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Year-End Spending Package Tackles Retirement Planning, Conservation Easements

On December 23, 2022, Congress passed the Consolidated Appropriations Act of 2023. The sprawling year-end spending “omnibus” package includes two important new laws that could affect your financial planning: the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act (also known as SECURE 2.0) and the Conservation Easement Program Integrity Act. Bolstering retirement savings The original SECURE Act, enacted in 2019, was a significant bipartisan law related to retirement savings. In the spring of 2022, with an eye toward building on the reforms in that law, the U.S. House of Representatives passed the Securing a Strong Retirement Act. Despite strong bipartisan support, the bill stalled. Then, the U.S. Senate introduced its own retirement legislation, dubbed the Enhancing American Retirement Now Act. SECURE 2.0 incorporates provisions from both bills and addresses a wide array of areas that make major c

Surprise Audits Can Keep Your Accounting Department on Its Toes

One of the best ways to tackle financial statement fraud is to conduct periodic surprise audits. In fact, surprise audits were associated with at least a 50% reduction in both median loss and median duration, according to Occupational Fraud 2022: A Report to the Nations published by the Association of Certified Fraud Examiners (ACFE) earlier this year. Surprisingly, however, less than half of respondents (42%) conduct surprise audits. So, numerous organizations have an opportunity to add this highly effective tool to their antifraud arsenal. Cost of financial misstatement Financial statement fraud happens when “an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.” Examples include a salesperson who prematurely reports sales to boost commissions or a controller who books fictitious revenue to hide theft — or lackluster fin

Be Prepared if You Are Worried About an IRS Audit

IRS audit rates are historically low, according to a recent Government Accountability Office (GAO) report, but that’s little consolation if your return is among those selected to be examined. Plus, the IRS recently received additional funding in the Inflation Reduction Act to improve customer service, upgrade technology and increase audits of high-income taxpayers. But with proper preparation and planning, you should fare well. From tax years 2010 to 2019, audit rates of individual tax returns decreased for all income levels, according to the GAO. On average, the audit rate for all returns decreased from 0.9% to 0.25%. IRS officials attribute this to reduced staffing as a result of decreased funding. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago. There’s no 100% guarantee that you won’t

Extracting Actionable Data from Your Financials with Ratio Analysis

What do you do with your financial statements when your auditor delivers them? Resist the temptation to just file them away — they’re more than an exercise in compliance. With a little finagling, you can calculate key financial ratios from line items in your company’s financial statements. These metrics provide insight into historical trends, potential areas for improvement, and how the business is likely to perform in the future. Financial ratios are generally grouped into the following four principal categories: 1. Operating Operating ratios — such as the gross margin or earnings per share — evaluate management’s performance and the effects of economic and industry forces. Operating ratios can illustrate how efficiently a company is controlling costs, generating sales and profits, and converting revenue to cash. This analysis shouldn’t stop at the top and bottom of the income statement. Often, it’s

529 Education Plans: Investing for Your Child

If you have a child or grandchild who’s going to attend college in the future, you’ve probably heard about qualified tuition programs, also known as 529 plans. These plans, named for the Internal Revenue Code section that provides for them, allow prepayment of higher education costs on a tax-favored basis. There are two types of programs: Prepaid plans, which allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won’t be starting college for some time; and Savings plans, which depend on the investment performance of the fund(s) you place your contributions in. You don’t get a federal income tax deduction for a contribution, but the earnings on the account aren’t taxed while the funds are in the program. (Contributors are eligible for state tax deductions in some states.) You can change the beneficiary or roll over the

Why Auditors Use Interviews to Assess Fraud Risks

Auditing standards require financial statement auditors to identify and assess the risks of material misstatement due to fraud — and to determine overall and specific responses to those risks. Here’s why face-to-face meetings are essential when assessing these risks. Audit inquiries Fraud-related questions are a critical part of the audit process. The AICPA requires auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit . Specific areas of inquiry under AU-C Sec. 240 includ

High-Income Taxpayers Could Owe Extra Taxes

High-income taxpayers face two special taxes — a 3.8% net investment income tax (NIIT) and a 0.9% additional Medicare tax on wage and self-employment income. Here’s an overview of the taxes and what they may mean for you. 3.8% NIIT This tax applies, in addition to income tax, on your net investment income. The NIIT only affects taxpayers with adjusted gross income (AGI) exceeding $250,000 for joint filers, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. If your AGI is above the threshold that applies ($250,000, $200,000, or $125,000), the NIIT applies to the lesser of 1) your net investment income for the tax year or 2) the excess of your AGI for the tax year over your threshold amount. The “net investment income” that’s subject to the NIIT consists of interest, dividends, annuities, royalties, rents, and net gains from property sale

LIFO Method May Cause Unexpected Problems for Businesses

Recent supply shortages may cause unexpected problems for some businesses that use the last-in, first-out (LIFO) method for their inventory. Here’s an overview of what’s happening so you won’t be blindsided by the effects of so-called “LIFO liquidation.” Inventory reporting methods Retailers generally record inventory when it’s received and title transfers to the company. Then, it moves to cost of goods sold when the product ships and title transfers to the customer. You have choices when it comes to reporting inventory costs. Three popular methods are: 1. Specific identification. When a company’s inventory is one of a kind, such as artwork or custom jewelry, it may be appropriate to use the specific-identification method. Here, each item is reported at historic cost and that amount is generally carried on the books until the specific item is sold. 2. First-i

Separating Real Estate Ownership from Your Business

Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability and estate planning advantages of separating real estate ownership from the business. Tax implications Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred. However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity in

Use Agreed-Upon Procedures for Specific Areas of Concern

Your CPA offers a wide menu of services. One flexible offering, known as an “agreed-upon procedures” engagement, provides limited assurance on a specific aspect of an organization’s financial or nonfinancial information. What’s covered? Agreed-upon procedures can cover various items. For example, a CPA could provide a statement about the reliability of a company’s accounts receivable, the validity of the sales team’s credit card payments, the effectiveness of the controls for the security of a system and even greenhouse gas emissions. Lenders may request these types of engagements before they’ll approve a new loan application or an extension of credit for an existing customer — or they might want one if a borrower defaults on its loan covenants or payments. These engagements can also be useful in M&A due diligence, by franchisors or when a business owner suspects an employee of misrepresenting financial results

Why Choose an LLC as an Entity for Your Business?

The business entity you choose can affect your taxes, your personal liability and other issues. A limited liability company (LLC) is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide you with the best of both worlds. Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for business debts except to the extent of their investment. Thus, they can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.

There Is Still Time to Reduce Your Businesses 2022 Tax Bill

It’s been a tumultuous year for many businesses, and the current economic climate promises more uncertainty for the short term, if not longer. Regardless of how your company has fared so far in 2022, there’s still time to make moves that may reduce your federal tax liability. Read on for some strategies worth your consideration. Time your income and expenses When it comes to year-end tax reduction strategies, the granddaddy of them all — for businesses that use cash-basis accounting — is probably the practice of accelerating deductions into the current tax year and deferring income into the next year. You can accelerate deductions by, for example, paying bills or employee bonuses due in 2023 before year end and stocking up on supplies. Meanwhile, you can defer income by holding off on invoicing until late December or early January. You should consider this strategy only if you don’t expect to see significantly high

Consider Income Taxes When Estate Planning

As a result of the current estate tax exemption amount ($12.06 million in 2022), many estates no longer need to be concerned with federal estate tax. Before 2011, a much smaller amount resulted in estate plans attempting to avoid it. But now, because many estates won’t be subject to estate tax, more planning can be devoted to saving income taxes for your heirs. While saving both income and transfer taxes has always been a goal of estate planning, it was more difficult to succeed at both when the estate and gift tax exemption level was much lower. Here are three considerations. Plan gifts that use the annual gift tax exclusion. One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from the donor’s estate. As mentioned,

How to Account for Collaborative Agreements

Today, many companies share research or technology to develop new products. For example, manufacturers might enter into a joint venture to conduct scientific research to design a new medical device. Or a watchdog group might work with a production company to create and distribute a documentary film. How revenue and other payments between the parties are reported can have a major impact on a participant’s income statement. So, it’s important to get it right. Unfortunately, the accounting rules for so-called “collaborative arrangements” remain somewhat murky, despite updated guidance from the Financial Accounting Standards Board (FASB). The basics Companies set up collaborative arrangements largely to share costs. Accounting Standards Codification (ASC) Topic 808, Collaborative Arrangements , provides guidance for income statement presentation, classification, and disclosures related to c

Here Are Five Steps to Take to Cut Your 2022 Tax Liability

It has been quite a year — high inflation, rising interest rates and a bear stock market. While there’s not a lot you can do about any of these financial factors, you may have some control over how your federal tax bill for the year turns out. Here are some strategies to consider executing before year end that may reduce your 2022 or future tax liability. 1. Convert your traditional IRA to a Roth IRA The down stock market could make this an especially lucrative time to convert all or some of the funds in a traditional pre-tax IRA to an after-tax Roth IRA. Although you must pay income tax on the amount converted in 2022, Roth accounts hold some significant advantages over their traditional counterparts. Unlike traditional IRAs, for example, Roths aren’t subject to required minimum distributions (RMDs). The funds in a Roth will appreciate tax-free. Qualified future distributions also will be tax-free, which wi

The IRS Released 2023 Cost-of-Living Adjustments -- What Do the Numbers Mean for You?

The IRS recently issued its 2023 cost-of-living adjustments for more than 60 tax provisions. With inflation up significantly this year, many amounts increased considerably over 2022 amounts. As you implement 2022 year-end tax planning strategies, be sure to take these 2023 adjustments into account. Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax-bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopts the C-CPI-U on a permanent basis. Individual income taxes Tax-bracket thresholds increase for each filing status but, because they’re based