Financial Planning

ira-charitable-donations-required-taxable-distributions

Using IRA Charitable Donations as an Alternative to Required Taxable Distributions
Using IRA Charitable Donations as an Alternative to Required Taxable Distributions 1600 941 smolinlupinco

If you’re a philanthropist that receives traditional IRA distributions, there’s a charitable tax advantage you should know about involving cash donations to a charity approved by the IRS. 

What are qualified charitable distributions?

The most relied upon method of transferring your IRA assets to your preferred charity is through an age-restricted tax provision. If you’re an IRA owner over the age of 70 and a half, you can send up to $100,000 annually of your distributions to your qualifying charitable organization. Qualified charitable distributions (QCDs) still count toward your required minimum distribution (RMD) amount but won’t trigger taxes or raise your adjusted gross income (AGI). 

Since your donation doesn’t increase your AGI, it will allow you to: 

  1. Qualify you for additional tax breaks such as threshold reductions for medical expenses, which have a cap of 7.5% of your AGI. 
  2. Circumvent Social Security’s 3.5% investment income tax taxation triggered by your investment income.
  3. Potentially avoid Medicare Part B and D high-income surcharges on your premiums when your AGI exceeds certain levels.
  4. Prevent the charity receiving your QCD from needing to pay federal estate taxes and avoid state death tax liability in most cases. 

Key considerations

You can’t claim deductions for any  QCD that isn’t included in your income. Also, remember that at 72 years of age, you must start taking your RMDs, although you can make QCDs starting at age 70 and a half. 

In 2022, you have to set up direct charitable payments to your qualified charity by December 31st to benefit from a QCD. You’re also allowed to use these QCDs to meet the RMD requirements for your IRA. For example, if you must take $15,000 in RMDs for 2022 and pay a QCD of $10,000, you would need to withdraw $5,000 to fulfill the remaining distribution requirement for this year. 

Other rules and limits may apply. Want more information? Contact us to see whether this strategy would be beneficial in your situation.

© 2022

corporate-estimated-tax-how-to-calculate-it

Corporate Estimated Tax: How to Calculate It
Corporate Estimated Tax: How to Calculate It 1600 941 smolinlupinco

June 15th is the next deadline to make quarterly tax payments. If you’re a business or individual who must pay, now is an excellent time to review the way corporate federal estimated payment calculations work. Your goal is to minimize your business’s estimated tax liability without getting dinged with an underpayment penalty. 

Four ways to calculate

To avoid an estimated tax penalty, corporations must pay an installment based on the lowest amount calculated by one of the below four methods: 

Preceding year method

Corporations can circumvent underpayment penalties on owed estimated tax by paying 25% of their preceding year’s tax according to the four payment due dates on their return. In 2022, some corporations are limited to only using this method for calculating their first payments if their taxable income was $1 million or more in any of the previous tax years. Also, if your corporation’s previous tax return covered less than twelve months or you filed a return that didn’t have any tax liability, you won’t be eligible to use this method. 

Current year method

Your corporation can pay 25% of the current year’s tax to avoid an estimated tax underpayment penalty. Just make sure to make these payments according to the installment schedule on your return. For example, if you didn’t file a return at all, you’ll pay 25% of this year’s tax. The installment due dates typically fall on the 15th of April, June, and September of the current year and January 15th of the next. 

Seasonal income method

Corporations with taxable income that follows recurring seasonal patterns can annualize their income by assuming earnings for the current year will follow the same pattern as previous years. A mathematical formulation is used to test a corporation’s eligibility for this method by establishing their seasonally patterned income. If you believe your company qualifies to use this method, you’ll want to ask for qualified assistance to ensure that it does.

Annualized income method

When using the annualized tax method, quarterly installments are made based on the computation of taxable income for the months in the tax year ending before the installment is due. This is achieved by assuming that any earnings received will be at the same rate throughout the year. 

Additionally, corporations aren’t limited to one method for the entire tax year and can switch among the four as needed. 

If you have questions about how your estimated tax bill can be reduced, contact us to set up a review of your corporate tax situation. 

© 2022

effects-of-inflation-on-financial-statements

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

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

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

Primary impacts

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

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

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

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

  • Extinguishment of debt 
  • Modification
  • Troubled debt restructuring

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

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

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

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

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

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

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

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

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

We’re here to help

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

© 2022

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

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

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

April 18

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

May 2

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

May 10

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

June 15 

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

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

© 2022

subsequent-events-financial-reporting

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

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

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

Recognized and unrecognized subsequent events

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

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

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

1. Recognized subsequent events

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

2. Nonrecognized subsequent events

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

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

Understanding disclosure requirements

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

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

We can help you make disclosure decisions

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

© 2022

audits-related-party-transactions

Audits and Related-Party Transactions
Audits and Related-Party Transactions 1600 941 smolinlupinco

Business transactions involving related parties—including parent companies, subsidiaries, affiliated entities, relatives, and friends—sometimes occur at above- or below-market rates. This can cause your company’s financial statements to become misleading to the people who rely on them, since undisclosed related-party transactions can skew their understanding of the company’s true financial results.

Auditors and related parties

Because there’s a strong possibility of double-dealing with related parties, auditors place significant focus on hunting for undisclosed related-party transactions.

To uncover these transactions, auditors may use all of the following documents and data sources:

  • Lists of a company’s current related parties and associated transactions
  • Disclosures from board members and senior executives regarding their previous employment history, ownership of other entities, or participation on additional boards
  • Press releases announcing significant business transactions with related parties
  • Minutes from board of directors’ meetings, especially any discussion of significant business transactions
  • Bank statements, particularly for transactions that involve intercompany wires, check payments, and automated clearing house (ACH) transfers

In assessing these documents, auditors will pay particular attention to contracts for goods or services that are priced at higher (or lower) rates than goods and services purchased or sold in similar transactions between unrelated third parties.

For example, in order to reduce its taxable income in the United States, a manufacturer might buy goods from its subsidiary at artificially high prices in a low-tax country. Similarly, an auto dealership might pay the child of the owner an above-market salary with benefits that aren’t available to unrelated employees. Or a spinoff business might lease office space at below-market rates from its parent company. 

Targeting related-party transactions

Auditors use all of the following procedures to target undisclosed related-party transactions:

  • Interviewing the accounting personnel who report related-party transactions in the company’s financial statements
  • Looking at the company’s enterprise resource planning (ERP) system and testing how related-party transactions are identified and coded
  • Analyzing how related-party transactions are presented in the company’s financial statements

Robust internal controls are needed to ensure accurate, complete reporting of these transactions. Your company’s vendor approval process should include clear guidelines to help accounting personnel identify related parties and mark them in the ERP system accordingly. Companies that don’t have these measures in place may inadvertently fail to disclose related-party transactions.

Communicating with auditors

Communication is key when it comes to related-party transactions. You should always tell your auditors if you have any known related-party transactions—and don’t be afraid to ask for assistance disclosing and reporting these transactions in accordance with U.S. Generally Accepted Accounting Principles.

Beneficiary Designations and Joint Titles: Careful Planning Avoid Overriding Will

Beneficiary Designations and Joint Titles: Careful Planning Is Needed to Avoid Overriding Your Will
Beneficiary Designations and Joint Titles: Careful Planning Is Needed to Avoid Overriding Your Will 850 500 smolinlupinco

A careless approach to beneficiary designations and jointly titled assets can easily undermine your estate plan. 

For example, you may specify in your will that all of your property should be divided equally among your children. But say that your IRA accounts for half of your estate and names your oldest child as the beneficiary. In this case, your oldest child will inherit half of your estate in addition to a third of the remaining assets. It’s hardly an equal division of your assets, and probably far from what you intended.

Jointly owned property requires similarly careful treatment. Regardless of the terms of your will, the surviving owner takes title to the property after your death. What many people fail to realize is that their wills exert no control over disposition of nonprobate assets. 

Understanding nonprobate assets

Nonprobate assets include life insurance policies, IRAs and retirement plans, joint bank or brokerage accounts, and even savings bonds. When you pass away, nonprobate assets are generally transferred automatically according to a beneficiary designation or contract. Because of this, they override your will. 

To ensure your estate plan remains in line with your wishes, it’s important to regularly review beneficiary designations and property titles, especially after significant life events such as a marriage or divorce, the death of a loved one, or the birth of a child. 

Planning to use POD and TOD designations

Payable-on-death (POD) and transfer-on-death (TOD) designations allow you to transfer assets outside of probate in a simple and cost-effective way. While POD designations are used for bank accounts and certificates of deposit, TOD designations can be used to transfer stocks, bonds, or brokerage accounts. In many states, you may even be able to use TOD designations to transfer real estate.

All you need to do to set up these designations is provide a signed POD or TOD beneficiary designation form. To claim the money or securities after you pass away, your beneficiaries will simply need to present their identification to the bank or brokerage, along with a certified copy of the death certificate.

Although they are useful and convenient, POD and TOD designations must be carefully coordinated with the rest of your estate plan. Without careful planning, your POD or TOD may conflict with your will, trusts, or other estate planning documents.

You should also take care not to use POD and TOD designations for too high a proportion of your assets. If you use these designations for the majority of your assets, there may not be sufficient assets left in your estate to settle your debts, taxes, or other expenses. In this case, your executor will need to initiate a proceeding to bring assets back into the estate.

If you hold joint accounts, use POD or TOD designations, or have large retirement accounts or life insurance policies, proper planning is essential to avoid overriding your will. We can help you identify potential conflicts in your estate plan.

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