Author: KraftCPAs

It can be challenging to find the right candidate if your CFO unexpectedly leaves or find specialized expertise if your organization is involved in a major transaction. An interim CFO might fit the bill.

Bridging gaps

Interim CFO services are provided by experienced professionals who fill in temporarily or on a periodic long-term basis. An interim CFO isn’t an employee but serves in a contract-based role that’s easy to scale up or scale back as needed.

Outsourced CFOs generally have skills and experience in several industries. As a result, they can share valuable lessons and insights and potentially save your business considerable time and expense. Just as important, they can free up senior executives to focus on specific strategies, such as developing and executing a business plan.

Achieving operational goals

Depending on the size and complexity of your organization, an interim or part-time CFO can cost considerably less than a full-time executive. Examples of ways that outsourced CFOs can help your business include:

Fill an immediate need. Head-hunting for a full-time CFO can be a long, difficult process. And hiring the wrong one can be costly. You can reduce the risk if you hire a temporary CFO who can hit the ground running and adapt to your business’s specific needs because of the experience gained filling in at other enterprises. Staffing the position temporarily allows you to take as much time as you need to find the right full-time executive.

Support a specific project. If your organization is planning to build a new factory, introduce a product or service, or perhaps start a joint venture, an interim CFO can provide financial expertise until the project is completed. For example, if a new segment is being launched, the temporary CFO can come up with financial forecasts of how the project will affect the company and its bottom line. That information can be used to justify the undertaking’s cost to potential lenders and investors. Interim CFOs can also provide insight when you’re restructuring, buying or selling a business, registering for an initial public offering, or onboarding a new accounting software system.

Provide financial planning and analysis. A seasoned professional can develop a detailed budget, prepare monthly forecasts, and compile a history of your company’s financial performance. This can give added depth and breadth in understanding the overall performance of your business. It also helps you comply with lenders’ requests for financial documentation. In fact, engaging a temporary or part-time CFO could ultimately demonstrate to lenders that your organization’s finances are in good enough shape to obtain additional credit, as well as take advantage of other financial opportunities they may make available.

Uncover fraud. Detecting corporate fraud requires experience, training, and a certain degree of professional skepticism. Most interim CFOs have developed these skills during their careers. In fact, they may have uncovered fraud at one time or another. If criminal activity is detected in your organization, an interim CFO can help your executives navigate the complex and sensitive investigation process.

© 2023 KraftCPAs PLLC

QuickBooks supports multiple ways to encourage your customers to pay faster, including allowing online payments and assessing finance charges. It provides reports that can help you determine exactly who is in arrears, like Open Invoices and A/R Aging Detail.

There’s something else you can do, though. You can send Payment Reminders to alert customers to invoices they need to settle. QuickBooks automates the process of sorting out who’s behind and alerts you to actions you should take. It also allows you to create Customer Groups that you can use in this task and for other purposes, like mailing lists.

Before you get started, though, Open the Edit menu and select Preferences | Payments | Company Preferences. Answer the questions under Payment Reminders and click OK.

Let’s look at how this all works.

Grouping customers

You can create Customer Groups in the process of sending Payment Reminders, but we’ll show you how to do it ahead of time. It’s not a difficult process. You specify the criteria you want to use to find customers that share certain characteristics, like location, customer type, and account balance.

To get started, open the Lists menu, and select Manage Groups. Click Create customer group. In the window that opens, enter a Name for your group. Let s create a group for all your residential customers in California and call it Residential California. Add a Description if you’d like and click Next.

In the next window, you can set up your filter by selecting a Field (Status, Open balance, etc.), an Operator (Equals, Not Equals, etc.), and Value (all the possible options). Click Add when you’re done. You can specify multiple filters for each group.

When you’re done, click Next to see the resulting table. Check the box at the top if you want QuickBooks to automatically add new members as they meet these criteria or remove them if they don’t. Click Finish.

Tip: If you want a group that contains all your customers that you can apply filters to in the future, just click through the window where you assign fields and values. You’ll end up with a comprehensive list of your customers. You could also select and unselected entries from this list manually.

Sending payment reminders

Let’s say you want to send a statement to your high-balance customers (more than $500 outstanding) who have invoices that are more than 15 days past due. You want the statements to go out on the first day of every month. (Statements, in case you’ve never used them, are lists of invoices sent and payments received within a specified period.)

Go to Customers | Payment Reminders | Schedule Payment Reminders again. Click New schedule in the upper right corner and select Statement. Click <New schedule> next to Statement below and enter a name for it, like “High balance 500.”  Click OK. Open the drop-down list next to Send reminder to and select <Add New>. Enter the name you gave it and click Next. Your Field should be Open Balance, and your Operator should be Greater Than. Let’s set the Value at 500. Click Add and Next.

QuickBooks will then display a list of the customers who meet those criteria. You can remove selected entries if you’d like and indicate that you’d like customers to automatically be moved in and out as their balances change. Click Finish. You’ll be back on the Payment reminders page. Find the “High balance 500” entry and click + Add reminder. Fill out the as indicated.

Below this in the same window, you can modify the email and statement templates that will be used or select alternative ones, though the default ones will probably be fine. Be sure to click Edit next to Email template, though, to make sure it says what you want. The fields contained in brackets will change to contain your customer data in your emails, and you can add fields if you’d like. (If you’ve never worked with mail-merge documents before, we can help you understand them.)

At the bottom of the window, check the box next to Generate a separate statement for each Customer:Job. Click OK. QuickBooks will now send you reminders when it’s time to dispatch individual statements. You can see what’s scheduled and send your reminders by going to Customers | Payment Reminders | Review & Send Payment Reminders.

 

© 2023 KraftCPAs PLLC

Company management is ultimately responsible for preparing its financial statements, including the identification of related parties. However, during fieldwork, external auditors look for undisclosed related parties and scrutinize significant unusual transactions. Here’s an overview of the nature of related-party financial relationships and transactions, as well as potential risks associated with them. Auditing standards require auditors to design their inquiries and testing procedures to address these risks.

What are related parties?

The term “related parties” is often associated with family-owned businesses that have family members on the payroll. While closely held business often engage in related-party transactions, public and large private companies also may have related-party arrangements, such as those involving directors, executives, and their family members and friends. Additionally, larger organizations might engage in transactions involving commonly controlled entities, such as subsidiaries and variable interest entities.

In recent years, the Public Company Accounting Oversight Board (PCAOB) has issued guidance to enhance auditors’ efforts in financial statement matters that pose an increased risk of misstatement. The PCAOB warns that related-party arrangements increase the risks of fraud and legal violations, warranting increased attention for companies of all sizes.

To the extent that material related-party transactions aren’t disclosed or don’t happen at arm’s length — meaning at market value — a company that engages in them could misstate its financial results and potentially mislead lenders, investors, and other stakeholders. For example, a company might artificially boost its profits by paying below-market rent to a subsidiary. Or a dishonest CFO might pay consulting fees to her nephew to divert money from her employer.

Auditing standards require auditors to evaluate related-party risks and take steps to identify them during an audit. Companies are required to disclose these relationships and transactions in the footnotes to their audited financial statements.

How auditors identify them

During fieldwork, auditors ask targeted questions to obtain an in-depth understanding of related-party financial relationships and transactions, including their nature, terms, and business purpose (or lack thereof). Tougher related-party audit procedures will be performed in conjunction with the auditor’s risk assessment procedures, which occur in the planning phase of an audit.

Examples of information that may be gathered during the audit that could reveal undisclosed related parties include:

• Disclosures contained on the company’s website
• Confirmation responses, correspondence, and invoices from the company’s attorneys
• Tax filings
• Life insurance policies purchased by the company
• Contracts or other agreements
• Corporate organization charts
• Public company proxy statements

Certain types of transactions — such as contracts for below-market goods or services, bill-and-hold arrangements, uncollateralized loans, and subsequent repurchase of goods sold — also might signal that a company is engaged in unusual or undisclosed related-party transactions. Auditors may inquire about significant unusual transactions that are outside the company’s normal course of business or that otherwise appear to be unusual due to their timing, size, or nature.

In some cases, auditors identify related-party arrangements that haven’t even been disclosed to management. To help identify friends and relatives involved in the business, consider implementing a conflict-of-interest policy. These policies typically require employees, suppliers, and new customers to complete an annual disclosure statement on which they list the names and addresses of their family members, their family’s employers, and business interests — and whether they have an interest in those entities.

Transparency is key

Not all related-party transactions are suspect, of course. For example, some of the world’s largest and most successful companies are run by families. Family-owned businesses aren’t usually run like large public companies, and working together can bring out the best and worst in families.

Here are key questions management can expect from their CPA when auditing these entities:

Are family members on the payroll? Although some business owners hire family members because they’re perceived as more trustworthy, many hire them out of obligation or to satisfy a desire to pass the business on to their offspring. It’s important for auditors to objectively consider whether family members are qualified for their positions and whether their compensation is reasonable. However, the reverse also may be true. Some family businesses overwork or underpay related parties. Consider, for example, business owners whose passion for their work and desire to succeed lead them to work exceptionally long hours.

When evaluating a related party’s compensation, auditors look beyond the family member’s base pay. For example, they must also consider benefits and extraneous perks. Perks may include such things as allowances for luxury vehicles, country club memberships or loans at below-market interest rates.

Are there other related-party transactions? Family-owned businesses may engage in other transactions with family members, such as rental contracts, supply agreements and related-party loans. It’s critical for auditors to inquire whether these transactions exist and are at arm’s length.

Is the management style casual or formal? Family business owners tend to have a more personal management style that favors gut instinct and trust over formal written policies. Many family business owners also favor conservative business strategies and nonfinancial goals, which often lead to slower growth and lower profits.

From an auditor’s perspective, the lax management style that characterizes many family businesses can lead to weak internal control systems — and even fraud. For instance, unscrupulous family members with a sense of entitlement might take advantage of generous older relatives. Likewise, weak internal controls and relaxed management styles provide opportunities for dishonest relatives to “borrow” assets or exaggerate timesheets. Auditors factor these concerns into their risk assessments and design audit procedures to account for any additional risks.

 © 2023 KraftCPAs PLLC

The Inflation Reduction Act of 2022 has brought about the largest investment in clean energy in the history of the United States. The legislation offers a range of tax credits and incentives for businesses, including healthcare organizations, to invest in assets that support decarbonization efforts.

What sets this act apart is that tax-exempt healthcare organizations, including government entities, can now directly receive refunds from the Internal Revenue Service by monetizing these tax credits. With options such as purchasing electric vehicles, installing solar panels, and upgrading to geothermal heat systems, healthcare organizations have the opportunity to earn tax credits and improve their financial position while contributing to clean energy initiatives.

Read the full article here…

As the cost of healthcare continues to rise, so does the interest in finding cost-effective ways to pay for it. For eligible individuals, a health savings account (HSA) offers a tax-favorable way to set aside funds (or have an employer do so) to meet future medical needs. Here are four tax benefits:

1. Contributions made to an HSA are deductible, within limits
2. Earnings on the funds in the HSA aren’t taxed
3. Contributions your employer makes aren’t taxed to you
4. Distributions from the HSA to cover qualified medical expenses aren’t taxed

Eligibility 

To be eligible for an HSA, you must be covered by a high-deductible health plan. For 2023, a high-deductible health plan is one with an annual deductible of at least $1,500 for self-only coverage, or at least $3,000 for family coverage. These amounts are scheduled to increase to $1,600 and $3,200 for 2024.

For self-only coverage, the 2023 limit on deductible contributions is $3,850. For family coverage, the 2023 limit on deductible contributions is $7,750. These amounts are scheduled to increase to $4,150 and $8,300 for 2024. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2023 can’t exceed $7,500 for self-only coverage or $15,000 for family coverage ($8,050 and $16,100 for 2024).

An individual and the individual’s covered spouse who reached age 55 before the close of the year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2023 and 2024 of up to $1,000 per year.

HSAs may be established by, or on behalf of, an eligible individual.

Deduction limits 

You can deduct contributions to an HSA for the year up to the total of your monthly limitation for the months you were eligible. For 2023, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,850. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,750. Thus, deductible contributions aren’t limited by the amount of the annual deductible under the high deductible health plan.

Also, taxpayers who are eligible individuals on the first day of the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if an individual is enrolled in Medicare, he or she is no longer eligible under the HSA rules and contributions to an HSA can no longer be made.

On a once-only basis, taxpayers can withdraw funds from an IRA and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the transfer time. The amount transferred is excluded from gross income and isn’t subject to the 10% early withdrawal penalty.

Taking distributions

HSA distributions to cover an eligible individual’s qualified medical expenses (or those of his or her spouse or dependents, if covered) aren’t taxed. Qualified medical expenses for these purposes generally means those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65 or in the event of death or disability.

An HSA offers a very flexible option for providing health care coverage, but the rules are somewhat complicated. Contact us if you have questions.

© 2023 KraftCPAs PLLC

Facing a flood of illegitimate claims for the Employee Retention Tax Credit (ERTC), the IRS has imposed an immediate moratorium through at least the end of 2023 on processing new claims for the credit. The IRS cited the increased risk of small business owners being scammed by unscrupulous promoters as the reason for the move.

The fraud problem

The ERTC is a refundable tax credit intended for businesses that either continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can receive credits worth up to $26,000 per retained employee. The ERTC can still be claimed on amended returns.

The requirements are strict, though. Specifically, you must meet one of three requirements:

• Sustained a full or partial suspension of operations due to orders from a governmental authority that limited commerce, travel, or group meetings due to COVID during 2020 or the first three quarters of 2021
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts in the first three quarters of 2021
• Qualified as a recovery startup business — which could claim the credit for up to $50,000 total per quarter, without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021 (qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three years preceding the quarter for which they are claiming the ERTC)

Additional restrictions also apply.

Nonetheless, the potentially high value of the ERTC, combined with the fact that some employers can file claims for it until April 15, 2025, has led to a cottage industry of fraudulent promoters offering to help businesses claim refunds for the credit. They wield inaccurate information to generate business from innocent clients who may pay upfront fees in the thousands of dollars or must pay the promoters a percentage of refunds they get.

Victims could end up on the hook for repayment of the credit, along with penalties and interest on top of the fees paid to the promoter. Moreover, as the IRS has noted, promoters may leave out key details, unleashing a “domino effect of tax problems” for unsuspecting businesses.

The impact of the moratorium

Payouts on legitimate claims already filed will continue during the moratorium period. But taxpayers should expect a lengthier wait. The IRS has extended the standard processing goal of 90 days to 180 days and potentially much longer for claims flagged for further review or audit.

Increased fraud worries are prompting the agency to shift its review focus to compliance concerns. The shift includes intensified audits and criminal investigations of both promoters and businesses filing suspect claims.

The IRS also is working to develop new initiatives to aid businesses that have fallen prey to aggressive promoters. For example, it expects to soon offer a settlement program that will allow those who received an improper ERTC payment to avoid penalties and future compliance action by repaying the amount received.

If you claimed the credit, but your claim hasn’t yet been processed or paid, you can withdraw your claim if you now believe it was improper. You can withdraw even if your case is already under or awaiting audit. The IRS says this option is available for filers of the more than 600,000 claims currently awaiting processing.

Still considering claiming the credit?

The IRS urges taxpayers to carefully review the ERTC guidelines during the moratorium period. Legitimate claimants shouldn’t be dissuaded, but, as the IRS says, it’s best to confirm the validity of your claim with a “trusted tax professional — not a tax promoter or marketing firm looking to make money” by taking a “big chunk” out of your claim.

© 2023 KraftCPAs PLLC

Merger and acquisition activity has been strong in many industries over the past few years. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. assets

From a tax standpoint, a transaction can basically be structured in two ways:

Stock (or ownership interest) sale. A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The now-permanent 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The TCJA’s reduced individual federal tax rates may also make ownership interests in S corporations, partnerships, and LLCs more attractive. That’s because the passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and depending on future changes in Washington, they could be eliminated earlier or extended.

Asset sale. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” We can help you determine whether this would be beneficial in your situation.

Buyer vs. seller preferences

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

A buyer can step up (or increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Keep in mind that other areas, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Professional advice is critical

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results.

© 2023 KraftCPAs PLLC

Every business owner should have an exit strategy that helps recoup the maximum amount for his or her investment. Understanding the tax implications of a business sale will help you plan for — and, in some cases, reduce — the tax impact. There are several things to consider that can help ensure the transition is as smooth as possible.

Maximizing value

Start by obtaining a professional valuation of your business to give you an idea of what the business is currently worth. The valuation process also will help you understand what factors drive the value of your business and identify any weaknesses that reduce its value.

Once you’ve received a valuation, you can make changes to enhance the business’s value and potentially increase the selling price. For example, if the valuator finds that the business relies too heavily on your management skills, bringing in new management talent may make the business more valuable to a prospective buyer.

A valuation can also reveal concentration risks. For instance, if a significant portion of your business is concentrated in a handful of customers or one geographical area, you could take steps to diversify your customer base.

Structuring the sale

Corporate sellers generally prefer selling stock rather than assets. That’s because the profit on a stock sale is generally taxable at more favorable long-term capital gains rates, while asset sales generate a combination of capital gains and ordinary income. For a business with large amounts of depreciated machinery and equipment, asset sales can generate significant ordinary income in the form of depreciation recapture. (Note: The tax rate on recaptured depreciation of certain real estate is capped at 25%.)

In addition, if your company is a C corporation, an asset sale can trigger double taxation: once at the corporate level, and a second time when the proceeds are distributed to shareholders as a dividend. In a stock sale, the buyer acquires the stock directly from the shareholders, so there’s no corporate-level tax.

Buyers, on the other hand, almost always prefer to buy assets, especially for equipment-intensive businesses, such as manufacturers. Acquiring assets provides the buyer with a fresh tax basis in the assets for depreciation purposes and allows the buyer to avoid assuming the seller’s liabilities.

Allocating the purchase price

Given the significant advantages of buying assets, most buyers are reluctant to purchase stock. But even in an asset sale, there are strategies for a seller to employ to minimize the tax hit. One strategy is to negotiate a favorable allocation of the purchase price. Although tax rules require the purchase price allocation to be reasonable considering the assets’ market values, the IRS will generally respect an allocation agreed on by unrelated parties.

As a seller, you’ll want to allocate as much of the price as possible to assets that generate capital gains, such as goodwill and certain other intangible assets. The buyer will prefer allocations to assets eligible for accelerated depreciation, such as machinery and equipment. However, depreciable assets are likely to generate ordinary income for the seller.

Allocating a portion of the purchase price to goodwill can be a good compromise between the parties’ conflicting interests. Sellers enjoy capital gains treatment while buyers can generally amortize goodwill over 15 years for tax purposes.

If your company is a C corporation, establishing that a portion of goodwill is attributable to personal goodwill — that is, goodwill associated with the reputations of the individual owners rather than the enterprise — can be particularly advantageous. That’s because payments for personal goodwill are made directly to the shareholders, avoiding double taxation.

You may need to take certain steps to transfer personal goodwill to the buyer. This may include executing an employment or consulting agreement that defines your responsibility for ensuring that the buyer enjoys the benefits of your ability to attract and retain customers. Buyers may want a noncompete agreement. These are common in private business sales and can help protect the buyer from competition from the seller after the deal closes.

ESOP as an option

An employee stock ownership plan (ESOP) might be a viable exit strategy if your business is organized as a corporation and you’re not interested in leaving it to your family or selling to an outsider. An ESOP creates a market for your stock, allowing you to cash out of the business and transfer control to the next generation of owners gradually.

An ESOP is a qualified retirement plan that invests in the company’s stock. Benefits to business owners include the ability to:

• Begin cashing out while retaining control over the business for a time
• Defer capital gains taxes on the sale of C corporation stock to the ESOP if certain requirements are met

ESOPs also provide significant tax benefits to the company, including tax deductions for contributions to the ESOP to cover stock purchases and — in the case of a leveraged ESOP — loan payments. S corporations may avoid taxes on income passed through to shares held by the ESOP.

But there are some downsides, too. For example, ESOPs are subject to many of the same rules and restrictions as 401(k) and other employer-sponsored plans. And they can involve significant administrative costs, including annual appraisals of the company’s stock.

Get started now

Different strategies can help you enhance your business’s value and minimize taxes, but they may take some time to put into place. Whatever your exit strategy, the earlier you start planning, the better.

© 2023 KraftCPAs PLLC

Many businesses see their day-to-day activity slow down during the holidays, giving management time to tie up loose ends. One rainy-day project to consider: Fraud risk management.

Internal controls are your company’s first line of defense against fraud. However, an internal control system that was effective years ago for an expanding retailer or a fledgling start-up may not meet the organization’s needs today.

Internal controls need to be continuously updated to stay atop changing market conditions and emerging fraud threats. Conducting a fraud sweep during the year-end lull can position your organization for success in the new year.

Prep work

Forensic accounting experts are often called in to help conduct a thorough, objective review of internal control weaknesses that may leave a business vulnerable to fraud perpetrators. Among the documents a fraud expert will examine are:

• Bookkeeping records
• Invoices
• Bank statements
• Payments
• Journal entries
• Financial reports

Management can assist by ensuring easy access to records and personnel. If employees take too long to produce documents or some records are missing, management needs to ask why, as well as determine what steps employees took to find them. Delayed responses, adversarial attitudes, and missing or incomplete documents can be red flags for fraud.

Review process

When conducting a fraud sweep, forensic accountants typically look for signs of doctored, forged, or missing documents — or anything else that appears inconsistent or unusual. For example, a cluster of journal entries posted near the end of the fiscal year could be adjustments made to cover theft or misappropriation.

Adjustments to receivables and payables are possible signs that employees are misappropriating customer payments or engaging in billing schemes. Another red flag is out-of-balance books. An end-of-year inventory of merchandise or cash can bring missing assets to light.

Experts pay particular attention to payroll documents. Missing or otherwise unaccounted-for employees could indicate the presence of “ghost” employees. In these schemes, perpetrators pay nonexistent staff members and pocket the money themselves. Management can help expose these crimes by personally handing out year-end paychecks or bonuses (or paper stubs if employees have their checks direct deposited). Any leftover checks merit further investigation.

Management should also observe employee behavior. Fraud perpetrators often avoid taking vacation or sick time for fear someone will uncover their activities in their absence. And thieves may seem irritable or defensive when asked to comply with an organized fraud sweep.

Taking action

If something appears suspicious, management must be willing to confront it and resist the temptation to explain away exceptions. If an employee is caught, it can’t be assumed that this employee is the only culprit. Unfortunately, fraud schemes often involve more than one person, including collusion between employees and involvement of people outside the company.

It’s important to keep in mind that warning signs don’t always indicate theft. Accounting irregularities may be explained by genuine errors or an ill-designed process. Honest mistakes can be corrected and avoided in the future with better training, process improvements, or the addition of more-effective controls.

Reporting mechanisms

If a company doesn’t already have a system for employees, vendors, customers, and the public to report suspicious activities, it should create one. While not required of private companies as they are of public ones, confidential hotlines can cut fraud losses by approximately 50% per scheme, according to Occupational Fraud 2022: A Report to the Nations, a biennial survey published by the Association of Certified Fraud Examiners (ACFE). The survey also found that companies with whistleblower hotlines detect frauds more quickly — the median duration of fraud schemes was 12 months for companies with hotlines compared to 18 months for those without.

Tips are the most common method of detecting fraud, and increasingly those tips come from phone and online reporting mechanisms. In 2012, the ACFE reported that 42% of fraud tips were made through hotlines. By 2022, that statistic increased to 58%.

Clean sweep

Year-end fraud sweeps allow businesses to close the books on the old year and welcome the new one with confidence. Although management and internal auditors can provide valuable information and assistance, an experienced outside fraud expert can provide fresh insights.

© 2023 KraftCPAs PLLC

The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act in December 2022 brought significant changes to so-called catch-up contributions, with implications for both employers and employees.

With the new catch-up provisions scheduled to kick in after 2023, many retirement plan sponsors have been struggling to institute the necessary processes and procedures to comply. In recognition of taxpayer concerns, the IRS recently provided a measure of relief in Notice 2023-62. In addition to extending the deadline, the new guidance corrects a technical error in SECURE 2.0 that had left taxpayers and their advisors confused about the continued availability of catch-up contributions for employees.

The new requirements

Tax law allows taxpayers age 50 or older to make catch-up contributions to their 401(k) plans and similar retirement accounts. The permissible amount is adjusted annually for inflation. For 2023, you can contribute an additional $7,500 over the current $22,500 annual 401(k) contribution limit. The contributions are allowed regardless of a taxpayer’s income level.

Under the existing rules, all eligible taxpayers can choose whether to make their contributions on a pre-tax basis or a Roth after-tax basis (assuming the employer allows the Roth option). Section 603 of SECURE 2.0, however, mandates that any catch-up contributions made by higher-income participants in 401(k), 403(b) or 457(b) retirement plans must be designated as after-tax Roth contributions.

Higher-income participants are those whose prior-year Social Security wages exceeded $145,000 (the threshold will be adjusted for inflation going forward). In addition, a plan that allows higher-income participants to make such catch-up contributions also must allow other participants age 50 or older to make their catch-up contributions on an after-tax Roth basis. The law provides that these requirements are effective for tax years beginning after December 31, 2023.

The imminent effective date had plan sponsors and payroll providers worried due to multiple administrative hurdles. For example, sponsors must develop processes to identify higher-income plan participants — they generally haven’t had the need to calculate employees’ Social Security wages previously — and provide that information to their plan administrators. Sponsors also must institute procedures to restrict catch-up contributions to Roth contributions and communicate the changes to their employees.

The challenges are even greater for employers that don’t already have Roth contribution features in their traditional retirement plans. They must choose between amending their plans to allow such contributions, which can take months to process and implement, or eliminating the ability to make catch-up contributions for all employees.

The IRS guidance

In Notice 2023-62, the IRS acknowledges the concerns related to the original effective date for the new requirements. In response, it has created an “administrative transition period,” extending the effective date to January 1, 2026. In other words, employers can allow catch-up contributions that aren’t designated as Roth contributions after December 31, 2023, and until January 1, 2026, without violating SECURE 2.0. And plans without Roth features may allow catch-up contributions during this period.

The guidance also addresses a drafting error in SECURE 2.0 that led to questions about whether the law eliminated the ability of taxpayers to make catch-up contributions after 2023. The IRS made clear that plan participants age 50 or older can continue to make catch-up contributions in 2024 and beyond.

After-tax vs. pre-tax

Unlike pre-tax contributions, after-tax contributions don’t reduce your current-year taxable income, but they grow tax-free. This is a significant advantage if you expect to be subject to a higher income tax rate in retirement than you are at the time of your contributions.

You generally can withdraw “qualified distributions” without paying tax if you’ve held the account for at least five years. Qualified distributions are those made one of three ways:

• Because of disability
• On or after death
• After you reach age 59½

You may be able to reap other savings from after-tax contributions, as well. For example, lower taxable income in retirement can reduce the amount you must pay for Medicare premiums and the tax rate on your Social Security benefits.

But you could have reasons to reduce your current taxable income with pre-tax contributions. For example, doing so could increase the amount of your Child Tax Credit, which phases out at certain income thresholds, as well as the amount of financial aid your children can obtain for higher education.

Roth 401(k) contributions are currently subject to annual required minimum distributions (RMDs), like traditional 401(k)s. Beginning in 2024, though, designated Roth 401(k) contributions won’t be subject to RMDs until the death of the owner.

Potential future guidance

The IRS also used Notice 2023-62 to preview some additional guidance regarding Section 603 that’s “under consideration.” After considering any comments received, the IRS stated it is considering releasing future guidance concerning multi-employer plans and other out-of-the-ordinary situations.

The IRS’s extension of the effective date for the Section 603 requirements is good news for employers and employees alike. As noted, though, the requisite changes to achieve compliance will take some time and effort to put into place. Plan sponsors would be wise to start sooner rather than later.

© 2023 KraftCPAs PLLC

As you put together your holiday shopping list this year, the option of giving cash or stocks might come to mind. With provisions of the Tax Cuts and Jobs Act still in effect until 2026, you can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2023 is $17,000.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $51,000 to the children this year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $17,000, the exclusion covers the first $17,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (detailed below).

Keep in mind that these rules don’t apply to gifts made to a spouse because those gifts aren’t subject to the gift tax.

Married taxpayers can split gifts 

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is given by only one of you. Thus, by gift-splitting, up to $34,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $204,000 each year to their children and to the children’s spouses ($34,000 for each of six recipients).

If gift-splitting is involved, both spouses must indicate their consent on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $17,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $34,000 exclusion covers total gifts.

Unified credit for taxable gifts 

Even gifts that aren’t covered by the exclusion, and are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $12.92 million for 2023. However, to the extent you use this credit against a gift tax liability, it reduces or eliminates the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else don’t count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus give him up to $17,000 as a gift.

Annual gifts help reduce the taxable value of your estate. The estate and gift tax exemption amount is scheduled to be cut drastically in 2026 to the 2017 level when the related Tax Cuts and Jobs Act provisions expire (unless Congress acts to extend them). Making large tax-free gifts may be one way to recognize and address this potential threat. They could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

© 2023 KraftCPAs PLLC