Reporting Profits Interest Awards

Equity incentives can be a valuable form of compensation for limited liability companies (LLCs). Corporations are more familiar with equity incentives; possibly in the form of restricted stock, stock options, or stock appreciation rights (SARs). However, “profit interest awards” are fairly new and gaining in popularity. The coronavirus pandemic has further spiked their appeal due to tight cash flow for many organizations.

What is a “profit interest?”

An LLC with more than a single member is classified as a partnership for US federal tax purposes unless it elects to be classified as a corporation. There are two types of equity in an LLC taxed as a partnership – “capital interests” and “profits interests.”

A capital interest is a financial interest in a company (i.e. a share of stock). It represents a piece of existing company value and only has value upon the occurrence of a triggering capital event (typically a sale or liquidation).
A profits interest represents only a right to share in the future growth of the entity; that is, income and/or appreciation that is generated after the date of grant.

Types of awards and how to account for them

U.S. Generally Accepted Accounting Principles (GAAP) includes four primary profits interest awards. They, along with their summarized accounting guidance, are listed below:

Share-based payments
Profit-sharing
Bonus arrangements
Deferred compensation.

Accounting for each type is dependent on the features of the profit interest award and will fall under either Accounting Standards Codification (ASC) 710, Compensation – General or ASC 718, Compensation-Stock Compensation. ASC 710 includes guidance for profit-sharing, performance bonuses, and deferred compensation plans. However, share-based payments are excluded and specifically addressed under ASC 718.

The key differences between the two accounting models include:

Recognition – Under ASC 710, the awards are recognized when payment is both probably and reasonably estimable. Under ASC 718, the awards are generally recognized as employee services are rendered.
Measurement – Under ASC 710, the awards are measured at present value and then remeasured at each reporting date. In contrast, ASC 718 calls for awards to be measured at fair value based on either the grant or settlement date.
Classification – Both sections provide guidance on classifying the awards as a liability. However, share-based payments should be evaluated to determine if they are truly an equity transaction.
Presentation – ASC 710 calls distributions to holders compensation cost. ASC 718 are typically treated as capital transactions (i.e. dividends)

U.S. GAAP does not provide explicit guidance on how to account for profit interests. Business entities must evaluate all terms, conditions, and characteristics of such awards to determine the best treatment. This often involves “looking through” the legal form of the instruments to determine the true intent. Based on this, there is often diversity in how entities account for-profit interests. The Financial Accounting Standards Board (FASB) has acknowledged the awards as a potential area where clarification and simplification may be needed.

Regardless of the intricacy in the accounting for the awards, they may prove to be a valuable tool for organizations looking for a way to reward employees during these periods of low-level cash flow.

The American Rescue Plan Act of 2021 (ARPA) allows small and midsize employers, and certain governmental employers, to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

The ARPA tax credits are available to eligible employers that pay sick and family leave for leave from April 1, 2021, through September 30, 2021.

The credits have been extended through September 20, 2021.
Employers are encouraged to offer paid leave to employees to receive or recover from vaccinations, but it is not mandated.
The Paid Health Emergency Leave has been increased from a maximum of $10,000 to a maximum of $12,000 per employee.
ARPA expands the qualifying reasons for which leave can be taken (and tax credit claimed) under the Emergency Paid Sick Leave (EPSL) and/or the Emergency Family Medical Leave (EFML), to include leave:
- to obtain COVID-19 immunization;
- to recover from an injury, disability, illness or condition related to the COVID-19 immunization; and
- to seek or await the results of a test for medical diagnosis of COVID-19, where the employee has been exposed to COVID-19 or the employer has requested such a test from the employee.
ARPA strikes the provision in the FFCRA requiring the first two weeks of paid Extended FMLA (Paid Health Emergency Leave) to be unpaid. That is why the maximum allotment per employee has been adjusted from $10,000 to $12,000.
The reasons for which the expanded family and medical leave may be taken have also been broadened. Under the FFCRA, the qualifying reasons for leave were limited to instances where an employee needed to care for their child because the child’s school was closed or the childcare provider was unavailable due to COVID-19. Under ARPA, all of the reasons for which emergency paid sick leave may be provided are qualifying reasons for the expanded family and medical leave.
ARPA resets the 10-day (or 80-hour) allotment limit on Emergency Paid Sick Leave (EPSL) effective April 1, 2021.
School districts can now receive credits.

Please read the IRS Fact Sheet to learn more about which employers are eligible for the tax credits and how employers may claim the credit.

With so many employees working remotely these days, engaging in competitive intelligence has never been easier. The Internet as a whole, and social media specifically, create a data-rich environment in which you can uncover a wide variety of information on what your competitors are up to. All you or an employee need do is open a browser tab and start looking.

But should you? Well, competitive intelligence — formally defined as the gathering and analysis of publicly available information about one or more competitors for strategic planning purposes — has been around for decades. One could say that a business owner would be imprudent not to keep tabs on his or her fiercest competition.

The key is to engage in competitive intelligence legally and ethically. Here are some best practices to keep in mind:

Know the rules and legal risks. Naturally, the very first rule of competitive intelligence is to avoid inadvertently breaking the law or otherwise exposing yourself or your company to a legal challenge. The technicalities of intellectual property law are complex; it can be easy to run afoul of the rules unintentionally.

When accessing or studying another company’s products or services, proceed carefully and consult your attorney if you fear you’re on unsteady ground and particularly before putting any lessons learned into practice.

Vet your sources carefully. While gathering information, you or your employees may establish sources within the industry or even with a specific competitor. Be sure you don’t encourage these sources, even accidentally, to violate any standing confidentiality or noncompete agreements.

Don’t hide behind secret identities. As easy as it might be to create a “puppet account” on social media to follow and even comment on a competitor’s posts, the negative fallout of such an account being exposed can be devastating. Also, if you sign up to receive marketing e-mails from a competitor, use an official company address and, if asked, state “product or service evaluation” as the reason you’re subscribing.

Train employees and keep an eye on consultants. Some business owners might assume their employees would never engage in unethical or even illegal activities when gathering information about a competitor. Yet it happens. One glaring example occurred in 2015, when the Federal Bureau of Investigations and U.S. Department of Justice investigated a Major League Baseball team because one of its employees allegedly hacked into a competing team’s computer systems. The investigation concluded in 2017 with a lengthy prison term for the perpetrator and industry fines and other penalties for his employer.

Discourage employees from doing competitive intelligence on their own. Establish a formal policy, reviewed by an attorney, that includes ethics training and strict management oversight. If you engage consultants or independent contractors, be sure they know and abide by the policy as well. Our firm can help you identify the costs and measure the financial benefits of competitive intelligence.

In recent months, there have been a number of tax changes that may affect your individual tax bill. Many of these changes were enacted to help mitigate the financial damage caused by COVID-19.

Here are two changes that may result in tax savings for you on your 2020 or 2021 tax returns. The 2020 return is due on May 17, 2021 (because the IRS extended many due dates from the usual April 15 this year). If you can’t file by that date, you can request an extra five months to file your 2020 tax return by October 15, 2021. Your 2021 return will be due in April of 2022.

1. Some unemployment compensation from last year is tax free.

Many people lost their jobs last year due to pandemic shutdowns. Generally, unemployment compensation is included in gross income for federal tax purposes. But thanks to the American Rescue Plan Act (ARPA), enacted on March 11, 2021, up to $10,200 of unemployment compensation can be excluded from federal gross income on 2020 federal returns for taxpayers with an adjusted gross income (AGI) under $150,000. In the case of a joint return, the first $10,200 per spouse isn’t included in gross income. That means if both spouses lost their jobs and collected unemployment last year, they’re eligible for up to a $20,400 exclusion.

However, keep in mind that some states tax unemployment compensation that is exempt from federal income tax under the ARPA.

The IRS has announced that taxpayers who already filed their 2020 individual tax returns without taking advantage of the 2020 unemployment benefit exclusion, don’t need to file an amended return to take advantage of it. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.

The IRS will take steps in the spring and summer to make the appropriate change to the returns, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.

2. More taxpayers may qualify for a tax credit for buying health insurance.

The premium tax credit (PTC) is a refundable credit that assists individuals and families in paying for health insurance obtained through a Marketplace established under the Affordable Care Act. The ARPA made several significant enhancements to this credit.

For example, under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) weren’t eligible for the PTC. But under the new law, for 2021 and 2022, the premium tax credit is available to taxpayers with household incomes that exceed 400% of the FPL. This change increases the number of people who are eligible for the credit.

Let’s say a 45-year-old unmarried man has income of $58,000 (450% of FPL) in 2021. He wouldn’t have been eligible for the PTC before ARPA was enacted. But under the ARPA, he’s eligible for a premium tax credit of about $1,250.

Other favorable changes were also made to the premium tax credit.

Many more changes

The 2020 unemployment benefit exclusion and the enhanced premium tax credit are just two of the many recent tax changes that may be beneficial to you. Contact us if you have questions about your situation.

Yeo & Yeo CPAs & Business Consultants, a leading Michigan accounting firm, has been named one of West Michigan’s Best and Brightest Companies to Work For for the seventeenth consecutive year. Yeo & Yeo and the other winning companies will be honored at a digital conference and awards celebration on July 20.

“We are honored to receive this award alongside so many other prominent West Michigan companies,” said Carol Patridge, managing principal of Yeo & Yeo’s Kalamazoo office. “We credit the excellent work environment we’ve created to our dedicated employees. They are engaged in the work they do for our clients and committed to teamwork and community service. We wouldn’t be where we are today without them.”

Yeo & Yeo is proud to offer more than 200 employees rewarding careers in the accounting industry. Yeo & Yeo develops future leaders through its award-winning CPA certification bonus program, in-house training department, professional development training, and formal mentoring while sustaining work-life balance.

Ali Barnes, CPA, managing principal of Yeo & Yeo’s Alma office, said, “This is an exciting achievement that recognizes Yeo & Yeo’s commitment to the development and well-being of our employees. We are proud to support and encourage employees who are working both at home and in the workplace.”

The annual competition provides the business community with the opportunity to gain recognition, showcase their best practices, and demonstrate why they are an ideal place for employees to work. An independent research firm evaluates organizations on a list of key metrics.

Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.

However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.

Determining reasonable compensation

There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:

Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
In the minutes of your corporation’s board of directors, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts.
Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.

In December 2020, Richard Jones stepped up as chairman of the Financial Accounting Standards Board (FASB). After meeting with stakeholders in early 2021, Jones identified a list of high-priority projects that he plans to tackle under his leadership.

Big picture

The FASB is responsible for creating and updating U.S. Generally Accepted Accounting Principles (GAAP), the rules that many domestic businesses use to report their financial results externally. In a recent interview, Jones said he wants the FASB to be “very transparent” when making and reviewing accounting rules.

He also encouraged stakeholders — including investors, CPAs, not-for-profits and businesses — to actively engage with the FASB. “Engagement is a critical part of our mission; we need that external feedback to function and set standards,” said Jones. His goal is to understand the environment in which stakeholders are operating and consider their input when prioritizing projects and setting comment periods.

In the coming year, Jones expects to face many challenges, because his tenure began amid a global pandemic that has had significant economic impacts. Moreover, he indicated that technological changes and a shift to one-party control of Congress and the White House may affect the future direction of the FASB.

Hot topics

Jones’ recent interview also sheds light on the FASB’s current agenda, which includes the following high-priority projects:

Non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA),
Environmental, social, and governance (ESG) disclosure rules,
Presentation of the statement of cash flows,
Classification of debt,
Goodwill,
Government assistance, and
Segment reporting.

When asked about the status of global convergence projects, Jones said the FASB has “great communication” with the International Accounting Standards Board (IASB). He plans to continue working with the IASB on “projects of common interest.”

Post-implementation reviews

During the interview, Jones stressed that FASB standards are subject to “continuous improvement.” Accordingly, he plans to conduct a post-implementation review of the updated standards for revenue, leases and credit losses that have been implemented in recent years. These types of large projects typically require fine-tuning after they’re adopted by public companies to make the standards more effective and to make it easier for smaller entities to comply with the changes. The review process usually takes multiple years, and the FASB is just in the initial stages of reviewing these standards.

Looking ahead

Finally, Jones shared his thoughts on the impact that technology — such as artificial intelligence and software developments — will have on the way the FASB sets standards. He noted that technology has helped investors access and process large volumes of data, which has led to a demand for additional, more-disaggregated reporting.

The FASB has been fairly quiet in the last few years, as companies worked to adopt the updates to the revenue, leases and credit losses standards. Now, with a new chairman at the helm, the FASB is positioned to resume rulemaking activities in key areas. Contact us to learn about the latest developments under GAAP.

The premium tax credit (PTC) is a refundable credit that helps individuals and families pay for insurance obtained from a Health Insurance Marketplace (commonly known as an “Exchange”). A provision of the Affordable Care Act (ACA) created the credit.

The American Rescue Plan Act (ARPA), signed into law in March 2021, made several significant enhancements to the PTC. Although these changes expand access to the credit for individuals and families, they could increase the risk of some businesses incurring an ACA penalty.

More eligible people

Under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) were ineligible for the PTC. Under ARPA, for 2021 and 2022, the PTC is available to taxpayers with household incomes that exceed 400% of the FPL. This change will increase the number of PTC-eligible people.

For example, a 45-year-old single person earning $58,000 in 2021 (450% of FPL) would have been ineligible for the PTC under pre-ARPA law. Under ARPA, that individual is eligible for a PTC of about $1,250.

Lower income cap

The PTC is calculated on a sliding scale based on household income, expressed as a percentage of the FPL. The amount of the credit is limited to the excess of the premiums for the applicable benchmark plan over the taxpayer’s required share of those premiums. The required share comes from a table divided into income tiers.

Because the required share is less under the new tables for 2021 and 2022 than it otherwise would have been, the PTC will be greater. Under pre-ARPA law, a taxpayer might have had to spend as much as 9.83% of household income in 2021 on health insurance premiums. Under ARPA, that amount is capped at 8.5% for 2021 and 2022.

More penalty exposure

As mentioned, the expanded PTC will help individuals and families obtain coverage through a Health Insurance Marketplace. However, because applicable large employers (ALEs) potentially face shared responsibility penalties if full-time employees receive PTCs, expanded eligibility could increase penalty exposure for ALEs that don’t offer affordable, minimum-value coverage to all full-time employees as mandated under the ACA.

An employer’s size, for ACA purposes, is determined in any given year by its number of employees in the previous year. Generally, if your company had 50 or more full-time or full-time equivalent employees on average during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is someone employed on average at least 30 hours of service per week.

Assess your risk

If your business is an ALE, be sure you’re aware of this development when designing or revising your employer-provided health care benefits. Should you decide to add staff this year, keep an eye on the tipping point of when you could become an ALE. Our firm can further explain the ARPA’s premium tax credit provisions and help you determine whether you qualify as an ALE — or may soon will.

Encryption can be a confusing subject for most people.

Is it a good thing or a bad thing?

We understand the confusion. After all, if your data is encrypted, how on earth will it be usable?

However, when you encrypt your data, you’re adding a level of protection to it. It means that should it be stolen, it’ll be unusable to anyone else.

But less than 50 percent of companies have standardized end-to-end encryption set up. While they have some level of encryption, they don’t have a documented standard that covers every area of their business.

And it’s not only hackers and other cybercriminals that could benefit from a business’ lack of data encryption. Lost or stolen devices put data at risk too. When you consider that a laptop is stolen every 53 seconds, it’s leaving businesses more vulnerable than they should be.

Microsoft 365 automatically encrypts business data by default. But your endpoints (laptops, phones, desktop computers, tablets, etc.) might still be vulnerable in the hands of an adept cybercriminal.

In today’s environment, roughly 70 percent of successful data breaches originate at the endpoint. Because endpoints represent every device connected to your network, an attack can become unmanageable quickly if endpoints are not properly managed and secured.

Yeo & Yeo Technology’s endpoint protection software protects your network from malicious attacks by using encryption and application control to secure end-user devices. Using static and behavioral AI, we can detect and prevent fileless, zero-day, and nation-grade attacks in real-time. Contact us to learn how endpoint security can protect your business.

Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

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

Uncomplicated paperwork

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

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

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

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

SIMPLE Plans

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

For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.

Voided transactions are sometimes necessary in the ordinary course of business. However, in some cases, these transactions could allow fraud to go unnoticed. Management should investigate voided transactions periodically to ensure no wrongdoing is taking place.

Voided transactions on the revenue side, possibly with a point of sale system or admissions tracker, should be investigated – what was the reason for the void and was it adequately documented. Pay special attention to patterns such as an excessive number of voids with the same employee or at the same time.

Voided transactions on the expense side should be similarly investigated, including tracing the transaction entirely through the process within the accounting system, original check, and bank statement.

In all cases, documentation and follow-up are essential – setting the tone that management will regularly examine these transactions should discourage fraud or abuse of this override.

Nonprofit budgeting has always been challenging. However, as we cross the one-year threshold into the coronavirus pandemic, you might notice the process is even more difficult than in the past. Many uncertainties exist, while many nonprofit organizations’ services are in demand more than ever. Here are some helpful tips and points to consider when budgeting for the future:

Realize there is not a one-size-fits-all when it comes to budgeting. Every nonprofit is unique in the services they offer and the funding that allows this to happen. What works for one organization will likely not work for another. Recognizing the uniqueness of your organization is essential to the budgeting process.
Remember that expenses are inherently more controllable than contributions. Possibly the most crucial factor in the budget is identifying a realistic estimate for revenues. Many organizations have seen an influx of special government funding to help meet the demand for services or stay afloat. However, not all nonprofits have been so lucky – particularly those that are mainly driven by contributions. Working closely with development staff and major donors is a critical exercise in having a good pulse on expected contributions.
Identify acceptable levels of funding shortfalls. Every organization has a different level of net assets and reserve funding. Work closely with the board of directors to identify the maximum amount of these that you are comfortable using in the future.
Develop a plan for potential cutbacks. If contributions fall short of historical levels and you find yourself at an unacceptable level of deficit, cutbacks may need to be made to protect the organization’s future. Having a ‘worst-case scenario’ plan in place can identify potential cuts in services you offer or specific non-critical expenses that could be eliminated, so you are prepared in advance.
Be realistic. Don’t fill holes in funding with phantom contributions that are unlikely to roll in. If you expect a net loss during the year and have accepted that fact, let the budget reflect that.
Get creative with new fundraising ideas. Virtual fundraisers have been successful for many nonprofits over the past year. Although in some cases, these events have yielded lower gross revenues than events that have been held in person in the past, expenses are typically much lower as well. This may be the year to depart from the annual gala and consider an event or other fundraising tactic you haven’t before!
Monitor, revise, analyze. Make budget-to-actual comparisons often and understand why areas are over or under budget. When it is clear that the budget is no longer realistic, you might wish to amend the budget to account for this and make adjustments in other areas to compensate.

Contact Yeo & Yeo’s Nonprofit Services Group if you would like assistance in the budgeting process or have specific questions about your organization.

You’ve answered hundreds of questions, pulled countless documents, and are sliding toward home plate for this year’s audit. You’re almost done! Reviewing draft reports and providing feedback is one of the last steps to wrapping up the audit and resuming business as usual. Following are tips to aid in this crucial audit step:

1. Review the proposed journal entries. Throughout the audit, if adjustments were needed, these were likely brought to your attention by the auditor once discovered. At the end of the audit, a comprehensive list of all adjustments should be provided. If one is not, ask for it or confirm that no adjustments were made. Review the journal entries to verify you agree with the amounts, accounts and why the entry is being recorded. The journal entries should be recorded in your general ledger once you agree with them. Be sure to follow your internal process for posting journal entries and retain appropriate supporting documentation for the journal entries. If the organization uses a tool to document how to prepare for year-end, update this tool as necessary to prevent similar adjustments from being missed in future years.

2. Compare your trial balance to the auditor’s trial balance. Once the proposed journal entries have been recorded, compare ending balances in your trial balance to the final trial balance generated by the auditor. There are times when they won’t match. Sometimes this is acceptable; other times, further investigation and resolution are required. Here are a few examples of differences that can occur:

1. The auditor posts a journal entry to reclassify amounts as part of the financial statement preparation process, but the organization does not maintain that level of detail in the general ledger. This may be the case when classifying amounts as short-term versus long-term on the balance sheet.
2. A journal entry was made on your general ledger that was never provided to the auditor. Review the journal entry to confirm it was, in fact, necessary. Then, provide the auditor with the journal entry and have further discussions to ensure they agree with posting the adjustment.

3. Review how the trial balance accounts are grouped and mapped to the financial statements. Suppose the auditor is preparing the financial statements. In that case, they should provide you with a grouping schedule that delineates which trial balance accounts are combined to equal lines on the financial statements. Review the grouping of accounts and be sure to understand why certain accounts are grouped. If a grouping doesn’t make sense, or you identify an obvious error, bring this up with the auditor.

4. Read the footnotes. The footnotes contain an explanation of the organization’s accounting policies and seek to enhance the reader’s understanding of the amounts presented in the financial statements. The footnotes should accurately reflect the accounting policies the organization uses. Additional information related to certain transactions, such as collectability of receivables, long-term debt terms, and revenue recognition practices, to name a few, need to reflect the specific circumstances of your organization.

5. Consider completeness of the information presented. This is the final “gut check” as to whether the materials are complete. Consider if the big-ticket financial transactions are included and make sense. If new debt was issued, was it properly presented? If a construction project was underway, were amounts properly capitalized? If a significant event happened after fiscal year-end, is the situation disclosed? Does the bottom line make sense?

At the end of the audit, management must attest to certain representations and take responsibility for the financial statements and all that is contained within them. Throughout the process above, if you notice errors, have questions, or don’t understand something, speak up. Issuing complete and accurate financial statements is the home run that results from collaboration and collective understanding among all members of the audit team.

School district technology teams continue to face numerous challenges as information technology and its risks develop rapidly. Students and teachers likely use various equipment and operating systems, including Windows, macOS, Chrome, Android and iOS, each with its own security risks and vulnerabilities. Software requires frequent monitoring for updates and patches, which may have unknown effects on other hardware or software the school district uses. Many users accessing the school district’s network will be legitimate users, but additional remote users and publicly accessible wireless networks make the school district vulnerable to intruders.

Although your school district likely has some controls in place to monitor these risks, your technology team cannot rely on best practices of the past. Failure of your technology team to focus on changing technology and controls can have serious consequences. For example, cybersecurity insurance is a common tool school districts use to mitigate loss related to malware and loss of data. However, the latest trend is that insurers provide coverage based on risk; a school district that cannot sufficiently demonstrate a response to significant information technology risks could be denied coverage or face a substantial increase in cost. Also, malware that locks your files in exchange for money continues to become more aggressive. In the past, backups were the best way to avoid having to pay to restore access to files, but malware has demonstrated the ability to infect network-connected backups.

The controls and infrastructure to mitigate information technology risks can be comprehensive and specific to each school district’s software and hardware environment. However, your technology team could use several simple and cost-effective tools to reduce the risk of malware and network intruders.

Enforce passwords meeting minimum complexity requirements, including minimum length and a combination of lower and uppercase characters, numbers and special characters for software and network access. Passwords should automatically require changing at reasonable intervals.
For most software and website access, passwords alone are not enough. The school district should require the use of multi-factor authentication, preferably via an authentication app on a phone, whenever possible. This reduces the risk that an intruder would gain access to secure information if a password were to be compromised.
Automatic backups should occur frequently and at regular intervals. Keep a backup offline and away from network access in the event malware affects your network and your automatic backups. Backups should be tested and restored regularly to ensure they function as intended.
Educate your employees on what risks they face and how their actions can impact their data and the school district’s data. Hackers can invade your systems and bypass security with malicious emails that look legitimate but instead lock files or gain access to sensitive information. Programs such as KnowBe4 offer low-cost training via short videos that help employees detect red flags and delete the emails before clicking on them. Contact your Yeo & Yeo professional if you would like more information about the Security Awareness Training program.

The following text was take from our eBook: 5 Steps to Drive Business Growth and Recovery to Fuel Your Dreams.

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Pivoting isn’t a new concept. Some of the most profitable and recognizable businesses in the country changed paths midstream before they truly became successful.

A classic example is Starbucks. The company didn’t start out as a franchiser of coffee shops. Initially, it sold coffee makers, bulk coffee beans and other items before shifting to its current model of coffee houses with a sense of community, like those in Italy and other European countries. Now it seems as if Starbucks has a coffee shop at every busy intersection in the country — and a loyal following of coffee aficionados.

Each situation is different as well as the sense of urgency and uncertainty varies for businesses experiencing challenges or a stunt in growth. In situations like millions of businesses have experienced in 2020, pivoting is one strategy to consider.

6 Tips for a Successful Pivot Strategy

Pivoting requires a transition period, especially if you’re shifting to a new product line or paradigm. It’s not as easy as snapping your fingers and announcing a change of plans. Here are six practical suggestions to smooth out the rough edges.

1. Communicate.

Let your customers know that you’re still there to serve them as you always have with expanded opportunities. Share new products and services on your website. If customers don’t know what you’re selling, they won’t be buying. Expand the reach of your social media accounts.

2. Adapt to meet new demands and needs.

Be creative about serving your customers. Can you offer new services that would be attractive to your buyers that would make you stand out from your competition? If a car dealership can drive a new vehicle to a buyer’s residence, can you do the same for your products? Can you use teleconferencing, or utilize demos to walk a client through the steps of a purchase? A small change can not only help you meet your clients’ need, but can also preserve resources such as transportation and travel cost when cash flow is low

3. Think ahead.

If demand for your product or service is low currently, you may be able to encourage your clients to purchase later. For example, if you own a retail outlet that’s had to close its doors, you might offer gift cards for future purchases at discounted rates. When restrictions in your area have been lifted, customers can cash in. In the meantime, you’ve boosted current cash flow. If you own a service business, would your clients be willing to schedule for services or appointments at a later date or sign a contract?

4. Learn a new skill.

Faced with necessity, owners may delve into areas they previously hadn’t touched. For instance, you could become adept at scheduling pick-ups through software. Or maybe ask employees to take on administrative work that had previously been delegated to others to reduce your staff.

5. Inform your employees.

Workers appreciate honesty. So, inform them as soon as possible if layoffs are coming, benefits are being scaled back or bonuses won’t be paid this year. These challenging times present an opportunity to build long-term loyalty among your workers.

6. Monitor your pivot strategy regularly.

Don’t rely on gut instinct or quarterly financial statements to monitor your company’s performance. Timely, accurate financial reporting is key during volatile market conditions. Consider producing daily or weekly “flash” reports that highlight what’s working and what’s not — and then take corrective measures. For example, you might need to adjust your pricing, staffing or hours of operation to improve profitability.

Which metrics should be included in your company’s flash report? Keep a close watch on revenue, payroll costs, and sources (and uses) of cash.

Article Updated September 17, 2021

The American Rescue Plan Act of 2021 requires all employers to whom COBRA applies to offer free COBRA coverage for up to six months to workers who lost health insurance due to involuntary termination of employment or a reduction in hours. The requirement went into effect on April 1, 2021. The free coverage is to be offset by tax credits to the entity providing the free coverage. Specifically, the Act allows employers to claim a refundable tax credit for any COBRA premiums waived due to the subsidy provision. Employers claim this credit through their quarterly Medicare tax filings as an offset to the liability the employer would otherwise have for Medicare taxes. The new law requires prompt action from employers and health plan administrators.

What is the Benefit?

Eligible individuals are to be provided a 100% COBRA premium subsidy for the six months starting April 1, 2021, through September 30, 2021.

Who Gets the Benefit?

An individual eligible for benefits under the Act is referred to as an “Assistance Eligible Individual” (“AEI”). An AEI is a COBRA qualified beneficiary eligible for COBRA coverage due to involuntary termination of employment or reduction in hours and who actually elects COBRA coverage. AEIs include both the employee and eligible family member dependents. Importantly, an individual who previously declined COBRA or dropped COBRA and who would otherwise currently be eligible for COBRA if a COBRA election were in effect is eligible for the COBRA subsidy if certain election requirements are satisfied.

How is the Benefit Provided?

Each AEI is deemed to have satisfied the requirement to pay premiums for a maximum period of April 1, 2021, through September 30, 2021. Therefore, AEIs who elected and are currently receiving COBRA coverage should have their premiums waived starting April 1, 2021. AEIs who previously dropped or declined COBRA coverage are allowed a window period to elect coverage during the six-month subsidy period. It is important to note that the subsidy is available only so long as the individual remains eligible for COBRA. The Act does not extend the availability of COBRA coverage beyond the 18 months following the involuntary termination or reduction in hours. This means, for example, that an employee (or his or her dependents) whose COBRA rights have expired as of April 1, 2021, are not eligible for the subsidy.

What is the Election Process?

AEIs not currently on COBRA will have 60 days from the date the employer notifies them of the COBRA premium subsidy’s availability to opt-in. The Department of Labor (“DOL”) is mandated to publish model notices within 30 days of the Act’s passage. Whether the DOL meets this requirement or not, employers are required to notify AEIs of their election option by May 31, 2021. AEIs have the right to retroactive subsidized coverage back to April 1, 2021. Their subsidized coverage does not expire until the end of the individual’s maximum COBRA coverage period or September 30, 2021, whichever is earlier.

Importantly, the ARPA required employers to notify each “assistance eligible individual” (employees who lost group coverage due to reduced hours or involuntary termination and who elect coverage) no more than 45 days, but no less than 15 days, before his or her subsidy termination date that their subsidized coverage is about to end. For most individuals still receiving subsidized coverage, this means they must be notified of the September 30 termination date no later than September 15, 2021. No notice is required, however, to those individuals whose premium assistance expires due to their eligibility for another group health plan or Medicare.

The expiration notice must specify that (1) premium assistance for the individual is about to expire, (2) the date of the expiration, and (3) that the individual may be eligible for coverage without any premium assistance through COBRA continuation coverage or coverage under a group health plan, Medicaid, or the Health Insurance Marketplace. The U.S. Department of Labor (the “DOL”) published guidance and a model form employers may utilize in providing notice of the expiration of ARPA’s premium subsidy. This model notice form can be obtained or viewed on the DOL’s website, please visit:

https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/laws/cobra/premium-subsidy/notice-of-premium-assistance-expiration-premium.pdf

What Should Employers Do Now?

Employers should work with their COBRA vendors to coordinate not only communication of the required notices, but also to determine which former employees and dependents will be eligible to receive notice. Employers should also modify existing notices for any individuals who become eligible for COBRA coverage during the subsidy period. Finally, employers should work with their COBRA vendors and tax professionals to clarify their understanding of which entity is actually providing the subsidy and, accordingly, which entity is entitled to claim the tax credits.

For more information, visit the U.S. Department of Labor’s COBRA Premium Subsidy website page and read FAQs About COBRA Premium Assistance Under the American Rescue Act of 2021.

The preceding summary of COBRA requirements for employers was provided by Masud Labor Law.

The Internal Revenue Service warns of an IRS-impersonation scam that primarily targets educational institutions, including university and college students and staff who have “.edu” email addresses.

The suspect emails display the IRS logo and use subject lines such as “Tax Refund Payment” or “Recalculation of your tax refund payment.” It asks people to click a link and submit a form to claim their refund. The phishing website asks taxpayers to provide personal information such as their Social Security number, date of birth, income, driver’s license number, electronic filing PIN and more. People who receive this scam email should not click on the link in the email.

While the scammers are primarily targeting universities, all education entities have the potential to be affected. The IRS will never initiate contact with taxpayers via email about a bill or tax refund. Always think before you click.

Read more. Learn how to report these scam emails to the IRS and what to do if you believe you may have provided identity thieves with this information.

Stop Cyberattacks in Their Tracks with These 10 Security Tips

If you were to ask your IT staff about how tech support for remote employees is going, they might say something along the lines of, “Fantastic! Never better!” However, if you asked remote workers the same question, their response could be far less enthusiastic.

This was among the findings of a report by IT solutions provider 1E entitled “2021: Assessing IT’s readiness for the year of flexible working,” which surveyed 150 IT workers and 150 IT managers in large U.S. organizations. The report strikingly found that, while 100% of IT managers said they believed their internal clients were satisfied with tech support, only 44% of remote employees agreed.

Bottom line impact

By now, over a year into the COVID-19 pandemic, remote work has become common practice. Some businesses may begin reopening their offices and facilities as employees get vaccinated and, one hopes, virus metrics fall to manageable levels. However, that doesn’t mean everyone will be heading back to a communal working environment.

Flexible work arrangements, which include the option to telecommute, are expected to remain a valued employment feature. Remote work is also generally less expensive for employers, so many will likely continue offering or mandating it after the pandemic fades.

For business owners, this means that providing optimal IT support to remote employees will remain a mission-critical task. Failing to do so will likely hinder productivity, lower morale, and may lead to reduced employee retention and longer times to hire — all costly detriments to the bottom line.

Commonsense tips

So, how can you ensure your remote employees are well-supported? Here are some commonsense tips:

Ask them about their experiences. In many cases, business owners are simply unaware of the troubles and frustrations of remote workers when it comes to technology. Develop a relatively short, concisely worded survey and gather their input.

Invest in ongoing training for support staff. If you have IT staffers who, for years, provided mostly in-person desktop support to on-site employees, they might not serve remote workers as effectively. Having them take one or more training courses may trigger some “ah ha!” moments that improve their interactions and response times.

Review and, if necessary, upgrade systems and software. Your IT support may be falling short because it’s not fully equipped to deal with so many remote employees — a common problem during the pandemic. Assess whether:

Your VPN system and licensing suit your needs,
Additional or better cloud solutions could help, and
Your remote access software is helping or hampering support.

Ensure employees know how to work safely. Naturally, the remote workers themselves play a role in the stability and security of their devices and network connections. Require employees to undergo basic IT training and demonstrate understanding and compliance with your security and usage policies.

Your technological future

The pandemic has been not only a tragic crisis, but also a marked accelerator of the business trend toward remote work. We can help you evaluate your technology costs, measure productivity and determine whether upgrades are likely to be cost-effective.

When you file your tax return, you must check one of the following filing statuses: Single, married filing jointly, married filing separately, head of household or qualifying widow(er). Who qualifies to file a return as a head of household, which is more favorable than single?

To qualify, you must maintain a household, which for more than half the year, is the principal home of a “qualifying child” or other relative of yours whom you can claim as a dependent (unless you only qualify due to the multiple support rules).

A qualifying child?

A child is considered qualifying if he or she:

Lives in your home for more than half the year,
Is your child, stepchild, adopted child, foster child, sibling stepsibling (or a descendant of any of these),
Is under age 19 (or a student under 24), and
Doesn’t provide over half of his or her own support for the year.

If a child’s parents are divorced, the child will qualify if he meets these tests for the custodial parent — even if that parent released his or her right to a dependency exemption for the child to the noncustodial parent.

A person isn’t a “qualifying child” if he or she is married and can’t be claimed by you as a dependent because he or she filed jointly or isn’t a U.S. citizen or resident. Special “tie-breaking” rules apply if the individual can be a qualifying child of (and is claimed as such by) more than one taxpayer.

Maintaining a household

You’re considered to “maintain a household” if you live in the home for the tax year and pay over half the cost of running it. In measuring the cost, include house-related expenses incurred for the mutual benefit of household members, including property taxes, mortgage interest, rent, utilities, insurance on the property, repairs and upkeep, and food consumed in the home. Don’t include items such as medical care, clothing, education, life insurance or transportation.

Special rule for parents

Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify under this rule, you must be able to claim the parent as your dependent.

Marital status

You must be unmarried to claim head of household status. If you’re unmarried because you’re widowed, you can use the married filing jointly rates as a “surviving spouse” for two years after the year of your spouse’s death if your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household. The joint rates are more favorable than the head of household rates.

If you’re married, you must file either as married filing jointly or separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household, you’re treated as unmarried. If this is the case, you can qualify as head of household.

We can answer questions if you’d like to discuss a particular situation or would like additional information about whether someone qualifies as your dependent.

As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.

Here are some considerations.

Shifting business earnings

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

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.

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

Income tax withholding

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

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

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

Social Security tax savings

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

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

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

Retirement benefits

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).

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