Financial Planning

Accounting M&As

Accounting for M&As
Accounting for M&As 850 500 smolinlupinco

Mergers and acquisitions (M&A) transactions significantly impact financial reporting, especially the balance sheet, which will look markedly different after the business combination. Keep reading for basic guidance on reporting business combinations under U.S. Generally Accepted Accounting Principles (GAAP).

Understanding the purchase price allocation process

Under GAAP, the buyer must allocate the purchase price to all acquired assets and liabilities based on their fair values. 

Estimate the purchase price

The purchase price allocation process begins by estimating a cash equivalent purchase price. Of course, this is simpler if the buyer pays 100% cash upfront. (The purchase price is already at a cash equivalent value.) If a seller accepts non-cash terms, however, the cash equivalent price is less clear. An example of this could be accepting stock in the newly formed entity or if an earnout is contingent on the acquired entity’s future performance. 

Identify assets and liabilities

Next, the buyer needs to identify all intangible and tangible assets and liabilities acquired in the merger. While the seller’s presale balance sheet is likely to report tangible assets and liabilities—like inventory, payables, and equipment—intangibles can be more difficult to nail down. They might only be reported if they were previously purchased by the seller. Since intangibles are generated in-house, they’re not often included on the seller’s balance sheet. 

Determining the fair value of acquired assets and liabilities

When a company acquires another company, the acquired assets and liabilities are added to its balance sheet at their fair value on the acquisition date. Any difference between the sum of these fair values and the purchase price is recorded as goodwill.

Generally, goodwill and other intangible assets with indefinite lives, such as brand names and in-process research and development, aren’t amortized under GAAP. Rather, goodwill must be tested for impairment on an annual basis. 

Testing for impairment

It’s also a good idea to test for impairment when certain triggering events—like the loss of a major customer or enactment of unfavorable government regulations—occur. If an impairment loss is reported by a borrower, this may signal that the business combination isn’t quite meeting management’s expectations. 

Straight-line amortization

As an alternative to testing for impairment, private companies may opt to amortize goodwill over 10 years straight-line. Even with this approach, though, the company will need to test for impairment when triggering events occur. 

Occasionally, a buyer negotiates a bargain purchase. In this circumstance, the fair value of the net assets exceeds the fair value of consideration transfer (the purchase price). Instead of recording negative goodwill, the buyer reports a gain from the purchase on their income statement. 

Questions? Smolin can help.

Accurately allocating your purchase price is crucial to minimize write-offs and restatements in subsequent periods. Contact Smolin from the start to ensure every detail of your M&A accounting is correct. We’ll help ensure your fair value estimates are supported by market data and reliable valuation techniques.

Tax Depreciation Rules Business Automobiles

How do tax depreciation rules apply to business automobiles?
How do tax depreciation rules apply to business automobiles? 850 500 smolinlupinco

If you use an automobile in your trade or business, you may question how depreciation tax deductions are determined. The rules are complex. In particular, special limitations apply to business vehicles classified as passenger autos (which include many pickups and SUVs). Often, these limitations result in longer-than-expected wait times to depreciate a vehicle completely.

As you review the details below, remember that the rules are different if you lease an expensive passenger auto you use for business. (Reach out for more details.) 

The cents-per-mile rate includes the cost of depreciation

For passenger autos, separate depreciation calculations only apply if you use the actual expense method to determine your deductions. If you use the standard mileage rate instead, depreciation is already included in that rate. For 2023, the standard mileage rate is 65.5 centers per business mile driven. 

Using the actual expense method to calculate depreciation for passenger automobiles

You must make a separate depreciation calculation for each year until the vehicle is fully depreciated if you choose to use the actual expense method to calculate your allowable deductions for a passenger automobile.

Generally, you can calculate depreciation over a six-year span as follows:

Year 1: 20% of the cost

Year 2: 32% of the cost

Year 3: 19.2% of the cost

Year 4: 11.52% of the cost

Year 5: 11.52% of the cost

Year 6: 5.76% of the cost

Note: If 50% or less of the use of the vehicle is for business purposes, you MUST use the straight-line method to calculate depreciation deductions, NOT the percentages listed above.

Depreciation ceilings

You’re limited to specified annual depreciation ceilings for passenger autos that cost more than the applicable amount for the year the vehicle is placed in service. These ceilings may change annually and are indexed for inflation.

For example, for a passenger auto placed in service in 2023 that cost more than a certain amount, the Year 1 depreciation ceiling is $20,200 if you choose to deduct first-year bonus depreciation. The annual ceilings for later years are as follows: Year 2, $19,500; Year 3, $11,700; and for all later years, $6,960 until the vehicle is fully depreciated.

To account for non-business use, these ceilings are proportionately reduced depending on the amount the vehicle is used for business vs. personal use. 

Reminder: Bonus depreciation will be phased out

Under the Tax Cuts and Jobs Act, bonus depreciation will be phased down to zero in 2027 unless Congress acts to extend it. 

In 2023, the deduction is 80% of eligible property. In 2024, it’s scheduled to decrease to 60%. 

Pickups, Heavy SUVs, and vans

If you have heavy SUVs, vans, or pickups that you use for business purposes over 50% of the time, you may be able to take advantage of more favorable depreciation rules. That’s because vehicles with a gross vehicle weight rating (GVWR) of over 6,000 pounds are treated as transportation equipment for depreciation purposes.

To determine whether your vehicle falls into this category, check the inside edge of the driver’s side door for the vehicle’s GVWR.

Depreciation limits change the after-tax cost of passenger autos used for business

These depreciation limits impact the after-cost tax of your business vehicles. The true cost of business assets is decreased in proportion to the tax savings from related depreciation deductions.

To the extent depreciation deductions are reduced and thereby deferred to future years, so is the value of the related tax savings, thanks to time-value-of-money considerations. Therefore, the true cost of the asset may be that much higher.

Questions? Smolin can help.

As you can see, tax depreciation rules for business automobiles are complex and constantly evolving. If you’re considering purchasing a new business vehicle soon, please contact us for the most personalized, up-to-date guidance.

Listing home vacation rental tax impacts

Listing your home as a vacation rental? Here are the tax impacts to watch for
Listing your home as a vacation rental? Here are the tax impacts to watch for 850 500 smolinlupinco

Whether in the mountains or a waterfront community, many Americans dream of owning their perfect vacation home. If you already own a second house in a desirable area, you might consider renting it out for part of the year.

Before you post that listing, though, take a moment to learn about the tax implications. Taxes for these transactions can be complicated. They are determined based on how many days the home is rented, as well as a few other factors.

Vacation use by yourself and family members (even if you charge them rent) may impact that amount of taxes you pay. Use by nonrelatives will also affect your rate if market rent isn’t charged.

Tax rates for short-term rentals

Did you know that if you rent a property out for less than 15 days during the year, it’s not treated as “rental property” at all? For tax purposes, any rent you receive for this timeframe won’t be included in your income. This can lead to revenue and significant tax benefits in the right circumstances.

There is a drawback to this, though. You can only deduct property taxes and mortgage interest—not depreciation or operating costs. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

Tax rates for longer rentals

You must include rent received for property rented out more than 14 days in your income for tax purposes. In this scenario, you may deduct part of your depreciation and operating expenses (subject to certain rules). 

However, navigating the numbers can prove challenging. You must allocate which portion of certain expenses are incurred via personal use days vs. rental days, such as: 

  • Maintenance
  • Utilities
  • Depreciation allowance 
  • Taxes
  • Interest

Both the personal use portion of taxes and the personal use part of interest on your second home may be deducted separately. To be eligible, the personal use part of interest must exceed the greater of 14 days or 10% of the rental days. Depreciation on the personal use portion of time is not deductible. 

Losses may be deductible

If allocable deductions are lower than your rental income, you must report the deductions and the rent to determine the amount of rental income you should add to your other income. If expenses exceed the income, it may be possible to claim a rental loss.

The number of days you use the house for personal purposes is important here. If you used the home for more than the greater of 14 days or 10% of the rental days, you used it “too much” to claim your loss.

In this instance, you may still be able to wipe out the rental income using your deductions. However, you can’t create a loss. Deductions you can’t claim will be carried forward, and you may even be able to use them in future years. 

If you can only deduct rental expenses up to the amount of rental income you received, you must prioritize the following deductions:

  • Interest and taxes
  • Operating costs
  • Depreciation

Even if you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, though, rental deductions that exceed rental income may be claimed as a “passive” loss (and will be limited under passive loss rules.) 

Questions? Smolin can help.

Tax rules regarding vacation rental homes can be confusing. We only discuss the basic rules above, and additional rules may apply to you if you’re considered a small landlord or real estate professional.

That’s why it’s best to consult with a tax professional before planning your vacation home use. Contact the friendly tax experts at Smolin to learn more.

Tax Considerations Merger Acquisition Transactions

Important Tax Considerations with Merger and Acquisition Transactions
Important Tax Considerations with Merger and Acquisition Transactions 850 500 smolinlupinco

Many industries have seen an increase in merger and acquisition activity in recent years. Is there potential for your business to merge with or acquire another? 

If so, you’ll need to understand the potential tax implications of that decision.

Assets vs. stocks

These transactions can be structured in two ways for taxes:

1. Stock (or ownership interest) sale 

If the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) treated as a partnership, the buyer may directly purchase a seller’s ownership interest.

Purchasing stock from a C-corp is a particularly attractive option because the 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) is now permanent.

The corporation will generate more after-tax income and pay less tax overall. Additionally, any built-in gains from appreciated corporate assets will be taxed at a lower rate should you eventually decide to sell them in the future.

Ownership interests in S corporations, partnerships, and LLCs are also made more attractive by the TCJA’s reduced individual federal tax rates. On the buyer’s personal tax return, the passed-through income from these entities also will be taxed at lower rates.

Keep in mind that the TCJA’s individual rate cuts are scheduled to expire at the end of 2025. Depending on future changes in Washington, only time will tell if they’ll be eliminated earlier or extended.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask us if this would be beneficial in your situation.

2. Asset sale

A buyer may also purchase assets of a business. For example, a buyer may only be interested in certain assets or product lines. If the target business is a sole proprietorship or single-member LLC treated as a sole proprietorship for tax purposes, an asset sale is the only option. 

Buyer vs. seller preferences

Buyers often prefer to purchase assets instead of ownership interests for many reasons. Typically, the buyer’s primary goal is to generate enough cash flow from an acquired business to cover the debt of acquiring it, as well as provide a pleasing return on the investment (ROI). 

As such, buyers are reasonably concerned about minimizing exposure to undisclosed and unknown liabilities and achieving favorable tax rates after the deal closes.

One option is for the buyer to step up (increase) the tax basis of purchased assets to reflect the purchase price. This can lower taxable gains for certain assets, like inventory and receivables when they’re sold or converted into cash. It can also increase amortization deductions and depreciation deductions for some qualifying assets. 

In contrast, many sellers prefer stock sales for both tax and nontax reasons. They strive to minimize the tax bill from a sale. This can often be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Of course, it’s worth bearing in mind that areas, like employee benefits, can cause unanticipated tax conundrums when acquiring or merging with another business. 

Pursuing professional advice is crucial for both buyers and sellers. 

Questions? Smolin can help.

For many people, selling or buying a business is the largest and most important financial transaction they’ll make in a lifetime. That’s why it’s essential to seek professional tax advice as you negotiate this situation. Once the deal is done, it could be too late to achieve a favorable tax result.

If you’re considering merging with another business or acquiring a new asset, contact the knowledgeable staff at Smolin to discuss the most favorable way to proceed.

Hit the jackpot? Tax bill

Hit the jackpot? Here’s what it means for your tax bill.
Hit the jackpot? Here’s what it means for your tax bill. 850 500 smolinlupinco

Everything comes at a cost—even “free money.” If you’ve won a sizable cash prize recently, congratulations! But be prepared. Your good fortune will likely impact your tax bill. Contacting your accountant or wealth advisor as soon as possible is probably in your best interest. 

Money earned from gambling 

Whether you win at a tiny bingo hall or a major casino, the tax rules are the same. 100% of your winnings must be reported as taxable income on the “Other income” line of your 1040 tax return. 


When it comes to reporting winnings for a particular wager, you’ll need to calculate your net gain. For example, if you bet $50 on the Super Bowl and win $140, you should report $90 of income rather than the full $140.

What about losses? They’re deductible, but only as itemized deductions. You can’t take the standard deduction and deduct gambling losses. Even so, they’re only deductible up to the amount of gambling winnings reported. In other words, losses can be used to “wipe out” gambling income, but your forms can’t report a gambling tax loss.

Still, it’s worth keeping a thorough record of your losses during the year. Hang onto any checks or credit slips and be sure to document the place, date, amount, and type of loss. It may also be helpful to keep track of the name of anyone who was with you. 

Note: If you’re a professional gambler, different rules apply. 

Lottery winnings

Did you know that lottery winnings are taxable? Hitting the jackpot is rare, but getting audited by the IRS for failing to follow tax rules after winning isn’t.

Winners are required to pay taxes on cash prizes and the fair market value of non-cash prizes, too, like vacations or cars. Your exact federal tax rate may vary, but it could be as high as 37% depending on the amount of your winnings and your other income. State income tax may also apply.

For non-cash prizes, you’ll need to report your winnings in the year the prize is received. If you take a cash prize in annual installments, you should report each year’s installment as income for the year you receive it. 

Winnings over $5,000

If you win over $5,000 from the lottery or certain types of gambling, 24% will be withheld for federal tax purposes. The payer (agency, casino, lottery, etc.) will send you and the IRS a Form W-2G listing the federal and state tax withheld and the amount paid to you. Hang onto this form for your records.

If a federal tax rate between 24% and 37% applies to you, the 24% withholding may not be enough to cover your federal tax bill. In this instance, you may need to make estimated tax payments. If you fail to do so, you could be assessed a penalty. You might be required to make state and local estimated tax payments, too. 

Since your federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments—and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

Questions? Smolin can help.

This article only covers the basic tax rules. Additional rules could apply in your situation. You may also have additional concerns after winning a large sum of money, such as updating your estate plan.

If you want to stay in compliance with tax requirements, minimize what you owe, and manage your winnings more effectively, we’re here to help. Contact us now. 

could you benefit health savings account

Could You Benefit from a Health Savings Account?
Could You Benefit from a Health Savings Account? 850 500 smolinlupinco

The cost of healthcare is rising. As a result, many people are on the hunt for a more cost-effective way to pay for their medical bills. 

If you’re eligible, a Health Savings Account (HSA) may offer a way to set aside funds for a future medical “rainy day” while also enjoying tax benefits, like: 

  • Withdrawals from the HSA to cover qualified medical expenses aren’t taxed
  • Earnings on the funds in the HSA aren’t taxed
  • Contributions made by your employer aren’t taxed to you
  • Contributions made by you are deductible within certain limits 

Who is eligible for an HSA? 

HSAs may be established by, or on behalf of, any eligible individual.

If you’re covered by a “high deductible health plan,” you may be eligible for an HSA. In 2023, a health plan with an annual deductible of at least $1,500 for self-only coverage or at least $3,000 for family coverage may be considered a high-deductible plan.

In 2024, these numbers will increase to $1,600 for self-only coverage and $3,200 for family coverage.

Deductible contributions are limited to $3,850 for self-only coverage in 2023 and $7,750 for family coverage. (Again, these numbers are set to increase in 2024 to $4,150 for self-only coverage and $8,300 for family coverage.)

Other than for premiums, annual out-of-pocket expenses required to be paid can’t exceed $7,500 for self-only coverage or $15,000 for family coverage in 2023. In 2024, these numbers will climb to $8,050 and $16,100, respectively. 

If an individual (or their covered spouse) is an eligible HSA contributor and turns 55 before the end of the year, they may make additional “catch-up” contributions for 2023 and 2024 up to $1,000 per year.  

Limits on deductions

Deductible contributions aren’t governed by the annual deductible of the high deductible health plan. You can deduct contributions to an HSA for the year up to the total of your monthly limitation for the months you were eligible. 

The monthly limitation on deductible contributions for someone with self-only coverage is 1/12 of $3,850 (or just over $320) in 2023. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,750 (or just under $646). 

At tax time, anyone eligible on the first day of the last month of the tax year will be treated as eligible for the entire year. This is relevant to computing the annual HSA contribution.

That said, if the individual is enrolled in Medicare, they’ll no longer be eligible per the HSA rules and can no longer make HSA contributions. 

Taxpayers may withdraw funds from an IRA and transfer them tax-free to an HSA—but only once. The amount allowed varies, depending on the maximum deductible HSA contribution for the type of coverage that is in effect at the time of transfer. 

The amount moved between the accounts will be excluded from gross income and thus won’t be subject to the early withdrawal penalty of 10%. 

HSA Distributions

Distributions from your HSA account that you use to pay for qualified medical expenses of those covered aren’t taxed. Typically, the qualified medical expenses in question would qualify for the medical expense itemized deduction.

However, funds withdrawn from your HSA for other reasons are taxed. Unless the person covered by the HSA is over 65, disabled, or dies, they will also be subject to an extra 20% tax. 

Questions? Smolin can help.

HSAs offer a very flexible option for providing health care coverage. However, as you can see, the rules can be quite complicated. 

If you have questions about tax rules regarding your HSA or the most favorable way to manage the funds within it, please reach out. The friendly accountants at Smolin are always happy to walk you through your options and help you determine the most tax favorable way to manage your money. 

Running business spouse Tax issues

Running a business with your spouse? Watch out for these tax issues.
Running a business with your spouse? Watch out for these tax issues. 850 500 smolinlupinco

For many spouses who run a profitable, unincorporated small business together, filing taxes can be confusing.

Here are some of the most common challenges to look out for.

Classification: the partnership issue

In many cases, the federal government classifies unincorporated businesses owned by two spouses as a partnership. This means you’ll need to file an annual partnership return on Form 1065.

In order to allocate the partnership’s taxable income, deductions, and credits, you and your spouse must also both be issued separate Schedule K-1s.

Once that paperwork is covered, you should also expect to complete additional compliance-related tasks. 

Calculating self-employment (SE) tax 

The government collects Medicare and Social Security taxes from self-employed people via self-employment (SE) tax.

This year, you should expect to owe 12.4% for Social Security tax on the first $160,200 of your income, as well as an additional 2.9% Medicare tax.

Beyond that $160,200 ceiling, you won’t owe additional Social Security tax. But the 2.9% Medicare tax component continues before increasing to 3.8%—thanks to the 0.9% additional Medicare tax—if the combined net SE income of a married couple that files jointly exceeds $250,000.

You must include a Schedule SE with your joint Form 1040 to calculate SE tax on your share of the net SE income passed through to you by your spousal partnership. In addition, you’ll need to submit a Schedule SE for your spouse to calculate their share of net SE income.

All in all, this can result in a larger SE tax bill than you might expect.

For example, say you and your spouse each have a net SE income of $150,000 ($300,000 total) in 2023 from your profitable 50/50 partnership business. The SE tax on your joint tax return is a whopping $45,900 ($150,000 x 15.3% x 2). That’s on top of regular federal income tax.

Potential tax saving solutions

Option 1: Minimize SE tax in a community property state via an IRS-approved method

IRS Revenue Procedure 2002-69 allows you to treat an unincorporated spousal business in a community property state as a sole proprietorship operated by one of the spouses for tax purposes.

This allocates all of the net SE income to one spouse, so that only the first $160,200 of net SE income from your business will be subject to the 12.4% Social Security tax.

This can dramatically reduce your SE tax bill.

Option 2: Make your business into an S-Corp that pays you and your spouse modest salaries as shareholder-employees

If you don’t live in a community property state, you still have options. By converting your business to an S-Corporation, you can lessen the amount of Social Security and Medicare taxes you’ll owe.

Only the salaries paid to you and your spouse will be hit by the Social Security and Medicare tax, collectively called FICA tax. From there, you can pay out most or all remaining corporate cash flow to yourselves as FICA-tax-free cash distributions. 

Option 3: End your partnership and hire your spouse as an employee

For some couples, running the operation as a sole proprietorship operated by one spouse may make more sense than continuing with a spousal partnership.

In this scenario, you’d hire your spouse as an employee of the proprietorship with a modest cash salary and withhold 7.65% of that salary to cover their share of the Social Security and Medicare taxes. The proprietorship must also pay 7.65% as the employer’s half of the taxes.

As long as the employee-spouse’s salary is modest, the FICA tax will also be modest.

With this strategy, you file only one Schedule SE with your joint tax return (for the spouse treated as the proprietor). A maximum of $160,200 (for 2023) will be exposed to the 12.4% Social Security portion of the SE tax.

Questions? Smolin can help.

If you’re looking for tax-saving strategies for your small business, contact Smolin. We’ll help you determine how to minimize compliance headaches and high SE bills so you can get back to running your business with less tax-induced stress.

How Investment Swings Affect Taxes

How This Year’s Investment Swings May Affect Your Taxes
How This Year’s Investment Swings May Affect Your Taxes 850 500 smolinlupinco

If you’ve noticed market fluctuations leading to significant gains or losses on your investments this year, you might be wondering how this will impact your 2023 tax returns.

It’s hard to say with complete certainty since nothing is decided until the final results of your trades at year’s end. However, you can still take measures to avoid tax surprises.

Here’s what you need to know. 

Retirement accounts: tax-favored and taxable accounts

Investment swings in tax-favored retirement accounts, such as 401(k)s, traditional IRAs, Roth IRAs, and SEP IRAs, have no immediate tax impact. Although your account balance is affected by market fluctuations, you won’t be taxed on that balance until you begin withdrawing money.

After you turn 59 ½, qualified withdrawals from your Roth IRA will be federal income tax-free.

What about taxable accounts?

Unrealized gains and losses won’t affect your tax bill. Cumulative gains and losses from trades executed during the year, however, will. 

Overall loss in 2023

If your losses for the year have outpaced your gains, you have a net capital loss. To determine the loss and apply it, take the following three steps.

  1. Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
    • You have a net short-term capital loss for the year if your short-term losses exceed your short- and long-term gains.
    • You have a net long-term capital loss for the year if your long-term losses exceed the total of your long- and short-term gains.
  2. Claim your allowable net capital loss deduction of up to $3,000 ($1,500 if you use married filing separate status).
  3. Carry over any remaining net short-term or long-term capital loss after Step 2 to next year, when it can be used to offset capital gains in 2024 and beyond.

Overall gain in 2023

If your gains for the year exceed your losses, congratulations! To calculate your net capital gain, do the following.

  • Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
    • If your short-term gains exceed the total of your short- and long-term losses, you have a net short-term capital gain for the year.
    • If your long-term gains exceed the total of your long- and short-term losses, you have a net long-term capital gain for the year.

Net long-term and short-term gain

Your regular federal income tax rate (which can be up to 37%) applies to net short-term capital gain. In addition, you may owe an additional 3.8% on net investment income tax (NIIT), as well as state income tax.

Net long-term capital gain (LTCG) is taxed at the lower federal capital gain tax rate of 0%, 15%, or 20%.

Most people pay 15%. If you’re a high-income individual, you’ll owe the maximum rate of 20% on the lesser of:

1) net LTCG

OR

2) the excess of taxable income, including any net LTCG, over the applicable threshold.

In 2023, the thresholds are: 

  • Married filing jointly: $553,850
  • Single filers: $492,300
  • Heads of household: $523,050

Again, you may also owe the NIIT and state income tax.

NIIT Impact

The 3.8% Net Investment Income Tax (NIIT) applies to the lesser of your net investment income, including capital gains, or the amount by which your modified adjusted gross income (MAGI) exceeds the following thresholds:

  • Married filing jointly: $250,000
  • Singles and heads of household: $200,000
  • Married filing separately: $125,000

Year-end is still months away

While these figures are helpful to avoid end-of-year sticker shock, your 2023 tax outcomes won’t be apparent until all of the gains and losses for the year’s trades are completed and added up. 

Have questions? Smolin can help. 

If you want a clearer picture of what to expect come tax time, we can help. Contact the friendly staff at Smolin to learn more.

Planning sell property How profits taxed

Planning to sell your property? Here’s how your profits could be taxed.
Planning to sell your property? Here’s how your profits could be taxed. 850 500 smolinlupinco

Across the United States, home values have risen dramatically over the last few years. The median price of existing home sales increased 1.9% between July 2022 and July 2023, and there were even larger increases in previous years.

While the upward trend appears universal, median home prices have varied by region:

Northeast: $467,000
Midwest: $304,600
South: $366,200
West: $610,500

If you hope to take advantage of these higher home sales pricetags by putting your house on the market, educate yourself about the tax planning implications first. You could be responsible for capital gains tax and Net Investment Income Tax (NIIT). 

A large chunk of your profits could be protected

If the house you plan to sell is your primary residence, some or all of the profit may be tax-free. Single filers can exclude $250,000 (or twice that for joint filers), but must meet certain requirements first: 

  • The seller must have owned the home for at least two of the five years leading up to the sale
  • The property must have been the seller’s principal residence for two or more years out of the last five

While these time periods don’t necessarily have to overlap to be eligible for the exclusion, they may.

Worth noting is the fact that homeowners may only use this exclusion once every two years. If you’re moving around more frequently than that, you won’t be able to claim it every time.

What happens to profits above the exclusion amount? 

What happens if the sale of your home generates more than $250,000 or $500,000 in profit? 

Providing you’ve owned the home for a year or longer, any cash exceeding these baseline amounts will be taxed at your long-term capital gains rate.

If you’ve owned the home for at least a year, the cash amount in excess of these baselines will likely be taxed at your long-term capital gains rate. If you acquired your house more recently, the profit will be deemed a short-term gain and subject to your ordinary income rate, which could double or even triple your long-term rate.

If the house you’re selling isn’t your primary residence (i.e. it’s a vacation home), the sale may not be eligible for the capital gains exclusion. However, it’s important to ask your accountant.

If you own more than one home and rent them out, they may be considered business assets. If so, this would allow you to defer tax or any gains through an installment sale or a Section 1031 like-kind exchange. You could potentially deduct a loss, as well—something you can’t do on the sale of a principal residence.

How does the 3.8% NIIT apply to home sales? 

The 3.8% Net Investment Income Tax (NIIT) generally doesn’t apply to capital gains from the sale of your main home, up to the exclusion limits of $250,000 for single filers and $500,000 for married couples filing jointly.

Still, if your modified adjusted gross income (MAGI) exceeds the amounts below, gains beyond the exclusion limit may be subject to the tax:

  • Married taxpayers filing jointly: $250,000
  • Surviving spouses: $250,000
  • Married taxpayers filing separately: $125,000
  • Unmarried taxpayers and heads of household: $200,000

The gain from the sale of a vacation home or other second residence that does not qualify for the main home exclusion is also subject to the NIIT tax. 

Two additional factors to consider

1. The actual value of your home once all factors are considered

Keep thorough records to support an accurate tax basis. Include documentation of your original cost, home improvements, casualty losses, and depreciation claimed for business use. 

2. Losses (generally) aren’t deductible

If you unfortunately fail to turn a profit on selling your principal resident, it generally isn’t deductible.

However, if you rent a portion of your home out or use it exclusively for business, any loss attributed to that portion of the home could be deductible. 

Clearly, taxes can vary between sales. Depending on your income and the profit of your home sale, some of all of the gain could be tax-free. However, higher-income homeowners with more expensive homes might be looking at a hefty, postsale tax bill. 

Have questions? Smolin can help 

If you’re considering selling your house, it pays to be prepared. To learn more about the tax impacts you may be facing, contact our knowledgeable team at Smolin for personalized advice.  

New Report Identifies High Risk Areas Financial Reporting

Don’t Get Caught Off Guard: New Report Identifies High-Risk Areas for Financial Reporting
Don’t Get Caught Off Guard: New Report Identifies High-Risk Areas for Financial Reporting 850 500 smolinlupinco

In July, the Public Company Accounting Oversight Board (PCAOB) published a report highlighting opportunities for improvement when it comes to audits for public companies. 

As private companies experience challenges similar to those of public companies when reporting their financial outcomes, this report may also be useful for internal accounting personnel and external auditors in pinpointing high-risk reporting areas that require extra scrutiny. 

Previous data

The PCAOB examined sections of public companies’ financial statement audits and published those findings in the recent PCAOB Spotlight report, Staff Update and Preview of 2022 Inspection Observations. Several of the discrepancies for 2022 stem from intrinsically complex areas with higher risks of material misstatement. 

The seven most noteworthy statement deficiency areas were: 

  1. Revenue and related accounts
  2. Inventory
  3. Information technology
  4. Business combinations
  5. Long-lived assets
  6. Goodwill and intangible assets
  7. Allowances for loan and lease losses

Auditors should take advantage of this information to outline and perform more effective audits. 

Meanwhile, in-house accounting personnel and managers can leverage these findings to increase the accuracy of financial reporting, reduce the necessity of audit adjustments, and streamline engagement with external auditors.  

Concerns over crypto transactions

Cryptocurrency transactions stand out as an area of particular concern in the PCAOB report.

These transactions may involve:

  • Investing in cryptocurrency
  • Selling or purchasing cryptocurrency in exchange for U.S. dollars
  • Mining crypto in exchange for a “reward” or other payment 
  • Trading cryptocurrency assets 
  • Selling goods or services for cryptocurrency 
  • Purchasing services and goods with cryptocurrency 

Material digital asset holdings and engaging in significant activity related to digital assets create unique audit risks for companies, as demonstrated by the collapse of FTX. 

These risks may be attributed to a lack of transparency regarding the parties engaging in the transactions, as well as the purpose of them. High levels of volatility, fraud, theft, market manipulation, and legal uncertainties also play a role.

To mitigate these risks as much as possible, the PCAOB encourages using specialists and technology-based auditing tools in certain scenarios. 

Key takeaways

Both private and public companies are encouraged to take proactive measures to keep financial reports transparent and accurate, such as: 

  • Ramping up internal audit procedures in the high-risk areas identified by the report
  • Increasing management review and staff supervision 
  • Providing accounting personnel with additional training 

Companies should anticipate that external auditors will want to hone in on these areas and prepare for this by providing extra documentation to back up account balances, reporting procedures, and accounting estimates for high-risk items. 

Have Questions? Smolin can help.

If you need help navigating high-risk audit items or determining how the PCAOB findings may affect your company’s audit process, we’re here for you. Contact the team at Smolin to learn more.

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