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

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

What should I do if I receive a tax notice?

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

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

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

How far back can I file unfiled tax returns?

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

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

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

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

What are my options if I owe back taxes?

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

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

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

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


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

Can tax penalties be reduced or removed?

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

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

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

Why are payroll tax-withholding problems so serious?

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

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

How can I avoid future tax problems?

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

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

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

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

Does your business qualify for the cash method?

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

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

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

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

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

How do the methods differ?

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

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

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

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

Is it time for a change?

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

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

To learn more, contact your Smolin representative.

 

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

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

Downsides (and upsides) of probate

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

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

Simple strategies to avoid probate

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

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

Strategies for homes and other real estate

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

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

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

Strategies using trusts

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

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

Making it easy for your family

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

To learn more, contact your Smolin representative.

 

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

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

Why the distinction matters

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

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

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

Potential safe harbors for profitable ventures

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

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

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

Factors that demonstrate a profit motive

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

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

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

Year-by-year determination

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

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

Start planning now

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

To learn more, contact your Smolin representative.

 

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

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

Filing basics

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

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

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

  1. Home office

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

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

  1. Education

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

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

  1. Business meals

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

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

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

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

  1. Business travel

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

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

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

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

  1. Business vehicle expenses

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

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

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

Don’t leave tax savings on the table

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

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

To learn more, contact your Smolin representative.

 

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

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

Traditional vs. Roth deferrals

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

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

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

How after-tax contributions are different

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

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

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

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

After-tax contributions in action

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

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

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

Beyond elective deferrals

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

To learn more, contact your Smolin representative.

 

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

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

Rules and restrictions

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

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

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

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

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

Is your income too high to qualify?

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

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

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

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

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

Additional benefits

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

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

Bottom line

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

To learn more, contact your Smolin representative.

 

  • Noelle Merwin
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Tax News: Amending Personal Income Tax Returns
Tax News: Amending Personal Income Tax Returns 266 266 Noelle Merwin

It is estimated that five million amended income tax returns are filed with the IRS annually. There are various circumstances why an amended Federal income tax return is filed by an individual taxpayer including:

•    To correct an error discovered after filing
•    Receipt of a corrected 1099 form, often from brokerage firms
•    Receipt of a third-party document such as a K-1 or 1099 form after filing
•    Receipt of an amended K-1 from a trust, estate, partnership or S corporation
•    To carryback credits in certain situations
•    To change one’s filing status – note that one cannot change from married joint to married separate after the due date.

There are circumstances where a Federal amended tax return also leads to the filing of amended state income tax returns. On the other hand, sometimes an amended state income tax return will be filed without the filing of an amended Federal income tax return. Case in point is where a nonresident personal income tax return is audited resulting in an increase in the nonresident tax liability. This often leads to a refund opportunity via the filing of an amended state income tax return for the resident state via claiming an increase in the credit for taxes paid to other jurisdictions.

The general time period for filing an amended income tax return is three years. If the original income tax return was filed prior to April 15 it is deemed filed on April 15. If the original income tax return was filed on extension, the three-year period is measured from the actual filing date. These rules apply not only for Federal purposes but for both New Jersey and New York. To illustrate, if an individual filed their 2022 personal income tax returns without going on extension, those income tax returns are deemed filed April 15, 2023. Thus, the three-year period has just expired. This not only applies to refunds but to tax deficiencies.

The IRS as well as the states have six years to conduct an audit if it is determined that there was an omission of gross income exceeding 25% of the reported gross income. For example, a taxpayer reports $400,000 of gross income. If it determined that there was an omission of income exceeding $100,000 then the statute of limitations becomes six years. Taxpayers cannot use this longer period to file amended tax returns.

If you have questions or need assistance, please contact your Smolin representative.

  • Noelle Merwin
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Debt vs. Equity: Why the Way Shareholders Fund a C Corporation Matters for Taxes
Debt vs. Equity: Why the Way Shareholders Fund a C Corporation Matters for Taxes 266 266 Noelle Merwin

If you operate your business as a C corporation, how you put money into your company — and how you take it back out — can have a major impact on your tax bill. Payments from shareholders to fund the business can either be classified as capital contributions (equity) or shareholder loans (debt). That might sound like an accounting technicality, but it has real tax consequences because our federal income tax system treats corporate debt more favorably than corporate equity. Put simply, equity can lead to double taxation; loans can help you avoid it.

Why it matters

Companies occasionally need capital infusions. Start-ups need cash to help get the business up and running. And established businesses may need additional funds to pursue growth opportunities or cover short-term cash flow gaps. If your business needs money, you could seek financing from a third-party lender. But for closely held businesses, shareholders are often a more convenient (and affordable) source of financing.

Some closely held C corporations are funded exclusively with equity, but many are intentionally structured with a mix of equity and shareholder loans. Lending money to your corporation can be a tax-smart move over the long run.
That’s because when you later get your money back out of the corporation in the form of loan repayments, the repayments of loan principal will generally be tax-free. Interest payments on a shareholder loan are taxable to you as ordinary income, but the corporation gets an offsetting deduction. In essence, shareholder loans provide a built-in, tax-advantaged mechanism for C corporation owners to get cash out of the business.

In contrast, making a capital contribution (a stock investment) can be costly from a tax perspective. When you later, as an equity investor, want to take cash out of the corporation, the withdrawals may be treated as nondeductible dividends to the extent of the corporation’s earnings and profits. This results in double taxation.
In other words, the corporation already paid income taxes on the profits (at a flat 21% rate), and you as a shareholder must pay individual-level taxes on the dividends. The maximum federal rate on qualified dividends is 20%, but most taxpayers pay 15%. Individuals may also owe the 3.8% net investment income tax (NIIT) on dividends.

How it works

Suppose your C corporation needs a $5 million capital infusion. As the sole shareholder, you ante up with a $2 million capital contribution and a $3 million loan. You execute a formal, written note that specifies the loan terms, including the interest rate, maturity date, any collateral pledged to secure the loan and a repayment schedule.

If the interest rate on your loan to the company equals or exceeds the applicable federal rate (AFR), you’ll avoid federal income tax complications and possible adverse tax results. AFRs can change monthly. In April 2026, the monthly AFR for mid-term loans with terms of three to nine years is only 3.75%. This is significantly lower than the rate you’d get from a third-party lender.
This capital structure allows you to recover $3 million of your investment in the company as tax-free repayments of loan principal. The interest payments give you additional cash from the corporation without double taxation, because your company can deduct the interest.
If you instead supply the full $5 million as a capital contribution and later want to withdraw money, all or part of the withdrawal could be treated as a double-taxed dividend.

For instance, say you withdraw $3 million after a few years, and the entire amount is treated as a taxable dividend. Assuming you’d be subject to the maximum 20% federal income tax rate and the 3.8% NIIT, you’d owe Uncle Sam $714,000 on the withdrawal ($3 million × 23.8%). You could have avoided incurring that tax liability by making a $2 million capital contribution and a $3 million loan to the corporation.

Bottom line

Structuring part of a needed capital infusion as a loan — rather than all equity — can minimize double taxation, giving you a more tax-efficient way to access cash in the future. But this arrangement only works if it’s properly documented and respected as bona fide debt. This includes:

  1. drafting a written promissory note with a stated interest rate and stated repayment dates, and
  2. making timely principal and interest payments. The IRS may reclassify shareholder loans as equity if they’re not properly structured, thereby eliminating the intended tax benefits.

If you’d like to take advantage of this strategy, contact your Smolin representative to explain your options and help you structure the loan to reduce the chance of IRS reclassification.

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