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smolinlupinco

partners-may-need-to-report-more-income-tax-return

Partners: You May Need to Report More Income on Your Tax Return Than You Received in Cash
Partners: You May Need to Report More Income on Your Tax Return Than You Received in Cash 1600 941 smolinlupinco

If you’re a business partner, you may find yourself confused during tax season. In any given year that you receive a distribution of your partnership income, you could be taxed for more than you actually received.

How is this possible? It’s because of how U.S. taxation is set up to tax partners and their partnerships. Because these entities are subject to income tax like C-corps, you get taxed on your partnership’s earnings whether distributed or not. In situations where losses are suffered, that too is passed on to you, even though you may be unable to use your share of this loss to offset other income.

Passing through your share to partners

Partnerships aren’t subject to income tax, but the IRS treats them as a separate entity for the purposes of income and gains, deductions, losses, and credits. Because of this, partners can pass through their share of these items. 

Filing an information return

Your partnership will submit a Schedule K of Form 1065 to separately identify important tax items, such as income, credits, deductions, etc. This is done so that you and other partners can apply any tax reporting rules or limitations to these items based on your role within the entity. These items may include interest expense on investment debts, any charitable contributions made, and capital gains and losses.

Options for avoiding double taxation

There are basis and distribution rules in place to help you avoid getting taxed twice. Your initial basis in your partnership, which depends upon how your interest was acquired, is increased by your share of taxable income from your partnership. 

If your share’s income gets paid in cash, you won’t owe tax on that cash if you have sufficient basis. Under this circumstance, you can simply reduce your basis by the amount of that distribution. However, if the opposite occurs and the cash amount exceeds your basis, then you have to pay a capital gains tax on that excess.

Example 

Two partners contribute $15,000 to create a partnership. In the first year, their partnership has $90,000 in taxable income and no cash distribution gets made to these partners. Each reports $45,000 of taxable income which is on their K-1 documentation from the partnership. Remember, they each had a starting basis of $15,000 but this increases by $45,000 to create a new basis amount of $60,000. In year two, they had no taxable income because their partnership broke even. As a result, when their $45,000 each gets distributed, it will be tax-free. However, they now must reduce their basis in their partnership from $60,000 to $15,000 to avoid taxation on the excess. 

Additional rules and limits to consider

The above overview is just a basic example of why partners may pay more taxes on distributed shares of their partnerships than actually received. Keep in mind there are still other rules that could impact your tax situation, such as additional special rules that govern non-cash distributions to partners, securities distributions, and those stemming from liquidations. There are also specific events that may also require basis adjustments of your share as a partner. 

To better understand how your partnership distributions could affect your tax return, contact us directly to learn more. 

© 2022

effects-of-inflation-on-financial-statements

The Effects of Inflation on Your Financial Statements
The Effects of Inflation on Your Financial Statements 1600 941 smolinlupinco

The continuing trend of rising inflation has investors and business owners on high alert. The U.S. The Bureau of Labor Statistics has also tracked the steady rise in consumer pricing, which has seen an 8.3% increase over the last year. Its findings are based on the Consumer Price Index (CPI), which measures changes in cost for items the public relies on for daily living needs, such as fuels, clothing, food, medical services, home costs, and more. This latest calculation is just slightly less than the previous 12-month increase of 8.5%, a number that topped the highest increase ever recorded back in December of 1981.

The producer price index (PPI) has also risen 11% over the past 12 months, furthering anxiety for consumers and financial experts. This is still a lower figure than the previous 11.2% increase for the last measured period in March, another record-breaking rise for wholesale inflation. PPI measures inflation rates before consumers feel the pinch in their wallets. 

Primary impacts

If you’re a business owner, inflation could directly affect costs and hurt consumer demand for goods and services deemed discretionary. You might experience decreases in profits unless you can pass these losses to your customers through strategic pricing models. Still, it’s not just your gross margins you need to worry about. Below are seven additional areas of concern from today’s inflationary trends that could impact your financial statements.  

1. Goodwill. Companies using GAAP to estimate the fair value of acquired goodwill should use valuation techniques that remain consistent from period to period. However, one should also recognize that as inflation increases, revisions to these assumptions may be necessary to maintain accurate estimations. For example, it’s common practice during inflationary periods for market participants to use higher discount rates. They might also anticipate revised cash flows due to rising costs, modifications to product pricing, and changing consumer behaviors in this market climate. 

2. Debts. As the Federal Reserve attempts to control inflation by raising interest rates, companies with variable-rate loans could see their interest costs rise as well. As of May, the Fed imposed a 0.5% increase in its target federal funds rate and might increase this rate again throughout the remainder of 2022.

If you’re one of the businesses affected by this increase, it might be wise to convert your variable-rate loans to fixed loans or seek approval for additional credit to secure a fixed-rate loan before any future increases by the Fed. Companies in this predicament could also explore restructuring their debt. Depending on the approach used, you may be able to report it as one of the following under the U.S. Generally Accepted Accounting Principles (GAAP):

  • Extinguishment of debt 
  • Modification
  • Troubled debt restructuring

3. Inventory. GAAP measures inventory at the lower of either net realizable value or cost and market value. There are several methods businesses rely on to determine their inventory cost:

  • Average cost
  • First-in, First-out (FIFO)
  • Last-in, First-out (LIFO)

Your profits and ending inventory valuation are directly impacted by your chosen method. Additionally, you might also experience a trickle-down effect on your tax liability.  

4. Investments. It’s well known that one source of volatility in public markets is inflation. Realized or unrealized gains and losses can occur when your company’s investments undergo market value changes–directly affecting any liabilities and deferred tax assets under GAAP. 

Companies may opt to modify their investment strategy out of concern for this inflationary impact, though doing so could potentially demand disclosures of the changes in financial statement footnotes. New accounting methods may even be necessary when taking this approach. 

5. Overhead costs. Escalation clauses related to CPI or other measures for addressing inflation could be in your long-term lease, thus increasing rent overheads. The same is possible for vendor contracts and contracts with other service providers.

6. Foreign currency. Foreign exchange rates aren’t impervious to inflation. When exchange rates fluctuate, businesses that accept, bank, and/or convert these currencies will adapt to ensure the rates used are appropriate for that point in time. 

7. Going concern disclosures. Business management must determine if there is substantial doubt about their company continuing as a going concern. Every reporting period, evaluations take place to review a company’s ability to meet its obligations within the 12-month period after its financial statement issuance. 

Skyrocketing inflation frequently devastates unprepared businesses. Without adequate countermeasures to inflationary effects, doubt arises about the company’s long-term viability.

We’re here to help

Inflation can have widespread impacts on a company’s financial statements. Reach out to us for assistance in anticipating the possible effects on your business’s financials and developing lasting solutions to mitigate these risks. 

© 2022

remember-fully-deduct-business-meals

Don’t Forget to Fully Deduct Business Meals in 2022
Don’t Forget to Fully Deduct Business Meals in 2022 1600 941 smolinlupinco

This year new business expense relief is coming from the federal government. Under a new COVID-19 relief provision, the standard 50% deduction for business meal costs has been doubled to 100% for any food and beverages bought at restaurants for 2021 and 2022. 

This increase means the entire cost of customer meetings at your favorite local cafe could qualify as write-offs. Related expenses, such as sales tax, tips, and delivery charges, are also included.

Business meal deduction guidelines

The Tax Cuts and Jobs Act (TCJA) had eliminated the deductions for business entertainment expenses after 2017, but business owners could still enjoy a 50% deduction on qualifying business meals. This tax break included meals while traveling for business or while away from home. 

The motivation behind this latest increase to 100%? To aid restaurant owners who have struggled financially during the past two years because of the pandemic. The Consolidated Appropriations Act is doubling this business meal deduction temporarily. Unless Congress decides to extend this tax break beyond 2021 and 2022, it will sunset on December 31st of this year. 

Currently, the deduction for business meals is allowable under the following circumstances:  

  • It is a usual expense your business typically pays to conduct business or trade during the year. 
  • The meal can’t be overly extravagant or lavish for any reason. 
  • The taxpayer or one of their employees is present at the meal. 
  • Only prospective or existing business customers, consultants, clients, or similar business contacts receive the meal. 

If the meal is part of a larger entertainment event, purchase the food and drinks separately or have them itemized on the primary bill. 

As you can see, taking clients out for business meals could qualify for a 100% tax deduction if you follow the guidelines mentioned above. 

Restaurants have to provide the meals

One of the main goals of this deduction is to support restaurants. Guidance also allows purchasing food and beverages from these establishments for immediate consumption or off the premises. This means you can have lunch delivered to your office instead of disrupting a sales meeting to go out to eat. 

Keep in mind that the IRS’s use of the word “restaurant” doesn’t include a business that only offers pre-packaged meals that cannot be eaten immediately on the premises. Specifically, food and beverage sales are excluded from certain companies, such as:

  • Convenience stores
  • Gas stations
  • Grocery stores
  • Beer, wine, or liquor stores
  • Vending machines or kiosks

If you have an onsite cafeteria at your workplace, these meals are typically excluded from an employee’s taxable income. If you opt to buy business meals from such facilities, you can only claim a 50% deduction. This rule applies even if your food service is operated by a third-party company contracted by your company.  

Maintain detailed expense records

As you would with any other business expense, you should keep detailed records of your business meal costs to ensure maximum tax benefit at the end of the year. 

You should record the below pieces of information:

  • Date
  • Itemized cost of every expense
  • Name and location of the restaurants used
  • Business purpose of the meal
  • Business relationship of those fed

You should also ask establishments to divide up the tab between entertainment costs and costs for food or beverages. Contact your tax advisor for more information.

© 2022

accounting-fair-value-faqs

Accounting Fair Value FAQs
Accounting Fair Value FAQs 1600 941 smolinlupinco

Over the past decade, the accounting industry has seen many rule changes that affect reporting of certain items on balance sheets. One such change is the guidance that certain items be reported at “fair value.” Read on to learn more about this new reporting standard and how to measure it accurately.

What is fair value?

The U.S. Generally Accepted Accounting Principles (GAAP) defines fair value as a “price that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date.” Buyers and sellers within the principal market of the item are “market participants,” but the market itself can vary according to the specific entity being measured.  

The purpose of estimating fair value is to report assets, including:

  • Nonpublic entity securities
  • Derivatives
  • Acquired goodwill
  • Specific long-lived assets
  • Other intangibles not listed here

However, entity-specific considerations such as transaction costs are specifically excluded from these estimates.

Fair value vs. fair market value

While fair value and fair market value are similar, they are not interchangeable. The IRS Revenue Ruling 59-60 provides the most widely accepted definition of market value: “[T]he price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

The Financial Accounting Standards Board (FASB) chose the term “fair value” to deter businesses from using IRS regulations and precedents from the U.S. Tax Court when determining their assets and liabilities for required financial reporting.  You should also avoid confusing the term with some of its uses in a legal context,  such as conducting a business valuation for a shareholder buyout or divorce. When used in a statutory context, definitions by the GAAP for fair value are different.

Measuring fair value

There are three different valuation methods that the FASB recognizes:  cost, income, and market. The FASB has also put in place a hierarchy for valuation inputs, starting at the highest priority and descending to the lowest: 

  1. Quoted pricing for liabilities and assets which are identical in active markets
  2. Observable inputs including active market pricing for similar items in quoted markets, quoted prices for identical or similar items in active markets, and related market data
  3. Unobservable inputs involving projections of cash flow or related internal metrics

It’s not uncommon to hire a valuation specialist to estimate fair value. Still, those in management roles can’t delegate their personal responsibility for these estimates. Leadership is obligated to understand a valuator’s assumptions, models, and methods, including implementation of adequate internal controls over the measurement process, impairment charges, and disclosures.

How auditors assess fair value

It’s part of an external auditor’s standard audit procedure to evaluate accounting estimates. This could entail inquiring about any underlying assumptions used to determine an input’s estimated completeness, accuracy, and relevance. 

Auditors will try to recreate these estimated assumptions by management whenever possible. If their determination comes to a substantially different conclusion than reported financial statement data, management will have to explain this discrepancy. Requests for additional supporting documentation of your estimations or questions related to your processes aren’t unusual and are a normal part of today’s uncertain marketplace. 

Find out more  

Contact us with any additional questions you may have about fair value measurements. We can help ensure that you’re meeting your financial reporting responsibilities.

© 2022

tax-issues-changing-to-s-corporation-from-c-corporation

Tax Issues Caused By Changing to an S-Corporation from a C-Corporation
Tax Issues Caused By Changing to an S-Corporation from a C-Corporation 1600 941 smolinlupinco

For some small businesses, switching to an S-corporation entity structure from a C-Corp can reduce federal employment taxes. Despite the financial savings your company can enjoy while operating under this new classification, there are some additional taxation liabilities to keep in mind before making this change. 

To better understand how your business could be impacted by converting to an S Corp formation, check out this quick overview of the issues you might face: 

Passive Income 

S-corporations may be liable for tax related to any passive income that exceeds a 25% threshold of their gross receipts and revenue and profits carried over from their former C-Corp status. This classification includes income such as:

  • Dividends
  • Royalties
  • Profitable stock sales

You could lose your S-Corporation classification if your company owes this tax for three consecutive years or more. This scenario is avoidable by distributing profits and earnings your business accumulated and letting shareholders pay their share of the owed taxes. If this isn’t an option, you may consider avoiding this tax by capping how much passive income can be earned. 

Tax Loss Carry Forwards

Suppose your C-Corp had experienced operating losses before switching and didn’t apply it to reduce taxable income. In that case, it can’t then be applied to your S-Corp as an offset to its income or get passed along to your shareholders. This is why you should first determine whether it’s worth forfeiting these tax savings for those you’ll enjoy as a company with an S status. 

LIFO Inventories 

If your C-Corp uses the LIFO inventory method, plan on paying taxes on that benefit if you convert to an S-Corp. While you can spread this cost over a four-year period, carefully consider if the possible gains you will receive as an S status are worth this additional expense. 

Built-in Gains Tax

When converting to a C-Corporation from an S, you will have to pay a built-in federal gains tax on your appreciated assets and profits for this changeover. This applies if you have recognized gains within the first five years of becoming an S-Corporation. While this may not be ideal, if your decision to switch will ultimately have improved tax benefits despite this taxation, you may opt to continue with your plans.

These potential factors that could impact your decision to change your corporation status from C to S are the most common, but not the only ones you should consider. You also have to keep in mind that any shareholder-employees you have under an S-Corp structure won’t have the same tax-free benefits as before, and those who have outstanding loans could complicate things further. 

There are several options companies have at their disposal to mitigate or completely eliminate some of the tax issues mentioned above. Avoiding some of the unnecessary pitfalls related to these solutions is also important and doable with the right planning. Ultimately, much depends on how you run your company and any special circumstances that might be at play. Contact us to discuss the effect of these and other potential problems, along with possible strategies for dealing with them.

cash-basis-accrual-accounting-methods-guide-for-small-businesses

Cash-Basis and Accrual Accounting Methods: A Quick Guide for Small Businesses
Cash-Basis and Accrual Accounting Methods: A Quick Guide for Small Businesses 1600 941 smolinlupinco

When they first start out, many small businesses use the cash-basis method of accounting. However, many eventually switch to accrual-basis reporting in order to conform with U.S. Generally Accepted Accounting Principles (GAAP). 

This quick guide can help you decide which method is right for your business.

The cash-basis method of accounting

Businesses using the cash-basis method recognize revenue as their customers pay invoices and expenses as they pay their bills. Because of this, cash-basis entities often report fluctuations in profits from period to period, particularly when they’re engaged in long-term projects. These fluctuations can make it difficult to benchmark a company’s performance from year to year or against other businesses that use the accrual method.

The cash method of accounting can allow eligible businesses to fine-tune their annual taxable income by timing the year in which they recognize taxable income and claim deductions.

The most common strategy is to postpone revenue recognition and accelerate expense payments at the end of the year. Although this can allow businesses to temporarily defer their tax liability, it also causes the company to appear less profitable to investors and lenders.

Some businesses may also find it advantageous to take the opposite approach if tax rates are expected to increase substantially in the coming year. Accelerating revenue recognition and deferring expenses at year-end can maximize a company’s tax liability in the current year to take advantage of the lower tax rates.

The accrual-basis method of accounting

The accrual method is more complex and conforms to the matching principle under U.S. GAAP. Companies using the accrual method recognize revenue and expenses in the periods that revenue is earned and expenses are incurred. This method facilitates better financial benchmarking by reducing fluctuations in profits from period to period.

Accrual-basis entities also report several asset and liability accounts that aren’t usually included on a cash-basis entity’s balance sheet: prepaid expenses, work in progress, accrued expenses, accounts receivable, accounts payable, and deferred taxes are all common examples. 

Although small companies have several options, including the cash-basis method, public companies are required to use the accrual method.

Changes under the TCJA

With the passage of the Tax Cuts and Jobs Act (TCJA), more companies are now eligible to use the cash-basis method for federal tax purposes. This has caused many small companies to reconsider which method of accounting is right for them.

Under the TCJA, the small business definition was expanded to include businesses with no more than $25 million of average annual gross receipts, based on the last three tax years (previously, this gross-receipts threshold was only $5 million). This $25 million limit is adjusted annually for inflation, and the inflation-adjusted limit is $26 million for tax years beginning in 2021. For 2022, the limit is $27 million.

The TCJA also modifies Section 451 of the Internal Revenue Code. For tax years beginning after 2017, the Code has been changed so that businesses recognize revenue for tax purposes no later than they recognize revenue for financial reporting purposes. This means that you must use the accrual method for federal income tax purposes if you choose to use it for financial reporting purposes.

Have further questions? We can help

Switching to the accrual method of accounting can help small businesses reduce variability in financial reporting and more easily attract financing from investors and lenders who prefer GAAP financials. However, the cash method offers more simplicity and flexibility in tax planning. 

If you need help choosing the best method for your situation, contact us to discuss your options.

© 2022

important-2022-q2-tax-deadlines-for-businesses-and-employers

Important 2022 Q2 Tax Deadlines for Businesses and Employers
Important 2022 Q2 Tax Deadlines for Businesses and Employers 1600 941 smolinlupinco

Businesses and other employers should take note of these key tax-related deadlines for the second quarter of 2022. 

April 18

  • Calendar-year corporations must use Form 1120 file a 2021 income tax return or use Form 7004 to file for an automatic six-month extension. Any tax due must be paid.
  • Corporations must pay the first installment of their estimated 2022 income taxes.
  • Individuals must use Form 1040 or Form 1040-SR to file their 2021 income tax return or use Form 4868 to file for an automatic six-month extension.
  • Individuals who don’t pay income tax through withholding must use Form 1040-ES to calculate and pay the first installment of their 2022 estimated taxes.

May 2

  • Employers must use Form 941 to report income tax withholding and FICA taxes for the first quarter of 2022. Any tax due must be paid.

May 10

  • If you deposited on time and fully paid all of the associated taxes due, employers must use Form 941 to report income tax withholding and FICA taxes for the first quarter of 2022.

June 15 

  • Corporations must pay the second installment of their 2022 estimated income taxes.

This list isn’t all-inclusive, and it’s worth keeping in mind that there may be other additional deadlines that apply to you. To learn more about filing requirements and ensure that you’re meeting all applicable tax deadlines, contact us.

© 2022

tax-deadline-april-18th-file-for-extension

The Tax Deadline Is April 18th: If You Aren’t Ready, File for an Extension
The Tax Deadline Is April 18th: If You Aren’t Ready, File for an Extension 1600 941 smolinlupinco

This year’s tax filing deadline is rapidly approaching—if you don’t have time to gather your tax information and file by April 18th, you can use Form 4868 to file for an extension.

An extension allows you to avoid incurring “failure-to-file” penalties and will give you until October 17 to file. However, you’re still required to pay your taxes by April 18th. If you haven’t paid whatever tax you estimate is owed by that date, you’ll incur steep penalties.

Tax deadline penalties: Failure to pay vs. failure to file

Failing to pay and failing to file incur separate penalties. 

For each month (or part of a month) your payment is late, the failure-to-pay penalty is 0.5%. For example, if payment is due on April 18 and you pay on June 25, the penalty is 1.5% (0.5% times 3 months or partial months). The maximum failure-to-pay penalty is 25%.

The failure-to-pay penalty is calculated based on the amount that is shown as due on your return (less credits for amounts paid via estimated payments or withholding), even if your actual tax bill is higher. However, if your actual tax bill turns out to be lower, the penalty will be based on the lower amount.

By contrast, the failure-to-file penalty runs at a higher rate of 5% for each month (or partial month) you fail to file after the deadline. The maximum failure-to-file penalty is 25%. As mentioned above, filing an extension on Form 4868 doesn’t exempt you from failure-to-pay penalties—however, it will prevent you from filing late unless you also miss the extended due date. 

If both the failure-to-file penalty and the 0.5% failure-to-pay penalty apply, the failure-to-file penalty drops to 4.5% per month (or part of a month), so the combined penalty will be 5%. For the first five months, the maximum combined penalty is 25%. After those five months, the failure-to-pay penalty can continue at 0.5% per month for an additional 45 months—an additional total of 22.5%. The combined penalties can thus reach a maximum total of 47.5%.

Another reason the failure-to-file penalty is more severe is that it’s based on the amount you’re required to show on your return, rather than the amount shown as due. (Credit is given for amounts paid via withholding or estimated payments.) 

For example, if your return is filed five months after the due date showing $5,000 owed (after payment credits), the combined penalties will be 25%, which equals $1,250. But if your actual liability is determined to be an additional $1,000, the failure-to-file penalty will also apply to this amount for an additional $225 in penalties (4.5% × 5 = 22.5%).  If no amount is owed, there’s no penalty for late filing.

If a return is filed more than 60 days late, there’s also a minimum failure-to-file penalty. For returns due through 2022, this minimum penalty is the lesser of $435 or the amount of tax required to be shown on the return.

Additional considerations

If returns are filed late due to “reasonable cause” such as death or serious illness in the immediate family, both penalties may be excused by the IRS.

Apart from and in addition to the above penalties, interest is assessed at a fluctuating rate announced by the government. The late filing penalty can also jump to 15% per month in especially abusive situations involving a fraudulent failure to file, with a 75% maximum.

If you have further questions about filing for an extension or possible IRS penalties, contact us.

© 2022

using-crummey-trusts-take-advantage-annual-gift-tax-exclusion

Using Crummey Trusts to Take Advantage of the Annual Gift Tax Exclusion
Using Crummey Trusts to Take Advantage of the Annual Gift Tax Exclusion 1600 941 smolinlupinco

For 2022, the unified gift and estate tax exemption is set at $12.06 million, adjusted for inflation, up from $11.7 million for 2021. For many families, this means estate tax liability won’t be a concern. However, others may still benefit from using the annual gift tax exclusion as an estate planning strategy, especially since future tax law changes may lower the gift and estate tax exemption. 

For this reason, a Crummey trust can still serve as an important part of your estate planning strategy.

Limitations on the annual gift tax exclusion

For 2022, the annual gift tax exclusion allows you to give gifts valued up to $16,000 per recipient without incurring any gift tax. This $16,000 amount is indexed for inflation, but only in $1,000 increments.

For instance, this means that if you have four adult children and six grandchildren, you can gift each of them $16,000 this year (for a total of $160,000) without paying any gift tax. Since this exclusion is per donor, the amount is doubled for married couples.

However, when giving outright gifts, there is always the risk that the money or property could be wasted, especially if you’re giving to a recipient who may be young or irresponsible. 

As an alternative, you can transfer assets to a trust that names your child (or another recipient) as a beneficiary. This setup allows your designated trustee to manage the assets until the recipient reaches a specified age.

But this strategy comes with a catch, because gifts must be a transfer of a “present interest” to qualify for the annual exclusion. In this context, a “present interest” means the recipient has an unrestricted right to the immediate use, possession, or enjoyment of the income or property included in the gift. 

Because of this, a gift made to a trust won’t qualify as a gift of a present interest unless certain provisions are made in the trust language. Instead, it will be considered a gift of a “future interest” and won’t be eligible for the annual gift tax exclusion.

How a Crummey trust can help

A Crummey trust can offer a solution here. Crummey trusts satisfy the rules for gifts of a present interest but don’t require the trustee to distribute the assets to the beneficiary.

In a Crummey trust, periodic contributions of assets can be coordinated with an immediate power that gives the beneficiary the right to withdraw the contribution for a limited time. The expectation of the donor, however, is that the power won’t be exercised. (This cannot be expressly provided for in the trust document.)

These gifts will not be treated as a gift of a present interest due to the beneficiary’s limited withdrawal right, allowing gifts to the trust to qualify for the annual gift tax exclusion. Note that the tax outcome is determined by the existence of the legal power and not the exercise of it.

Additional requirements

To ensure your Crummey trust will hold up under IRS scrutiny, you must give the beneficiary actual notice of the withdrawal right, as well as a reasonable period (typically at least 30 days) to exercise it. 

If you have further questions regarding the use of a Crummey trust, contact us.

© 2022

subsequent-events-financial-reporting

Subsequent Events and Financial Reporting
Subsequent Events and Financial Reporting 1600 941 smolinlupinco

In financial reporting, “subsequent events” are major events or transactions that occur after the reporting period ends but before financial statements are finalized. These events may include cyberattacks, natural disasters, regulatory changes, and the loss of a large business contract.

Whether or not you should report these subsequent events is something of a gray area, but the following guidance from the AICPA can help you make your decision.

Recognized and unrecognized subsequent events

Financial statements are a reflection of a company’s financial position at a specific date, as well as the operating results and cash flows for the period ending on that date. 

Since completing financial statements takes time, there’s often a gap between the financial statement date and the date when financial statements are ready to be issued. In some cases, unforeseeable events may occur during this time frame.

The AICPA classifies subsequent events into two groups in chapter 27 of their Financial Reporting Framework for Small- and Medium-Sized Entities:

1. Recognized subsequent events

These subsequent events offer further evidence of conditions that already existed on the financial statement date. For example, a major customer may declare bankruptcy due to the risk associated with its accounts receivable. In this case, there are often indicators of financial distress—such as rising staff turnover or late payments—for some time before the customer finally files for bankruptcy.

2. Nonrecognized subsequent events

Nonrecognized subsequent events are due to conditions that arose after the financial statement date. For example, if a business is severely damaged by an earthquake or a major storm, they’ll usually have no way of forseeing this disaster before it occurs.

Generally speaking, recognized subsequent events must be recorded in your company’s financial statements. Nonrecognized subsequent events don’t need to be recorded, but you may need to disclose the details of the event in the footnotes.

Understanding disclosure requirements

As a general rule, you should disclose nonrecognized subsequent events in the footnotes if omitting information about them might mislead investors, lenders, or other stakeholders. At a minimum, your disclosures should describe the event and provide an estimate of its financial impact, if possible.

In certain extreme cases, a subsequent event may have an effect pervasive enough that it puts your company’s viability in question. If so, your CPA may choose to re-evaluate the going concern assumption underlying your financial statements.

We can help you make disclosure decisions

If you’re unsure whether you need to report or disclose a subsequent event, contact us. We can offer you guidance and help you eliminate the guesswork.

© 2022

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