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Impact of Digital Currency on Businesses’ Accounting

Impact of Digital Currency on Businesses’ AccountingThe emergence of digital currency is reshaping how businesses operate and account for financial transactions. As accounting professionals navigate this transformative wave, understanding the profound impact of digital currency on business accounting becomes not just relevant but imperative.

What is digital currency?

Digital currency is a form of currency that exists only in electronic or digital form, without a physical counterpart like coins or banknotes. There are two main types of digital currencies.  First, there are decentralized cryptocurrencies such as Bitcoin or stablecoins such as USDC (that track to the US dollar at 1-1). Cryptocurrencies are always based on blockchain technology.  The other main type and more likely to serve as a substitute for traditional government issued currencies are digital currencies such as central bank digital currencies (CBDCs).  Unlike crypto-currencies, CBDCs are centralized and issued by issuing authority and also are not necessarily based on a blockchain or immutable ledger systems.

Immutable ledger systems ensure transparency, traceability, and security in financial transactions. The technology has also given rise to decentralized finance, or DeFi, designed to offer access to financial services without the need for institutions such as banks. This translates into a paradigm shift for accounting professionals, as digital currency and cryptocurrency are continually adopted to make payments and investments and as a reservoir of value.

The Impact of Digital Currency on Business Accounting

  1. Enhance Financial Reporting – Digital currencies facilitate real-time transactions, eliminating the lag time associated with traditional banking processes. This newfound speed provides accounting professionals with instant access to financial data, enabling quicker and more accurate financial reporting. Businesses can now assess their financial health daily, leading to more informed decision-making.
  2. Smart Contracts Streamline Auditing Processes – Smart contracts, self-executing contracts with the terms of the agreement written directly into code, bring automation to the auditing process. This reduces the risk of human error and accelerates auditing procedures. Accounting professionals can leverage smart contracts to automate routine tasks, allowing them to focus on higher-value analytical work.
  3. Cross-Border Transactions Simplify Global Accounting – Accounting for international transactions has historically been intricate due to varying currencies and exchange rates. With digital currencies, businesses can streamline these processes, reduce the complexities associated with global accounting, and provide accounting professionals with standardized data for analysis.
  4. Enhanced Financial Inclusion Accounting for a Broader Audience – Digital currencies can enhance financial inclusion by providing access to financial services for unbanked or underbanked individuals. Accounting professionals will need to consider the unique accounting challenges associated with this expanded user base, such as diverse transaction volumes and varying levels of financial literacy.

Challenges of Digital Currencies

Accounting professionals face both challenges and opportunities as businesses increasingly adopt digital currencies for transactions. Accounting standards may need to evolve to accommodate the unique characteristics of digital currencies.

The integration of digital currencies with traditional accounting systems is another critical consideration. Businesses will likely operate in a hybrid financial environment for the foreseeable future, necessitating seamless integration between digital and conventional accounting systems. Accounting professionals must adapt to this coexistence, ensuring data accuracy and integrity across platforms.

The volatile nature of digital currencies poses both risks and opportunities for businesses. While the potential for significant gains exists, so does the risk of value fluctuations. Accounting professionals play a pivotal role in developing robust risk management strategies, ensuring businesses can thrive in the evolving landscape of digital currency without exposing themselves to undue financial risks.

The regulatory environment surrounding digital currencies is still evolving. Accounting professionals must stay abreast of changing regulations to ensure businesses remain compliant. This adaptability is crucial as governments define and regulate digital currencies worldwide. For instance, the lack of a precise classification of digital currencies poses difficulties in determining their financial treatment. The absence of standardized guidelines complicates valuation, reporting, and compliance, requiring accountants to navigate a complex landscape where traditional classifications may not fully capture the distinctions of these evolving assets. Therefore, a proactive approach to compliance will be integral to the long-term success of businesses in this space.

As digital currencies evolve, accounting professionals must commit to continuous learning. Staying ahead of technological advancements, regulatory changes, and industry best practices is paramount. Professional development in areas such as blockchain technology, cryptocurrency taxation, and digital auditing will be essential for accounting professionals aiming to thrive in the digital era.

Conclusion

The impact of digital currency on business accounting is transformative and far-reaching. Accounting professionals are at the forefront of this paradigm shift, navigating the challenges and harnessing the opportunities presented by the digital revolution. Embracing innovation, adapting to changing regulations, and continuously honing skills will ensure businesses survive and thrive in this dynamic era of digital currency.

How to Manage Taxes in Retirement

How to Manage Taxes in RetirementThe biggest difference between managing taxes throughout your career versus during retirement is that when you are retired, you are responsible for calculating how much you owe and paying it on a timely basis. Retirees normally have several different income sources, and not all automatically withhold taxes from distributions.

Retirement Income Sources

Having multiple sources of income during retirement is a good strategy, as it helps protect you from market declines, tax legislation changes, and potential defaults or cutbacks in pensions or entitlement programs. However, be aware that the more income sources you have, the more effort it takes to determine how much you owe in taxes for the year.

As a general rule, retirement income is taxed as either ordinary income or long-term capital gains. Ordinary income includes:

  • Employer wages
  • Taxable interest payments
  • Ordinary dividends
  • Short-term capital gains (on assets held a year or less)
  • Taxable withdrawals from retirement accounts
  • Taxable Social Security benefits
  • Withdrawals from health savings accounts (HSAs) for nonqualified expenses
  • Annuity payouts
  • Rental income
  • Pension payouts

Income subject to long-term capital gains is taxed at 0 percent, 15 percent, or 20 percent, depending on your total taxable income. This type of income is generated from:

  • Profits from the sale of a business (assuming you started and sold the business over more than 1 year)
  • Real estate (excluding rental income)
  • Securities
  • Most other investments held for over a year
  • Qualified dividends

Additional Investment Tax

Single taxpayers may be subject to an additional 3.8 percent net investment income tax (NIIT) on income generated from invested assets – if their modified adjusted gross income (MAGI) is $200,000 or more ($250,000 or more if a married couple filing jointly). Examples of investment assets include interest, dividends, long- and short-term capital gains, rental income, royalty income, and nonqualified annuities.

Automate Tax Withholding

One way to make tax planning easier in retirement is to have taxes automatically withheld whenever you take income distributions. Much like having payroll taxes withheld from your paycheck, when you file year-end taxes, you reconcile the amount owed by either paying more or receiving a refund.

There are certain income sources on which taxes are automatically withheld, but be aware that a fixed percentage (e.g., 10 percent) may not be the appropriate amount for all taxpayers. The fixed percentage withheld may vary by investment type, and in many cases, the account holder can change the default withholding. The following shows how taxes are handled for different retirement income sources.

  • 401(k), 403(b), and other qualified workplace retirement plans – Basic distributions are typically subject to 20 percent withholding. However, required minimum distributions (RMDs) are subject to a 10 percent withholding. Note that if the plan balance is high enough for the RMD to place the taxpayer in a higher tax bracket, a 10 percent withholding may be too low. Set up or change the withholding percentage by submitting Form W-4R to the plan administrator.
  • IRA (Traditional, SEP, and SIMPLE) – Unless the retiree specifies otherwise, non-Roth IRAs typically withhold 10 percent of distributions. Set up or change the withholding percentage by submitting Form W-4R to the custodian.
  • Annuity – Annuities are taxed as ordinary income, thus subject to a tax rate based on the total amount of income the retiree receives throughout the year. Note that a non-qualified annuity is usually comprised of already taxed income plus earnings. When a retiree starts receiving distributions, only the earnings portion is taxed. Set up or change the withholding percentage by submitting Form W-4P to the issuer.
  • Pension – Pensions are taxed as ordinary income, thus subject to the total amount of taxable income received throughout the year. Set up or change the withholding percentage by submitting Form W-4P to the payer.
  • Social Security – If Social Security benefits and all other income totals less than $25,000 per year, the beneficiary generally does not have to pay income taxes. However, if a retiree earns a higher amount through a combination of income sources, including tax-exempt income, up to 85 percent of Social Security benefits may be taxable. In this scenario, the retiree can request that the government withhold a fixed percentage (7 percent, 10 percent, 12 percent, or 22 percent) from his Social Security paychecks. Set up or change the withholding percentage by submitting Form W-4V to the local SSA office.
  • Taxable bank or brokerage accounts – These accounts may give you the option to have a percentage of taxes (10 percent or choose your own percentage) withheld from investments with realized capital gains, dividends, or other asset-based income. Retirees who withdraw regular income or periodic high distributions may want to elect a percentage of taxes withheld to reduce their tax liability at the end of the year. You can make this election at the time you set up your withdrawal.

Develop a Tax Payment Plan

One of the best ways to enjoy retirement is to automate your tax payment plan. You can do this by actively selecting a withholding percentage for each income source you own and varying it based on the amount and frequency you tend to draw down each year.

Another option is to pay estimated quarterly taxes (due Jan. 15, April 15, June 15, and Sept. 15 every year). This is how most independent business owners and contractors self-pay their taxes in order to avoid an underpayment penalty. This strategy works best if you receive unexpected income throughout the year, earn self-employment income, or receive rental or taxable investment income.

The good news is that after your first full year of retirement, you will have set the bar for how much you owe in taxes – referred to as your safe harbor. Thereafter, you’re not subject to an underpayment penalty as long as you pay at least:

  • 90 percent of the prior year’s full tax bill or
  • 100 percent of the prior year’s full tax bill (if AGI is $150,000 or less;$75,000 or less if married filing separately), or
  • 110 percent of the prior year’s full tax bill (if AGI is more than $150,000; more than $75,000 for individuals or married couples filing separately)

Remember that in addition to creating a retirement income plan, it’s important to develop a tax payment plan as well. This will help make tax season go a whole lot easier.

Wage Garnishment Considerations for Business Owners

Wage GarnishmentAccording to the United States Department of Labor’s Consumer Credit Protection Act (CCPA), wage garnishments are a complex legal process for employers to account for when it comes to employment matters. This article specifically refers to Title III of the Consumer Credit Protection Act. 

Usually authorized through a court order, a wage garnishment directs an employer to withhold or garnish an employee’s wages for a certain amount or percentage to satisfy an outstanding debt. Wage garnishments also can be implemented for delinquent tax obligations and other debts owed to federal agencies of the U.S. federal government, as well as for state-level tax collectors. 

Another consideration for Title III is that for a single debt, employees may not be fired; but if an employee’s earnings are garnished for two or more distinct debts, an employer has the discretion to involuntarily separate an employee from its business. This law also permits varying amounts and percentages of an employee’s “disposable earnings” that may be withheld.

The first step is determining how earnings are defined in the course of deciding the final wage garnishment calculation. Examples include but are not limited to retirement and pension payments to the employee, hourly wages, yearly salaries, commissions, bonuses, along with profit sharing, etc.

When it comes to lump-sum payments, the CCPA requires counting earnings that are for personal services but not including non-personal service-related lump-sum payment compensation as the first step when calculating the final wage garnishment. 

Defining Disposable Earnings

The final amount able to be garnished is determined by the employee’s disposable earnings. This is defined as the earnings remaining once legally mandated deductions are factored into an employee’s earnings. Example deductions include local, federal, and state taxes, along with withholdings for unemployment, Medicare, and Social Security taxes. Voluntary deductions, such as health premiums, voluntary retirement plan contributions, etc., are not factored into the disposable earnings calculation.

When it comes to regular garnishment guidelines, which include non-support, bankruptcy, or tax-based requests, for both state and federal taxes, the maximum weekly amount is the smaller amount of either one-fourth of the worker’s disposable earnings or how much the worker’s disposable earnings exceed 30 times the U.S. minimum wage of $7.25 per hour x 30 hours = $217.50 (as of June 2023).

Looking at a weekly view, if disposable earnings are $217.50 or less, no garnishment can occur. If disposable earnings between $217.50 and up to $290 are considered, only $72.50 may be garnished, depending on how much the outstanding debt is in total. If the worker’s disposable earnings exceed $290 for a weekly pay period, up to one-fourth of the pay period’s disposable earnings can be considered to be garnished. It’s important to note that some bankruptcy court orders, state/federal tax debts, and court orders for child support and/or alimony are not necessarily subject to the garnishment ceilings discussed above.

While this information is not comprehensive for employers, it’s important to understand all the federal, state and local regulations to ensure compliance is achieved to reduce the chances for adherence complications.

4 Smart Ways to Maximize Your IRA Contributions

Maximize Your IRA ContributionsUnless you’re near retirement, chances are you’re depositing a certain amount of cash each year in your IRA at tax time, then kind of forgetting about it, not thinking much about it until the next year. This dynamic can cost you a lot of money – today and at retirement age. Here are a few ways to make all your hard-earned money work even harder.

Invest your money; don’t simply fund it. According to a Vanguard study, two-thirds of last-minute IRA contributions end up just sitting in money market funds. The result? They’re just a little more than a checking account with a fancy name. Lesson: Don’t let your funds sit idle. They should be placed in the right investment, perhaps a target-date mutual fund. Maybe a bond fund or some carefully selected stocks. Do the work now. Take time to analyze what’s right for you so you can max out your investment.

Convert to a Roth. This scenario might not apply to you, but it’s a reality that quite a few have encountered: A sharp mid-career income loss, say, because of the pandemic, which would put you into a lower tax bracket. If this applies to you, it’s a good time to convert your traditional IRA to a Roth. Another scenario where converting might be a good idea is if tax rates are temporarily lowered by Congress. There’s also the backdoor Roth, which is a good tax reduction strategy; it works best for people who have high salaries (think C-suite) and access to a workplace retirement plan that causes them to be ineligible to deduct their traditional IRA contributions in the first place. It’s easy. Open a new traditional IRA, make non-deductible contributions, then convert it to a Roth. All said and done, no matter where you fall on the income spectrum, Roth IRAs are well worth looking into.

Avoid the procrastination penalty. Sure, making a full-sized IRA contribution right before your filing deadline feels good. You’re doing what you’re supposed to do, right? Taking the tax break for the prior year, right? Yes, but not so fast. (Just to refresh, it’s $6,500 for individuals in 2023; $7,500 for people 50 and older; the contribution cap is $7,000 for individuals in 2024 and $8,000 for people 50 and older.) But here’s the rub: You’ve left more than 15 months of potential investment income on the table. What? Yes, that is $6,500 that you should have invested during the previous year, maybe placed in a mutual fund or stock that could have been earning for you. So, think again about waiting until the last minute to contribute. It might end up being quite costly.

Invest in stocks and bonds – strategically. If you’ve been lucky enough to maximize your tax-advantaged account contributions and have some cash left over in your standard investment accounts, think about buying bonds in your IRA and stocks in your standard account. But why? Bond dividends are taxed as ordinary income. Stocks and stock-filled mutual funds generally generate capital gains. Specifically, these gains aren’t simply regular payments you get from your stocks. They’re the increase in their sticker price each year. It’s important to understand the difference. Capital gains, which only occur when you sell a stock or fund, are taxed at a lower rate. It makes sense to put them in taxable investment account and then save your tax-advantaged accounts for larger investments. Regardless of which IRA you decide upon, you won’t pay taxes on money while it stays put in your account.

Saving for retirement is one of the most important things you can do. Granted, life happens, and sometimes you get off track. But if you keep your eyes on your future nest egg and max out contributions while you’re working, you’ll be better prepared to enjoy your next season of life.

Sources

https://www.forbes.com/advisor/retirement/maximize-ira-contribution