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401(k) plans allow employees to accumulate retirement savings on a tax-advantaged basis, and employers may offer them for several reasons, including as an incentive to attract and retain talent. If your employer offers such a plan and you’re thinking about participating, here are a few things to know.

A 401(k) plan gives you the option to set aside a portion of your wages and place them in a qualified retirement plan. When cash is set aside in a 401(k) plan, your gross income is reduced and the tax on the amount set aside is deferred until it’s distributed to you (adjusted by earnings). These earnings will either be distributed from the plan or (if you choose to roll the proceeds into another plan after leaving your job) from an IRA or whatever other plan you roll them into.

401(k) plan advantages

A 401(k) plan saves you current income taxes by reducing wages and other compensation by the amount of your pre-tax contributions. However, these earnings are still subject to Social Security and Medicare taxes. 

Your employer’s plan may also allow you to make some or all of your contributions as Roth 401(k) contributions (contributions made on an after-tax basis). Amounts set aside in Roth 401(k) contributions are subject to current income taxation. However, distributions (including earnings) will be tax-free if the funds are left in the plan for a required time.

Annual IRS limits apply to all elective contributions, whether pre-tax or after-tax. The maximum permitted amount of contributions for 2021 is $19,500. 

Once you reach age 50, your employer’s plan may allow you to make additional “catch-up” contributions (this additional amount is limited to $6,500 for 2021). Because of this, employees age 50 or older may contribute a total of $26,000 in 2021 to all 401(k) plans. Total employer contributions, including elective deferrals, are also limited to the lesser of 100% of compensation or, for 2021, $58,000 (catch-up contributions are exempt from this limitation).

In most cases, the amount of your contributions, as well as employer matching and other contributions, can be invested among certain investment options selected by your employer. You’ll want to review your plan investment performance periodically to make sure that each investment is still suitable for your risk specifications and retirement planning goals.

Limits on distributions

When considering a 401(k) plan, it’s important to know that there’s a limitation on distributions as long as you’re still working. Amounts in the plan that are set aside through elective contributions won’t be available to you until you reach one of the following events: 

• Retirement (or other separation from service) 
• Plan termination 
• Reaching age 59½ 
• Disability
• Hardship

Hardship withdrawals are also governed by stringent eligibility requirements and must be deemed necessary in order to satisfy an immediate and significant financial need.

Some employer’s 401(k) plans may allow you to receive a plan loan as an alternative to taking a hardship withdrawal or other plan withdrawal. These loans are paid back to your account, with interest. You may roll any distribution that you do take into an IRA or another employer’s plan (so long as that plan permits it), which allows you to continue deferring tax on the amount rolled over. Generally, if taxable distributions are not rolled over, they’re subject to 20% federal tax withholding.

Your employer may opt to make matching contributions up to a certain amount—if so, it’s a good idea to contribute enough to receive the full match. You’ll miss out on free money otherwise!

This is only a basic overview of 401(k) plans for employees. If you need more information about a specific plan, contact your employer. We can also answer any tax questions you may have.

Valuation plays an essential role in any well-crafted estate plan. After all, the value of your assets at the time of transfer has a major effect on the tax implications of different estate planning strategies.

Many business interests and other assets have had their value impacted by the COVID-19 pandemic, and this may create some attractive opportunities for estate planning. However, these pandemic disruptions can also present a challenge for valuation professionals, and involving an experienced valuation expert in the estate planning process is now more important than ever.

New opportunities

The COVID-19 pandemic has depressed the value of many assets (oftentimes only temporarily), which makes it an ideal time to consider gifting them, either directly to family members or by placing them into other estate planning vehicles such as irrevocable trusts. 

Since values are currently low, gifting these assets now will also allow you to minimize the use of your gift and estate tax exemption, keeping more of that amount available for future gifts or bequests. If your asset values fully rebound as the economy recovers, the beneficiaries of these gifts will enjoy significant growth outside your taxable estate.

Pandemic challenges

Unfortunately, COVID-19 has also created some unique challenges for those in the valuation profession. The pandemic differs from other recent economic crises in that most of the damage to the economy has been caused by business closures, travel restrictions, and other measures for stopping the spread of the virus.

This can present a number of challenges for business valuation, including:

Is pandemic fallout “known or knowable”? Generally, fair market valuations don’t consider “subsequent events,” meaning events that occur after the valuation date and weren’t “known or knowable” at that time. Although experts are generally in agreement that the pandemic wasn’t known or knowable as of December 31, 2019, the picture is less clear for valuation dates that come after that. Because of this, it can be difficult to determine whether the pandemic was known or knowable and whether this should be considered when valuing a business or other asset.

Impacts on valuation methods. Valuators usually consider all three of the major approaches to valuation: the income, market, and asset approaches. However, the pandemic may affect how appropriate each approach is and how much weight each approach should be assigned.

Market-based methods, for instance, may be less relevant in cases where the underlying transactions predate COVID-19, since these methods rely on data about actual transactions involving comparable businesses (however, it may still be possible to adjust to reflect the impact of the pandemic).

By contrast, income-based methods such as the discounted cash flow (DCF) method are now being emphasized by many valuators. Using the DCF method involves making a projection of a business’s future cash flows over a defined period (for example, over the next five years), then discounting these projections to present value. The DCF method is particularly useful at the moment because it allows for a good deal of flexibility: a business’s expected financial performance can be modeled based on current conditions while also incorporating assumptions about its eventual return to “normal” over the next few years.

It’s also important for valuators to make an assessment of a business’s available and expected cash needs and its future viability, regardless of the valuation methods they use. These considerations allow valuators to assess a business’s risk, which may have a significant impact on its value.

Need help with valuation?

Although the depressed value of certain assets during the COVID-19 pandemic has created some attractive opportunities for estate planning, other assets have remained unaffected or even increased in value. If you have questions about the valuation of your assets, contact us.

If your business is depreciating the entire construction cost of the building that houses your operation over a 30-year period, a cost segregation study may be worth considering. Running a cost segregation study could allow your business to reduce taxes and boost cash flow by accelerating depreciation deductions on certain items. And as a result of enhancements to certain depreciation-related tax breaks, the potential benefits of cost segregation studies are greater now than they’ve been in past years.

Depreciation basics

Business buildings typically have a depreciation period of 39 years (for residential rental properties, the depreciation period is 27.5 years). In most instances, a company will depreciate the structural components of a building along with the building itself—this includes walls, windows, elevators, plumbing, wiring, and HVAC systems. Personal property, including equipment, furniture, fixtures, and machinery is eligible for accelerated depreciation, typically over a period of five or seven years, while land improvements (parking lots, fences, outdoor lighting, etc.) are depreciable over a 15 year period.

Many businesses overlook the opportunity to allocate costs to land improvements or shorter-lived personal property and instead allocate most or all of their buildings’ construction or acquisition costs to real property. The distinction between real and personal property is sometimes obvious—as in the case of furniture and computers—but oftentimes, it’s less easy to differentiate between the two. Some items that seem to be “part of the building” (such as removable floor and wall coverings, window treatments, signs, decorative lighting, awnings, and canopies) may actually be personal property.

Items that would otherwise be treated as real property but serve more of a business function than a structural purpose might also qualify as personal property. These items may include plumbing and electrical installations needed to operate specialized equipment, dedicated cooling systems used in data processing rooms, and reinforced flooring to support heavy manufacturing equipment.

Properly classifying property using asset classes

Cost segregation studies utilize both engineering and accounting techniques to identify which building costs can be allocated to tangible personal property and which must be classified as real property. They can be a valuable investment, although the particular facts and circumstances of your business will determine the relative costs and benefits.

Certain depreciation-related tax breaks were enhanced with the passage of the Tax Cuts and Jobs Act (TCJA)—among other changes, the act permanently increased Section 179 expensing limits, allowing for the entire cost of qualifying equipment or other fixed assets to be immediately deducted up to specified thresholds. 

Under the TCJA, 15-year-property treatment was also expanded and now applies to qualified improvement property—in the past, this break could only be applied to retail improvement, qualified leasehold improvement, and restaurant property. In addition, first-year bonus depreciation was temporarily increased from 50% to 100%. All of these enhancements may also amplify the benefits of a cost segregation study. 

Claim substantial savings now

If your business incorrectly assumed certain items to be part of real property for depreciation purposes, it’s not too late to gain the benefits of faster depreciation for these items. If you’re claiming the depreciation you could have already claimed, you won’t need to amend your past tax returns or meet any deadline for claiming tax refunds. Instead, this depreciation can be claimed by following certain procedures as you file your next tax return. This will “automatically” result in the IRS consenting to a change of your depreciation accounting.

Although they often come with many substantial benefits, cost segregation studies aren’t right for every business. If you’re wondering whether a cost segregation study would be worthwhile for your company, contact us. We can help you judge whether your savings in taxes will outweigh the costs of the study itself.

Have you or your clients used cryptocurrency? 

We’re here to fill you in on IRS enforcement efforts and how investors and companies in the virtual currency industry should address these actions and what they mean for you, including:

• Risks of not following the rules
• How is the IRS prioritizing audits and prosecution
• The IRS’ use of big data
• What do you do if you haven’t paid taxes on cryptocurrency transactions, including potential voluntary disclosure considerations
• How to protect your business from a US Department of Justice investigation, including compliance updates to address this risk

After months of virtual meetings, your business’s employees may be finally resuming travel. If so, your employees can use the IRS’s “per diem” rates to substantiate the amount of expenses for lodging, meals, and incidental expenses while traveling away from home (or use a special transportation industry rate if your company works in the transportation industry). 

The IRS has announced the “per diem” rates for the 2022 fiscal year in Notice 2021-52. These rates became effective October 1, 2021.

The high-low per diem method

For employees of a business, the high-low per diem method is a simpler alternative to tracking actual travel expenses. The high-low per diem method provides fixed travel per diems based on the IRS’s per diem rates which vary depending on locality.

Under this method, certain areas with higher costs of living fall under an annual “high-cost” flat rate, and all other locations within the continental United States are automatically considered “low-cost.” High-cost areas include locations such as San Francisco, Seattle, and Boston. Taxpayers may choose to use the high-low method instead of applying the specific per diem rates for individual business destinations. 

Under certain circumstances, such as an employer paying the hotel directly or providing lodging, employees may receive a per diem reimbursement that only covers meals and incidental expenses. If an employee is traveling but doesn’t pay or incur meal expenses for a full (or partial) calendar day, there’s also a $5 incidental-expenses-only rate.

Per diem rates and record keeping

Employees don’t need to follow the IRS’s usual recordkeeping rules if your company uses per diem rates. 

Under the per diem method, receipts of expenses generally aren’t required, and reimbursements aren’t typically reported on an employee’s Form W-2 or subject to income or payroll tax withholding. However, employees will still need to substantiate the place, time, and business purpose of their travel.

The new per diem rates for fiscal year 2022

The new per diem rate for travel after September 30, 2021 is $296 for all high-cost areas within the continental U.S.—this amount includes $222 for lodging and $74 for meals and incidental expenses. The per diem rate for travel after September 30, 2021 is $202 for all other areas within the continental U.S., consisting of $138 for lodging and $64 for meals and incidental expenses. Per diem rates for both high- and low-cost areas increased $4 compared to fiscal year 2021.

It’s important to note that various rules and restrictions apply to the use of this method. For instance, if a company uses the high-low method for an employee, they must then continue to use that method for all reimbursement of business travel expenses within the continental U.S. for the rest of that calendar year (that employee may be reimbursed for travel outside the continental U.S. through any permissible method, however).

When reimbursing a particular employee’s travel, employers must continue to use the same method (high-low or per diem) that they used during the first nine months of a calendar year during the last three months of the calendar year. It’s also worth noting that individuals who own 10% or more of the business can’t be paid per diem rates.

Switching to the high-low method can potentially help your company reduce the time and frustration of traditional travel reimbursement. If you’re considering using the high-low method for travelling employees or have other questions about travel reimbursements, contact us.

If your business is depreciating the entire construction cost of the building that houses your operation over a 30-year period, a cost segregation study may be worth considering. Running a cost segregation study could allow your business to reduce taxes and boost cash flow by accelerating depreciation deductions on certain items. And as a result of enhancements to certain depreciation-related tax breaks, the potential benefits of cost segregation studies are greater now than they’ve been in past years.

Depreciation basics

Business buildings typically have a depreciation period of 39 years (for residential rental properties, the depreciation period is 27.5 years). In most instances, a company will depreciate the structural components of a building along with the building itself—this includes walls, windows, elevators, plumbing, wiring, and HVAC systems. Personal property, including equipment, furniture, fixtures, and machinery is eligible for accelerated depreciation, typically over a period of five or seven years, while land improvements (parking lots, fences, outdoor lighting, etc.) are depreciable over a 15 year period.

Many businesses overlook the opportunity to allocate costs to land improvements or shorter-lived personal property and instead allocate most or all of their buildings’ construction or acquisition costs to real property. The distinction between real and personal property is sometimes obvious—as in the case of furniture and computers—but oftentimes, it’s less easy to differentiate between the two. Some items that seem to be “part of the building” (such as removable floor and wall coverings, window treatments, signs, decorative lighting, awnings, and canopies) may actually be personal property.

Items that would otherwise be treated as real property but serve more of a business function than a structural purpose might also qualify as personal property. These items may include plumbing and electrical installations needed to operate specialized equipment, dedicated cooling systems used in data processing rooms, and reinforced flooring to support heavy manufacturing equipment.

Properly classifying property using asset classes

Cost segregation studies utilize both engineering and accounting techniques to identify which building costs can be allocated to tangible personal property and which must be classified as real property. They can be a valuable investment, although the particular facts and circumstances of your business will determine the relative costs and benefits.

Certain depreciation-related tax breaks were enhanced with the passage of the Tax Cuts and Jobs Act (TCJA)—among other changes, the act permanently increased Section 179 expensing limits, allowing for the entire cost of qualifying equipment or other fixed assets to be immediately deducted up to specified thresholds. 

Under the TCJA, 15-year-property treatment was also expanded and now applies to qualified improvement property—in the past, this break could only be applied to retail improvement, qualified leasehold improvement, and restaurant property. In addition, first-year bonus depreciation was temporarily increased from 50% to 100%. All of these enhancements may also amplify the benefits of a cost segregation study. 

Claim substantial savings now

If your business incorrectly assumed certain items to be part of real property for depreciation purposes, it’s not too late to gain the benefits of faster depreciation for these items. If you’re claiming the depreciation you could have already claimed, you won’t need to amend your past tax returns or meet any deadline for claiming tax refunds. Instead, this depreciation can be claimed by following certain procedures as you file your next tax return. This will “automatically” result in the IRS consenting to a change of your depreciation accounting.

Although they often come with many substantial benefits, cost segregation studies aren’t right for every business. If you’re wondering whether a cost segregation study would be worthwhile for your company, contact us. We can help you judge whether your savings in taxes will outweigh the costs of the study itself.

The recently expanded Employee Retention Credit provides immediate cash-flow relief to eligible employers that have been impacted by the COVID-19 pandemic. 

Employers can receive as much as $5,000 per impacted employee for 2020 and up to $28,000 per impacted employee for 2021!

Wondering what it means for you and how to take advantage of it? We have all the information you need. In this webinar you’ll learn: 

• What credits are available to you 
• How to determine if you’re eligible
• The impact of other tax credits and relief provisions
• How employers can claim the credit

Many businesses and not-for-profit organizations are still experiencing the adverse effects of the COVID-19 pandemic, but different organizations are affected differently depending on their geographic location and the nature of their operations. 

If your organization only prepares its financial statements at the end of the year, you may not have considered how to factor the effects of the pandemic into your financial statements this year in compliance with U.S. Generally Accepted Accounting Principles.

However, as we approach the audit season for 2021, it’s a good time to make an analysis of whether your financial situation has improved or worsened this year. 

Here are 10 areas to focus on as you consider your financial statements:

1. Revenue recognition

Make an assessment of how changes in customer preferences, credit policies or payment terms, discounts, refund concessions, and contract modifications have affected the top line of your income statement. You should also consider any impacts on the collectability of accounts receivable.

2. Fair values and estimates

Typically, these items are based on budgeting and forecasting of revenue, costs, and cash flows, but uncertainty during the COVID pandemic may have decreased the fair values of certain balance sheet items and increased the discount rates used in making estimates.

3. Investments

The fair values of investments and financial instruments that qualify for hedge accounting may have been negatively impacted by market changes due to the pandemic.

4. Government grants

These items may be accounted for as revenue or as donor-restricted contributions. You may also need to address documentation, eligibility, expense tracking, and other requirements such as government audits, depending on the specific requirements of government funding programs.

5. Property, plant, and equipment. 

If the pandemic has led to changes in business plans, consider if there have been any changes in useful lives and related deprecation as a result. Long-lived assets and leased assets may also be subject to potential impairment.

6. Inventory

The value of raw materials, work-in-progress, and finished goods inventory may have been affected by certain market conditions, such as inflation, supply chain disruptions, and reductions in production. Write-offs may also be needed due to obsolescence.

In addition, year-end physical inventory counts may be delayed, restricted, or prevented due to travel and work restrictions. If your external auditors need to observe counts remotely, additional testing procedures during audit fieldwork may be required.

7. Deferred tax assets

Consider the effects of current-year losses and future uncertainty, including the impact of possible federal tax law changes, on the realizability of these assets.

8. Accrued liabilities

Additional liabilities may need to be booked this year for employee terminations, payroll tax payment deferrals, and changes in benefits. In addition, existing contingency accruals may no longer be adequate.

9. Long-term debt

Financial difficulties may result in debt modification or extinguishment. If your organization fails to meet its debt covenants, you may also have debt classification issues for existing loans. You should also consider the Paycheck Protection Program’s compliance requirements for loans and the probability of forgiveness.

10. Goodwill and other intangible assets

These items may require impairment testing or write-offs due to COVID-19 triggering events. 

Contact us for assistance

This list should serve as a useful starting point for considering how the pandemic may affect your financial reporting. If you have questions about how the pandemic has affected financial results in 2021 and how to report these effects, contact us for guidance. 

We are pleased to announce that Smolin Lupin has been voted Best Business Accounting Provider and Best Matrimonial Valuation Provider in the most recent New Jersey Law Journal Best of Survey by the New Jersey legal community.

The annual Best Of competition selects nominees from among industry resources, products, and service providers to be voted on by attorneys. The results highlight highly qualified vendors and business partners that help attorneys to compete in today’s legal environment. 

“At Smolin, our clients are at the focus of everything we do. Nothing is more essential to us,” said Henry Rinder, Smolin CPA and Certified Fraud Examiner. “That is why earning this recognition means so much to us. It underscores our dedication to assisting clients and supporting them in achieving their goals.”  

Smolin has been widely recognized as an industry leader and client favorite for delivering exceptional results for the legal community. Most recently, Smolin was named as one of the Inside Public Accounting Top Accounting Firms. 

More about the 2021 “Best Of” rankings and awards, as well as a complete list of winners, can be found on New Jersey Law Journal’s site.

About Smolin

Founded in 1947, the accounting practice of Smolin, Lupin & Co., LLC services clients ranging in size from large companies to privately held corporations and individuals out of four offices in the New York, New Jersey, and Florida markets. 

The firm named one of the NJBiz Magazines top NJ accounting firms provides audit, accounting, and tax services to many industries and professions, including construction, distribution, manufacturing, real estate, and retail. 

The firm’s professionals have extensive experience with business strategies, business succession, international issues, litigation support, contingency and estate planning, fraud detection and prevention, and many other business needs and concerns. For more information, please call 973-439-7200 or visit www.smolin.com. 

It’s hard to make informed decisions for your business without timely access to financial data—but getting access to the right information at the right time can be a challenge, especially if your company is using an outdated accounting system. With the wrong system, entering and extracting data for specific customers and/or projects can take multiple, confusing steps

The businesses and accounting software solutions that worked for your company years ago might not still be ideal solutions today. As accounting systems have evolved over time, more user-friendly and sophisticated systems have become available—and there may be options that are better customized for your specific industry. 

When evaluating your current accounting system, consider these four factors:

Does your system allow remote access?

Remote access is more important than ever—whether you’re working from home to facilitate social distancing or accessing your accounting system from the field. Remote access allows your team to keep tabs on real-time project data from anywhere, and also facilitates daily reporting of important financial information—including labor hours, sales figures, cash on hand, and equipment usage. Managers can catch potential problems and adjust as needed by comparing this information against budgeted amounts.

Does it integrate with other platforms and applications?

Modern accounting software allows seamless integration with other existing platforms and applications—look for a solution that supports project management software and timecard entry. The software you choose should also be compatible with customer networks, supplier networks, and any systems used by third party payroll providers—this will make it easier to update or automatically import key information in a timely manner.

Does the vendor offer customer support?

Top-notch customer support is an important feature of any quality accounting system. If you’re trying to decide whether your current system provides enough support, ask your vendor representative whether you’re taking full advantage of your accounting software’s functionality—they should be able to tell you how you can improve your use of the software. If the vendor provides minimal feedback or doesn’t respond, that may be a sign that you should switch providers.

Is your team on-board?

Your entire team (or at least its key members) should have some input in selecting an accounting system—after all, these changes will affect people throughout your organization.

Ask your team which features they consider to be “must haves,” as well as which features they’d prefer for convenience. After that, you can ask IT and financial specialists to help you choose three to five prospective vendors to carefully research and test drive.

Promptly announcing your accounting system upgrade plans, thoroughly explaining your reasons for switching systems, and keeping your staff updated during implementation can all help to reduce fear or confusion about the new software. You’ll also want to implement the right training once the new system comes online—there may be a learning curve for more complex systems, and formal instruction from the vendor can help smooth out any difficulties.

Contact us for help

Contact us today if you need help assessing or replacing your current accounting system. We’d be happy to help you assess the effectiveness of your current system and identify other cost-effective and suitable solutions.