Trends – Roth&Co

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One of the few pieces of legislation that is being pursued during this Congressional lame duck session is an update to the Secure Act, which was originally passed in December of 2019. Dubbed the ‘Secure Act 2.0,’ this legislation carries a whole array of changes to the world of retirement accounts.

The act’s acronym stands for, “Setting Every Community Up for Retirement Enhancement,” but after a review of the first round of this legislation, it looks like “Setting Every Community Up for Robbery of Estates” would be a better fit. The legislation has eliminated what was known as the ‘stretch IRA’ – which allowed IRA beneficiaries to ‘stretch’ their IRA’s tax benefits over their lifetime.

Obviously, there were a few bones thrown in to support the legislation’s claim to ‘enhance retirements.’ The smoke screen created by titling this act in a positive way isn’t as egregious as it was for the Inflation Reduction Act, but it’s not far from it.

In the new version of the act, currently being deliberated by the offices of Congresspeople and various lobbying groups, there are north of thirty changes. However, though few of these changes will impact the act substantially, there are some minor provisions that are notable.

One of the changes being proposed is a positive one. It will allow employers to contribute – either through a match or a non-elective deferral – as a Roth contribution.

Currently, 401(k) plans can allow participants (i.e., employees) to contribute as a Roth contribution, but the company match and non-elective deferrals need to go into the plan as a pre-tax contribution. Also included in the proposed legislation is a provision allowing Roth accounts in SEP-IRAs.

So why is this exciting? Simple. ROTHs allow you to buy out the IRS for future taxation.

Picture this: You have a partner in a business who, without your consent, is entitled to decide at any time what his share of the business consists of. Wouldn’t you want to rid yourself of him and buy him out? With a pre-tax 401(k) or IRA, the IRS remains a silent partner that can walk in one day asking for its share of your money. If it decides that tax rates are 50%, then you have no choice but to comply.

When deciding to utilize a pre-tax or a Roth account, many people try to calculate what their current tax rates are as opposed to their future expected tax rates in retirement. The problem with this reasoning is that nobody really knows what tax rates will apply in the future.

Based on where our national debt is and the trillions in untapped resources for IRS retirement accounts, we don’t think it’s a bad idea to buy out this bossy partner. So, although we need to live with some of the negative clauses in this legislation, make sure to also glean some of the benefits as well.

Are you setting yourself up for retirement success? If you’re not sure, reach out to us at info@equinum.com for professional guidance.

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.

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Have you ever been in a meeting and felt the ideas you were trying to communicate were not getting through? You could have the greatest idea in the world, but if you can’t persuade anyone else to follow your vision, or if no one can understand it, then even the brightest idea will go to waste.

Long considered a “soft skill,” effective communication is now regarded as one of the most important skills a business leader can have. Leaders who reach the top of their field study the art of communication in all its forms — writing, speaking, presenting — and are constantly striving to improve on those skills. The ability to explain the direction and strategy of your business to others so they can do what needs to be done is critical for any business leader and is often the difference between success and failure.

In his new book, The Bezos Blueprint, best-selling author and Harvard University Instructor Carmine Gallo describes three common tactics that top leaders use when communicating with their employees:

Using short words to talk about hard things

Long, complicated sentences make ideas hard to understand. “If you care about being thought credible and intelligent, do not use complex language where simpler language will do,” writes Nobel prize-winning economist Daniel Kahneman. Instead of muddling your ideas with complex and technical language, find the simplest and clearest way to communicate what you want to say.

There are simple ways to improve the clarity of your communication. Software tools can review your writing and create a numerical readability score that corresponds to an education grade level. For example, a document written for someone with at least an eighth-grade education level is considered “very easy to read.” It does not imply that your writing sounds like an eighth-grader wrote it; it means that the ideas are easy to grasp. And ideas that are easy to understand are more persuasive. (For context, Grammarly assessed this article at a 9th-grade education level.)

Choosing metaphors to reinforce key concepts

The beauty of metaphors is that they can provide simple, concrete and memorable comparisons to explain the complex or abstract.

In business, metaphors communicate complex information in short, catchy phrases. Warren Buffet is an expert communicator who has long used metaphorical references to explain complex financial topics. Buffett’s metaphors grab the reader’s attention and reduce complexity to a short sentence. For example, Buffett is frequently asked why 90% of his investments are made in the U.S. His answer: “America’s economic soil remains fertile.” Heavy textbooks have been written on foreign vs. domestic investment, but in five simple words, a metaphor allows Buffet to communicate a complex concept simply.

Visualizing or humanizing data to create value

In the information age, data is being collected in greater and greater quantities every day, but throwing up a graph or a pie chart on a presentation is often met with eyes glazing over. A trick to making any data point interesting is to humanize it by placing the number in perspective. Any time you introduce numbers, take the extra step to make them engaging and memorable.

An example from Gallo’s book is, “By 2025, scientists expect humans to produce 175 zettabytes (one trillion gigabytes) of data annually. It’s simply too big a number for most people to wrap their minds around. But what if I said that if you could store 175 zettabytes on DVDs, the disks would circle the earth 222 times?” The number is still the same, but the description is more engaging because it paints a powerful image.

The human brain does not do well with complexity or abstractions. Consider the previous strategies to improve your communication style and make sure your messages and ideas have the desired effect. Former PepsiCo CEO Indra Nooyi may have said it best: “If you cannot simplify a message and communicate it compellingly, believe me, you cannot get the masses to follow you.”

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Most businesses have some intangible assets, and the tax treatment of these assets can be complex.

What makes intangibles so complicated?

IRS regulations require the capitalization of costs to:

Acquire or create an intangible asset,
Create or enhance a separate, distinct intangible asset,
Create or enhance a “future benefit” identified in IRS guidance as capitalizable, or
“Facilitate” the acquisition or creation of an intangible asset.

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible at all, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

What’s an intangible?

The term “intangibles” covers many items. It may not always be simple to determine whether an intangible asset or benefit has been acquired or created. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entity (for example, corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments and agreements.

Here are just a few examples of expenses to acquire or create intangibles that are subject to the capitalization rules:

Amounts paid to obtain, renew, renegotiate or upgrade a business or professional license;
Amounts paid to modify certain contract rights (such as a lease agreement);
Amounts paid to defend or perfect title to intangible property (such as a patent); and
Amounts paid to terminate certain agreements, including, but not limited to, leases of the taxpayer’s tangible property, exclusive licenses to acquire or use the taxpayer’s property, and certain non-competition agreements.

The IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any type of business, and many ordinary business transactions. Examples of costs that facilitate acquisition or creation of an intangible include payments to:

Outside counsel to draft and negotiate a lease agreement;
Attorneys, accountants and appraisers to establish the value of a corporation’s stock in a buyout of a minority shareholder;
Outside consultants to investigate competitors in preparing a contract bid; and
Outside counsel for preparation and filing of trademark, copyright and license applications.

Are there any exceptions?

Like most tax rules, these capitalization rules have exceptions. There are also certain elections taxpayers can make to capitalize items that aren’t ordinarily required to be capitalized. The above examples aren’t all-inclusive, and given the length and complexity of the regulations, any transaction involving intangibles and related costs should be analyzed to determine the tax implications.

Need help or have questions?

Contact us to discuss the capitalization rules to see if any costs you’ve paid or incurred must be capitalized or whether your business has entered into transactions that may trigger these rules.

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The effects of inflation are all around. You’re probably paying more for gas, food, healthcare and other expenses than you were last year. Are you wondering how high inflation will affect your federal income tax bill for 2023? The IRS recently announced next year’s inflation-adjusted tax amounts for several provisions.

Some Highlights

Standard Deduction

What does an increased standard deduction mean for you? A larger standard deduction will shelter more income from federal income tax next year. For 2023, the standard deduction will increase to $13,850 for single taxpayers, $27,700 for married couples filing jointly and $20,800 for heads of household. This is up from the 2022 amounts of $12,950 for single taxpayers, $25,900 for married couples filing jointly and $19,400 for heads of household.

The Highest Tax Rate

For 2023, the highest tax rate of 37% will affect single taxpayers and heads of households with income exceeding $578,125 ($693,750 for married taxpayers filing jointly). This is up from 2022 when the 37% rate affects single taxpayers and heads of households with income exceeding $539,900 ($647,850 for married couples filing jointly).

Retirement Plans

Many retirement plan limits will increase for 2023. That means you’ll have an opportunity to save more for retirement if you have one of these plans and you contribute the maximum amount allowed. For example, in 2023, individuals will be able to contribute up to $22,500 to their 401(k) plans, 403(b) plans and most 457 plans. This is up from $20,500 in 2022. The catch-up contribution limit for employees age 50 and over who participate in these plans will also rise in 2023 to $7,500. This is up from $6,500 in 2022.

For those with IRA accounts, the limit on annual contributions will rise for 2023 to $6,500 (from $6,000). The IRA catch-up contribution for those age 50 and up remains at $1,000 because it isn’t adjusted for inflation.

Flexible Spending Accounts (FSAs)

These accounts allow owners to pay for qualified medical costs with pre-tax dollars. If you participate in an employer-sponsored health Flexible Spending Account (FSA), you can contribute more in 2023. The annual contribution amount will rise to $3,050 (up from $2,850 in 2022). FSA funds must be used by year end unless an employer elects to allow a two-and-one-half-month carryover grace period. For 2023, the amount that can be carried over to the following year will rise to $610 (up from $570 for 2022).

Taxable Gifts

Each year, you can make annual gifts up to the federal gift tax exclusion amount. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption. For 2023, the first $17,000 of gifts to as many recipients as you would like (other than gifts of future interests) aren’t included in the total amount of taxable gifts. (This is up from $16,000 in 2022.)

Thinking Ahead

While it will be quite a while before you have to file your 2023 tax return, it won’t be long until the IRS begins accepting tax returns for 2022. When it comes to taxes, it’s nice to know what’s ahead so you can take advantage of all the tax breaks to which you are entitled.

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If your company uses supplier finance programs to buy goods or services, and if you’re required to adhere to U.S. Generally Accepted Accounting Principles (GAAP), there will be changes starting next year. At that time, you must disclose the full terms of supplier finance programs, including assets pledged to secure the transaction. Here are the details of this new requirement under GAAP.

Gap in GAAP

Supplier finance programs — sometimes called “structured payables” and “reverse factoring” — are popular because they offer a flexible structure for paying for goods and services. In a traditional supplier arrangement, the buyer agrees to pay the supplier directly within, say, 30 to 45 days.

Conversely, with a supplier finance program, the buyer arranges for a third-party finance provider or intermediary to pay approved invoices before the due date at a discount from the stated amount. Meanwhile, the buyer receives an extended payment date, say, 90 to 120 days, in exchange for a fee. This enables the buyer to keep more cash on hand. However, many organizations haven’t been transparent in disclosing in their financial statements the effects those programs have on working capital, liquidity and cash flows.

That’s the reason the Financial Accounting Standards Board recently issued Accounting Standard Update (ASU) No. 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. It will require buyers to disclose the key terms of supplier finance programs and where any obligations owed to finance companies have been presented in the financial statements.

More details

Supplier finance programs are a relatively new form of arrangement that continues to evolve and grow in popularity. Even after this ASU becomes effective, GAAP doesn’t provide any specific guidance on where to present the amounts owed by the buyers to finance companies. It’s up to the buyer to decide whether these obligations should be presented as accounts payable or short-term debt.

However, the updated guidance does require that in each annual reporting period, a buyer must disclose:

The key terms of the program, including a description of the payment terms and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary, and
For the obligations that the buyer has confirmed as valid to the finance provider or intermediary 1) the amount outstanding that remains unpaid by the buyer as of the end of the annual period, 2) a description of where those obligations are presented in the balance sheet, and 3) a roll-forward of those obligations during the annual period, including the amounts of obligations confirmed and obligations subsequently paid.

In each interim reporting period, the buyer must disclose the amount of obligations outstanding that the buyer has confirmed as valid to the finance provider or intermediary as of the end of the period.

Ready, set, go

The new rules take effect for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll-forward information. That provision is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. Contact us for more information or help implementing the changes.

The Secure Act 2.0

Communication Strategies to Motivate and Inspire

Intangible Assets: How Must the Costs Incurred Be Capitalized?

How Inflation Will Affect Your 2022 and 2023 Tax Bills

New Accounting Rules for Supplier Finance Programs