Posted on

New Personal Finance Provisions in the 2.0 Secure Act

4 min read

2.0 Secure ActThe Continuing Appropriations Act, enacted at the end of 2022, included several provisions that impact retirement plans going forward. Specifically, the legislation enacts SECURE 2.0, an updated version of the Setting Every Community Up for Retirement Enhancement Act of 2019. The following provisions are financial planning considerations that affect individuals.

Increases Catch-up Contributions

Beginning in 2024, catch-up contributions to employer retirement plans made by employees who earn more than $145,000 a year (regularly adjusted for inflation) must be classified as after-tax Roth contributions. This is necessary for eligible plans to retain their tax-favored status.

Starting in 2025, catch-up contributions for participants ages 60 to 63 will increase from $7,500 to $10,000 per year for contributors in most qualified retirement plans. Beginning in 2026, the new catch-up contribution will be indexed to inflation.

Allows Employer Contributions to Roth 401(k)

Employers are now able to make post-tax contributions to a Roth option in an employee’s 401(k) plan. Employers also may open a Roth account option in SIMPLE, and SEP IRA plans for employees.

Expands Emergency Distributions from Retirement Accounts

Starting in 2024, there will be a new exception to the rule for early withdrawals from qualified retirement accounts. Distributions used for unforeseeable events, such as a personal or family emergency, will not be subject to the 10 percent early withdrawal penalty. However, the rule applies to only one distribution per year and only up to $1,000. The plan member has the option to repay the distribution within three years. Absent full repayment, no further emergency withdrawals may occur during those three years.

The provision also waives the withdrawal penalty on any amount for individuals certified by a physician to have a terminal illness.

Increases Age for Required Minimum Distributions (RMD)

Starting in 2023, the age that triggers required minimum distributions (and their requisite income tax liability) from qualified retirement accounts increases from 72 to 73. Starting in 2033, the trigger age raises to 75. The RMD rule apples to 401(k), 403(b) and 457(b) plans). Also, starting in 2024, Roth 401(k) accounts will no longer require RMDs.

Reduces Excise Tax on Noncompliant RMDs

If an investor is required to start taking minimum distributions and does not take out the required amount in a single year, he is subject to a tax on the amount not distributed. The tax used to be 50 percent, but starting in 2023, it was reduced to 25 percent. Moreover, if the account owner corrects the course and takes the full distribution within a certain window of time, the tax may be further reduced to only 10 percent.

Allows Emergency Savings Accounts

Starting in 2024, the legislation permits employers to offer an emergency savings account option within its retirement plan. The following provisions apply:

  • Employee contributions are made with after-tax income
  • There is an annual cap of $2,500
  • Participants may make at least one withdrawal per month
  • Up to four withdrawals per year are not subject to fees
  • Emergency savings may be held in an interest-bearing cash-equivalent account
  • Employers may match contributions, but those must be deposited to the participant’s retirement plan investment, not the emergency savings account.
  • The emergency account is portable when the participant leaves the employer and can be rolled into a Roth-defined contribution plan or IRA

Permits Employer Match for Student Loan Payments

Presently – through 2025 – employers may contribute up to $5,250 (tax-free) a year toward worker student loan payments. Starting next year, employers have the option to classify those loan payments as contributions to the company retirement plan, such as a 401(k). This allows workers with student loans the opportunity to pay down that debt with their own income and still receive an employer match toward their retirement plan – so they don’t have to choose one or the other.

Posted on

Purchase Acquisition Accounting

3 min read

Purchase Acquisition Accounting, What is Purchase Acquisition AccountingPurchase acquisition accounting is the commonly accepted method to document the acquisition of another business on the balance sheet of the acquiring company. The business’ assets that are being acquired are documented on the acquiring firm’s books at fair market value. The fair market value – defined as what assets would go for on the open market between a buyer and seller on the acquisition date – would increase the overall value of the acquiring company.  

The purchase accounting adjustment re-assesses the acquired business’ liabilities and assets to fair value. Required under GAAP and IFRS, re-assessed items include intangibles, inventories, and fixed assets. Adding intangible assets, like non-compete agreements or customer rosters, to the acquiring company’s books will impact how assets and liabilities are valued because these items were not originally accounted for by the acquired company.

Potential accounting outcomes from an acquisition include depreciation and inventory considerations. Depreciation strategies, such as going beyond straight-line depreciation, will need to be examined and strategically implemented because fixed assets with higher valuations will have accounting implications. For inventory that is re-assessed with higher valuations, the cost of goods sold will increase upon sales for the acquiring company.

Looking forward, the purchase accounting adjustments often affect the business taking ownership of recognizable non-cash expenses. The company buying the other company out can see major losses from these recognizable non-cash expenses prior to the business completing the amortization of the underlying intangible assets. Companies, chiefly publicly traded ones, are encouraged to discuss the losses in financial documents to illustrate their impact on forward guidance.

According to ASC 805 and GAAP, in order to be considered a business combination, certain criteria must be met. According to the CPA Journal, businesses must evaluate if the transaction in question meets the distinctions between acquiring another business versus acquiring assets only. It’s important to distinguish between the two because if an asset acquisition occurs, the transaction is processed via a cost accumulation standard. However, if the transaction in question qualifies as a business acquisition, meeting ASC 805 criteria, it uses a fair value standard.

The primary way to determine in which category a transaction may be classified is to see if it fits the business definition. Based upon FASB’s January 217 Accounting Standards Update (ASU) 2017-01, Clarifying the Definition of a Business, the following explanation is provided.

According to FASB, to be considered a business for this business acquisition accounting purpose, a company is defined as a group or collection of tasks that encompass “an input and a substantive process.” Though it’s important to note that the fair value of the collection is not centralized in one or multiple assets. The inputs and processes generally result in services and/or goods to buyers and repayment to stakeholders. It also may apply to companies that don’t presently produce outputs.

When it comes to a business acquisition, having accountants that understand the intricacies of navigating the process is essential for a business to emerge more streamlined after integrating assets.

Posted on

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

3 min read

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

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

History of Section 139

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

Section 139

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

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

Impact on Benefits

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

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

The Big Problem

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

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

Conclusion

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

Posted on

Delving Into Forensic Accounting

4 min read

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

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

Forensic Accounting Methodology

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

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

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

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

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

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

Sources

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

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

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

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

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

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

Posted on

Upholding Human Agency in an Era of Evolving Digital Systems

4 min read

AI and Human AgencyTechnology has greatly contributed to improving and streamlining everyday life. However, as technology advances, there is an increased reliance on digital tools powered by artificial intelligence and machine learning. Unfortunately, these technologies are also challenging the fundamental notion of human agency. As a result, there are rising concerns about humans losing the ability to make independent decisions.

What is Human Agency?

Human agency refers to the capacity of individuals to act intentionally and make choices that shape their lives. Although the human agency is influenced by various factors, including social, cultural, and environmental contexts, individuals should maintain the ability to exert some degree of control and influence over their lives. As far as technology is concerned, individuals must retain control and decision-making power. This calls for technologies that support humans in making informed decisions rather than controlling the decisions made.

Concerns Over the Effects of Digital Systems on Human Agency

The Pew Research Center and Elon University’s Imagining the Internet Center conducted a nonscientific canvassing to gather expert views about the future of the human agency.

The experts were specifically asked, “By 2035, will smart machines, bots, and systems powered by artificial intelligence be designed to allow humans to easily be in control of most tech-aided decision-making that is relevant to their lives?”

Of the 540 experts from different fields, 56 percent disagreed with the statement, while 44 percent agreed. Some of the main themes raised by the experts who disagreed with the statement include:

  • The agendas of commercial interests and governments will determine the future.
  • The convenience that comes with automation makes users less vigilant over technology.
  • AI technology’s complexity and rapid evolution can be overwhelming, making it difficult for users to assert their agency.

Common themes raised by participants that agreed with the statement include:

  • Humans also will evolve with technology, and there is the expectation that AI and tech companies will be regulated.
  • Expectations that businesses will protect the human agency to retain public trust and to keep ahead of the competition.
  • Technology will allow varying degrees of human agency.

Key Considerations for Upholding Human Agency

Seeing that technology will keep advancing and more automated systems will be witnessed, it’s crucial to implement ways to help uphold human agency. Some considerations include the following:

  1. Implement mechanisms that contest AI systems. An AI system is as good as the information fed to it. Therefore, it can be faulty or deliberately flawed, and there should be ways to request redress. This can be through AI policies that allow users to contest or rectify a decision made by AI systems.
  2. Empower users through systems that include meaningful choices and controls, enabling users to decide how to interact with them. For example, a system should allow users to adjust preferences, customize settings and choose the features they want. This promotes a sense of ownership and autonomy over digital experiences.
  3. Promote digital literacy and education to teach about technology capabilities and limitations. Technology users must develop critical thinking skills to exercise human agency and make informed decisions.
  4. Integrate ethical principles into technology design and deployment. This can be done by creating guiding ethical frameworks that consider the likely societal impacts and consequences of digital systems.
  5. Guarantee transparency and explainability in technologies and algorithms, providing users with accessible explanations of how decisions are made and what data is utilized. This transparency fosters trust in the technology and empowers individuals to make informed choices.
  6. Establish accountability for the design, development, and implementation of digital systems. Holding individuals and organizations accountable for the impact of their technology helps maintain human agency and promotes ethical behavior.
  7. Implement robust measures to safeguard individuals’ privacy and protect their data. This includes incorporating strong data protection mechanisms, giving users control over their personal information, and establishing clear consent mechanisms for data collection and usage, accompanied by transparent policies. Respecting privacy rights is paramount for preserving human agency in the digital realm.

Conclusion

The essence of being human lies in exercising control over the nature and quality of an individual’s life. However, technological advances such as artificial intelligence are raising concerns about this human ability. Humans are responsible for actively embracing and comprehending the possibilities and implications of living in a world where digital systems take over various tasks and processes. Instead of surrendering their agency, humans should view partnering with these digital systems as a means to supplement and strengthen their intelligence rather than surrendering it.