist can help. Contact us.

Do you want to sell commercial or investment real estate that has appreciated significantly? One way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange where you exchange the property rather than sell it. With real estate prices up in some markets (and higher resulting tax bills), the like-kind exchange strategy may be attractive.

A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).

For these purposes, like-kind is broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.

Important change

Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.

If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, please contact us to discuss the matter.

Assuming the exchange qualifies, here’s how the tax rules work. If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”

Frequently, however, the properties aren’t equal in value, so some cash or other property is tossed into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.

An example to illustrate

Let’s say you exchange land (business property) with a basis of $100,000 for a building (business property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain. That’s the amount of cash (boot) you received. Your basis in your new building (the replacement property) will be $100,000: your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note that no matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.

If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to the person giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Great tax-deferral vehicle

Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade or business real property. Contact us if you have questions or would like to discuss the strategy further.

Management needs timely, accurate feedback to guide operating decisions, anticipate problems and take advantage of emerging opportunities. Unfortunately, comprehensive financial statements take a long time to generate. Reporting key performance indicators (KPIs) on a monthly or weekly basis is a simplified alternative to gauge performance in real time.

Popular financial metrics

KPIs measure an organization’s progress toward its objectives. However, with so many metrics to choose from, data overload can easily happen. That’s why your KPI report should be customized and streamlined to cover the metrics that are the most critical to your success.

KPIs differ from one company to the next based on the industry and the company’s objectives. Common examples include:

Operating cash flow. This helps management evaluate how much cash is available for immediate spending needs. Poor cash flow, not slow sales or lagging profits, is one of the leading causes of business bankruptcy.

Return on assets. This metric equals net income divided by total assets. It measures how effectively your company is managing its assets to generate earnings.

Inventory turnover. The number of times inventory is converted into sales is usually computed by dividing cost of goods sold by the average inventory balance. This tells you how efficiently you’re “selling through” inventory. Many companies waste valuable cash by allowing slow-moving inventory to sit idle on their shelves for too long.

KPIs can also be industry specific. To illustrate, auto dealers might compare new vehicle sales to used vehicle sales; contractors might focus on the bid-hit ratio; and hospitals might want to know the average wait time in the emergency room or the bed occupancy rate in the intensive care unit.

Beyond the numbers

Many companies also include nonfinancial metrics in the areas of customer service, sales, marketing and manufacturing. However, nonfinancial KPIs must be both specific and measurable.

For instance, just saying that your company wants to “provide better customer service” doesn’t produce a sound KPI. Instead, if your goal is to improve response time to customer complaints, a relevant KPI might be to provide an initial response to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction.

Benchmarking results

A basis of comparison is important when reviewing KPIs. Benchmarks will provide a standard against which you can compare to see how your KPIs stack up. You can benchmark your current KPIs against historical results or averages published in trade publications.

This will help you spot trends and identify potential problems, allowing you to deal with them before they worsen. For example, if your accounts receivable days are lengthening, it might indicate that your collections are lagging and a cash flow crunch is looming.

Unlocking the keys to success

During the pandemic and the ensuing economic turmoil, tracking relevant performance metrics is more important than ever. Threats and opportunities abound — and new ones seem to arise quickly. We can help you tailor your KPI report to meet your business needs, as well as find meaningful benchmarks based on current market conditions.

Business owners, year end is officially here. It may even be over by the time you read this. (If so, Happy New Year!) In any case, the end of one year and the beginning of another is always an optimal time to look back on the preceding 12 calendar months and ask a deceptively simple question: How’d we do?

Large companies tend to have thoroughly documented strategic plans in place, some stretching years into the future, that include various metrics for measuring whether they’ve achieved the growth intended. For them, reviewing a calendar year’s success in terms of strategic planning is relatively easy. They mostly just crunch the numbers.

For small to midsize businesses, the strategic planning process may be a little more informal and less precise. Yet even if your strategic plan isn’t a detailed document replete with spreadsheets and pie charts, you can still review actual performance against it and use this assessment to look ahead to 2022.

Areas that inform

Generally, there are three areas of most businesses that inform the success of a strategic plan. They are:

HR. Your people are your most valuable asset. So, how does your employee turnover rate for 2021 compare with previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.

Much has been written this year about “the Great Resignation,” the trend of employees leaving their jobs for various reasons. How has it affected your company? Has it stymied your efforts to meet strategic goals? You may need to make hiring and retention efforts a focal point of your 2022 strategic plan.

Sales and marketing. Did you meet your monthly goals for new sales, in terms of both revenue and number of new customers? Did you generate an adequate return on investment (ROI) for your marketing dollars?

If you can’t clearly answer the latter question, enhance your tracking of existing marketing efforts so you can better gauge ROI going forward. And set reasonable but growth-oriented sales goals for 2022 that will make or keep your business a competitive force to be reckoned with.

Production. If you manufacture products, what was your unit reject rate over the past year? Or, if yours is a service business, how satisfied were your customers with the level of service provided?

Again, if you’re not sure, you may need to establish or enhance your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals. Many companies now use customer satisfaction scores or a customer satisfaction index to establish objectives and benchmark their success.

Flexibility and the right adjustments

By now, you should probably have at least the framework of a 2022 strategic plan in place. However, if you’re not that far along, don’t worry. Strategic plans are best when they’re flexible and open to adjustment as economic conditions and buying trends change.

This is particularly true when the year ahead looks as uncertain as this one, given the continuing impact of the pandemic. We can help you review your 2021 financials and use the right metrics to develop a cohesive, realistic strategic plan for the next 12 months.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

Covering tax, accounting, technology, financial and advisory topics relevant to you and your business, Yeo & Yeo’s podcast is hosted by industry and subject matter professionals, where we go beyond the beans.

On episode 15 of Everyday Business, host Taylor Bartosiewicz, marketing associate, is joined by Dave Youngstrom, Yeo & Yeo’s new President & CEO. Listen in as Taylor talks to Dave about his career and his vision for the future of Yeo & Yeo. Dave, a principal and shareholder, serves on Yeo & Yeo’s board of directors, is a member of the firm’s strategic planning team and has led Yeo & Yeo’s Assurance Service Line since 2015. He has very successfully directed the firm-wide audit practice, streamlining and growing the firm’s assurance solutions.

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DISCLAIMER
The information provided in this podcast is believed to be valid and accurate on the date it was first published. The views, information, or opinions expressed during the podcast reflect the views of the speakers. This podcast does not constitute tax, accounting, legal or other business advice, or an advisor-client relationship. Before making any decision or taking action, consult with a professional regarding your specific circumstances.