Nonprofit Quick Tip: Payroll Internal Controls

Payroll is a key transaction cycle in most organizations. Everyone likes to get paid! However, payroll is commonly an area where fraud can occur if the proper internal controls are not in place. Critical internal controls to help detect and prevent fraud or error within payroll are:

Wage rates are documented and approved by management or human resources.
The person processing the payroll and cutting checks does not have access to enter new employees or change pay rates.
Timesheets are reviewed and approved before wages are paid.
The person reconciling the payroll cash account is not the person processing the payroll.
Procedures are in place to remove terminated employees from the payroll system timely.
New employees entered into the system are reviewed to ensure that no fictitious employees are set up.
Payroll detail or registers are reviewed and approved before payment.

These basic controls will help segregate duties in the payroll cycle and ensure only legitimate employees of the organization are paid, and that they are paid accurately.

Most nonprofits face the struggle of fulfilling their mission with very limited resources. Organizations are always on the hunt for new revenue sources, which are often in the form of contributions and grants. Some nonprofits are lucky enough to have a significant revenue source or donor that consistently provides them with funding. Others have a well-known special event that generates a large amount of its annual contribution revenue. While consistently receiving a substantial chunk of money from a single source or event each year seems ideal, could it be a concern?

Revenue concentration could be considered one of the most significant risks facing nonprofits. When considering sustainability, nonprofits need to determine if they could survive if this key revenue source were suddenly gone. Diversification is critical for a financially sound organization. COVID-19 has shown us that unexpected events can arise at any time and severely affect and quickly reshape our businesses. By not placing high reliance on a small number of revenue sources, an organization increases its chances of an easy recovery should any major changes in funding levels occur from any source.

Some questions to consider when looking at the organization’s revenue:

Is more than 25% of our revenue coming from a single source or event?
How financially stable is the funding source? Are there concerns that funding could decline or be discontinued?
Could we survive if we lost the revenue from one of our large sources?
How can we better plan for a change in significant revenue sources or better diversify our revenue streams?

While having a large revenue source is not a bad thing by any means, it is essential to periodically evaluate that source and its ability to continue funding the organization. By staying informed regarding these sources, the organization can better ensure its ability to carry on if changes in these sources were to occur.

To combat some of the financial burden that has come with operating in a pandemic, many nonprofit organizations have qualified for and received government aid. Paycheck Protection Program (PPP) loans are the most prevalent of the government aid that many have received. However, often nonprofits are uncertain about how to account for these funds. Budgeting and accounting issues for the PPP loans are the significant question marks surrounding the new funding.

To assist with some of the questions that many nonprofits may have, we have outlined some key areas that can help to make these issues clearer.

Documentation

Documentation is one of the most critical factors in determining if an organization will have its PPP loans forgiven. Many nonprofits will be able to account for their full forgiveness amount just with payroll costs now, thanks to the extension from eight to 24 weeks, rather than having to include other forgivable expenses. For this funding to be forgiven, thorough documentation of the payroll costs will still be needed.

Accounting

The AICPA laid out two paths that demonstrate how the PPP funds should appear on the financial statements. The decision of which path to follow is a judgment decision that is entirely in the hands of management.

If a nonprofit has a goal to have their loans forgiven, and are actively pursuing this goal, the funds may be accounted for as either debt or a conditional contribution. However, the nonprofits that do not plan to request forgiveness should account for PPP funds as debt.

“Double-dipping” is not permitted

Nonprofits will not be allowed to use PPP funds for the same expenses that are being paid with other government funds. To ensure that such “double-dipping” does not occur, a great way to account for how the funding is being spent is to separate the expenses in the general ledger software so that expenses being paid with PPP funds are separate from those paid with other government money.

Challenges for June 30, July 31, and Aug. 31 year-ends

Accounting for PPP loans should be straightforward for nonprofits with calendar year-ends because their loan forgiveness will occur in the same year as the covered period.

However, nonprofits with fiscal year-ends of June 30, July 31, or Aug. 31 may have more difficulty with accounting for their loans because the loan forgiveness will most likely occur in the fiscal year following the covered period. Covered periods also have the potential to span over multiple fiscal years. These situations will call for more strategy in the use of the funding and even potential use of attorneys to figure out compliance with the new laws and legal interpretations of such laws.

Scenario planning

Some nonprofits rely on public events and conferences for revenue. Due to governmental restrictions around group gatherings, most have had to conduct these events virtually or reschedule them. Revenue recognition issues may arise as a result of when the events take place and when the funds were received from sponsors or participants.

Prioritize health and virtual capabilities

We encourage nonprofits to continue to look after the physical health of their customers and employees. Mental health should also be included as a focus, particularly as parents may face issues while many schools will be virtual on at least a part-time basis.

If an organization hasn’t taken advantage of online capabilities, such as electronic accounts payable or accepting donations through their website, now is a better time than ever to implement such tools.

Meanwhile, the ability of a nonprofit and its employees to be able to work in a virtual setting is more critical than ever. If there is anything positive that will come as a result of this pandemic, it is that many do not need to be in the office during traditional hours to be able to work effectively. While this may not be the case for some, it is good to have the flexibility and make sure that expectations are appropriately communicated with employees.

Unusual accounting and tax challenges

New strategies may result in new accounting and tax challenges. For example, some performing arts organizations and public charities that have had to cancel events are asking ticket holders to donate the cost of their ticket instead of receiving a refund. This circumstance changes an exchange transaction into a donation that must be documented and validated and requires new treatment for tax purposes.

Contact your Yeo & Yeo professional if you need assistance.

For more than 20 years, we have followed the financial reporting model established by GASB Statement No. 34, which includes the Management’s Discussion and Analysis and major fund reporting. GASB 34 makes it possible to more fully assess a government’s overall financial health with the recording of capital assets and long-term debt in the government-wide financial statements.

In 2013, the Governmental Accounting Standards Advisory Council added the reexamination of the financial reporting model to its slate of pre-agenda research activities. After two years of research, they determined that most of the components of the financial reporting model remain effective; however, the Council highlighted several areas for improvement.

In September 2015, GASB added the financial reporting model project to its agenda. The project focused on areas to enhance the effectiveness of the financial reporting model and reduce the complexity and length of the financial statements.

In September 2018, GASB issued its Preliminary Views with a comment period and held public hearings, which resulted in much discussion and deliberation of the concepts and wording included in the Exposure Draft.

Most recently, on June 30, 2020, GASB provided final edits and approved the issuance of the Exposure Draft of the proposed Statement, Financial Reporting Model Improvements, which included the following significant changes:

Management’s Discussion and Analysis (MD&A) would continue to be Required Supplementary Information (RSI). However, it would be limited to the related topics discussed in five sections: 1) Introduction, 2) Financial Summary, 3) Detailed Analyses, 4) Significant Capital Asset and Long-term Debt Activity, and 5) Currently Known Facts, Decisions, or Conditions. The proposed Statement emphasizes that “boilerplate” discussions should be avoided.
Unusual or infrequent items would be required to be displayed as the last presented flow of resources before the new change in resource flows in the government-wide, governmental fund and proprietary fund statements of resource flows.
Governmental funds would use a short-term financial resources measurement focus and accrual basis of accounting. This means the financial statement would reflect the amount of fund balance at the period-end that is available to spend in the next period. This would eliminate the current 60-day rule. Additionally, all long-term debt issued for short-term purposes would be recognized as a short-term transaction. Interfund balances and transfers would also be recognized as short-term transactions.
The governmental fund balance sheet will now be titled “Short-term Financial Resources Balance Sheet,” and the government fund statement of revenues, expenditures and changes in fund balances will be titled “Statement of Short-term Financial Resource Flows.” The new statement would separately report inflows and outflows of resources related to the purchase and disposal of capital assets and the issuance and payment of long-term debt from other activities in governmental funds. The governmental fund financial statement captions would be assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund balances, inflows of resources from current activities, outflows of resources from current activities, and net flows from noncurrent activities. This means governmental funds would no longer have revenues and expenditures. Also, special revenue funds will be known as special resources funds.
Proprietary funds are required to continue to present separately operating and nonoperating revenues and expenses of the statement of revenues, expenses, and changes in fund net position. Nonoperating revenues and expenses would include 1) subsidies received and provided, 2) revenues and expenses related to financing, 3) resources from the disposal of capital assets and inventory, and 4) investment income and expenses. Operating revenues and expenses would be defined as all other revenues and expenses other than nonoperating revenues and expenses. An additional subtotal for operating income (loss) and noncapital subsidies must be presented before reporting other nonoperating revenues and expenses. Subsidies would be defined as 1) resources received from another party or fund to keep the rates lower than otherwise would be necessary to support the level of goods and services to be provided and 2) resources provided to another party or fund that results in higher rates than otherwise would be established for the level of goods and services to be provided.
Budgetary comparison information would be presented using a single method of communication as Required Supplementary Information (RSI). Governments would also be required to present 1) variances between final budget and actual amounts and 2) variances between original and final budget amounts. An analysis of significant variances would be presented in notes to RSI rather than in the MD&A.

GASB plans for a comment period and public hearings to be held, after which time they will redeliberate the issues based upon all the feedback and plan to issue a final statement in June 2022.

Based on the timeline, GASB has spent many years determining the best approach to improving the financial reporting model and implementation is not planned until June 2025 or 2026, depending on the revenue size of the government.

Please contact your local Yeo & Yeo government auditor if you have questions.

To read the full Exposure Draft, click here and click the Accept button.

Management’s Discussion and Analysis (MD&A) would continue to be Required Supplementary Information (RSI). However, it would be limited to the related topics discussed in five sections: 1) Introduction, 2) Financial Summary, 3) Detailed Analyses, 4) Significant Capital Asset and Long-term Debt Activity, and 5) Currently Known Facts, Decisions, or Conditions. The proposed Statement emphasizes that “boilerplate” discussions should be avoided.
Unusual or infrequent items would be required to be displayed as the last presented flow of resources before the new change in resource flows in the government-wide, governmental fund and proprietary fund statements of resource flows.
Governmental funds would use a short-term financial resources measurement focus and accrual basis of accounting. This means the financial statement would reflect the amount of fund balance at the period-end that is available to spend in the next period. This would eliminate the current 60-day rule. Additionally, all long-term debt issued for short-term purposes would be recognized as a short-term transaction. Interfund balances and transfers would also be recognized as short-term transactions.
The governmental fund balance sheet will now be titled “Short-term Financial Resources Balance Sheet,” and the government fund statement of revenues, expenditures and changes in fund balances will be titled “Statement of Short-term Financial Resource Flows.” The new statement would separately report inflows and outflows of resources related to the purchase and disposal of capital assets and the issuance and payment of long-term debt from other activities in governmental funds. The governmental fund financial statement captions would be assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund balances, inflows of resources from current activities, outflows of resources from current activities, and net flows from noncurrent activities. This means governmental funds would no longer have revenues and expenditures. Also, special revenue funds will be known as special resources funds.
Proprietary funds are required to continue to present separately operating and nonoperating revenues and expenses of the statement of revenues, expenses, and changes in fund net position. Nonoperating revenues and expenses would include 1) subsidies received and provided, 2) revenues and expenses related to financing, 3) resources from the disposal of capital assets and inventory, and 4) investment income and expenses. Operating revenues and expenses would be defined as all other revenues and expenses other than nonoperating revenues and expenses. An additional subtotal for operating income (loss) and noncapital subsidies must be presented before reporting other nonoperating revenues and expenses. Subsidies would be defined as 1) resources received from another party or fund to keep the rates lower than otherwise would be necessary to support the level of goods and services to be provided and 2) resources provided to another party or fund that results in higher rates than otherwise would be established for the level of goods and services to be provided.
Budgetary comparison information would be presented using a single method of communication as Required Supplementary Information (RSI). Governments would also be required to present 1) variances between final budget and actual amounts and 2) variances between original and final budget amounts. An analysis of significant variances would be presented in notes to RSI rather than in the MD&A.

GASB plans for a comment period and public hearings to be held, after which time they will redeliberate the issues based upon all the feedback and plan to issue a final statement in June 2022.

Please contact your local Yeo & Yeo education auditor if you have questions.

To read the full Exposure Draft, click here and click the Accept button.

On August 8, 2020, President Trump signed an executive memorandum that defers an employee’s portion of Social Security and Medicare taxes from September 1 through December 31, 2020. At this point, the taxes are just deferred, meaning they’ll still have to be paid at a later date. However, the action directs U.S. Treasury Secretary Steven Mnuchin to “explore avenues, including legislation, to eliminate the obligation to pay the taxes.”

The exact impact on employers and employees isn’t yet known. There are many open questions, including President Trump’s legal ability to implement the deferral. Some professionals believe there may be legal challenges to this executive action.

Deferral details

The payroll tax deferral will be available for “any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000.”

The deferral will be calculated on a pretax basis or the equivalent amount with respect to other pay periods. Plus, the amounts will be deferred without any penalties, interest, additional amount or addition to the tax.

Stay tuned for additional guidance

No doubt there is much to flesh out about this payroll tax deferral. Secretary Mnuchin has been instructed to provide additional guidance and employers can’t act on the deferral until that happens. It’s also possible Congress could take action. We’ll be monitoring developments and their implications, so turn to us for the latest information.

Yeo & Yeo CPAs & Business Consultants is proud to be named an INSIDE Public Accounting (IPA) Top 200 Accounting Firm for the twelfth consecutive year.

“We are honored to be continuously recognized as one of the top 200 firms in the nation,” said Thomas E. Hollerback, President & CEO. “We are thankful to our staff and friends, and to our clients who put their trust in Yeo & Yeo, and we remain committed to helping our clients grow.”

This is INSIDE Public Accounting’s 30th annual ranking of the largest accounting firms in the nation. Firms are ranked according to U.S. net revenues and are further analyzed according to responses received for IPA’s Survey and Analysis of Firms.

Download and view the list of top-ranked IPA firms in its entirety.

INSIDE Public Accounting, founded in 1987, is published by The Platt Group. Dedicated to helping firm leaders, and their firms, achieve their ultimate potential, IPA reports and analyzes the news, trends, strategies and politics that affect the nation’s public accounting firms, providing them with the information and resources they need to compete and operate more profitably.

Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

Filing requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you will need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

Reasons for the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

What’s considered “cash”

For Form 8300 reporting, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

E-filing and batch filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Setting up an account

To file Form 8300 electronically, a business must set up an account with FinCEN’s BSA E-Filing System. For more information, interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST) or email them at BSAEFilingHelp@fincen.gov. Contact us with any questions or for assistance.

When the COVID-19 crisis exploded in March, among the many concerns was the state of the nation’s supply chains. Business owners are no strangers to such worry. It’s long been known that, if too much of a company’s supply chain is concentrated (that is, dependent) on one thing, that business is in danger. The pandemic has only complicated matters.

To guard against this risk, you’ve got to maintain a constant awareness of the state of your supply chain and be prepared to adjust as necessary and feasible.

Products or services

The term “concentration” can be applied to both customers and suppliers. Generally, concentration risks become significant when a business relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region.

Concentration related to your specific products or services is something to keep a close eye on. If your company’s most profitable product or service line depends on a few key customers, you’re essentially at their mercy. If just one or two decide to make budget cuts or switch to a competitor, it could significantly lower your revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, your profit margin could narrow considerably. This is especially problematic if your number of alternative suppliers is limited.

To cope, do your research. Regularly look into what suppliers might best serve your business and whether new ones have emerged that might allow you to offset your dependence on one or two providers. Technology can be of great help in this effort — for example, monitor trusted news sources online, follow social media accounts of professionals and use artificial intelligence to target the best deals.

Geography

A second type of concentration risk is geographic. When gauging it, assess whether many of your customers or suppliers are in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a substantial impact. As we’ve unfortunately encountered this year, the severity of COVID-19 in different regions of the country is affecting the operational ability and capacity of suppliers in those areas.

These same threats apply when dealing with global partners, with the added complexity of greater physical distances and longer shipping times. Geopolitical uncertainty and exchange rate volatility may also negatively affect overseas suppliers.

Challenges and opportunities

Business owners — particularly those who run smaller companies — have always faced daunting challenges in maintaining strong supply chains. The pandemic has added a new and difficult dimension. Our firm can help you assess your supply chain and identify opportunities for cost-effective improvements.

GUIDANCE UPDATE AS OF 8/7/2020:

The Revenue from ESSER fund cannot be recognized in fiscal year 2020 if a school did not receive its award letter/Grant Award Notification (GAN) by June 30, 2020. Prior guidance allowed for schools until August 31 to receive its GAN.

ORIGINAL POST 7/27/2020:

The following information about Coronavirus Relief Funds and Elementary and Secondary School Emergency Relief Funds is what we understand as of July 27, 2020, and is subject to change. The 2020 Compliance Supplement related to these funds has not been released from the U.S. Office of Management and Budget (OMB).

Coronavirus Relief Funds (CRF)

In July, within state School Aid payments, Local Education Agencies (LEAs) received a funding line item called “District COVID Costs,” equating to approximately $12 per pupil. Although these funds are coming through State Aid, they are restricted federal funds, Federal Coronavirus Relief Fund (CFDA 21.019), authorized by SB 690 and signed into law on July 1, 2020. Since SB 690 was not signed into law until after schools’ 2019-20 fiscal year ended, these revenues should not be recognized in 2019-20 financial reporting or audited financial statements.

Additionally, Senate Bill 373 has not been finalized and therefore, the timing and method of distribution of those funds are unknown. However, anticipate it will include an additional $350 per pupil in the August State Aid payment. These funds would follow the above concepts. They are also restricted federal dollars and are not to be recognized in the 2019-20 fiscal year.

The main reason for not recognizing the above funds until the 2020-21 Fiscal Year is the date the bill was signed into law, which was after year-end. GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, is very clear in the requirements of when the recipients (LEAs) have an asset (receivable) and it cannot be before the passing of the bill. Therefore, we recommend that as of June 30, 2020, no receivable, unearned, or earned revenue be reported. Amounts should be reported as Federal Expenditures and Revenue for fiscal year 2021.

CARES Act ESSER Funds

The Elementary and Secondary School Emergency Relief (ESSER) Fund (84.425) is part of the United States Education Department’s (USED) Educational Stabilization Fund Program. It awards grants to state educational agencies (SEAs) to provide LEAs, including charter schools, with emergency relief funds to address the impact that COVID-19 has had on elementary and secondary schools across the nation. Eligible applicants are those LEAs that received a 2019-20 Title I, Part A allocation from MDE. The grant period is March 13, 2020 through September 30, 2021. Eligible LEAs were able to apply for these funds beginning May 8, 2020. The LEAs will initiate and apply in the Michigan Electronic Grants System Plus (MEGS+).

This grant has led to questions about how to account for these funds as well. MDE has noted that many applications/award letters are not yet complete, which leads to concerns on the availability of revenue and when to recognize that revenue. This award (or a portion of the award) is allowable to be spent in fiscal year 2020. However, to do so, three items must happen before August 31 (the period the LEA uses for availability, also known as the 60-day rule):

The application must be submitted.
The award must be approved.
The funds must be requested and received by LEA.

Timing of recording the funds

The main concern with the CRF funds has been that they were intended by legislation to “backfill” the reduction in State Aid that is coming in August. The reduction will be approximately $175 per pupil, which will affect fiscal year 2020. The CRF funds, as noted above, will be approximately $362 per pupil, which is a net gain for cash flow purposes of $187 per pupil. However, due to the timing, the reduction and the CRF funding will be recorded at different times. Hence, fiscal year 2020 will show the entire per-pupil reduction and fiscal year 2021 will show the whole CRF amount.

The above items will affect your audit, single audit, major program testing, compliance testing, etc. Therefore, it is vital to work with your Yeo & Yeo auditor closely.

Michigan Department of Education (MDE) has provided guidance on some of these issues and will update it in the next few weeks. Initial guidance is available at MDE CARES Act Grant Information and MDE Financial Accounting Guidance During the COVID-19 Pandemic.

Q&A

When should I record revenue for CRF funds?
FY 2021.

Are CRF funds federal or state dollars?
Federal.

Can I have expenditures in FY 20 for CRF funds?
Technically, yes. However, the expenses cannot be recorded as such until fiscal year 2021, as the grant award did not exist as of 6/30/20. This will likely be handled through an adjustment to the SEFA in fiscal year 2021 and explained in the notes to the SEFA.

Are CRF funds subject to supplanting?
Yes.

Can ESSER Funds be used and recorded in fiscal year 2020?
Yes, provided the application is completed, you accounted for the spending of the funds, and the reimbursement (cash) was received before August 31, 2020.

UPDATE as of 8/7/2020: ESSER fund cannot be recognized in fiscal year 2020 if a school did not receive its award letter/Grant Award Notification (GAN) by June 30, 2020, not August 31 as previous guidance stated. If you have received the award letter/GAN as of June 30, 2020, it is allowable to have expenditures related to ESSER funds in fiscal year 2020, providing you have requested and received the funds within 60 days after year-end.

Are ESSER Funds subject to supplanting?
No.

What can the ESSER Funds be spent on?
The costs allowable for the ESSER funds are broad. Refer to a memo from MDE on the usages of the funds at MDE ESSER Important Information.

Are ESSER Funds the same as Title I, Part A funds?
No, although the LEA receives ESSER formula funds via the Title I, Part A formula, ESSER funds are not Title I, Part A funds and are not subject to Title I, Part A requirements.

Contact your Yeo & Yeo professional if you need assistance.

Timely, relevant financial data is critical to managing a business in today’s unprecedented conditions. Similar to the control panel in a vehicle or machine, dashboard reports provide a real-time snapshot of how your business is performing.

Why you need a dashboard report

Everything in a dashboard report can typically be found elsewhere in the company’s financial reporting systems, just in a less user-friendly format. Rather than report new information, a dashboard report captures the most critical data, based on the nature of the business. It can provide an early warning system for potential problems, allowing you to pivot as needed to minimize losses and jump on emerging opportunities in the marketplace.

To maximize the effectiveness of dashboard reports, make them accessible to managers across your organization via the company’s internal website or weekly email blasts. Widespread, easy access will allow your management team to quickly identify trends that require immediate attention. Additionally, businesses that are struggling during a reorganization or debt restructuring sometimes share these reports with their lenders as a condition of their continued support.

Metrics that matter

When deciding which information to target, look at your company’s loan covenants — lenders usually have a good sense of which metrics are worth monitoring. Then conduct your own risk assessment. What’s relevant varies depending on your industry, general economic conditions and the nature of your business operations.

In addition to tracking cash balances and receipts, most dashboard reports include the following ratios:

Gross margin [(revenue – cost of sales) / revenue],
Current ratio (current assets / current liabilities), and
Interest coverage ratio (earnings before interest and taxes / interest expense).

From here, consider adding a handful of company- or industry-specific performance metrics. For example, a warehouse might report daily shipments and inventory turnover. A hotel that’s struggling to reopen might provide a schedule of net operating income, average room rates and vacancy rates compared to the previous week or month. A law firm might report each partner’s realization rate.

A diagnostic test

Comprehensive financial statements are the best source of information about your company’s long-term stability and profitability — especially for external stakeholders. But dashboard reporting is critical for internal purposes, too. These reports can help assess a sudden change in market conditions, interim performance or potential downward trend in your financial performance. Contact us to help you compile a meaningful dashboard reporting process for your organization.

If you’re a partner in a business, you may have come across a situation that gave you pause. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.

Why is this? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.)

Separate entity

While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.

A partnership must file an information return, which is IRS Form 1065. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.

Here’s an example

Two individuals each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his partnership interest from $50,000 to $10,000.

Other rules and limitations

The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions and other matters.

When Congress authorized an additional $600 in monthly unemployment benefits as part of the CARES Act, out-of-work Americans weren’t the only ones it helped. Criminals have descended like locusts on state unemployment insurance agencies, using stolen identities to fraudulently claim both standard benefits and the additional funds administered by the Pandemic Unemployment Assistance (PUA) program. States have lost hundreds of millions of dollars. Individuals have also suffered, as government efforts to control fraud have clogged up benefit systems and delayed payments to the jobless.

States struggle

Washington state was the first to experience a COVID-19 outbreak and has since estimated losses of $650 million to unemployment insurance fraud. According to the Secret Service, a scam was detected when someone noticed that multiple direct deposits of benefits had been made to individuals residing out of state. These deposits were subsequently transferred overseas — likely by organized crime gangs.

But Washington is hardly alone. Many other states have discovered fraud. In May, Rhode Island’s labor agency reported that it had almost as many illegitimate unemployment insurance claims as legitimate ones. And widescale fraud in Michigan forced that state to stop payment on nearly 20% of unemployment claims pending review.

Fighting back

If you’re currently employed and receive an unemployment benefit check or debit card or a letter confirming an application for unemployment benefits, immediately contact your state. If you can’t get ahold of your state agency (a problem encountered by thousands of potential fraud victims), report your suspicions to police and the Federal Trade Commission (FTC) at identitytheft.gov. Your identity has likely been stolen and sold to criminals on the dark web. Be sure to request copies of your credit reports and review them for illegitimate activity.

Businesses can help fight unemployment insurance fraud, too. The FTC suggests that companies:

Ask employees to speak up if they suspect their identities are being used to perpetrate unemployment insurance fraud,
Direct HR to flag state unemployment agency notices about currently employed workers,
Report suspected fraud to a state agency — preferably via its website,
Provide a copy of the documentation to affected employees and let them know if the state requires them to also make a report,
Bolster cybersecurity to prevent the loss of personal data that could be used to commit fraud.

This last tip is particularly important if your employees currently are working from home.

An easy target

The pandemic has probably unleashed more fraud activity than any other recent event. Even though PUA program payments were due to expire on July 25, state unemployment benefits are too easy and lucrative a target for fraudsters to pass up. But you can do your part to help disrupt these schemes.

This week, the Michigan Economic Development Corporation announced the MEDC Small Farm Safety Grant Program that will award $1.25 million in grants to Michigan farms with fewer than 10 employees to fund COVID-19 mitigation costs. This program accompanies the Agriculture Safety Grant program, which uses federal CARES Act funding of $15 million to award grants to farms and agricultural processors with 10 or more employees.

Farms may use the MEDC Small Farm Safety Grants for COVID-19 testing costs, personal protection equipment, facility needs, increased sanitation costs, employee training, upgraded safety procedures for farm-provided housing and more.

For grant criteria, eligible expenditures, Frequently Asked Questions and a grant application, refer to the MEDC’s Small Farm Safety Grant Program.

If you have questions or need assistance, contact your local Yeo & Yeo Agribusiness Services Group professional.

A widely circulated article about the COVID-19 pandemic, written by author Tomas Pueyo in March, described efforts to cope with the crisis as “the hammer and the dance.” The hammer was the abrupt shutdown of most businesses and institutions; the dance is the slow reopening of them — figuratively tiptoeing out to see whether day-to-day life can return to some semblance of normality without a dangerous uptick in infections.

Many business owners are now engaged in the dance. “Reopening” a company, even if it was never completely closed, involves grappling with a variety of concepts. This is a new kind of strategic planning that will test your patience and savvy but may also lead to a safer, leaner and better-informed business.

When to move forward

The first question, of course, is when. That is, what are the circumstances and criteria that will determine when you can safely reopen or further reopen your business. Most professionals agree that you should base this decision on scientific data and official guidance from agencies such as the U.S. Department of Health and Human Services and Centers for Disease Control and Prevention (CDC).

But don’t stop there. Although the pandemic is, by definition, a worldwide issue, the specific situation on the ground in your locality should drive your decision-making. Keep tabs on state, county and municipal news, rules and guidance. Plug into your industry’s professionals as well. Establish strategies for expanding operations or, if necessary, contracting them, based on the latest information.

Testing and working safely

Running a company in today’s environment entails refocusing on people. If employees are unsafe, your business will likely suffer at some point soon. Every company that must or chooses to have workers on-site (as opposed to working remotely) needs to consider the concept of COVID-19 testing.

Employers are generally allowed to test employees, but there are dangers in violating privacy laws or inadvertently exposing the company to discrimination claims. The CDC has said that routine testing will likely pass muster “if these goals are consistent with employer-based occupational medical surveillance programs” and “have a reasonable likelihood of benefitting workers.” Consult your attorney, however, before implementing any testing initiative.

There’s also the matter of working safely. If you haven’t already, look closely at the layout of your offices or facilities to determine the feasibility of social distancing. Re-evaluate sanitation procedures and ventilation infrastructure, too. You may need to invest, or continue investing, in additional personal protective equipment and items such as plastic screens to separate workers from customers or each other. It might also be necessary or advisable to procure or upgrade the technology that enables employees to work remotely.

Move forward cautiously

No one wanted to do this dance, but business owners must continue moving forward as cautiously and prudently as possible. While you do so, don’t overlook the opportunity to identify long-term strategies to run your company more efficiently and profitably. We can help you make well-informed decisions based on sound financial analyses and realistic projections.

Technical jargon is fun for the .005% that care about it, but what about for the rest of us? These terms can trip up the most savvy business owner, and cloud phone features are no exception. If you’re looking to switch from your on-premises phone system to a new cloud business phone, our business glossary simplifies these tech terms.

You’ll learn:

The difference between a “digital receptionist” and “auto-attendant”
Why you’ll want to pay attention to your presence indicator
How “call flip” and “call park” compare

Download “The Business Owner’s Phone System Features Cheat Sheet” today and ease your transition to cloud phones.

We want your business to continue operating effectively during these uncertain times and believe these tools and resources can help. Contact us to get started today at 989.797.4075.

Sign up for this offer before July 31.

Get Started with GoMeet Video Conferencing

The State of Michigan allocated $100 million of CARES Act funding to implement the Michigan Small Business Restart Program to support the needs of businesses directly impacted by COVID-19.

The funds will be administered by 15 local economic development organizations to support small businesses in all Michigan counties. At least 30% of the funds will be awarded to eligible women-owned, minority-owned or veteran-owned businesses.

The program will provide grants to eligible small businesses that need working capital to support payroll expenses, rent, mortgage payments, utility expenses or other similar expenses.

Businesses and nonprofits with 50 or fewer employees (not FTEs) are eligible.
Grants must be used for expenditures made between March 1, 2020, and December 30, 2020.
Applications are due August 5, 2020. Applicants can apply for up to $20,000 in grant funds.

Refer to the Michigan Small Business Restart Program on the MEDC website for eligibility requirements, program guidelines, the application questions, a grant application, and Frequently Asked Questions.

If you have any questions about the grants, contact the MEDC Customer Care Center at (888) 522-0103 or send an email to medceconomic@michigan.org. Contact your Yeo & Yeo professional if you need assistance.

During the COVID-19 pandemic, many small businesses are strapped for cash. They may find it beneficial to barter for goods and services instead of paying cash for them. If your business gets involved in bartering, remember that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

For example, if a computer consultant agrees to exchange services with an advertising agency, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there is contrary evidence.

In addition, if services are exchanged for property, income is realized. For example, if a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. Another example: If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock.

Joining a club

Many businesses join barter clubs that facilitate barter exchanges. In general, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

Bartering is generally taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,000 credit units one year, and that each unit is redeemable for $1 in goods and services. In that year, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income at a 24% rate.

Forms to file

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

Many benefits

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. Contact us if you need assistance or would like more information.

In response to the economic impact of COVID-19, the State of Michigan has allocated $15 million of CARES Act funding to implement the Michigan Agricultural Safety Grant Program. The program supports the implementation of COVID-19 monitoring and mitigation strategies to protect agricultural employees and the state’s food production industry.

Agricultural processors and farms may use the grants for COVID-19 testing, facility or farm needs to protect against the spread of COVID-19, personal protection equipment, increased sanitation, employee training, establishing or conducting COVID-19 screening procedures, and more.

Applications will be available beginning July 15, 2020, at 9:00 a.m. and will be processed by GreenStone Farm Credit Services. GreenStone will complete an initial screening of all applications and recommend applications to the Michigan Economic Development Corporation (MEDC) for final approval and disbursements of the grants awarded.

To be eligible for funding, agricultural processors and farms must employ at least 10 employees in Michigan and meet other criteria. For grant criteria, eligible expenditures, Frequently Asked Questions and a grant application, refer to the MEDC’s Michigan Agricultural Safety Grant.

If you have questions or need assistance, contact your local Yeo & Yeo Agribusiness Services Group professional.

The school year ended with many districts experiencing changes to their food service distribution programs. The following are a few impacts those changes may have on your 2020 audit and the 2021 school year.

We encourage districts to make sure they have all the documentation in place to have successful administrative reviews. All new Summer Food Service Program sponsors will be subject to a review. The focus of the administrative reviews will be on menu, production records, daily meal count sheets, and monthly claims.
Keep in mind that the Unanticipated School Closure Summer Food Service Program (USCSFSP) meals ended June 30, 2020. After that, claims will be related to the Summer Food Service Program.
The USCSFSP caused many districts to have an increase in Child Nutrition revenue. Estimate and evaluate your federal revenue as early as possible to determine any impact an increase may have had on your need for a single audit and which major programs may need to be tested for your June 30, 2020, audit. Conversely, if your district saw a significant decline in Child Nutrition revenue, consider any impact on your major programs.

We have seen many other changes related to federal programs for the 2021 school year, and we are here to help you navigate those changes any way we can. Please reach out to your Yeo & Yeo professionals for assistance.