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Oct 01
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How to Inflation-Proof a Retirement Portfolio

By Blog, Financial Planning

Statistics indicate that the average life expectancy is longer than it used to be, but empirically we see this every day among elderly people who have lived much longer than they probably expected. This phenomenon spotlights a particular component of retirement planning that was not as significant in the past as it is now: long-term inflation.

While we’ve not experienced annual inflation rates this century as high as the latter part of the 20th century, inflation can balloon at any time. But what can be even more devastating to a retiree on a fixed income is cumulative inflation over time. It’s also important to recognize that specific consumer product inflation rates can differ substantially from the averages.

For example, according to the Bureau of Labor Statistics, the cost (not always the price a consumer pays) of an oil change in 2000 was about $20. However, motor oil, coolant and fluids have experienced an average inflation rate of 5.66 percent per year – so in 2019 the cost of providing an oil change was about $56.89. That’s a 184.45 percent increase in less than 20 years for a common household expense during a normal retirement timeframe.

To build a portfolio designed to provide inflation-adjusted income throughout a long retirement, consider the following tactics.

Optimize Your Social Security Benefits

Social Security benefits receive periodic cost of living adjustments (COLA) based on the Consumer Price Index (CPI), which is a weighted average of prices of common goods and services purchased by all urban consumers. However, retirees spend more of their household income on goods and services that experience higher levels of inflation, such as medical services. Therefore, Social Security benefit increases might not keep up with a retiree’s actual cost of living – especially over time.

That’s why it’s important to consider inflation in order to optimize your Social Security benefits. In other words, except for people in exceedingly poor health (expected to die within a few years) or in dire circumstances, it’s a good idea to delay starting Social Security benefits as long as you can. If you can wait until age 70, benefits will increase by as much as 8 percent each 12-month period past your full retirement age. Delaying not only increases the level of income you’ll receive each month, but it also gives you more time to save money for retirement and allows your investments more time to grow.

Inflation-Aligned Investments

Another way to inflation-proof your retirement portfolio is to allocate a portion of assets to investments that tend to increase at the same pace as inflation. The following are some options you might want to consider.

  • Series I Savings Bond – The I-Bond, guaranteed by the federal ­government, helps protect an investor from creeping inflation in a couple of ways. First, the I-Bond credits the holder’s account with a fixed interest rate plus the annualized inflation rate from the preceding six months. Second, the account value does not drop when prices fall.
  • TIPS – Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal increases and decreases in tandem with the inflation rate (adjusted every six months). However, the coupon rate is fixed, so payouts vary based only on the inflation-adjusted principal. Upon maturity, the investor receives the greater of the adjusted principal or the original principal.
  • CIPS – Corporate Inflation Protected Securities (CIPS) are similar to TIPS, but they invest in corporate bonds and typically pay a higher yield that combines a fixed payout plus the variable CPI rate. Unlike TIPS, they are not guaranteed by the U.S. government but are backed by the financial strength of the issuing company.
  • REITS – A Real Estate Investment Trust (REIT) pays out reliable dividend income that tends to rise with inflation. REITS own or finance a diversified portfolio of income-producing real estate, such as office buildings, apartment buildings, warehouses, retail centers or hotels. REIT dividends have outpaced inflation in all but two of the past 20 years, according to the National Association of Real Estate Investment Trusts.
  • IPA – With an inflation-protected annuity (IPA), initial income payouts are low but rise over time to align with long-term inflation, based on a formula linked to the CPI. A differentiating benefit of an IPA is that it offers issuer-guaranteed income for life, so the retiree doesn’t have to worry about reinvesting assets during later stages of retirement.

It is a good idea to work with a financial advisor to incorporate inflation-resistant investments for your retirement portfolio based on your individual objectives, tolerance for risk and timeline.

Oct 01
Love0

Will China’s Recent Soybean Purchase Begin Thawing the Trade War?

By Blog, Stock Market News

With the United States Department of Agriculture’s Foreign Agriculture Service announcing a purchase of 204,000 metric tons of U.S. soybeans by private Chinese importers, there are hopes that the trade war is beginning to dissipate.

Seeing that the last significant purchase of U.S. soybeans by China was in June, professional traders see the September acquisitions as a potential weakening of the U.S.-China trade war. With the USDA’s Foreign Agricultural Service announcing more than 600,000 tons of U.S. soybeans purchased by private Chinese operators on Sept. 13, 16 and 17, there are signs of positive movement between the two nations.

The shipments are expected to leave between October and December from ports in the Pacific Northwest. Looking at the Chicago Mercantile Exchange, soybean futures hit monthly highs on Sept. 16. Coupled with November futures contracts well off their lows, this shows renewed promise. The purchase of soybeans is part of China’s gesture of goodwill to buy other agricultural products, such as pork, during ongoing trade negotiations.

These recent developments are important because China increased tariffs on American soybeans by 25 percent in July 2018 in response to the Trump Administration’s tariffs. On Sept. 1, 2019, U.S. soybeans were subject to another 5 percent in import tariffs by China.

The Context of Soybean Sales

Based on data from the United States International Trade Commission (USITC), there was a drop in soy exports from the U.S. to China to $3.1 billion, or 18 percent of U.S. soybean exports for 2018.

The 2018 U.S. soybean export figure to China represents a drop of 75 percent, compared to 2017’s U.S. sales exports of soybeans worth $12.2 billion to China. The large drop in 2018 is also noteworthy against U.S. exports of soybeans to China in 2016 of $10.5 billion. This drop was directly attributable to trade tensions.

It’s important to note that soybeans are America’s biggest agricultural export (16 percent of all agricultural exports) – $20.9 billion annually on average between 2014 and 2018. With China importing more than 50 percent of U.S. soy over the past 60 months, it illustrates why the trade war has been so impactful. In response to the sharp drop in exports to China, 2018 began the quest for U.S. growers of soybeans to counteract the $9.1 billion drop in soy exports to China by finding new buyers in Mexico, the European Union and Egypt.

Similarly, as the Congressional Research Service points out, trade talks are working toward building upon an existing $12.9 billion of U.S. agricultural exports to Japan, as of 2018. Current talks have expectations for an additional $7 billion in U.S. agricultural exports to Japan. Soybeans, along with dairy, wine, beef and pork, are examples of agricultural imports Japan is willing to buy, based on soon-to-be released details from finalized U.S.-Japanese trade talks.  

However, despite maintaining a competitive or even subpar price against competitor nations such as Brazil, it didn’t sway the Chinese to buy more American soy. Much like American farmers and with China’s state-influenced help, there may be long-term, structural changes for future Chinese soybean purchases even if trade tensions subside. However, China also has established new suppliers of soybeans from Ukraine, Kazakhstan and Russia.

While many do expect a trade deal between the United States and China, there could very well be structural and long-lasting changes on how both countries conduct trade for years to come.

Oct 01
Love0

When Full Costing Accounting Makes Sense

By Blog, General Business News

With more than 1.4 million accounting jobs in 2018, according to the Bureau of Labor Statistics, there are many different uses for accountants and their skills. With the need for accuracy and transparency in private and public accounting, one important concept to explore is absorption, or full costing.

Absorption or full costing is an accounting method that is used by businesses to determine the complete cost of producing products or services.

When it comes to calculating the full cost, there are three main categories taken in account:

  1. Direct Costs – How much material, labor, machinery, etc. it costs to produce each product.
  2. Total Amount of Fixed Costs – Examples include monthly rent payments, tax payments, base salaries, etc. These are the types of expenses a company would incur regardless of the level of production.
  3. Total Amount of Variable Costs – If there’s increased demand for a particular product, companies would incur variable costs to meet that demand. Examples would include additional wage payments, increased electricity bills for extended or additional shifts, etc. Unlike a pre-negotiated rate for a lease, paying overtime or for more staff would vary based on changes in production needs.

It’s important to note that with absorption or full costing, regardless of the accounting period, both variable and fixed selling and administrative costs are not included when calculating cost per item. These costs are accounted for in the accounting time, whenever the expenses actually occurred or on an accrual basis.

Along with being GAAP-compliant (following Generally Accepting Accounting Principles) when it comes to absorption or full costing, the direct material costs, labor costs and variable and fixed overhead expenses are factored into the per-product cost to the point of sale. Once sold, the expenses will then be reflected on the Income Statement within the COGS fields (Costs of Good Sold).

Further Considerations and Differences with Variable Costing

The primary difference between full costing and variable costing can be seen when it comes to fixed overhead manufacturing costs.

For the absorption or full costing approach, fixed manufacturing overhead costs are recognized when the product is sold. With the variable costing method, the fixed manufacturing overhead costs are accounted for when the business incurs the expenses for that product (i.e., during production time).

Whether or not produced items are sold or still part of the business’ inventory, the absorption costing approach assigns all expenses to the inventory. This helps companies calculate their net profit more precisely. The approach to determining net profit is especially helpful if a company’s inventory is unsold after the accounting timeframe when production occurred.

When fixed costs such as insurance, salary, advertising and related expenses add up quickly and to great amounts, this is something to keep in mind when determining private performance and public perception for publicly traded companies.

Sources

https://www.bls.gov/ooh/business-and-financial/accountants-and-auditors.htm

 

Oct 01
Love0

How to Get the IRS to Pre-Approve Your Taxes

By Blog, Tax and Financial News

It might seem odd, but it is possible to get the IRS to give you a straight-forward and binding answer to ambiguous tax positions in advance. How does this happen, you ask? The answer is through an IRS private letter ruling.

IRS private letter rulings provide many benefits, but they are not easy to obtain. There are costs, potential delays, and even then, you run the risk of not being granted a ruling. This dynamic might seem odd as the entire point of applying for a private letter ruling is to obtain certainty. If your position is weak from a tax law perspective, the government could refuse to rule on it. Alternatively, if the position you are seeking is obviously correct, the government might refuse to rule as well because they don’t like to issue “comfort rulings.” Essentially, the only way to get the government to rule is to make a request regarding a position that is in the middle.

If you believe the tax position in question lies somewhere in the middle, requesting a private letter ruling may make sense. If you are more likely one of the outliers, then requesting a tax opinion usually makes more sense. The problem is that tax opinion, unlike private letter rulings, doesn’t bind the IRS.

Deciding Which Path to Take

If the relative certainty of the tax position in question doesn’t provide enough guidance, how do you decide to go after a tax opinion versus a private letter ruling? To make the choice, it helps to understand more details.

First, tax opinions can cover a broader range of topics and can be written about pretty much anything; rulings cannot. In fact, the IRS has an explicit list of subjects that it will not produce private letter rulings on (they modify it occasionally, but there’s always a list). As a result, the first step is to assess the list as this might make the choice for you.

Second, don’t request a private letter ruling unless there is a good chance you think it will be granted. For one, rulings are not cheap with fees often costing upward of $25,000 to obtain a ruling. If you get a “No” ruling against your position, you can withdraw the request to take the ruling off the books, but you may or may not get the fee back. Moreover, when you withdraw a request for a ruling, the IRS sends a notice to your local IRS field office, potentially flagging your return for audit.

Third, opinions can be quick and obtained in as little as a few days or weeks. Rulings, on the other hand, often take months. Also consider that a request for a ruling must be specific and there is little room for modification after filing. Opinions have more flexibility.

Private Letter Ruling Process

Given the specificity and consequence of requesting a ruling, there are intermediate steps to help you test the water before you go all in. Nearly all ruling requests start by initiating a discussion with the IRS to get their general view on your proposed ruling. After this, the taxpayer usually submits a brief memo covering the facts and ruling they are looking to obtain. Next, there are more meetings either in person or by phone with IRS attorneys involved. At this point, if everything looks good, you can prepare and submit the actual ruling request. If you back out at this point, you avoid triggering any fees (IRS fees – not your lawyers or accountants) or audit notices.

Benefits of a Ruling Versus an Opinion

The reason taxpayers go through the time, expense and effort to obtain rulings instead of opinions is that they have several advantages. First, rulings are binding on the IRS. Second, you don’t need to consider penalty protection. Most of all, they provide certainty. Given the difficulty in obtaining a ruling, they generally make financial sense only when a taxpayer has a seriously substantial tax position in play, or at least will over time, and he wants to protect against future audits and legal challenges.

Sep 07
Love0

IRS Releases New Projected 2019 Tax Brackets, Rates and More

By Blog, Tax and Financial News

IRS Releases New Projected 2019 Tax Brackets, Rates and More

IRS Releases New Projected 2019 Tax Rates, Brackets and MoreBloomberg recently released projected tax rates, brackets and other numbers that apply to the 2019 tax year (the IRS will release the official numbers later this year). Note, these are NOT the numbers that apply to the 2018 taxes you file in 2019, but to the income and activity that occurs during the 2019 tax year that starts January 1, 2019.

A big part of the IRS’s consideration in formulating 2019 numbers is the inflation index. The Tax Cuts and Jobs Act (TCJA) replaced the normal Consumer Price Index with chained CPI. Chained CPI doesn’t simply measure the change in prices, it measures consumer responses to high prices, effectively creating a smaller inflation adjustment. In any case, inflation adjustments are a critical component (and often the main driver) in year-to-year tax bracket, exemptions and eligibility thresholds.

With an understanding of what underpins the 2019 adjustments (in addition to the impact of the new tax legislation), let’s look at the changes.

Tax Brackets

The increasing CPI means brackets are being pushed upward – albeit slightly – giving us these projected tax brackets for 2019.

Individual Taxpayers
Taxable Income Tax Due
$ – to $9,700 10% of Taxable Income
$9,701 to $39,475 $970 plus 12% of the amount over $ 9,700
$39,476 to $ 84,200 $4,543 plus 22% of the amount over $39,475
$84,201 to $160,725 $14,383 plus 24% of the amount over $84,200
$160,726 to $204,100 $32,749 plus 32% of the amount over $160,725
$204,101 to $510,300 $46,629 plus 35% of the amount over $204,100
$510,301 and higher $153,799 plus 37% of the amount over $510,300
Married Filing Jointly
Taxable Income Tax Due
$ – to $19,400 10% of Taxable Income
$19,401 to $78,950 $1,940 plus 12% of the amount over $19,400
$ 78,951 to $168,400 $9,086 plus 22% of the amount over $78,950
$168,401 to $321,450 $28,765 plus 24% of the amount over $168,400
$321,451 to $408,200 $65,497 plus 32% of the amount over $321,450
$408,201 to $612,350 $93,257 plus 35% of the amount over $408,200
$612,351 and higher $164,710 plus 37% of the amount over $612,350
Married Filing Separately
Taxable Income Tax Due
$ – to $9,700 10% of Taxable Income
$9,701 to $39,475 $970 plus 12% of the amount over $ 9,700
$39,476 to $ 84,200 $4,543 plus 22% of the amount over $39,475
$84,201 to $160,725 $14,383 plus 24% of the amount over $84,200
$160,726 to $204,100 $32,749 plus 32% of the amount over $160,725
$204,101 to $306,175 $46,629 plus 35% of the amount over $204,100
$306,175 and higher $82,355 plus 37% of the amount over $306,175
Head of Household
Taxable Income Tax Due
$ – to $13,850 10% of Taxable Income
$13,851 to $52,850 $1,385 plus 12% of the amount over $13,850
$52,851 to $84,200 $6,065 plus 22% of the amount over $52,850
$84,201 to $160,700 $12,962 plus 24% of the amount over $84,200
$160,701 to $204,100 $31,322 plus 32% of the amount over $160,700
$204,101 to $510,300 $45,210 plus 35% of the amount over $204,100
$510,301 and higher $152,380 plus 37% of the amount over $510,300
Trusts & Estates
Taxable Income Tax Due
$ – to $2,600 10% of Taxable Income
$2,601 to $9,300 $260 plus 12% of the amount over $2,600
$9,301 to $12,750 $1,868 plus 22% of the amount over $9,300
$12,751 and higher $3,076 plus 37% of the amount over $12,750

Personal Exemption Amounts

Personal exemptions are eliminated under the TCJA, so there is no adjustment any longer. The deduction for a qualifying relative is a similar type of item to the personal exemptions and is expected to be between $4,150 and $4,200 for 2019.

Standard Deduction

Standard Deductions
Filing Status Standard Deduction Amount
Single $12,200
Married Filing Jointly & Surving Spouse $24,400
Married Filing Separately $12,200
Head of Household $18,350

In combination with eliminating personal exemptions, the TCJA approximately doubled the standard deduction for most taxpayers in 2018. With inflation figures where they currently stand, projections are as follows for 2019:

Certain taxpayers receive additional standard deductions; for example, the aged (65 or older) or the blind will be $1,300 in 2019 for married filing jointly and $1,650 if neither married nor a surviving spouse.

Capital Gains

There is no change in capital gains rates for 2019; break points between brackets do change, with the maximum zero and 15 percent rate amounts as follows:

Capital Gains
Filing Status Maximum Zero Amounts Maximum 15% Rate Amount
Single $39,350 $434,550
Married Filing Jointly & Surving Spouse $78,750 $488,850
Married Filing Separately $9,350 $244,400
Head of Household $52,750 $461,700
Trusts & Estates $2,650 $12,950

Section 199A Deduction (aka the Pass-Through Deduction)

Under the TCJA, sole proprietors and owners of pass-through entities are allowed up to a 20 percent deduction on qualified business income. To qualify for the deduction, a certain threshold must be met, and phased-in limitations are applicable. They are projected to be as follows for 2019:

Section 199A Deduction (aka the Pass-Through Deduction)
Filing Status Threshold Amount Phased-In Amount
Married Filing Jointly $321,450 $421,450
Married Filing Separately $160,725 $210,725
All Other Taxpayers $160,700 $210,700

Alternative Minimum Tax (AMT)

AMT exemptions are also subject to adjustment for inflation and are projected to be as follows:

Alternative Minimum Tax (AMT) Exemptions
Filing Status Exemption Amount
Single $71,700
Married Filing Jointly & Surving Spouse $111,700
Married Filing Separately $55,850
Trusts & Estates $25,000

Don’t forget, these are only projected changes. The IRS will release the official numbers later this year.

Aug 01
Love0

Pass It On: Accounting Tips to Share With Kids

By Blog, Tip of the Month

Accounting Tips to Share With Kids, Accounting childrenIt’s never too early to helps kids understand accounting – the concepts of earning and spending. Here are a few ways to teach your little ones about how money works and even have a little fun.

Play Money Games

One way to explain the principles is by playing games like Monopoly and The Game of Life. However, if you want to be more homegrown and less commercial, bake some cookies, bag and price them, and turn your kitchen into a store. You might even get a toy cash register and calculators to make the whole experience more authentic. Then record the earnings, expenses and profits. This will really give children a “taste” of accounting!

Create a Family Budget

When sharing this activity with your kids, you don’t have to include every single expense – just those that they can easily understand, such as mortgage or rent, electricity, gas, phone, groceries and so on. Then, ask them to write up a budget of their own and include their income and expenditures for an allotted amount of time, perhaps a week. This way, you can demonstrate the importance of tracking money and explain that this is a common way that businesses and families deal with their finances.

Teach Them About Checking Accounts

Even though checks are being used less and less these days, a check register is still a good way to show kids how to reconcile expenses. First, you can let them watch you write a check, then explain how to record the check in the register. Then, get some generic deposit slips from your bank and demonstrate how deposits and withdrawals work. Finally, tell them that these transactions will be sent to them each month in a statement – you might even show them one you have to help them visualize the concept.

Explain Debits and Credits

Grab a blank sheet of paper and write a large T on it. Above the left side of the bar, write “Income: Money In” and above the right side of the bar, write “Expenses: Money Out.” Point out the difference between the two sides. If your child has an allowance, a way of earning money by doing chores or if they have a summer job, then ask them to pretend that they’re going to spend some of their money on things they’d like, such as games or candy. Have them record the amounts of earned income in the left column. Then ask them to imagine spending the money on the things they want and have them record those expenses in the right column. Then subtract the expenses from the income. This is quite effective because it helps kids see the money going in and out of an account. When they get a feel for how this works, they might be a little less interested in spending every cent they earn.

There are many other tools you can use to teach your children how money works, but these are a few good ones to get you started. As many parents can attest, helping kids comprehend how to manage money is one of the best lessons you can teach them.

Sources

https://www.sapling.com/12003624/accounting-activities-kids

Aug 01
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How the Accountant Role has Morphed with Technology, and What New Skills are Necessary

By Blog, What's New in Technology

How the Accountant Role has Morphed with Technology, and What New Skills are NecessaryAccountants are no strangers to inventions. Known inventions such as the abacus, calculators and computers have helped complete tasks quickly and in less time. However, today’s technology is complex and is reshaping the world of accounting. Such new technologies include big data, cloud computing, artificial intelligence, block chain, payment systems, mobility and social collaboration, among many others.

How Technology has Changed the Accounting Industry

Accounting, a traditional field, has not been immune to technological innovations. Initially, an accounting department would rely on IT leaders to make its technology decisions. Today, CFOs are increasingly taking part in decision making when it comes to the implementation of new technologies.

These changes are due to technological innovations in the accounting industry that have contributed to improved productivity and operational efficiency. The replacement of manual accounting with computerized tools has contributed greatly to reducing errors, resulting in more accurate reporting.  

The accounting industry has reaped many benefits from adopting technology. Such benefits include virtual storage of documents, compliant online tools for accounting and taxes, use of communication platforms that ease connecting with customers, forensic analysis tools, and filing financial details with authorities.

Technology such as cloud computing means that a CPA can collaborate with clients in real time. This means that you are able to provide your clients with frequent business insights for performance monitoring and decision making.

All this makes it crucial for any company or professional to adopt these new technologies to remain competitive in today’s digital world.

Impact on the Accounting Profession

There is mixed opinion regarding how technology impacts the accounting industry. With the new technologies adopted in accounting, the accountant and finance professionals are expected to master new skills beyond numbers.

As accounting technology continues to evolve, there are considerations about necessary skill sets for new hires. Recruiters also are searching for candidates with extra skills relating to emerging technological trends.

Obviously, some roles such as manual entry and calculations have become obsolete. But technology has introduced new roles that require that accountants to approach the business environment differently so as to drive value. This calls for a mindset ready to embrace the constant state of change.  

Why It’s Necessary to Have IT Skills

Today it’s not enough just to have basic training for software programs used in accounting. CPAs are now becoming part of strategic planning teams. Their new roles include developing new processes, giving advice and even performing future forecasts. You may find an accountant working with a system programmer when developing a digital financial process.

This means that apart from learning accounting practices, an accountant should know how to integrate accounting processes with IT programs. Systems used today require technical skills. Such systems include strategic software applications like enterprise resource planning (ERP) and supply chain management (SCM) systems. Other technologies such as cloud computing have taken accounting to new levels that require advanced skills.

We also can’t ignore the fact that technology has also brought with it new challenges. Data security is one such challenge. This requires that accountants also be equipped with knowledge on protecting data and computer systems against cyber threats.

Technology Skills for Accountants

As we have seen, the accounting industry has been impacted by technology. For an accountant to remain relevant in the accounting industry, here are some necessary technology skills:

  • Knowledge of enterprise resource planning (ERP) and supply chain management (SCM) systems
  • Experience in cloud computing
  • Data analytics skills
  • Knowledge of business intelligence software
  • Understanding how processes work
  • Advanced Excel ability

What the Future Holds

Initially, it was thought that the advent of accounting tools would make the accountant redundant. But these tools have helped professional accountants become financial advisors, business counselors and strategists. Hence, the growing automation of accounting tasks presents a great opportunity for professional accountants willing to take up new skills.

It is critical that accountants understand the importance of investing in themselves. This will require learning skills beyond number crunching and preparing tax returns.

It’s also important to note that apart from technological skills, the new work environment will require additional skills such as customer service, business insight, flexibility, communication skills, regulatory knowledge and leadership abilities.

Aug 01
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3 Big Tax Issues to Look Out for in Your Estate Plan

By Blog, Tax and Financial News

3 Tax Issues Estate PlanThere are three big tax issues that can derail an otherwise well-executed estate plan. These include Family Limited Partnerships, Revocable Trust Swap Powers and Trust Situs. Below we explore the pitfalls with each issue.

Fixing FLPs

Family Limited Partnerships (FLP) are often created to hold investments or business assets in order to leverage a valuation discount, exert control and provide asset protection.

First, to understand the valuation discount, take the example in which an FLP owned a family business valued at $10 million. A straight 25 percent interest in this business would therefore be worth $2.5 million. However, due to valuation discounts for a non-controlling interest that would not be readily available for sale or able to control liquidation, the 25 percent might actually be valued at $1.7 million for estate tax purposes.

Second, FLPs also could be set up to allow the founder or parents to control operations even after a majority of their interest is given away.

Lastly, FLPs can protect assets. If an interest owner is sued, the claimant might not be able to exercise their claim, especially if they sued a minority interest holder. Instead, they could be limited to receiving a charging order. A charging order limits the claimant to only the distributions that interest holder would be entitled to and protects the other owners.

FLPs that ignore legal upkeep and technical legal formalities can jeopardize these the protection benefits by causing the FLP entity to be disregarded. Common errors include co-mingling personal and entity assets and ignoring the legal requirements to have current signed governing instruments.

On the valuation front, many FLPs were set up to provide valuation discounts at a time of significantly lower estate tax exemptions. Not only is this unnecessary, but the valuation discount can actually hinder the heirs by passing along a lower asset value when the basis is stepped up at death.

Swap Powers

Traditionally, irrevocable trusts are by definition trusts that cannot be altered (hence the name irrevocable). Uses include carving out assets from an estate to better protect the assets and provide tax savings.

Irrevocable trusts are often structured as “grantor” trusts for income tax benefit purposes. Grantor trusts allow the grantor to report the trust income on their individual 1040, effectively having the grantor pay the tax burden and bypass the trust. This strategy can reduce the grantor’s estate.

There are numerous ways to create grantor trust status. Including swap powers is the most common. Swap powers allow the swapping of personal assets for trust assets of equivalent value. The problem with swap powers is that little attention is paid to them and they aren’t exercised in the right circumstances, leading to adverse income tax consequences.

It’s best to review the value of trust assets annually or even more often if the grantor is in poor health so you know when to exercise the swap powers. It’s also a good idea to involve your estate planning attorney and CPA if you are going to exercise the swap powers. This will ensure the swap is handled according to the rules of the trust document and properly reported on your tax returns.

Trust Situs Selection

Trust situs is the state where your trust is based. It determines which state law administers and rules the trust. Frequently, the trust situs is simply set up in the same state where the trust creator is a resident.

While simple, using a home state as the trust situs is not always best. A person’s home state may not provide the best protections or state taxation. The way around this is to “rent” a different trust jurisdiction. Doing so can allow you to lower or altogether avoid state income taxes. You’ll have to factor in the costs to do so as there will be more legal fees and trustee fees since an institution will need to hold the trust to create the state nexus. Overall, you can often come out ahead.

Conclusion

The best thing you can do is to review your current or potential trust with your estate planning attorney and CPA. This way you can stay on top of both the formalities and mechanisms in place to maximize the protections and benefits of the trust.

Aug 01
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How Will the July 17, 2019 Beige Book Impact the Economy?

By Blog, Stock Market News

2019 Beige Book Impact the EconomyThe Federal Open Market Committee (FOMC) recently met at the close of July, bringing to light many questions on the Federal Reserve’s future monetary policy.

While there was much speculation that the Fed would lower the federal funds rate at its most recent meeting, there are many factors impacting this decision. One relevant factor is the Beige Book. Understanding what the Beige Book is and how it’s factored into the FOMC’s decisions gives us a better understanding of our economy.   

What is the Beige Book?

According to the Board of Governors of the Federal Reserve System, one survey of the U.S. economy is done through the Beige Book. Put out by the Fed eight times annually, it aggregates economic information and provides a snapshot of the U.S. economy through its 12 Federal Reserve Districts. It contains reports from each district branch and bank director, along with information gleaned from interviews with economic experts and business contacts who are familiar with the economic activity of each Federal Reserve District.     

The process to begin compiling the Beige Book starts six weeks before the next FOMC meeting. Once all surveys are completed, it’s compiled and published 14 days before the FOMC meeting.

The Importance of the Beige Book

As the Federal Reserve Bank of San Francisco explains, each Book includes both formal reports and informal anecdotal information. As such, it is integral to The Federal Open Market Committee that decides monetary policy.

This report gives the current pulse on economic conditions. The Beige Book is more timely for FOMC members’ decisions because statistics, such as personal income and gross state product, are published well after they were measured.  

The July 17 Beige Book covered three nationwide categories, among others: Overall Economic Activity, Employment and Wages, and Prices.

For Overall Economic Activity, highlights from the July 17 Beige Book found that between the mid-point of May to the start of July, the country saw increasing growth overall. While there was no growth in automobile sales, items sold to consumers increased. It also found the tourism industry grew strongly, especially in Richmond and Atlanta. It also revealed that home sales rose, but new residential construction saw no increase in growth.   

According to the U.S. Census Bureau, housing starts for single-family homes in June was 847,000, or 3.5 percent more than the 818,000 starts in May. Looking at building permits for single-family structures, June’s permits grew to 813,000, growing 0.4 percent from May 810,000 building permits.

With regard to Employment and Wages, the July 17 Beige Book found that wages, especially for entry-level positions, and benefit packages increased their offerings due to a less than ideal selection from the labor market. Employment rolls increased, but not as fast as the previous Beige Book reported. Along with interviewed sources mentioning challenges in obtaining work visa re-authorizations, sectors such as IT, health care and construction were especially challenged in finding candidates to fill new positions.

When it came to the Prices category, there were a variety of reports and experiences in responses. Cost of many goods and services was stable or fell modestly from the last report. It also found that increased cost of labor and “input costs” due to tariffs were incurred by businesses. However, companies weren’t able to push costs onto consumers due to market competition forces.

Based on the mixed data from the Beige Book and other statistical data that the Fed reviewed during its recent FOMC meeting, reverberations throughout the economy will be felt. Any new rate cuts this year could reduce the strength of the U.S. dollar, impacting the cost of imported goods and materials, further impacting businesses. However, rate cuts could similarly help reduce mortgage rates, potentially helping to spur the housing market.  

Regardless of the Fed’s decision, there will be winners and losers in the U.S. economy and beyond.

Aug 01
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Understanding and Applying Accounting Reports and Ratios

By Blog, General Business News

Understanding Accounting RatiosWhen it comes to tracking incoming sales and outgoing expenses, there are many ways businesses can keep up with their invoices and implement strategies to reduce the time they spend on unpaid sales.

Accounts Receivable Turnover Ratio

Simply defined, the accounts receivable turnover ratio is a way of showing what percent of a company’s receivables or invoices are paid by clients. 

The U.S. Small Business Administration explains this ratio is determined by “dividing average accounts receivable by sales.” Determining average accounts receivable is done by adding the beginning and ending figures — be it a month, quarter or year, then dividing by 2. Determining the sales figure is calculated by taking the total sales still on credit and deducting any allowances or returns from the gross sales figure.    

If the beginning and ending accounts receivables for a 12-month period were $20,000 and $30,000, the average accounts receivable would be $50,000/2 or $25,000. If the gross sales were $200,000 for the 12-month period and there were $20,000 in returns, it would leave $180,000/$25,000 or an accounts receivable turnover ratio of 7.2

Accounts Payable Turnover Ratio

The payable turnover ratio is determined by taking all purchases from suppliers and dividing the supplier purchase figure by the mean accounts payable figure. The average accounts payable figure is calculated by adding the starting accounts payable figure and the ending accounts payable figure, normally at the beginning and ending of a period, such as 12 months. From there, the summed up accounts payable figure is divided by 2 to get an average.  

A business made yearly purchases on credit for about $250,000 from suppliers and had returns to those suppliers for about $20,000. If at the beginning of the 12-month period accounts payable were $11,000, then at the end of the period the accounts payable balance was $26,000, the total figures would equal $37,000.

From that point, there would be $230,000 in net yearly purchases on credit for the business and an average of $18,500 for the period’s accounts payable. Dividing the $230,000 by $18,500 equals 12.43. Therefore, the business’ accounts payable turned over about 12.5 times during the period. As the SBA explains, the higher the ratio, the more dependent companies are on accounts payable to acquire inventory.   

Accounts Payable Aging Report

When it comes to defining an accounts payable aging report, businesses can use this tool to determine and organize outstanding accounts payable to vendors or suppliers and how much each is owed. While it can be broken into discreet time frames, such as net-14 or net-60 or net-90, depending on how the supplier and business decided on payment terms, commonly accepted time frames established are: up to 30 days; 31 to 60 days; and so on.

This report is used to organize which supplier invoices are due and when. One important consideration to note is if the report assumes that all invoices are due within 30 days. If there’s special arrangements or terms from important suppliers, it could need adjusting as determined by individual supplier payment terms.  

By using an accounts payable aging report, businesses will see when they need to pay their bills on time and what percentage are being paid on time (or not). It will help businesses see if they’re paying late fees by organizing invoices. Businesses can also identify if there’s a need to negotiate with suppliers for reduced payments for early payments or for extended time to pay invoices if cash flow is an issue. 

Accounts Receivable Aging Report

Similar to an accounts payable aging report, an accounts receivable aging report helps businesses track outstanding invoices owed by clients. It also contains the client name, the time when payment is due and how late, if at all, client invoices are for issued invoices.

These reports help businesses determine the likelihood of debt becoming bad, and if unpaid invoices need to be sent to collections or written off. It can also measure in short and long terms how clients have made timely payments on their invoices. This can help businesses determine if they should reduce existing credit terms to their clients or to make an offer to discount what’s owed in order to get an otherwise uncollectible invoice paid.

Whether a company owes money or expects to be paid for a product or service, with the proper accounting tools, there’s a way to keep track of all inflows and outflows.

Sources

https://www.sba.gov/offices/district/nd/fargo/resources/capacity-and-credit

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