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When it comes to restricted cash, your company’s financial statements need to be transparent. Make sure your reporting practices are compliant with the current accounting guidance.

What is restricted cash?

Restricted cash is a type of “cash and cash equivalents” that can’t be used for general business operations or investments.

Restricted cash comes in many forms, including:

• Money set aside for a specific business purpose (i.e. a loan repayment, plant expansion, or legal retainer)
• A minimum cash balance kept by a borrower as collateral against a loan
• A customer’s deposit, which a business may be restricted from accessing until the terms of the contract are complete

Restricted cash and the balance sheet

Restricted cash and cash equivalents must be differentiated from unrestricted amounts in a business’s balance sheet—and the nature of any restrictions on cash needs to be disclosed in the footnotes.

Restricted cash should be classified as a current asset if it’s expected to become available within a year of the balance sheet date. However, it must be classified as a noncurrent asset if it won’t be available for use for more than a year.

Restricted cash and the statement of cash flows

According to guidance provided in Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230)—Restricted Cash, transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents shouldn’t be reported in the statement of cash flows as cash flow activities. This is because these transfers aren’t considered a part of the entity’s operating, investing, and financing activities.

If a reconciliation of the total cash balances for the beginning and end of the period is included in the statement of cash flows, the amounts for restricted cash and restricted cash equivalents should instead be included along with cash and cash equivalents.

The new accounting guidance requires that cash flow statements report separate amounts for changes of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents during a reporting period. In the statement of cash flows, these amounts are usually found just before the reconciliation of net income to net cash provided by operating activities.

Need assistance? We can help

Even though restrictions on cash are common, navigating the accounting rules isn’t always easy. Contact us today—we can help you report these amounts accurately and transparently.

Many people are working from home during the COVID-19 pandemic. If you’re self-employed, you might be able to claim deductions for home office expenses against your business income—as long as you run your business from your home or perform certain functions there. There are two ways to claim this tax break: the actual expenses method and the simplified method.

How do I know if I qualify?

Generally speaking, if part of your home is utilized as your principal place of business “regularly and exclusively,” you qualify for home office deductions.

However, you may still qualify for these deductions even if your home isn’t your principal place of business. Home office deductions are possible if:

1. You meet in-person with patients, clients, or customers on your property, or
2. A storage area in your home or any free-standing structure on the premises is used exclusively and regularly for your business

Deducting actual expenses

Deducting actual expenses is one method many taxpayers use when claiming home office deductions. Such deductible expenses may include:

• Direct expenses, such as money spent painting or carpeting a space used exclusively for business
• A proportionate share of indirect expenses, such as mortgage interest, property taxes, rent, repairs, utilities, and insurance
• Depreciation

However, keeping track of actual expenses can be time-consuming and requires careful organization.

The simplified method

Fortunately, there’s a simpler method: Taxpayers may deduct $5 for each square foot of home office space, up to a maximum of $1,500.

Because of this maximum total, the simplified method can be less valuable for larger home office spaces. But even when it comes to small spaces, some taxpayers qualify for bigger deductions if they use the actual expense method—meaning that tracking your actual expenses is worth it in some cases.

What if I want to switch methods?

You don’t have to commit to a particular method when claiming home office deductions. If, for example, you choose to use the actual expense method on your 2020 return, you can still use the simplified method when you file your 2021 return the year after, and even return to the actual expense method for 2022.

Selling a home with a deductible home office

If your home contains (or has contained) a home office, and you choose to sell your home at a profit, there may be implications for your taxes. We can explain them to you.

Also note that the amount you can deduct for your home office is subject to limitations based on how much of your income is attributable to your use of the office, and other rules and limitations may apply. However, if there are any home office expenses that can’t be deducted due to these limitations, it’s possible to carry over and deduct these expenses in later years.

Do I qualify as an employee?

Unfortunately, the business use of home office deductions for employees was suspended from 2018 through 2025 through the Tax Cuts and Jobs Act. This means that if you receive a paycheck or a W-2 exclusively from your employer, you aren’t eligible for deductions—even if you’ve been working from home.

Contact us today—we can help you determine if you’re eligible for home office deductions and advise you on how to proceed.

If you’re like many Americans, you may be receiving letters from your favorite charities acknowledging your 2020 donations. But can you still claim a deduction for the donation on your 2020 income tax return if you haven’t received such a letter? The answer is: It depends.

Requirements for substantiation

In order to support a charitable deduction, you’ll need to comply with IRS substantiation requirements—generally speaking, this will involve obtaining a contemporaneous written acknowledgement from the charity which states the amount of the donation, whether or not you received any goods or services in consideration for it, and the value of these goods or services.

In this context, “contemporaneous” means earlier than:

• The date on which you file your tax return, or
• The extended due date of your tax return

As long as you haven’t filed your 2020 return, it’s not too late to receive substantiation from a charity you donated to last year. You can still contact the charity to request a written acknowledgment.

It’s worth noting that if you made a cash gift of under $250 with a check or credit card, a canceled check, bank statement, or credit card statement is usually sufficient. However, if you received anything in return for your donation, you’re generally required to reduce your deduction by its value. In this case, the charity will still need to provide you a written acknowledgment as described earlier.

CARES Act: A new deduction for non-itemized returns

In general, taxpayers can’t claim a charitable deduction if they don’t itemize their deductions (and claim the standard deduction instead). However, under the CARES Act, individuals who don’t itemize deductions can claim a federal income tax write-off for up to $300 of cash contributions they’ve made to IRS-approved charities. This $300 limit applies to both unmarried taxpayers and married joint-filing couples.

To make this even better, the tax break was extended under the Consolidated Appropriations Act to cover $300 of 2021 cash contributions. Under the new law, the deduction limit for cash contributions made in 2021 is doubled to $600 for married joint-filing couples.

Contact us today for help with 2020 and 2021 deductions

For some donations, there may be additional substantiation requirements—we can help you determine if you have sufficient substantiation for the gifts you hope to deduct on your 2020 tax return, and advise you on the substantiation you’ll need for donations made this year. Contact us today to get started.

In many industries, merger and acquisition activity slowed in 2020 due to COVID-19. However, analysts expect things to improve as the country emerges from the pandemic in 2021. If you’re thinking about buying or selling a business, you’ll want to make sure you understand the tax implications.

Arranging a deal

There are two basic ways a transaction can be arranged under current tax law:

1. Stock (or ownership interest)

If the target business operates as a C or S corporation or partnership—or if it operates as a limited liability company (LLC) that’s treated as a partnership for tax purposes—a buyer can acquire a seller’s ownership interest directly.

Currently, a 21% corporate federal income tax rate means that buying the stock of a C corporation is somewhat more enticing, because the corporation will pay less tax and generate more after-tax income—any built-in gains from appreciated corporate assets will also be taxed at a lower rate if and when the corporation is sold later on.

Because of the current law’s reduced individual federal tax rates, the passed-through income from these corporations is also taxed at lower rates on the buyer’s personal tax return—another reason why ownership interests in S corporations, partnerships, and LLCs have also become more desirable.

However, keep in mind that with Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two. Current individual rate cuts are scheduled to expire at the end of 2025—and they might be eliminated earlier, depending on actions in Washington. President Biden has also proposed increasing the tax rate on corporations to 28% and increasing the top individual income tax rate from 37% to 39.6%.

2. Assets

Buyers can also purchase the assets of a business. A buyer may wish to do this if they only want specific assets or product lines—and if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes, purchasing assets is the only way of acquiring the business.

Buyers’ preferences

For many reasons, buyers tend to prefer to buy assets rather than ownership interests. A buyer’s primary goal is to generate enough income from an acquired business to pay the acquisition debt and provide a strong return on their investment. As such, buyers want to limit exposure to undisclosed and unknown liabilities and minimize taxes after closing a transaction.

To reflect purchase price, a buyer can “step up,” or increase, the tax basis of assets they’ve acquired. Stepped-up basis increases depreciation and amortization deductions and lowers taxable gains when assets such as receivables and inventory are sold or converted into cash.

Sellers’ preferences

Unlike buyers, sellers tend to prefer stock sales for both tax and nontax reasons. One of a sellers’ objectives is to minimize the tax bill from a sale, and that can usually be accomplished by selling their ownership interests in a business (such as corporate stock, partnership, or LLC interests) instead of selling assets.

When a stock or other ownership interest is sold, liabilities generally transfer to the buyer. And if the ownership interest has been held for longer than one year, any gain on sale is generally treated as lower-taxed long-term capital gain.

Seek professional advice

It’s important to know that other issues, such as employee benefits, can also cause tax complications in M&A transactions. Since buying or selling a business could be the largest transaction you’ll ever make, it’s important to seek professional help. After all, once a transaction is complete, it may be too late to get the best tax results. Contact us today for advice on how to proceed.

By Thomas Cole, CPA, MST & Member of the Firm

The US Treasury issued new rules on March 3, 2021, which increase PPP loan funds available to sole proprietors. Both first and second draw PPP loans can be based on the sole proprietor’s gross income for 2019 or 2020 (as listed on Schedule C). The bad news, at this point, is that this new loan calculation method cannot be applied to previously approved loans.

The maximum gross income considered under these new rules is $100,000.

For a sole proprietor with no employees, this makes the maximum available PPP loan $20,833. (The loan can be larger for sole proprietors with W-2 employees). This change is a major improvement for small sole proprietors because PPP loan fund calculations were previously based on net income (instead of gross), resulting in a smaller maximum loan.

For borrowers with a gross income listed on Schedule C at $150,000 or less, the statutorily required certification concerning the loan request’s necessity is granted automatically. If gross income is over $150,000, the borrower’s application may be subject to review by the SBA of its necessity certification.

The new rules remove the eligibility restriction that prevents business owners with non-financial fraud felony convictions in the last year from obtaining PPP loans. The eligibility restriction was also removed for owners who are delinquent or in default on their Federal student loans from obtaining PPP loans.

Have questions on how this will impact you? Contact us – we’re here to help.

Thomas Cole is a Member of the Firm and licensed Certified Public Accountant in Florida and New Jersey and has more than 33 years of public accounting experience. Tom services clients in the construction, retail, real estate, and professional service industries, providing these companies and their owners with accounting, tax, and management consulting support. Tom is a member of the American Institute of Certified Public Accountants, the Florida Institute of Certified Public Accountants, and the New Jersey Society of Certified Public Accountants. 

During the COVID-19 pandemic, many businesses have experienced severe financial stress, and some may have delayed or missed loan payments as a result. Debtors who have become delinquent due to the pandemic may wish to ask lenders about restructuring their loans, rather than filing for bankruptcy.

Debt restructuring as an alternative to Chapter 11

In the process of out-of-court debt restructuring, a public or private company informally renegotiates its outstanding debt obligations with creditors. The resulting, legally-binding agreement allows the distressed company to reduce its debt, extend its maturities, change its payment terms or consolidate its loans.

Compared to filing for Chapter 11 bankruptcy, debt restructuring is far less demanding—and less expensive. In addition, lenders are often more open to a restructuring than they are to taking their chances in bankruptcy court.

General and troubled debt restructuring: What’s the difference?

Out-of-court debt restructuring can occur in two ways:

1. General

A general debt restructuring allows the distressed company time to regain financial stability by extending loan maturities, lowering interest rates, and consolidating debt. General restructuring ensures that creditors will receive the full amount owed, even if it’s paid over a longer period—as such, creditors tend to prefer this kind of restructuring.

General restructuring is suitable for companies that have strong financials overall but are facing a temporary crisis—such as the loss of an important customer or the departure of a key team member. The changes to debt structure in a general restructuring can either be permanent or temporary—and if changes are permanent, creditors will likely push for compensation in the form of higher equity stakes or increased loan payments.

2. Troubled

In this type of debt restructuring, creditors are required to write off a portion of the company’s outstanding debt and must accept these losses permanently. Usually, the creditor and debtor reach a settlement instead of the debtor filing for bankruptcy.

This solution is suitable when companies simply can’t pay their debts at current interest rates and when their only alternative is bankruptcy. However, creditors may receive some compensation in the form of increased equity shares in the business.

Due to the COVID-19 pandemic, many are asking the Financial Accounting Standards Board about how to apply accounting guidance on debt restructurings. Because of this, the Board recently published an educational staff paper to help borrowers sort through the details.

Contact us for help with debt restructuring

Need help reporting restructured loans in your company’s financial statements? Contact us today—we stay on top of the latest developments in debt restructuring and can assist you in making decisions around this complex accounting topic.

Should you gift now? Or not? The answer isn’t simple. The doubling of the federal gift and estate tax exemption to an inflation-adjusted $11.7 million in 2021 is sometimes considered to mean that you use it or lose it. This means that you should gift now to take advantage of this exemption, which ends in 2025 (or even sooner, depending on legislation).

So what should you do? It depends. For some people, there may be advantages to keeping assets in your estate. Here’s what you need to consider.

Giving now or at death?

The main advantage of making lifetime gifts is that if you remove assets from your estate now, future appreciation isn’t subject to the estate tax. The tradeoff is that the recipient receives a “carryover” tax basis. He or she assumes your basis in the asset. If the gifted asset has a low basis relative to its fair market value (FMV), a sale will trigger capital gains taxes on the difference.

If an asset is transferred at death, it currently receives a “stepped-up basis” equal to its date-of-death FMV, and the recipient can sell it with little or no capital gains tax liability. The strategy that you choose will depend on which approach has the lower tax cost: transferring an asset by gift (now) or by bequest (later)?

This depends on factors including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and how long you expect the recipient to hold the asset after receiving it.

Here’s another thing to keep in mind: President Biden proposed eliminating the stepped-up basis benefit during his campaign.

Educated guesses

It can be hard to know exactly when you should transfer wealth. But, carefully designed trusts can help reduce the impact of this uncertainty.

For example, if you believe that the gift and estate tax exemption will be reduced dramatically in the near future, you might transfer appreciated assets to an irrevocable trust in order to take advantage of the current rates and shield future appreciation from estate tax. Your beneficiaries will receive a carryover basis in the assets, and will have to pay capital gains taxes when they sell them.

But what if when you die the exemption amount hasn’t dropped, but instead has stayed the same or increased? To prevent this possibility, the trust can give the trustee the ability to cause the assets to be included in your estate. In this case, your beneficiaries can enjoy a stepped-up basis and the higher exemption can also shield all or most of the asset’s appreciation from estate taxes.

If you have questions about setting up this type of trust, or for advice about navigating gifting decisions, contact a Smolin advisor today.

For many people, paying 2020 taxes is more pressing right now than figuring out their 2021 tax situation. That makes sense! Your 2020 return is due in April—and the 2021 review is still a long way off.

If you want to be ahead of the game, however, it’s still smart to get familiar with the taxes that have changed for next year. Check out these FAQs below.

Don’t forget that not all figures are adjusted every year for inflation, and even if they are changed, that change might not be significant. Some taxes only change when a new law is passed.

What is the 2021 IRA contribution max?

Eligible individuals can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. For people who are 50 or older, you can make another $1,000 “catch up” contribution.

How much can I contribute to a 401(k) that I hold through my job?

The 2021 maximum contribution is $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. For people who are 50 or older, you can make an additional $6,500 catch-up contribution.

What if I employ a babysitter and a cleaning person? Do I have to withhold and pay FICA tax on the amounts I pay them?

It depends. In 2021, a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., if they pay over $2,300 (up from $2,200 in 2020).

At what salary point can stop paying Social Security on my salary in 2021?

This year, the Social Security tax wage base has gone up to $142,800 from last year’s $137,700, so you don’t have to pay Social Security on amounts you pay above that. You must pay Medicare tax, however, on your entire salary.

If I didn’t qualify for itemized deductions on my last tax return, will I qualify for 2021?

In 2017, the standard deduction was increased, which meant that itemized deductions were often no longer beneficial. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions is less than the applicable standard deduction amount, you won’t itemize for 2021.

Does that mean I can’t take charitable deductions?

Generally, taxpayers who claim the standard deduction on their federal tax returns haven’t been able to deduct charitable donations. The CARES Act, however, decided that single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act increased the amount that married couples filing jointly can claim to $600 in 2021.

How much can I give to one person without triggering a gift tax return in 2021?

This number is the same as it was in 2020/ The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

The tax strategy for your tax situation

These are only some of the tax amounts that may apply to you. Contact your trusted Smolin advisor for more information about your tax situation, or if you have questions

Many tax-related limits affecting businesses are changed annually to account for inflation, and many have increased for 2021. Some, however, have stayed low, and there’s more good news: the deduction for business meals doubled for this year. Here’s what you need to know.

Social Security changes

There was a change in the amount of earnings subject to Social Security. This number is now capped for 2021 at $142,800 (up from $137,700 for 2020).

Deduction changes

There have also been changes to section 179 expensing:

• The limit is now $1.05 million (up from $1.04 million for 2020)
• The pasehaseout is $2.62 million (up from $2.59 million)

• Additionally, income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begin $329,800 (up from $326,600) if married filing jointly and $164,925 (up from $163,300) if married filing separately

Business meal expense changes

Eligible business-related food and beverage expenses provided by a restaurant are now deductible at 100% (up from 50% last year).

Retirement plan changes

Here are the highlights:

• Maximum compensation used to determine contributions: $290,000 (up from $285,000)
• Annual benefit for defined benefit plans: $230,000 (up from $225,000)
• Compensation defining a highly compensated employee: $130,000 (unchanged)
• Combined employer/employee contributions to defined contribution plans: $58,000 (up from $57,000)

Other employee benefits

Some Health Savings Account contribution exclusions have changed as well.

• Individual coverage is up to $3,600 (from $3,550)
• Family coverage is up to $7,200 (from $7,100)

These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, contact your trusted Smolin advisor today.

The small print on your company’s financial statements give investors and lenders insight into knowledge that’s vital to business and investment decisions. These footnotes include account balances, accounting practices and potential risk factors. Make sure your footnote disclosures cover these areas. 

1. Transactions with related parties

If companies may employ friends or relatives (or give or receive preferential treatment in transactions with these parties), it’s important that this information be contained in the footnotes.

For example, say, a shoe boutique rents a retail store from the owner’s cousin at discounted rents, saving roughly $100,000 each year. If the owner doesn’t disclose this related-party deal, lenders may be led to believe that the business is more profitable than it really is. When the owner’s cousin unexpectedly dies—and the person who inherits the real estate raises the rent—the owner could fall on hard times and the stakeholders could be blindsided by the undisclosed risk.

2. Contingent or unreported liabilities.

Under some circumstances, a company’s balance sheet won’t reflect all future obligations. For example, footnotes can reveal potentially damaging lawsuits, IRS inquiries, or environmental claims.

These notes also contain specifics on items like loan terms, warranties, leases, and other contingent liabilities. On some occasions, managers might conceal or downplay liabilities to avoid violating loan agreements or revealing financial problems to stakeholders.

3. Changes to accounting principle

Footnotes must explain the nature of and cause for any change in accounting principle, in addition to how that change affects the financial statements. Although valid reasons exist to change an accounting method, dishonest managers might use accounting changes to manipulate financial results.

4. Any major event

If a company recently lost a major customer or is about to be subject to stricter regulatory oversight in the coming year, disclosures may warn of this fact. Significant events that could materially impact future earnings or impair business value are disclosed in footnotes—but again, a dishonest manager may be tempted to downplay significant events to preserve the company’s credit standing.

How much is enough?

The Financial Accounting Standards Board has eliminated some footnote disclosures in recent years and simplified others. While too many disclosures can be burdensome, it’s important that companies don’t cut back on critical disclosures too much. After all, transparency is key to effective corporate governance.

Please contact your trusted Smolin Advisor with any questions or concerns.