Taxes

new-yorks-covid-19-capital-costs-tax-credit-program

New York’s COVID-19 Capital Costs Tax Credit Program
New York’s COVID-19 Capital Costs Tax Credit Program 1600 942 smolinlupinco

On October 26, 2022, the State of New York announced a new tax credit program. The COVID-19 Capital Costs Tax Credit Program will subsidize small businesses for COVID-19-related expenses incurred between January 1, 2021, and December 31, 2022. 

Eligible businesses must: 

  • Operate in New York
  • Have 100 or fewer employees
  • Have $2.5 million or less of gross receipts for the 2021 tax year
  • Have at least $2,000 in qualifying expenses

Qualifying expenses include disinfecting supplies, physical barriers, hand sanitizing stations, respiratory devices (such as air purifying systems), signage related to COVID-19, contactless payment equipment, and more. Please visit the New York website for a complete listing of qualifying expenses.

What this means for you

If you own and operate a small business in New York, you can receive 50% of qualifying expenses up to $50,000, for a maximum tax credit of $25,000. 

This program is awarded on a first-come, first-served basis until the funds—$250 million—are depleted. 

Contact us for more information

Not sure if you qualify for the COVID-19 Capital Costs Tax Credit Program, or need help with compiling documentation for your application? The CPAs at Smolin are here to help. Please reach out if you have any questions about your eligibility, application, or otherwise.

5-ways-to-update-your-accounting-practices

5 Ways to Update Your Accounting Practices
5 Ways to Update Your Accounting Practices 1594 938 smolinlupinco

When you think about the internal workflows and processes of your business, are you able to pinpoint why you do things a certain way? If the answer is “because we’ve always done it that way,” it might be time to make some changes. 

In fact, with all of the new developments in the financial and accounting realm, sticking to those traditional methods may actually be costing your business in terms of efficiency and cash flow alike. 

Here are five ways to keep your accounting processes and systems up-to-date. 

1. Streamline the payables process

When it comes to managing your accounts payable, using traditional paper processes could be costing you valuable time (and money). With automated technology solutions, you can streamline the process to improve efficiency, reduce costs, enhance security, and even obtain early payment discounts. 

Automatic payables systems can scan invoices and post them automatically based on the purchase or invoice number. Then, the payables clerk—or whoever is responsible for reviewing the invoice—can cross-reference the invoice and approve it for electronic payment based on terms negotiated with the vendor. 

2. Implement daily reconciliation

Many accounting firms wait until the end of the month to reconcile their bank accounts—but it doesn’t have to be this way. By reconciling accounts on a daily basis using automation software, you can catch in-transit payments that have been cashed but not recorded. And by eliminating that crunch at the end of the month, you can speed up other monthly closings. 

This also keeps you from having to wait for standard monthly entries that remain the same—depreciation, prepaid expenses, and property tax or insurance accruals, for example. By starting your end-of-month closing process sooner, you can improve the accuracy and timeliness of your financial statements while also taking some of the pressure off of your accounting staff. 

3. Use p-cards

Consider issuing corporate purchase cards, or p-cards, to at least one employee in each department to cover travel and entertainment expenses, or small items under $100 or so. This way, your accounting department can make a single payment for multiple purchases, rather than processing multiple small-dollar checks. 

As an added perk, most p-cards offer points and cash-back rewards that your team can take advantage of when paying back expenses. 

4. Digitize your processes

When you go paperless, you can lower expenses, increase efficiency, and maintain compliance—all in a way that’s more environmentally friendly. And when you use an electronic document management system, you can save significant amounts of physical storage space and reduce the time it takes to create and modify documents. 

While you may not be able to go completely paperless, there are plenty of documents and processes that can be digitized: contracts, invoices, payables, payroll documents, and employee records, for example. 

Consider implementing document management software solutions to help you convert your processes from paper to digital. 

5. Make the most of your accounting software

With ever-changing policies and practices, it’s more important than ever to use your accounting software to help you stay compliant and financially sound. This could involve making better use of your current account system or switching over to new software. Keep in mind that, as your firm grows, you will likely need more advanced functionality. 

To optimize your accounting software, start by making a list of your requirements, from types of activities to reporting. Then, cross-reference those needs with your software features to ensure that they’re all being met. You’ll also want to prioritize remote access so that your team can securely access real-time project information from anywhere. 

Look for integrations with other software and platforms, too, such as timecard entry and project management software, or third-party payroll software that can be used with minimal manual data entry.

Ready to upgrade your accounting practices? 

If your accounting firm’s processes and systems have been the same for years, it’s likely time for an upgrade—and our knowledgeable accounting advisers can help. Contact us to learn more.

iras-and-rmds-answering-your-faqs

IRAs and RMDs: Answering Your FAQs
IRAs and RMDs: Answering Your FAQs 1600 941 smolinlupinco

You may be aware of the fact that you can’t let funds sit in your traditional IRA indefinitely. Once you reach age 72, you’re required to start taking withdrawals. 

You may also be aware that the rules for taking required minimum distributions, or RMDs, are complex. Here are some answers to frequently asked questions about taking withdrawals from a traditional IRA (including SIMPLE IRA or SEP IRA). 

Can I withdraw money before retirement?

The simple answer: yes. 

That said, if you want to take money out of a traditional IRA before the age of 59.5, those distributions are taxable and you may be subject to a 10% penalty tax. 

That 10% penalty tax—but not regular income tax—can be avoided if you pay: 

  • Qualified higher education expenses
  • Up to $10,000 of expenses if you’re a first-time homebuyer
  • Health insurance premiums if you’re unemployed 

When can I take my first RMD for an IRA?

You must take your first RMD by April 1 of the year after the year in which you turn 72. Note that this rule applies whether or not you’re still employed. 

How do I determine my RMD? 

When calculating your RMD, take the account balance from the end of the preceding calendar year and divide it by the distribution period from the IRS’s Uniform Lifetime Table. 

If the sole beneficiary is a spouse who is 10 or more years younger than the owner, a separate table will be used. 

What if I have multiple accounts? 

For those with more than one IRA, the RMD for each must be calculated separately each year. 

However, you don’t have to take a separate RMD from each IRA—you may combine the RMD amounts for all IRAs, and either withdraw the total from one IRA or a portion from each. 

Can I withdraw amounts exceeding my RMD? 

Yes—you can always withdraw more than your RMD. Note, however, that you cannot put excess withdrawals toward RMDs in future years. 

When planning for RMDs, weigh your income needs against the ability to maintain the IRA tax shelter for as long as possible. 

Can I withdraw more than once a year? 

Yes. As long as you withdraw the total annual minimum amount by December 31 (or, if it’s your first RMD, April 1), you may withdraw your yearly RMD in any number of distributions throughout the year.

What if I don’t take an RMD? 

If your distributions for any given year are less than your RMD, you’ll be subject to an additional tax. This tax is equal to 50% of the amount that was not paid out but should have been. 

Plan ahead with us

Questions about your retirement planning? Our knowledgeable tax advisors can help. Contact us to learn more. 

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Annual Gift Tax Exclusion Amount to Increase in 2023
Annual Gift Tax Exclusion Amount to Increase in 2023 1600 941 smolinlupinco

Conveniently enough, one of the most effective ways to save on your estate taxes is also one of the simplest: when you use the annual gift tax exclusion, you can transfer assets to loved ones without any gift tax. 

While the current gift tax exclusion amount is $16,000 per recipient in 2022, that amount will increase by $1,000 in 2023. 

Making the most of your gifts

While it’s commonly misconceived that the onus of the federal gift tax is on the recipient of the gift, the reality is that these taxes are generally owed by the giver. That said, gifts can be structured so that they’re excluded from gift tax (and, if necessary, unified gift and estate tax). 

In 2022, you can gift each family member up to $16,000 without owing gift tax. In 2023, that amount will increase to $17,000. If you gift your children and grandchildren up to $16,000 before December 31, you can then gift them each an additional $17,000 beginning in January—significantly reducing your estate in a matter of months. 

This annual gift tax exclusion is available to each taxpayer. For those who are married and whose spouse consents to a joint gift, or “split gift,” the exclusion amount is effectively doubled. 

If you exceed the annual exclusion amount, you will need to file a gift tax return. Note that even if you give joint gifts with your spouse, you must each file individual gift tax returns. 

Lifetime gift tax exemption

As part of the unified gift and estate tax exemption, the lifetime gift tax exemption can shelter gifts above the annual exclusion amount from taxation. The current amount is $12.06 million, and that amount will increase to $12.92 million in 2023. 

That said, if you tap into your lifetime gift tax exemption, the exemption amount available for your estate will be eroded.

Gift tax exceptions 

Some gifts are exempt from gift tax, including gifts given: 

  • From one spouse to another
  • To a qualified charitable organization
  • To a healthcare provider for medical expenses
  • To an educational institution for tuition

These exemptions preserve both the full annual gift tax exclusion amount and the exemption amount, and won’t count against the annual gift tax exclusion. 

Plan your gifting strategy with us

Not sure how to get the most out of the annual gift tax exclusion for your estate planning? Contact us to work with a knowledgeable advisor and develop a powerful strategy that works for you. 

are-tax-free-bonds-really-free-of-taxes

Are Tax-Free Bonds Really Free of Taxes?
Are Tax-Free Bonds Really Free of Taxes? 1600 941 smolinlupinco

While investing in tax-free municipal bonds generally provides tax-free interest, you may still encounter tax consequences. Keep reading to learn more about the potential tax and other financial consequences of investing in tax-free bonds.

Purchasing tax-exempt bonds

There are no immediate tax consequences for purchasing a tax-exempt bond for its face amount, whether on the initial offering or in the market. If you buy a tax-exempt bond between interest payment dates, however, you will owe the seller any accrued interest since the most recent interest payment date. 

The amount of interest accrued is then treated as a capital investment and will be deducted as a return of capital from the following interest payment. 

Is interest included in income?

Generally speaking, interest received on a tax-free municipal bond will not be included in gross income—but it may be used for alternative minimum tax (AMT) purposes. Tax-free interest may be appealing, but it’s important to note that compared to an otherwise equal taxable investment, a municipal bond may pay a lower interest rate. What really matters is the after-tax yield. 

The after-tax yield for a tax-free bond is typically equivalent to the pre-tax yield. Alternatively, the after-tax yield for a taxable bond is determined by your interest amount after accounting for the increase in your tax liability due to annual interest payments—which is based on your effective tax bracket. 

Taxpayers in higher brackets tend to be more interested in tax-free bonds, since excluding interest from income offers a greater benefit. Taxpayers in lower brackets, however, may find that the tax benefit from excluding interest from income may not adequately make up for a lower interest rate.

While not taxable, municipal bond interest still shows on a tax return. This is because tax-exempt interest is taken into account when determining the amount of taxable Social Security benefits (and other tax breaks). 

Tax-exempt bond interest and the NIIT

Another tax advantage of tax-exempt bond interest is that it is exempt from the 3.8% net investment income tax (NIIT). 

This is imposed on the investment incomes of individuals whose adjusted gross income exceeds:

  • $250,000 for joint filers
  • $125,000 for married filing separate filers
  • $200,000 for other taxpayers 

What about retirement accounts?

Because the income in your traditional IRA or 401(k) isn’t currently taxed, it generally isn’t logical to hold municipal bonds in those accounts. Once you start taking distributions, however, the entire amount withdrawn may be taxed. 

For those who want to invest retirement funds in fixed-income obligations, it’s typically a good idea to invest in higher-yielding taxable securities. 

Consult with a tax professional

Before investing in tax-free municipal bonds, it’s important to fully understand the tax implications—and those mentioned above are only some of the tax consequences. If you need assistance understanding and applying tax rules to your situation, contact us to work with a knowledgeable tax advisor.

© 2022

why-auditors-prefer-to-assess-fraud-risks-face-to-face

Why Auditors Prefer to Assess Fraud Risks Face-to-Face
Why Auditors Prefer to Assess Fraud Risks Face-to-Face 1600 941 smolinlupinco

Due to AICPA auditing standards—namely the Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit—financial statement auditors are required to evaluate and assess fraud-related material misstatement risks and determine appropriate responses. 

Keep reading to learn why it’s important to conduct in-person interviews when evaluating fraud-related misstatement risks. 

What to expect in an audit inquiry

A crucial aspect of the audit process is asking fraud-related questions. Specific areas of inquiry include: 

  • Whether management is aware of any fraud—actual, suspected, or alleged 
  • Management’s identification, assessment, and response tactics regarding fraud risks 
  • The results of any fraud risk assessments 
  • Any previously identified fraud risks
  • Transaction, account balance, or disclosure classes likely to contain a fraud risk
  • Any communications regarding fraud risk identification and response processes, including sharing views on appropriate and ethical business practices and behavior with employees  

Each audit requires a separate interview, as fraud risks can vary by accounting period. 

The importance of nonverbal communication

While the pandemic resulted in a number of audit procedures being done remotely, auditors are returning to face-to-face fraud risk interviews for more effective evaluations. 

Psychologists estimate that 55% of communication is body language—meaning that in an in-person interview, auditors can pick up on nonverbal cues they may have otherwise missed in a virtual setting. In addition to the words being spoken, tone and inflection, and the speed of response, auditors can also keep an eye on the interviewee’s physical comportment. 

The auditor will look for signs of stress as the interviewee is answering questions—for example, long pauses before responding, starting over mid-explanation, sweating profusely, or fidgeting. 

An additional benefit of face-to-face interviews is that they allow for immediate follow-up. While in-person meetings are ideal, they aren’t always a viable option. In these cases, video or phone calls are the next best thing.

Work with us

External audits are an important tool for identifying fraud risks. While they’re not guaranteed to detect all unethical behavior, they often deliver results. According to Occupational Fraud 2022, companies who had financial statements audited were able to detect fraud 33% faster—and lost one-third less from fraud—than those who hadn’t.

Our team can help you with the audit process by providing services tailored to your unique needs. By anticipating the type of information we’ll ask for, from questions to source documents, you can help streamline our fraud risk assessment process. When you provide prompt responses, we can ensure that your audit stays right on schedule. Contact us to learn how we can help. 

does-your-income-warrant-extra-taxes

Does Your Income Warrant Extra Taxes?
Does Your Income Warrant Extra Taxes? 1600 941 smolinlupinco

If you’re a high-income taxpayer, you may need to pay two extra taxes: a 3.8% net investment income tax (NIIT), and an additional 0.9% Medicare tax on wage and self-employment income. 

Keep reading to learn more about these taxes and what they might mean for you. 

3.8% NIIT

In addition to income taxes, the NIIT applies to your net investment income. This tax affects taxpayers with adjusted gross income (AGI) exceeding the following: 

  • $250,000 for joint filers
  • $200,000 for single taxpayers and heads of household
  • $125,000 for married individuals filing separately 

If your AGI is above this threshold, the NIIT applies to the lesser of: 

  • Your net investment income for the year, or
  • The excess of your AGI over the threshold amount for the tax year 

What incomes are subject to the NIIT? 

Net investment incomes subject to the NIIT include interest, dividends, annuities, royalties, rents, property sale net gains, and passive business income. This does not include wage income and active trade or business income, or tax-exempt income tax such as bond interest. 

After considering your income needs and investments, you may want to consider switching some of those taxable investments over to tax-exempt bonds. 

How does the NIIT apply to home sales? 

If you sell your primary residence, you may be able to exclude up to $250,000—or $500,000 for joint filers—in your income tax, which will not be subject to the NIIT. If your gain exceeds that amount, however, it will be subject to tax. This also applies to gain from selling a vacation home or other secondary residence. 

Note that distributions from retirement plans such as pension plans and IRAs are not subject to the NIIT. However, if these distributions push your AGI above the threshold, they can cause other income types to be taxed. 

Additional 0.9% Medicare tax

In addition to the 1.45% Medicare tax that applies to all wage earners, some high wage earners are subject to an additional 0.9% Medicare tax. This applies to wages that exceed: 

  • $250,000 for joint filers
  • $125,000 for married individuals filing separately
  • $200,000 for all others 

Note that this tax only applies to employees—not employers. 

The employer must begin withholding the additional 0.9% Medicare tax once their employee’s wages for the year reach $200,000. However, if the employee (or the employee’s spouse) has additional wage income from another job, this may prove insufficient. Instead, the employee may file a new W-4 with the employer to request extra income tax withholding. 

How does the extra Medicare tax affect self-employment income? 

In addition to the regular 2.9% self-employment Medicare tax, the additional 0.9% Medicare tax applies to self-employment income for the tax year that exceeds the same amounts as wage earners—note, however, that the $250,000, $125,000, and $200,000 thresholds are modified according to the self-employed taxpayer’s wage income. 

Work with our tax advisors

Income taxes can be complicated, especially when they vary from year to year. Is your income high enough that you owe these extra taxes? Contact us to discuss your taxes and their implications with a qualified tax professional.

© 2022

thinking-about-purchasing-an-ev-dont-forget-to-qualify-for-this-tax-credit

Thinking about Purchasing an EV? Don’t Forget to Qualify for This Tax Credit
Thinking about Purchasing an EV? Don’t Forget to Qualify for This Tax Credit 1600 941 smolinlupinco

In 2022, industry sources have noted that electric vehicles (EVs) have seen a spike in sales and registrations. And though their popularity continues to grow steadily and demand for EVs has increased, these vehicles still only make up a small percentage of automobiles on U.S. roadways today.

Buying a new EV can qualify you as for a tax break for new electric vehicle owners. This tax code gives credit to purchasers on certain plug-in electric drive vehicles, including light truck and passenger options. The current value of the new credit is $2,500, though buyers can get additional savings based on their battery capacity. This extra credit has a cap of $5,000, and the overall limit for this break is $7,500 per qualifying EV.

But, buyer beware–not all EVs can qualify for this tax credit.

What is an EV?

When attempting to qualify for this tax credit, the requirements for an eligible EV are defined these autos using the following characteristics:

  • Has four wheels
  • Propelled primarily using an electric motor
  • The motor draws its energy from the vehicle battery
  • The battery’s capacity must have a minimum of four kilowatt-hours
  • Recharging must be conducted using an external energy source (a plug, for example) 

Who can benefit from this tax credit?

However, not all that apply get this credit due to the per-manufacturer cumulative sales limitation. This means that when a manufacturer sells 200,000 or more qualifying EVs in the U.S., this tax credit phases out over the following six quarters. This is determined on a cumulative sales basis after December 31, 2009. 

To better understand what this means for prospective buyers, consider the following: Tesla and General Motors EVs are no longer eligible for this tax break. Additionally, Toyota recently sold enough plug-in EVs to trigger its own credit phase-out of this federal tax incentive because it sold more than the 200,000 electric plug-in car threshold in the U.S.

However, there has been a recent movement in which more automakers are approaching Congress to remove the limit on how many consumers can receive this tax break. Big-name auto manufacturers like Chrysler, Ford, GM, and Toyota recently sent a letter asking House and Senate leaders to extend this tax incentive to allow all EV buyers to benefit from it. The belief motivating the request to lift this limit is that doing so will encourage buyers to purchase EVs, create more purchase options, and stabilize careers for autoworkers.  

If you would like to know more about which EVs qualify for this tax credit, the IRS maintains a list of current qualifying vehicles on its website here: https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit.

Other notable details about the plug-in EV tax credit include the following pieces of information:

  • This credit only applies to new EVs
  • You can take the credit for the year you begin driving the vehicle
  • Eligible vehicles should be used primarily in the United States
  • EVs should have a gross weight of under 14,000 pounds

Keep in mind, these are just the general requirements, and your state might offer additional incentives. To learn more about this federal tax break for your new plug-in electric vehicle, contact us. 

© 2022

quarter-3-tax-calendar-2022-essential-deadlines-for-businesses-and-employers

Quarter 3 Tax Calendar 2022: Essential Deadlines for Businesses and Employers
Quarter 3 Tax Calendar 2022: Essential Deadlines for Businesses and Employers 1600 941 smolinlupinco

The following tax-related deadlines during quarter three of 2022 are important for employers and businesses to meet. However, this isn’t a complete accounting of all deadlines that might apply to you. To ensure that you meet all the necessary deadlines for your organization in the third quarter, reach out to our office today to learn more about the filing requirements you may have. 

August 1, 2022

  • The retirement plan report (Form 5500 or Form 5500-EZ) for the 2021 calendar year is due, or you can request an extension to file. 
  • Second quarter reporting of your income tax withholding and FICA taxes (FORM 941) is due, and any tax owed should be paid. There is an exception below under the August 10th deadline.

August 10, 2022

  • If you paid all associated taxes due on time, you should report your second quarter 2022 income tax withholding and FICA taxes (Form 941).

September 15, 2022 

  • Pay your third installment of 2022 estimated income tax if you are a calendar-year C-corporation.
  • For companies that filed for an automatic six-month extension as a calendar-year S-corporation or partnership:
    • Pay all interest, penalties, and owed taxes on your 2021 income tax return filing (Forms 1065, 1120S, or 1065-B). 
    • Make necessary contributions to certain employer-sponsored retirement plans for 2021.

© 2022

how-taxes-affect-merger-and-acquisition-transactions

How Taxes Affect Merger and Acquisition Transactions
How Taxes Affect Merger and Acquisition Transactions 1600 941 smolinlupinco

Despite merger and acquisition (M&A) activities being lower in 2022, reports suggest that businesses are still successfully sold. If you’re considering an M&A with another company, it’s essential that you know the tax implications of your transaction under current law.

M&A Transactions: Stocks vs. Assets

From a tax perspective, merger and acquisition transaction structures can take one of two forms: 

1. Buyers could opt to purchase business assets. This scenario usually takes place when buyers only want to purchase specific product lines or assets. If the targeted company is a sole proprietorship or single-member LLC treated as a sole proprietor for tax reasons, this could be the only option for an M&A transaction. 

2. Buyers purchase a seller’s stock or ownership interest. This often takes place if their business operates as one of the following:

  • C-Corp
  • S-Corp
  • Partnership
  • LLC treated as a partnership for tax purposes

Currently, the corporate federal income tax rate is at 21%, creating a more favorable environment for purchasing stock of C-corporations. This is because corporations have fewer tax obligations and more after-tax revenue than ever before. Also, consider that these companies have lower tax rates for their built-in gains from corporate asset appreciation when selling.

Current law puts individual federal tax rates even lower than they were a few years ago, which may grow ownership interest in LLCs, S-Corps, and partnerships. This is possible thanks to the lower tax rate buyers can enjoy on their personal returns for the pass-through income these entities generate. Keep in mind that these individual rate cuts are due to sunset at the end of 2025, though they could be extended or ended earlier, depending on changes coming from Washington in the future.  

Special Note: There are some situations where purchasing corporate stock could be viewed as an asset purchase if a “Section 338 election” is taken. Talk to your tax advisor to get more details. 

What Buyers and Sellers Want in M&A Transactions

Why do buyers prefer asset purchases over ownership interest? For a couple of good reasons. 

Typically, a buyer wants their acquired businesses to generate enough cash flow to pay off any incurred debt and make a decent ROI. So, it makes sense that buyers want to limit their exposure to any unknown (and undisclosed) liabilities. They also keep their tax liability at a minimum once the deal is finalized. 

Buyers have the option of increasing, or stepping up, an acquired asset’s tax basis to reflect the price paid. Doing this lowers taxable gains whenever assets involving inventory or receivables are converted to cash or sold. This also boosts depreciation and deductions for amortizations of qualifying assets. 

On the other hand, some sellers pursue stock sales for reasons that have to do with taxation and interest liabilities. A primary objective for stock buyers is to reduce the tax expense related to the M&A transaction. This is usually done through selling their business ownership interest (LLC, partnership, or corporate stock interests) and not business assets. 

When selling ownership interests or stocks, the associated liabilities are often transferred to the buyer, and any gains get classified as a lower-taxed long-term capital gain. But this is based on the assumption that the ownership interest has existed for more than a year.

Still, unexpected tax issues can arise when buying or selling a business, such as those caused by employee benefits. You’ll want to follow the latest IRS reporting guidelines closely. Getting the right professional guidance in these situations is always wise.

Work with an M&A Advisor

In business, acquiring a new company can be one of the most important decisions you’ll ever make. This is why you need professional tax advice during the negotiation process. Waiting to take this step until after you finalize the deal could be too late to maximize your tax results. Reach out to our office today to learn more about how to best proceed with your M&A transaction. 

© 2022

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