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Does a FAST Fit into Your Estate Plan?
Does a FAST Fit into Your Estate Plan? 850 500 smolinlupinco

Traditional estate planning often focuses on minimizing gift and estate taxes while protecting your assets from creditors or lawsuits. While these are important considerations, many people also hope to create a lasting legacy for their family.

Dovetailing with the “technical” goals of your estate plan, such “aspirational” goals might include preparing your children or grandchildren to manage wealth responsibly, promoting shared family values and encouraging charitable giving. A Family Advancement Sustainability Trust (FAST) is one way to ensure your estate plan meets your objectives while informing your advisors and family of your intentions. 

FAST funding options

A well-structured estate plan can protect your assets while aligning with your family values and goals. Establishing a FAST can bridge the gap between those objectives.

A FAST typically requires minimal up-front funding, instead being primarily funded with life insurance or a properly structured irrevocable life insurance trust (ILIT) upon the grantor’s death. This lets you maximize the impact of your trust without depleting your current assets. 

4 decision-making entities

FASTs are typically created in states that 1) allow perpetual, or “dynasty,” trusts to benefit future generations, and 2) have directed trust statutes, making it possible to appoint an advisor or committee, making it possible for family members and trusted advisors to participate in the governance and management of the trust.

To ensure effective management and decision-making, a FAST often includes four key roles:

  1. An administrative trustee oversees day-to-day operations and administrative tasks but doesn’t handle investment or distribution decisions.
  2. An investment committee typically consists of family members and an independent, professional investment advisor who collaboratively manage the trust’s investment portfolio.
  3. A distribution committee which determines how trust funds are used to support the family and helps ensure that funds are spent in a way that achieves the trust’s goals.
  4. A trust protector committee essentially takes over the role of the grantor after death and makes decisions on matters such as the appointment or removal of trustees or committee members and amendments to the trust document for tax planning or other purposes.

Bridging the leadership gap

In many families, the death of the older generation creates a leadership vacuum and leads to succession challenges. A FAST can be particularly beneficial for families looking to help avoid a gap in leadership and establish a leadership structure that can provide resources and support for younger generations.

Consult with a Smolin advisor to discuss if including a FAST in your estate plan is the right choice for your family.

Could Borrowing From Your Corporation Equal Lower Rates, Bigger Risks?
Could Borrowing From Your Corporation Equal Lower Rates, Bigger Risks? 850 500 smolinlupinco

Did you know that you can borrow funds from your own closely held corporation at rates much lower than those charged by a bank? This strategy can be advantageous in some aspects but careful planning is crucial to avoid certain risks.  

The Basics

Interest rates have risen sharply over the last couple of years, making this strategy more attractive. Rather than pay a higher interest rate on a bank loan, shareholders can opt to take loans from their corporations. 

This option—with its lower interest rates—is available thanks to the IRS’s Applicable Federal Rates (AFRs) which are typically more budget-friendly than rates offered by banks. If the charged interest falls short of the AFRs, adverse tax results can be triggered.

This borrowed money can be used for a variety of personal expenses, from helping your child with college tuition to tackling home improvement projects or paying off high-interest credit card debt. 

Two Traps to Avoid

1. Not creating a genuine loan 

The IRS needs to see a clear-cut borrower-lender relationship. If your loan structure is sloppy, the IRS could reclassify the proceeds as additional compensation, which would result in an income tax bill for you and payroll tax for you and your corporation. However, the business would still be able to deduct the amount treated as compensation as well as the corporation’s share of related payroll taxes.

On the other hand, the IRS can claim that you received a taxable dividend if your company is a C corporation, triggering taxable income for you with no offsetting deduction for your business.

It’s best to create a formal written loan agreement to establish your promise of repayment to the corporation either as a fixed amount under an installment schedule or on demand by the corporation. Be sure to document the terms of the loan in your corporate minutes as well.

2. Not charging sufficient interest

To avoid getting caught in the IRS’s “below-market loan rules” make sure you’re charging an interest rate that meets or exceeds the AFR for your loan term. One exception to the below-market loan rules is if aggregate loans from corporation to shareholder equal $10,000 or less.

Current AFRs

The IRS publishes AFRs monthly based on current market conditions. For loans made in July 2024, the AFRs are:

  • 4.95% for short-term loans of up to three years,
  • 4.40% for mid-term loans of more than three years but not more than nine years, and
  • 4.52% for long-term loans of over nine years.

These rates assume monthly compounding of interest. However, the specific AFR depends on whether it’s a demand loan or a term loan. Here’s the key difference: 

  • Demand loans allow your corporation to request repayment in full at any time with proper notice.
  • Term loans have a fixed repayment schedule and interest rate set at the loan’s origination based on the AFR for the chosen term (short, mid, or long). This type of loan offers stability and predictability to both the borrower and the corporation.

Corporate Borrowing in Action

Imagine you borrow $100,000 from your corporation to be repaid in installments over 10 years. Right now, in July 2024, the long-term AFR is 4.52% compounded monthly over the term. To avoid tax issues, your corporation would charge you this rate and report the interest income.

On the other hand, if the loan document states that the borrowed amount is a demand loan, the AFR is based on a blended average of monthly short-term AFRs for the year. If rates go up, you need to pay more interest to avoid below-market loan rules. And, if rates go down, you pay a lower interest rate.

From a tax perspective, term loans for more than nine years are because they lock in current AFRs. If interest rates drop, you can repay the loan early and secure a new loan at the lower rate.

Avoid adverse consequences

Shareholder loans are complex, especially in situations where the loan charges below-AFR interest, the shareholder stops making payments, or your corporation has more than one shareholder. Contact a Smolin advisor for guidance on how to proceed in your unique circumstance.

Maximize Giving and Minimize Taxes with the Power of Qualified Charitable Distributions
Maximize Giving and Minimize Taxes with the Power of Qualified Charitable Distributions 850 500 smolinlupinco

Are you a philanthropic person nearing or past retirement age and facing required minimum distributions (RMDs) from your traditional IRA? There is a smart strategy that allows you to support the causes you care about while reducing your tax burden: Qualified Charitable Distributions (QCDs).

Here’s how it works:

Once you reach age 70½, you can make a cash donation to an IRS-approved charity out of your IRA. This method of transferring assets to charity leverages the QCD provision so you can direct up to $105,000 of their distributions to charity in 2024 (or $210,000 for married couples). 

By making QCDs, the money given to charity counts toward your RMDs but won’t increase adjusted gross income (AGI) or generate a tax bill.

There are several important reasons to keep your donation amount out of your AGI. When distributions are taken directly out of traditional IRAs, federal income tax of up to 37% (in 2024) and possible state income taxes must be paid. A QCD avoids these taxes. 

Here are some other potential benefits:

  1. You might qualify for other tax breaks. A lower AGI can reduce the threshold for itemizers who deduct medical expenses, which are only deductible to the extent they exceed 7.5% of AGI.
  2. You can skip potential taxes on your Social Security benefits and investment income, avoiding the 3.8% net investment income tax.
  3. It might help you bypass a high-income surcharge for Medicare Part B and Part D premiums that are triggered when AGI falls above a certain level.

Note: You can’t claim a charitable contribution deduction for a QCD that is not included in your income. Also, remember that the age after which you must begin taking RMDs is now 73, but the age you can start making QCDs is 70½.

To benefit from a qualified charitable distribution for 2024, you must arrange for the payment from your IRA to go directly to a qualified charity before December 31, 2024. 

QCDs are truly a win-win. You can use them to fulfill all or part of your RMD for the year. 

Think of it as a double-duty approach, supporting a cause you care about while meeting your IRA withdrawal needs. For example, if your 2024 RMDs are $20,000 and you make a $10,000 QCD, you only need to withdraw another $10,000 to satisfy your requirement.QCDs aren’t right for everyone, though. Depending on your unique situation, additional rules and limits may apply. Contact a Smolin advisor to discuss whether this strategy makes sense for you.

Decoding Corporate Estimated Tax: Which Method is Best for You?
Decoding Corporate Estimated Tax: Which Method is Best for You? 850 500 smolinlupinco

With the next quarterly estimated tax payment deadline coming up on September 16, it’s the perfect time to brush up on the rules for computing your corporate federal estimated payments. Ideally, your business can pay the minimum amount of estimated tax without triggering any penalties for underpayment. 

But how do you determine that amount? To avoid penalties, corporations must pay estimated tax installments equal to the lowest amount calculated using one of these four methods: 

Current Year Method

Pay 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of four corporate installment due dates –  generally April 15, June 15, September 15 and December 15. If a due date falls on a Saturday, Sunday or legal holiday, the payment is due the following business day.

Preceding Year Method 

Pay 25% of the tax shown on the return for the preceding tax year by each of four installment due dates. For 2022, corporations with taxable income of $1 million or more in any of the last three tax years can only use the preceding year method to determine their first required installment payment. Additionally, this method is not available to corporations whose last tax return covered less than a full year (i.e. new corporations) or corporations without a tax return from the previous year showing some tax liability.

Annualized Income Method

Under this option, a corporation can avoid the estimated tax underpayment penalty if it pays its “annualized tax” in quarterly installments. The annualized method estimates tax based on the corporation’s taxable income for the months leading up to the installment due date. It also assumes income will stay consistent throughout the year.

Seasonal Income Method

Corporations with recurring seasonal patterns of taxable income can annualize income by assuming income earned in the current year is earned in the same pattern as in preceding years. There’s a somewhat complicated mathematical test corporations must pass to establish that they meet the threshold to qualify to use this method.

If you think your corporation might qualify, reach out to your Smolin Advisor for assistance making that determination.If you find yourself needing to adjust estimated tax payments, corporations are able to switch between the four methods during the given tax year. Let the Smolin team help you determine the best method for your corporation.

Tax Breaks for Family Caregivers: Are You Eligible?
Tax Breaks for Family Caregivers: Are You Eligible? 850 500 smolinlupinco

Caring for an elderly relative is a privilege that offers many rewards: a deeper bond with your loved one, the knowledge that you are making an impact, and the peace of mind knowing they are in good hands. There are also potential tax benefits that can help lighten the load of caregiving. 

1. Medical expenses. When you provide over 50% of your loved one’s support, including medical expenses, they qualify as your “medical dependent” on your tax return. This allows you to include their qualified medical expenses along with your own when you itemize, which can potentially lower your income. The test for determining whether an individual qualifies as your “medical dependent” is less stringent than that used to determine “dependents,” which is covered in more detail below. 

In order to claim medical expense deductions, the total costs must exceed 7.5% of your adjusted gross income (AGI). 

Deductible medical expenses include costs for qualified long-term care services required by a chronically ill individual. Eligible long-term care insurance premiums can also be deducted; however, there is an annual cap on the amount. The cap is based on age, and in 2024 goes from $470 for an individual aged 40 or less to $5,880 for an individual over 70.

2. Filing status. You may qualify for “head-of-household” status by virtue of the individual you’re caring for if you are not married and:

  • The person you’re caring for lives in your household,
  • You cover more than half the household costs,
  • The person qualifies as your “dependent,” and
  • The person is a relative.

If you are caring for your parent, they do not need to live with you. As long as you provide more than half of their household costs and they qualify as your dependent, you can claim head of household status which has a higher standard deduction and lower tax rates than a single filer.

While dependency exemptions are currently on hold for 2018 through 2025, the rules for determining who qualifies as a dependent still apply when determining eligibility for other tax benefits, like head-of-household filing status.

The following must be true for the tax year you are filing in order for for an individual to qualify as your “dependent”:

  • You provide more than 50% of their support costs,
  • They must either live with you or be related,
  • They must not have gross income in excess of an inflation-adjusted exemption amount,
  • They can’t file a joint return for the year, and
  • They are a U.S. citizen or a resident of the U.S., Canada or Mexico.

3. Dependent care credit. In cases where your loved one qualifies as your dependent, lives with you and is physically or mentally unable to take care of themselves, you may qualify for the dependent care credit. This credit is designed to account for costs incurred for their care necessary while you and your spouse go to work.

4. Nonchild dependent credit. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) created a credit of up to $500 dependents who don’t qualify for the Child Tax Credit. This could apply to a dependent parent; however, they must pass the aforementioned gross income test to be classified as your dependent. You must also pay over half of your parent’s support.

If your adjusted gross income (AGI) is above $200,000 ($400,000 for a married couple filing jointly), this credit is reduced by $50 for every $1,000 that your AGI exceeds the threshold.

Contact your Smolin Advisor to explore the tax implications of financially supporting and caring for an elderly relative.

Is Switching to an S-Corp Right For You? A Tax Guide For Business Owners
Is Switching to an S-Corp Right For You? A Tax Guide For Business Owners 850 500 smolinlupinco

The type of business you run (sole proprietorship, partnership, limited liability company or LLC, C corporation, or S corporation) can greatly impact your tax bill. Choosing the right one is important from the get-go, but you can switch from one entity to the other if it makes sense to maximize your tax benefits.

For instance, S corporations commonly provide substantial tax benefits over C corporations; however, there is the potential for costly tax issues that should be considered before making a decision on whether or not to convert from a C corporation to an S corporation.

Here are four considerations to help guide your decision:

1. LIFO Inventory Tax: If your C corporation uses a last-in, first-out (LIFO) inventory method, converting to an S corporation can trigger a tax payment on benefits gained by using LIFO. While this tax can be paid over four years, you should weigh it against any potential tax gains you’ll receive by converting to S status.

2. Built-in Gains Tax: S corporations generally do not pay taxes on their profits. However, if your business was formerly a C corporation, you could be taxed on certain profits (like appreciated property) that were already owned before the switch. This tax applies if those assets were sold within five years of the switch to being an S corp. While this tax is a drawback, there are situations where the tax benefits of an S election outweigh this cost.

3. Passive Income: S corporations with a history as C corporations may face a special tax on passive investment income (such as dividends, interest, rents, royalties, and stock sale gains) that exceeds 25% of their overall income, and they carried over profits from their C corporation years. Owing this tax for three consecutive years can cancel the S corporation status! There are ways to avoid this tax, like distributing accumulated earnings and profits to shareholders or limiting passive income. 

4. Unused Losses: If your C corporation has accumulated losses, they cannot be used to offset the S corporation’s income, nor can they be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, you need to weigh the cost of giving up the losses against the potential tax savings of becoming an S corporation.

Beyond Taxes: Other Considerations

These are just some of the factors to consider when switching from C to S status. For example, employee-owners of S corporations may not qualify for all the tax-free benefits available to C corporations. There can also be complications for shareholders who have outstanding loans from their qualified plans. These factors need to also be taken into account to have a clear picture of the implications when making your decision.If you’re considering changing your business structure, reach out to a Smolin Advisor. We can explain your options and potential strategies that can minimize your tax burden. 

Q3 Tax Deadlines for Businesses
Q3 Tax Deadlines for Businesses 850 500 smolinlupinco

Can you believe the third quarter is already here? We’ve compiled a list of key tax-related deadlines that might affect your business and employees to give you a leg up as we head into Q3. Keep in mind that this list isn’t all-inclusive and there could be other deadlines that apply to you. 

July 15

  • Employers with monthly tax deposit rules must submit Social Security, Medicare, and withheld income taxes along with nonpayroll withheld income taxes for June.

July 31

  • Report and pay second quarter taxes: Report income tax withholding and FICA taxes for employees paid in April, May, and June using Form 941. Be sure to pay any tax due by this date. (See the exception below, under “August 12.”)
  • File or request an extension for retirement plan report (if applicable): File your 2023 calendar-year retirement plan report using Form 5500 or Form 5500-EZ or request an extension.

August 12

  • Report income tax withholding and FICA taxes for second quarter 2024 using Form 941, if you deposited on time and in full all associated taxes due.

September 16

  • Calendar-year C corporation be sure to pay the third installment of 2024 estimated income taxes.
  • Calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2023 income tax return with Form 1120-S, Form 1065 or Form 1065-B and pay any tax, interest and penalties due.
    • Make contributions for 2023 to certain employer-sponsored retirement plans.
  • Employers should deposit Social Security, Medicare and withheld income taxes for August if monthly deposit rules are applicable. Include non-payroll withheld income tax for August if subject to monthly deposits.

Contact your Smolin Advisor to ensure you’re meeting all applicable deadlines and filing requirements.

Could a Contrary Approach with Income and Deductions Benefit Your Business Tax Rates

Could a Contrary Approach with Income and Deductions Benefit Your Business?
Could a Contrary Approach with Income and Deductions Benefit Your Business? 850 500 smolinlupinco

Businesses typically want to delay the recognition of taxable income into future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why would you want to?

There are two main reasons why you might take this unusual approach: 

  • You anticipate tax law changes that raise tax rates. For example, the Biden administration has proposed raising the corporate federal income tax rate from a flat 21% to 28%. 
  • You expect your non-corporate pass-through entity business to pay taxes at higher rates in the future, and the pass-through income will be taxed on your personal return. Debates have also occurred in Washington about raising individual federal income tax rates.

Suppose you believe your business income could be subject to a tax rate increase. In that case, consider accelerating income recognition in the current tax year to benefit from the current lower tax rates. At the same time, you can postpone deductions until a later tax year when rates are higher, and the deductions will be more beneficial.

Reason #1: To fast-track income

Here are some options for those seeking to accelerate revenue recognition into the current tax year:

  • Sell your appreciated assets with capital gains in the current year, rather than waiting until a future year.
  • Review your company’s list of depreciable assets to see if any fully depreciated assets need replacing. If you sell fully depreciated assets, taxable gains will be triggered.
  • For installment sales of appreciated assets, opt out of installment sale treatment to recognize gain in the year of sale.
  • Instead of using a tax-deferred like-kind Section 1031 exchange, sell real estate in a taxable transaction.
  • Consider converting your S-corp into a partnership or an LLC treated as a partnership for tax purposes. This will trigger gains from the company’s appreciated assets because the conversion is treated as a taxable liquidation of the S-corp, giving the partnership an increased tax basis in the assets.
  • For construction companies previously exempt from the percentage-of-completion method of accounting for long-term contracts, consider using the percentage-of-completion method to recognize income sooner instead of the completed contract method, which defers recognition of income.

Reason #2: To postpone deductions

Here are some recommended actions for those who wish to postpone deductions into a higher-rate tax year, which will maximize their value:

  • Delay buying capital equipment and fixed assets, which would give rise to depreciation deductions.
  • Forego claiming first-year Section 179 deductions or bonus depreciation deductions on new depreciable assets—instead, depreciate the assets over several years.
  • Determine whether professional fees and employee salaries associated with a long-term project could be capitalized, spreading out the costs over time.
  • If allowed, put off inventory shrinkage or other write-downs until a year with a higher tax rate.
  • Delay any charitable contributions you wish to make into a year with a higher tax rate.
  • If permitted, delay accounts receivable charge-offs to a year with a higher tax rate.
  • Delay payment of liabilities for which the related deduction is based on when the amount is paid.
  • Buy bonds at a discount this year to increase interest income in future years.

Questions about tax strategy? Smolin can help.

Tax planning can seem complex, particularly when policy changes are on the horizon, but your business accountant can explain this and other strategies that could be beneficial for you. Contact us to discuss the best tax planning actions in light of your business’s unique tax situation.

How WIP is Audited

How Work In Progress (WIP) is Audited 
How Work In Progress (WIP) is Audited  850 500 smolinlupinco

During fieldwork, external auditors dedicate many hours to evaluating the way businesses report work-in-progress (WIP) inventory. Why is this so important? And how do auditors decide whether WIP estimates are realistic and reasonable? 

Determining the value of WIP 

Depending on the nature of their operations, companies may report a variety of categories of inventory on their balance sheets. For companies that convert raw materials into finished products for sale, WIP inventory is a crucial category to track.

WIP inventory refers to unfinished products at various stages of completion. Management must use estimates to determine the value of these partially finished products. By and large, the more overhead, labor, and materials invested in WIP, the greater its value. 

Typically, experienced managers use realistic estimates. However, inexperienced or dishonest managers may inflate WIP values. This makes a company appear more financially healthy than it is by overstating the value of the inventory at the end of the period and understating the cost of goods sold during the current accounting period. 

Assessing costs correctly

How companies assign cost to WIP largely depends on the type of products they produce. For example, a company that produces large amounts of the same product will often allocate costs as they complete each phase of the production process. If the production process involves six stamps, the company might allocate one-third of their costs to the product at step two. This is called standard costing.

Assessing the cost of WIP becomes a bit more complicated when a company produces unique products, like made-to-order parts or the construction of an office building. A job costing system must be used to allocate overhead, labor, and material costs and incurred.

Auditing WIP

Financial statement auditors examine the way that companies allocate and quantify their costs. The WIP balance increases under standard costing based on the number of steps completed in the production process. Thus, auditors analyze the methods used to quantify a product’s standard costs and the way the company allocates those costs to each phase of the process.

Under a job costing framework, auditors review the process to allocate overhead, labor, and materials to each job. Specifically, auditors test to make sure that the costs assigned to a particular project or product correspond to that job. 

Revenue recognition

Auditors perform additional audit procedures to ensure a company’s recognition of revenue is in compliance with its accounting policies. Under standard costing, companies usually record inventory—WIP included—at cost. Then, revenue is recognized once the company sells the products.

When it comes to job costing, revenue is recognized based on the percentage of completion or completed-contract method.

Questions? Smolin can help

Whichever method you use, accounting for WIP dramatically impacts your business’s income statement and balance sheet. If you need help reporting WIP properly, reach out to your Smolin accountant. We’re here to help.

2024 Q2 Tax Deadlines for Businesses and Employers

Key 2024 Q2 Tax Deadlines for Businesses and Employers
Key 2024 Q2 Tax Deadlines for Businesses and Employers 850 500 smolinlupinco

The second quarter of 2024 has arrived! If you’re a business owner or other employer, add these tax-related deadlines to your calendar. 

April 15

  • Calendar-year corporations: File a 2023 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.
  • Corporations: Pay the first installment of estimated income taxes for 2024. Complete Form 1120-W (worksheet) and make a copy for your records.
  • Individuals: File a 2023 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868). Pay any tax due.
  • Individuals: pay the first installment of 2024 estimated taxes (Form 1040-ES), if you don’t pay income tax through withholding.

April 30

  • Employers: Report FICA taxes and income tax withholding for the first quarter of 2024 (Form 941). Pay any tax due.

May 10

  • Employers: Report FICA taxes and income tax withholding for the first quarter of 2024 (Form 941), if they deposited on time, and fully paid all of the associated taxes due.

May 15

  • Employers: Deposit withheld income taxes, Medicare, and Social Security for April if the monthly deposit rule applies.

June 17

  • Corporations: Pay the second installment of 2024 estimated income taxes.

Questions? Smolin can help

This list isn’t all-inclusive, which means there may be additional deadlines that apply to you. Contact your accountant to ensure you’re meeting all applicable tax deadlines and learn more about your filing requirements.

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