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Jan 01
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The IRS Versus the Taxpayer

By Blog, Tax and Financial News

According to the IRS, not only is your ignorance no excuse, but so is that of your tax preparer. In other words, the fact that your tax preparer made a mistake is no excuse and will not absolve you from compliance penalties.

Unfortunately, the penalty for making what could be deemed an innocent mistake can cost a taxpayer a significant sum. What is worse yet is that defending yourself against the IRS is a costly endeavor in terms of both time and money. Part of the problem is that taxpayers often do not have the option of making an appeal directly to the tax court and, instead, must first pay the IRS and then challenge it in either District Court or the Court of Claims. Stated plainly, the average taxpayer simply cannot afford to fight the IRS in tax court.

In the remainder of this article, we will look at two main areas that tend to be problematic for taxpayers: first, assorted penalties for misfilings and mistakes; second, obscure international forms.

Miscellaneous Mishaps and Mistakes

Taxpayers can get caught up in “gotcha” type situations where they inadvertently make a mistake in the type, accuracy or timing of the filings. Here is a checklist of some of most common issues in which taxpayers typically make unintentional errors that will not be forgiven by the IRS.

  • Filing late and paying short: Filing a return late and underpaying the tax owed each carry separate penalties. Together, these penalties can add up to 47.5 percent of the original tax owed in a worst-case scenario.
  • Careless Filing Details: If you make a mistake in filing your return and it results in tax liability in your favor, you can owe a penalty of 20 percent of the under-reported taxes. In the case of faulty appraisals for items such as donated property, the penalty can double up to 40 percent.
  • Writing Bad Checks: Technically it does not matter if it is a physical check or another payment method, but if a taxpayer’s payment to the IRS is declined, the IRS will change an additional 2 percent penalty.
  • Missing Checklists: Failure to file the two-page “due diligence” checklist before claiming certain credits, such as the earned-income or college credits, can result in a fine of $545 per credit.

Obscure International Forms

Many compliance-related rules related to international investments and banking activities were originally created to put a stop to drug dealers, terrorists and flagrant tax cheats. Unfortunately, the regulations are still in force, but apply to increasingly more taxpayers as the threshold amounts have not increased yet more U.S. citizens are working, living or retiring abroad. Moreover, the penalties can be severe. In this section, we will look at some of the most obscure and serious foreign tax compliance issues.

  • Passive Foreign Investments: If you own mutual fund shares incorporated abroad you must file Form 8621.
  • Personal Holding Companies: If you create a corporation to hold a foreign property, you will need to file Form 5471, for a Controlled Foreign Corporation.
  • FBAR: If you have $10,000 or more in any combination of international bank and brokerage accounts, at any single point in the year, you need to file the FBAR form electronically. Note, the trigger here is that the bank or brokerage is outside the United States. If you hold securities of foreign companies or foreign currencies with a U.S. institution, the reporting is not required.
  • Fatca Disclosures: Facta disclosures were created to combat money laundering, covering all manner of foreign financial assets, including insurance and retirement assets. It can overlap with the FBAR requirements, but the additional reporting here is triggered by higher thresholds starting at $50,000 in assets for single U.S. residents and up to $400,000 for couples residing abroad and filing joint returns.

Conclusion

Remember that ignorance of the tax law is no excuse, especially in the eyes of the IRS. It does not matter if a mistake you make is truly innocent; there is still a good chance that you will end up paying unpleasant fines and penalties and, in the worst case, a big mess. It is best to be timely and diligent in your filings.

Jan 01
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Understanding the Weighted Average Cost (WAC) Method for Inventory Valuation

By Blog, General Business News

When it comes to businesses and their inventory and accounting methods for managing it, there are a few different ways to approach the task. The three different options to value inventory/implement cost flow assumptions, include: Last In, First Out (LIFO); First In, First Out (FIFO); and Weighted Average Cost Accounting (WAC). This article will focus only on the WAC method.

Weighted Average Cost (WAC) Method

WAC is a way to value inventory based on how much each tranche contributes to the overall valuation of its cost of goods sold (COGS) and inventory. Recognized by both GAAP and IFRS, it’s determined by taking the cost of goods available for sale and dividing it by the quantity of inventory ready to be sold. It’s important to note that while WAC is a generally accepted accounting principle, it’s not as precise as FIFO or LIFO; however, it is effective at assigning average cost of production to a given product.

It’s done primarily for types of inventories where parts are so intertwined that it makes it problematic to attribute clear-cut expenditures to a particular part. This often happens when stockpiles of parts are indistinguishable from each other. It also accounts for businesses offering their inventory for sale all at once. Here’s a visual representation of the formula: 

Weighted Average Cost (WAC) Method Formula

WAC per unit = Cost of goods available for sale / Units available for sale

Costs of goods available for sale is determined by adding new purchases of inventory to the value of what the business already had in its existing stock. Units available for sale is how many saleable items the company possesses. Its value is assessed per item and encompasses starting inventory and additional purchases.

When it comes to calculating WAC, there are two different types of inventory analysis systems: periodic and perpetual.

Periodic Inventory System

In this system, the business tallies its inventory at the end of the accounting period – be it a quarter, half or fiscal year – and analyzes how much the inventory costs. This then determines the value of the remaining inventory. The COGS is then calculated by adding how much starting, final, and additional inventory within the accounting period cost.

Perpetual Inventory System

This system puts a bigger emphasis on more real-time management of its stock levels. The trade-off for such real-time tracking of inventory requires more company financial resources. Looking at an example of how a company began its fiscal year with the following inventory can illustrate how it works.

At the beginning of the year, a company had 1,000 units, costing $50 per unit. It also made three additional inventory purchases going forward.

Jan 20: 75 units costing $100 = $7,500

Feb 17: 150 units costing $150 = $22,500

March 18: 300 units costing $200 = $60,000

During the fiscal year, the business sold:

235 units sold during the last week of February

325 units sold during the last week of March

Looking at the Periodic Inventory System, for the first three months of its fiscal year, the company can determine its COGS and the number of items ready to be sold over the first three months of its fiscal year.

WAC per item – ($50,000 + $7,500 + $22,500 + $60,000) / 1,525 = $91.80

Based on this method, the WAC per unit would be multiplied by the number of units sold during the accounting period, therefore:

560 units x $91.80 = $51,408 (inventory sold)

To calculate the final inventory value, we take the entire purchase cost and subtract the remaining inventory to arrive at the valuation:

$140,000 – $51,408 = $88,592

Perpetual Inventory System

Unlike the periodic inventory system, this looks at determining the mean prior to the transaction of items:

This would calculate the average before the 235 units were sold during the last week of February:

WAC for each item: ($50,000 + $7,500 + $22,500) / 1,225 = $65.31

Looking at the 235 units sold during the last week of February, it’s calculated as follows:

235 x $65.31 = $15,347.85 (inventory sold)

$80,000 – $15,347.85 = $64,652.15 (remaining inventory value)

Before calculating for the 325 units sold the last week of March, the unit valuation per WAC is: ($64,652.15 + $60,000) / (1225 – 235 + 300) = 1290 = $96.63

Looking at the 325 units sold during the last week of March is calculated as follows:

325 x $96.63 = $31,404.75 (inventory sold)

$124,652.15 – $31,404.75 = $93,247.40 (remaining inventory)

Based on these options, businesses have the choice, along with LIFO and FIFO, to decide how they want to vary it based on their own business needs.

Jan 01
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No-Heir Estate Planning

By Blog, Financial Planning

Even if you have no heirs, you should have an estate plan. Otherwise, the state will determine the fate of your worldly possessions. In fact, if you pass away “intestate” (without a will), the state can even keep all of your assets for itself – if no heirs are found.

The most basic tenet of no-heir estate planning is to write a will. Every state has different rules about what constitutes a legally enforceable will, so be sure to check out your state’s guidelines. If you move, you’ll need to update your will according to the state you live in when you pass away.

In yourwill, direct who receives which of your assets. There is no edict that says you must leave possessions to a relative. You can choose a friend, a group of people or even one or more charitable organizations. You also should choose an executor of your will: someone you trust to carry out your wishes. This person can be an attorney or bank custodian of your assets. You should speak with whomever you choose to make sure they are willing to take on the role of executor. It is generally no small task, and might entail distributing and even selling your possessions in order to make cash distributions to the beneficiaries.

If you have any pets, be sure to figure out during the planning process who is willing to take care of your animals after you pass, or direct their care to a specific shelter.

Also, consider the beneficiaries you will designate for bank and investment accounts, as well as any insurance policies you own. Note that beneficiary designations you assign on these accounts will supersede your will instructions, even if they precede when you wrote your will. For example, your employer might pay for a life insurance policy in your name that pays out proceeds equaling two to three times your salary. You might not even remember that you completed this paperwork years ago, naming your girl/boyfriend at the time as your beneficiary. If you don’t keep those designations up to date, you may end up leaving a substantial sum to a woman/man who broke your heart, instead of the person who embraces it now.

It is also a good idea to name a “Transfer on Death” (TOD) designation on other types of accounts, such as your bank checking and savings accounts. This designation also supersedes will instructions and allows your money to be distributed once the beneficiary presents your death certificate and proper ID. It’s actually advisable to name the executor of your will as TOD, as he may need to access your funds quickly to pay for funeral and burial expenses. Other assets can take longer to distribute, so a TOD designation is a quicker way for your beneficiary to access cash.

Be aware that even if you have prepared a will, your estate will still be subject to probate, in which a judge makes the final determination of your assets. If you wish to avoid this step, you can fold all or a portion of your assets under one or more trusts, which will distribute them according to the trust directionsand avoid probate altogether. A trust is particularly beneficial if you have a large estate or wish to leave a substantial donation to one or more charities.

Another estate planning consideration is what to do if, instead of dying, you become incapacitated and cannot make decisions for yourself. As part of the estate planning process, you should name a power of attorney to make financial decisions for you. This can be anyone – a friend or close neighbor, or the person you name as executor of your will.

You should also establish a living will, advanced care directive, and/or healthcare proxy. A living will is a directive that states your wishes regarding medical care should you become incapacitated (e.g., permanently unconscious). An advanced care directive can be more specific, such as establishing a “do not resuscitate” (DNR) order if your breathing or heartbeat stops, and if you would like to donate tissues or organs after you pass.

A healthcare proxy, which may be referred to as a medical or durable power of attorney, is the assignment of a person who will make all of your healthcare decisions when you no longer can. Note that with medical instructions as well, states have varying guidelines. It’s important to be familiar with your state’s requirements and update your medical care directives if you relocate to another state.

Jan 01
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5 Financial Resolutions You Can Live With

By Blog, Tip of the Month

For the most part, New Year’s resolutions are hard to keep because many times you either list too many things or ones that aren’t manageable for the long haul – especially those that involve money. Here are a few simple tricks to help you make changes that are bite-sized, easy to implement, and more likely to stick.

Do a five-minute daily money check-in. Life is so busy that sometimes it’s easy to just spend money, then move on to the next task at hand. You might think, “I’ll check my bank balance later,” and then you never do. But if you’re serious about getting a handle on your finances, you might want to try this one thing: give yourself a “money minute.” Select a time of day, maybe after dinner, to log into your bank account. Take stock of what you spent money on. Did you really need that bottled water? That designer coffee? This way, you can nip those small (perhaps unnecessary) expenditures in the bud and make smarter choices in the coming days.

Get a money-saving app. One of the best ones to help you achieve financial goals is Ibotta. Let’s say you want to buy a new pair of running shoes; a good brand that’ll really last. With this app, you’ll save on everyday purchases and when you’ve earned enough cash back, you can cash it in for a gift card from your selected store and get what you really want.

Consider micro savings goals. This technique is actually about rewarding yourself financially for changing your behavior. For instance, every time you go to yoga or Pilates, stash away $5. Or if you wake up early or finish a difficult task, stash away $10. When you’ve saved enough money to buy whatever it is you’ve decided on beforehand, you’ve not only avoided the trap of putting your goodie on credit (and paying interest), but also most likely started a new, healthy habit.

Set up an automatic savings plan. After you’ve paid taxes, insurance premiums and perhaps even your retirement account, you might consider tucking away money for yourself that you’ll never miss. Every. Single. Paycheck. That’s right. When you automatically have a set amount deducted every time you get paid, over time you’ll accumulate a bucket of money to use in whatever way you deem important – it could be saving for a vacation or a new car. It could also be a fund for emergencies. The point is, it’s an easy, failsafe way to save and achieve your goals.

Do one frugal thing a day. This is all about a little bit of forethought and then just taking action. And when you adapt this mindset, you’ll be working daily toward your financial goals like paying off debt, saving money to quit a job you hate, or even having enough extra cash to invest in real estate or whatever strikes your fancy. Here are a few things to consider: drink more water than soda. Eat at home. Use public transportation instead of driving when you can. But this just scratches the surface. For more smart ways to start living frugally, check out this super helpful article. You’ll be surprised at all the ways you can cut back and save.

All of these tricks are easy and, in some cases, no-brainers. When you take a few minutes, set your mind on what you want, anything’s possible. Here’s to fulfilling your dreams in the New Year!

Sources

11 Financial Resolutions That Will Stick in 2023

Jan 01
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Handling Talent Shortages in Tech Departments

By Blog, What's New in Technology

Technology advancement has brought about great digital transformation. Unfortunately, this has come with a global tech talent shortage. IT executives highlight the shortage as a huge barrier to the adoption of emerging technologies, as reported by this Gartner study.

It is estimated that the demand for tech talent will keep increasing, and this could result in an estimated 85 million global talent shortage by the year 2030. Therefore, companies need to rethink their approach to hiring and retention.

Reasons Behind the Tech Talent Shortage

It is worth trying to first understand what is causing the tech talent shortage. A few of the reasons that have led to the shortage include:

  • Advances in technology – technology is advancing at a high speed, requiring workers with skills to match the new technology. Unfortunately, the tech education system can’t keep up with the speed, hence a shortage of people with the required skills.
  • The great resignation – this became a buzzword with work from home that came with the Covid pandemic; unfortunately, even after the pandemic people are still leaving jobs. A survey by TalentLMS and Workable found 72 percent of employees working in tech are considering quitting their jobs or exploring other opportunities.
  • High demand for tech talent – There has been an increase in the demand for tech workers in recent years as more businesses and industries turn to technology for daily operations. New technology creates new roles such as data professionals, data security specialists and software engineers among others that are highly competitive.
  • Challenges in training and development – some companies might not have the resources and time to invest in employee development.

Business Challenges of IT Talent Shortage

Businesses are feeling the effect of the tech talent shortage, especially when it comes to digital transformation. Emerging technologies such as robotic process automation (RPA), artificial intelligence, blockchain and augmented reality that promise to keep a business ahead of its competition require skilled workers.

Hiring new talent or reskilling employees also comes at a cost, and companies struggle to fill positions. On the other hand, failing to have skilled employees results in unrealized annual revenues.

As a result, businesses of all sizes find themselves failing to develop projects on time and hence fail to meet deadlines. In other cases, the existing employees end up overburdened with too much work, and this may lead to them quitting. Eventually, a business experiences slow innovation and slow growth.

How to Handle the Tech Talent Shortage

A few strategies to help address this issue include:

  • Investing in employee development and training
    Providing ongoing training and development opportunities for current employees can help them acquire new skills and knowledge. This will not only make them more valuable to your organization, but also less likely to leave.
  • Attract top talent through a strong employer brand
    Building a strong employer brand can help in attracting top talent to your organization. This can involve highlighting your company’s culture, values and mission, as well as offering competitive compensation and benefits packages. A good reputation will also help attract new talent.
  • Partnering with educational institutions
    A company may also partner with local colleges and universities to gain access to a pool of talented students who are looking for internships or entry-level positions. Additionally, setting up mentorship or internship programs helps build a pipeline of talent for your organization.
  • Increase recruitment efforts
    Sometimes it might be difficult to find the right talent, which makes it necessary to increase recruitment efforts. This could involve working with recruitment agencies, posting job openings on job boards and social media platforms, and attending job fairs and industry events.
  • Consider hiring remote workers
    Even with all efforts in place, it may still be difficult to find the right talent in a business location. Today, technology has enabled people to work remotely. This offers access to a larger pool of candidates and also can help attract top talent from other parts of the country or even the world. It is also possible to work with freelancers or contractors to fill specific skills gaps on a project-by-project basis.
  • Enhance the recruitment process
    An inefficient recruitment process will cost the company good talent. Therefore, any poor communication or delayed communication will affect talent acquisition. A company might need to streamline its recruitment process.

Final Thoughts

The global tech talent shortage is already negatively affecting businesses. Since the shortage is expected to rise, business leaders need to decide on the best way forward so they are not left behind in digital transformation. A good decision should fit business goals whether choosing to hire internal talent, remote workers, or outsource technology needs.

Jan 01
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Expanding Options for Marriage, Defense, Medical Marijuana, Amateur Athletes and Rail Workers

By Blog, Congress at Work

Respect for Marriage Act (HR 8404) – Introduced by Sen. Jerry Nadler (D-NY) on July 18, this Act replaces previous provisions that defined marriage as strictly between a man and a woman. It codifies marriage to state that a spouse may be a person of the opposite sex as long as the contract between the two individuals is valid under state law, and prohibits any state from denying out-of-state marriages on the basis of sex, race, ethnicity or national origin. The bill passed in the Senate on Nov. 29 and the final bill passed in the House on Dec. 8. President Biden signed the Act into law on Dec. 13.

James M. Inhofe National Defense Authorization Act for Fiscal Year 2023 (HR 7776) – This bill authorizes defense spending at $858 billion, an approximate 10 percent increase over last year and $37 billion more than President Biden requested in his budget. This bill is expected to increase pay for service members and civilians by 4.6 percent and include inflation bonuses for those earning less than $45,000 a year. The bill was initially introduced on May 16 and the final bill was agreed upon by a bipartisan committee comprised of Sens. Jim Inhofe (R-Okla.) and Jack Reed (D-R.I.), and Reps Adam Smith (D-Wash.) and Mike Rogers (R-Ala.) The bill first passed in the House on July 14. It was signed into law by the President on Dec. 23.

Help Find the Missing Act (S 5230) – This Act is designed to facilitate data sharing between the National Missing and Unidentified Persons System and the National Crime Information Center database of the Federal Bureau of Investigation, in order to improve efforts in finding missing persons. The bill was introduced by Sen. Chris Murphy (D-Conn.) on Dec. 8 and passed in the Senate on the same day. It passed in the House on Dec. 14 and is currently awaiting the President’s signature.

Medical Marijuana and Cannabidiol Research Expansion Act (HR 8454) – This legislation was introduced by Rep. Earl Blumenauer (D-Ore.) on July 21. The purpose of the bill is to increase the supply of marijuana that may be used in government studies. It expands the number of registered entities (e.g., academia, practitioners, manufacturers) that may manufacture, distribute, dispense or possess marijuana or cannabidiol (CBD) for the purposes of medical research. The bill also enables physicians to discuss with patients the potential harms and therapeutic potential of marijuana and its derivatives (such as CBD). Going forward, the Department of Health and Human Services will report on marijuana’s impact on various conditions, such as epilepsy; its impact on adolescent brains; and on the ability to operate a motor vehicle. The bill passed in the House on July 26 and in the Senate on Nov. 16. It was signed into law by the President on Dec. 2.

Equal Pay for Team USA Act of 2022 (S 2333) – This bill was introduced by Sen. Maria Cantwell (D-Wash.) on July 13, 2021, and was passed in the Senate on Dec. 8. The legislation would require equal compensation and benefits for all athletes representing the United States in international amateur athletic competitions, regardless of gender. The bill would require each sport’s national governing body to submit annual compliance reports pertaining to this requirement. The bill’s fate currently lies in the House.

To provide for a resolution with respect to the unresolved disputes between certain railroads represented by the National Carriers’ Conference Committee of the National Railway Labor Conference and certain of their employees (HJ Res 100) – Passage of this bill was successful in averting a nationwide strike of rail workers, but it did not satisfactorily address all of their demands. The Act provides improved healthcare benefits and a 24 percent pay raise, as well as the ability to take limited unpaid sick leave without being subject to penalties. However, the bill failed to provide the five days of paid medical leave sought. The bill was introduced by Rep. Donald Payne Jr (D-N.J.) on Nov. 29, passed in the House on Nov. 30 and the Senate on Dec. 1. It was signed into law on Dec. 2.

Safe Connections Act of 2022 (HR 7132) – Introduced on March 17 by Rep. Ann Kuster (D-N.H.), this bill instructs cell phone service providers to waive separation of contract service fees when requested by survivors of domestic violence, human trafficking and related harms. The Act requires that the requestor present verifying documentation that a cosigner of thecontract committed or allegedly committed an act of domestic violence, trafficking or a related criminal act against the survivor. The requestor must assume financial responsibility for services after a line separation. The bill passed in the House on July 27, in the Senate on Nov. 17 and was signed into law on Dec. 7.

Dec 01
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The 2022 Tax Guide

By Blog, Tax and Financial News

The 2022 Tax GuideNow is the time of year to do everything you can to minimize taxes and maximize your financial health with proper year-end planning. In this article, we’ll look at several actions to consider taking before the end of 2022.

Thoughtfully Harvest Losses and Gains Before Year-End

Tax loss harvesting by selling securities at a loss to offset capital gains is a classic year-end planning strategy. Just make sure not to violate the wash sale rules. This means you can’t buy back the same security or a substantially identical one within 30 days of the sale.

Reinvest Capital Gains into Opportunity Zones

Another way to offset capital gains is to reinvest those gains into a qualified opportunity fund (QOF). To be eligible, you must make the investment within 180 days of the sale of the asset-bearing gains. QOF investments allow you to defer the recognition of the capital gains tax on the original investment. The details and exact rules can be tricky, so it’s best to check with your tax advisor before making this type of transaction.

Consider Installment Sales Where Applicable

When a taxpayer sells a private asset such as real estate, a business, or private equity in exchange for a series of payments over multiple years through a promissory note, this can constitute an installment sale. Installment sales are generally taxed with each payment representing a portion of the proceeds; return of basis, interest, and gain are recognized over the life of the note

There are situations in which installment sales can be structured so that gains are not recognized until principal payments are recouped. If you are considering selling an asset via an installment sale this year-end or next, consult with your tax advisor to determine if it’s possible to structure the sale to defer gains.

Funding Retirement

If you can contribute to a retirement account, now is the time to see if you need to make additional contributions or top-up to the full amount allowable. As you review your situation, keep in mind the annual maximum contribution limits for 2022.

  • IRAs – $6,000. If you are 50 or older, it’s $7,000.
  • 401(k)s/403(b)s —  $20,500. If you are 50 or older, it’s $27,000

Also, converting assets from a traditional IRA to a Roth IRA may be a smart move if: you believe your tax rate will be higher in the future; you can afford to pay the taxes now with spare cash; and you don’t plan to leave the IRA assets to charity.

Take Your Required Minimum Distributions

The annual deadline to take required minimum distributions (RMD) from your own or inherited retirement accounts is Dec. 31, 2022. It’s important to take RMDs because there is a 50 percent penalty on amounts not distributed. The amount needed to be taken were determined on Dec. 31, 2021, even though the value of the investment has likely fluctuated significantly since that time. RMDs are based on a calculation of age and amount of assets. There are online calculators to help you figure out the amount you need to take.

Giving to Charity

Some taxpayers believe that the deduction for charitable donations is no longer applicable to them since it can be hard to make donations large enough to exceed the standard deduction. One strategy to overcome this challenge is to cluster your donations. Instead of making equal gifts every year, consider making more substantial gifts all in one year instead.

When it comes to making donations around year-end, it’s important to understand the rules on timing and when a gift is effectively deemed given for tax purposes. Here are the basic rules on timing of charitable donations.

  • To give to charity by check => the date the check is mailed
  • Gifts of stock certificates => when the transfer occurs, according to the issuer’s records
  • Gifts of stocks by electronic transfer => when the stock is received, according to the issuer’s records
  • Gifts by credit card => date the charge is made

Conclusion

As we enter the final part of the year, now is the time to take stock of your financial and tax situation to see if there are any moves you can make to minimize your 2022 tax liabilities and maximize your wealth.

Dec 01
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Defining and Calculating Amortization

By Blog, General Business News

Calculating AmortizationWhen there’s a question of the benefit that tangible or intangible assets provide businesses, there are many factors that must be weighed to make internal accounting procedures effective. Businesses must determine how the cost of business assets can be expensed each year over the asset’s lifespan. Looking at how amortization and depreciation work, implementing both processes depend on the type of asset being expensed. There are noticeable differences for each method, including how to salvage value is considered, whether accelerated expensing is allowed, and how each type is expressed on financial statements.

Amortization

Amortization is an accounting practice of spreading the cost of an intangible asset over its useful life. Examples of intangible assets, according to the Internal Revenue Service’s “Section 197 Intangibles,” include goodwill, intellectual property such as trademarks, patents, and government or agency-granted permits or licenses. These are all assets that must be amortized over 15 years.

Based on IRS regulations, when it comes to determining how an asset is expensed over its useful life, amortization is most similar to the straight-line basis method of depreciation. 

It’s important to note that the timeframe of amortization is subject to interpretation. Examples, according to the IRS, include a 36-month amortization timeline for computer software because it’s not categorized as an asset under the same IRS Section. Other examples not mandated to be amortized under a 15-year time frame include interests to land, business partnerships, financial contracts (such as interest rate swaps) or creation of media. 

Depreciation

One of the main differences when it comes to depreciation is that it focuses on tangible or fixed assets and requires a certain percentage of its useful life to be allocated each year. Examples of assets that can be expensed include trucks for service calls, computers, printers, equipment for production, etc. Another important difference is that the asset’s salvage value is deducted from the asset’s starting cost. The remaining balance (original cost – salvage cost) determines annual expensing amounts, which is divided by the asset’s years of useful life.

Along with the above method of depreciation, also called “Straight-Line Method,” there are other ways depreciation can determine how much is expensed annually and over the asset’s useful life. For example, Declining Balance or Double Declining Balance methods are alternate ways businesses can depreciate their assets – some frontload the amounts to take advantage of accounting/tax rules to reduce their tax liabilities. Another way is to depreciate via Units of Production. This method pro-rates the level of an asset’s expected use within a particular accounting period, on a per-unit basis, to determine how much the company can expense during a particular accounting timeframe.

When it comes to accounting for goodwill, according to a November 2020 electronic survey of CFA charter holders by the CFA Institute, respondents found that investors who see amortization used by companies still require investors’ due diligence. Sixty-one percent of respondents said there need to be alternate ways to figure out if management is effective or not, and 63 percent said that amortization “distorts financial metrics.”

When it comes to understanding and navigating the differences between amortization and depreciation, business owners and investors need to be well-versed in performing due diligence to ensure compliance.

Sources

https://www.irs.gov/pub/irs-pdf/p535.pdf

https://www.cfainstitute.org/en/research/survey-reports/goodwill-investor-perspectives

Dec 01
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Retirement Tax Planning For 2023

By Blog, Financial Planning

Retirement Tax Planning For 2023Although you might get busy with the holiday season, don’t forget to consider ways to strengthen tax efficiencies for 2023 and beyond.

2023 Retirement Contribution Increases

Set up your accounts to automatically defer money to meet the new increases in retirement contributions next year. In 2023, you can defer up to $22,500 in a 401(k), 403(b), most 457 plans and the government’s Thrift Savings Plan. Plan participants who are age 50 and older may defer up to $30,000 next year.

Furthermore, the combined 2023 limit for Traditional and Roth IRAs is $6,500, or $7,500 if you’re age 50 or older.

If you are a business owner with a solo 401(k) plan, you may make an additional employer contribution of up to 25 percent of compensation, for a combined maximum of no more than $66,000 in 2023. Note that self-employed individuals are subject to specific calculation rules.

Investment Tax Management

If you’re bullish that the New Year will outperform the dismal investment market returns of 2022, consider repositioning assets to reduce your tax liability. One way to take advantage of this year’s poor results is to convert assets from a Traditional IRA to a Roth. While you still have to pay taxes on any earnings to date, the tab should be lower than in a year of outperformance. Going forward, any gains made under the Roth will grow and be withdrawn free of taxes. This can help lower your tax bill during retirement. It’s a good idea to do a Roth conversion while still working in order to pay capital gains without having to use money from the account. Be aware that you don’t have to convert the entire IRA balance. Assets will be reported as 2022 income, so try to convert only up to your current tax bracket.

As a general rule, it’s a good idea to spread your investment portfolio across a variety of vehicles, including taxable (brokerage), tax-deferred (employer plan) and tax-free (Roth IRA) accounts. When you retire, you can better manage your tax bill based on which accounts you draw money from each year. Conventional guidance recommends withdrawing from taxable accounts first, giving your tax-advantaged accounts more time to grow. However, another option is to make proportionate withdrawals from both taxable and non-taxed accounts for a more stable tax impact each year – that way you won’t have a higher tax bill in the latter years of retirement.

Residential Property Sales

Higher housing prices may cause some home sellers to exceed the current tax exclusion amount:

  • Exclude $250,000 from the sales profit if the seller is single or married filing separately
  • Exclude $500,000 from the sales profit if the seller is married and filing jointly

If your sales profit is higher than these exclusions, that amount may be subject to capital gains taxes. However, if you make value-added improvements to the home, keep those receipts because you may be able to add certain expenses as well as closing costs to your cost-basis – which will help reduce your tax bill.

Charitable Giving

If you are required to take distributions (RMDs) from retirement plans but don’t need the money, consider redirecting that money to a qualified charity. This tactic enables you to redirect up to $100,000/year and avoid paying taxes on those distributions. Another way to donate and receive a substantial tax break is to gift stocks with long-term appreciation to the charity of your choice. This will allow you to receive a tax deduction without having to pay capital gains taxes by selling the stock first.

If you are on the cusp of exceeding the standard deduction for your 2022 return, consider making several years’ worth of charitable donations in one year in order to exceed it and be able to itemize your return. If you don’t know where you stand for this year, consider delaying charitable gifts until next year so you can bunch them on your 2023 return. Note that for charitable donations to qualify for a deduction, they must be completed by Dec. 31 of the tax filing year.

Estate Transfer Planning

The 2023 gift tax exclusion ($12.92 million per person; $25.84 million for married couples) is scheduled to return to $6 million in 2026. Therefore, ultra-high net-worth households should consider taking advantage of this window to transfer much of their net worth by the end of 2025. Also, you may gift up to $17,000 (2023) per year per person without those amounts counting toward the gift tax exclusion limit.

Dec 01
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Your Year-End Financial Checklist

By Blog, Tip of the Month

2022 Your Year-End Financial ChecklistBelieve it or not, the year is coming to a close. If you want to finish strong and set attainable goals for 2023, here’s a handy, actionable checklist to help you navigate upcoming expenditures.

Review Your Spending and Create a Budget

This might seem like Finance 101, but it’s a tried and true method that works. Take a look back to see where your money went. When you’ve evaluated your patterns of spending, you can reset priorities for the New Year, assuming you want to make changes. If you do, sit down and create a budget. Your tax professional will probably have a downloadable tax planning guild so ask them first, but here’s an example of a family-friendly free, downloadable template to get you started on your 2023 plan. 

Rethink Your Savings

If you already have a healthy amount in savings, congrats. Make sure it’s an account that’s interest-bearing and you have the best rate. However, if you had to dip into your emergency savings, then chart a course to replenish it. If you don’t have an emergency fund, it makes good sense to start one. A smart rule to consider is having six months of income saved up, should your heater go out, you experience a sudden job loss, or suffer unforeseen medical expenses that your insurance doesn’t cover. A no-nonsense way to begin is to automate a certain amount each month that will be deducted from your paycheck. You’ll begin to accumulate money in no time. Best of all, you’ll never miss it.

Evaluate Your Debt

Have you made progress in paying it down? Or have you gone the other way?  If you’ve eliminated your debt, once again, congrats. If you’ve increased your debt, don’t despair because there are some easy ways to cut expenses. Slow down on eating out. Review your subscriptions and see which ones you really need. Here’s a list of more areas to consider. Another way to get rid of the shackles of debt is to apply for a consolidation loan. You might also use the debt snowball method—starting with the smallest debt and working your way up to the largest. Or the inverse, the debt avalanche, where you pay off high-interest rate balances first.

Contribute to Your 401(k) by Dec. 31

You still have time to do this, but make sure it happens before the clock strikes midnight on Dec. 31. If you’re fortunate enough to receive a year-end bonus, you might want to put as much of it as you can toward your 401(k) plan. For the New Year, increase the amount you’re contributing. Just one or more percentage points higher can make a big difference. Finally, if your company offers a match that you have yet to take advantage of (read: max out), do so before it’s too late.

Consider a Roth Conversion

If you’ve experienced a loss of income this year, you may be in a lower tax bracket. This means you can take advantage of your situation by converting some of your pre-tax assets like a Traditional IRA into a Roth IRA. If you’ve earned too much to convert to a Roth IRA, a back-door Roth IRA contribution might be the way to go. Here’s how you do it: Deposit money into a non-deductible Traditional IRA, then convert that IRA into a Roth IRA. But before you do anything at all, consult your tax advisor, as there are potential costs and tax liabilities that might come up.

Check your FSA Balance

An FSA (Flexible Spending Account) is a great benefit if your employer offers it. However, check your balance to see how much you have left because the rule is: Use it or lose it. That said, many companies offer a grace period until mid-March to spend what you have left, though not all do. Make sure to inquire about the rules of your account before the New Year.

Get a Free Credit Report

When was the last time you checked your credit? If you haven’t done so, now’s a good time because looking back can help you plan ahead. Here’s a great place to get a free report. If you notice any errors or discover any identity theft, you can immediately take steps to correct them and start with a clean slate for 2023.

While taking care of financial matters at the end of the year can be a love/hate kind of thing to do, if you spend a little time now, the coming days might be substantially merrier and bright.

Sources

https://www.bankrate.com/personal-finance/end-of-year-financial-checklist/

The First 10 Things to Cut from your Budget

https://www.bankrate.com/retirement/what-is-a-backdoor-roth-ira/

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