Trends – Roth&Co

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Your employee opens an email attachment or clicks on a link. It sounds inconsequential, but the next thing you know, you and your employees are locked out of your company’s computers and network. You may receive an intimidating message demanding a ransom and threatening that if you do not pay up in a day or two, all your data will be deleted or your company’s sensitive data will be published online. This type of cyberattack is known as ‘ransomware’ and is one of the most significant cyber risks that can jeopardize you and your business.

Earlier this month, a malicious ransomware attack forced the largest pipeline operator on the East Coast to temporarily shut down all operations. The attack led to price spikes and gasoline shortages across a large expanse of the United States. The pipeline operator ended up paying the hackers $4.4 million to regain control of their system. Such a high-profile case has publicized the problem of cybersecurity and ransomware to the public. Worse still is that large companies are not the only targets of cyberattacks.

Across the country, we have seen a dramatic increase in cyberattacks as organizations have shifted to remote work during the pandemic. According to Homeland Security Secretary Alejandro Mayorkas, the rate of ransomware attacks increased by 300% in 2020, and about three-quarters of victims were small businesses, who paid a total of over $350 million in ransoms during the year. Sadly, the attacks are becoming more brazen and costly as the pandemic drags into 2021.

So, what exactly is ransomware?

Ransomware is a computer program that is a form of malware. There are many variants, but ransomware is typically activated when someone clicks a link in a phishing email, or hackers find a weakness in your company’s computer system. Once the hacker is in, they encrypt and lock your business’s files, then demand a ransom for the key to decrypt and unlock them. More recently, hackers have begun downloading a business’s sensitive data, threatening to publish it online if a ransom is not paid.

Small businesses are frequent targets because they often lack the security or training to prevent a cyberattack. With the threat of ransomware and other cyberattacks becoming more common, what actions can you take to protect yourself and your business? Here are some steps that all organizations should consider as the frequency and sophistication of cyberattacks become more alarming:

Cyberattack Response Plan: Make sure your company has a cyberattack response plan so that in the event of an attack, you know what you need to do and who you need to contact. Cyberattacks always happen when you least expect them. When they happen, you will need to make decisions very quickly. The complexity of the plan will depend on the size of your company, but remember, hackers do not care how big or small you are. They give the same timeframes to a sole proprietor as they do a Fortune 500 company, and your response will have to be immediate.

Train Employees: Human error is the main cause of a business’s data being compromised. Train your employees to identify phishing emails and regularly educate them on the dangers of clicking unknown links. More than merely training, consider conducting drills to help employees identify and prevent a phishing attack. This can include sending fake phishing emails to your own employees to familiarize them with identifying dubious links or suspicious attachments.

Good Cyber Hygiene: Along with employee training, be sure to practice other good cyber hygiene habits. Regularly backing-up your data will leave your company less vulnerable. Making sure your systems and software are up-to-date is another simple yet effective tool to help prevent a cyberattack. The Federal Trade Commission has a useful website where you can learn more strategies for protecting your business from cyberattacks: https://www.ftc.gov/tips-advice/business-center/small-businesses/cybersecurity

Cyber Insurance: Determine if your company has a cyber insurance policy and be sure to review it. If your business does not have one, you may consider getting one, but be sure that ransom is covered and that the level of coverage reflects the current reality.

Remember that the cost of ransomware goes beyond just the ransom. Downtime during the attack means a loss of revenue and sales. Moreover, even if a ransom is paid, there is no guarantee you will get your computer or data back. Protecting your business from ransomware and other cyberattacks requires a multi-faceted approach. With good preparation and cybersecurity hygiene, your company can reduce risk in an increasingly dangerous digital world.

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After trekking steadily upwards, the equity markets in the U.S. and around the world have hit some turbulence. While the larger indices like the S&P 500 and the Dow are only a couple of percentage points off their highs, some notable high-flyers have been taken out to the woodshed. Other “stay-at-home” darlings like Zoom, Peloton, Teladoc and others have been cut in half. The uber-famous Ark Invest Innovation ETF (ticker: ARKK), managed by its new star fund-manager, Kathy Wood, was up 358% off the lows back in March of 2020, and has now dropped about 35% off its highs. This pales in comparison to the complete mania experienced by crypto currencies. Doge Coin, which is up thousands of percentage points for the year, has experienced 30-40% swings on a daily basis.

So why have many investors, or shall we call them speculators, embraced these wild investing themes? The answer is simple. People want to get rich quick. There are plenty of newly minted crypto millionaires out there making Tik Tok videos, and they make Warren Buffet’s recent investments look lame.

But will they hold onto their millions? That remains to be seen. Historically, most who chase quick riches tend to crash and burn. Getting rich slowly, while perhaps less exciting, is definitely a smarter goal. There are a couple of ways to get there. One standard method lies in real estate, an asset class that consistently produced millionaires. But investing in real estate requires time, the ability to research and more importantly, the skill to manage your assets.

There is yet another way – perhaps an even more subdued method – to make those millions: By establishing yourself as a 401k millionaire. According to Fidelity Investments, their account roster currently includes 233,000 people holding 401k’s with an account balance of $1 million or more. Fidelity also has an additional 208,000 IRA accounts assessed at the same value. Although this is only 1.6% of the $27.2 million retirement accounts they manage, it’s way up from the 21,000 retirement plans, valued in the millions, that were managed in 2009.

So, what will it take for you to become a 401k millionaire?

For 2021, the contribution limit for employees is $19,500. Imagine being able to max out on this amount each year (the contribution limit tends to go up over time, but let’s stick to this sum for illustrative purposes). Assuming you want to retire at age 65, here is the investment return you will need to earn in order to reach your goal:

Starting Age	Required Returns
25	1.08%
35	3.15%
45	8.14%
55	28.31%

You don’t need to be a rocket scientist to see that the earlier you start, the better your chances are of reaching the million dollar mark. As the famous investing adage goes, “It’s not timing the market, rather time in the market.”

To drive this compounding point home, let’s work the other way: If you max out your 401k’s $19,500 and earn an average 8% return, here is the amount you would have at age 65, at various starting ages.

Starting Age	Ending balance
25	$5,475,230.28
35	$2,405,244.43
45	$983,246.97
55	$324,587.01

Though it may be hard to save and invest such a large sum each year, hitching your wagon to the newest crypto fad or meme stock and praying for it to go up as you keep on refreshing your browser window may not help you make it to the finish line. A balanced and fixed investment plan will do more to help you achieve the wealth and security you want.

Reach out to info@equinum.com to ensure that your investment accounts are aligned with your financial goals and risk tolerance.

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In recent years, the accounting rules for certain balance sheet items have transitioned from historical cost to “fair value.” Examples of assets that may currently be reported at fair value are asset retirement obligations, derivatives and intangible assets acquired in a business combination. Though fair value may better align your company’s financial statements with today’s market values, estimating fair value may require subjective judgment.

GAAP definition

Under U.S. Generally Accepted Accounting Principles (GAAP), fair value is “the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.” Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, explains how companies should estimate the fair value of assets and liabilities by using available, quantifiable market-based data.

Topic 820 provides the following three-tier valuation hierarchy for valuation inputs:

Quoted prices in active markets for identical assets or liabilities,
Information based on publicly quoted prices, including older prices from inactive markets and prices of comparable stocks, and
Nonpublic information and management’s estimates.

Fair value measurements, especially those based on the third level of inputs, may involve a high degree of subjectivity, making them susceptible to misstatement. Therefore, these estimates usually require more auditor focus.

Auditing estimates

Auditing standards generally require auditors to select one or a combination of the following approaches to substantively test fair value measurements:

Test management’s process. Auditors evaluate the reasonableness and consistency of management’s assumptions, as well as test whether the underlying data is complete, accurate and relevant.

Develop an independent estimate. Using management’s assumptions (or alternate assumptions), auditors come up with an estimate to compare to what’s reported on the internally prepared financial statements.

Review subsequent events or transactions. The reasonableness of fair value estimates can be gauged by looking at events or transactions that happen after the balance sheet date but before the date of the auditor’s report.

Outside input

Measuring fair value is outside the comfort zone of most in-house accounting personnel. Fortunately, an outside valuation expert can provide objective, market-based evidence to support the fair value of assets and liabilities. Contact us for more information.

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One benefit of the current federal gift and estate tax exemption amount ($11.7 million in 2021) is that it allows most people to focus their estate planning efforts on asset protection and other wealth preservation strategies, rather than tax minimization. (Although, be aware that President Biden has indicated that he’d like to roll back the exemption to $3.5 million for estate taxes. He proposes to exempt $1 million for the gift tax and impose a top estate tax rate of 45%. Of course, any proposals would have to be passed in Congress.)

If you’re currently more concerned about personal liability, you might consider an asset protection trust to shield your hard-earned wealth against frivolous creditors’ claims and lawsuits. Foreign asset protection trusts offer the greatest protection, although they can be complex and expensive. Another option is to establish a domestic asset protection trust (DAPT).

DAPT vs. hybrid DAPT

The benefit of a standard DAPT is that it offers creditor protection even if you’re a beneficiary of the trust. But there’s also some risk involved: Although many experts believe they’ll hold up in court, DAPTs haven’t been the subject of a great deal of litigation, so there’s some uncertainty over their ability to repel creditors’ claims.

A “hybrid” DAPT offers the best of both worlds. Initially, you’re not named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds in the future, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.

Before you consider a hybrid DAPT, determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children or other family members, either outright or in a trust, without retaining any control. If the transfer isn’t designed to defraud known creditors, your creditors won’t be able to reach the assets. And even though you’ve given up control, you’ll have indirect access to the assets through your spouse or children (provided your relationship with them remains strong).

If, however, you want to retain access to the assets later in life, without relying on your spouse or children, a DAPT may be the answer.

Setting up a hybrid DAPT

A hybrid DAPT is initially created as a third-party trust — that is, it benefits your spouse and children or other family members, but not you. Because you’re not named as a beneficiary, the trust isn’t a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.

There’s little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the previously discussed risks.

If you have additional questions regarding a DAPT, a hybrid DAPT or other asset protection strategies, please don’t hesitate to contact us.

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Even after your 2020 tax return has been successfully filed with the IRS, you may still have some questions about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.

Are you wondering when you will receive your refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.

Which tax records can you throw away now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2017 and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

If you overlooked claiming a tax break, can you still collect a refund for it?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

Year-round tax help

Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re available all year long.

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Many businesses use independent contractors to help keep their costs down. If you’re among them, make sure that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be a costly error.

It can be complex to determine whether a worker is an independent contractor or an employee for federal income and employment tax purposes. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations.

On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).

What are the factors the IRS considers?

Who is an “employee?” Unfortunately, there’s no uniform definition of the term.

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.

Note: Section 530 doesn’t apply to certain types of workers.

Should you ask the IRS to decide?

Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.

It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

These are the basic tax rules. In addition, the U.S. Labor Department has recently withdrawn a non-tax rule introduced under the Trump administration that would make it easier for businesses to classify workers as independent contractors. Contact us if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified.

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“Tax day” is just around the corner. This year, the deadline for filing 2020 individual tax returns is Monday, May 17, 2021. The IRS postponed the usual April 15 due date due to the COVID-19 pandemic. If you still aren’t ready to file your return, you should request a tax-filing extension. Anyone can request one and in some special situations, people can receive more time without even asking.

Taxpayers can receive more time to file by submitting a request for an automatic extension on IRS Form 4868. This will extend the filing deadline until October 15, 2021. But be aware that an extension of time to file your return doesn’t grant you an extension of time to pay your taxes. You need to estimate and pay any taxes owed by your regular deadline to help avoid possible penalties. In other words, your 2020 tax payments are still due by May 17.

Victims of certain disasters

If you were a victim of the February winter storms in Texas, Oklahoma and Louisiana, you have until June 15, 2021, to file your 2020 return and pay any tax due without submitting Form 4868. Victims of severe storms, flooding, landslides and mudslides in parts of Alabama and Kentucky have also recently been granted extensions. For eligible Kentucky victims, the new deadline is June 30, 2021, and eligible Alabama victims have until August 2, 2021.

That’s because the IRS automatically provides filing and penalty relief to taxpayers with addresses in federally declared disaster areas. Disaster relief also includes more time for making 2020 contributions to IRAs and certain other retirement plans and making 2021 estimated tax payments. Relief is also generally available if you live outside a federally declared disaster area, but you have a business or tax records located in the disaster area. Similarly, relief may be available if you’re a relief worker assisting in a covered disaster area.

Located in a combat zone

Military service members and eligible support personnel who are serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any tax due. This includes taxpayers serving in Iraq, Afghanistan and other combat zones.

These extensions also give affected taxpayers in a combat zone more time for a variety of other tax-related actions, including contributing to an IRA. Various circumstances affect the exact length of time available to taxpayers.

Outside the United States

If you’re a U.S. citizen or resident alien who lives or works outside the U.S. (or Puerto Rico), you have until June 15, 2021, to file your 2020 tax return and pay any tax due.

The special June 15 deadline also applies to members of the military on duty outside the U.S. and Puerto Rico who don’t qualify for the longer combat zone extension described above.

While taxpayers who are abroad get more time to pay, interest applies to any payment received after this year’s May 17 deadline. It’s currently charged at the rate of 3% per year, compounded daily.

We can help

If you need an appointment to get your tax return prepared, contact us. We can also answer any questions you may have about filing an extension.

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‘Opportunity Zones’ are part of an economic development initiative rolled out in 2017 as part of the 2018 Tax Cuts and Jobs Act, and were supposed to be a win-win proposition from the Federal Government. The goal was to encourage investment in the development of low-income neighborhoods and to spur economic growth and job creation in low-income communities. In exchange for their investment in these low-income zones, investors were offered significant capital gain tax deferrals and discounts.

New York designated 514 “low-income community” census tracts as Opportunity Zones. The three major benefits of investing in these sites include:

1) Tax deferrals on original capital gains through 2026

2) Eligibility for partial exclusions of 10% or 15% if the investment was held for longer than five or seven years, respectively

3) No tax on the appreciation of investments held for over 10 years (known as “the ten-year benefit”)

But taxes are always subject to change, and the New York State fiscal year 2022 budget did just that. New legislation “decouples” New York from the federal income tax deferral available for investments in Opportunity Zones beginning in January of 2021. Because of the new legislation, a New York investor with a gain in 2021 will lose the Opportunity Zones tax benefits they would have accrued for New York tax purposes.

This change means that any eligible gain earned in 2021 that is deferred for federal purposes will be added back in when calculating a taxpayer’s taxable income for New York purposes. In 2026, when the gain becomes subject to federal income, it will be excluded from the New York taxable income, so New York will only tax the gain once. This provision is effective for taxable years beginning on or after January 1, 2021.

Important Considerations:

> 2020 capital gains that are still eligible to be deferred for federal purposes will also be eligible in New York, if the 180-day condition is maintained. The original initiative requires that the taxpayer invest the realized capital gain dollars into a qualified Opportunity Zone with 180 days from the date of the sale or exchange of appreciated property.

> New Yorkers with gains disbursed through a K-1, or a flow-through entity, like a partnership or trust, still have a few months to reinvest 2020 gains in 2021 and receive both the federal and New York tax benefits.

> There is the possibility that when tax on the deferred gain is due in 2026, the taxpayer will have tax due in their state of residence, but no offsetting credit for the taxes paid to New York in 2021. This looks a lot like double taxation.

> President Biden has indicated that he intends to increase the tax rate on capital gains. This may mean higher capital gains’ tax rates in 2026.

> Finally (and on a positive note) the wording of the legislation does not indicate that New York has decoupled from the 10-year benefit. Gains from the sale of an Opportunity Zone investment may still be eligible for exclusion from income for both federal and New York purposes, assuming the requisite 10-year holding period is met.

In light of these changes, Roth&Co recommends those considering or participating in an Opportunity Zone fund to speak to their financial advisor to see how the new bill affects their investment.

Roth&Co is committed to keeping you informed of all provisions that may benefit you, your business or your organization. We will provide more information as it becomes available.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

Are You Prepared for a Ransomware Attack?

The Path of Least Resistance

What’s “Fair Value” in an Accounting Context?

Protect Your Assets With a “Hybrid” DAPT

Still Have Questions After Filing Your Tax Return?

Help Ensure the IRS Doesn’t Reclassify Independent Contractors as Employees

Tax Filing Deadline Is Coming Up: What to Do if You Need More Time

New York Divorces from Federal Opportunity Zone Legislation