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Traveling for business this summer? Here’s what you can deduct
Traveling for business this summer? Here’s what you can deduct 1275 750 smolinlupinco

If you and your employees are hitting the road for work-related travel this summer, there are several considerations to keep in mind. To claim deductions under tax law, you must meet specific requirements for out-of-town business travel within the United States. These rules apply if the business you’re conducting reasonably requires an overnight stay.

Note that, due to the Tax Cuts and Jobs Act, employees are unable to deduct their unreimbursed travel expenses on their own tax returns until 2025. This is because unreimbursed employee business expenses fall under the category of “miscellaneous itemized deductions,” which aren’t deductible until 2025.

With that said it’s also important to note that self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Rules that come into play

The actual cost of travel—things like plane fare and rides to the airport—are deductible for out-of-town business trips. You can also deduct the cost of lodging and meals. Your meals are deductible while you’re on the road, even if they’re not connected to a business conversation or related function.

There was a temporary 100% deduction for business food and beverages provided by a restaurant in 2021 and 2022, however, it was not extended to 2023. This means that there’s once again a 50% limit on deducting your eligible business meals this year. 

Please be aware that no deduction is allowed for meal or lodging expenses that are categorized as “lavish or extravagant,” a term that’s generally interpreted to mean “unreasonable.”

Any personal entertainment costs on your trip aren’t deductible, but business-related costs like dry cleaning, computer rentals, and phone calls can be written off.

Mixing business with pleasure

If your trip includes a mix of business and pleasure, you may need to make allocations. For instance, if you fly to a destination for four days of business meetings and stay an additional three days for vacation, only the expenses for meals, lodging, and other related costs incurred during your business days are deductible.

Note that if your business activities spanned over a weekend (say you had meetings Wednesday through Friday and again on Monday), the costs incurred during the weekend portion of your trip can still be deducted.

On the other hand, if the trip is primarily for business purposes, the entire cost of the travel, including plane fare and other expenditures, may be deducted without any allocations required. 

Remember that if the trip is largely personal, none of the travel costs are deductible. The amount of time spent on each aspect of the trip is a significant factor in determining whether it is primarily a business or personal trip, though this is not the sole factor.

If the trip does not involve actual business activities but is intended for attending a convention, seminar, or similar events, the IRS may closely scrutinize the nature of the meeting to ensure it is not just a disguised vacation. Keep any documentation that will aid in establishing the business or professional nature of your travel.

Other expenses

The rules for deducting the costs of a spouse accompanying you on a business trip are quite restrictive. No deduction is allowed unless the spouse is your employee or an employee of your company, and their travel is also for business reasons.

Finally, please be aware that personal expenses incurred at home as a result of the trip are not deductible. For example, if you need to board a pet or pay for babysitting while you’re on the road, this cost cannot be claimed as a deduction. 

Have questions? Smolin can help.

If you’re looking for ways to get the most benefit from your travel deductions this summer, contact the knowledgeable professionals at Smolin, and we’ll help you navigate all of the ins and outs of deducting travel expenses for your business.

Pay Attention to These DOs and DON’Ts When Deducting Business Meal and Vehicle Expenses
Pay Attention to These DOs and DON’Ts When Deducting Business Meal and Vehicle Expenses 1275 750 smolinlupinco

If you plan on claiming tax deductions for auto expenses or business meals, you should expect them to be closely reviewed by the IRS. 

In some situations, taxpayers may have incomplete documentation or try to create records months or years after the fact. In doing so, they fail to meet the strict substantiation requirements that exist under federal tax laws. 

Tax auditors are trained to root out inconsistencies, omissions, and errors in taxpayer records as is evidenced by a recent U.S Tax Court case involving a couple of unscrupulous taxpayers whose poor documentation of expenses came back to haunt them.

Details of the case

In this case, a married couple claimed over $13,000 in car and truck expenses, supported only by mileage logs that weren’t kept contemporaneously and were created using estimates instead of odometer readings. 

The court disallowed the entire reduction, stating that “subsequently prepared mileage records do not have the same amount of credibility as those made at or near the time the vehicle was used and supported by documentary evidence.”

The court observed that the taxpayers appeared to have tried to deduct their commuting costs. However, it stated that the “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which… are nondeductible.”

Taxpayers aren’t relieved of their obligation to substantiate business mileage, even if they opt to use the standard mileage rate of 65.4 cents per business mile instead of keeping track of actual expenses. 

The court also ruled that the couple was not entitled to deduct over $5,000 of meal, travel, and entertainment expenses due to the fact that they didn’t meet the strict substantiation requirements of the tax code. (See TC Memo 2022-113).

Stay on the right track

The case mentioned above is an example of why it’s essential to maintain precise records to support business expenses for vehicle and meal deductions. Here’s a list of “DOs and DON’Ts” to assist you in meeting the strict IRS and tax law substantiation requirements for these write offs.

DO maintain meticulous and accurate records. For every expense, you need to document the amount, date, location, business purpose, and the business relationship with any individual for whom you provided a meal. If you have employees whom you reimburse for meals and auto expenses, ensure they’re in compliance with all the rules.

DON’T reconstruct your expense logs at the end of the year or wait to do so until you get a notice from the IRS. Take the time to record the details in a log or diary or on a receipt at the time of the event or soon thereafter. Require your employees to submit monthly expense reports.

DO recognize the clear distinction between personal and business expenses. Be careful about trying to combine business and pleasure. Your business checking account shouldn’t be used for any of your personal expenses.

DON’T be surprised if the IRS requires you to prove your deductions. Vehicle and meal expenses attract a great deal of attention. Be prepared to substantiate your claims in the event of a challenge.

Have questions? Smolin can help

With help from the professionals at Smolin, your tax records will stand up to scrutiny by the IRS. There may even be opportunities to substantiate deductions that you haven’t thought of, as well as a way to estimate certain deductions (under the Cohan rule) if your records are lost to theft, flood, fire, or other disaster.

Contact us today to make sure you keep your business in the clear when writing off expenses.

Reporting Non-GAAP Measures
Reporting Non-GAAP Measures 1275 750 smolinlupinco

Generally Accepted Accounting Principles (GAAP) is commonly known as the benchmark for financial reporting in the United States. However, both public and private entities occasionally use non-GAAP metrics in their press releases and disclosures or when seeking financing.

GAAP vs. Non-GAAP

GAAP comprises a framework of rules and procedures that accountants typically follow to record and summarize business transactions. These guidelines establish the basis for consistent, accurate, and fair financial reporting. While private companies are not generally obligated to comply with GAAP, many choose to do so. Public companies, on the other hand, have no choice—they’re required by the Securities and Exchange Commission to follow GAAP. 

The use of non-GAAP measures has grown over the years, and some executives and investors maintain that certain unaudited figures provide a more meaningful representation of financial performance compared to customary earnings figures reported under the GAAP. With that said, it’s crucial to understand what’s included and excluded to avoid making misinformed investment decisions.

Spotlight on EBITDA

One prominent example of a non-GAAP metric is earnings before interest, taxes, depreciation, and amortization (EBITDA). This metric was created in the 1970s to help investors assist in forecasting a company’s long-term profitability and cash flow. EBITDA is considered one of the most valuable benchmarks investors use when evaluating a company that is being bought or sold. 

Unfortunately, some companies manipulate EBITDA figures by omitting certain costs, such as stock or options-based compensation, which are undeniably a cost of doing business. This practice has made it difficult for investors and lenders to make accurate comparisons and understand the items that have been removed.

Last year, the Financial Accounting Standards Board (FASB) added a project to its research agenda to explore the standardization of key performance indicators (KPIs) within the existing regulatory framework, including the development of a standardized definition for EBITDA. During a March meeting of the Financial Accounting Standards Advisory Council, senior accountants assessed the feasibility of establishing a GAAP definition of EBITDA for use as either a one-size-fits-all formula or as a starting point for companies to make adjustments based on their specific business requirements.

For instance, a company might tailor its EBITDA calculation to align with the definition specified in its loan agreements. Any modifications to EBITDA would need to be transparently disclosed in the company’s footnotes.

Adopt a balanced approach

Many organizations opt to report EBITDA and other non-GAAP metrics to help stakeholders and investors make better-informed choices. However, it is crucial for these entities to avoid making assertions that could potentially mislead investors and lenders. 

Have questions? Smolin can help

If you’re unsure of how the regulations on reporting non-GAAP measures will affect your business, or if you want to know more about which reporting style works best for you, contact our team of professionals at Smolin and let us walk you through the ins and outs of these rules.

Beware of the Gray Areas in Accounting
Beware of the Gray Areas in Accounting 1275 750 smolinlupinco

Recent high-profile bank failures have raised concerns about the reliability of accounting auditing standards. U.S. government agencies are still investigating the reasons behind the collapses of Silicon Valley Bank and Signature Bank earlier this year. 

However, it’s likely that these banks exploited some gray areas in the accounting rules to make them appear more economically secure in their year-end financial statements than they actually were. 

Learning from Enron

Andrew Fastow often speaks publicly about issues concerning financial misstatement. A convicted felon, Fastow has a unique experience with fraud: He was the CFO of Enron in October 2001, when it the company became famous for the largest U.S. bankruptcy case of its time. 

Fasto recently addressed the Public Company Accounting Oversight Board (PCAOB), which was established by the Sarbanes-Oxley Act of 2002 to prevent future scandals like Enron. He recommended that the PCAOB consider revising the accounting and auditing rules to deter corporate fraud. 

Rather than solely focusing on detecting deliberate fraudulent activities, Fastow urged the PCAOB to pay attention to the “fraud that arises from exploiting loopholes resulting from the ambiguity and complexity of the rules.” According to Fastow, this scenario played out in the Enron case, where misleading information was often a consequence of exploiting the complexities of the rules rather than intentionally reporting false numbers.

Compliance vs. reality

To illustrate how companies can exploit the complexities of accounting rules, Fastow provided a good example of how financial statements that are fully compliant with regulations can deviate from economic reality. 

Here is that example: In 2014, the average price of oil was $95 per barrel, and although the price hovered around $110 for most of the year and dropped to $50 at the end of the year, companies were required under the accounting rules of that time to calculate an average based on the price on the first day of each of the preceding 12 months. This calculation resulted in an average of $95 per barrel despite the market price being $50 when oil and gas companies issued their financial statements.

All oil and gas companies followed this rule, reporting reserves based on $95 per barrel even though the market price had dropped precipitously to $50 by the end of the year. Consequently, they massively overstated their economically recoverable reserves, a critical metric used by Wall Street when evaluating independent oil and gas companies. 

Fastow concluded that the prevailing mindset was that as long as the rules were being followed, the misleading nature of certain financial statements was deemed inconsequential.

A complex problem

A founding member of the PCAOB, Charles Niemeier, has acknowledged that resolving the issue of financial reporting fraud extends far beyond simply revising auditing standards. The challenge becomes even more daunting when dealing with financial reporting matters that rely on subjective judgments.

For example, accounting estimates can be based on subjective or objective information involving varying degrees of measurement uncertainty. Some examples of accounting estimates include allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets. While certain estimates may be straightforward, many are inherently subjective or intricate.

Another area prone to manipulation is the going concern assessment, which forms the foundation of all financial reporting, according to the U.S. Generally Accepted Accounting Principles. 

The accounting rules grant company management the final responsibility for determining whether or not there is substantial doubt about the company’s ability to continue as a going concern and disclosing the related information in footnotes. The standard provides management with guidance that aims to reduce the inconsistencies in the timing and content of disclosure commonly found in footnotes.

Misrepresentation of finances can occur in a variety of ways when executives seek to exploit the ambiguous aspects of financial reporting for their own benefit, particularly as regulations have transitioned from historical cost in favor of fair value estimates.

Have questions? Smolin can help

When making subjective estimates and evaluating the going concern assumption, it’s important to step back and ask whether your institution’s financial statements, even while they are in compliance with regulations, could potentially mislead investors. 

If you have questions about these issues, contact our team of professionals at Smolin, and we’ll help you understand the rules and assess current market conditions.

Important Tax News for Investors and Users of Cryptocurrency
Important Tax News for Investors and Users of Cryptocurrency 1275 750 smolinlupinco

If you use or invest in cryptocurrency, you may have seen something new on your tax return this year. And you may soon discover a new form reporting requirements for digital assets. 

Make sure you check the box

Starting from tax year 2022, taxpayers are required to check a box on their tax returns that indicates whether or not they received digital assets as a reward, award, or payment for services or property, or whether they disposed of any digital assets that were held as capital assets through exchanges, sales, or transfers. 

If you check the “yes” box, then you’re required to report all income related to any digital asset transactions.

A new information form for crypto users

According to the information recording rules, all brokers must report transactions in securities to both investors and the IRS. These transactions are reported on form 1099-B. Legislation enacted in 2021 extended these rules to crypto exchanges, custodians and platforms, as well as digital assets like cryptocurrency. 

These new requirements were set to be effective for returns required to be filed, and statements required to be furnished for transactions after 2022, but the IRS has since postponed the effective date until it issues a set of final regulations that provides instructions. 

In addition to extending this reporting requirement to cryptocurrency, the legislation also extends cash reporting rules for payments of $10,000 or more to cryptocurrency. This means that any business that accepts crypto payments of $10,000 or more is required to report those payments to the IRS on Form 8300. The rules apply to any transaction taking place in 2023 and beyond. 

Current rules and new reporting for digital assets

Currently, if you have a stock account, whenever you sell securities, you are issued a Form 1099-B. This form requires your broker to report details of transactions like sale proceeds, relevant dates, and your tax basis for the sale and the gain or loss. 

The 2021 legislation expanded the definition of “brokers” who are required to provide Form 1099-B to include businesses that regularly provide services involving the transfer digital assets on behalf of another individual. Once the IRS finalizes these regulations, any platform where you buy and sell crypto will be required to report digital asset transactions to you and the IRS.

These platforms and exchanges will be required to gather information from their customers so that they can issue Form 1099-B. They will need customers’ names, addresses, and phone numbers; the gross proceeds from sales, capital gains, or losses; and information on whether they were short or long-term proceeds.

It’s important to note that it’s not yet known whether the platforms or exchanges will be required to file Form 1099-B or a new IRS form.

Cash transaction reporting

Under another set of rules that are separate from the broker reporting rules, when a business receives over $10,000 in cash, it is required to report the transaction to the IRS, including the identity of the person from whom the cash was received. This is reported on Form 8300, and for this reporting requirement, businesses will need to treat digital assets the same as cash.

Form 8300 requires reporting information like occupation, address, and a taxpayer identification number. Current rules that apply to cash are usually applied to in-person payment in actual cash. This could make it difficult for businesses to comply with reporting rules when collecting the information needed for crypto transactions.

What you should know

If you’re using a crypto platform or exchange that hasn’t already collected a Form W-9 from you, expect it to do so in the future. Aside from collecting information from customers, these businesses will be required to begin tracking holding periods and buy-and-sell prices of any digital assets in customer accounts.

Stay up to date with Smolin 

If you want to find out how these new tax rules will affect you or your business, contact the knowledgeable professionals at Smolin for more information.

Simple Options for Retirement Savings Plans that can Benefit your Small Business
Simple Options for Retirement Savings Plans that can Benefit your Small Business 1275 750 smolinlupinco

If you’re considering creating a retirement plan for yourself and your employees but you’re concerned about the cost and administrative hurdles involved, take heart: there are some good options available to you. 

In this article, we’ll explore two types of plans that small business owners can use to get the ball rolling with retirement: Simplified Employee Penson (SEP) and Savings Incentive Match Plan for Employees (Simple).

A SEP is designed to be a viable alternative to “qualified” retirement plans and is geared toward small businesses. The relative ease of administration with this plan and your decision as an employer on whether or not to make annual contributions are two features of the plan that can be appealing to business owners. 

SEP setup can be easy for business owners

If your business doesn’t already have a qualified retirement plan, you can set up a SEP by using the IRS model SEP, Form 5305-SEP. When you adopt and implement this model SEP, which isn’t required to be filed with the IRS, you will satisfy the SEP requirements. 

This means that as the employer, you’ll get a current income tax deduction for the contributions you make on behalf of your employees. Employees won’t be taxed when contributions are made but will be taxed in the future when they receive distributions, typically at retirement. 

Depending on your requirements, an individually designed SEP might be a better choice for you than the model SEP.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to every employee’s IRA, known as a SEP-IRA, which are required to be approved by the IRS. The maximum amount of deductible contributions one can make to an employee’s SEP-IRA (and that the employee can exclude from income) is the lesser of either 25% of compensation or $66,000 for 2023. 

The deduction for your contributions to your employee’s SEP-IRA isn’t limited by the deduction ceiling that’s applicable to an individual’s contribution to a regular IRA. Your employees have control over their individual IRAs and IRA investments, on which the earnings are tax-free.

There are additional requirements that must be met in order to be eligible to set up a SEP: 

  • All regular employees must elect to participate in the program 
  • Contributions must not discriminate in favor of highly compensated employees

The requirements for creating a SEP are minor, though, compared to the administrative and bookkeeping burdens that come with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans are required to maintain in order to comply with complex nondiscrimination regulations are not not necessary with a SEP. Employers aren’t required to file annual reports with the IRS (which, in the case of a pension plan, could require the services of an actuary). Instead, all required recordkeeping can be handled by a trustee of the SEO-IRAs, usually a mutual fund or a bank.

Consider SIMPLE plans

Another viable option for businesses with fewer than 100 employees is a SIMPLE plan. With these plans, a “SIMPLE IRA” is established for each eligible employee. The employer makes matching contributions based on the contributions chosen by participating employees under a qualified salary reduction arrangement.

Like a SEP, a SIMPLE plan also comes with much less stringent requirements than traditional qualified retirement plans. 

Another option is for an employer to adopt a “simple” 401(k) plan, with features similar to a SIMPLE pan, which creates an automatic passage over the otherwise complex nondiscrimination test for 401(k) plans.

For 2023, SIMPLE deferrals are allowed up to $15,500 plus an additional $3,500 for catch-up contributions available to employees aged 50 and older.

Questions about retirement savings? Smolin can help.

If you’re looking for manageable options to help create retirement plans for yourself of your employees, contact Smolin today. Our knowledgeable team of accounts can help you decide which plan works best for you and walk you through the process.

New and Improved Accounting Rules for Common Control Leases
New and Improved Accounting Rules for Common Control Leases 1275 750 smolinlupinco

On March 27, 2023, the Financial Accounting Standards Board (FASB) published narrowly drawn amendments to the lease accounting rules. This updated guidance clarifies issues pertaining to rental agreements between businesses with the same owner.

Written vs. verbal leases

Accounting Standards Update (ASU) No. 2023-01, Leases (Topic 842) Common Control Arrangements, explains how related business entities controlled by the same owner determine whether a lease exists. 

This guidance settles questions about how to approach verbal common control leases and whether legal counsel is required to determine the terms and conditions of a lease. Specifically, it gives an optional practical expedient to private businesses and not-for-profit organizations that aren’t conduit bond obligors. (A practical expedient is an accounting workaround that enables a business to use a more straightforward route to end up with the same outcome.)

The practical expedient is only applicable for written leases. Under the updated guidance, a business electing to use the practical expedient must follow the written terms and conditions of a common control arrangement to determine whether a lease exists and how to account for it. 

With a verbal lease agreement, as is typically the case between private entities under common control, the company must document the existing unwritten terms of the agreement before applying these lease accounting rules.

The lessee isn’t required to determine whether written terms and conditions are enforceable when applying the practical expedient. Additionally, businesses can use the practical expedient on an arrangement-by-arrangement basis.

Leasehold improvements

The accounting rules for certain leasehold improvements have also changed for public and private organizations under ASU 2023-01. Examples of leasehold improvements include:

  • Installing carpet 
  • Painting
  • Building out the space for the lessee’s needs

For example, a salon might install new plumbing fixtures and sinks, a chemical manufacturer could require ventilation for its production process, and a neighborhood restaurant may create a rooftop garden to attract new customers.

Under these amendments, lessees must amortize leasehold improvements over the improvements’ useful lives to the common control group, regardless of lease terms.

When the lessee no longer controls the underlying asset, the transfer of those improvements must be accounted for with either net asset or equity. The improvements will remain subject to the impairment requirements of Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment.

Guidance for implementation

ASU No. 2023-01 is an amendment to ASC Topic 842, Leases, which was issued in 2016. It went into effect for public entities in 2019 and for private entities in 2022. This standard requires the full effect of entities’ long-term lease obligations to be reported on the balance sheet.

Starting on December 15, 2023, the updated regulations will be implemented for this and subsequent fiscal years. If a company decides to adopt these modifications during an interim period, it must be done at the beginning of the fiscal year that includes that interim period. However, early adoption is allowed for both interim and financial statements that have yet to be issued. 

If your business opts to adopt ASU 2023-01 concurrently with the adoption of Topic 842, you should use the same transition approach as this standard. If your company chooses to adopt these rules in a subsequent period, it must do this prospectively or retrospectively.

Need help understanding these rules? Get in touch. 

If your company rents from a related party, we can help you report these arrangements in alignment with this updated guidance. The accounting professionals at Smolin Lupin know how to determine whether a common control lease exists and how to report improvements and other fixes made to rented property.

If You Inherit Property, You Can Benefit From a “Stepped-Up Basis”
If You Inherit Property, You Can Benefit From a “Stepped-Up Basis” 1275 750 smolinlupinco

One of the most common questions for people planning their estates or inheriting assets is: What is the “cost” (or “basis”) a person gets in property that is inherited from someone else? This vital area is often overlooked when families start planning for the future.

According to the fair market value basis rules (otherwise known as the “step-up” and “step-down” rules), an heir can receive a basis in inherited assets equal to their date-of-death value. For example, if your uncle bought shares in an oil stock in 1942 for $500 and the stock was worth $5 million at the time of his death, the basis would be stepped up to $5 million for your uncle’s heirs, which means that the gain on the stock would escape income taxation forever.

Fair market value basis rules apply to any inherited property that can be included in the gross estate of the deceased individual, whether or not a federal estate tax return was filed. The rules apply even to property inherited from foreign individuals not subject to U.S. estate tax. 

Fair market value basis rules also apply to the inherited portion of the property jointly owned by the inheriting taxpayer and the deceased, but not to the portion of the jointly held property that the inheriting taxpayer owned prior to their inheritance. They don’t apply to reinvestments of estate assets on the part of fiduciaries. 

Lifetime gifting

It’s important to understand the fair market value basis rules so that you can avoid paying more tax than you’re legally required to.

For example, in the previous scenario, if your uncle instead decided to make a gift of the stock during his lifetime (rather than passing it down to his heirs when he died), the “step-up” in basis (from $500 to $5 million) would be lost.

Property acquired as a gift that has increased in value is subject to the “carryover” basis rules. This means that the person who received the gift takes the same basis the donor had in it ($500 in this example), plus a portion of any gift tax the donor pays on the gift. 

If someone dies owning property that has declined in value, a “step-down” occurs. In this case, the basis is lowered to the date-of-death value. Sound financial planning can help avoid this loss of basis, and it’s important to note that giving away the property before death won’t preserve the basis. 

Why is that? Because when a property that has gone down in value is given as a gift, the person who receives the gift must use the date of gift value as the basis for determining their loss on a later sale. An excellent strategy for handling a property that has declined in value is for the owner to sell it before death so they may enjoy the tax benefits of the loss. 

Have questions? Smolin can help

We’ve covered the basic rules here, but other rules and limits may apply. For example, in certain cases, a deceased person’s executor may be able to make an alternate valuation election, and gifts made just before a person died may be included in the gross estate for tax purposes. 

If you’re wondering how you can benefit from a “stepped-up basis” or need guidance with planning your estate, contact the knowledgeable professionals at Smolin. We’re ready to guide you through complicated tax laws to ensure you miss out on possible savings for your estate or inheritance.

Tax Rules for Donating Artwork to Charity
Tax Rules for Donating Artwork to Charity 1275 750 smolinlupinco

If you’re an art collector, you may be curious about the tax breaks that come with donating a work of art to charity. You should be aware that many different tax rules come into play when making these kinds of contributions.

Basic rules

A deduction for a donation of art can be reduced if the charity you donated to uses the art for a purpose or function that’s unrelated to the reason for its qualification as a tax-exempt organization. The reduction will be equal to the amount of capital gain you would have received if you sold the property instead of donating it.

Example: You bought a sculpture six years ago for $10,000, and it’s now worth $20,000. You contribute it to a charitable foundation. Your deduction is limited to $10,000 because the foundation’s use of the sculpture is unrelated to its charitable function, and you would have had a $10,000 long-term capital gain if you had sold it.

But what if you donated the sculpture to an art museum? In this instance, your deduction would be $20,000.

Substantiation requirements

There are substantiation rules that apply when you donate a work of art to charity. First, if you claim a deduction of less than $250, you’re required to obtain and keep a receipt from the charity, and you must keep records for any item you contributed.

If you claim a deduction of at least $250, but not more than $500, you’re required to obtain an acknowledgment of your contribution from the group you donated it to. The acknowledgment must state whether the organization gave you any goods or services in exchange for your donation and include a description with a good-faith estimate of the value. 

If you claim a deduction of more than $500, but less than $5,000, you’ll need to maintain records that include information about how and when you obtained the artwork and its cost basis in addition to getting an acknowledgment. You are also required to complete an IRS form and attach it to your tax return.

If the claimed value of the property you donated is more than $5,000, you must have an appraisal of the property in addition to the acknowledgment. Your appraisal must be completed by a qualified appraiser no more than 60 days before the date of the contribution and meet other requirements. You must include information about these donations on the IRS form you send with your tax return. 

If the total of your deduction is more than $20,000, you must attach a copy of the signed appraisal, and the IRS may require you to include a photograph. If the item has been appraised at $50,000 or more, you can request that the IRS issue a “Statement of Value,” which can be used to substantiate the value of your donation.

Percentage limitations

Additionally, your tax deduction may be limited to 20%, 30%, 50%, or 60% of your contribution base, which is typically your adjusted gross income. Percentages vary depending on the year in which the contribution is made, the type of organization, and whether the deduction was required to be reduced based on the unrelated use rule described above. The amount not deductible because of a ceiling may be deductible in the next year under carryover rules.

Partial interest gifts 

Sometimes donors make gifts of partial interests in artwork. For instance, a donor may contribute a 50% interest in a piece of artwork to a museum, with the agreement that the museum will exhibit it for six months of the year, and the donor will retain possession of it for the following six months. There are special requirements that apply to these donation agreements.

Make sure you get the most from your donations with Smolin

If you’re unsure of how to claim deductions for artwork you may have donated this tax year, or if you have further questions about how these deductions work, contact us for more information. 

Give Your Trusts New Life by Decanting Them
Give Your Trusts New Life by Decanting Them 1275 750 smolinlupinco

Creating flexibility within your estate plan using different strategies is worth considering when planning for the future. Because life circumstances can change over time (especially those involving tax laws and family situations), it’s important to use techniques to provide greater flexibility for your trustees. One such method is decanting a trust.

What is decanting?

Decanting usually refers to pouring wine or another liquid from one container into another. In estate planning terms, it means “pouring” assets from one trust into another with modified terms. 

The idea behind decanting is that if a trustee has discretionary power to distribute trust assets among that trust’s beneficiaries, they also have the ability to distribute those assets into another trust.

Depending on the language of the trust and the provisions of applicable state law, decanting may enable the trustee to:

  • Change the number of trustees or alter their powers
  • Add or enhance spendthrift language to protect the trust assets from creditors’ claims
  • Move funds to a special needs trust for a disabled beneficiary
  • Correct errors or clarify trust language
  • Move the trust to a state with more favorable tax or asset protection laws
  • Take advantage of new tax laws
  • Remove beneficiaries

In contrast to assets transferred at death, assets transferred to a trust to receive a stepped-up basis, so they can subject beneficiaries to capital gains tax on any appreciation in value. A potential solution to this problem is decanting.

Decanting can authorize a trustee to confer a general power of appointment over the assets to the trust’s grantor, causing the assets to be included in the grantor’s estate, and therefore, eligible for a stepped-up basis.

Stay compliant with your state’s laws

Many states have decanting statutes, and in some states, decanting is authorized by common law. No matter the situation, it’s essential to understand your state’s requirements. For example, in certain states, the trustee is required to notify the beneficiaries or even obtain their consent to decant a trust. Even if decanting is permitted, there may be limitations on its uses. 

Some states, for example, bar the use of decanting to remove beneficiaries or add a power of appointment, and most states won’t allow the addition of a new beneficiary. If your state doesn’t allow decanting, or if its decanting laws don’t allow you to achieve your goals, it may be possible to move the trust to a state whose laws are more aligned with your needs.

Be aware of tax implications

One of the risks associated with decanting is uncertainty over its tax implications. 

For example, a beneficiary’s interest is reduced. Have they made a taxable gift? Does it depend on whether the beneficiary has consented to decanting? If the trust language allows decanting, is the trust required to be treated as a grantor trust? Does such language jeopardize the trust’s eligibility for marital deduction? Does the distribution of assets from one trust to another trigger capital gains or other income tax consequences to the trust or its beneficiaries?

Create more flexibility in your trust with Smolin

If you want to create more flexibility with an irrevocable trust or have any questions about the tax implications of your situation, contact us for more information. 

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in NJ & FL | Smolin Lupin & Co.