Category: Blog

Your Tax Return “Whose Responsibility Is It?” Reboot

6 min read

Your Tax Return “Whose Responsibility Is It?” RebootThis article is not for those of you who prepare your own tax returns. Let us face it, when you prepare your own return, you are responsible for what is or is not included on the forms. What if you have a CPA or other tax practitioner prepare your annual state and federal income tax returns? Who is responsible for the numbers on your Form 1040, then?

Who’s Responsible – You or your Tax Preparer 

Many people have the misconception that once you turn over your tax information to a preparer, all you must do is sign the result and mail it in (or electronically file it). Nothing can be farther from the truth. That is not to say the tax preparer has no responsibility for the numbers included in the return. In fact, in Internal Revenue Service Circular 230, the government specifically states that a practitioner must exercise due diligence in preparing a tax filing, including determining the veracity of oral or written client representations. This does not mean a tax preparer must verify everything you tell him, but he or she must be satisfied that the amounts included on a tax return make sense. 

The real problem in a case like this is not that additional tax was due, though that was bad enough. The real problem is that the understatement of taxes opens a taxpayer up to both penalties and interest. At a minimum, interest would be due because the IRS cannot, by law, forgive or abate interest. Add to that the potential for penalties on the late payment of income taxes, negligence, or filing of fraudulent returns – and it doesn’t take long for your tax bill to double.

Many times, taxpayers sign their returns and put them in the mail (snail or electronic) without reviewing the numbers. Either they trust the preparer implicitly (even if the numbers look wrong) or they are happy to have the tax return chore out of the way for another year. Whatever the reason, many taxpayers fail to double-check the preparer’s numbers.

Reviewing Your Return 

Wait a minute – did you notice the error in that last paragraph? The error is in characterizing amounts on a tax return as the “preparer’s numbers.” Sure, the calculations may come from your CPA’s computer, but those numbers had better be the amounts you provided to your tax accountant. Any good preparer will welcome a second or third set of eyes checking the numbers to make sure the amounts are correct. That is because he or she knows that the taxpayer is ultimately responsible for the amounts included in the return. The preparer makes sure they are in the right place on the return.

Without naming names, there have been many recent cases where taxpayers were held liable for understated taxes plus penalties and interest. Simply put, ignorance of the law, or the numbers, is not considered an excuse for filing false and misleading returns. 

An Army of New Agents?

Now that you know your role and responsibility in filing your tax return, the thought of the IRA hiring 87,000 new agents is keeping you up at night. This figure, which is being bandied about in the news, comes from the projected hiring of new agents from the almost $80 billion in new IRS funding over the next decade as part of the Inflation Reduction Act passed this past summer. 

The truth is, yes, many new IRS agents will be hired. No, there will not be anywhere near 87,000 of them. The 87,000 figure comes from a Department of Treasury report from May 2021, which estimated the number of new hires.

However, many of the 87,000 figures include new hires to replace retiring agents over the next decade. Replacement hires are likely to be the bulk of the new hires, with more than 50% of the agency’s current employees becoming eligible for retirement over the next decade. Furthermore, the funds will not just be for IRS agents but also for IT technicians, taxpayer services support staff, and experienced auditors.

All-in-all, the IRS will be beefing up the number of employees with the new funding; but it will net somewhere between 20,000 – 30,000 new employees of all types. This would bring staffing levels back to where they were a little over a decade ago. 

How Many Agents Will Really Be Armed

Related to the rumor of 87,000 new agents is that they will be armed and coming to bust down the doors of millions of Americans as part of stepped-up tax enforcement. Again, reality and news headlines are not lining up.

Collecting taxes can be a dangerous business. It is not just scouring checkbooks and bank records when it comes to tackling drug dealers, terrorists, and money launderers. In addition to forensic accounting, IRS Criminal Investigation Special Agents also work undercover inside criminal organizations.

In fact, they have been doing this for over one hundred years since the Criminal Investigation division (previously called the Intelligence Unit) was created in 1919 with just six agents. Think of taking down Mobsters like Al Capone based on tax fraud in the 1930s.

So, to put it in perspective, the IRS Criminal Investigation (CI) unit only has about 3,000 employees, of which about 2,100 are special agents. Only special agent carries guns.

Even with the new funding previously mentioned, the CI unit is looking to hire around 300-350 new Special Agents in 2022, with about half of that replacing retirees and those who leave the department. In the end, the IRS is only going to gain about 150 or so new gun-wielding agents. 

What’s Your Best Defense 

Now that you know you will not have an army of armed IRS agents busting down your door, what is your best defense against getting an unexpected bill from the IRS? First, make sure you are dealing with a reputable preparer. Ask for a copy of the practitioner’s license to do business as a tax preparer. Ask your friends for references of reputable CPAs or other tax practitioners.

Finally, review your tax return and ask questions about anything that you do not understand. Reputable preparers take pride in their work and are honest enough to admit when a mistake has been made. Do not be afraid to ask questions for fear of offending your preparer.

Conclusion 

Returning to our original question, just who is responsible for your tax return? The simple answer is you are. Good tax preparers realize this and make every attempt to provide you with an accurate return because protecting you is their job. We congratulate you on your wisdom if you have just such a professional. If you are looking for someone who fits that bill, please consider giving us a call.

Improving Federal Hiring Processes, Foreign Election Influence and Natural Disaster Protections

4 min read

S 3510, S 4254, HR 6967, S 5002, HR 8987, S3232, HR 5441, S 4524Disaster Resiliency Planning Act (S 3510) – Introduced by Sen. Gary Peters (D-MI) on Jan. 13,this Act details guidelines for federal agencies to incorporate natural disaster resilience with regard to real property asset management and investment decisions. The bill passed in the Senate on June 22, in the House on Nov. 14 and is awaiting signature by President Biden.

Disclosing Foreign Influence in Lobbying Act (S 4254) – This Act is designed to combat attempts of foreign adversaries, such as Russia and China, from trying to influence U.S. political elections. Specifically, the bill closes a loophole used to conceal lobbying efforts frequently used by the Chinese Communist Party (CCP).The bill was introduced by Sen. Chuck Grassley (R-IA) on May 18 and passed in the Senate on Sept. 29. It is currently under consideration in the House.

Chance to Compete Act of 2022 (HR 6967) – This legislation was introduced by Rep. Jody Hice (R-GA) on Jan. 25, 2021. The bipartisan bill attempts to improve the federal civil service hiring process by waiving education degree requirements. The focus would shift to an evaluation of skills, aptitude and experience. Furthermore, the bill would enable agencies to share applicant assessments and permit interviewing by subject matter experts. The bill passed in the House on Sept. 29 and is now being reviewed in the Senate.

A bill to allow for alternatives to animal testing for purposes of drug and biological product applications (S 5002) – This bipartisan bill was introduced by Sen. Rand Paul (R-KY) on Sept. 29, 2021, and was passed in the Senate on the same day. The legislation requires that certain alternatives be utilized in animal testing in order to receive an exemption from an investigation of the safety and effectiveness of a drug. Alternatives may include cell-based assays and computer models. The Act also waives the requirement of using animal studies to get a license for a biological product that is interchangeable with another biological product. The bill’s fate currently lies in the House.

Fairness for 9/11 Families Act (HR 8987) – Introduced by Rep. Jerry Nadler (D-NY) on Sept. 26, this bipartisan bill authorizes funding for catch-up payments from the United States Victims of State Sponsored Terrorism Fund. The Act passed in the House on Sept. 30 and is currently being considered in the Senate.

Stop Tip-Overs of Unstable, Risky Dressers on Youth Act (STURDY) Act (S3232) – This legislation directs the Consumer Product Safety Commission to revise the safety standards for freestanding dressers, bureaus and chests of drawers. The new manufacturing standards would require testing related to tip-overs for all products sold in the U.S. market. The bill was introduced by Sen. Robert Casey (D-PA) on Nov.18, 2021. It was passed in the Senate on Sept. 29 and is presently under consideration in the House.

Prevent All Soring Tactics (PAST) Act of 2021 (HR 5441) – Introduced on Sept. 30, 2021, by Rep. Steven Cohen (D-TN), this bill addresses soring horses. Soring is the practice of making adjustments to horses’ limbs in order to produce a higher gait for showing at horse shows, exhibitions, sales and auctions. These alterations can cause pain, distress, inflammation or lameness. Specifically, the bill seeks to expand soring regulation and enforcement by establishing a new system for soring inspections and increasing penalties for violations. The bill passed in the House on Nov. 14 and currently lies with the Senate.

Speak Out Act (S 4524) – Introduced on July 13 by Sen. Kristen Gillibrand (D-NY), this Act would waive enforcement of nondisclosure agreements (NDS) involving sexual assault or harassment disputes. The legislation would allow any survivor to share his or her story regardless of a previously signed NDA. The bill passed in the Senate on Sept. 29 and is in the House for consideration.

Defining and Calculating Amortization

3 min read

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

The 2022 Tax Guide

4 min read

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.

Inventory Valuation: How Companies Can Calculate It

3 min read

Inventory ValuationBy 2021, there were 20,000 warehouses in the United States and growing, according to the United States Bureau of Labor Statistics (BLS). With more warehouses expected to pop up in 2022 and beyond, one important consideration for businesses of all sizes is to keep track of their inventories. With different tracking and valuation methods, it’s important to understand how they work and what they can tell business owners.

Before inventory can be valued, it’s imperative to understand how it can be expressed mathematically:

Ending Inventory = Starting Inventory + Net Acquisitions – Cost of Goods Sold (COGS)

Now that inventory is better defined, understanding different approaches to inventory valuation is essential to keeping track. The first type of inventory valuation is referred to as FIFO or First In, First Out. This means that businesses sell their earliest produced inventory first and new inventory last.

Assume a company produces 500 widgets on day 1, costing $2 per widget. The same company then produces 500 widgets on day 2, costing $2.50 per widget. This method says that if 500 widgets are sold over the next week, the cost of goods sold (COGS), derived from the Income Statement, is $2 per widget because that’s how much the first 500 widgets cost to produce for inventory. The remaining widgets, 500 widgets at a cost of $2.50 per unit, would be accounted for under the ending inventory on the balance sheet.

One consideration, especially in an inflationary environment, for remaining inventory on the balance sheet is that a business might see a higher tax obligation. This is likely to occur because of higher net income due to a lower cost basis from the older inventory when assessing the COGS. Newer, more expensive inventory will naturally lead to a lower tax basis, especially if inflation falls and the retail cost is mitigated from decreased demand.

The next option is referred to as LIFO – or Last In, First Out. This means that businesses sell what they’ve produced first, then move on to the older inventory. If any inventory is left at the end of the accounting time-frame, it’s accounted for accordingly. Assuming the same 500 widgets were sold in the particular accounting period, the time-frame’s COGS would be $2.50 per widget, with the 500 widgets left over in inventory valued at the $2 per widget cost.  

One important caveat to this type of valuation is with regard to inventory that’s perishable or becomes obsolete quickly (cell phones, televisions, etc.). It is not an effective method because the product will either spoil or become worth next to nothing due to highly competitive industries. For this approach, using the most recently produced goods first would lend their COGS basis to be higher. In one respect, the higher COGS basis can lower profits, but can also offset taxes due to the same effect. The third type of inventory valuation is referred to as Average Cost. This method is a way to blend LIFO and FIFO, which takes the average of inventory across all production and storage timelines. This approach averages costs in proportion to the amount of widgets produced in each run, then calculates the mean cost to determine the ending inventory and COGS figures.

[(500 x $2) + (500 x $2.50)]/1,000 = ($1,000 + $1,250)/1,000 = $2,250/1,000 = $2.25

Therefore, the average cost for inventory using this method would be $2.25 per widget.

With different types of inventory valuation explained, there are considerations that businesses should be mindful for each approach. This can make a difference to those running the company and for potential investors and lenders contemplating investing in or loaning the company money.

Quantum Computing Uses That Solve Business Problems

4 min read

Quantum Computing for businessEarly technology adopters are more likely to gain better business results, including higher revenue growth and market position. With businesses facing complex problems every day, it is no doubt that they are always watching out for the next big tech that offers a better solution.

Although still in its infancy stages, quantum computing is a technology whose commercial use will disrupt the business environment.

What is Quantum Computing?

Quantum computing is a technology that focuses on manipulating and controlling different laws of physics. This non-classical technology uses quantum mechanical concepts like superposition and quantum entanglement.

The idea of quantum computing is not new and has come a long way. The first algorithm of large integer factorization for quantum computing was introduced in 1994. This algorithm intended to reduce the time it would take classical computers to find the prime factors of large numbers. It’s worth noting that the majority of the current infrastructure for encryption and information security is built on prime factorization.

Since the first algorithm was developed, more technological advances have been reported, and the field is continuously receiving funding. According to the McKinsey & Company Quantum Technology Monitor, funding from private and public sectors for this new technology is skyrocketing worldwide.

How it Works

Unlike classical computing, whose information is encoded by bits, in quantum computing a qubit is the basic unit of quantum information. Qubit allows all combinations of information to exist simultaneously so that quantum computers can solve problems exponentially faster and with less energy consumption than classical computers.

In 2019, Google, in partnership with NASA, achieved quantum supremacy by demonstrating that quantum computers can compute in seconds what would take advanced supercomputers thousands of years.

Advanced development in this technology has also seen the introduction of quantum-computing cloud infrastructure through Quantum as a Service (QaaS). QaaS provides access to quantum computing platforms over the internet to customers. Major technology companies, such as Amazon, Alibaba, IBM, Google, and Microsoft, have already launched commercial cloud services for quantum computing.

With the continued increase in the quantum computing ecosystem and emerging business use cases, business leaders must stay aware and prepare to adopt the new technology.

Business Use Cases for Quantum Computing

1. Quick Data Analytics

Today more than ever, businesses are faced with big data and a large quantity of information requiring analysis and storage. Since classical computers are built to solve one task at a time, it takes longer to solve these complex problems.

However, quantum technology has the potential to turn complex computations into simple calculations that are solved in less time.

2. Optimize Investment Strategies

Optimization is all about finding the most ideal solution in a situation. When many options are available, it takes a classical computer a long time to find a solution. Therefore, classical computers use shortcuts, and the final solution is partly optimal. But, with quantum computing, there will be better optimization.

3. Better Forecast and Prediction

Businesses rely on forecasts and predictions generated after analyzing complex and large data sets. Quantum computing is built to process huge amounts of data quickly and more accurately. As a result, better forecasts and predictions will enable better decision-making.

4. Solve Problems With Financial Services

There are various computationally intensive jobs in finance that could be facilitated by quantum computing, such as credit-risk management, financial crime reduction, and trading strategy optimization. These tasks will greatly benefit from quantum algorithms that increase the speed of financial calculations.

5. Improve Data Security

Quantum computers are built to break encryptions that ordinary computers cannot. This might become a problem if hackers were to acquire encrypted data and store it until large-scale quantum computers are operational. To handle this problem, postquantum cryptography, a type of cyber security that can be used by conventional computers, is currently being developed. Therefore, a switch to quantum-resistant cryptography will prevent the possibility of data being exposed. At the same time, it will ensure better protection of digital assets.

Final Thoughts

Quantum computers will not replace classical computers; however, the two will form a hybrid solution whereby each task will be assigned to the most suitable machine – either quantum or classical.

Achieving the aforementioned benefits will require businesses to have teams of experts who are knowledgeable about the implications of quantum computing and who can recognize the company’s potential future needs, opportunities, and vulnerabilities.

With signs of commercial quantum computing becoming a reality, it’s not too early for business leaders to consider how it will encourage digital investment, reshape industries and ignite innovation. Therefore, having a thorough understanding of quantum applications is essential for positioning a business to gain a competitive edge.

Saving Animals, Enhancing Government Efficiency, and Supporting Global Food Security

4 min read

Saving Animals, Enhancing Government Efficiency, and Supporting Global Food SecurityPlanning for Animal Wellness Act /PAW Act (S 4205) – Introduced by Sen. Gary Peters (D-MI) on May 12, this act instructs the Federal Emergency Management Agency (FEMA) to compile best practices and federal guidance for handling household pets, service and assistance animals and captive animals during emergencies and disasters. Initiatives include preparedness (e.g., sheltering and evacuation planning), response and recovery.The bill passed in the Senate on Aug. 6, in the House on Sept. 14 and was signed into law on Oct. 17 by President Biden.

Bulb Replacement Improving Government with High-Efficiency Technology Act/BRIGHT Act (S 442) – Presently, public buildings managed by the General Services Administration (GSA) must be equipped with energy-efficient lightbulbs and fixtures. This new bill expands requirements to ensure buildings are equipped with the most cost-effective and energy-efficient lighting systems available. Procurement must take into consideration factors such as motion sensors, fixture distribution and other elements. The act was introduced by Sen. Gary Peters (D-MI) on Feb. 25, 2021. It passed in the Senate on March 30, the House on Sept. 14 and was enacted into law on Sept. 17.

FTC Collaboration Act of 2021 (HR 1766) – Introduced by Rep. Tom O’Halleran (D-AZ) on March 10, 2021, this bill authorizes the Federal Trade Commission (FTC) to work with state attorneys general to evaluate procedures, such as accountability mechanisms, to better facilitate efforts to prevent and detect fraud and scams. FTC proposals must provide the opportunity for public comment, then submit legislative recommendations based on the results of the study. This bill passed in the House on April 14, 2021, and in the Senate on Sept. 29, 2022. It was signed into law on Oct. 10.

Expedited Delivery of Airport Infrastructure Act of 2021 (HR 468) – This legislation was introduced by Rep. Sam Graves (R-MO) on Jan. 25, 2021, to amend Title 49 of the United States Code. New provisions allow for incentive payments to expedite certain federally financed airport development projects, subject to an allowable project cost standard. The bill passed in the House on June 15, 2021, the Senate on Sept. 27, 2022, and was signed into law on Oct. 10.

Supporting Families of the Fallen Act (S2794) – This legislation impacts service members (or former members) covered by the Servicemembers’ Group Life Insurance program and the Veterans’ Group Life Insurance program. Specifically, it increases the maximum life insurance coverage amount from $400,000 to $500,000. The bill was introduced by Sen. Tommy Tuberville (R-AL) on Sept. 22, 2021. It was passed in the Senate on March 23, 2022, and in the House on Sept. 29. It was signed into law by the president on Sept. 17.

Global Malnutrition Prevention and Treatment Act of 2021 (HR 4693) – Introduced on July 26, 2021, by Rep. Michael McCaul (R-TX), this bipartisan bill directs the U.S. Agency for International Development (USAID) to develop initiatives designed to prevent and treat malnutrition globally. The USAID is charged with choosing recipient countries based on specified malnutrition-related indicators. These initiatives andcountry selections must be made within five years, and the provisions are scheduled to terminate seven years after the bill’s enactment. The bill passed in the House with a 90 percent vote on April 27, 2022, in the Senate on Sept. 20, 2022, and was signed into law on Oct. 19.

Global Food Security Reauthorization Act of 2022 (HR 8446) – This act reauthorizes funding to support the government Global Food Security Strategy and the Emergency Food Strategy programs through fiscal year 2028. The first program is designed to promote nutrition and food security, with a newly enhanced focus on improving efficiency and reliability in agriculture production. The latter program provides market-based assistance throughout the world. The bill was introduced by Rep. Betty McCollum (D-MN) on July 20. With 78 percent of the vote, it was passed in the House on Sept. 29 and is currently under consideration in the Senate.

Auditing: What it is & Why It’s Done

4 min read

What is AuditingThe Importance of Auditing

Auditing typically refers to an objective review of a company’s financial statements, which consists of the cash flow statement, the income statement and the balance sheet. It analyzes the level of accuracy that the business has characterized its financial records. The process looks at how a business documents investing, financing and operating ventures.

Depending on the type of audit and what it aims to accomplish, it can be conducted by internal employees or independent, third-party examiners like a Certified Public Accountant (CPA) firm or a government agency such as the Internal Revenue Service. When it comes to the United States, the Generally Accepted Accounting Principles (GAAP) is what auditors look to when analyzing financial statement preparation. External audits are guided by the American Institute of Certified Public Accountants’ (AICPA) Auditing Standards Board (ASB). The AICPA requires that the generally accepted auditing standards (GAAS) are followed by external auditors to ensure proper protocol is followed.

When it comes to regulations, the Sarbanes-Oxley Act of 2002 requires publicly traded companies to have their internal controls’ impacts reviewed. It also states that companies that do not implement and enforce their internal controls may be subject to criminal charges.

Defining Internal Controls

These can be thought of as how businesses can manage operations by regulating permissions, documentation, congruency, protection/safety and partitioning of responsibilities for business processes. These are broken into preventative and detective activities.

Sometimes referred to as protective activities, responsibilities are compartmentalized and distributed among different individuals to dissuade mistakes or deceit from occurring.

It also integrates highly detailed written procedures and validation procedures for further cautionary measures. It’s meant to verify that no sole person is able to approve, document or be responsible for monetary transactions and final products. Permitting invoices and validation of expenses are examples of internal controls. Only permitting appropriate access to the fewest employees necessary and the fewest required business equipment is one way to implement this type of internal control.

Detective Controls Defined

These are redundant systems that are put in place to intercept issues that might have fallen through the initial round of quality control measures. Looking to reconciliation procedures, which matches data in question against known accurate data sets, it’s used to fix discrepancies.

Internal Audits

This type of audit is usually conducted by the business’ employees, primarily performed as a way to evaluate internal operations and internal controls. It looks to identify any deficiencies or weaknesses in the business’ operations, often occurring before an external auditor reviews its financial statements. It’s also meant to review and identify any legal or regulatory compliance issues.

External Audits

This type of audit occurs when an independent auditor, such as a third-party CPA firm, assesses a business’ internal controls and financial statements. It is performed to provide an objective opinion that an audit conducted by the business itself cannot. With a “clean opinion” or “unqualified opinion” provided by the independent auditor, businesses can provide those looking at financial statements confidence that such financial statements are reliable. It enables the outside entity to focus on the financials, the business’ internal controls, etc. by providing a conflict-of-interest-free perspective.

Government Audits

This type of audit is done to ensure that businesses have accurately reported their taxable income to respective government agencies. This can include federal agencies such as the Internal Revenue Service (IRS) and Canada Revenue Agency (CRA), which are the U.S. and Canada’s respective tax collection agencies.

When an IRS audit has concluded its review, there may be a few different preliminary results and resulting paths. The tax return may see no modification. There may be a modification the taxpayer agrees to, which could result in additional money being owed. The third result occurs when the filer doesn’t agree with the change, and it is worked out through an appeal process.

Whether it’s an investor for a publicly traded company or a business looking for creditors for help with money, materials, etc., having audited financial statements provides confidence that they’ll see a return on their investment or a high likelihood of their debts being satisfied in the future.

Sources

https://www.congress.gov/bill/107th-congress/house-bill/3763

 

 

Tax Planning Guide for Disaster Area Victims

4 min read

Tax Planning Guide for Disaster Area VictimsThe recent hurricane Ian impacted much of the southeast United States. As a result, it is good to know the general tax rules related to disaster victims. Below, we look at several tax topics for disaster area victims.

1. Tax Returns and Filings

Q: I am a disaster area victim and needed to move from my home. I might not be back for a long time or even at all. Which address should I use on my tax return?

A: A taxpayer should always use their current address in filing a tax return. In the situation where you move after filing your return, you need to update your address with the IRS. You can do this either by filing form 8822 or calling the IRS Disaster Hotline at 866-562-5227.

Q: I filed an extension for my form 1040, giving me until Oct. 15 to file. Are there any further extensions available?

A: Taxpayers who already filed for an extension until Oct. 15 and live in a federally declared disaster area of the recent hurricanes receive an automatic extension due date of Dec. 31.

2. Payments

Q: I have a balance due on my 2021 tax return and am currently accruing interest on it. Is there any relief for disaster victims on interest charges?

A: No, the IRS is not giving any forbearance or cancellation of interest on tax balance liabilities. The IRS is, however, willing to waive late payment penalties when the taxpayer can prove the reason they are late is caused by issues related to the disaster.

3. Property and Casualty Loss

Q: During a recent disaster, we lost electricity, and all the food in my refrigerator and freezers spoiled, and I had to throw it away. My homeowners’ insurance reimbursed me, and it was for more than the food cost me. Do I have to report any income on the amount over my food costs?

A: No. The tax code makes a distinction between scheduled property and general reimbursements. For unscheduled property (general reimbursements), the taxpayer does not need to recognize income for reimbursements on personal property, even if it was more than the cost of the lost property.

Q: I need to prove the reasonable value (FMV) of my home. Am I allowed to use property tax assessments to substantiate the FMV of my home?

A: No, the only way a taxpayer can establish the FMV of a property is either with an appraisal by a credentialed appraiser or using the cost of repairs method.

4. Sale of Home

Q: My primary residence was destroyed, and the cause was deemed to be a federally declared disaster. After clearing the lot, I sold the land alone for a gain. Do I have to pay taxes on the gain or is there an exclusion since it is where my primary residence used to be?

A: Selling a vacant lot does not qualify for the exemption on gains from primary residences. The exception to this rule is if the land previously had the taxpayer’s main residence on it. In this case, if the taxpayer would have qualified for the main residence exemption before the disaster, the gain on the sale of the vacant land would be exempt here as well.

5. Expenses

Q: I worked in a federally declared disaster area and had to move for my job at my own expense. Can I deduct my travel and related expenses?

A: The answer depends on whether or not the move is expected to last for more than one year. If you expect the move to be temporary, defined as less than one year, then there is no change in your tax home. In this case, you can deduct travel and related expenses to get you both to and back from your temporary work assignment. If the move is long-term, defined as more than one year, then the expenses are not deductible, regardless of whether your employer reimbursed you.

Dissecting the Revenue Recognition Principle

4 min read

What is Revenue Recognition PrincipleSome businesses, especially publicly traded ones, may choose accrual accounting to reduce volatility in earnings, while start-ups or small businesses may choose to go with a cash basis accounting option. A poll conducted by the Journal of Accountancy on Topic 606 discovered that one in five respondents reported that one of the most common audit perils for their clients was the risk of evaluating “material misstatement” when it comes to recognizing revenue under Topic 606.

According to the Association of International Certified Professional Accountants (AICPA) and the Financial Accounting Standards Board’s (FASB) Accounting Standards Topic 606, proper revenue recognition involves following five steps. While each step requires exercising judgment, the following is a brief overview.

Step 1

When all the following criteria is satisfied in the first step to establish a contract with their client, an organization should follow the revenue recognition standard mandates when an agreement falls within such criteria.  

All contract parties have agreed to the terms of the contract and are engaged in fulfilling their agreed-to commitments. All party’s rights are easily identifiable when it comes to goods/services to be exchanged. Payment is clearly described for the goods/services to be delivered. The recipient’s cash flows are expected to change based upon the contract’s deliverables. The organization that provides the product or service should have “a reasonable expectation” of receiving consideration from the customer and they have a reasonable expectation the customer is able and willing to provide such payment.

Step 2

The second step is to determine what each party of the contract must fulfill to satisfy their respective contractual obligations. This is what businesses pledge to customers and clients while delivering their unique product or service. This step is where each performance obligation should be identified as unique. If each performance obligation does not qualify as unique, based upon this standard, it must be packaged with other goods or services until it meets such criteria.

The FASB AICPA ASC 606 standards explains if both of the following apply, a good or service is considered “distinct:”

If the receiving party can receive a useful product or professional assistance by itself or in conjunction with related materials the client had pre-existing to the contract in question;

AND

The business’ contractual pledge to deliver the service or finished materials is individually distinguishable from additional pledges from the contract.

Step 3

The third step is to calculate the financial terms of the deal. This entails how much money the business anticipates receiving in return for delivering the goods or services, minus portions related to that of external organizations. This can include taxes businesses must collect for local, state or federal government agencies. Other examples of this include “variable consideration” – or how much consideration a company will receive, bearing in mind financial adjustments in conjunction with delivering their product or service. Businesses should estimate the impact of such variable costs and what they might be allowed while fulfilling their contractual obligations. Examples can include financial enticements, fines, reimbursements, price cuts, etc.

Step 4

The fourth step is to figure out how much it will cost parties to fulfill their responsibilities spelled out in the legal agreement. When attempting to recognize revenue according to Topic 606, if there’s multiple distinct responsibilities, the business is required to break down the price based on “each separate performance obligation in an amount” that is commensurate to an amount the business is expected to receive for each “separate performance obligation.” This means looking at each piece of the contract as a unique “performance obligation.”

When the transaction is subject to a discount or “variable consideration,” businesses may or may not assign the price concession or “variable consideration” to one or more performance obligations versus across the agreement’s full list of “performance obligations.” If the business offers markdowns of the goods or services, in addition to adjusting the “transaction prices,” there should be proportional and estimated calculations when it comes to recognizing revenue.

Step 5

The fifth step says that once a business has satisfied its “performance obligation” set out in the contract, revenue can be recognized. This occurs when the customer receives their contracted goods or services, which is when they have complete command of the property. This can be illustrated when the customer can increase their cash flow, use it as an asset to obtain financing, leverage pre-existing equipment or service delivery, etc.

When it comes to recognizing revenue under Topic 606, this is just the beginning of how businesses can analyze and interpret the many nuances of this accounting topic.