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Running a Business Solo? Here’s What You Need to Know About Taxes
Running a Business Solo? Here’s What You Need to Know About Taxes 266 266 Noelle Merwin

Many small businesses start out as sole proprietorships. This structure is simple and inexpensive to establish and maintain — and it gives the owner direct access to profits without having to take formal distributions. But it also makes your taxes more complicated than when you were a W-2 employee. Here are some federal tax issues to consider if your business operates as a sole proprietorship.

Reporting income and expenses

You’ll report income and expenses from your business activities on Schedule C of your personal return (Form 1040). The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income, not as itemized deductions. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, “excess” business losses incurred by noncorporate taxpayers, passive activity losses and losses from activities in which you weren’t “at risk.”

Sole proprietors may be eligible for certain deductions that generally aren’t available to other individual taxpayers. For instance, you may qualify for an above-the-line self-employed health insurance deduction for premiums paid for medical, dental and qualifying long-term care coverage, subject to certain limitations. This means your deduction for medical insurance won’t be subject to the rule that limits itemized deductions for medical expenses.

In addition, you may be entitled to deduct home office expenses if:

  • A home office is your principal place of business (including when you perform management or administrative tasks there and have no other fixed place to perform them),
  • You use your home as a place to meet or deal with customers, clients or patients in the normal course of business, or
  • You store inventory or product samples at home.

In general, to qualify, the area must be used regularly and exclusively for business purposes.

The home office deduction may include an allocable part of mortgage interest or rent, insurance, utilities, repairs, maintenance and, if you own the home, depreciation. Alternatively, you can use a simplified method based on the square footage of the qualifying space. You may also be able to deduct travel expenses from your home office to another work location.

Be sure to keep complete records of your income and expenses. Proper documentation is needed to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because they’re subject to special recordkeeping rules or deductibility limits.

Claiming the QBI deduction

Another special tax break that you might qualify for as a sole proprietor is the Section 199A qualified business income (QBI) deduction. It generally equals 20% of QBI, not to exceed 20% of taxable income. QBI generally is defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items or reasonable compensation paid to an owner for services rendered to the business.

This deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the QBI deduction even if you don’t itemize deductions and instead claim the standard deduction.

One word of caution: The QBI deduction is subject to additional limits at higher income levels. For 2026, these limitations generally begin to apply when taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 for married couples filing jointly). For 2026, these limitations are fully phased in once taxable income exceeds $276,750 ($553,500 for joint filers). Contact us to learn more about the limitations that apply to your situation.

The One Big Beautiful Bill Act (OBBBA) made the QBI deduction permanent. Starting in 2026, the OBBBA also expands the income ranges over which the limitations phase in, potentially allowing larger deductions for some taxpayers. And it provides a new minimum deduction of $400 for taxpayers who materially participate in an active trade or business if they have at least $1,000 of QBI from it. The minimum deduction will be annually adjusted for inflation after 2026.

Paying self-employment taxes

One downside of owning your own business is that you must pay self-employment taxes. These taxes are the equivalent of federal payroll taxes for employees, but self-employed people must pay both the employer’s and employee’s share of them. They’re imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

For 2026, you must pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment up to $184,500, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint filers, $125,000 for married taxpayers filing separate returns and $200,000 in all other cases. The additional Medicare tax threshold isn’t adjusted for inflation.

Establishing a tax-advantaged retirement plan

You might also want to consider setting up a qualified retirement plan. The advantages are that amounts contributed to it are deductible at the time of the contributions and aren’t subject to income tax until they’re withdrawn.

One option is a Simplified Employee Pension (SEP) plan, which requires minimal paperwork. You generally can set up a SEP and make deductible contributions for the tax year as late as the due date of your income tax return for the year, including extensions. The contribution amounts are discretionary, and the annual limits are high. But, if you have employees, they generally must be included in the plan, provided they work enough hours and meet other qualification requirements.

If you don’t establish a qualified retirement plan, you may still be able to contribute to a traditional IRA. But your annual contribution limit will generally be significantly lower.

Making quarterly estimated payments

The U.S. tax system is considered “pay as you go.” So, you’ll probably have to make estimated tax payments each quarter. Estimates should include both federal income tax and self-employment taxes. Estimated payments are generally calculated using Form 1040-ES.

Quarterly payments are generally due on April 15, June 15 and September 15 of the current year and January 15 of the following year. If a due date falls on a weekend or legal holiday, the deadline generally moves to the next business day. Paying enough by each deadline is critical; if you fall behind, you’ll likely owe interest and penalties.

Applying for an EIN

Sole proprietors don’t automatically need an employer identification number (EIN). You can generally use your Social Security number for federal tax purposes — unless you hire employees. You might also need an EIN if your business:

  • Owes employment or excise taxes,
  • Withholds certain taxes on payments to a nonresident alien,
  • Establishes certain retirement plans, or
  • Changes its legal structure, such as incorporating or forming a partnership.

Additionally, you might consider obtaining an EIN voluntarily for banking or administrative purposes. An EIN is available at no cost through the IRS website. To apply, you’ll need to provide identifying information, including a valid Social Security number or other taxpayer identification number, and details about the business. Eligible U.S. applicants generally receive the EIN immediately after completing the online application. You can also submit Form SS-4 by fax or mail.

We can help

Even though your business may be small, tax compliance and planning are a big deal. These are just highlights of federal income tax issues sole proprietors face. State and local income, sales, payroll, and other tax requirements may also apply. Contact your Smolin representative if you’d like additional information regarding the tax aspects of your business.

 

  • Noelle Merwin
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NYC Pied-à-Terre Tax: What Property Owners Need to Know
NYC Pied-à-Terre Tax: What Property Owners Need to Know 266 266 Noelle Merwin

New York City has issued notices regarding the new Non-Primary Residence Surcharge, commonly referred to as the Pied-à-Terre (“foot on the ground”) Tax. The surcharge applies to certain non-primary residences located in New York City. In some cases, notices were also sent to New York City individuals whose properties qualify as their primary residence. Recipients of these notices who occupy the real estate as their primary residence or whose market value is less than the thresholds need to:

Response Deadline & Required Actions:

  • The response deadline has been extended to September 18, 2026.
  • The surcharge generally applies to non-primary residences with a market value of $5 million or more for 1–3 family homes and $1 million or more for condominiums and cooperative apartments.
  • Clients who receive a notice should log in to nyc.gov/npsurcharge and provide supporting documentation (tax return, driver’s license, or other acceptable proof) demonstrating that the property is their primary residence.

Additional information and surcharge rates are available on the New York City website: NYC Non-Primary Residence Surcharge Information

If you have questions regarding applicability or response requirements, please contact your Smolin representative.

  • Noelle Merwin
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IRS Scam Alert: Protect Your Information
IRS Scam Alert: Protect Your Information 266 266 Noelle Merwin

We want to make you aware of a new scam targeting taxpayers that involves criminals impersonating the Internal Revenue Service (IRS). Scammers are sending fraudulent letters, emails, and text messages claiming recipients must enroll in a so-called “Digital Asset Compliance Portal” before a specified deadline. These communications may include QR codes or links designed to steal sensitive personal and financial information.

Please remember:

  • Do not scan QR codes from unsolicited letters, emails, or text messages.
  • Do not click on links or provide personal information in response to unexpected communications claiming to be from the IRS.
  • Be cautious of any message that creates a sense of urgency or threatens penalties if immediate action is not taken.
  • Always verify tax-related communications directly through official IRS channels.

The IRS has warned taxpayers about this and similar impersonation schemes. Fraudsters frequently use fake notices, QR codes, and websites to obtain sensitive information.

If you receive a suspicious communication claiming to be from the IRS regarding a “Digital Asset Compliance Portal” or any other tax matter, do not respond. Instead, contact your Smolin advisor for guidance or visit the official IRS website for information about current tax scams.

For more information, visit the IRS Tax Scams page: https://www.irs.gov/newsroom/tax-scams-consumer-alerts.

Thank you for staying vigilant and helping protect your personal and financial information.

  • Noelle Merwin
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Sending a Child to College This Fall? Don’t Overlook These Valuable Tax Breaks
Sending a Child to College This Fall? Don’t Overlook These Valuable Tax Breaks 266 266 Noelle Merwin

A higher education is expensive, and many parents spend years saving up. Others haven’t had the financial bandwidth to save or have hit unexpected financial roadblocks along the way. Regardless of your situation, current tax breaks may be available to you (or to your children or even their grandparents) once your child begins attending college or other post-secondary school. Here are some tax tips.

Claim tax credits

If you have one or more children in college — or graduate school — you might be eligible for valuable tax credits. Remember, credits reduce your tax liability dollar-for-dollar, so they’re more valuable than deductions of the same amount, which only reduce the amount of income subject to tax. So it’s important to see if you’re eligible for one or both of these credits:

American Opportunity Tax Credit (AOTC). You may be able to take this credit of up to $2,500 for the first four years of postsecondary education in pursuit of a degree or recognized credential — a 100% credit for the first $2,000 in tuition, fees and books, and a 25% credit for the second $2,000. The AOTC is 40% refundable, meaning you can get a refund if the credit amount is greater than your tax liability.

The credit is available on a per-student basis. For example, if you have a child who’s a freshman and another who’s a fourth-year senior, you can claim a credit of up to $2,500 for each child — as long as you otherwise qualify.

Lifetime Learning Credit (LLC). If your child is beyond the first four years of college or in graduate school, you may be able to take the LLC. It can be up to $2,000 for every additional year of college or graduate school — a 20% credit for up to $10,000 in tuition and fees.

However, only one LLC is available per tax return. If, say, you have one child in the fifth year of college finishing up his or her bachelor’s degree and another child in grad school, you can claim only one LLC of up to $2,000. But if the first child instead is in his or her first four years of college, you can potentially claim the AOTC for that child and the LLC for your child in graduate school, as long as you otherwise qualify for both credits.

Speaking of qualifying, both credits are phased out for married couples filing jointly with modified adjusted gross income (MAGI) between $160,000 and $180,000, and for singles and heads of household with MAGI between $80,000 and $90,000. (Married taxpayers filing separately can’t claim either credit.) If your income is too high for you to qualify, your child might be able to qualify on his or her own tax return.

Finally, only one education credit can be claimed for the same student in any given tax year. For instance, if your child graduated from college (in four years) in May of 2026 and starts graduate school in September of 2026, you can’t claim both the AOTC for the last semester of your child’s undergraduate education and the LLC for his or her first semester of graduate education. Other rules also apply to these credits.

Take advantage of tax-free 529 plan and ESA distributions

Does your child have a tax-advantaged education account, such as a Section 529 plan or Coverdell Education Savings Account (ESA)? Tax-free withdrawals can be taken to pay qualified expenses.

Section 529 plan distributions used to pay most postsecondary school expenses are income-tax-free for federal purposes and potentially for state purposes as well. Qualified expenses include tuition, mandatory fees, books, supplies, computer equipment, software, internet, and, for students enrolled at least half-time, room and board.

The postsecondary expenses that qualify for tax-free 529 plan distributions generally also qualify for tax-free ESA distributions. However, you can’t take tax-free distributions from both accounts for the same expenses. Also, expenses paid with tax-free distributions from a 529 plan or ESA can’t be used to claim education credits.

(If you have younger children and are deciding whether to contribute to a 529 plan or an ESA, keep in mind that there are other important differences to consider, such as the rules for using the funds for K-12 expenses, age-related limits for beneficiaries, and contribution limits — including income-based limits. Contact us to learn more.)

Think twice before tapping your retirement accounts

You can take money out of your traditional IRA or Roth IRA to pay college costs without incurring the 10% early withdrawal penalty that usually applies to distributions before age 59½. However, the distributions are subject to tax to the extent otherwise applicable.

You also may be able to borrow against your employer retirement plan, such as a 401(k) plan, or take withdrawals from it to pay for college. But before you do so, make sure you understand the tax implications, including any penalties you may incur.

And any time you make a withdrawal or take a loan from a retirement account, you’re sacrificing the tax-deferred (or tax-free in the case of a Roth account) potential growth on that money. So first think carefully about the future impact on your retirement security.

Be aware of scholarship tax treatment

Has your child been awarded a scholarship? Congratulations! But it’s also important to understand the tax impact.

Scholarships are exempt from income tax if certain conditions are satisfied. The three most significant are that, generally, the scholarship:

  1. Must be for a student who is a degree candidate at an eligible educational institution,
  2. Can’t be compensation for services, and
  3. Must be used for tuition, fees, books and supplies (not for room and board).

Also, a tax-free scholarship reduces the amount of expenses that may be taken into account in computing the AOTC and LLC and may reduce or eliminate those credits.

Advise grandparents and others to pay tuition directly

If someone gives you or your child money to pay some or all of your child’s college expenses, it’s generally treated as a taxable gift to the extent the payments exceed the gift tax annual exclusion of $19,000 per recipient for 2026. Married couples who split gifts may exclude gifts of up to $38,000 for 2026. (Gift tax generally applies to the giver, not the recipient.)

However, if the person (say, a grandparent) pays your child’s tuition directly to an educational institution, it won’t be treated as a taxable gift regardless of the amount. This applies only to payments of direct tuition costs (not room and board, books, supplies, etc.).

Consider your specific situation

Additional rules apply to many of these tax breaks, and there are other tax consequences to consider when it comes to your children and their post-secondary education. Contact us for more information about these breaks and to discuss your specific situation. We can help you take advantage of all the breaks available to you and your family and avoid tax pitfalls.

  • Noelle Merwin
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Before You Donate: Know the Tax Rules
Before You Donate: Know the Tax Rules 266 266 Noelle Merwin

Have you already made contributions to charity this year? Are you considering making more between now and year end? If so, it’s important to be familiar with the tax rules for different types of donations so you can maximize your tax benefit or at least avoid finding out at tax filing time that your charitable deductions are smaller than you expected.

For example, be aware that a new limit goes into effect this year: a 0.5% floor on the charitable deduction for itemizers. This generally means that only charitable donations in excess of 0.5% of your adjusted gross income (AGI) will be deductible if you itemize deductions. So, if your AGI is $100,000, your first $500 of charitable donations for the year won’t be deductible.

Let’s take a look at some of the other significant rules, limits and changes affecting different types of donations.

Cash contribution

When you make a cash or cash-equivalent contribution to a qualified charitable organization, if you don’t itemize deductions, you can claim the new charitable deduction for nonitemizers of up to $1,000 ($2,000 for married couples filing jointly). Only cash donations qualify.

If you do itemize deductions, you can generally deduct the full amount of cash contributions once you’ve surpassed the new 0.5% floor. But, your annual deduction is generally limited to 60% of your AGI. Any excess may be carried forward for up to five years.

Be aware that the IRS imposes strict recordkeeping rules for cash contributions. For instance, for cash donations of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity before filing your income tax return.

Donating property

Several special rules apply to charitable gifts of property. For starters, property donations are subject to lower annual deduction limits (which we’ll detail shortly).

Donating appreciated property you’ve held for more than one year can provide a significant tax benefit. This applies to assets that would have qualified for long-term capital gains tax rates if sold instead of donated.

In this case, you can deduct the property’s current fair market value. Thus, any appreciation in value while you owned the property will be untaxed. Examples of eligible property include publicly traded securities and mutual funds. However, your annual deduction for such donations is typically limited to 30% of AGI.

For tangible property, how the charity uses the property may affect the amount of your deduction. For example, if you donate a car, your deduction is generally limited to the amount the charity receives from its sale. An exception may apply if the charity uses the vehicle to support its mission. But a 50% of AGI limit typically applies to deductions for donations where you can’t deduct the fair market value, rather than the 30% limit.

These are just a few examples of rules that apply to deductions for property donations. Contact us to find out the rules for specific property you’re considering giving to charity.

Making quid pro quo contributions

Generally, if you receive a benefit in return for making a donation, your deduction amount is reduced. For such a “quid pro quo contribution,” the charity must provide a good-faith estimate of the goods and services you received. You can deduct the difference between the amount you donated and the value of the benefit you received — nothing more.

For example, let’s say you attend a fundraising dinner cruise costing $300. If the charity values the meal and boat ride at $100 per person, your deduction is limited to $200. However, most low-cost items, featuring the charity’s logo, don’t have to be subtracted from your deduction.

Volunteering

You can’t deduct the value of the time you spend helping a charity. But you can write off related out-of-pocket expenses, such as supplies and mileage, if you itemize deductions. The deductible mileage rate for charitable miles driven is 14 cents per mile.

Travel and lodging expenses can qualify, such as if you attend a convention as a delegate for the charity. However, travel expenses can’t be deducted if the trip is merely a disguised vacation.

Achieving your goals

If you itemize deductions, charitable donations can be a powerful tax-saving tool. But, as you can see, there’s much to consider as you plan your giving for the rest of the year. We can help you create a charitable giving strategy for the remainder of 2026, contact your Smolin representative.

  • Tonni
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Vitolo & Associates Joins Smolin, Expanding Tax and Advisory Capabilities
Vitolo & Associates Joins Smolin, Expanding Tax and Advisory Capabilities 150 150 Tonni

Red Bank, NJ — July 8, 2026 — Smolin, Lupin & Co., LLC (Smolin), a leading advisory, tax, and accounting firm, announces that Vitolo & Associates has joined the firm, marking a strategic alignment between two companies dedicated to delivering exceptional client service.

Vitolo & Associates brings deep tax expertise and a well-established Client Accounting and Advisory Services (CAAS) practice, with capabilities spanning accounting, bookkeeping, advisory, and controllership support. This addition enhances Smolin’s ability to provide clients with expanded resources, advanced technology, and a broader suite of services while maintaining the personalized approach they value.

As part of the transition, clients of Vitolo & Associates will continue working with their trusted advisors, now supported by the collective strength and infrastructure of Smolin.

“Welcoming Vitolo & Associates marks an exciting step forward for Smolin,” said Paul Fried, CPA, CEO of Smolin. “We are building a firm designed for the future, where strong advisory relationships are at the center of everything we do. This combination expands our resources and allows us to deliver more strategic, forward-looking guidance that helps our clients grow, adapt, and succeed in a changing environment.”

Joining Smolin from Vitolo & Associates are:

  • Michael Vitolo, CPA, Member of the Firm
  • Michael Vincent, CPA, Tax Manager
  • Rachel Baldino, CAAS Bookkeeper
  • Shelley Carlock, CPA, CAAS Senior Accountant
  • Daisy Haffner, CAAS Bookkeeper
  • Carla Oliveira, CAAS Bookkeeper

This combination reflects Smolin’s continued growth strategy and commitment to strengthening its advisory and accounting capabilities to better serve clients across industries.

  • Noelle Merwin
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Small Business Tax Problems: Answers to Common Questions
Small Business Tax Problems: Answers to Common Questions 266 266 Noelle Merwin

Tax problems can happen to even the most organized small business owners. A cash flow crunch, an unexpected tax notice, a missed filing deadline or a payroll tax oversight can be stressful — especially when penalties and interest begin to add up. Fortunately, businesses can get back on track by addressing tax issues promptly and strategically.

What should I do if I receive a tax notice?

If you or your business receives a tax notice from the IRS or a state agency, don’t ignore it. Start by reviewing the notice carefully. It may relate to:
• A balance due,
• A missing tax return,
• A proposed tax adjustment,
• A payroll tax deposit issue, or
• A request for documentation.

Be aware that tax notices typically include response deadlines — and missing them can limit your options and lead to additional penalties and interest. Tax authorities may eventually pursue collection measures (such as liens or levies) on unpaid amounts. A lien is a legal claim against property, which can affect your ability to secure credit or complete financial transactions. A levy allows the tax agency to seize assets to satisfy the debt.

Before making a payment or sending a response, confirm that the notice is accurate. We can help you compare the notice with your business records, gather supporting documentation and prepare an appropriate response.

How far back can I file unfiled tax returns?

If you have unfiled tax returns, it’s important to address them as soon as possible. In many cases, you’ll need to file past-due returns before you can qualify for certain resolution options, such as a payment plan or settlement program.

How far back you need to file depends on your circumstances, the type of return involved and the tax agency’s requirements. There generally isn’t a simple time limit that makes an unfiled return “go away.”
For federal income taxes, the statute of limitations for the IRS to assess additional tax for a particular tax year generally starts only after a valid return is filed. It’s typically three years, but it’s six years if you understate your gross income by more than 25%. If you fail to file a return (or you file a false or fraudulent return), the IRS has an unlimited amount of time to assess tax for the tax year.

So, filing past-due returns can help reduce the risk of penalties, interest and collection activity — as well as the risk that the taxing authority could create a “substitute for return” for you. (This is generally undesirable because the return likely will include your income but not all the deductions, credits and other tax breaks you may be eligible for.)

If you’re owed a refund, filing promptly is especially important because you may lose the ability to receive an otherwise valid refund if you wait too long. Federal income tax refunds and credits generally must be claimed by the later of three years from the date you filed the return or two years from the date you paid the tax.

What are my options if I owe back taxes?

Some business owners who owe tax can’t immediately pay the full balance due. If you owe back taxes, you may have several options depending on the amount owed, the type of tax involved and your financial situation. Ways to manage tax debt may include:
• Making a payment,
• Asking for a temporary delay in collection due to financial hardship,
• Participating in a settlement program (see below), and
• Setting up an installment agreement or payment plan.

An installment agreement or payment plan may give qualifying taxpayers extra breathing room to pay the balance over time. However, you must generally stay current with future tax filings and payments. Falling behind again can cause you to default on your payment plan and potentially lead to additional collection actions.

Can I settle my tax debt for less than the full amount owed?

Some tax agencies offer settlement programs that allow eligible taxpayers to settle tax debt for less than the full amount owed. For federal tax debt, the offer in compromise (OIC) program may be available in limited circumstances.


However, an OIC isn’t available to all taxpayers and may not be the best option in every situation. The IRS reviews income, expenses, asset equity and ability to pay when determining whether to approve an OIC request. Before applying, you’ll generally need to have all required tax returns filed. You also must be current with ongoing tax obligations, including estimated tax payments and federal tax deposits.

Can tax penalties be reduced or removed?

Penalty relief may be available in certain circumstances. Depending on the penalty and the facts involved, you may qualify for administrative relief, such as an automatic exemption from penalty, first-time penalty abatement or relief based on reasonable cause.

Reasonable cause may apply when you made a good-faith effort to meet your tax obligations but were unable to do so because of circumstances beyond your control, such as:
• A serious illness,
• A death in your immediate family,
• A natural disaster, or
• Loss of records.

Penalty abatement isn’t automatic. You must follow the instructions in the notice. You might need to call the IRS or submit a written request with a clear explanation and supporting documentation. Even if penalties are reduced, interest may still apply, so it’s advisable to respond as soon as possible.

Why are payroll tax-withholding problems so serious?

Payroll tax-withholding problems are among the most urgent tax issues small business owners can face. If you have employees on your payroll, you’re responsible for withholding federal income tax, state income tax (if applicable), Social Security tax and Medicare tax from their wages and remitting those amounts to the government. Tax agencies closely monitor these tax remittances because you’re withholding money on behalf of your employees and holding it in trust until you deposit it with the taxing authority.

In some cases, business owners or other responsible individuals may be held personally liable for unremitted taxes through the Trust Fund Recovery Penalty. The penalty can apply to individuals who are responsible for collecting, accounting for or depositing the taxes and who willfully fail to do so. If your business falls behind on these tax deposits, professional guidance is critical.

How can I avoid future tax problems?

For small business owners, preventing future tax issues starts with strong accounting systems, accurate bookkeeping and timely tax filings. You should also engage in proactive tax planning by reviewing financial reports regularly, setting aside funds for taxes, and making estimated income tax payments and depositing withheld taxes by the required deadlines.

If you’re facing tax resolution issues, contact your Smolin representative. We can help you understand your options, communicate with tax authorities and create a plan to keep your business moving full speed ahead.

  • Noelle Merwin
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Cash vs. Accrual Accounting: Which Method Could Help Lower Your Small Business Taxes?
Cash vs. Accrual Accounting: Which Method Could Help Lower Your Small Business Taxes? 266 266 Noelle Merwin

Small business owners must answer an important question: Should we use the cash or accrual accounting method for federal income tax purposes? Larger entities are required to use the accrual method. But certain small businesses can elect to use the cash method. You may want to consider this option if it will help lower your taxes. However, it’s not right (or even available) for every situation.

Does your business qualify for the cash method?

Under Internal Revenue Code Section 448(c), your business may be eligible for the cash accounting method if it had average annual gross receipts that don’t exceed a specific, inflation-adjusted threshold for the prior three-year period. For 2026, businesses with average annual gross receipts up to $32 million are eligible.

Some businesses may be eligible for cash accounting even if their gross receipts are above the threshold. Examples include S corporations, partnerships without C corporation partners, farming businesses and certain personal service corporations.

In addition, the Sec. 448(c) gross receipts test serves as the eligibility standard for several other tax provisions available to qualifying small businesses, such as:

  • Simplified inventory accounting,
  • An exemption from the uniform capitalization rules,
  • An exemption from the business interest deduction limit, and
  • The option to use the completed contract method (rather than the percentage-of-completion method) for certain long-term contracts.

When determining your business’s gross receipts, you may need to include those earned by certain related entities, such as those under common control. Special rules apply to organizations that have existed for less than three years. Also, tax shelters, including syndicates, don’t qualify for small business status, even if their gross receipts are below the threshold.

How do the methods differ?

The cash method often provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when paid, they have greater control over the timing of income and deductions. For example, toward the end of the year, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating expense payments.

In contrast, accrual-basis businesses recognize income when earned and deduct expenses when incurred, regardless of the timing of cash receipts or payments. Therefore, they have little flexibility to time the recognition of income or expenses for tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year received, it helps ensure that a business has the funds needed to pay its tax bill.

However, for some businesses, the accrual method may be preferable. For instance, if your accrued income tends to be lower than your accrued expenses, the accrual method may result in a lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Is it time for a change?

Even if your business would benefit from switching its accounting method, you should consider the administrative costs. Changing accounting methods for tax purposes may require IRS approval. And, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, using the cash method for tax purposes would require you to maintain two sets of books (cash-basis tax records and accrual-basis financial reporting records).

Fortunately, you don’t have to make this decision by yourself. We can help determine the right method for your situation.

To learn more, contact your Smolin representative.

 

  • Noelle Merwin
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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.

 

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