Year: 2023

Delving Into Forensic Accounting

What is Forensic AccountingAccording to a 2022 Allied Market Research report, the size of the global forensic accounting market is forecast to increase in value to $11.68 billion in 2031, up from its 2021 estimated value of $5.13 billion. Allied Market Research puts this compound annual growth rate at nearly 9 percent (8.8 percent). This same report found that the Covid-19 pandemic saw an uptick in the need for forensic accounting skilled professionals and approaches.

Forensic accounting is a specialization within the general accounting profession. Professionals in this specialized subset focus on allegations of financial fraud brought by individuals and businesses in the civil courts and government agencies in the criminal courts. Disputes can range from family members contesting assets and valuations of such assets in an estate, business, or divorce proceedings. When it comes to proving criminal allegations, government agencies look to forensic accountants to investigate financial records for evidence of fraud in the quest to prove crimes such as securities fraud or identity theft.   

Forensic Accounting Methodology

According to the Journal of Accountancy and the Association of Certified Fraud Examiners (ACFE), CPAs and specifically forensic accountants can use Benford’s Law to begin the process of identifying potential fraud. Examples of data sets that forensic accountants can build and analyze come from income statements, expense reports, ledgers, balance sheets, invoice and inventory data, accounts payable, and accounts receivable. When analyzing the leading or first digit in a data set, forensic investigators can take the data set and look at how the leading digits are distributed against the percentages that Benford’s Law sets out.

According to the ACFE, in contrast to the common belief that digits occur in equal probability, Benford’s Law states that numbers starting with 1 as the first digit occurs with the highest frequency. Then each subsequent number 2 through 9 occurs with lower probability. According to Carnegie Mellon University, per Benford’s Law, 30.1 percent of a data set will be led by a 1. The digit 2 will be the first in a data set 17.6 percent of the time. For numbers 3 to 9, the likelihood of each respective number leading the data set should become less frequent.

The ACFE gives the example of a counting exercise to illustrate Benford’s Law. When counting to 25, only one of the 25 numbers would lead with a 3; seven numbers would lead with a 2; and there would be 11 leading numbers beginning with 1. Numbers generated by a computer would give equal weighted probability to 1 to 9 being the first or leading digit. If equally weighted numbers were in fact generated, the results would deviate from Benford’s Law. However, simply because Benford’s Law is not observed in the dataset analyzed, it doesn’t automatically mean fraud occurred. But it is a tool that helps forensic accountants investigate further and determine through additional means if fraud did, in fact, occur.

Similarly, the ACFE points out that if someone wants to commit a financial crime, they would generate invoices worth a lot. It would be a lot more effective for someone to pass off invoices of $800 or $900, versus smaller $100 or $200 amounts. While this would make better use of a criminal’s time, according to Benford’s Law, if a forensic accountant were to test a data set against a few hundred invoices, they might see an abnormal percentage of them with high leading numbers, prompting further investigation.

The Journal of Accountancy reminds readers that it’s important to keep in mind a few caveats. The more numbers available in the data set, the better. It can work with as few as 50 to 100 numbers, but more is always preferred. Another consideration, per the ACFE, is where the data comprising the data set originates. Using a sports analogy, if players are between 5 feet and 8 feet tall, it would make testing the data set against Benford’s Law impossible because there’s zero chance of numbers 1 through 4 and 8 or 9 showing up in a probability test. In these scenarios, Benford’s Law wouldn’t apply.

While the method for detecting financial fraud is not black and white, the need for more forensic accountants will not slow down any time soon.

Sources

https://www.acfeinsights.com/acfe-insights/2023/3/28/benfords-law-how-to-use-it-to-spot-fraudnbsp?rq=Benford

https://www.acfeinsights.com/acfe-insights/2023/3/21/benfords-law-applicationsnbsp?rq=Benford

https://www.acfeinsights.com/acfe-insights/what-is-benfords-law?rq=Benford

https://insights.sei.cmu.edu/blog/benfords-law-potential-applications-insider-threat-detection/

https://www.journalofaccountancy.com/issues/2017/apr/excel-and-benfords-law-to-detect-fraud.html

https://www.alliedmarketresearch.com/forensic-accounting-market-A17182

End of Covid Emergency Declarations Put Work from Home Benefits at Risk

Work from Home Benefits at RiskThe end of the federal emergency declaration for Covid-19 came on May 11. As a result, there are various public health policy changes. For example, vaccines and treatments will remain available, but at-home tests may no longer be covered by insurance, and national CDC data reporting is subject to change.

Administratively, there are also changes to regulatory measures temporarily put in place by the emergency status that will have tax consequences. As employers struggled during the pandemic, some even had to meet payroll issues around expense reimbursements, stipends, and how these are considered fringe benefits or compensation came into light.

History of Section 139

Section 139 came into being over 20 years ago after the Sept. 11 terrorist attacks. Then President George W. Bush signed the Victims of Terrorism Tax Relief Act, which created Section 139, defining qualified disasters and providing a non-taxable status to relief payments. The emergency Covid declaration enabled Section 139 to apply under its time in existence.

Section 139

Consequently, employers were able to aid employees under the federally declared Covid-19 disaster by providing non-taxable benefits to employees while deducting 100 percent at the company level.

One of the typical principles of tax law is that in order for compensation, whether cash or in-kind, to not be taxable to the recipient, it cannot be deducted by the compensating party. This makes sense logically, as the IRS simply wants one side to pay taxes in the end. The disaster declaration allowed a sort of have your cake and eat it to the period when it came to certain employee benefits.

Impact on Benefits

So, Section 139 is the reason why some Covid-related payments never found their way onto a Form W-2. It meant that certain medical expense reimbursements such as testing and OTC treatments, dependent care expenses, and work-from-home expenses, including home office stipends, were treated as deductible for the employer providing them but still not taxable to the employee receiving them.

There was never any specific IRS guidance stipulating exactly which Covid-19 expenses qualify under Section 139. Instead, most employers looked at what benefits they would not have otherwise provided but for the COVID-19 pandemic and classified these as qualifying items.

The Big Problem

Using this logic of classifying benefits that would otherwise not exist, but for Covid-19, as the justification for their taxability under Section 139 put companies in a bind. If they want to continue these benefits, they have to be treated as taxable income to the employee, or the employer can no longer deduct them.

While some benefits, such as Covid-19 test reimbursements, are less of an issue, many employees have come to see others, such as home office stipends, as a normal benefit – especially in the context of the work-from-home (or at least partial) new normal. No longer receiving these benefits or having to pay taxes on them is going to cause a lot of consternation.

Conclusion

One thing is certain. The end of the emergency declaration is going to bring changes in the realm of employee benefits. While the easy solution could be to simply make these benefits taxable to employees, companies need to think about what and how they provide in the context of both tax compliance and employee engagement and retention.

How to Look at Liquidity through an Accounting Lens

Liquidity, Accounting LiquidityLiquidity refers to a business’s ability to convert its short-term assets or securities into cash quickly to meet its short-term financial obligations or pay bills due within the next 12 months. Naturally, cash is the most liquid. This is different than solvency, which refers to the ability of a business to satisfy its long-term bills.

It’s important to distinguish between market liquidity and accounting liquidity. Market liquidity implies how a nation’s stock market or real estate market functions, specifically if there are enough buyers and sellers. The closer the bid and ask prices are, the greater the level of liquidity that exists. The greater the liquidity, the easier it is for participants to transact.

Determining the liquidity of a business helps investors see how a company balances its cash. This demonstrates how well a company manages its ability to pay bills versus being able to direct money for retained earnings, dividends, reinvesting in its business, or for acquisitions. When it comes to measuring liquidity, there are three ratios that estimate how liquid a business is: current, quick, and cash ratios.

Current Ratio

This compares current assets to current liabilities. It’s expressed as follows:

Current Ratio = Current Assets / Current Liabilities  = $20,000 / $5,000 = 4

This means for every $1 in outstanding bills, the company has $4 in cash available to satisfy those debts. While each industry has a unique target ratio, a range of 1.5 to 2.5 is seen as a healthy measure.

Quick Ratio (Acid-Test Ratio)

This calculation removes inventories and some short-term assets that are more illiquid than incoming payments expected to be paid within a reasonable short-term time frame, such as accounts receivable. It’s expressed as:

Quick Ratio = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable) / Current Liabilities   

If the resulting number is less than 1, this could indicate the business is facing an inability to pay its short-term bills.

Cash Ratio

This looks at how well a company can pay off short-term debt with its cash and similar financial assets that can be converted to cash instantaneously. It’s expressed as follows:

Cash Ratio = Cash and Cash Equivalents / Current Liabilities = $10,000 / $3,000 = 3.33

With a 3.33 ratio, this example shows the company is in good shape liquidity-wise. A general reference of at least 0.5 (but higher shows better financial health) is recommended.

Interpreting Results

Once the results are calculated, businesses can analyze their findings and see the financial position of their company. For example, if they are looking for financing, lenders take into account these ratios to determine a level of confidence in debt repayment. If a company is looking for investors, savvy investors can determine how competitive the company is against its industry/sector competitors.

Internal Company Reflection

Depending on the company’s circumstances, changes might need to be implemented immediately and over the long term. A business may need to look at operating costs to cut costs. Cash flow projections are recommended to see how the company is doing on its restructuring and cost-cutting efforts.

When it comes to managing liquidity, using these ratios along with short- and long-term planning to improve a company’s financial and liquidity position can make a business more attractive to lenders and investors and more resistant to economic downturns.

Shoring Up Services for Veterans, Energy Production and Cybersecurity Risks

Shoring Up Services for Veterans, Energy Production and Cybersecurity RisksRelating to a national emergency declared by the President on March 13, 2020 (HJ Res 7) – On March 13, 2020, then-President Trump declared a national emergency relating to the COVID-19 pandemic. Since then, emergency status has continued until the passage of this resolution. The national emergency status relaxed many healthcare rules, such as training mandates for nursing home aides, easier access to certain prescribed medications (e.g., Adderall, Ritalin, oxycodone, buprenorphine), and utilization of uncredentialed nurse practitioners and physician assistants for hospitalized Medicare patients. The resolution to end emergency status passed in the House on Feb. 1 and Senate on March 29. The resolution was introduced by Rep. Paul Gosar (R-AZ) on Jan. 9 and enacted by President Biden on April 10.

Wounded Warrior Access Act (HR 1226) – This bill requires the Department of Veterans Affairs (VA) to respond to online requests by claimants for records related to VA claims and benefits. The VA must notify a requester within 10 days that their request has been received and fulfill the request within 120 days. The bill was introduced by Rep. Pete Aguilar (D-CA) on Feb. 28 and passed in the House on March 7. It currently resides in the Senate.

Veterans’ COLA Act of 2023 (S 777) – Effective Dec. 1, 2023, this bipartisan bill would increase the rates of compensation for veterans with service-connected disabilities as well as dependency and indemnity compensation for the survivors of certain disabled veterans. The bill was introduced on March 14 by Sen. Jon Tester (D-MT). It passed in the Senate on March 30 and is currently under consideration in the House.

Understanding Cybersecurity of Mobile Networks Act (HR 1123) – Introduced by Rep. Anna Ashoo (D-CA) on Feb. 21, this bill would require the National Telecommunications and Information Administration to report on the cybersecurity vulnerability of mobile service networks and mobile devices to cyberattacks and surveillance by adversaries. The bill was passed unanimously in the House on March 7; its fate currently resides in the Senate.

Lower Energy Costs Act (HR 1) – This bill is designed to reduce energy costs by increasing American energy production, exports, infrastructure, and critical minerals processing by implementing transparency, accountability, and permitting rules as well as improving water quality certification and expediting energy projects. The bill was introduced by Rep. Steve Scalise (R-LA) on Jan. 26 and passed in the House on March 30. It is currently awaiting review in the Senate.

SECURE Notarization Act of 2023 (HR 1059) – This bipartisan legislation was introduced in the House by Rep. Kelly Armstrong (R-ND) on Feb. 17. It would permit notaries public to notarize electronic records and perform notarizations for remotely located individuals. The bill provides technical requirements, including creating and retaining video and audio recordings to conduct the transaction. Additionally, the bill would require all U.S. courts and states to recognize in-person and remoted notarizations affecting interstate commerce. The bill also allows a notary public to remotely notarize electronic records involving an individual located outside of the United States, subject to certain requirements. The bill passed in the House on Feb. 27 and is currently under consideration in the Senate.

What Is Web 3.0? Understanding The Next Generation of the Internet

What Is Web 3.0? The internet keeps evolving. It started with static web pages in Web 1.0 before evolving to interactive and dynamic content in Web 2.0. A new phase of technology is now introducing Web 3.0, or the third generation of The World Wide Web. Although it is a work in progress, it is necessary to understand the new concept and how it will impact the future of online interactions.

What is Web 3.0?

Web 3.0 is a term used to describe the next generation of the internet. Industry experts consider it the next big thing in the evolution of the The Web after Web 2.0. Web 2.0 refers to the Internet era characterized by user-generated content, social networking, and interactive web applications; it is known mainly as the Internet of Information.

Web 3.0, on the other hand, is built on top of the existing infrastructure; however, it introduces new technologies that enable computers to interpret data in a more human-centered manner. It combines disruptive technologies such as blockchain, augmented reality, virtual reality, edge computing, IoT, etc. As a result, the internet will become a more intelligent and efficient tool for finding and processing information.

Web 3.0 is also referred to as the semantic web or decentralized web and aims to create a more meaningful online experience by integrating artificial intelligence (AI), decentralized networks, and semantic understanding.

Key Features of Web 3.0

Decentralization

Web 3.0 makes good the move toward decentralization. Decentralization implies that instead of relying on central authorities, data is simultaneously stored in multiple locations. Since Web 3.0 is built on decentralized networks, such as blockchain technology, it creates a more transparent, secure, and trusted web and gives users more control over their data.

Artificial Intelligence and Machine Learning

Web 3.0 will enable computers to comprehend information similar to the way humans do, using semantic web concepts and natural language processing. It also will utilize machine learning – technology that employs data and algorithms to imitate human learning and enhance accuracy. Web 3.0 is designed to leverage the power of artificial intelligence (AI), making web applications more intelligent and enhancing their capacity to make informed decisions. It also helps automate tasks, improve efficiency, and provide more personalized experiences for users.

Ubiquity and Connectivity

The rise of the Internet of Things (IoT) is another contributing factor, enabling information and content to be more connected and ubiquitous. It also means data is accessible via multiple applications and devices.

3D Visualization

Using augmented reality, virtual reality, and mixed reality combined with technologies such as IoT makes it possible to create a spatial web. This helps maintain real-life scale and experience on the web. A good example is the application of VR technology in e-commerce.

Openness and Accessibility

Web 3.0 is built on open standards and protocols, which make it more accessible to both developers and users. This promotes innovation and collaboration across different sectors and communities.

The Impact of Web 3.0 and Challenges

Web 3.0 will significantly change how users interact with information online and transform different aspects of life, including commerce, health, and education, among others. For instance, decentralization gives users greater control over their personal data. This might help limit the collection of data without user consent or compensation.

With blockchain technology as a foundation of Web 3.0, the data becomes immutable, transparent, and hard to hack. This is because all transactions will use self-executing smart contracts.

Web 3.0 will usher in a new era of automation as intelligent systems and algorithms become increasingly integrated into online experiences. This will include more intelligent chatbots, personalized recommendations, sophisticated predictive analytics, and autonomous systems.

As a result, there will be an improved user experience. Users will have a more personalized and interactive experience online, with applications that can better understand their needs and preferences.

Despite the impressive positive impact, Web 3.0 is still in its early emerging stage and is not without challenges. As more significant work and effort are being put toward its actualization, several issues must be addressed. First, to facilitate specific user functions, additional layers must be built on top of the blockchain to ease its complex operations.

Secondly, decentralization introduces data governance and regulation concerns. With no central control of data, bad actors can take advantage to promote hate speech, misinformation and cybercrime.

Thirdly, this new iteration of the internet also requires implementing new technologies and using advanced devices.

Conclusion

The evolution of the internet is inevitable. Although more effort is still required to realize the full potential of Web 3.0, business leaders should be aware of new developments to ensure they can take advantage of opportunities presented by the spatial web and venture into new avenues to remain competitive.

Financial Tasks to Tackle in the Month of May

Financial Tasks to Tackle in the Month of MayNow that spring is here, it might be a great time to give your finances a fresh look. Here are a few key items to put on your May to-do list.

Say Bye-Bye to PMI

If you bought your home for less than 20 percent down, there’s a good chance you’ve been paying private mortgage insurance (aka PMI) on your loan, which is usually an extra 1 percent of what you paid. But here’s the good news: the rise in home prices over the past few years has meant one thing — a bump in your home equity. If your equity position is now at least 20 percent of the original purchase price, you might not have to keep paying your PMI. All you need to do is contact the company that services your mortgage and check things out. You might have to pay several hundred dollars for a new appraisal, but when you compare it to the thousands you could save in a year, it’s well worth it.

Take Advantage of 529 Day

That would be May 29, a day that has been reserved to remind parents of future college students to start saving in a tax-advantaged 529 savings account. Here’s how it works: whatever amount you put in it grows tax-free. And better still, you won’t pay any taxes on withdrawals used to pay for qualified college expenses. You can also use up to $10,000 tax-free for qualified K-12 expenses. How sweet is that?

Get Rid of Unnecessary Financial Documents

Do you have stacks of old tax returns, bill stubs, and old ATM and bank deposit receipts collecting dust inside your filing cabinet? If so, spring is a good time to go through and shred them. For instance, you can toss tax returns after 10 years and ATM and bank receipts after just one year. If you don’t have a shredder, check to see if and when your city holds free shredding days. And don’t forget about your computer, external drives, and mobile devices that also might be getting full. A great resource to securely delete your personal documents is Eraser, a free software program for PCs. Last but not least, clean out your phone. Take a few minutes to delete any unused apps. Digital spring cleaning is always a great idea.

Review Recurring Charges

Do you really need that magazine subscription? How about the channel you bought to watch a show but forgot to cancel? These are the kinds of small charges that can really add up — and cost you over time. Take a look at your credit card statements, give them a good once over, highlight the ones that can go, and then start the process of canceling. If you want to help streamline this process, check out free apps like Rocket Money and Trim. It’ll feel so good when you’re finished.

Budget for Home Improvement Projects

During May, especially Memorial Day, you can find big discounts on materials for all those projects around the house you want to dive into this summer. It’s best not to wait because prices can climb in June and July. If you’re thinking of bigger projects like putting in a deck or repairing your roof, you might need help. That’s why buying the materials in May could help you stretch your budget when it’s time to hire people to do the work. Even if you aren’t 100 percent ready to get started, you can still measure how much decking or roofing you’ll need and take advantage of holiday sales.

Whether you’re saving up, cleaning up or clearing out, May is a great month to take stock of your finances. Who knows? It might put a little spring in your step.

Sources

https://www.consumerreports.org/financial-planning/may-financial-to-do-list/

Estate Taxes vs. Inheritance Taxes: Understanding the Differences

Estate Taxes vs. Inheritance TaxesEstate and inheritance (“death”) taxes are levied on the transfer of property at death. The difference between an estate tax and an inheritance tax is based on who pays the bill. An estate tax is levied on the estate of the deceased, while an inheritance tax is levied on the heirs of the deceased. That’s the simple explanation. As for execution, there are far more nuances based on the monetary value of a bequest; the status of the beneficiary/(ies); and where you live when you pass away.

Federal Estate Tax

An estate tax applies to the value of the assets left behind by a decedent and is paid out from the proceeds of the estate before the rest of the assets are distributed to heirs. Estate wealth is usually comprised of cash, securities, and real estate.

In 2023, if an estate is valued at more than $12.92 million ($25.84 million for couples), the estate will owe a progressive tax rate levied on the value above that amount. For example, if an estate is valued at $15 million, it will pay estate taxes on the $2,080,000 above the exemption. The federal tax rate ranges from 18 percent to 40 percent, depending on the taxable value of the estate.

Generally, the estate tax applies to only the wealthiest 2 percent of Americans, and only 0.07 percent of estates end up paying the tax, according to the Tax Policy Center. Note that assets inherited by a spouse or charitable organizations are generally not subject to an estate tax.

Some states also levy an estate tax based on the location of the property. Presently, 12 states plus the District of Columbia levy an estate tax:

  • Connecticut
  • District of Columbia
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

Estate Tax Strategies

To minimize or eliminate estate taxes, the estate owner has several options. Among the more sophisticated are structuring an Irrevocable Life Insurance Trust, a Family Limited Partnership or funding a Qualified Personal Residence Trust. However, the easiest way to legally avoid estate taxes is to give assets away before you die. Estate owners can make tax-deductible contributions to charitable organizations or gift up to $17,000 in 2023 ($16,000 in 2022) a year, per person, to as many people as you want.

Inheritance Tax

An inheritance tax, on the other hand, is a state tax paid by the beneficiary (heir) of an estate. Not every state levies an inheritance tax, and the laws vary considerably by state. The tax is based on the relationship of the beneficiary to the decedent. For example, in some instances, a beneficiary who is a surviving spouse, parent, child or grandchild may be exempt from the tax, whereas a brother, sister, niece or nephew may be subject to an inheritance tax.

Presently, six states levy an inheritance tax (only Maryland levies both estate and inheritance taxes). Each state sets its own exclusion amount, ranging from $1 million to $9.1 million. Amounts above the state exclusion are then subject to a separate estate tax, which tends to range between 1 percent and 18 percent. The tax applies to decedents who lived in one of these states:

  • Iowa (phasing out tax by 2025)
  • Kentucky
  • Maryland
  • Nebraska
  • New Jersey
  • Pennsylvania

Inheritance Tax Strategies

Similar to estate tax strategies, an estate owner can minimize state inheritance taxes by transferring assets to a trust or family limited partnership or by gifting assets. Be aware that assets owned under a Roth IRA or Roth 401(k) – that has been open for at least five years – are not subject to any taxes since contributions were already taxed and earnings grow tax-free. You also might consider using a portion of your assets to purchase life insurance, naming your heirs as beneficiaries. Since life insurance proceeds are not taxable, this is a way to remove money from the estate to create a larger, tax-free inheritance.

As for current estate assets, one surefire way to legally avoid inheritance taxes is to move to a state that doesn’t levy them.

Defining and Understanding Reproduction Costs

What are Reproduction Costs, Reproduction Costs, Defining Reproduction CostsWhen it comes to businesses looking to mitigate risk, one concept that’s important to explore is reproduction costs. The first step is to distinguish between reproduction and replacement costs. Replacement cost refers to how much it would cost a company to replace an asset that will duplicate the performance of the beginning asset; however, it does not necessarily have to meet the same materials, specifications, etc. Reproduction cost refers to how much it would cost a company to reproduce the asset so that it’s constructed of the same materials, specifications, etc., based on current market prices.  

When looking to assess real estate accurately, the cost approach examines how much a builder would need to spend on the land and building outlays to replicate the original building and its functionality. This looks at what the current market conditions would assess the land for and the construction/development costs on said land. From there, it removes depreciation to obtain its property value.

It’s expressed as follows:

Property Value = Replacement / Reproduction Cost – Depreciation + Land Value

The first step is to determine the structure’s reproduction and replacement costs. The Replacement Method looks at expenses that would be incurred to build a structure featuring the same usefulness as the building under review, constructed with present-day raw materials, blueprints, specifications, etc. The Reproduction Method looks at how much it would cost to build an exact replica of the original structure, employing analogous inputs and building standards. It also requires adhering to historically accurate conventions and blueprints. Naturally, when comparing a historic property to a recent building, there would be a greater divergence between replacement and reproduction costs.

Depreciation of improvements for the next step must be estimated. This is defined as the difference between the value of renovations and the current contributing value of them, which is measured in three ways:

  • How much has the building physically deteriorated?
  • How much has the building has fallen out of favor with real estate purchasers over time?
  • How much value has the building lost due to factors beyond itself? Examples include deteriorating local economic conditions, recent and lasting environmental contamination, etc.

After calculating the three conditions in the aforementioned questions, the resulting figure is the accrued depreciation. This step entails looking at current property values to ascertain a competitive worth for the land. This can be referred to as the Estimated Assessed Value of Land to give the value a name.

From there, the accrued depreciation must be taken off the value of either the replacement cost or reproduction cost. It’s expressed as follows:

Replacement Cost or Reproduction Cost (either can be selected depending on the desired outcome) – Accrued Depreciation

The resulting figure is referred to as the Depreciated Cost of the Structure.

Once the Accrued Depreciation is accounted for, the land’s estimated assessed value must be added to the Depreciated Cost of the Structure figure. It is calculated as follows:

Completed Estimate of Real Estate = Depreciated Cost of the Structure + Estimated Assessed Value of Land

Contemplating the Cost Approach’s Drawbacks

One concern is that if there’s a problem finding the right lot, the parcel’s valuation might not reflect its true worth. Zoning or land-use restrictions can reduce the attractiveness of a parcel of land, thereby lowering its value. When it comes to calculating depreciation for older properties, age could skew the value estimate. For example, with construction materials for certain items may not be available anymore, making the calculation subject to interpretation.

Understanding how different cost assessments work allows business owners to make decisions that benefit their customers and their bottom line.

I Needed to Repay Part of My Compensation; Will I Get a Refund on My Taxes?

Repay Part of My Compensation, Refund on My Taxes?So, you filed and paid all your taxes on the money you earned in 2021. Now, the company you work for finds itself in trouble, and you are forced to pay back part of your compensation. The big question is, will the IRS refund you for the taxes you already paid related to this compensation? While this seems like a bizarre scenario at first glance, it is more common than you might think.

Reducing or holding back compensation that hasn’t been earned yet is easy. Simply pay an executive or employee less, or don’t grant the stock option or bonus. Just don’t pay it.

Things get tricky in a situation where compensation has already been paid and needs to be reversed. This is much, much tougher. If you are still within the same calendar year, then logistically, it’s easier to make an adjustment; but unwinding compensation already awarded is never simple or easy.

Requiring an employee to pay back compensation is not as uncommon as many think. The situation can be as simple as receiving a signing bonus with the stipulation to stay at least a year. IRS treatment of repaid compensation depends on the details.

Details on Compensation Clawbacks

The answer to the core question can vary, with the legal context and timing being the biggest drivers. For example, both Dodd-Frank and the Consumer Protection Act grant regulatory authority to mandate clawbacks, even in cases where the taxpayer was unaware of any wrongdoing. The Sarbanes-Oxlet Act has its own set of clawback regulations. In cases such as this, there is the possibility, due to legal concerns, that a refund is not due to the taxpayer.

Generally, in cases of contractual issues, the IRS doesn’t allow a taxpayer to undo an economic event as if it never happened. The general exception to this rule is if you receive and give back the same compensation within the same calendar year. The problem, however, is that clawbacks usually come in later years after a tax return has been filed.

If you are still employed at the same company, they could simply agree to reduce your current year salary. If you are a former employee, things get tricker. You also have the possibility of amending a prior tax return in some cases. Unfortunately, many people find themselves in a situation where they need to claim a tax refund under Section 1341 of the tax code.

Section 1341 is based on the claim of right doctrine and attempts to put a taxpayer in the same position he or she would have been in had they never received the income. To qualify for and file under this provision, the taxpayer must have included money in income in the prior year because they had an unrestricted right to it at that time and then later learned they did not have an unrestricted right to it after all, therefore having to give it back.

Conclusion

The rules and regulations around the taxability of compensation required to be repaid is not simple. While the core issue of whether one is voluntary or mandatory, givebacks almost always create tax problems. If you ever find yourself in a situation where you have to return a material amount of compensation, no matter what the source, it’s best to reach out to your trusted tax adviser for help navigating the complexities.

How Blockchain Could Impact Accounting and Auditing

How Blockchain Could Impact Accounting and AuditingBlockchain has the promise to revolutionize the way businesses and their accountants keep track of their financial records. When it comes to audit evidence, blockchain may be able to give organizations more efficient ways to bring financial data into universal conformity; help businesses present relevant financial data in an open manner; and interpret and select data effectively. Blockchain is a digitally distributed ledger that captures transactions conducted among parties within a network. It’s a peer-to-peer, internet-based archive that records all transactions since its creation and maintains proof of these transactions.

Each participant is a node on the mutual database connected to the blockchain, with every user maintaining an identical copy of the ledger. Each entry is a transaction that represents an exchange of value between participants. Along with featuring near real-time transaction settlement, which speeds up payment completion between parties, properly designed blockchains create unchangeable transaction records. This can help auditors investigate transactions as they occur in real-time.

And as blockchain is adopted more and more, auditors will be able to obtain data from the blockchain; however, it’s important to view it all with a skeptical eye. Transactions may be fraudulent or prone to error. Viewers must be even more skeptical if the blockchain is controlled by an entity other than the entity being audited.

Using Bitcoin as an example, the transfer of assets is recorded on the blockchain. Accountants can use blockchain to look at transactions one by one. However, instead of focusing on bookkeeping tasks, for example, accountants’ roles are expected to evolve into higher-level tasks requiring more judgment. As blockchain adoption increases, responsibilities like bookkeeping and reconciliation will require less of an accountant’s time, permitting them to work on more analytical tasks like transaction classification and valuations.

Determining depreciation and the resulting salvage value of an asset when its useful life is exhausted is one example of a transaction that might need some investigating by an auditor.

The Internal Revenue Service mandates businesses judge a fair salvage value, but it’s just that – an estimate. Based on the asset’s usage and expected service time frame, the equipment could have scrap value contingent on metal content or technology that might become obsolete, rendering it of little to no value. Since it’s so subjective, this can impact a company’s accounting and resulting profitability and income tax obligations, requiring careful judgment.

If the salvage value is determined to be too high, it will reduce the depreciation for the business. If it’s too low, depreciation would be factored in too much, and the company’s net earnings will be less than expected. As part of determining the salvage value, businesses and those who audit a business’ financial statements need to exercise judgment when looking into transactions, whether it’s on the blockchain or another type of ledger.

As blockchain evolves, businesses that take advantage of this technology can leverage its efficiencies to reduce the need for rote work and focus on the substance of accurately reporting transactions and not the rudimentary movement of data between parties.