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IRS Provides Gift Tax Filing Relief for Certain Trump Account Contributions
IRS Provides Gift Tax Filing Relief for Certain Trump Account Contributions 266 266 Noelle Merwin

The IRS has issued Revenue Procedure 2026-25, providing gift tax reporting relief for certain individuals who contribute to Trump Accounts established for eligible children. Under the new safe harbor, qualifying contributions will be treated as completed gifts that are not future interests in property and that qualify for the annual per donee gift tax exclusion. This means that, if all requirements are met, donors will not need to file a federal gift tax return solely because they contributed to a Trump Account.

As a refresher, Trump Accounts are a new type of individual retirement account created under IRC §530A for eligible children. Because account beneficiaries generally cannot access the funds during the account’s “growth period,” there was concern that contributions could be treated as future-interest gifts. Future-interest gifts generally do not qualify for the annual gift tax exclusion and can require Form 709 reporting, even when no tax is ultimately due. The new IRS guidance is intended to reduce that compliance concern for qualifying donors.

To qualify for the safe harbor,

  1. The donor must be an individual.
  2. The donor’s only taxable gifts for the year must be cash, check, money order, or electronic funds transfer contributions to one or more Trump Accounts and each contribution must be made before the calendar year in which the account beneficiary turns age 18.
  3. The donor’s total gifts to each beneficiary, including Trump Account contributions, must not exceed the annual gift tax exclusion amount, which is $19,000 for 2026.
  4. Contributions do not create gift or generation-skipping transfer tax liability after applying the donor’s available exemptions.
  5. No gift tax return is otherwise required or filed for that year. For example, if a donor makes other reportable gifts or needs to make certain GST elections, Form 709 may still be required.

For families, grandparents, and others considering contributions to Trump Accounts, this guidance removes a significant reporting concern—but the rules are technical. Before making larger gifts or coordinating Trump Account contributions with other estate or gift planning, please consult your Smolin professional to confirm whether the safe harbor applies.

 

  • Noelle Merwin
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A Smarter Approach to Reducing Probate Challenges
A Smarter Approach to Reducing Probate Challenges 266 266 Noelle Merwin

When a loved one passes away, settling his or her financial affairs can be an emotional and complex task. One legal process that often comes into play is probate. Understanding how probate works — and implementing strategies to minimize or avoid it — can help you protect your assets and simplify matters for your family after your death.

Downsides (and upsides) of probate

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs. Depending on applicable state laws, the probate process can be expensive and time consuming. Not only can probate reduce the value of your estate due to executor and attorney fees, but it can also force your family to wait through weeks or months of court hearings. In addition, probate is a public process, so you can forget about keeping your financial affairs private.

However, there are instances where the probate process can work in your favor. Under certain circumstances, for example, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

Simple strategies to avoid probate

The simplest ways to avoid probate involve designating beneficiaries or titling assets so they can be transferred directly to beneficiaries outside of your will. So, for example, have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities, IRAs and other retirement plans.

For assets such as bank and brokerage accounts, consider the availability of pay on death (POD) or transfer on death (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. Keep in mind that while the POD or TOD designation is permitted in most states, not all financial institutions offer this option.

Strategies for homes and other real estate

Some people avoid probate on their homes or other real estate (as well as bank and brokerage accounts and other assets) by holding title with a spouse or child as “joint tenants with rights of survivorship” or as “tenants by the entirety.” But joint ownership has several significant drawbacks.

First, unlike with beneficiary designations, once you retitle property you can’t change your mind. Second, holding title jointly gives your spouse or child some control over the asset and exposes it to his or her creditors. Finally, adding someone to the title may be considered a taxable gift of half the asset’s value.

A handful of states permit TOD deeds, which allow you to designate a beneficiary who’ll succeed to ownership of your real estate after you die. TOD deeds allow you to avoid probate without making an irrevocable gift or exposing the property to your beneficiary’s creditors.

Strategies using trusts

For larger, more complicated estates, a living trust (sometimes called a revocable trust) is generally the most effective tool for avoiding probate. It involves setup costs but allows you to manage the disposition of your wealth in a single document while retaining control and reserving the right to modify the trust’s terms. Assets in the trust will be distributed to your heirs according to the trust’s provisions, without having to go through probate.

Other types of trusts can be beneficial for specific situations. For example, placing life insurance policies in an irrevocable life insurance trust (ILIT) can provide significant tax benefits.

Making it easy for your family

Avoiding probate isn’t appropriate for every situation, but thoughtful estate planning can reduce costs, delays and administrative burdens for your surviving family members. We can help you develop strategies to minimize probate costs, reduce taxes and achieve your other estate planning goals.

To learn more, contact your Smolin representative.

 

  • Noelle Merwin
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Hobby or Business? It Could Cost You
Hobby or Business? It Could Cost You 266 266 Noelle Merwin

Do you operate a side gig in addition to your regular day job? Whether you’ve turned a love for crafting into an online store or you play the guitar at a local venue, you’ll need to report the income from your sideline activity on your tax return. But can you deduct the related expenses? The answer depends on whether the IRS classifies your activity as a business or a hobby. Let’s take a closer look.

Why the distinction matters

If your activity incurs significant expenses — or even losses in some years — how the IRS classifies it can have a major impact on your taxes. For-profit businesses can deduct “ordinary and necessary” business expenses.

So, if you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can use the loss to offset income from other sources, such as salary and self-employment income, subject to annual limits. In 2026, the limit is $256,000 ($512,000 for married couples filing jointly). You can carry any excess losses forward to later tax years.

Conversely, hobbies receive less favorable treatment. Before 2018, hobby expenses could be claimed as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor. Recent tax law changes permanently repealed itemized deductions for miscellaneous business expenses. So you generally can’t deduct hobby-related expenses for federal income tax purposes — even though you’re still required to report 100% of hobby-related income.

Potential safe harbors for profitable ventures

If you can show a profit motive for your sideline activity, the IRS will classify it as a for-profit business, and you can generally write off related expenses as the cost of doing business. Two safe harbors create a presumption that an activity is engaged in for profit:

  1. Your activity produces positive taxable income (revenues in excess of deductions) for at least three out of every five years.
  2. You’re engaged in a horse racing, breeding, training or showing activity, and your activity produces positive taxable income in at least two out of every seven years.

Proactive tax planning can help you qualify for these safe harbors — and earn the right to deduct your losses in unprofitable years.

Factors that demonstrate a profit motive

If you aren’t eligible for one of the safe harbors but can demonstrate an honest intent to make a profit, you may still be able to treat your side gig as a for-profit business. After all, many start-ups take years to become profitable. Questions the IRS considers when determining whether your activity is a business or a hobby include:

  • Do you carry on the activity in a business-like manner?
  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, did they occur due to circumstances beyond your control or in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you (or your advisors) have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

The degree of personal pleasure you derive from the activity is also a factor. For example, most people would say that woodworking is more fun than working in a high-stress executive position — so the IRS is far more likely to classify the former is a hobby if you start claiming recurring losses on your tax returns.

Year-by-year determination

The IRS tests each year separately when determining whether an activity is a for-profit business or a hobby. So what once was considered a hobby can become a business — and vice versa. However, you generally bear the burden of proving your profit motive each year.

For example, you might be able to persuade the IRS that you’ve established a profit motive by keeping more detailed records, advertising and devoting more time to your side gig. It also helps to report profits for a few years, rather than just recurring losses. In fact, a pattern of losses over multiple years can sometimes trigger IRS scrutiny of whether an existing business is operating with a profit motive.

Start planning now

If you have a side business that isn’t yet profitable, we can evaluate your situation and offer suggestions to help improve your odds of business tax treatment. But don’t wait until year end — many factors the IRS considers when evaluating your profit motive require proactive planning throughout the year. We can help strengthen your position in case the IRS questions your deductions.

To learn more, contact your Smolin representative.

 

  • Noelle Merwin
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Business Owner? 5 Overlooked Tax Deductions
Business Owner? 5 Overlooked Tax Deductions 266 266 Noelle Merwin

If you’re self-employed, you probably have questions about deducting business expenses on your federal income tax return. Here’s a quick overview of the filing requirements for sole proprietors and independent contractors, and five examples of expense deductions that are commonly overlooked or misunderstood.

Filing basics

Sole proprietors and independent contractors must report their business activity on Schedule C, “Profit or Loss From Business,” of their personal tax returns (Form 1040). Business income includes money earned from customers, side gigs, online sales and other self-employment activities. Income may be reported on Forms 1099-NEC or 1099-K, but you must report all taxable business income, even if you don’t receive a tax form.

Although employees can no longer deduct unreimbursed business expenses, self-employed individuals can offset their business income with various deductions for business-related expenses. This is a major tax advantage for the self-employed.

When evaluating whether costs are deductible, follow this golden rule: Business expenses must be ordinary (common in your industry) and necessary (helpful and appropriate for the business). Of course, you’ll need to keep detailed records to support your business deductions. Obvious examples of potentially deductible expenses are supplies, materials, and, if you have employees, payroll and benefits. Other business-related expenses may also be deductible on Schedule C, though the rules are sometimes confusing. Below are five common examples.

  1. Home office

Unlike employees who work remotely, you can deduct the costs for a workspace in your home that’s used regularly and exclusively as your principal place of business. This can include a portion of actual indirect home expenses — such as rent or mortgage interest, insurance, utilities and repairs — based on your business-use percentage. For instance, if you use 10% of your apartment’s square footage for business, you can deduct 10% of your rent.

You can also fully deduct direct expenses (for example, the cost of painting your office) and, if you own your home, claim a depreciation allowance under IRS tables. In lieu of tracking your actual expenses, the IRS also offers a simplified method of $5 per square foot for up to 300 square feet.

  1. Education

The costs of refresher courses, continuing education classes, vocational training and other education programs may be deductible if you’re required to take them to maintain or improve skills required for your current trade or business. Qualifying expenses include tuition, books, supplies and fees, and potentially travel costs to attend education programs.

However, costs of education that’s needed to meet the minimum requirements for a trade or business or that qualifies you for a new trade or business generally aren’t deductible. For example, you can’t claim the cost to obtain an undergraduate degree as a business expense.

  1. Business meals

You generally can deduct 50% of the costs of business meals if they aren’t “lavish or extravagant.” This applies to food and beverages provided to customers, clients, suppliers, employees, agents, partners or professional advisors — whether established or prospective.

Although entertainment costs aren’t deductible under current law, food and beverages might be deductible even if they’re provided at a nondeductible entertainment activity. But such a deduction is available only if:

  • The food and beverage items are separately purchased or identified from the entertainment costs on bills, invoices or receipts, and
  • The amount charged for food or beverages reflects the venue’s usual selling price for those items if purchased separately from the entertainment or approximates the reasonable value of those items.

Say, for example, that you take a customer to a World Cup match this summer. The ticket costs aren’t deductible. But if you buy the customer popcorn, nachos and drinks while there, you can deduct half of those costs as long as you have proper documentation, such as the itemized receipt, and records showing who attended and the business purpose.

  1. Business travel

If you travel to a temporary location for business purposes, you can deduct your travel expenses, including round-trip airfare, hotel costs and other incidentals (such as tips and cab fares). However, the primary purpose of your trip must be business related. For instance, you might travel to a different city or country to attend a trade show or educational conference.

Beware: Some allocations may be required if a trip combines business and pleasure — for example, if you fly to a location for four days of business meetings and stay for an additional three days of vacation. Only the reasonable cost of lodging and 50% of meals incurred during the business days are deductible. Lodging and meal costs incurred for the personal vacation days aren’t deductible.

On the other hand, with respect to the cost of the travel itself (for example, plane fare), if the trip is primarily for business purposes, the travel cost can be deducted in its entirety, and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible.

If your spouse joins you, his or her travel expenses generally aren’t deductible, unless your spouse is your employee and has a bona fide business reason to be there. But the restrictions apply only to additional costs incurred by having your nonemployee spouse travel with you. For example, the expense of a hotel room or for traveling by car would likely still be fully deductible because the cost to rent the room or travel by car alone vs. with another person would be the same, even in a rented car.

  1. Business vehicle expenses

If you drive your personal vehicle for business purposes, you may be eligible to deduct some auto-related expenses on Schedule C. The amount of your deduction is based on the percentage of business use.

For example, suppose you use your car 60% for business driving in 2026. That means you can deduct 60% of your vehicle costs — such as gas, repairs and insurance — plus a generous depreciation allowance, subject to certain limits for “luxury cars.” And, if you buy the vehicle in 2026, you may also qualify for a Section 179 deduction and 100% bonus depreciation, subject to applicable eligibility requirements and limitations.

Be aware that the IRS is a stickler for documentation. Briefly stated, you must keep a contemporaneous log listing every business trip and proof of your expenses. Alternatively, you can cut down on recordkeeping by using the standard mileage rate of 72.5 cents per business mile (plus business-related tolls and parking fees) in 2026.

Don’t leave tax savings on the table

Many self-employed taxpayers miss legitimate deductions because they fail to keep adequate records or misunderstand the rules. Tracking expenses throughout the year can make tax filing easier, help ensure you don’t miss legitimate deductions and strengthen your position if the IRS questions a deduction.

We can help you identify qualifying business expense deductions and establish recordkeeping practices that support them. Contact us to start discussing a tax strategy tailored to your small business.

To learn more, contact your Smolin representative.

 

  • Noelle Merwin
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New Reporting Requirements for New Jersey Health Care Service Firm License Renewals
New Reporting Requirements for New Jersey Health Care Service Firm License Renewals 266 266 Noelle Merwin

New Jersey health care service firms should take a close look at the financial reporting documents they must submit when renewing their registration with the New Jersey Division of Consumer Affairs. Recent rulemaking and agency guidance make clear that every health care service firm must now submit an annual financial statement with its renewal.

Annual financial statements are now required

If a firm generated more than $10 million in gross income in any year, that year’s financial statement needs to be audited and submitted with registration renewal the following year.  If a firm received more than $250 thousand in NJ Medicaid Personal Care Assistance during 2025, their 2025 financial statement also needs to be audited.  Additionally, for these firms, their financial statements need to be audited every third year thereafter.

For firms that don’t meet these requirements, there is no required accountants report that must accompany the submitted financial statement.  If a firm is unable to prepare a financial statement internally, choosing which accountants report is correct for your firm may be confusing.   Accountants can issue three types of financial statement reports: audits, reviews, and compilations. Audits provide the highest level of assurance and are the most comprehensive and costly option. Reviews offer a lower level of assurance at a reduced cost, while compilations provide no assurance and are generally the least expensive.

Another CPA Prepared Report

For some firms, the annual financial statement will not be enough. If your firm received less than $250 thousand in NJ Medicaid Personal Care Assistance, and generated between $1 million and $10 million in gross income, the rules require an additional report from a CPA regarding certain financial transactions and business relationships.

Unfortunately, the requirements for this report, as described by the Division of Consumer Affairs are vague and may be difficult for CPAs not familiar with health care service firms to complete.  Additionally, CPAs that don’t routinely provide assurance would be subject to additional scrutiny if they were to prepare such a report.  This will limit which CPAs are able to provide this report at a reasonable cost.

Updated renewal timing matters

The Division has announced that health care service firm registrations now expire on September 30, and renewal applications must be submitted before October 1 each year together with any required financial statements, audits, or reports. That extended timeline may give firms additional time to coordinate with accountants, but it also raises the importance of early planning. A delay in assembling the required financial materials could put a firm’s renewal at risk.

Practical takeaway for providers

Health care service firms that operate in New Jersey should not treat their registration renewal as a routine filing. The new framework requires annual financial statements from all firms and may require CPA-prepared audits or other reports for firms that meet specific thresholds. Providers should review the current rules, confirm which filing category applies to their business, and begin working with a CPA familiar with healthcare service firms and the new reporting requirements early enough to avoid last-minute problems when renewing their registration with the New Jersey Division of Consumer Affairs.

Act Now to Stay Compliant

Taking a proactive approach now can help avoid last-minute challenges and ensure a smooth renewal process. Don’t risk delays or compliance issues with your upcoming renewal. Contact Henna Reit at Smolin today to review your requirements and get ahead of New Jersey’s health care service firm reporting deadlines.

Email hreit@smolin.com or call 732-978-4181.

  • Noelle Merwin
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After-Tax vs. Roth 401(k) Contributions: Which Strategy Fits You?
After-Tax vs. Roth 401(k) Contributions: Which Strategy Fits You? 266 266 Noelle Merwin

If you participate in a company 401(k) plan, you already know that you can make pre-tax contributions up to the annual elective deferral limit to a traditional, tax-deferred account. If your 401(k) plan offers a Roth option, you can use part or all of your limit to make after-tax contributions to a Roth account instead. But you may have a third option, if your 401(k) plan allows it: Make after-tax contributions to a traditional account.

Traditional vs. Roth deferrals

For 2026, 401(k) elective deferral contributions are generally limited to $24,500. If you’ll be 50 or older at year end, you can make additional elective deferral contributions, called “catch-up” contributions. The 2026 catch-up contribution limit is either $8,000 or $11,250, depending on your age. However, if your 2025 salary exceeded $150,000, any catch-up contributions must be made to a Roth 401(k) account.

When you make pre-tax elective deferrals to a traditional 401(k), the contributions aren’t included in your taxable income for the year, but they’re still subject to Social Security and Medicare taxes (collectively called FICA tax). The account funds can grow on a tax-deferred basis, and you’ll owe income taxes on distributions — both those attributable to contributions and those attributable to growth.

When you make after-tax Roth 401(k) elective deferrals, the contributions don’t reduce your taxable income. So, they’re subject to both income tax and FICA tax. The payoff is that earnings in your Roth 401(k) account are allowed to accumulate income-tax-free and you can take income-tax-free qualified withdrawals from the account once you meet the requirements. (Generally, qualified distributions are those after age 59½ if the account has been open at least five years.)

How after-tax contributions are different

If your 401(k) plan allows non-Roth after-tax contributions, they’re treated as part of your taxable wages. Therefore, these contributions are subject to income tax and FICA tax. You may owe state and local income taxes, too. Because they don’t go into a Roth account, they aren’t eligible for all the tax benefits Roth accounts offer.

So, you might be thinking, “why would I want to make after-tax contributions?” The answer is to get more money into your 401(k) account, where it can accumulate income and gains without being taxed until you start taking withdrawals. These contributions aren’t subject to the annual elective deferral limit. So you can make them after you’ve maxed out that limit, including catch-up contributions, if applicable.

However, there’s still a limit on total additions that can be made each year to your 401(k). Including your elective deferrals (except for any catch-up contributions), your after-tax contributions and any employer contributions, 2026 contributions can’t exceed the lesser of: 1) $72,000 or 2) 100% of your compensation.

Also, after-tax contributions create tax basis in your account, which means that the after-tax amount contributed can eventually be withdrawn tax-free. (But withdrawals attributable to growth on that amount will be taxable, a significant difference from qualified Roth distributions.)

After-tax contributions in action

To illustrate how these contributions work, here’s an example: Let’s say your employer sponsors a 401(k) plan with a 50% company match, your 2026 salary is $150,000 and you’re under age 50. The plan allows employees to make after-tax contributions. You max out your elective deferral limit by contributing $24,500 to your traditional 401(k) account. Your employer makes a matching contribution of $12,250. That means you’re allowed to make up to $35,250 in after-tax contributions ($72,000 – $24,500 – $12,250) this year. You decide to make $10,000 of after-tax contributions.

  • Your $24,500 of elective deferral contributions aren’t included in your taxable wages for federal income tax purposes but they are subject to FICA tax withholding.
  • Your employer’s $12,250 matching contribution is exempt from federal income tax and FICA tax.
  • Your $10,000 after-tax contribution is included in your taxable income and is subject to federal income tax and FICA tax. But it creates $10,000 of tax basis in your 401(k) account, which can be withdrawn tax-free.

Be aware that 401(k) plans are subject to complicated nondiscrimination rules intended to prevent plans from operating in favor of highly compensated employees as opposed to rank-and-file workers. In most cases, nondiscrimination rules won’t impact the ability of an employee to make after-tax contributions, but there may be exceptions.

Beyond elective deferrals

If you’ve been maxing out your elective deferrals, after-tax 401(k) contributions can be a tax-efficient way to add to your retirement nest egg. We can review your situation and help you determine whether you might benefit.

To learn more, contact your Smolin representative.

 

  • Noelle Merwin
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Self-employed? Don’t overlook a Roth IRA
Self-employed? Don’t overlook a Roth IRA 266 266 Noelle Merwin

Some small business owners overlook Roth IRAs because they assume their income is too high for them to qualify to make Roth contributions. Others may think their current tax rate is higher than it will be in retirement, making current tax deductions more valuable than future tax-free distributions. However, if you don’t at least consider contributing to a Roth IRA, you may be missing a potentially valuable tax-saving opportunity.

Rules and restrictions

Roth IRA contributions aren’t deductible, but they’re beneficial because you reap tax savings on the back end. (More on that later.) For 2026, the annual contribution limit is $7,500 (up from $7,000 for 2025). If you’ll be 50 or older by the end of the tax year, you can make an additional $1,100 catch-up contribution. The same limits apply to traditional IRAs, and your Roth IRA limit is reduced by any traditional IRA contributions you make for the year.

But your ability to make Roth IRA contributions is phased out if your modified adjusted gross income (MAGI) exceeds certain levels. For 2026, the phaseout ranges are:

  • $153,000 to $168,000 for single individuals and heads of households, and
  • $242,000 to $252,000 for married couples filing jointly.

If your MAGI falls within the range, your contribution limit is reduced. If it equals or exceeds the top of the range, your ability to contribute is eliminated.

Married individuals who file separately and live apart for the full year are treated as single individuals for the income limitations. However, separate filers who live together at any time during the year are subject to a phaseout range of $0 to $10,000.

Is your income too high to qualify?

At first glance, these figures may cause you to assume you’re ineligible for Roth contributions. But take another look.

When calculating MAGI for Roth IRA eligibility purposes, self-employed individuals may be able to significantly reduce their taxable income through deductions for:

  • Certain business expenses, such as rent, home office expenses and computer costs,
  • Contributions to a tax-deferred retirement plan, such as a solo 401(k), SEP IRA or SIMPLE,
  • Health insurance premiums, and
  • Self-employment tax.

These deductions, along with others, are subtracted when calculating MAGI. Therefore, a self-employed person can have relatively high gross income from his or her business while having a much lower MAGI.

The choice between contributing to a Roth IRA or a tax-deferred account isn’t an all-or-nothing proposition. Depending on your situation, you may decide to contribute to both types of accounts, subject to applicable limits. Contributing to a tax-deferred retirement plan provides immediate tax savings. And, because these contributions lower your MAGI, they may put your taxable income below the phaseout limits for Roth IRA contributions.

Additional benefits

The main upside of contributing to a Roth IRA is that qualified withdrawals won’t be taxed. This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase. Moreover, withdrawals from Roth accounts aren’t counted when calculating the taxable portion of your Social Security benefits.

Another Roth IRA advantage is that you don’t have to take withdrawals at any age, meaning the account can continue to grow tax-free. With a traditional IRA (and other tax-deferred retirement accounts), at age 73, you generally must begin to take required minimum distributions or face a penalty equal to 25% of the amount you should have withdrawn but didn’t. In addition, if your Roth IRA is passed on to your heirs, it can continue to grow tax-free, and their withdrawals generally will be tax-free. However, most nonspouse beneficiaries will be required to deplete the account within 10 years of inheriting it.

Bottom line

A Roth IRA offers many potential benefits, and self-employed individuals may be more likely to qualify to make Roth IRA contributions than other taxpayers with similar gross incomes. But they aren’t right for every situation. We can help evaluate your eligibility and develop a long-term retirement strategy that aligns with your personal and financial goals.

To learn more, contact your Smolin representative.

 

  • Noelle Merwin
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Beyond the Balance Sheet: Tracing True Value in Shareholder and Partnership Battles
Beyond the Balance Sheet: Tracing True Value in Shareholder and Partnership Battles 266 266 Noelle Merwin

Welcome back to Follow the Money. In the last article, we dug into how inflated assets and hidden liabilities can distort a company’s financial picture. This month, we’re shifting to a problem that shows up just as frequently in shareholder and partnership disputes but is often much harder to see at first glance: the value that exists outside the balance sheet. Value that’s moved, suppressed, or withheld long before a case ever lands in court.

In closely held companies, disputes can quickly become close and personal. Minority shareholders feel squeezed out. Partners stop communicating. Financial statements arrive late or not at all. And while the official records may look stable or even healthy, the economic reality behind them often tells a very different story. That’s where forensic accountants step in, not as advocates, but as the professionals responsible for figuring out what actually happened.

The Balance Sheet Rarely Tells the Full Story

GAAP financials have their own place and time, but they don’t necessarily reflect how owner‑managed companies actually operate. In the disputes I’ve worked on, it’s common to see:

  • Minority interests are undervalued due to overly aggressive discounts.
  • Revenue or intellectual property is diverted to related entities owned by the adversary, who is also the controlling party.
  • Controlling shareholders are taking compensation or perks that reduce profits and benefit them personally to the unfair disadvantage of other shareholders.
  • Minority interests are denied information or fed selectively incomplete data.

In many jurisdictions, courts award fair value in oppression cases and not heavily discounted value. That makes it critical to rebuild what the ownership stake should have been worth without the controlling influence.

Red Flags That Something Doesn’t Add Up

Here are patterns that often indicate value is being stifled:

1. Limited or Delayed Access to Information

Records show up late, are incomplete, or key schedules are “missing.” This experience is usually the first sign that something needs closer scrutiny.

2. Unequal Financial Benefits

Majority owners pay themselves unusually high salaries or bonuses, taking shareholder loans, or using company funds for personal expenses, all while minority owners are denied distributions.

3. Related‑Party Deals

Rents paid to a building owned by the majority shareholder, management fees to an affiliate, or contracts directed to side commonly controlled entities. These maneuvers can quietly drain the company’s value.

4. Suppressed Dividends Despite Strong Results

Profits keep accumulating on the books, but somehow never make their way to minority owners as dividends.

5. Business Opportunities Redirected Elsewhere

A new contract or customer is assigned to a different entity owned by the controlling group, leaving the company’s reported revenue flat.

6. Financial Patterns That Don’t Match the Market

When revenue stalls while the industry grows, or when “consulting expenses” spike out of nowhere, it’s worth asking why.

Not all of these are classic fraud and they can be smaller, ongoing breaches of trust that nevertheless cause significant economic harm over time.

How We Reconstruct the Truth Behind the Numbers

Revealing the company’s real economic picture requires combining valuation methods with investigative accounting.

1. Normalizing Earnings

We adjust the historical income statement to remove one-time events, reverse excessive owner compensation, and correct transactions made at below‑ – or above-market rates.

2. Tracing Cash Flows

This step goes beyond reviewing summarized statements. We track money movements across accounts, identify hidden transfers and side accounts, and reconcile discrepancies between bank activity, tax returns, and internal records.

3. Applying Adjusted Valuation Approaches

Traditional valuation models (income, market, asset) get combined with forensic adjustments that quantify the impact of:

  • diverted profits
  • suppressed dividends
  • related‑party transactions
  • removed corporate opportunities

4. Reviewing Lifestyle and Net Worth

When majority owners claim modest compensation but show significant lifestyle and personal asset growth, that’s a financial anomaly worth exploring.

5. Third‑Party Verification

We often confirm vendor relationships, customer contracts, property ownership, and related‑entity activity. Independent sources often break a case open.

Clear visual summaries such as cash flow maps or adjusted earnings models often help the triers of fact better understand the financial picture than pages of spreadsheets.

How These Findings Shape Litigation Outcomes

Once the true economic picture is reconstructed, the impact can be significant:

Claims of shareholder oppression gain support when the financial harm becomes quantifiable.
Buyouts are recalculated at fair value rather than discounted figures.
Damages for lost profits, diverted opportunities, or reduced distributions become easier to demonstrate.

Many cases settle once forensic analysis reveals discrepancies that the controlling party cannot explain away.

In many closely held companies, adjusting for these issues can increase the true value of a minority equity interest by 20% to 50%.

Advice for Shareholders, Partners, and Attorneys

· Document concerns early—emails, tax filings, and financial statements all matter.

· Preserve records before a dispute escalates.

· Don’t rely solely on the numbers presented by the controlling party.

· In litigation, bringing in forensic expertise after discovery deadlines makes the investigative work harder.

A balance sheet can only tell you so much. The real story lies in the flow of money—often hidden in places that traditional financial statements don’t capture or present.

What signs of value suppression have you seen in the matters you’ve handled?

AUTHOR BIO:

Charles “CJ” Pulcine, CPA, CFF is a Manager in Smolin’s Forensic and Valuation Services practice, specializing in forensic accounting, fraud investigations, and litigation support. He is a licensed Certified Public Accountant in New Jersey and holds the Certified in Financial Forensics (CFF) credential.

With more than seven years of experience in forensic accounting, financial audits, and fraud investigation, CJ works with businesses and legal counsel on financial fraud investigations, commercial litigation support, matrimonial litigation, business valuation analyses, and shareholder disputes. His work focuses on uncovering hidden transactions, tracing assets, and analyzing financial misconduct.

As a member of Smolin’s forensic team, CJ supports attorneys throughout the litigation lifecycle, including asset tracing, damages analysis, and preparation of financial evidence for mediation, depositions, and trial. He practices out of Smolin’s Red Bank, New Jersey office.

 

 

 

  • Noelle Merwin
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CAPE Opens in ACE: What Importers Need to Know About IEEPA Refund Processing
CAPE Opens in ACE: What Importers Need to Know About IEEPA Refund Processing 266 266 Noelle Merwin

U.S. Customs and Border Protection (CBP) activated the Consolidated Administration and Processing of Entries (CAPE) functionality in the Automated Commercial Environment (ACE) on April 20, 2026, marking the first operational mechanism for processing refunds of duties paid under tariffs illegally imposed pursuant to the International Emergency Economic Powers Act (IEEPA).

CAPE represents CBP’s initial attempt to operationalize refund relief following the Supreme Court’s invalidation of IEEPA based tariffs and subsequent court orders directing CBP to remove and refund those duties (for prior coverage, see the trade alert, IEEPA Tariff Refunds: CIT Suspends Tariff Refund Order, CBP Develops New Refund Procedure, dated March 17, 2026). CAPE is planned to be deployed in phases, with more functionality added in subsequent stages. While CAPE creates an administrative pathway for recovery, eligibility is limited in Phase 1, with many entries deferred to later phases or requiring additional procedural action to preserve refund rights.

Background: From IEEPA Invalidation to Administrative Refund Processing

Following the Supreme Court’s decision holding that IEEPA does not authorize the imposition of tariffs, CBP was directed through subsequent orders of the U.S. Court of International Trade (CIT) to remove IEEPA duties from affected entries through the normal administrative procedures involving entry-by-entry liquidation (closing out and final assessment of duties). However, CBP objected citing a lack of resources and other factors, and the CIT instead allowed the agency to develop a new “mass claims” refund process: CAPE.

CAPE was developed within CBP’s ACE to consolidate, validate, and process refunds of the ad valorem duties imposed under IEEPA (which, in many cases, were in addition to the Normal Trade Relations duties and other trade remedy tariffs). As CBP has acknowledged, refund eligibility will be segmented based on liquidation status, timing windows, and the presence of complicating factors such as reconciliation, drawback, protests, or antidumping/countervailing duty (ADD/CVD) suspensions of liquidation.

CAPE Phase 1: Entries Eligible for Processing Beginning April 20

Phase 1 of CAPE is intentionally narrow and focuses on entries where CBP has clear administrative authority to act without additional court involvement. Eligible entries generally include:

  • Unliquidated entries, including those with liquidation status shown in ACE as suspended, extended, or under review;
  • Recently liquidated entries within the voluntary reliquidation window under 19 U.S.C. § 1501 (practically, entries liquidated within approximately the last 80 days to allow processing before the 90 day statutory deadline);
  • Warehouse entries and warehouse withdrawals where IEEPA Chapter 99 codes were declared and refunds will issue upon liquidation in the normal course; and
  • ADD/CVD entries that remain under suspension where IEEPA codes have been removed but refunds will issue only when liquidation occurs.

To be eligible in Phase 1, the entry must have had at least one IEEPA specific HTSUS Chapter 99 number declared, must exist electronically in ACE, and must not be subject to an exclusion category.

Entries Excluded from CAPE Phase 1

CBP has identified several categories that are excluded from Phase 1 processing, even though refund rights may still exist. These include:

  • Entries liquidated more than 90 days ago (outside CBP’s voluntary re-liquidation window);
  • Entries flagged for reconciliation or filed as Entry Type 09 reconciliation summaries;
  • Entries designated on active drawback claims;
  • Entries covered by open protests; and
  • Entries lacking an electronic ACE record or liquidation status.

For these entries, CAPE does not provide immediate relief, and importers must evaluate alternative or interim strategies to preserve rights while later phase mechanisms develop.

CAPE Later Phases: Deferred, Not Eliminated

A substantial portion of potentially refundable IEEPA duties will fall outside Phase 1 and be addressed in later phases—or may require additional court action. Deferred categories include:

  • Finally liquidated entries still within the 180 day protest period (refund rights preserved if protests are timely filed);
  • Finally liquidated entries beyond the protest deadline, which are covered by the CIT’s amended March 27 order but are not yet operationally refundable through CAPE;
  • Entries involving reconciliation, active drawback claims, complex interest calculations, or enhanced CBP compliance review; and
  • Entries with outstanding non IEEPA duty balances, which CBP has flagged for potential offset in a later phase.

Importantly, deferral to later phases does not mean refund rights are lost but it does require careful planning, documentation, and deadline management.

Universal Rules Importers Must Observe

Across all phases of CAPE, several foundational rules apply:

  • Only IEEPA duties are refundable; Section 232, Section 301, and other duties on the same entry are not;
  • Refunds are issued to the importer of record, absent a properly filed CBP Form 4811 designating another party;
  • Only the importer of record or the customs broker who filed the entry summary on behalf of the importer of record may file for a refund;
  • ACH Refund enrollment in ACE is mandatory and refunds will be rejected without it; and
  • Section 301 and Section 232 duties—particularly on China origin entries—must be carefully separated from IEEPA duties to avoid processing delays or denials.

The businesses most affected by Trump-era tariff refunds are importers of record, particularly in the technology, manufacturing, and retail sectors. If you believe your business may be entitled to a possible refund, please contact Dan Kruesi for assistance.

Some content borrowed with permission from BDO USA. Our firm is an independent member of the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting, and service firms.

 

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