GASB 87: Fundamental Changes in Lease Accounting for Schools

The Governmental Accounting Standards Board (GASB) issued a new lease accounting standard back in June 2017, following suit with ASU No. 2016-02 issued by the Financial Accounting Standards Board (FASB) in February 2016.

The initial implementation date of GASB 87 was for reporting periods beginning after December 15, 2019, which for Michigan school districts would have been implemented for June 30, 2021, fiscal year-ends. However, due to COVID-19, GASB issued Statement No. 95 delaying implementation for many standards, including Statement No. 87, which was delayed for 18 months. Now, the new lease accounting standards must be implemented for Michigan school districts with June 30, 2022 year-ends.

This standard will put all financial reporting of Michigan school districts on a level playing field, as all districts will use a single model of reporting leases and will be required to report lease liabilities that are not currently being reported. A lessee is required to recognize a lease liability and an intangible right-to-use lease asset for leases that were previously classified as operating leases and had only footnoted the future lease payment obligations.

At the commencement of the lease, the lease liability and assets would be recognized. The liability would be based on the present value of the future lease payments, and the lease asset would be equal to the lease liability, plus any upfront payments or direct lease costs.
The lease liability would be reduced as payments are made throughout the lease term and recognize an outflow of resources for interest expense.
The lease asset will be amortized over the asset’s lease term or useful life, whichever is shorter.

The lease asset and liability will be the same at the start of the lease; however, depending on payment terms and the leased asset’s useful life, they will most likely be different throughout the lease term.

The financial statements’ notes will disclose a description of the leasing arrangement, the amount of leased assets recognized, and the future lease payment schedule.

The standard also includes information on short-term leases, lessor accounting, lease modification, lease terminations, subleases, and sale-leaseback transactions.

See the full text of GASB 87.

Please contact your local Yeo & Yeo Education Services Group member if you have questions or need help implementing lease accounting.

Many businesses have experienced severe cash flow problems during the COVID-19 pandemic. As a result, some may have delayed or missed loan payments. Instead of filing for bankruptcy in court, delinquent debtors may reach out to lenders about restructuring their loans.

Restructuring vs. Chapter 11

Out-of-court debt restructuring is a process by which a public or private company informally renegotiates outstanding debt obligations with its creditors. The resulting agreement is legally binding, and can enable the distressed company to reduce its debt, extend maturities, alter payment terms or consolidate loans.

Debt restructuring is a far less extreme and burdensome (not to mention less expensive) alternative to filing for Chapter 11 (reorganization) bankruptcy protection. And lenders often are more receptive to a restructuring than they are with taking their chances in bankruptcy court.

Types of restructuring

There are two basic types of out-of-court debt restructuring:

1. General. This type of negotiation buys the distressed company the time needed to regain its financial footing by extending loan maturities, lowering interest rates and consolidating debt. Creditors typically prefer a general restructuring because it means they’ll receive the full amount owed, even if it’s over a longer time period.

General restructuring suits companies facing a temporary crisis — such as the sudden loss of a large customer or the departure of a key management team member — but have overall financials that are still strong. Debt structure changes can be permanent or temporary. If they’re permanent, creditors are likely to push for higher equity stakes or increased loan payments as compensation.

2. Troubled. A troubled debt restructuring requires creditors to write off a portion of the distressed company’s outstanding debt and permanently accept those losses. Typically, the creditor and debtor reach a settlement in lieu of bankruptcy.

This solution is appropriate when a company simply can’t pay its current debts at current interest rates and the only alternative is bankruptcy. Creditors may receive some compensation, however, with increased equity shares in the business or, if it’s acquired, in the merged company.

During the COVID-19 pandemic, the Financial Accounting Standards Board has received many questions about how to apply the accounting guidance on debt restructurings. So, it recently published an educational staff paper to help financially distressed borrowers work through the details.

Thinking about debt restructuring?

We are on top of the latest developments in this nuanced accounting topic. Contact us to help report restructured loans in your company’s financial statements.

Using a strengths, weaknesses, opportunities and threats (SWOT) analysis to frame an important business decision is a long-standing recommended practice. But don’t overlook other, broader uses that could serve your company well.

Performance factors

A SWOT analysis starts by spotlighting internal strengths and weaknesses that affect business performance. Strengths are competitive advantages or core competencies that generate value (and revenue), such as a strong sales force or exceptional quality.

Conversely, weaknesses are factors that limit a company’s performance. These are often revealed in a comparison with competitors. Examples might include a negative brand image because of a recent controversy or an inferior reputation for customer service.

Generally, the strengths and weaknesses of a business relate directly to customers’ needs and expectations. Each identified characteristic affects cash flow — and, therefore, business success — if customers perceive it as either a strength or weakness. A characteristic doesn’t really affect the company if customers don’t care about it.

External conditions

The next SWOT step is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit business performance.

When differentiating strengths from opportunities, or weaknesses from threats, the question is whether the issue would exist without the business. If the answer is yes, the issue is external to the company and, therefore, an opportunity or a threat. Examples include changes in demographics or government regulations.

Various applications

As mentioned, business owners can use SWOT to do more than just make an important decision. Other applications include:

Valuation. A SWOT analysis is a logical way to frame a discussion of business operations in a written valuation report. The analysis can serve as a powerful appendix to the report or a courtroom exhibit, providing tangible support for seemingly ambiguous, subjective assessments regarding risk and return.

In a valuation context, strengths and opportunities generate returns, which translate into increased cash flow projections. Strengths and opportunities can lower risk via higher pricing multiples or reduced cost of capital. Threats and weaknesses have the opposite effect.

Strategic planning. Businesses can repurpose the SWOT analysis section of a valuation report to spearhead strategic planning. They can build value by identifying ways to capitalize on opportunities with strengths or brainstorming ways to convert weaknesses into strengths or threats into opportunities. You can also conduct a SWOT analysis outside of a valuation context to accomplish these objectives.

Legal defense. Should you find yourself embroiled in a legal dispute, an attorney may want to frame trial or deposition questions in terms of a SWOT analysis. Attorneys sometimes use this approach to demonstrate that an expert witness truly understands the business — or, conversely, that the opposing expert doesn’t understand the subject company.

Tried and true

A SWOT analysis remains a useful way to break down and organize the many complexities surrounding a business. Our firm can help you with the tax, accounting and financial aspects of this approach.

Economic credits and incentives deliver tremendous value to growing companies. When the Amazon HQ2 project made national headlines, everyone became aware of the breadth of credits and incentives. It seems that these valuable tax savings are reserved for only large-scale projects; however, that is not the case. Everyday businesses in manufacturing, technology, logistics and even commercial or multi-family developments can benefit from credits and incentives if they meet the necessary thresholds. The driving factor involves planning for economic credits and incentives in advance of a growth project.

The question business owners and their advisors must ask themselves is: How can we realize these valuable outcomes? More specifically, when should the process start, and what are the key steps?

Timing is the most crucial element for businesses seeking economic credits and incentives. Correct timing can deliver tens of thousands of dollars in savings. As business owners make plans for the new year and future years to come, economic credits and incentives should be a part of the strategic planning discussion.

The majority of incentives are discretionary and often require a “but-for” clause; in other words, were it not for the offered incentives, the company would not invest or would limit its investment in a new growth project. Therefore, businesses must apply for economic incentives before final growth decisions take place. By discussing growth options with your CPA early in the decision-making process, your trusted advisors will evaluate and determine the best programs or tax savings tools.

A few “key triggers” signify incentive opportunities for business owners. Key triggers include plans to:

Add jobs
Add investment (tangible property or real property)
Make a business acquisition
Change a company location

When a company states it is considering new growth in these areas, advisors should see potential incentive value.

Growth triggers often sound like:

“I need to add another shift to keep up with demand!”
“My equipment is running 24/7 – I need to add more capacity and am looking at capital options to purchase additional machinery and equipment.”
“We are busting at the seams! We have been looking at the space next door, and I’ve started talking with a real estate broker about finding a bigger location.”
“One of our competitors did not make it through the pandemic; I’m starting to talk with my attorney about acquiring their assets and book of business.”

Future growth and vision are essential starting points for economic credits and incentives discussions. CPAs and economic credits and incentives professionals can help vet these opportunities and determine which options are best for the business. By starting these conversations early in the decision-making process, the business owner can increase their opportunity to maximize their tax savings.

Do you have a growth project planned soon? Will you add more jobs or increase investment into your business this year? If so, reach out to your CPA advisor, and let’s discuss credits and incentives that may be available to you!

Contributor: Ben Worrell, Economic Credits & Incentives Consultant at McGuire Sponsel

Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, 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 2020.)

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

For 2021, you can contribute up to $19,500 (unchanged from 2020) 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.

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 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). 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 2021?

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 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

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

A number of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2021. Some stayed the same due to low inflation. And the deduction for business meals has doubled for this year after a new law was enacted at the end of 2020. Here’s a rundown of those that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2021 at $142,800 (up from $137,700 for 2020).

Deductions

Section 179 expensing:
- Limit: $1.05 million (up from $1.04 million for 2020)
- Phaseout: $2.62 million (up from $2.59 million)
Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
- Married filing jointly: $329,800 (up from $326,600)
- Married filing separately: $164,925 (up from $163,300)
- Other filers: $164,900 (up from $163,300)

Business meals

Deduction for eligible business-related food and beverage expenses provided by a restaurant: 100% (up from 50%)

Retirement plans

Employee contributions to 401(k) plans: $19,500 (unchanged from 2020)
Catch-up contributions to 401(k) plans: $6,500 (unchanged)
Employee contributions to SIMPLEs: $13,500 (unchanged)
Catch-up contributions to SIMPLEs: $3,000 (unchanged)
Combined employer/employee contributions to defined contribution plans: $58,000 (up from $57,000)
Maximum compensation used to determine contributions: $290,000 (up from $285,000)
Annual benefit for defined benefit plans: $230,000 (up from $225,000)
Compensation defining a highly compensated employee: $130,000 (unchanged)
Compensation defining a “key” employee: $185,000 (unchanged)

Other employee benefits

Qualified transportation fringe-benefits employee income exclusion: $270 per month (unchanged)
Health Savings Account contributions:
- Individual coverage: $3,600 (up from $3,550)
- Family coverage: $7,200 (up from $7,100)
- Catch-up contribution: $1,000 (unchanged)
Flexible Spending Account contributions:
- Health care: $2,750 (unchanged)
- Dependent care: $5,000 (unchanged)

These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.

Does your business need a loan? Before contacting your bank, it’s important to gather all relevant financial information to prove your business is creditworthy. By anticipating information requests, you can expedite the application process and improve your chances of approval.

Lenders love GAAP

U.S. Generally Accepted Accounting Principles (GAAP) is a collection of specific accounting rules and principles that’s regularly updated by the Financial Accounting Standards Board. Lenders generally prefer GAAP financial statements over those prepared under special purpose frameworks, such as cash- or tax-basis financial statements, because GAAP financials tend to be more transparent and consistent from one business (or reporting period) to the next.

Businesses that follow GAAP use accrual-basis reporting. That is, they record sales as earned and expenses when incurred. Under GAAP, the balance sheet also includes receivables, payables, prepaid assets and accrued expenses. These accounts generally are created only when a business uses accrual accounting.

Dig deeper with financial benchmarks

During the loan application process, lenders may also compute various financial ratios and then compare them over time or against competitors. Common benchmarks used in the underwriting process include:

Profit margin,
Average days in inventory,
Average days in receivables,
Average days in payables,
Current assets to current liabilities,
Debt-to-equity ratio, and
Interest coverage.

Beyond the numbers

Your lenders also may want to evaluate the operations of your business. This meeting provides opportunities to perform the following due diligence procedures:

Touring the facilities,
Meeting with members of your management team,
Collecting additional information, such as copies of marketing materials, pricing lists and key contracts, and
Discussing benchmarking anomalies and major discrepancies between the company’s GAAP financial statements and tax returns.

Also be prepared to explain how you intend to use the loan proceeds for future business operations. For example, you might want to expand your facilities, hire more employees or buy equipment. Or maybe you want a cushion to fund occasional working capital shortfalls.

Ready, set, apply

Need help securing a commercial loan for your business? We can be a valuable resource during the application process.

Over the past year, the importance of leadership at every level of a business has been emphasized. When a crisis such as a pandemic hits, it creates a sort of stress test for not only business owners and executives, but also supervisors of departments and work groups.

Among the most important skill sets of any leader is communication. Can your company’s supervisors communicate both the big and little picture messages that will keep employees reassured, focused and motivated during good times and bad? One factor in their ability to do so is the age of the employees with whom they’re interacting.

Encourage a flexible management style

Right now, there may be four different generations in your workplace: 1) Baby Boomers, born following World War II through the mid-1960s, 2) Generation X, born from the mid-1960s through the late 1970s, 3) Millennials, born from the late 1970s through the mid-1990s, and 4) Generation Z, born in the mid-1990s and beyond. (Birth dates for each generation may vary depending on the source.)

Supervisors need to develop a flexible style when dealing with multiple generations. Millennial and Generation Z employees tend to have different needs and expectations than Baby Boomers and those in Generation X.

For example, Millennials and Gen Z employees generally like to receive more regular feedback about their performances, as well as more frequent public recognition when they’ve done well. Baby Boomers and Gen Xers also enjoy positive performance feedback, but they may expect praise less often and derive personal satisfaction from a job well done without needing to share it with co-workers quite as often.

Employees from different generations also tend to have differing views on company loyalty. Many younger employees harbor greater allegiance to their principles and co-workers than their employers, while many older employees feel a greater sense of fidelity to the business itself. Train your supervisors to keep these and other differences in mind when managing employees across generations.

Recognize the impact of benefits

While financial security is highly valued by every generation, younger employees (Millennials and Gen Z) may prioritize salary less than older workers. What’s often more important to recent generations is a robust, well-rounded benefits package.

Of particular importance is mental health care. Whereas older generations may have historically approached mental health issues with hesitancy, and some still do, younger generations generally prioritize psychological well-being quite openly. Business owners should keep this in mind when designing and adjusting their benefits plans, and supervisors (and HR departments) need to encourage and guide employees to optimally use their benefits.

Promote workplace harmony

To be clear, a person’s generation doesn’t necessarily define him or her, nor is it a perfect predictor of how someone thinks or behaves. Nevertheless, supervisors who are aware of generational differences can develop more flexible, dynamic management styles. Doing so can lead to a more harmonious, productive workplace — and a more profitable business. We can assist you in developing cost-effective strategies for upskilling supervisors and maximizing productivity.

Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one, you may be eligible for a federal tax break.

The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

The EV definition

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.

The IRS provides a list of qualifying vehicles on its website and it recently added a number of models that are eligible. You can access the list here: https://bit.ly/2Yrhg5Z.

Here are some additional points about the plug-in electric vehicle tax credit:

It’s allowed in the year you place the vehicle in service.
The vehicle must be new.
An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

Electric motorcycles

There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.

These are only the basic rules. There may be additional incentives provided by your state. Contact us if you’d like to receive more information about the federal plug-in electric vehicle tax break.

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-and-one-half cents, to 56 cents per mile. As a result, you might claim a lower deduction for vehicle-related expenses for 2021 than you could for 2020 or 2019. This is the second year in a row that the cents-per-mile rate has decreased.

Deducting actual expenses vs. cents-per-mile

In general, businesses can deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is useful if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes. Why? Under current law, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

The 2021 rate

Beginning on January 1, 2021, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 56 cents per mile. It was 57.5 cents for 2020 and 58 cents for 2019.

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. The rate partly reflects the current price of gas, which is down from a year ago. According to AAA Gas Prices, the average nationwide price of a gallon of unleaded regular gas was $2.42 recently, compared with $2.49 a year ago. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.

When this method can’t be used

There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2021 — or claiming them on your 2020 income tax return.

The footnotes to your company’s financial statements give investors and lenders insight into account balances, accounting practices and potential risk factors — knowledge that’s vital to making well-informed business and investment decisions. Here are four important issues that you should cover in your footnote disclosures.

1. Unreported or contingent liabilities

A company’s balance sheet might not reflect all future obligations. Detailed footnotes may reveal, for example, a potentially damaging lawsuit, an IRS inquiry or an environmental claim.

Footnotes also spell out the details of loan terms, warranties, contingent liabilities and leases. Unscrupulous managers may attempt to downplay liabilities to avoid violating loan agreements or admitting financial problems to stakeholders.

2. Related-party transactions

Companies may employ friends and relatives — or give preferential treatment to, or receive it from, related parties. It’s important that footnotes disclose all related parties with whom the company and its management team conduct business.

For example, say, a dress boutique rents retail space from the owner’s uncle at below-market rents, saving roughly $120,000 each year. If the retailer doesn’t disclose that this favorable related-party deal exists, its lenders may mistakenly believe that the business is more profitable than it really is. When the owner’s uncle unexpectedly dies — and the owner’s cousin, who inherits the real estate, raises the rent — the retailer could fall on hard times and the stakeholders could be blindsided by the undisclosed related-party risk.

3. Accounting changes

Footnotes disclose the nature and justification for a change in accounting principle, as well as how that change affects the financial statements. Valid reasons exist to change an accounting method, such as a regulatory mandate. But dishonest managers also can use accounting changes in, say, depreciation or inventory reporting methods to manipulate financial results.

4. Significant events

Disclosures may forewarn stakeholders that a company recently lost a major customer or will be subject to stricter regulatory oversight in the coming year. Footnotes disclose significant events that could materially impact future earnings or impair business value. But dishonest managers may overlook or downplay significant events to preserve the company’s credit standing.

Too much, too little or just right?

In recent years, the Financial Accounting Standards Board has been eliminating and simplifying footnote disclosures. While disclosure “overload” can be burdensome, it’s important that companies don’t cut back too much. Transparency is key to effective corporate governance.

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 11 of Everyday Business, host Jacob Sopczynski, principal in the Flint office, is joined by Randy Howard, CPA, and Zaher Basha, CPA, CM&AA, from the Auburn Hills office.

Listen in as Jacob, Randy, and Zaher discuss the tax effects of cryptocurrency in the second of our two-part series on blockchain.

When do cryptocurrencies become taxable (1:11)
Transferring cryptocurrency and its effects (3:00)
Being compensated through cryptocurrency (4:42)
Nontaxable cryptocurrency transactions (5:50)
Is buying and trading in cryptocurrency taxable? (7:04)
Reporting (8:27)
Cost to cost tracking (10:10)
Penalties for not reporting cryptocurrency (14:40)
Foreign reporting (15:14)
How TCJA changed the taxation of cryptocurrency (16:20)
Tax considerations with forking (17:00)
Credit cards that give cash back via bitcoin (17:48)
Reporting and what records should be maintained when paying employees? (18:23)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

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.

The 2021 tax season is upon us, and to help ensure important 2021 deadlines are not missed, Yeo & Yeo has provided a summary of due dates for various tax-related forms, payments and other actions.

Please review the tax calendar and let us know if you have questions about the deadlines or would like assistance in meeting them. It is important to note that these dates are accurate as of January 26, 2021, and are subject to change. We recommend bookmarking this article, which will be updated if changes occur.

View the 2021 Tax Calendar

Important dates to review

March 15: S corporations tax filing deadline
April 15: Individual, corporate, trust and estate tax filing deadline
May 17: Tax-exempt Form 990 filing deadline
June 15: If you live outside the United States, file a 2020 individual income tax return, Form 1040 or Form 1040-SR, or file for a four-month extension, Form 4868.
September 15: Calendar-year S corporations file a 2020 income tax return Form 1120S and pay any tax, interest, and penalties due if an automatic six-month extension was filed.
November 15: For exempt organizations, file a 2020 calendar-year information return Form 990, Form 990-EZ, or Form 990-PF and pay any tax, interest, and penalties due, if a six-month extension was previously filed.

Many business owners generate financial statements, at least in part, because lenders and other stakeholders demand it. You’re likely also aware of how insightful properly prepared financial statements can be — especially when they follow Generally Accepted Accounting Principles.

But how can you best extract these useful insights? One way is to view your financial statements through a wide variety of “lenses” provided by key performance indicators (KPIs). These are calculations or formulas into which you can plug numbers from your financial statements and get results that enable you to make better business decisions.

Learn about liquidity

If you’ve been in business for any amount of time, you know how important it is to be “liquid.” Companies must have sufficient current assets to meet their current obligations. Cash is obviously the most liquid asset, followed by marketable securities, receivables and inventory.

Working capital — the difference between current assets and current liabilities — is a quick and relatively simple KPI for measuring liquidity. Other KPIs that assess liquidity include working capital as a percentage of total assets and the current ratio (current assets divided by current liabilities). A more rigorous benchmark is the acid (or quick) test, which excludes inventory and prepaid assets from the equation.

Accentuate asset awareness

Businesses are more than just cash; your assets matter too. Turnover ratios, a form of KPI, show how efficiently companies manage their assets. Total asset turnover (sales divided by total assets) estimates how many dollars in revenue a company generates for every dollar invested in assets. In general, the more dollars earned, the more efficiently assets are used.

Turnover ratios also can be measured for each specific category of assets. For example, you can calculate receivables turnover ratios in terms of days. The collection period equals average receivables divided by annual sales multiplied by 365 days. A collection period of 45 days indicates that the company takes an average of one and one-half months to collect invoices.

Promote profitability

Liquidity and asset management are critical, but the bottom line is the bottom line. When it comes to measuring profitability, public companies tend to focus on earnings per share. But private businesses typically look at profit margin (net income divided by revenue) and gross margin (gross profits divided by revenue).

For meaningful comparisons, you’ll need to adjust for nonrecurring items, discretionary spending and related-party transactions. When comparing your business to other companies with different tax strategies, capital structures or depreciation methods, it may be useful to compare earnings before interest, taxes, depreciation and amortization (EBITDA).

Focus in

As your business grows, your financial statements may contain so much information that it’s hard to know what to focus on. Well-chosen and accurately calculated KPIs can reveal important trends and developments. Contact us with any questions you might have about generating sound financial statements and getting the most out of them.

If you have a traditional IRA or tax-deferred retirement plan account, you probably know that you must take required minimum distributions (RMDs) when you reach a certain age — or you’ll be penalized. The CARES Act, which passed last March, allowed people to skip taking these withdrawals in 2020 but now that we’re in 2021, RMDs must be taken again.

The basics

Once you attain age 72 (or age 70½ before 2020), you must begin taking RMDs from your traditional IRAs and certain retirement accounts, including 401(k) plans. In general, RMDs are calculated using life expectancy tables published by the IRS. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what you should have taken out — but didn’t. (Roth IRAs don’t require withdrawals until after the death of the owner.)

You can always take out more than the required amount. In planning for distributions, your income needs must be weighed against the desirable goal of keeping the tax shelter of the IRA going for as long as possible for both yourself and your beneficiaries.

In order to provide tax relief due to COVID-19, the CARES Act suspended RMDs for calendar year 2020 — but only for that one year. That meant that taxpayers could put off RMDs, not have to pay tax on them and allow their retirement accounts to keep growing tax deferred.

Begin taking RMDs again

Many people hoped that the RMD suspension would be extended into 2021. However, the Consolidated Appropriations Act, which was enacted on December 27, 2020, to provide more COVID-19 relief, didn’t extend the RMD relief. That means if you’re required to take RMDs, you need to take them this year or face a penalty.

Note: The IRS may waive part or all of the penalty if you can prove that you didn’t take RMDs due to reasonable error and you’re taking steps to remedy the shortfall. In these cases, the IRS reviews the information a taxpayer provides and decides whether to grant a request for a waiver.

Keep more of your money

Feel free to contact us if have questions about calculating RMDs or avoiding the penalty for not taking them. We can help make sure you keep more of your money.

There’s a new IRS form for business taxpayers that pay or receive certain types of nonemployee compensation. Form 1099-NEC must be furnished to recipients and IRS by February 1, 2021. After sending the forms to recipients, taxpayers must file the forms with the IRS by March 1 (March 31 if filing electronically).

The requirement begins with forms for tax year 2020. Payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report any payment of $600 or more to a recipient. February 1 is also the deadline for furnishing Form 1099-MISC, “Miscellaneous Income,” to report certain other payments to recipients.

If your business is using Form 1099-MISC to report amounts in box 8, “substitute payments in lieu of dividends or interest,” or box 10, “gross proceeds paid to an attorney,” there’s an exception to the regular due date. Those forms are due to recipients by February 16, 2021.

1099-MISC changes

Before the 2020 tax year, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee (in other words, an independent contractor). These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was introduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that reported NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers.

Payers of nonemployee compensation now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. But for 2020 tax returns, the due date is February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

When to file 1099-NEC

If the following four conditions are met, you must generally report payments as nonemployee compensation:

You made a payment to someone who isn’t your employee,
You made a payment for services in the course of your trade or business,
You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
You made payments to a recipient of at least $600 during the year.

We can help

If you have questions about filing Form 1099-NEC, Form 1099-MISC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

Businesses and not-for-profit entities capitalize machines, furniture, buildings, and other property, plant and equipment (PPE) assets on their balance sheets. Here’s a refresher on some common questions about how to properly report these long-lived assets under U.S. Generally Accepted Accounting Principles (GAAP).

What’s included in book value?

PPE is reported on the balance sheet at historical cost. This includes the amount of cash or cash equivalents paid for an asset. Historical cost also may include costs to relocate the asset and bring it to working condition. Examples of capitalized costs include the initial purchase price, sales tax, shipping and installation costs.

Costs incurred during an asset’s construction or acquisition that can be directly traced to preparing the asset for service also should be capitalized. In addition, costs incurred to replace PPE or enhance its productivity must be capitalized. However, repairs and maintenance costs may be expensed as incurred.

GAAP doesn’t prescribe a dollar threshold for when to capitalize an asset. But, for simplicity, management may set a capitalization threshold as long as it doesn’t materially affect the financial statements. PPE below that threshold may be written off as incurred.

How long is the useful life?

Useful life is the period over which the asset is expected to contribute directly or indirectly to future cash flow. When estimating the useful life of an asset, management should consider all relevant facts and circumstances, such as:

The asset’s expected use,
Any legal or contractual time constraints,
The entity’s historical experience with similar assets, and
Obsolescence or other economic factors.

What’s the right depreciation method?

Depreciation is meant to allocate the cost of an asset (less any salvage value) over the period it’s in use. GAAP provides the following four depreciation methods:

Straight-line,
Sum-of-the-years-digits,
Units-of-production, and
Declining-balance.

For simplicity, many small businesses deviate from GAAP by using the same depreciation method for tax and financial statement purposes. The IRS prescribes specific recovery periods for different categories of PPE and provides accelerated depreciation methods.

Under current tax law, instead of using the standard Modified Accelerated Cost Recovery System (MACRS) depreciation method, certain entities currently may choose to immediately deduct a qualified PPE purchase under Section 179 or the bonus depreciation program, thus minimizing taxable income in the years the asset is placed in service. The use of these accelerated depreciation methods may create a large spread between the value of PPE on the balance sheets and the assets’ fair market values.

For more information

Reporting PPE is a gray area in financial reporting that relies on subjective estimates and judgment calls by management. We can help you report these assets in a reliable, cost-effective manner.

The U.S. Small Business Administration released an updated one-page simplified loan forgiveness application for businesses that received Paycheck Protection Program loans of $150,000 or less. This application applies to both PPP1 and PPP2 loans, but forgiveness for each round must be applied for separately.

Recipients of loans of $150,000 or less will apply for forgiveness using Form 3508S. They will need to disclose the loan amount, the loan disbursement date and covered period dates, number of employees as of the time of the loan application and as of the time of forgiveness, and amount of funds spent on payroll costs. They must also disclose the requested amount of loan forgiveness.

Applicants will not be required to submit any supporting documentation to their lender or the SBA with their forgiveness application; however, they are required to maintain any payroll, nonpayroll or other documents in their records.

Access the instructions for completing the PPP Loan Forgiveness Application Form 3508S.

Reach out to your Yeo & Yeo professional about your situation. Visit Yeo & Yeo’s COVID-19 Resource Center for ongoing updates and resources available to assist you further.

Yeo & Yeo CPAs & Business Consultants is committed to helping the next generation of leaders maximize their careers. In line with this philosophy, the firm is excited to announce that Jennifer Tobias, CPA, recently graduated from Upstream Academy’s Emerging Leaders Academy.

This three-year leadership development program is a course for accounting firm professionals who show outstanding promise as future firm leaders. The program helps them put their hands on the steering wheel of their careers by giving them the tools, training and resources they need to excel. As part of the program, Jen completed yearly goals, attended Leadership conferences, and tackled a challenging project during each year of the program.

Jen is the co-leader of Yeo & Yeo’s Death Care Services Group and a member of the Agribusiness and Construction Services Groups. 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 Certified QuickBooks ProAdvisor and a senior manager in the firm’s Kalamazoo office.

Jen is a member of the Michigan Funeral Directors Association’s Suppliers Sales Club, Michigan Farm Bureau – Barry County, and the Farm Financial Standards Council.

In the community, she 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.

A new year has arrived and, with it, a fresh 12 months of opportunities to communicate with customers and prospects. Like every year, 2021 brings distinctive marketing trends to the table. The COVID-19 pandemic and resulting economic challenges continue to drive the conversation in most industries. To get more for your marketing dollars, you’ll need to tailor your message to this environment.

Continue to invest in digital

There’s good reason to remind yourself of digital marketing’s continuing value in our brave new world of daily videoconferencing and booming online shopping. It’s affordable and allows you to communicate with customers directly. In addition, it provides faster results and better tracking capabilities.

Consider or re-evaluate strategies such as regularly updating your search engine optimization so your website ranks highly in online searches and more people can find you. Adjust your use of email, text messages and social media to communicate with customers and prospects.

For instance, craft more dynamic messages to introduce new products or special events. Offer “flash sales” and Internet-only deals to test and tweak offers before making them via more expansive (and expensive) media.

Seek out better deals

During boom times, you may feel at the mercy of high advertising rates. In the current uncertain and gradually recovering economy, look for better deals. The good news is that there are many more marketing/advertising channels than there used to be and, therefore, much more competition among them. Paying less is often a matter of knowing where to look.

Track your marketing efforts carefully and dedicate time to exploring new options. For example, podcasts remain enormously popular. Could a marketing initiative that exploits their reach pay dividends? Another possibility is shifting to smaller, less expensive ads posted in a wider variety of outlets rather than engaging in one massive campaign.

Excel at public relations

When the pandemic hit last year, every business had to address current events in their marketing messaging. This stood in stark contrast to decades previous, when companies generally tended to steer clear of the news. Nowadays, public relations is a key component of marketing success. Your customers and prospects need to know that your business is aware of the current environment and adjusting to it.

Ask your marketing department to craft clear, concise but exciting press releases regarding your newest products or services. Then distribute these press releases via both traditional and online channels to complement your marketing efforts. In this manner, you can disseminate trustworthy information and maintain a strong reputation — all at a relatively low cost.

Strengthen ROI

Your company’s marketing dollars need to provide a return on investment just as robust as its budget for production, employment and other key areas. Our firm can help you evaluate your marketing efforts from a financial perspective and identify ways to make those dollars go further.