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Changes we expect to see with divorce

Divorce is stressful enough, but the new tax bill may ramp up the complications and anxieties for couples who are calling it quits.

Divorce experts are predicting a confusing, turbulent year, thanks to the tax plan’s reversal on who pays taxes on alimony. For more than 70 years, the tax law allowed the higher-earning spouse to deduct the alimony they paid to their exes, while the “receiving” spouse was taxed at a 15% rate.

But the new Tax Cuts and Jobs Act reverses that long-standing arrangement. Starting in 2019, the higher-income spouse will lose the alimony deduction and must pay federal taxes on it, while the receiving spouse won’t have to pay taxes. The new tax bill affects divorce agreements signed after Dec. 31, 2018, while divorces settled before that will be grandfathered in under the old tax bill.

Those dynamics may result in a tense year of negotiations for couples who are splitting apart as higher-earning spouses likely push for a settlement in 2018, allowing them to lock in a tax deduction. Lower-earning spouses may want to delay the settlement until 2019, believing the new tax law will benefit them, he said.

Where to start

Given the complicated mix of emotion and finances in divorce, it can be helpful to rely on a team of experts, including a divorce attorney, a divorce coach and a financial analyst with expertise in divorce. The analyst can help spouses understand how the tax bill will affect their settlement.

A detailed financial analysis can help put things in perspective, including how the new tax code will affect spouses. Examining a post-divorce forecast of your cash flow — and how the tax law will affect it — will clarify whether it’s possible to maintain your current home or where you might need to cut back, for instance.

Take a step back

A spouse who wants to argue for lower alimony payments based on the new tax code may want to examine how much their fight will cost in legal fees. The typical hourly rate for a divorce attorney is $350, although it can be as high as $1,000 an hour in big cities.

How it affects happily married couples

Married couples with prenuptial agreements should also pay attention to the new alimony taxation. That’s because most of those prenups likely include alimony provisions based on the prior tax law.

Those prenups probably have to change. If you are happily married, this probably isn’t even on your radar. But they’ll have a big ‘uh-oh’ moment if they go through divorce and have this in their prenup.

Why Financial Statements Prepared by Outsourced Accounting Services Can Be More Reliable

Whether you want your business to have a single owner forever or you’re actively seeking investors, you need to have accurate financial statements. Your financial statements can help you get lower interest rates on loans, better forecast your cash flow, and make informed decisions for future growth.

Because strong information is the key to any business decision, your financial statements need to go beyond the minimum requirements. The new standard of outsourced accounting and bookkeeping services often give you the most accurate picture of your finances.

Eliminate Multitasking

In many smaller businesses, the owners or managers do most of the accounting. Even when a CPA does the taxes or end-of-year reports, most of the day-to-day bookkeeping may be done by someone with many duties that go beyond accounting. This creates several problems:

First, the people preparing the books may not have advanced accounting knowledge. If they lack knowledge of accounting rules, they may report transactions in the wrong period or make other errors.

Second, when an owner or employee has other duties, accounting often takes a backseat. Accounting reports that managers use to make decisions can quickly become out of date. Needed documents may also be misplaced before the designated “accountant” records them.

Finally, when accounting is viewed as an undesirable chore, there is added incentive to rush through it. This also increases the likelihood of errors.

Introduce Automation

Even when you prepare your books carefully, there is always the risk of human error. Even a single missed or transposed digit can throw off your books.

Outsourced accounting services can often be directly integrated into your inventory, point-of-sale, payroll, and other bookkeeping systems. Each time a transaction is made, your accounting systems are automatically updated. This virtually eliminates the possibility of human error in data entry.

Provide Expert Review

Virtual outsourced accounting and bookkeeping isn’t done entirely by computers. A CPA is still reviewing the entries and checking for errors.

Five Accounting Technology Innovations that Every CFO Should Be Aware of

In a survey conducted by Robert Half Management Resources, 41 percent of CFOs cited technology as a major source of stress in their jobs, saying that innovations in accounting are progressing so rapidly that it’s difficult to keep up. Becoming familiar with the biggest trends minimizes the struggle with increased efficiency and a more streamlined approach to managing corporate finances.

Cloud-Based Accounting

The cloud computing trend that has grown increasingly popular in other areas of business is making its way into the realm of accounting. Cloud applications can handle everything from payroll and invoicing to taxes and benefit payments. All financial information is updated as soon as changes occur and can be monitored and managed from a user-friendly administrator dashboard. Automation handles tasks that previously took time away from more important duties. Moving accounting processes to the cloud also removes a burden from the IT department by shifting the responsibility for software management and updates to the cloud service provider.

Complete Integration

Customized integration solutions are changing the way businesses operate, and this is proving to be a boon to accounting executives. In the past, accuracy was a major concern, especially when financial information was transferred between departments. One small error could compound to create serious problems down the line, necessitating corrections that wasted valuable company time.

Today, it’s possible to link together ERP, CRM and CMS software as well as legacy applications to create a unified environment where authorized users from every department can access the information they need at any time. Alerts can be set up to call attention to any errors that do occur, preventing the “snowball effect” that cripples productivity.

Manual Entry Minimized with OCR

Using an integrated system already cuts down on the amount of manual entry required to manage company finances, but the advent of optical character recognition (OCR) software is simplifying the process even more. Advances in this technology allow companies to use scanners or even the cameras on mobile devices to capture printed financial information such as receipts and invoices and translate the text into digital files. Improved accuracy has cut down on the rate of error during this translation, and future updates promise to further improve the procedure’s efficiency.

New Solutions in Tax Software

 

With payroll, expenses, receivables, payables and all other pertinent financial information available through an integrated, cloud-based solution, tax time becomes much less stressful. Modern innovations in accounting and tax software allow CFOs to take advantage of the correlated data collected throughout the year to ensure accuracy for all tax forms and payments. Real-time data updates prevent errors caused by outdated reports and missed entries.

Whether a company pays quarterly or annually, precision in tax reporting is essential. Mistakes can lead to over- or under-payment or, in the worst case, an audit. Most tax software programs make the process easy with tools that handle details such as deductions and alerts that point out potentially costly data entry errors.

Remote access is one of the greatest benefits of modern accounting technology. CFOs and other financial professionals are no longer required to be in an office to input new data, update tax information or run reports. With the right software solution and related mobile applications, it’s possible to handle a company’s finances from anywhere. Data entered by employees at the office is immediately accessible via the cloud. Other members of the mobile workforce can record expenses or payments on the go. This flexibility gives CFOs the up-to-the-minute information they need to stay on top of the financial health of the business.

Today’s CFOs recognize the value of these and other emerging accounting technologies. Understanding how to implement and utilize the right combination of systems results in a more stable financial state and improved corporate growth. Modern accounting technologies are efficient, scalable and secure, providing just what CFOs need to ensure success.

 

 

How to Choose Between Cash and Accrual

 

The accounting method you choose to use can determine if you show a profit or not in each year. This directly affects your business income taxes, and it may also impact whether you are able to obtain a loan or raise equity investments. Unlike other tax or accounting choices, you can’t choose what’s best from year to year — you must make a choice and stick with it for the long term.

What’s the Difference Between Cash and Accrual Accounting?

Your accounting method determines when transactions should be reported on your financial statements. The cash method is named because you record a transaction when you get the cash. In the accrual method, you report your accrued income and expenses when they were earned or incurred regardless of when the cash changes hands.

For example, say you sell a widget on December 15th and the customer pays $500 on January 15th as you agreed. In the cash method, the $500 is recorded as income on January 15th and, if your tax year follows the calendar year, goes on the new year’s taxes. In the accrual method, the $500 is recorded on December 15th and would be taxed in the previous year even though you didn’t receive the money until the new year.

What are the Advantages and Disadvantages of Each Method?

The most important thing to understand is that the accounting method you choose doesn’t affect how much money you make or lose. It simply affects when you record a transaction. While your taxes might be slightly impacted depending on your tax bracket, if the method you chose increased or decreased your taxes in one year, that difference will generally be offset in the next year.

Cash Method

The key advantage to the cash method is simplicity. You can simply look at your checkbook and sales receipts to add up your profits and losses. You also know exactly how much cash you have at any given time.

The downside is that when you receive or send cash may not accurately reflect when you earned or incurred an expense.

Accrual Method

The key advantage to the accrual method is smoothing out your profits and losses. When you make or receive a large payment for something that happened over a period of several months, accrual accounting divides the transaction over those months.

The downside to the accrual method is that it takes extra work to figure out how all your transactions should be recorded in your books. You also need to keep separate cash flow statements to know how much cash you have on-hand at any given time.

How to Choose Between Cash and Accrual

You are generally free to choose either method for any reason at all. Many small businesses use cash accounting because it’s easier. If you’re looking to raise funds, outside investors often prefer to see books using the accrual method so they can view the big picture of the company’s financials.

You must use the accrual method for tax purposes if:

  • Your average annual gross receipts over three years exceed $5 million
  • You hold products in inventory and your gross receipts exceed $1 million per year
  • You are a publicly traded company that is required to follow Generally Accepted Accounting Principles(GAAP)

Changing Accounting Methods

Businesses may not freely change their accounting methods to prevent them from using changes to avoid taxes. Once you’ve selected your accounting method and filed taxes under that method, you must request IRS approval for any changes to your accounting method. If an approved change results in an adjustment to your taxable income, you will receive credit for the difference/payment in the tax year in which the change is approved. The company can also elect to recognize one-fourth of the adjustment in the four succeeding years starting with the year of the adjustment.

For example:

Company Z, a calendar-year corporation, has a net positive section 481(a) adjustment of $320,000 at the end of year 20X1. If Company Z initiates a change in its accounting method under revenue procedure 97-27 for the 20X2 tax year, the company will recognize one-fourth of the 481(a) adjustment in the four succeeding years, start with 20X2. However, if Company Z is under examination for 20X1 and the IRS makes an accounting change adjustment, the entire section 481(a) adjustment will be taxable in the year of examination

Year

Taxable Income –

IRS Initiates Change

Company Initiates Change

20 X 1

$320,000

20 X 2

$80,000

20 X 3

$80,000

20 X 4

$80,000

20 X 5

$80,000