Consulting Archives - Walter Shuffain

Mastering Cash Flow Cycles: How to Predict and Smooth Cash Flow Fluctuations

wsadvisors — Mon, 02 Mar 2026 20:42:26 +0000

Key Takeaways

Use cash flow analysis and forecasting together to identify pressure points early.
Maintain both short-term and long-term forecasts to support payroll and operating decisions.
Strengthen predictability by updating assumptions and reviewing actual results regularly.

Cash flow problems often come from timing gaps between when income is earned and when cash is available to pay employees, vendors, and lenders. For business owners, understanding cash flow cycles is one of the most effective ways to reduce uncertainty, protect liquidity, and make more confident decisions year-round.

What Are Cash Flow Cycles and Why Do They Matter?

Cash flow cycles describe how money consistently moves into and out of your business. Managing a company’s cash flow is important because profitability does not guarantee liquidity. A company can be growing and still struggle to meet short-term obligations if cash inflows and outflows are misaligned.

When you analyze cash movement over time, patterns begin to surface. These patterns are often tied to seasonality, customer payment behavior, inventory timing, or investment activity. Recognizing them lets you plan rather than react when cash is already tight.

How Does Cash Flow Analysis Improve Decision Making?

A cash flow analysis shows whether your operations are generating enough cash to sustain the business. It organizes activity into operating, investing, and financing categories so owners can understand what is driving changes in cash.

This view helps clarify whether a cash dip is operational, strategic, or temporary. When owners understand the source, they can make informed decisions about spending, pricing, and financing rather than relying solely on bank balances.

Metrics That Make Cash Flow Easier to Manage

Below are a few measures which can turn cash flow analysis into a practical management tool. These measures help translate financial statements into operational insight.

Free cash flow shows how much cash remains after investments.
Operating cash flow margin shows how efficiently sales generate cash.
Cash coverage measures indicate how comfortably obligations can be met.

An example of a tool used is a 13-week cash flow that is used when projecting a cash flow over a period of time because tracking trends across multiple periods is far more helpful than focusing on a single month.

How Does Forecasting Help Predict Cash Fluctuations?

Forecasting helps you anticipate shortfalls before they disrupt operations. By using historical cash patterns alongside expected activity, forecasts estimate where your cash position is heading.

When forecasting is paired with regular cash flow analysis, owners gain visibility into upcoming risks and fluctuations. This gives you time to adjust collections, delay discretionary spending, or reconsider investment timing before liquidity becomes a concern.

Forecasting Methods That Work for Business Owners In 2026

Different planning horizons require different approaches. Short-term needs, such as payroll and vendor payments, benefit from detailed forecasts, while longer-range planning benefits from broader projections tied to financial statements.

Most businesses rely on a mix of methods, including direct forecasting for near-term cash needs, indirect forecasting for longer-term planning, and rolling forecasts that update as new results come in. Scenario planning adds resilience by helping owners prepare for delayed payments or rising costs.

Internal Controls That Improve Cash Predictability

Strong internal controls support forecasting accuracy by improving consistency and accountability. Forecasts lose value when assumptions are outdated or when departments operate in silos.

One of the most effective controls is reviewing the forecast against the actual results. This comparison highlights where assumptions need refinement and which parts of the business introduce volatility. Coordination between sales, operations, and finance further improves reliability because each team sees timing risks differently.

It is also important that the business has updated and accurate financial statements to use in analyzing patterns and forecasting the cash flow. Performing a monthly close strengthens internal controls over financial reporting.

How Can Forecasts Be Used to Smooth Cash Flow Year-Round?

Forecasts create value only when they drive action. If projections show a dip coming, owners can respond early by adjusting spending, accelerating collections, or rethinking the timing of major purchases before cash pressure builds.

Over time, forecasting becomes part of normal operations rather than a reactive exercise. This supports steadier payroll planning, stronger vendor relationships, and better risk decisions throughout the year. For many business owners, the most significant gains come from reviewing cash flow trends and forecasts with their CPA, who can help perform analysis, interpret results, challenge assumptions, and align cash planning with broader business goals. That collaboration turns forecasting into a strategic tool rather than just a financial report.

Frequently Asked Questions (FAQ’s)

How Often Should Business Owners Review Cash Flow?
Monthly reviews are a strong baseline for most businesses, with more frequent reviews during periods of change. Reviewing cash flow regularly helps keep assumptions current and forecasts useful.
Can Cash Flow Analysis Predict Financial Trouble?
Cash flow analysis reflects past activity, but when using the patterns from the past to forecast future cash flow, it can surface warning signs. Declining operating cash flow or shrinking free cash flow often signals the need for closer review.
Is Cash Flow Forecasting Only Useful for Larger Businesses?
No. Smaller businesses often benefit even more because they have less margin for error with the timing of their cash flows.
Do Forecasting Tools Replace Professional Guidance?
Tools improve visibility, but interpretation remains critical. A CPA or outsourced accounting provider helps translate forecasts to decisions around pricing, spending, and risk management. They also ensure forecasts stay accurate and relevant by updating models and analyses as part of the monthly close process.

The post Mastering Cash Flow Cycles: How to Predict and Smooth Cash Flow Fluctuations appeared first on Walter Shuffain.

Strengthening Internal Controls for Small Businesses

wsadvisors — Fri, 27 Feb 2026 20:38:40 +0000

Key Takeaways

Internal controls help prevent errors, deter fraud, and improve the reliability of your financial reporting.
Focus first on cash, inventory, receivables, and disbursements because those areas carry the highest day-to-day risk.
Testing controls helps you confirm they’re working, so your cash flow decisions and forecasts are based on dependable numbers.

Small and mid-size businesses face many of the same financial risks as larger organizations, but with fewer layers of oversight and fewer specialized roles. That’s why internal controls matter. When controls are straightforward, documented, and consistently followed, they protect assets, support compliance, and reduce operational surprises while giving owners more confidence in the numbers they use to run the business.

Just as important, internal controls become more valuable as a company grows. The goal isn’t bureaucracy. It’s building enough structure that your financial processes remain consistent as you add staff, customers, vendors, and systems.

What Are Internal Controls in a Small and Mid-Size Business?

Internal controls are the policies and procedures that help you safeguard assets, produce reliable financial reporting, and operate within legal and regulatory requirements. In everyday terms, they’re the checks, approvals, and documentation standards that keep money moving through your business in a consistent, accountable way.

For many growing companies, controls are also what enable delegation. When the business no longer runs entirely through the owner, controls help ensure financial work is done correctly, even when responsibilities are shared.

Why Do Internal Controls Matter for Cash Flow and Forecasting?

Internal controls matter because better inputs lead to better decisions. If receivables are misstated, deposits aren’t reconciled, or disbursements aren’t reviewed, you can end up planning based on numbers that don’t reflect reality. Over time, that can affect staffing, purchasing, and pricing decisions.

As a business scales, even small process gaps can become expensive. Controls help you maintain stable, trustworthy numbers, which improves both forecasting and profitability planning.

The Core Elements Behind Effective Controls

A strong control framework is usually described in five categories, and small and mid-size businesses can apply them without creating unnecessary complexity.

These categories are:

Control environment: expectations, ethics, and accountability set by leadership
Risk assessment: identifying where error or fraud is most likely and most costly
Control activities: reconciliations, approvals, access limits, and documentation
Information and communication: getting the correct financial info to the right people
Monitoring: reviewing and testing controls so problems are caught early

What Internal Controls Should Owners Prioritize First?

Start with cash, inventory, receivables, and disbursements, since these areas directly affect liquidity and are vulnerable to both errors and misuse. A simple way to think about control design is to ensure no single person can initiate, approve, and record the same transaction without oversight.

This becomes more important as your business grows. When responsibilities expand across multiple people, precise controls reduce confusion and prevent minor errors from becoming recurring issues.

Standard high-impact controls include:

Segregation of duties, or owner review when staffing is limited
Regular bank reconciliations with documented review
Approval limits for larger purchases, refunds, and write-offs
Access controls for accounting systems, including audit trails and logs

How Do You Strengthen Controls Over Receivables?

You strengthen receivables controls by tightening the path from credit decisions to invoicing, collections, and reconciliation. Receivables represent cash you’re counting on, so weak controls can show up as slow collections, higher write-offs, or misleading revenue and cash flow projections.

Practical steps include setting clear credit policies, issuing invoices promptly, reviewing ageing reports regularly, and requiring approval and documentation for adjustments such as credit memos and write-offs. As your business grows, these controls also help you maintain consistent customer treatment and avoid collection issues that can damage relationships.

When billing, collections, and reconciliation are separated, it becomes harder for errors or manipulation to go unnoticed.

What Does Internal Control Testing Mean in Practice?

Internal control testing is how you confirm your controls are designed to address risk and are actually being performed. Testing generally looks at two things: whether a control makes sense on paper and whether it’s operating consistently in real life.

Typical testing methods include reviewing documentation, interviewing the person responsible, observing the process, and re-performing the control to confirm the results. For growing businesses, testing also helps demonstrate that processes remain effective as transaction volume increases.

How Can Small and Mid-Size Teams Test Controls Without Slowing Operations?

Small and mid-size teams can test controls by focusing on the highest risk processes and using compensating controls when complete segregation isn’t realistic. For example, an owner or senior leader can review bank reconciliations, approve vendor setup changes, and spot check receivables adjustments on a consistent cadence.

Many businesses use a rolling schedule, testing one area each quarter to keep controls current without overwhelming the team. This approach also helps controls evolve gradually as the company adds staff and complexity.

Keeping Controls Effective Over Time

Internal controls aren’t a one-time setup. As you add staff, vendors, customers, and technology, risks shift, and controls need to be updated, retrained, and tested. The most effective approach is to keep controls practical and scalable, so they support growth rather than slow it down.

If you’d like help strengthening controls or setting up a realistic testing approach, reach out to your CPA. With a few targeted improvements, you can improve financial accuracy, reduce avoidable risk, and support more confident decision-making.

Frequently Asked Questions (FAQ’s)

What’s the difference between internal controls and bookkeeping?
Bookkeeping records transactions, while internal controls help ensure those transactions are accurate, authorized, and complete. Controls make your bookkeeping more reliable and more useful for decision-making.
How often should a small and mid-size business test internal controls?
Testing works best on a rolling basis throughout the year. Higher-risk areas such as cash, receivables, and disbursements typically warrant more frequent review.
What if we can’t segregate duties because our team is small?
Use compensating controls such as owner review, documented approvals, and periodic spot checks. The goal is to prevent a single person from controlling a transaction end to end without oversight.
Where should owners start if they’re building controls from scratch?
Start with cash handling and bank reconciliations, then move to receivables and disbursements. Those areas most directly affect liquidity and fraud risk, and they scale well as the business grows.

The post Strengthening Internal Controls for Small Businesses appeared first on Walter Shuffain.

ERISA Fidelity Bonds: Myth Busting Five Common Misconceptions

wscpa — Tue, 27 May 2025 16:21:16 +0000

Written by: Stephen Candelario, CPA and Jill Blumen, CPA

In the complex world of employee benefit plans, fidelity bonds serve as a crucial safeguard against losses caused by financial malfeasance. Given the costs and vagaries of litigation, plan sponsors and participants may have no recourse when plan assets are stolen except for fidelity bonds that cover first dollar losses with no deductible. In fact, the Employee Retirement Income Security Act (ERISA) requires most retirement plans to have such coverage regardless of the number of participants or the value of plan assets.

However, misconceptions and confusion surrounding these bonds can often lead to compliance pitfalls for plan sponsors. This article aims to provide clarity by “busting” common myths and misunderstandings about ERISA fidelity bonds and leading sponsors on a path to compliance.

Fidelity Bond Facts

Gaining a basic understanding of fidelity bonds can aid in uncovering the truth about them:

General:

Bonds are mandatory for most retirement plans, with exceptions for unfunded plans and those not subject to ERISA Title I, such as some government and church plans.
Form 5500, which is signed under penalty of perjury, asks whether the plan has a fidelity bond.
Bonds may be standalone or included in an insurance policy.
Plan sponsors must obtain bonds from a company approved by the Department of the Treasury’s Listing of Approved Sureties. The company name does not need to include the word “fidelity.”

Bond amounts:

As mandated by ERISA, generally, fidelity bonds must cover 10% of fund assets (determined as of the last day of the prior year) up to a certain dollar amount limit.
The minimum required amount is $1,000. The maximum required for most plans is $500,000, but the maximum required for plans that include employer securities (e.g., ESOPs and KSOPs) is $1,000,000.

Coverage:

Fidelity bonds must cover anyone who handles the funds or property of an employee benefit plan, including but not limited to fiduciaries and some third-party service providers.
The bond must cover the handling of all plan assets, regardless of type or location.
ERISA fidelity bonds must provide first dollar coverage with no deductible to the plan.

Armed with this basic knowledge, common myths can be tackled.

Myth #1: Fidelity Bonds vs. Fiduciary Insurance Coverage

“My company’s fiduciary insurance covers the plan’s ERISA fidelity bond requirement.”

Fiduciary insurance and fidelity bonds serve entirely different purposes.

A plan’s fiduciary liability insurance protects it against a fiduciary’s breach of duty. For example, an individual trusted to manage plan assets may breach their duties by engaging in risky transactions that reduce plan assets. This person’s breach of fiduciary duty potentially would be covered by the plan’s fiduciary liability insurance coverage.

In another scenario, though, someone with access to payroll deductions — not limited to fiduciaries — could divert funds to a phantom account. The plan’s fidelity bond could cover the loss, up to the maximum amount of the bond.

Myth #2: Obtaining Retroactive Coverage

“Retroactive fidelity bonds are easy to get.”

Plan audits often reveal that a plan has been operating without a fidelity bond. In such cases, the Department of Labor (DOL) will require the plan sponsor to obtain coverage and may ask that the coverage should be obtained for all years where a bond was not in place. However, retroactive fidelity bonds may be unavailable because insurers are typically prohibited by state law from issuing retroactive coverage. Instead, a plan sponsor can work with the DOL to document its attempts to comply with the fidelity bonding requirement and can maintain proper coverage going forward.

Myth #3: Fidelity Bond vs. Plan Audit Requirement

“We don’t need a fidelity bond because our plan doesn’t meet plan audit requirements.”

This myth is fairly easy to debunk. It’s true that ERISA does contain provisions about both fidelity bonds and plan audit requirements; the size of the company matters with plan audits but not with fidelity bonds. ERISA specifically requires fidelity bonds for most plans, regardless of the number of employees or the size of the plan. The plan audit requirements typically apply to plans with 100 or more participants. A plan can be exempt from the audit requirements yet still be required to have a fidelity bond.

Myth #4: Automatic Coverage

“Our D&O insurance coverage automatically covers fidelity bonds.”

A directors and officers (D&O) insurance policy may include a general fidelity bond, which may or may not satisfy the requirements for ERISA fidelity bonds. However, such inclusion is generally not mandatory. Because coverage varies from policy to policy, the person or group responsible for maintaining insurance coverage should review all policies to determine whether a separate fidelity bond is included and whether the bond meets all ERISA requirements. For example, like many other insurance policies, D&O coverage often includes a deductible; however, ERISA requires fidelity bonds that carry no deductible. Maintaining fidelity bonds and insurance policies requires a periodic review of both.

Myth #5: Fidelity Bonds and Cybersecurity Concerns

“Our ERISA fidelity bond covers theft through cyber means.”

While fidelity bonds might cover cybersecurity issues, it is best not to assume that such protection exists. As with D&O insurance, reviewing the terms of any fidelity bond can help clarify the bond’s stance toward cyber issues. Plan sponsors can voluntarily obtain combination policies that combine fidelity bond coverage with cybersecurity coverage, as long as the bond meets all other ERISA requirements.

Because of cyber risks to employee retirement plans, the DOL has issued guidance for plan sponsors that emphasizes the need for separate protection against cyber threats.

Does Your Plan Fully Comply with ERISA and Other Laws?

How well is your employee retirement plan protected from theft and fraud? Before falling victim to any myths mentioned in this article, reach out to our team for guidance.

The post ERISA Fidelity Bonds: Myth Busting Five Common Misconceptions appeared first on Walter Shuffain.

Future-Proof Your Business with Rolling Forecasts

wscpa — Tue, 04 Mar 2025 19:47:42 +0000

If you’ve ever put together an annual budget only to realize a few months later that it’s already outdated, you’re not alone. Business conditions change fast—unexpected expenses pop up, revenue doesn’t always hit projections, and market shifts can throw your carefully planned numbers out the window. But if you’re stuck with a static budget, adjusting to these changes can feel like trying to steer a ship with an outdated map.

Without a flexible approach, you end up making decisions based on old data, leading to cash flow surprises, missed opportunities, and constant backtracking to revise numbers that no longer make sense. That’s where rolling forecasts come in. Essential factors like customer acquisition rates, sales figures, and operating expenses should serve as the backbone of your rolling forecast.

A rolling forecast is a financial plan that keeps moving forward. Rolling forecasts update regularly—usually every month or quarter—so your business is always working with the latest financial data. As one period ends, another one is added, ensuring you always have a forward-looking plan in place.

The Future of Business Planning

Rolling forecasts are changing the way businesses plan for the future. Instead of locking into a budget that may not hold up, companies that embrace dynamic budgeting are staying flexible, making strategic financial moves, and keeping their accounting practices stress-free.

If you’re tired of revising budgets and want an easier way to manage your business’s finances, switching to rolling forecasts might be one of the best decisions you can make. It’s not just about keeping up—it’s about staying ahead.

How to Make the Switch to Rolling Forecasts

Switching to a rolling forecast system doesn’t have to be complicated. Here’s how to start:

Use Financial Planning Software

Tools like cloud-based accounting software such as NetSuite or ePROMIS can automate forecasts, saving time and reducing errors. With rolling forecasts, updates happen automatically as new data comes in, eliminating the need for constant budget overhauls. This ensures your financial plan stays current and accurate with minimal manual effort.

Update Forecasts Regularly

Decide whether you want to update forecasts monthly, quarterly, or at another interval that makes sense for your business. Unlike static budgets that rely on initial assumptions, rolling forecasts pull in real-time financial data. This means your numbers are always up to date, leading to more precise planning and better cash flow management.

Focus on the Right Metrics

Track what matters—whether it’s revenue, operating costs, or cash flow—to make your forecasts as useful as possible. A clear, always-updated forecast helps businesses plan for payroll, investments, and taxes while avoiding cash crunches and unexpected financial surprises.

Get Input from Your Team

Work with finance, sales, and operations teams to make sure forecasts reflect the reality of your business. Rolling forecasts allow for smarter, faster business decisions by continuously adjusting plans based on actual performance. Instead of waiting for a year-end budget review, your team can pivot quickly—whether that means scaling up during a boom or tightening expenses before they become problematic.

Final Thoughts

By making these adjustments, businesses can reduce the stress of year-end reconciliations and compliance tasks. With financial data updated throughout the year, reporting becomes much smoother, saving time and effort for your accounting team.

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The Importance of Proper Inventory Management for Financial Stability

wscpa — Mon, 06 Jan 2025 14:27:17 +0000

Proper inventory management is essential for sustaining your business’s financial health. Though it may not always be the most obvious focus, how you handle your inventory significantly impacts cash flow, profit margins, and long-term growth. This article will discuss how maintaining an organized inventory can lay the foundation for enduring success.

Why Inventory Management is Essential for Financial Reporting

Inventory management is about knowing precisely what you’ve got, where it’s located, and when you need it. The goal is simple: keep the right amount of stock on hand at the right time—no more, no less. While this may sound easy, even small mistakes can make a significant impact. Your inventory isn’t just “stuff” on shelves—it’s directly tied to your financials. If inventory is poorly tracked, it can throw off your cost of goods sold (COGS), disrupt your cash flow, and reduce profitability. Conversely, getting it right gives you better control over your finances and helps you make smarter decisions for your business.

Inventory and COGS: Why It’s So Important

Your cost of goods sold (COGS)—what it costs to make the products you sell—is one of the key numbers on your income statement. Your inventory management practices heavily influence it. Here’s why:

Accuracy Matters: The more precise your inventory records are, the more accurate your COGS calculation will be, giving you a true picture of your financial health.

Inflated Inventory = Overstated Profits: If you overestimate your inventory, you can make your COGS look smaller, inflating your profits and giving you a misleading view of your business.

Undervaluing Inventory = Lower Profits: Conversely, undervaluing your inventory will increase COGS, making profits seem slimmer.

Keeping your inventory accurate gives everyone—your team, investors, and stakeholders—a clear view of your business’s performance.

Cash Flow: Keep Things Moving

Inventory is often one of your most significant investments, and if it’s not carefully managed, it can hurt your cash flow:

Too Much Stock = Tied-Up Cash: Overstocking ties up cash in unsold inventory, which could be better spent elsewhere. Plus, extra stock means more storage costs, insurance, and possibly even markdowns if the products don’t sell.

Too Little Stock = Lost Sales: Running out of inventory means missed sales, unhappy customers, and a lost opportunity to generate revenue.

The Sweet Spot: The trick is to find the balance—enough stock to meet customer demand but not so much that your cash is stuck in unsold goods. When done right, this frees up money to reinvest in your business or handle other expenses.

By managing inventory wisely, you can keep your cash flow strong and be able to invest in growth.

Profitability: The Bottom Line

Inventory management is more than just keeping products in stock—it’s crucial to running a smooth and profitable operation. It can transform how your business functions and improve your bottom line when done strategically. Innovative inventory practices help you save money by cutting waste, lowering storage costs, and avoiding overproduction. Accurate data lets you plan better, predict demand, and dodge unexpected hiccups. When your inventory is well-organized, you can react quickly to market changes, keeping your business flexible and ahead of the competition.

How to Take Charge of Your Inventory

Improving your inventory management doesn’t have to mean a massive overhaul. Small changes can make a big difference. Here’s how:

Embrace Technology: Modern inventory software does the heavy lifting—tracking stock, reducing errors, and giving you real-time insights to make smarter decisions.
Do Regular Audits: Comparing your physical stock to your records regularly helps catch discrepancies early before they become costly problems.
Try Just-in-Time (JIT) Ordering: Instead of overstocking, order only what you need, when you need it. It’s a great way to free up cash and avoid excess inventory.
Train Your Team: Equip your team with the skills and tools they need to manage inventory smoothly. A knowledgeable team keeps everything running like clockwork.
Get Expert Advice: Your accountant can provide invaluable insights to refine your inventory strategy and align it with your financial goals.

Final Thoughts

Inventory management is frequently underestimated when it comes to maintaining the financial stability of a business. An organized and precise inventory system is crucial in influencing cash flow, profit margins, and overall business performance. By prioritizing accurate inventory control, you’re setting the stage for smoother operations, more precise financial insights, and improved profitability.

The post The Importance of Proper Inventory Management for Financial Stability appeared first on Walter Shuffain.

Supreme Court Ruling on Taxation of Corporate-Owned Life Insurance: What Business Owners Need to Know

wscpa — Thu, 22 Aug 2024 14:40:05 +0000

Written by: William Cooper, CPA

On June 6, 2024, the Supreme Court issued a ruling in Connelly v. United States that has significant implications for privately held business owners. The Court unanimously decided that the value of company-owned life insurance policies must be included in the estate valuation for federal estate tax purposes, regardless of any contractual obligations that dictate how these insurance proceeds are used.

The main takeaway: This decision marks a pivotal moment in estate planning for business owners who rely on life insurance as part of their business succession strategies. The decision underscores the need for business owners to carefully evaluate how their life insurance policies and redemption agreements are structured.

The Core of the Connelly Decision

The Connelly case addressed whether the death benefit from a company-owned life insurance policy should be included in a closely held business’s valuation for estate tax purposes. The Supreme Court clarified that the full value of these proceeds must be included in the estate valuation, regardless of whether the proceeds are used to redeem a deceased shareholder’s shares.

Implications for Business Owners

This ruling has profound implications for business owners with company-owned life insurance policies. The Court effectively raises the potential estate tax liability for business owners and their heirs by mandating that life insurance proceeds be included in the estate’s valuation. The decision underscores the need for business owners to carefully evaluate how their life insurance policies and redemption agreements are structured.

Consider the following key points:

Increased Estate Tax Liability: Including life insurance proceeds in the estate valuation could significantly increase the estate’s taxable value. For some business owners, this could mean a substantial portion of the intended benefits for their heirs is instead paid as estate taxes. In the Connelly case, for example, the estate’s valuation increased by $3 million due to the inclusion of life insurance proceeds, doubling the estate tax liability from $1.19 million to $2.12 million.
Review of Redemption Agreements: Business owners should review their existing redemption agreements, particularly those that rely on company-owned life insurance. The ruling suggests that simply using life insurance proceeds to buy out a deceased shareholder’s interest will not shield those proceeds from being included in the estate’s valuation. Owners may need to consider alternative arrangements or modifications to existing agreements to mitigate the impact of this ruling.
Impact on Business Succession Planning: For closely held businesses, succession planning often involves life insurance as a tool to ensure a smooth transition of ownership. The Connelly ruling introduces new complexities into these plans, making it essential for business owners to revisit their strategies. Tax advisors can help explore options such as changing the structure of life insurance policies or altering ownership arrangements to reduce estate tax exposure.

What Steps Should Business Owners Take?

In light of the Connelly decision, business owners should take the following steps to protect their interests and those of their heirs:

Consult with Tax and Legal Advisors: The complexity of estate tax laws means that professional advice is crucial. Tax and legal advisors can help assess the impact of the ruling on your specific situation and recommend changes to your life insurance and estate planning strategies.

Review and Possibly Restructure Agreements: If your business has redemption agreements funded by company-owned life insurance, it is essential to review these agreements immediately. Consider whether changes are needed to avoid unexpected estate tax liabilities.

Understand the Transfer-for-Value Rule: Before making any changes to life insurance policies, be aware of the transfer-for-value rule. This rule stipulates that if a life insurance policy is transferred to another party for something of value, a significant portion of the death benefit may become taxable as ordinary income. This potential tax consequence should be carefully weighed when considering changes to policy ownership.

Final Thoughts

The Supreme Court’s ruling in Connelly v. United States serves as a critical reminder for business owners to stay vigilant in their estate and succession planning. The inclusion of company-owned life insurance proceeds in estate valuations adds a new layer of complexity that could have significant financial implications. By taking proactive steps, business owners can better manage their estate tax exposure and ensure that their plans continue to align with their long-term goals.

This ruling highlights the importance of regular reviews of estate planning strategies, especially for those involving closely held businesses. As always, the guidance of experienced tax and legal professionals will be invaluable in navigating these challenges and safeguarding your legacy.

If you have questions about how the Connelly decision may affect your business or need assistance with estate planning, our team of advisors is here to help. Contact us today to schedule a consultation.

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Employee Retention Credit: Prompt Response Necessary as IRS Sharply Increases Compliance Action Through Taxpayer Audits

wscpa — Mon, 20 May 2024 19:38:05 +0000

Written By: Jonathan C. Hitter, CPA, MST, CGMA

To combat a wave of frivolous employee retention credit (ERC) claims, the IRS has sharply increased compliance action through audits and criminal investigations, with more activity planned in the future. In this heightened enforcement environment, employers are advised to act swiftly when responding to IRS notices regarding ERC claims.

Immediate Action Required for Employers Receiving IRS Audit Notifications

Employers must be aware that failing to respond to IRS notices within the time frame specified can lead the IRS to disallow the entire ERC claim and issue a notice of disallowance. Once the IRS formally disallows a refund claim, the taxpayer may be permitted to first file a protest with the IRS Office of Appeals or, in some cases, the taxpayer may decide to file a lawsuit in federal court to litigate the issue. Both scenarios subject employers to the necessary defense of an often burdensome and costly refund claim controversy, further delaying the much-needed ERC relief promised by Congress.

Successful defense of any ERC examination will depend greatly on an understanding of the risks and eligibility criteria to avoid the costly repercussions of noncompliance, including the potential for general examination. As noted below, the IRS highlighted in Notice IR-2024-39 warnings signs that ERC claims may be incorrect, urging businesses to revisit eligibility.

Key Examination Risks Identified by the IRS

Claiming Too Many Quarters: It is unusual for employers to qualify for the ERC in all available quarters. A meticulous review of eligibility for each quarter is advised to avoid overstating claims.
Non-Qualifying Government Orders: The IRS has clarified that not all government orders related to COVID-19 qualify for the ERC. Orders must have directly affected the employer’s operations, and mere guidance or recommendations do not suffice. Businesses must be able to document and substantiate the impact of qualifying government orders.
Employee Counts and Calculation Errors: With changes in the law during 2020 and 2021, employers must be vigilant in their calculations, adhering to the dollar limits and credit amounts for qualified wages.
Supply Chain Disruptions: Qualifying for the ERC based solely on supply chain issues is rare. Employers must demonstrate that their supplier was affected by a qualifying government order.
Overstating the Eligibility Period: Claiming the ERC for an entire calendar quarter is possible only if the business was impacted for the full duration. Employers are entitled to claim only the actual suspension period and must maintain accurate payroll records.

Navigating Refund Claim Controversies Amid Increased IRS Action

Employers should seek guidance from trusted tax professionals to ensure compliance and to effectively manage the challenges of the IRS’s ongoing enforcement actions.

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Understanding the Tax Relief for American Families and Workers Act of 2024

wscpa — Wed, 24 Jan 2024 15:00:24 +0000

The House Ways and Means Committee approved The Tax Relief for American Families and Workers Act of 2024, symbolizing a legislative victory for taxpayers, especially small business owners and professionals. This proposed legislation deserves a detailed look due to its retroactive provisions and potential to affect the upcoming tax season. The proposed bill will now advance through Congress and will ultimately need approval by the Senate and President Biden.

For Businesses: Incentives to Sustain and Grow

Several key provisions have been introduced to support business growth and adaptability:

Research and Experimentation Expenses:

Under current law, domestic research and experimental expenditures paid or incurred in tax years beginning after December 31, 2021, are required to be amortized over a five-year period. In tax years prior to 2021, these expenses could be immediately deducted in the year in which they were paid or incurred. Costs attributable to research or experiments outside the U.S. must be deducted over a 15-year period. The proposed law would delay to tax years beginning after December 31, 2025 the application of this rule with regard to research and experimental costs attributable to domestic activities. There would be no change for activities outside the U.S. The bill provides transitional rules applicable to interactions with research credits, as well as making accounting changes.

Bonus Depreciation:

The Act extends the 100% bonus depreciation for qualifying property placed in after December 31, 2022, and before January 1, 2026. This extension allows businesses to deduct the full cost of eligible property in the year of service, promoting investment in new assets. The provision retains 20-percent bonus depreciation for property placed in service after December 31, 2025, and before January 1, 2027.

Section 179 Deduction:

The deduction limit under Section 179 is increased for tax years starting after 2023, allowing businesses to expense up to $1.29 million and phase out thresholds starting at $3.22 million, indexed for inflation thereafter. Under current law, the maximum amount a taxpayer may expense is $1 million of the cost of qualifying property placed in service for the taxable year.

Business Interest Limitation:

For tax years starting after 2023 and before 2026, businesses can compute adjusted taxable income (ATI) for interest limitation with reinstated depreciation, amortization, and depletion deductions, enhancing cash flow.

Combating Fraud and Ensuring Compliance:

The Act introduces stringent measures to curb fraudulent claims, specifically targeting the misuse of the Employee Retention Tax Credit (ERTC). If signed into law, the proposed tax package would shorten the deadline to file all ERC claims to January 31, 2024.

For Families: A More Generous Child Tax Credit

The Child Tax Credit (CTC) sees a notable expansion for individuals. This credit calculates the refundable portion per child once the taxpayer’s earned income exceeds $2,500 by 15%. For tax years 2023 through 2025, the credit increases to $1,800, $1,900, and $2,000, respectively, offering substantial savings for families. Additionally, for the tax years 2024 and 2025, taxpayers can calculate their CTC based on the previous year’s earned income, providing flexibility in fluctuating income.

International Relations: U.S. and Taiwan

In a significant move, the bill extends tax treaty-like benefits to Taiwan to avoid double taxation, which may impact businesses with operations or interests in Taiwan.

Disaster Relief: Continued Assistance

Disaster relief provisions from the Taxpayer Certainty and Disaster Tax Relief Act of 2020 are extended. This includes benefits for those affected by federally declared disasters between January 1, 2020, and 60 days post-enactment of the new bill.

Simplifying Tax Reporting:

The reporting threshold for Form 1099-NEC and 1099-MISC increases from $600 to $1,000 for payments made after December 31, 2023, easing the administrative load for small businesses.

Promoting Affordable Housing:

The bill boosts the 9% low-income housing tax credit ceiling by 12.5% for calendar years 2023 through 2025 and reduces the bond financing threshold to 30% for projects financed by bonds issued before 2026.

Practical Implications:

This Act presents a mosaic of opportunities and considerations. Small business owners and professionals must promptly assess how these changes impact their operations and tax strategies. As the provisions have retroactive effects, it’s crucial to consult with tax professionals to maximize benefits and navigate the complexities of the new law.

The post Understanding the Tax Relief for American Families and Workers Act of 2024 appeared first on Walter Shuffain.

Data and Technology Are Key to Managing Third-Party Risk

wscpa — Tue, 16 Jan 2024 22:48:35 +0000

In today’s globalized business environment, no company operates alone. From manufacturers to financial services companies to cloud service providers, external vendors are integral to every business’s success — though each third-party relationship also introduces potential risks.

This ecosystem of interconnected risks is too complex and dynamic to be managed without technology. Different vendors interact with different segments of a company, which means that no single team is responsible for managing third-party risk. A third-party risk management (TPRM) platform can help meet this need, interfacing with a company’s existing systems to create a centralized hub to manage the risks introduced by external vendors.

A TPRM platform, such as that offered by Fusion Risk Management, can enable companies to organize and mobilize their defenses by breaking down silos, increasing visibility, and improving decision-making through the use of data analytics. With an uptick in regulatory scrutiny across the globe, companies can’t afford the cost of non-compliance, let alone the reputational damage and loss of revenue that result from a data breach.

Third-Party Risk Doesn’t End at Procurement

TPRM begins at the point of procurement, when companies perform due diligence before formalizing any business relationship with an external vendor. Vetting various risks — cybersecurity, financial, supply chain, business continuity and more — is a critical piece of this diligence. If the vetting process is too cumbersome or complex, users may circumvent controls and critical information can fall through the cracks. Using a TPRM platform, companies can streamline this process into a stepped workflow and use automation to accelerate intake and approval. If an external vendor has not provided the necessary data, there is a clear line of sight into all missing information. More importantly, they cannot proceed through the onboarding process without demonstrating an adequate risk assessment was performed.

But due diligence during procurement is just the first step in TPRM. To effectively manage vendor risks, companies must take a systems-based approach, considering every point at which external partners engage with their organization. A TPRM platform creates a central interface that can connect with different sources of information, driving visibility and facilitating cooperation between procurement, IT, legal, and risk management functions like compliance and resilience that have a hand in managing third-party risk.

TPRM assessments are typically performed on an annual basis, which is far from sufficient to successfully protect against third-party risk. Instead, companies must engage in risk management on an ongoing basis – activities like monitoring vendor KPIs, continuous monitoring and real-time alerts, benchmarking performance, and live data breach detection. A TPRM platform can turn what would otherwise be a series of interrelated, but siloed processes into a cohesive, end-to-end program, providing the overarching visibility and collaborative infrastructure necessary to keep a company safe.

Technology is also necessary to keep pace with new and existing regulations like the Department of Justice’s updated General Compliance Program Guidance and the EU’s Digital Operational Resilience Act (DORA). Even a company that only does business in the U.S. may be subjected to dozens of regulations because of its globalized supply chain. This regulatory web will only become more tangled as more governmental agencies focus their attention on third-party risk. A TPRM platform can automatically update its parameters based on new and evolving laws, such that businesses need not worry about maintaining alignment with their compliance needs.

The TPRM platform need not replace a company’s existing systems, although doing so over time can streamline processes and reduce costs without jeopardizing compliance. Because it is unlikely a company will ever migrate all third-party data into one system, the ideal TPRM platform is porous and can easily connect to other sources of information. Fusion’s offering, for instance, links to real-time data feeds from companies, while providing a user experience that enables vendor surveys, intuitive workflows, remediation, and reporting.

Level Up Your Defenses with Data Analytics

Technology also empowers companies to put their third-party data to use. For most businesses, it would be impossible to manually track every interaction with external vendors. Data analytics can provide a holistic, digestible view of this information, pinpointing potential vulnerabilities and other areas that require attention. Especially when assessing risk in real time, companies must rely on automated tools and alerts that can identify and respond to threats faster than a human user. Ongoing monitoring also enables companies to demonstrate that their external vendors maintain compliance with all relevant regulations. A TPRM platform fosters easier tracking to ensure risk mitigation efforts don’t lapse and third parties remain compliant.

Predictive analytics can help companies proactively hunt for vulnerabilities within their third-party ecosystem, using historical data to predict – and prevent – future threats. By analyzing historical data about a vendor’s normal operations, for instance, predictive analytics may enable a company to quickly detect aberrant behavior that indicates a potential of cybersecurity breach. Geographic visualization capabilities help companies monitor real-time risk events like hurricanes and wildfires that threaten their assets and those of their vendors.

Invest in Technology Now to Secure Your Third-Party Ecosystem

When every external vendor is a potential opening for a cybersecurity breach, businesses can no longer limit their risk management to their own systems and networks. They must protect against the risks presented by their entire third-party ecosystem, a scope so large and complex that companies must leverage the power of data analytics and technology to manage it. These tools are indispensable to helping businesses keep track of their vendors to stay compliant – and safe.

This insight was developed in collaboration with Fusion.

The post Data and Technology Are Key to Managing Third-Party Risk appeared first on Walter Shuffain.

2023 Year-End Guide – Financial Transactions

wscpa — Thu, 07 Dec 2023 18:10:27 +0000

The tax rules dealing with financial transactions and instruments can be complicated, but failure to understand these rules and their application to your business’s transactions could result in negative tax consequences or forgone opportunities. As part of year-end planning and looking ahead to next year, there are a few steps that companies might want to take with respect to their financial transactions during the course of the year:

Consider Tax Implications of Debt Refinancing Transactions
Review Tax Hedging Identification and Documentation Processes
Consider Deductibility of Eligible Bad Debts

Consider Tax Implications of Debt Refinancing Transactions

Many companies refinanced existing indebtedness over the past year to lock-in current interest rates. Refinancing transactions that result in a “significant modification” of the debt under applicable regulations can have disparate tax consequences depending on the specific circumstances. Although the regulations provide relatively clear rules for determining when a modification is “significant,” the application of these rules is highly fact-dependent and frequently requires relatively complex calculations.

Companies should review their debt modification transactions undertaken during the year to confirm their tax impact. Companies that are considering changes to existing credit facilities in the coming year should likewise assess whether the proposed change would amount to a significant modification and, if so, determine the tax implications of the modification.

Tax Treatment of Debt Modifications

The U.S. federal income tax treatment of debt refinancing transactions is highly fact-specific and requires careful analysis. Certain refinancing transactions may be treated as a taxable retirement of the existing (refinanced) debt, which may give rise to the ability to write-off any unamortized debt issuance costs and original issue discount, the latter as “repurchase premium.” However, in certain situations a refinancing transaction may also give rise to taxable ordinary income in the form of “cancellation of indebtedness income.”

The tax consequences of a debt refinancing transaction hinge in part on whether the transaction results in a “significant modification” of the debt under rules set out in Treas. Reg. §1.1001-3, which results in a deemed retirement of the existing debt in exchange for a newly issued debt instrument.

When Is a Modification Significant?

As a threshold matter, a modification includes not only a change to the terms of an existing debt instrument but would also include an exchange of an old debt instrument for a new one or the retirement of an existing debt instrument using the proceeds of a new debt instrument. Stated differently – it is the substance, not the form, that governs whether debt has been modified for federal income tax purposes.

Whether a modification of a debt instrument constitutes a significant modification depends on the materiality of the changes. The regulations provide a general “economic significance” rule and several specific rules for testing whether a modification is significant. In practice, most debt modifications are covered by two specific rules governing changes in the yield to maturity of a debt instrument (the change in yield test) and deferrals of scheduled payments (the deferral test).

Under the change in yield test, a modification will be significant if the yield of the modified debt instrument varies from the yield of the unmodified debt instrument by more than the greater of 25 basis points (i.e., 1/4 of 1%) and 5% of the unmodified yield. The regulations include specific rules for making this determination. However, it is important to observe that a number of changes to a debt instrument may cause a change in the yield. Examples include changes to the interest rate, deferral (or acceleration) of scheduled payments, and payment of a modification or consent fee in connection with the modification. It is not uncommon for a modification with only a minor (or no) change to the stated interest rate to result in a significant modification due to changes in the yield to maturity that result from the payment of modification fees or changes to the due dates for certain payments. This issue is often overlooked.

Under the deferral test, a modification will be significant if it results in a material deferral of scheduled payments. The deferral test does not define what constitutes a material deferral, but instead provides a deferral safe harbor pursuant to which a modification to defer payments will not be significant as long as all deferred payments are unconditionally payable by the end of the safe harbor period. The safe harbor period begins on the due date of the first scheduled payment that is deferred and extends for a period equal to the lesser of five years or 50% of the original term (e.g., the deferral safe harbor for a five-year debt instrument would be two-and-a-half years).

In applying both the change in yield test and the deferral test, taxpayers are required to consider the cumulative effect of the current modification with any prior modifications (or, in the case of a change in yield, modifications occurring in the past five years). This cumulative rule is particularly noteworthy for taxpayers who routinely modify their indebtedness (and often incur modification fees in connection with the modification), as the results of certain modifications may not be significant when viewed in isolation but may be significant when combined with prior modifications.

Tax Implications of Significant Debt Modifications

A significant modification results in the deemed retirement of the existing debt instrument in exchange for a newly issued debt instrument. The existing debt instrument will be deemed retired for an amount equal to the “issue price” of the newly issued debt instrument, together with any additional consideration paid to the lenders as consideration for the modification.

The issue price of a debt instrument depends on whether the debt instrument was issued for cash or property. If a significant amount (generally 10%) of the debt was issued for money, the issue price will be the cash purchase price. Otherwise, assuming the debt instrument is in excess of $100 million, the issue price will be its fair market value (or the fair market value of the property for which it was issued) if it is “publicly traded.” In all other cases, the issue price of the debt instrument will generally be its stated principal amount.

If the issue price of the modified debt instrument (i.e., the repurchase price) is less than the tax adjusted issue price of the old debt instrument, a borrower will incur cancellation of indebtedness income, which is generally taxed as ordinary income in the current tax year. If instead the repurchase price exceeds the adjusted issue price (this may occur when the old debt instrument had unamortized original issue discount or where the debt is publicly traded and has a fair market value in excess of its face amount), the borrower will incur a “repurchase premium.” Repurchase premium is deductible as interest expense. Special rules apply to determine whether such repurchase premium is currently deductible or is instead amortized over the term of the newly issued debt instrument.

The retirement of an existing debt instrument may also give rise to the ability to deduct any unamortized debt issuance costs. As a general matter, the determination of whether any unamortized debt issuance costs should be written off or carried over and amortized over the term of the new debt instrument generally follows the same analysis as repurchase premium. Notably, debt issuance costs are deducted as ordinary business expenses under Section 162, and therefore are not subject to the limitation on business interest expense deductions under Section 163(j).

Finally, a significant modification may give rise to a number of additional tax implications that companies should consider, including the potential for foreign currency gain or loss and the need to “mark-to-market” existing tax hedging transactions.

Review Tax Hedging Identification and Documentation Processes

Most companies enter into hedging transactions to manage risk that arises in their business, such as interest rate and currency risk. These transactions are subject to tax hedging rules, and failure to follow the requirements under those rules could result in negative tax consequences. The tax hedging rules impose a same-day identification requirement with timing and character whipsaw rules that may apply if such transactions are not timely identified.

As part of year-end reviews and planning for next year, companies should review these rules and the sufficiency of their hedging identification and documentation processes to ensure that they meet the requirements.

Tax Hedge Qualification & Character

To qualify as a tax hedge, the transaction must occur within the normal course of business and be used to manage either interest rate, currency, or price risk with respect to ordinary property or ordinary obligations (incurred or to be incurred) by the taxpayer. For this purpose, property is ordinary if a sale or exchange of the property could not produce capital gain or loss under any circumstances. Taxpayers may manage risk on a transaction-by-transaction basis or, alternatively, may manage aggregate risk (i.e., they may enter into one or more foreign currency contracts to manage aggregate foreign currency risk).

Gain or loss on a tax hedging transaction will be ordinary income or loss if the transaction is properly identified and documented in a timely manner.

Same-Day Identification Requirement

The tax hedging rules require that each tax hedging transaction be identified as such no later than the close of the day on which the hedge was entered into. The hedged item must be identified substantially contemporaneous with the tax hedging transaction, but in no case more than 35-days after the hedging transaction was entered into.

An identification must identify the item, items, or aggregate risk being hedged. Identification of an item being hedged involves identifying a transaction that creates risk and the type of risk that the transaction creates. This identification is made in (and retained as part of) the company’s tax files and is not sent to the IRS. A GAAP (or IFRS) hedge identification will not satisfy the tax hedge identification requirement unless the taxpayer’s books and records make clear that such identification is also being made for tax purposes. Additional regulatory guidance is provided for certain categories of hedging transactions, including hedges of debt issued (or to be issued) by the taxpayer, inventory hedges, and hedges of aggregate risk.

Taxpayers are given significant flexibility regarding the form of such identification. For companies that enter into tax hedging transactions infrequently, a same-day identification may be prepared and saved in the company’s tax files. However, this approach is often challenging for taxpayers that enter into hedging transactions routinely (often on a daily basis). For taxpayers who enter into hedging transactions more frequently, the same-day identification requirement can be satisfied through a tax hedging policy. A tax hedging policy will identify the types of transactions entered into to manage risk and the risk managed (and how such risk is managed) and will identify all transactions described in the policy as tax hedging transactions. If properly prepared, the tax hedging policy will serve as identification (for tax hedging purposes) of any transactions described in the policy.

Hedge Timing Rules

Treasury regulations provide special tax accounting rules for tax hedging transactions known as the “hedge timing rules.” The hedge timing rules provide a general requirement that the method of accounting used to account for hedging transactions must clearly reflect income by matching the recognition of income, deduction, gain, or loss on the hedging transaction to the recognition of income, deduction, gain, or loss on the hedged item. Special rules are provided for specific types of hedging transactions.

Failure to Identify – Timing & Character Whipsaws

Failure to properly identify a hedging transaction generally establishes that the transaction is not a tax hedging transaction. As a result, gain or loss on the hedging transaction is determined under general principles. However, the regulations provide a broad anti-abuse rule that will frequently treat any gains as ordinary, which may result in a character whipsaw in which losses are capital and any gains are ordinary income. An inadvertent-error exception is provided in the regulations which, if applicable, may allow taxpayers to treat losses in some circumstances as ordinary.

A properly and timely hedge identification also prevents the application of certain loss deferral rules. One example is the tax “straddle” rules, which may defer losses (but not gains) on certain unidentified hedging transactions.

Planning Considerations

With highly volatile commodity prices, and the ever-changing interest and foreign exchange rates, many businesses are likely considering increasingly relying on hedging activity to manage risk. To avoid the character and timing whipsaws described above, and ensure that gain or loss on such hedging transactions is reportable as ordinary income in the same period as the income, deduction, gain, or loss on the hedged item, companies should review their existing tax hedge identification policies (or draft such identifications, if none currently exist). While the identification and documentation requirements can be complex, insufficient attention to the rules could potentially result in negative tax consequences.

Consider Deductibility of Eligible Bad Debts

Accounts receivable, loans, and other debts due to a business are not always collectible in full. A current tax deduction for such losses can yield a tax benefit which takes some of the sting out of the loss. Realizing this tax benefit requires careful and prompt attention to the details of the tax rules governing bad debt deductions.

Special rules apply for determining what is a bona fide debt and the worthlessness of a debt. A tax deduction may be permitted when a debt is determined to be partially worthless, but only to the extent that the debt is also written down (charged off) on the company’s books during the year. A tax deduction may also be permitted for debt that becomes wholly worthless during the year.

As part of year-end planning, companies should consider the tax rules governing bad debt deductions and how they affect the company’s eligibility to deduct losses on account of partially or wholly worthless debts.

Overview of Bad Debt Deduction Tax Rules

Only a bona fide debt arising from a valid and enforceable obligation to pay a fixed or determinable amount of money can support a bad debt deduction. Accordingly, to support a bad debt deduction, companies must first confirm that the purported debt is properly characterized as debt for tax purposes. This analysis can be challenging in the context of related party indebtedness.

The tax rules applicable to bad debts distinguish between debt held by corporations and debt held by other taxpayers. Corporations can take ordinary deductions for bad debts owed to the corporation. Taxpayers other than corporations can take ordinary deductions for bad debts only if the debt was created or acquired in connection with the taxpayer’s trade or business or the worthlessness of the debt was incurred in the taxpayer’s trade or business. Non-business bad debts realized by taxpayers other than corporations constitute short term capital losses rather than ordinary deductions.

Further, the bad debt rules do not apply to “securities,” which is broadly defined as debt issued by a corporation (or by a government or political subdivision thereof) with interest coupons attached or in registered form. The precise scope of the term “registered form” for these purposes is unclear, but in general, for an instrument to be in registered form, transfer of an interest in the principal or interest of the instrument from one holder to another must require entry on a register maintained by the issuer or a clearing organization or the physical surrender and reissuance of the instrument. A worthless security deduction is permitted only on complete worthlessness and is treated as a loss from the sale or exchange, on the last day of the tax year, of a capital asset.

A determination of worthlessness must be based on all relevant facts and circumstances. Complete worthlessness must generally be established through an identifiable event during the tax year. Where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of a judgment, a showing of these facts is usually sufficient evidence of worthlessness. Bankruptcy is generally an indication of the worthlessness of at least a part of an unsecured and unpreferred debt. In bankruptcy cases, a debt may in some instances become worthless before and in other cases only when a settlement in bankruptcy has been reached.

If a (non-security) debt becomes partially uncollectable during a tax year, corporations (or other taxpayers that acquired such debt in the course of their trade or business) may take a partial bad debt deduction for the amount that they can demonstrate is uncollectable. In this case, the specific amount must also be written off on the taxpayer’s books for the year.

Year-End Planning Tip

As part of year-end planning, companies should analyze whether indebtedness they hold is partially or wholly worthless. For debt that is determined to be partially worthless, companies should make sure to charge the debt off in their books and records as required to establish an ordinary bad debt deduction.

The post 2023 Year-End Guide – Financial Transactions appeared first on Walter Shuffain.