Author: Service2Client

How to Defer, Avoid Paying Capital Gains Tax on Stock Sales

5 min read

How to Defer, Avoid Paying Capital Gains Tax on Stock SalesThe markets are hitting all-time highs, so if you are thinking of selling stocks now or in the near future, there is a good chance that you will have capital gains on the sale. If you’ve held the stocks for more than a year, then they will qualify for the more favorable long-term capital gains tax (instead of being taxed at ordinary income rates for short-term sales). But the total tax due can still be enough to warrant some tax planning. Luckily, the tax laws provide for several ways to defer or even completely avoid paying taxes on your securities sales.

1. Using Tax Losses

Utilizing losses is the least attractive of all the options in this article since you obviously had to lose money on one security in order to avoid paying taxes on another. The real play here is what is often referred to as tax-loss harvesting. This is where you purposely sell shares that are at a loss position in order to offset the gains on profitable sales and then redeploy this capital somewhere else. You’ll need to carefully weigh where to put the money from the sale of the shares sold at a loss as you can’t just buy the same stocks back. This is considered a “wash sale” and invalidates the strategy.

2. The 10 Percent to 15 Percent Tax Bracket

For taxpayers in either the 10 percent or 12 percent income tax brackets, their long-term capital gains rate is 0 percent. The income caps for qualifying for the 12 percent income tax rate is $39,375 for single filers and $78,750 for joint filers in 2019 ($40,000 and $80,000, respectively in 2020). Also, keep in mind that the stock sales themselves add to this limit – so calculate carefully.

Aside from selling appreciated securities yourself, another way to take advantage of the 0 percent bracket is to gift the stock to someone else instead of selling the securities and then giving the cash. Beware, however, as trying to do this with your kids can disqualify the 0 percent treatment because the kiddie tax is triggered on gifted stock sold to children younger than 19 or under 24 if a full-time student.

3. Donate

Donating appreciated securities is where we start to get into the more beneficial strategies. This technique only makes sense if you were already planning to make charitable contributions. Say for example you are planning to donate $10,000 to an organization and are in the 25 percent tax bracket. In order to write a donation check for $10,000, you would have had to earn $13,333 in income to sell the same amount of stock in order to have $10,000 left after taxes to make a cash donation in that amount.

If you donate appreciated stock instead, you only need to donate securities valued at $10,000 and you get to deduct $10,000 as a charitable deduction. That avoids the capital gains tax completely. Plus, it generates for you a bigger tax deduction for the full market value of donated shares held more than one year – and it results in a larger donation.

4. Qualified Opportunity Zones

This is the newest and most complicated (as well as controversial) way to defer or avoid capital gains taxes. Opportunity Zones were created via the Tax Cuts and Jobs Act to encourage investment in low-income and distressed communities. Qualified Opportunity Zones can defer or eliminate capital gains tax by utilizing three mechanisms through Opportunity Funds – the investment vehicle that invests in Opportunity Zones.

First, they offer a temporary deferral of taxes on previously earned capital gains if investors place existing assets into Opportunity Funds. These capital gains defer taxation until the end of 2026 or whenever the asset is disposed of – whichever is first.

Second, capital gains placed in Opportunity Funds for a minimum of five years receive a step-up in basis of 10 percent – and if held for at least seven years, 15 percent.

Third, they offer an opportunity to permanently avoid taxation on new capital gains. If the opportunity fund is held for at least 10 years, the investor will pay no tax on capital gains earned through the Opportunity Fund.

Again, the caveat here is that the details of Opportunity Zone investments can be extremely complicated, so it’s best not to attempt this one on your own. Consult with your tax advisor.

5. Die with Appreciated Stock

Unfortunately, while probably the least popular method for readers, this is certainly the most effective. When a person passes away, the cost basis of their securities receives a step-up in basis to the fair market value to the date of their death. As an example, if you purchased Amazon stock for $50 per share and when you pass away it is worth $1,700 per share, your heir’s basis in the inherited stock is $1,700. This means if they sell it at $1,700, they pay no tax at all.

Conclusion

None of the above methods are loopholes or tax dodges; they are all completely legitimate. However, your ability to take advantage of these techniques will depend on your income level, personal goals and even your age. As a result, it’s best to consult with your tax advisor to see what makes sense for your personal situation.

Gross Domestic Product: A Primer

4 min read

Gross Domestic Product: A Primer

The economic indicator known as Gross Domestic Product (GDP) represents the dollar value of all purchased goods and services over the course of one year. It is comprised of purchases from all private and public consumption, including for profit, nonprofit and government sectors.

There are four components that are added to calculate the GDP:

  • Consumer spending
  • Government spending
  • Investment spending (this includes business, inventory, residential construction and public investment),   Net exports, meaning the value of goods exported minus the value of goods imported

The government calculates and publishes the GDP rate on a quarterly basis and for the entire year.

What Affects GDP?

There are different ways GDP is measured. For example, nominal GDP refers to a straight calculation of raw data, while real GDP adjusts the calculation to include the impact of inflation.

When inflation increases, the GDP tends to rise; when prices drop, so does the GDP. Be aware that this adjustment can happen even when there is no change in the quantity of goods and services produced in the United States during that time frame.

A key component of the GDP calculation is net exports. This number rises when the country sells more goods and services to foreign countries than it buys from them. A trade surplus means the United States sells more than it purchases, which is a strong contributor to GDP. When the United States buys more foreign goods than it sells, this creates a trade deficit, which is a negative weight in the GDP calculation.

GDP also reflects demand. The dollar output of certain sectors and industries rises and falls based on the popularity of their products and services. For example, when a new product is well received, then those sales increase that sector’s contribution to the GDP. This is a helpful measure because it enables companies to make better research and development decisions based on recent success. The same is true when a new product, or even an upgrade to a new product, does not increase sales.

What Does GDP Indicate?

The GDP is the most common, broad-based measure used to monitor the country’s economic progress. When it is on the rise, the economy is considered to be growing. When the GDP rate drops – even if it remains in positive territory – the economy is viewed as contracting. If it continues to slip quarter after quarter, it is an indicator that the economy might be in trouble and the Federal Reserve or Congress could consider altering monetary (interest rates) or fiscal (taxes and government spending) policy to inject cash into the nation’s financial system.

Technically, economists define a recession as a prolonged period of economic decline, often precipitated by two consecutive quarters of negative GDP growth.

This economic yardstick also is used to indicate a country’s general standard of living. The better a country is able to produce the goods and services that its residents and businesses use, the more that capital is infused back into the country. Therefore, higher GDP levels indicate a more prosperous country and relatively higher standard of living among its residents.

The GDP doesn’t just gauge domestic economic health, it serves as a comparison measure to other countries. This is particularly important during periods of growth and decline, when the United States can track how well it is responding to global economic factors relative to other countries.

Current Trendline

According to the Bureau of Economic Analysis, first quarter real GDP closed at 3.1 percent. In the second quarter, real GDP fell to 2.0 percent. The advanced assessment for the third quarter of 2019 is 1.9 percent.

 

Furniture, Fixtures and Equipment – and Depreciation

4 min read

Furniture, Fixtures and Equipment - and DepreciationWhen it comes to determining depreciation for Furniture, Fixtures and Equipment (FF&E), there are many considerations that exist for accountants and business owners.

Defining Furniture, Fixtures and Equipment

FF&E refers to expenses for business items that are not affixed to the building where that business operates. Real-world examples of depreciable assets include chairs, desks, phones, tables, cabinets, etc., which are used to perform business-related tasks, directly or indirectly. These types of items are associated with long-term use, generally more than 12 months, according to the Internal Revenue Service.

Understanding How It Works

When it comes to accounting for the expense of the item, it can be depreciated equally and discreetly over its useful life. According to the IRS’ General Depreciation System (GDS), these office items, such as safes, desks, and files, are expected to have a seven-year life.

While there are different approaches to calculating depreciation, a common way to do so is through straight-line depreciation. This method is used by many organizations, including The Federal Reserve, and it works by starting with how much the item costs to acquire or its adjusted basis. From there, the item’s cost is reduced by the salvage value or the asset’s value after its useful life. The resulting figure is divided by the number of months of the asset’s useful life. Once the asset has exhausted this amount of time, it remains on the books as its salvage value until it’s sold or removed from service.

Using the straight-line method, a company might find the monthly depreciation charge for a truck purchase like this. The company purchases a new truck for $40,000; assuming a 60-month useful life allowable by the IRS and a 20 percent salvage value, the formula would be as follows:

  1. $40,000 – (20 percent x $40,000) / 60 months
  2. $40,000 – ($8,000) / 60 months
  3. $32,000 / 60 = $533.33 per month for monthly depreciation

Special Considerations

In addition to tangible property, some intangible property also can be depreciated under the right circumstances. Examples of the IRS cites of this primarily intellectual property include copyrights, patents, and software. Conditions for depreciation of this type of intangible property include that it must be owned by the business owner, used within the business or for profit-related activities, have a useful life, and can be used by the business for more than a year.

The IRS gives an example of an individual buying a patent for $5,100. Using the straight-line method, the IRS permits this type of non-section 197 intangible property to be depreciated under certain conditions. The owner then must reduce any salvage value from the non-section 197 intangible property’s adjusted basis and depreciate it over the patent’s useful life, prorating terms less than a year, if applicable.  

Eligible Intangible Property Example

Assume the individual bought a patent in May to be used starting June 1 of the same year. The patent was bought for $5,100, has a 17-year useful life and won’t have any salvage value.

The first year of depreciation must be prorated for six months since it will be used from June to December of the first year. Taking these circumstances and rules from the IRS, the first year’s depreciation available is $150. Each subsequent year, the remaining 16 will be $300.

While there are many intricacies for depreciation, understanding how it applies to each business’ operations will help give a fair assessment of an equipment’s value.

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Depreciation

Sources

https://www.irs.gov/pub/irs-pdf/p946.pdf

Hanging Flags, Awarding Geniuses, Supporting Hong Kong Protestors and Criminalizing Animal Cruelty

4 min read

Hanging Flags, Awarding Geniuses, Supporting Hong Kong Protestors and Criminalizing Animal CrueltyNational POW/MIA Flag Act (S 693) – This bill amended title 36 of the United States Code to require that the POW/MIA flag be displayed on all days that the flag of the United States is displayed on certain federal properties. Previously, the POW/MIA flag was displayed only on Armed Forces Day, Memorial Day, Flag Day, Independence Day, National POW/MIA Recognition Day and Veterans Day. The legislation was introduced by Sen. Elizbeth Warren (D-MA) on March 7. It was passed in the Senate on May 2, passed in the House on Oct. 22 and signed into law by the president on Nov. 7.

Hidden Figures Congressional Gold Medal Act (HR 1396) – This legislation awards Congressional Gold Medals to Katherine Johnson and Dr. Christine Darden, and posthumously to Dorothy Vaughan and Mary Jackson, as well as all of the women who contributed to the success of the National Aeronautics and Space Administration during the Space Race. The legislation was sponsored by Rep. Eddie Johnson (D-TX). It was introduced on Feb. 27, passed in the House on Sept. 19, in the Senate on Oct. 17 and then signed into law by the president on Nov. 8.

Rebuilding Small Businesses After Disasters Act (S 862) – Introduced on March 25 by Sen. John Kennedy (R-LA), this bill makes permanent the increased collateral requirements for major-disaster loans issued by the Small Business Administration. It passed the Senate on Aug. 1, the House on Nov. 20, and is currently awaiting signature by the president to enact into law.

Hong Kong Human Rights and Democracy Act of 2019 (S 1838) – In response to the millions of Hong Kong citizens who have protested and demonstrated for government reform since last June, this bill authorizes three actions. 1) Requires the State Department to recertify Hong Kong’s autonomous status each year in order to continue receiving special treatment by the United States; 2) mandates the U.S. government identify anyone involved in abductions or extraditions of Hong Kong protesters or citizens to mainland China, plus freezes any U.S.-based assets and denies them entry into the United States; and 3) clarifies under federal law that no one should be denied a visa to the United States on the basis of participating in Hong Kong protests. The bill was introduced on June 13 by Sen. Marco Rubio (R-FL) and passed both Houses of Congress in November. It is currently with the president, who may sign or veto the bill.

A bill to prohibit the commercial export of covered munitions items to the Hong Kong Police Force (S 2710) – This legislation prohibits the issuance of licenses to export certain munition items to the Hong Kong Police Force and the Hong Kong Auxiliary Police Force, such as tear gas, rubber bullets and handcuffs. The bill does allow for the president to make an exception upon certifying to Congress how such exports would be advantageous to U.S. national interests and foreign policy goals. This prohibition would expire one year after enactment. The bill was introduced on Oct. 24 by Sen. Jeff Merkley (D-OR) and passed in Congress on Nov. 20. It is currently awaiting signature by the president.

Preventing Animal Cruelty and Torture Act or the PACT Act (HR 724) – This bill expands criminal provisions with respect to animal crushing (torture by stepping on an animal). It subjects violators to criminal prosecution for intentionally crushing an animal, or knowingly creating or distributing an animal crush video using interstate commerce. Criminal penalties include a fine, a prison term of up to seven years, or both. The bill was introduced by Rep. Theodore Deutch (D-FL) on Jan. 23, passed the two Houses of Congress in October and November, and is currently awaiting to be signed into law.

What is Splinternet and Why You Should Care

4 min read

What is Splinternet and Why You Should CareEric Schmidt, former Google CEO, made a prediction in September 2018 that the internet will split in two – one part being led by China and the other by the United States. The reasoning behind this involves China’s active monitoring of all internet activities, as well as technological products and services from the country. Other reasons include a different leadership regime, controls and censorship.

Although it’s just speculation, the splinternet phenomenon has been around since the 1990s. Also known as cyber-balkanization, the concept is slowly taking root as governments seek to fence off their internet to create national internets.

How Realistic is Splinternet?

The United States has maintained dominance over the internet since its inception and going public. But in the modern digital landscape, rules and regulations are expected to curve the global internet into smaller networks. The idea is being driven by nationalism as well as concerns surrounding digital colonization and privacy issues.

China is one country known to be taking steps to compartmentalize the internet through its Great Firewall. Other countries that have taken steps to control domestic access to the internet include Russia and Iran. Europe is also taking steps toward reducing U.S. dominance by increasing regulations that require data localization. They have facilitates this with the 2018 introduction of General Data Protection Regulation (GDPR).

In the United States, there is a drive to increase internet fragmentation to reduce the domination of large companies. This is because of the need to increase personal data protection and reduce data control by large companies. With the world becoming more global, we continue to see cases of large companies like Facebook or Apple having more influence as well as centralized power.

Though a small fraction of the internet interactions, this provides a good example of the splintering. With such fragmentation of the internet increasing, it’s bound to have an effect on economic interests.

How a Split Internet Would Affect Businesses

Data has become a critical resource, from influencing purchasing decisions, behavior dynamics, health and other aspects. But with the changing internet landscape, businesses could be affected in one way or another. Businesses have had an easy time operating in a standardized web. But with the unity of the internet shattered, they would have to adjust their planning and metrics to fit into the new environment. For instance, due to China’s domestic internet control, it’s impossible for some companies in the United States to carry out business operations in China.

This situation presents a challenge for businesses – and especially those whose operations are purely internet based. Increased regulation means disruption of operations.

For small companies expanding to other countries, it would be difficult due to the overhead costs of compliance to various regional regulations. As a business, failing to comply with the laws of a different region would subject it to hefty fines.

Be Prepared

Whether this is going to be a reality or not, the fact is there are big changes happening on the internet. The days of an open internet are dwindling with different countries and companies erecting digital walls on the internet every other day.

Unless we have a new set of global rules that enhance openness and public interest, then businesses and consumers will have to navigate complex laws and regulations that will not only affect the economy, but also disrupt seamless communication.

Since data today plays a big role in the digital economy, businesses can’t afford to ignore the possibility of a splinternet. As a business owner, you need to stay steps ahead as it would be a challenge connecting with your customers when caught up in the changes.

Businesses need to know how to follow consumers to new environments – and this could mean a bigger budget is required for development and testing different markets. Given that technological changes happen gradually, it’s advisable to keep tabs on tech trends and adjust accordingly. 

Practicing Gratitude: A Look Back at 2019

4 min read

Practicing Gratitude: A Look Back at 2019It may be hard to believe, but the end of the year is upon us. During this time, many of us might reflect on the year and tally up the good and the bad, the pros and the cons of the past 12 months. In a society that focuses on success and getting ahead, probably the most common thing to do is zero in on what you didn’t accomplish, or what went wrong. But science tells us that if you’re smart, you’ll look back with gratitude. And the best news is: it’s good for our health.

Gratitude Changes Your Brain – For the Better

When you give thanks for positive things in your life and show appreciation, it literally changes the structure of your brain, according to UCLA’s Mindfulness Awareness Research Center. It keeps the gray matter functioning and causes synchronized activation in multiple brain regions, lighting up parts of the brain’s reward pathways and the hypothalamus. It’s kind of like an anti-depressant: it boosts neurotransmitter serotonin and causes the brain stem to produce dopamine, a chemical that mediates pleasure in the brain. In short, thinking about what you’re grateful for is kind of like free therapy.

Make a List of Your Successes

So now that you know how gratitude works, make a list of what you’ve accomplished this year. It doesn’t have to be big and dramatic; for instance: you ate at home more often. You decided to recycle. You drank more water. However, if you got a promotion and raise, by all means write it down and feel good about it. Besides, there’s more that happens: when you’re feeling grateful, you generate higher levels of activity in your hypothalamus, the area which controls a large array of essential body functions, like eating, drinking and sleeping. According to the National Institute of Health (NIH), this activity prompts you to exercise more, get better sleep and, best of all, decreases depression and bodily aches and pains. How’s that for some motivation to put pen to paper?

Keep a Journal for Next Year

As you can see, being grateful is beneficial, both mentally and physically. So why not keep a journal for the upcoming year? It doesn’t have to be fancy. Granted, a journal helps organize your thoughts and can be your go-to source should you start feeling down. But practicing gratitude can be as simple as jotting down your thoughts on a sticky note and posting it on your mirror. Another way to do this is to pick a gratitude buddy. When you think of something you’re thankful for, text or email a friend. Don’t worry about it sounding right, just do it! Chances are, it’ll not only make you feel better, it might brighten your friend’s day, too.

Just Look for Positive Things

According to Dr. Alex Korb in his book “Upward Spiral,” the simple act of seeking things to be grateful for has as much if not more benefit than the things you are actually grateful for. Korb says that the search “forces you to focus on the positive aspects of your life. This simple act increases serotonin production in the anterior cingulate cortex.” This area of the brain not only regulates blood pressure and heart rate, it’s also responsible for decision making and evaluation processes. Serotonin is good stuff: it’s known as the happy chemical. See how good this gratitude thing is?

So, in the coming year, if you start feeling blue and negative, here are some quick remedies:

  1. Look in the mirror and name five things you like about yourself.
  2. Write someone a thank you note.
  3. When something bad happens, think of something good that’s happened.
  4. Give someone a compliment. The act of giving is soul-nourishing: to give is to receive.

Here’s to looking back and feeling good, then moving forward with positive vibes!

Sources

https://thriveglobal.com/stories/how-gratitude-actually-changes-your-brain-and-is-good-for-business/

https://www.news-medical.net/health/Dopamine-Functions.aspx

http://ebooksdownloadfreeed.blogspot.com/2016/04/the-upward-spiral-pdf-free-download.html

https://www.alleydog.com/glossary/definition.php?term=Anterior+Cingulate+Cortex

https://www.medicalnewstoday.com/kc/serotonin-facts-232248

What to Expect and How to Prepare for a Recession

5 min read

Prepare for a RecessionEconomists generally determine that the country has fallen into a recession after two consecutive quarters of negative gross domestic product (GDP) growth. Since 1967, the United States has experienced seven recessions.

The thing is, predicting a recession is a little like predicting a tornado. Experts are never exactly sure if or when one will occur, but they can cite when conditions a ripe for one based past experience. The good news for predictors is that the economy follows a similar pattern of indicators in the months leading up to a recession.

The bad news is that many those indicators have recently emerged. For example:

  • Inverted Yield Curve – This is when the yield on longer-term Treasury bonds is lower than the yield on shorter-term Treasury bonds, which happened recently for the first time since 2007. On average, an inverted yield curve has occurred 14 months in advance of every recession in the past 50 years.
  • Corporate Profits – Estimates for corporate earnings growth have dropped substantially since last year, from 7.6 percent to 2.3 percent.
  • Global Trade – The ongoing U.S. trade war with China has resulted in weakness in the manufacturing and farming industries. Moreover, global trade volume is also down, which further reduces the market for U.S.-manufactured goods.

What to Expect in a Recession

The worst recession in U.S. history was the most recent one, between 2007 and 2009. Dubbed the Great Recession, it was short (compared to the Great Depression of 1929-1939) but it took a powerful toll on a large chunk of the population. For example, close to half of U.S. households lost at least 25 percent of their net worth; one out of every four households lost at least 75 percent of their net worth.

About one-third of households experienced one or more of the following:

  • Fell more than two months behind on their mortgage
  • Had their home foreclosed
  • Had their home equity drop into negative territory
  • Lost a job

That was a bad recession. Fortunately, while economists are seeing signs of another one on the horizon, as of now (absent any significant shocks) they do not expect it to be as severe.

Tips to Prepare for a Recession

With multiple warning signs evident, it appears we do have some time before a recession potentially hits. It’s a good idea to use this time to protect your financial situation to help minimize any impact that a recession can have on you personally. The following are some tips to consider.

Shore Up Your Finances

Start by reducing your debt as much as possible, particularly any accounts exposed to a variable interest rate. The interest on credit cards and home equity lines of credit have a habit of increasing when you can least afford it. If you have a variable rate mortgage you might want to refinance at today’s low fixed mortgage rates so your monthly payments do not increase. One way to generate a robust savings fund is to temporarily suspend contributions to a retirement plan and save that money in a readily available account.

Minimize Household Expenses

Most people have to cut back on household expenses during a recession, so you might as well start now to help you prepare. For example, consider trading in a gas-guzzling car for one with better gas mileage and lower monthly payments, or pull the plug on cable TV and switch to a streaming service. Deploying these cost-reduction strategies now not only reduces your expenses during a recession but will also help contribute to your savings fund.

In many areas of the country, real estate prices are at the top of the market. It might be worth considering selling your house now while you can get a good price. This will give you a pot of cash to sit on during the recession, which is especially helpful if you lose your job. In fact, after the sale you may consider renting until real estate prices drop and you can purchase another home at a good price – and maintain a healthy cache of savings. This strategy could also save you from raiding your investment portfolio for money – helping protect your future financial security.

Protect Your Investment Portfolio

Take a good look at your portfolio and give it a recession stress test. Consider reallocating some funds to options that tend to perform reliably during an economic decline, such as:

  • Government bonds
  • Treasury Inflation-Protected Securities (TIPS)
  • Corporate Inflation-Protected Securities (CIPS)
  • Consumer staples stocks
  • Well-established dividend stocks
  • Fixed Income Annuity (FIA)

Recognize that it is generally not a good idea to completely cash out of the market. The best way to accumulate wealth over time is to stay invested regardless of temporary economic declines. In fact, investors who maintained their market positions between 2007 and 2017 experienced an average 240 percent growth rate.

Once the recession has ended, think about rebalancing your portfolio to realign its strategic asset allocation with your investment objectives and timeline. This allows you to cash in on outperforming assets and buy into depressed securities that could be poised for post-recession growth.

LIFO Versus FIFO and How Each Method Values Inventory

3 min read

LIFO Versus FIFOAs the name implies, First-In, First-Out (FIFO) is a way for companies to value their inventory. The first items put into inventory or produced by the company are accordingly the first taken out of inventory or transferred to customers and therefore expensed. When it comes to accounting for acquisition and/or production costs, initial and earlier costs are the first to be expensed, with more recent costs staying on the balance sheet to be expensed later.

Assume a company already has 200 widgets costing $4/widget. From there, the company increased its inventory at three more times during a selected accounting period. Three hypothetical, additional purchases include:

200 widgets @ $6/widget

200 widgets @ $7/widget

200 widgets @ $8/widget

If the company had 500 widgets purchased, there would be different considerations be it FIFO or LIFO. First, we’ll discuss FIFO.

For the 500 widgets sold to customers, the FIFO’s Cost of Goods Sold (COGS) (assuming there are no additional inputs that would increase the COGS for simplicity sake) would be $2,700.

This calculation will look at how COGS works for FIFO:

200 initial widgets costing $4/widget = $800 in COGS  

200 widgets from the first additional purchase, costing $6/widget = $1,200 in COGS

100 widgets from the second additional purchase, costing $7/widget = $700 in COGS

For a total of $2,700 in COGS

Assuming there were no purchases during the selected accounting period, there would be 300 widgets remaining in inventory, or $3,000 in inventory costs. The inventory would show up on the balance sheet, according to the following calculation:

200 widgets @ $7/widget = $1,400 in inventory

200 widgets @ $8/widget = $1,600 in inventory

Now this is compared to LIFO, or Last-In, First-Out, which accounts for expenses by looking at most recent costs first. With the same company selling the same 500 widgets in the same accounting time-frame, but expensing their most recent 500 widgets first, here is the rundown:

200 widgets @ $8/widget = $1,600 in COGS

200 widgets @ $7/widget = $1,400 in COGS

100 widgets @ $6/widget = $600 in COGS

For a total of $3,600 expensed

The inventory would be left as the following:

100 widgets @ $6/widget = $600

200 widgets @ $4/widget = $800

For a total of $1,400 in remaining inventory.

Considerations Between LIFO and FIFO

One important consideration when choosing between LIFO or FIFO is that more likely than not input costs rise over time. Therefore, valuations can change based on the type of method.

Looking at the LIFO method, taking out inventory that’s been produced most recently does not always reflect market prices of the remaining inventory, especially if remaining stock is a few years old. Along with Costs of Goods Sold lowering net income, if older inventory is obsolete and it can’t be sold, it’ll render the inventory’s value far below market prices.

When it comes to the FIFO method, you get a better indication of the remaining inventory’s value. However, using this method increases a business’ net income since remaining inventory can be older and is valued by the Cost of Goods Sold. Similarly, if net income increases, there’s also a good chance of greater tax obligations for the company.

These scenarios account for rising prices. However, if prices are falling, then these scenarios would be reversed.

How to Stay Safe with Business Email Compromise on the Rise

4 min read

Email Compromise, hacked emailAccording to a report by the Financial Crimes Enforcement Network (FinCEN) released in July, financial institutions have incurred more than $9 billion in losses due to Business Email Compromise (BEC) schemes since 2016. With such staggering losses, businesses and even individuals can’t afford to ignore BEC attacks.

What is BEC?

BEC fraud involves cyber thieves posing as company executives or a business contact with the intention to commit wire transfer fraud or obtain sensitive information. The main targets are businesses working with foreign suppliers or a business that carries out regular wire-transfer payments.

To carry out this attack, criminals might pretend to be the company CEO and request that a junior staff member perform a task for them, such as transferring funds. Attackers take advantage of the fact that most organizations don’t have a set procedure to verify instructions received from the top management.

How Attackers Collect Data from their Targets

Cyber criminals use various techniques to carry out BEC fraud, with the main aim of stealing funds from the victims. The techniques used include:

  • Imposter techniques – this can be carried out in various ways. Attackers use a look-alike domain, display-name deception and spoofed emails that appear to come from legitimate addresses.
  • Social engineering – when a target has not set appropriate privacy settings on social media accounts, an attacker can easily collect information that will make their requests sound legitimate.
  • Malware – this enables attackers to have access to sensitive information that makes the fake request sound legitimate.
  • Mining from the Dark Web – here attackers can obtain stolen credentials.

How to Avoid BEC Attacks

It is difficult for conventional security systems to detect BEC schemes. Consider a case in which a transaction is initiated willingly by a legitimate user in response to a request from a legitimate source. Such an email has no payloads such as malicious attachments that can be blocked.

Here are some methods to help reduce the possibility of these attacks:

  • Raising awareness of common attack scenarios or tactics used by the cyber criminals, such as a false domain name that looks almost like the original one, impersonation of a vendor, false sense of urgency or a request for secrecy.
  • Training employees on cyber security risks and implications.
  • Implementing email authentication protocols like Domain-Based Message  Authentication, Reporting and Conformance (DMARC) and email authentication, such as DomainKeys Identified Mail (DKIM).
  • Using layered defense, such as encryption, and virtual private networks.
  • Implementing a multifactor authentication that will introduce a secondary authorization control. This will help stop attackers even when they have access to the target’s credentials.
  • Establishing communication protocols that will allow for a follow-up. For instance, if the person is requesting financial transactions, an employee should call to ascertain the request.
  • Scrutinizing all emails that request for fund transfer.
  • Monitoring incoming email, especially those that use VIP names.
  • Optimizing accounting systems and controls.

Final Thoughts

Apart from taking precautionary measures, businesses also should make sure that their insurance specifically covers BEC attacks, as courts might have different interpretations of policies. Consider the case of Apache Corporation, which lost $7million due to a BEC attack. The judge ruled that since the money was sent to pay a legitimate invoice to the wrong bank, it was not covered by their insurance policy.

Note that a majority of these criminals are from countries that might not have strict laws on cybercrime, making it difficult to have them prosecuted.

So, whether you run a small, medium or large business, or even a personal account, it’s vital that you take precautionary measures against the increasing BEC schemes.

Tax Changes 2019

4 min read

Tax Changes 2019With the start of the fourth quarter of 2019 underway, it’s time to see what the Internal Revenue Service (IRS) will expect of filers for their 2019 taxes. The following are a list of major changes that filers need to be aware of:

1. Removal of the Affordable Care Act’s (ACA) Individual Mandate Penalty

With the passage of the Tax Cuts and Jobs Act (TCJA), filers and households who failed to carry adequate health insurance according to the ACA’s minimum coverage requirements will no longer have to pay the penalty on their 2019 taxes. This is because the TCJA lowered the penalty to zero dollars permanently. In previous years, households not meeting ACA health insurance requirements were mandated to pay either 2.5 percent of household income or $347.50 per child and $695 per adult, up to $2,085.

2. Greater Medical Expense Deduction Requirements

2019 filers are only able to deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income (AGI). The threshold was lowered to 7.5 percent for the 2017 and 2018 tax years by the TCJA, but will revert to the original 10 percent threshold in 2019.  

3. Changes to Treatment of Alimony

The TCJA removed the ability for those paying alimony to their former spouse to deduct these payments for the 2019 tax year. The IRS also removed deductibility for alimony or separate maintenance payments for divorce or separation agreements signed off after Dec. 31, 2018. If a divorce or separation agreement that provides for alimony or separate maintenance payments was agreed to before Dec. 31, 2018, and is then modified after Dec. 31, 2018, such payments lose deductibility. Former spouses receiving alimony or separate maintenance payments from an agreement created or modified after Dec. 31, 2018, are not required to report such payments on their tax return.  

4. Contribution Limits Raised for Retirement Accounts

Those with 401(k), almost all 457 plans, the federal government’s Thrift Savings Plan and 403(b) account plans can contribute $19,000 in 2019, an increase of $500 from 2018’s $18,500 limit. Taxpayers 50 and older can still contribute another $6,000 for 2019, a catch-up contribution. Taxpayers with Individual Retirement Accounts (IRAs) can contribute $6,000 in 2019, $500 more than 2018’s $5,500 limit. Those 50 years or older can add another $1,000 to their IRA accounts in 2019. The increase in IRA contribution limits is the first increase since 2013.     

5. Increased HSA Contribution Limits

Health Savings Accounts’ contribution limits for 2019 have increased, according to the IRS. For an individual or a self-only High Deductible Health Plan, 2019’s contribution limit is raised to $3,500, or $50 more than 2018’s contribution limit of $3,450. For a family high deductible health plan, 2019’s contribution limit is raised to $7,000, $100 more than 2018’s contribution limit of $6,900. The catch-up contribution is an extra $1,000 for account holders age 55 or older.

6. Increasing Standard Deduction Allowances

For those choosing not to itemize their deductions in 2019, the IRS has increased standard deduction amounts for filers. For single filers and those filing as married filing separately, the standard deduction increased by $200, to $12,200. For those filing as head of household, the standard deduction increased by $350, to $18,350. For those choosing to file married filing jointly, there’s an increased allowance of $400, to $24,400.

7. 2019 Income Brackets

With the new tax year comes higher income tax brackets. Depending on how much taxpayers made in 2019, the following are the new income level brackets:

  • 37 percent: Individual single taxpayers making more than $510,300 or married couples filing jointly making $612,350.
  • 35 percent: Individuals making more than $204,100, or $408,200 for married couples filing jointly.
  • 32 percent: Individuals making more than $160,725, or $321,450 for married couples filing jointly.
  • 24 percent: Individuals making more than $84,200, or $168,400 for married couples filing jointly.
  • 22 percent: Individuals making more than $39,475, or $78,950 for married couples filing jointly.
  • 12 percent: Individuals making more than $9,700, or $19,400 for married couples filing jointly.
  • 10 percent: Individuals making up to $9,700, or $19,400 for married couples filing jointly.