With the world seeing inflation, the Internal Revenue Service (IRS) has issued guidance for tax filers. Based upon an October 2022 IRS News Release, there have been more than 60 adjustments in conjunction with its yearly inflation alterations. Highlights of inflation adjustments include increasing the married couples’ standard deduction for 2023 by $1,800 to $27,700. Another highlight of inflation adjustments includes raising the threshold for the highest tax rate of 37 percent for individual taxpayers to an income higher than $578,125 or $693,750 if two married individuals are filing jointly.

However, there are certain things that are not subject to indexing for inflation. This includes permitting unlimited itemized deductions and maintaining the personal exemption at zero for the 2023 tax year – codified into law by the Tax Cuts and Jobs Act. The modified adjusted gross income (MAGI) amount used by joint filers to determine the reduction in the Lifetime Learning Credit (§25A(d)(2)) is not inflation adjusted for the taxable year (post-Dec. 31, 2020).

When it comes to the topic of inflation, while the United States experienced monthly inflation as high as 9.1 percent in 2022, there are considerations for economies and businesses operating in foreign jurisdictions where the rate of inflation is much higher for sustained periods of time (multiple years).

The International Financial Reporting Standards (IFRS), via International Accounting Standard IAS 29, explains how companies navigate financial statements if their primary currency used for commerce is the same legal tender experiencing hyperinflation in a particular economy, generally within a specific country. It also may be referred to as functional currency. IFRS generally looks at wages, pricing, and interest correlated with a price index increasing by at least 100 percent in aggregate over 36 months when determining if a company’s financial statements must be amended for economies with hyperinflation.

With PWC considering Argentina a hyperinflationary economy to entities whose functional currency is the Argentine peso, it’s considered so due to IAS 29. Specifically, IAS 29.3 details criteria when evaluating if indeed, an economy and its currency is experiencing hyperinflation. Select criteria include:

• Residents of the subject jurisdiction attempting to preserve wealth via non-monetary assets or stable non-native currencies.
• Business is indexed and transacted in non-native currencies with far lower rates of inflation.
• When credit is the means of a transaction, it is priced at levels factoring in the expected debasement of the subject currency according to the time frame of the borrowing.

As of the 2019 publication, based on the 36-month lookback measuring inflation gauges and the IAS 29 evaluation criteria indicating hyperinflation, PWC determined the Argentina economy to be hyperinflationary. And according to IAS 29 standards, if a company’s primary legal tender it uses for commerce is the same as a country experiencing hyperinflation economic conditions, it must adhere to specific financial reporting standards.

Financial statements in hyperinflationary environments, according to IAS 29, that factor in relative details are required to be reported in the functional currency in up-to-date figures at the conclusion of the coverage time frame. When it comes to revising to current units of currency, businesses must use a general price index to account for inflationary changes. In addition to requiring a distinct declaration for a required business’ net monetary position, it must be reflected as proceeds or a decline in profits for the defined time frame.

The business must adhere to full disclosure, which includes transparency whereby financial statements have been restated, what price index the business relied upon to adjust for currency inflation considerations, and if the financial statements have been put together via historical or original costs versus current or fair value costs. The remaining requirement is that business results must assess its financial outcome and situation in its functional currency. Although according to IAS 21 guidelines, once financial results are restated, the restated functional currency can then be read in alternate forms of currency.

When it comes to inflation and the jurisdiction it occurs in, knowing the levels is important to help businesses account for times of normal and abnormally high levels. 

There has been updated guidance on how and when tax filers must file and report Form 1099-K, Payment Card, and Third-Party Network Transactions in 2022 and 2023. According to the December IRS release, new income and transaction reporting requirements for so-called third-party settlement organizations (TPSOs) have been delayed for one year.

A TPSO, according to the IRS, facilitates payments to “participating payees” of the platform. This type of organization can be an online marketplace, an app, or payment card processors that are used to facilitate commerce transactions. It could be a digital marketplace that holds auctions or items for sale that functions as a nexus between those selling items and those buying the items. The TPSO also is tasked with reporting the total amount of transactions to the IRS and the payee or individual who receive remittance(s) from the TPSO in conjunction with selling an item on an auction website or similar platform, based on the new $600 tax calendar year threshold.

The previous reporting threshold (which is in effect for filing taxes for the 2022 calendar year) for TPSOs to be mandated to report to the IRS was:

1. More than 200 transactions occurring annually
2. More than $20,000 in sales annually

Originally set to take effect for the 2022 tax calendar year and mandated in the American Rescue Plan (ARP) of 2021, the new reporting threshold is triggered when more than $600 is earned in aggregate for a single tax year, without regard to the number of transactions per calendar year. It will take effect starting Jan. 1, 2023.

When it comes to calculating tax obligations, it’s important to notice how differences exist between gains and losses. For example, the first step is to determine whether there’s been a sale or a loss. If there’s a gain, it must be reported on Schedule D and Form 8949.

Depending on the outcome of the sale (a gain or loss), the IRS gives guidance accordingly. If it’s a gain, when it comes to accounting for fees paid in conjunction with the item’s listing, the selling expenses should be reported as “a downward adjustment” on either Form 8949 or Schedule D. Another consideration on sales of personal items is determining whether it’s a short- or long-term gain. Items sold that are held for more than one year are recognized as long-term. If the item sold has been held one year or less, the capital gain is recognized as short-term. But when it comes to losses, the IRS doesn’t permit filers’ deductions.

There is one important distinction between online sellers and “personal transactions” with the 1099-K Form. When items are sold for a profit, the intent of the 1099-K Form is to ensure income earned is reported to the IRS (and state revenue agency). However, if family members or friends are using such “third-party payment platforms” to split a purchase (for a meal, entertainment, ride-share, reimbursing a bill payment, etc.), such transactions are excluded because they qualify as “personal transactions” under IRS guidance.

With the guidance for smaller transactions evolving, which will undoubtedly impact more and more filers, individuals and those professionals helping them will undoubtedly have to keep an eye on future changes to 2023’s Tax Code.

According to the Harvard Business Review, mark-to-market accounting was what some attributed to the Great Financial Crisis of 2008. Economists such as Brian Wesbury and Steve Forbes attacked the so-called “fair value accounting” because it created further instability, leading to the eventual crash of the markets that prompted the Federal Reserve to implement the “Fed Put.” Understanding how mark-to-market asset valuation works is an essential piece of information for businesses to make the most of their accounting.

Mark-To-Market Accounting vs. Historical Cost Accounting

Mark-to-market, also known as fair value accounting, measures the current market value of an asset. Historical cost accounting values assets according to their original purchase price.

Mark-to-market is a method to assess the fair value of assets if they were sold at current market conditions with liabilities removed from the business’ obligations. It’s generally a fair assessment in times of normal market functions; but during times of volatility, it can provide a skewed assessment of value.

When businesses prepare their financial statements for a particular fiscal year and assess fair value for assets, the business would update its balance sheet with the value they would receive selling assets at current market conditions. This is opposed to what the business bought the assets for, or the asset’s historical or original purchase price.

This is especially true when it comes to trading in the markets, such as futures contracts. Futures contracts are marked to market on a daily basis at the end of the trading day. Depending on how the commodity traded intraday, short and long contract values are added to or subtracted from their starting basis, respectively.   

Traded Assets and Bad Debts

When it comes to “traded assets,” HBR gives an example of when an asset is to be marked to market every quarter. If a traded asset’s fair market value falls, it lowers the equity on its balance sheet and migrates via its income statement as a loss. For example, if a bank buys a bond for $2 million, then it falls to $1.8 million when the subsequent quarter closes (assuming the bond is still held), the business’ balance sheet will need to be adjusted (excluding any potential tax impacts). The balance sheet should reflect a $200,000 decrease in assets on the left side and a $200,000 decrease in equity. It will also be included on the bank’s income statement, reflecting a $200,000 pretax quarterly loss.

Institutions that provide loans will inevitably see a certain percentage go bad within a fiscal year. After accounting for the actual percentage of so-called uncollectable loans, they will have to re-evaluate such assets through the use of a contra account. This also can apply when companies offer pre-payment discounts to clients to encourage fast collection of accounts receivables (AR). Similarly, such assets will have to be marked down to lower values via a contra account.  

Conclusion

When it comes to valuing assets, businesses that understand the nuances of how accounting standards treat different types of assets will be better prepared to navigate their own tax and accounting needs.