Navigating LIFO Inventory Methods During Global Supply Chain Disruptions

Dec 20, 2021

State of the Global Economy
The same issues have been covered in the news cycle for months; supply chain malfunctions, production shortages, inflation, increased tariffs… all the reasons why businesses are facing heightened costs of resources this year. COVID-19-related disruptions have affected distributors and manufacturers worldwide, with gradual increases in the consumer prices index every month since the third quarter of 2020 (apart from May ‘21.) Numerous products including crude oil and petroleum products, natural gas, leather, lumber and wood, chemicals, and metal products have all seen substantial inflation (from 25% – 200%) in the last twelve months.

As costs go up, one tax leveraging option for those required to maintain inventories is the LIFO (last-in, first-out) inventory method. By using LIFO, goods sold throughout the year are deemed to come first from any goods purchased or produced during that year, then from the beginning inventory. As a result, inflation on items in the ending inventory is already included in the cost of goods sold, which may result in a lower taxable income.

LIFO Snapshot
LIFO is an alternative inventory valuation method, used by companies during periods of increased inflation to defer significant taxation. When adopting a LIFO inventory method, taxpayers can measure the effects of inflation on their internal and external prices by assuming the most recently purchased items are being sold first. This is achieved through an “inventory price index computation method,” using indexes published by the Bureau of Labor Statistics.

First, the taxpayer must ascribe value to all inventory (including beginning inventory) at cost. Then, say the LIFO method was adopted in the tax year 2020, the taxpayer should value all inventory at cost, ratably, for 2020 through 2022 and account for any necessary adjustments. In theory, the result of those adjustments would reflect the impact of inflation on company inventory and would then be deducted from taxable income and removed from the balance sheet.

It is required all taxpayers adopting the LIFO method for tax purposes, apply a LIFO computing method to book income. Additionally, all financial statements issued by the taxpayer must reflect computation under a LIFO method. To adopt LIFO, taxpayers must attach Form 970, Application to Use LIFO Inventory Method, to their federal income tax return.

Considerations
Adopting a LIFO inventory method may not benefit all taxpayers. Companies considering the use of a LIFO method for the 2021 tax year should first perform a cost-benefit analysis in order to answer the following questions:

As always, our team of advisors is available to help you determine the best approach for your given situation.

Categories: COVID-19, Manufacturing & Distribution

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Employee Retention Tax Credit – Updates & Reminders

Nov 15, 2021

Don’t leave ERTC money on the table!

The Employee Retention Tax Credit (ERTC) is a provision established under the CARES Act which has been enhanced by additional legislation and could provide an immense amount of capital to employers. Unfortunately, statistics are showing the credit is being underutilized. The good news is with year-end planning on the horizon, now is the perfect time to leverage the ERTC.

What is the ERTC?
This is a refundable tax credit employers can claim against certain employment taxes, equal to a percentage of qualified wages and health insurance premiums paid after March 12, 2020, and before September 30, 2021.

For 2020, the credit is 50% of qualified payments, up to $10,000 per employee. Simply put, an eligible business has the potential to request refunds of up to $5,000 per employee for the year.

For 2021, the credit increases to 70% of qualified payments, up to $10,000 per employee per quarter. The credit was intended to run through December 31, 2021, but the passing of the recent Infrastructure Bill put an end to it after September 30. Nevertheless, the credit is still fair game for the first three quarters of 2021. With a maximum credit of $7,000 per employee, per quarter, a business eligible for all three quarters of 2021, could receive refunds of $21,000 per employee. Without question, the ERTC can provide much-needed dollars for eligible employers.

How do I know if my business is eligible?
For most businesses, eligibility is determined by meeting one of two tests; with a third test available for quarters 3 and 4 of 2021, which will be outlined later.

• TEST #1 – A measure of decline in gross receipts. If an employer experiences a significant decline in gross receipts for any calendar quarter, as compared to the same calendar quarter in 2019, they will be eligible for the credit in that quarter. For 2020, this is defined as gross receipts that are less than 50% of gross receipts for the same quarter in 2019, and for 2021, this is gross receipts being less than 80% of gross receipts for the same quarter in 2019.
• TEST #2 – A full or partial suspension of operations. If an employer was subject to any full or partial suspension of operations because of government orders related to COVID-19 they could be eligible. These orders could be Federal, State, county, and/or municipality. Even if your business was deemed essential and was not directly affected by such orders, there still could be avenues to be eligible for the credit.
• TEST #3 – Under a third test, if a business can meet the definition of a recovery startup business, they can claim the credits for the 3rd and 4th quarters of 2021 only (not exceeding $50,000 per quarter). A recovery startup business is any employer that began a trade or business after February 15, 2020, and has average annual gross receipts of less than $1,000,000.

What are some important details to keep in mind?

1. First, gross receipts are determined based on the method used for the employer’s tax return. Meaning, if your business uses the cash method for tax purposes, then gross receipts for Test #1 should be calculated using the cash method, even if your financial statements use the accrual method. This could be beneficial for businesses, especially during times when the pandemic was hitting the hardest and collections slowed.
2. Another important item to keep in mind is that, for this credit, employers are considered either small or large. For 2020, a small employer is one that, based on 2019 counts, averaged 100 or fewer full-time employees. For 2021, this number increases to an average of 500 or fewer full-time employees, still based on 2019 counts. If a business is above these amounts, they are considered large. Small employer status is more advantageous because it allows qualified wages to include all wages paid. If a business is considered a large employer, qualified wages are limited to wages paid to an employee only for the time that employee was not providing services. For example, if your business is a large employer and operations were partially suspended, but all your employees continued working during that time, your business may not be able to claim any credits on the wages paid during that suspension period. For this purpose, a full-time employee is an employee that, in 2019, averaged at least 30 hours per week or 130 hours per month. As an example, an employer in 2019 who had 5 employees that worked 25 hours per week and 5 employees that worked 30 hours a week, would only be considered to have 5 full-time employees. Early on, a common misconception was that full-time employees were equal to full-time equivalents, which may have caused some businesses to think they were large employers, when in fact that may not be the case.
3. Finally, there are several different paths a business could take to qualify for the ERTC based on a full or partial suspension of operations due to governmental orders. As previously mentioned, even if your business was not directly affected by the orders, there still could be ways to qualify for the credit. We encourage you not to overlook this test as it could be very beneficial to revisit.

What are my next steps?
With year-end planning season looming, your William Vaughan Company advisor will surely be discussing this topic with you in the coming weeks. If you are not currently a client, but this topic has piqued your interest and you would like us to look at how this credit might benefit your business, please do not hesitate to reach out to us. As mentioned, the credit has been generally underutilized, so we would love to help your business realize the greatest benefits it can.

Connect With Us.

Mike Hanf, CPA, CGMA

ERTC Lead

mike.hanf@wvco.com

Categories: Tax Planning

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Timely Estate Planning Strategies: Part Three

Nov 01, 2021

Charitable Gift Planning Opportunities

In the third installment to our Timely Estate Planning Strategies Series, we outline how traditional income and estate planning may incorporate an individual’s desire to fulfill philanthropic goals. Giving can be done both while living (receiving current income tax deductions) and through one’s will at the time of death (garnering estate tax deductions). However, given the current ‘perfect storm’ we outlined in the first blog of the series, there is no better time to address your giving strategies.

The estate tax exclusion is currently $ 11.7 million per individual which means persons with an estate less than this will NOT benefit from charitable bequests in their wills. The emphasis for these individuals should be obtaining current income tax deductions while fulfilling their charitable intent. Individuals with taxable estates greater than $ 11.7 million can receive a double tax benefit by making lifetime charitable gifts. The donation is deductible for income tax purposes when the gift is made; the property along with any future appreciation is removed from the taxable estate.

Several opportunities to benefit from current charitable gifts are available. It is important to note, total itemized deductions including charitable deductions must exceed the standard deduction to receive a current income tax benefit. Some of your options include:

1. Bunching contributions into one year to make sure you exceed the standard deduction.
2. Contributing to Donor-Advised Funds (DAFs). A large contribution to the fund in year one provides the income tax deduction. After which, amounts can be paid from the fund to charities over a designated number of future years.
3. Donating to Charitable Remainder Trusts. The remainder interest in a given property is donated to charity, obtaining a current income tax deduction, and retaining an annuity (income) interest in the property during the donor’s lifetime. Or the reverse of this,
4. Giving to Charitable Lead Trusts. This provides a charity an annual distribution while the remainder interest passes to a Trust beneficiary in the future.
5. Making Qualified Charitable Distributions (QCDs). Taxpayers over the age of 70 1/2 contribute directly from their IRA to a specified charity. The distribution is not taxable and no charitable deduction is taken. Structured properly, this can convert required minimum distributions into nontaxable withdrawals from the retirement account.

Your WVC advisor would love to meet with you and your estate planning team to see how charitable transactions could help you meet your philanthropic goals in a tax-efficient manner.

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wvco.com | 419.891.1040

Categories: Estate Planning

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New Mandatory Requirement For Cyber Insurance

Oct 19, 2021

During the past year, ransomware attacks and other cyber breaches have skyrocketed leading to significant changes in the cyber insurance marketplace. Historically, obtaining cyber insurance was simple and renewals were a matter of updates based on major changes within an organization. Fast forward to now and notable shifts in insurance policies and regulations are taking shape. Underwriters are now asking for more information related to cyber controls and IT risk management.

Multi-Factor Authentication (MFA)

Multi-Factor Authentical (MFA) is now a minimum requirement for cyber insurance through most carriers. The message, if you have not incorporated MFA into your current IT environment, your organization may be considered a high risk which would disqualify you from coverage.

MFA provides an additional layer of security above and beyond your traditional password protection. It requires users to validate their identity with additional credentials. These credentials could be the answer to a security question, the click of a button in an app for approvals, or even a biometric identifier such as a fingerprint. This extra layer of protection stops attackers as they won’t be able to access an account without all required credentials, even if they have stolen a password. The additional proof points confirm the person attempting to enter the system is truly who they say they are.

According to both Microsoft, ‘up to 99% of cyber identity attacks can be prevented with MFA’. Google has also supported this with their research ‘which shows that simply adding a recovery phone number to your Google Account can block up to 100% of automated bots, 99% of bulk phishing attacks, and 66% of targeted attacks.’

If you already have cyber insurance you more than likely will find stricter requirements during your renewal. If you are in the market for cyber insurance, you will need to incorporate MFA before you seek coverage. Carrier data proves those without MFA are at a much higher risk for extortion and therefore coverage is not obtainable.

Our WVC Technologies team can assist with your MFA initiatives to help you: one, qualify for cyber insurance quotes from multiple carriers, and two, help reduce your claims activity which can improve your insurance pricing.

Connect With Us.

Greg Gomach, WVC Technologies Senior Client Rep.

greg.gomach@dmctechgroup.com

Categories: Risk Services

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Timely Estate Planning Strategies: Part One

Oct 11, 2021

Current Ideal Estate & Gift Planning Environment On Its Way Out

For the past few years, we have experienced a near-perfect environment for estate and gift planning purposes given the vastly expanded exemption amounts, low-interest rates, and retention of step-up in basis at death.

The Perfect Storm

How did we get here you ask? When Congress passed the 2017 Tax Cuts and Jobs Act (TCJA), substantial changes were made to the estate, generation-skipping transfer, and gift tax laws. Most notably, the TCJA included:

• A doubling of the basic exclusion amount from $5 million to $10 million, indexed for inflation, and an exclusion amount of $11.7 million for 2021. Coupled with proper planning around the concept of portability of a spouse’s amount, this could allow a married couple up to $23.4 million of assets to be exempt from the estate tax.
• The retention of the concept of “step-up” in basis at death. With the increased estate exclusion amount, income tax savings from the basis step-up at death sometimes became more important than trying to avoid estate tax via gifting or other transfer techniques.

These provisions were to be effective from 2018 through the end of 2025. Furthermore, regulations subsequently issued by the IRS stated there would be no clawback or adjustment of increased amounts taken by taxpayers during this period when the amounts reverted back to the old amounts on January 1, 2026.

This coupled with recent ultra-low interest rates left taxpayers and their planners taking a renewed interest in reviewing family gift and estate plans to take advantage of the perfect storm.

Changing Winds

While these conditions were expected to remain until 2026, the political winds have changed and with that is incredible uncertainty regarding what changes might be coming and when.

A number of proposals have been outlined which would greatly impact gift and estate plans—both existing and those contemplated. Among the proposed changes:

• drastic reduction in the basic estate exclusion amount
• possible increase in estate tax rates
• restrictions on certain transfers in trust
• restrictions on discounts when valuing property

More critical are the various effective dates proposed which may be retroactive to earlier this year.

While no one can predict the future, these potential changes make for increased risks and uncertainty in planning in the current environment. What is clear, however, is that regardless of what changes are ultimately made and when their effective date might be, the estate and gift tax rules will be far less liberal or beneficial than they are right now.

What Should I Do Now?

We believe significant planning opportunities exist under the current law and urge you to review your personal plans now. If new trusts or other asset transfer plans are contemplated, you will need to act immediately.

Here are some basic recommendations. Stay tuned to our series as we will delve into two other opportunities you should be considering before year-end:

• Make Gifting A Priority – Your timeframe to complete gifts may be much shorter if your plan involves an irrevocable grantor trust or gifts of interests in nonbusiness assets held in a limited liability company (LLC), partnership, or other private entity.
•  Fund Grantor Trusts – Irrevocable grantor trusts allow you to gift assets and continue to be the owner of those assets for income tax purposes. Under the new proposals, these tax benefits would no longer be possible as soon as the new law is enacted.
• Complete Gifts of Nonbusiness Assets in LLCs or LPs – Currently, if you gift a minority or non-controlling interest in a private entity, the interest is valued at a lower price to account for the lack of control and marketability. Under the new proposals, these discounts would go away if the LLC’s assets include publicly traded securities, non-operating cash, or other passive, non-business assets.

We highly encourage you to not only contact your William Vaughan Company practitioner but also your financial advisors so your personal situation can be reviewed and updated before your potential risk may increase.

Connect With Us.
wvco.com | 419.891.1040

Categories: Estate Planning, Tax Planning

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