accounting

How do cash accounting and accrual accounting differ

How Do Cash Accounting and Accrual Accounting Differ?
How Do Cash Accounting and Accrual Accounting Differ? 850 500 smolinlupinco

Financial statements play a key role in maintaining the financial health of your business. Not only do year-end and interim statements help you make more informed business decisions, but they’re also often non-negotiable when working with investors, franchisors, and lenders.

So, which accounting method should you use to maintain these all-important financial records—cash or accrual?

Let’s take a look at the pros and cons of each method.

Cash basis accounting

Small businesses and sole proprietors often choose to use the cash-basis accounting method because it’s fairly straightforward. (Though, some other types of entities also use this method for tax-planning opportunities.)

With cash basis accounting, transactions are immediately recorded when cash changes hands. In other words, revenue is acknowledged when payment is received, and expenses are recorded when they’re paid.

The IRS places limitations on which types of businesses can use cash accounting for tax purposes. Larger, complex businesses can’t use it for federal income tax purposes. Eligible small businesses must be able to provide three prior tax years’ annual gross receipts, equal to or less than an inflation-adjusted threshold of $25 million. In 2024, the inflation-adjusted threshold is $30 million.

While it certainly has its pros, there are some drawbacks to cash-basis accounting. For starters, revenue earned isn’t necessarily matched with expenses incurred in a given accounting period. This can make it challenging to determine how well your business has performed against competitors over time and create unforeseen challenges with tracking accounts receivable and payable. 

 Accrual basis accounting

The United States. Generally Accepted Accounting Principles (GAAP) require accrual-basis accounting. As a result, a majority of large and mid-sized U.S. businesses use this method. 

Under this method, expenses are accounted for when they’re incurred, and revenue when it’s earned. Revenue and its related expenses are recorded in the same accounting period, which can help reduce significant fluctuations in profitability, at least on paper, over time. 

Revenue that hasn’t been received yet is tracked on the balance sheet as accounts receivable, as are expenses that aren’t paid yet. These are called accounts payable or accrued liabilities. 

With this in mind, complex-sounding line items might appear, like work-in-progress inventory, contingent liabilities, and prepaid assets.

As you can see, the accrual accounting method is a bit more complicated than cash accounting. However, it’s often preferred by stakeholders since it offers a real-time picture of your company’s financial health. In addition, accrual accounting supports informed decision-making and benchmarking results from period to period. It also makes it simpler to compare your profitability against other competitors.

For eligible businesses, accrual accounting also offers some tax benefits, like the ability to: 

  • Defer income on certain advance payments
  • Deduct year-end bonuses paid within the first 2.5 months of the following tax year

There are downsides, too.

In the event that an accrual basis business reports taxable income prior to receiving cash payments, hardships can arise, especially if the business lacks sufficient cash reserves to address its tax obligations. Choosing the right method? Smolin can help!

Each accounting method has pros and cons worth considering. Contact your Smolin accountant to explore your options and evaluate whether your business might benefit from making a switch.

Choosing the Best Accounting Method for Business Tax Purposes

Choosing the Best Accounting Method for Business Tax Purposes
Choosing the Best Accounting Method for Business Tax Purposes 850 500 smolinlupinco

Businesses categorized as “small businesses” under the tax code are often eligible to use accrual or cash accounting for tax purposes. Certain businesses may be eligible to take a hybrid approach, as well. 

Prior to the implementation of the Tax Cuts and Jobs Act (TCJA), the criteria for defining a small business based on gross receipts ranged from $1 million to $10 million, depending on the business’s structure, industry, and inventory-related factors.

By establishing a single gross receipts threshold, the TCJA simplified the small business definition. The Act also adjusts the threshold to $25 million for inflation, which allows more companies to take advantage of the benefits of small business status. 

In 2024, a business may be considered a small business if the average gross receipts for the three-year period ending prior to the 2024 tax year are $30 million or less. This number has risen from $29 million in 2023.

Small businesses may also benefit from: 

  • Simplified inventory accounting,
  • An exemption from the uniform capitalization rules, and
  • An exemption from the business interest deduction limit.

What about other types of businesses?

Even if their gross receipts are above the threshold, other businesses may be eligible for cash accounting, including: 

  • S-corporations
  • Partnerships without C-corporation partners
  • Farming businesses
  • Certain personal service corporations

Regardless of size, tax shelters are ineligible for the cash method.

How accounting methods differ

Cash method 

The cash method provides significant tax advantages for most businesses, including a greater measure of control over the timing of income and deductions. They recognize income when it’s received and deduct expenses when they’re paid. 

As year-end approaches, businesses using the cash method can defer income by delaying invoices until the next tax year or shift deductions into the current year by paying expenses sooner.

Additionally, the cash method offers cash flow advantages. Since income is taxed when received, it helps guarantee that a business possesses the necessary funds to settle its tax obligations.

Accrual method

On the other hand, businesses operating on an accrual basis recognize income upon earning it and deduct expenses as they are incurred, irrespective of the timing of cash receipts or payments. This reduces flexibility to time recognition of expenses or income for tax purposes. 

Still, this method may be preferable for some businesses. For example, when a company’s accrued income consistently falls below its accrued expenses, employing the accrual method could potentially lead to a reduced tax liability.

The ability to deduct year-end bonuses paid within the first 2 ½ months of the next tax year and the option to defer taxes on certain advance payments is also advantageous. 

Switching accounting methods? Consult with your accountant

Your business may benefit by switching from the accrual method to the cash method or vice versa, but it’s crucial to account for the administrative costs involved in such a change.

For instance, if your business prepares financial statements in accordance with the U.S. Generally Accepted Accounting Principles, using the accrual method is required for financial reporting purposes. Using the cash method for tax purposes may still be possible, but you’ll need to maintain two sets of books, the administrative burden of which may or may not offset those advantages.

In some cases, you may also need IRS approval to change accounting methods for tax purposes. When in doubt, contact your Smolin accountant for more information.

Is Qualified Small Business Corporation Status Right for You

Is Qualified Small Business Corporation Status Right for You?
Is Qualified Small Business Corporation Status Right for You? 850 500 smolinlupinco

For many business owners, opting for a Qualified Small Business Corporation (QSBC) status is a tax-wise choice.

Potential to pay 0% federal income tax on QSBC stock sale gains

For the most part, typical C corporations and QSBCs are treated the same when it comes to tax and legal purposes, but there is a key difference. QSBC shareholders may be eligible to exclude 100% of their QSBC stock sale gains from federal income tax. This means that they could face an extremely favorable 0% federal income tax rate on stock sale profits.

However, there is a caveat. The business owner must meet several requirements listed in Section 1202 of the Internal Revenue Code. Plus, not all shares meet the tax-law description of QSBC stock. And while they’re unlikely to apply, there are limitations on the amount of QSBC stock sale gain a business owner can exclude in a single tax year. 

The date stock is acquired matters

QSBC shares that were acquired prior to September 28, 2010 aren’t eligible for the 100% federal income tax gain exclusion. 

Is incorporating your business worth it?

Owners of sole proprietorships, single-member LLCs treated as a sole proprietorship, partnerships, or multi-member LLCs treated as a partnership will need to incorporate their business and then issue shares to themselves in order to attain QSBC status in order to take advantage of tax savings. 

There are pros and cons of taking this step, and this isn’t a decision that should be made without the guidance of a knowledgeable accountant or business attorney. 

Additional considerations

Gains exclusion break eligibility

Only QSBC shares held by individuals, LLCs, partnerships, and S corporations are potentially eligible for the tax break—not shares owned by another C corporation. 

5 Year Holding period
QSBC shares must be held for five years or more in order to be eligible for the 100% stock sale gain exclusion. Shares that haven’t been issued yet won’t be eligible until 2029 or beyond. 

Share acquisition 

Generally, you must have acquired the shares upon original issuance by the corporation or by gift or inheritance. Furthermore, only shares acquired after August 10, 1993 are eligible.

Not all businesses are eligible

The QSBC in question must actively conduct a qualified business. Businesses where the principal asset is the reputation or skill of employee are NOT qualified, including those rendering services in the fields of:

  • Law
  • Engineering
  • Architecture
  • Accounting
  • Actuarial science 
  • Performing arts 
  • Consulting 
  • Athletics 
  • Financial services 
  • Brokerage services 
  • Banking
  • Insurance 
  • Leasing 
  • Financing 
  • Investing
  • Farming
  • Production or extraction of oil, natural gas, or other minerals for which percentage depletion deductions are allowed 
  • Operation of a motel, hotel, restaurant, or similar business 

Limitations on gross assets

Immediately after your shares are issued, the corporation’s gross assets can’t exceed $50. However, if your corporation grows over time and exceeds the $50 million threshold, it won’t lose its QSBC status for that reason.

Impact of the Tax Cuts and Jobs Act

Assuming no backtracking by Congress, 2017’s Tax Cuts and Jobs Act made a flat 21% corporate federal income tax rate permanent. This means that if you own shares in a profitable QSBC and decide to sell them once you’re eligible for the 100% gain exclusion break, the 21% corporate rate could be the only tax you owe.

Wondering whether your business could qualify? Smolin can help.

The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are both strong incentives to operate as a QSBC, but before making your final decision, consult with us.

While we’ve summarized the most important eligibility rules here, additional rules do apply. 

sole proprietor business tax impacts

Starting a Business as a Sole Proprietor? Here’s How It Could Impact Your Taxes
Starting a Business as a Sole Proprietor? Here’s How It Could Impact Your Taxes 850 500 smolinlupinco

It’s not uncommon for entrepreneurs to launch small businesses as sole proprietors. However, it’s crucial to understand the potential tax impacts first.

Here are 9 things to consider. 

1. The pass-through deduction may apply

If your business generates qualified business income, you could be eligible to claim the 20% pass-through deduction. (Of course, limitations may apply.)

The significance of this deduction is that it’s taken “below the line”. It reduces taxable income, as opposed to being taken “above the line” against your gross income.

Even if you claim the standard deduction instead of itemizing deductions, you may be eligible to take the deduction. Unless Congress acts to extend the pass-through deduction, though, it will only be available through 2025. 

2. Expenses and income should be reported on Schedule C of Form 1040

Whether you withdraw cash from your business or not, its net income will be taxable to you. Business expenses are deductible against gross income, rather than as itemized deductions.

If your business experiences losses, they’ll be deductible against your other income. Special rules may apply in relation to passive activity losses, hobby losses, and losses from activities in which you weren’t “at risk”. 

2. Self-employment taxes apply

In 2024, sole proprietors must pay self-employment tax at a rate of 15.3% on net earnings from self-employment up to $160,600. You must also pay a Medicare tax of 2.9% on any earnings above that. If self-employment income is in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separate returns, or $200,000 in other cases, a 0.9%
Medicare tax (for a total of 3.8%) will apply to the excess. 

Self-employment tax is charged in addition to income taxes. However, you may deduct half of your self-employment tax as an adjustment to income. 

4. You’ll need to make quarterly estimated tax payments

In 2024, quarterly estimated tax payments are due on April 15, June 17, September 16, and January 15. 

5. 100% of your health insurance costs may be deducted as a business expense

This means the rule that limits medical expense deductions won’t apply to your deduction for medical care insurance. 

6. Home office expenses may be deductible.

If you use a portion from your home to work, perform management or administrative tasks, or store product samples or inventory, you could be entitled to deduct part of certain expenses, such as: 

  • Mortgage
  • Interest 
  • Rent 
  • Insurance
  • Utilities 
  • Repairs 
  • Maintenance 
  • Depreciation

Travel expenses from a home office to another work location may also be deductible. 

7. Recordkeeping is essential

Keeping careful records of expenses is key to claiming all of the tax breaks to which you’re entitled. Special recordkeeping rules and deductibility limits may apply to expenses like travel, meals, home office, and automobile costs. 

8. Hiring employees leads to more responsibilities 

If you’d like to hire employees, you’ll need a taxpayer identification number and will need to withhold and pay over payroll taxes. 

9. Establishing a qualified retirement plan is worth considering

Amounts contributed to a qualified retirement plan will be deductible at the time of the contributions and won’t be taken into income until the money is withdrawn.

Many business owners prefer a SEP plan since it requires minimal paperwork. A SIMPLE plan may also be suitable because it offers tax advantages with fewer restrictions and administrative requirements. If neither of these options appeal to you, you may still be able to save using an IRA.

Questions? Smolin can help.

For more information about the tax aspects of various business structures or reporting and recordkeeping requirements for sole proprietorships, please contact your Smolin accountant. 

Providing Beneficiaries Power Remove Trustee

Consider Providing Your Beneficiaries With the Power to Remove a Trustee
Consider Providing Your Beneficiaries With the Power to Remove a Trustee 850 500 smolinlupinco

Appointing a trustee who is, well, trustworthy is crucial to ensuring a trust operates as intended. As such, you may invest a large amount of time and mental energy in selecting the right person for the job. 

But what happens if your carefully chosen trustee fails to carry out your wishes? 

Your beneficiaries may want to remove or replace your trustee in this circumstance, but they won’t be able to without facing a lengthy and expensive court battle—that is, unless you grant them the power to remove a trustee.  

A trustee’s role and responsibilities 

A trustee holds the legal responsibility to administer a trust on behalf of its beneficiaries. This person’s authority may be broad or extremely limited, depending on the terms of the trust.

There are certain fiduciary duties to the beneficiaries of the trust that a trustee must uphold. For example, a trustee is expected to treat all beneficiaries impartially and fairly. They must also manage the funds in the trust prudently.

It sounds simple, but when beneficiaries have competing interests, a trustee’s role can quickly become complicated. When it comes to making investment decisions, the trustee must find a way to balance the beneficiaries’ variable needs.

In some ways, choosing an executor and naming a trustee are somewhat similar. Both roles require financial acumen, dedication to the beneficiaries and the deceased person, and great attention to detail. 

Since investment expertise is important to the role, many people opt to choose a professional trustee rather than a friend or family member. Those who don’t should encourage their trustee that they can—and should—consult with financial experts as appropriate.   

“Cause” for removing a trustee 

If you don’t grant your beneficiaries the option to replace or remove a trustee, they would have to petition a court to remove the trustee. For a petition to be considered, the beneficiaries must be able to prove “cause” for the removal or replacement.

While the definition of “cause” isn’t the same in every state, there are some common grounds for removal, such as: 

  • Bankruptcy or insolvency that impacts the trustee’s ability to manage the trust 
  • Conflict of interest between the trustee and at least one beneficiary 
  • Fraud, misconduct, or other mismanagement of funds  
  • Legal incapacity 
  • Poor health 

While cause isn’t always difficult to prove, going to court can be expensive and time-consuming. Plus, many courts are hesitant to remove a trustee who’s been chosen by the trust’s creator.

With this in mind, it may be wise to include a provision in the trust document that empowers beneficiaries to remove or replace a trustee without cause if they’re dissatisfied with their management of the trust.

As an alternative, you might choose to list specific circumstances in the trust document under which your beneficiaries may remove a trustee. 

Alternative options to limit beneficiaries’ power

If you’re concerned about your beneficiaries having too much power over your trust, you might choose not to have them elect a removed trustee’s successor. Instead, you could opt to list a succession of potential trustees within the trust document.

If one trustee is removed, the next person on the list automatically becomes the trustee, instead of the beneficiaries choosing the next one.

Appointing a “trust protector” may also be a viable option. A trust protector is a person you grant power to make certain decisions regarding the management of your trust, including whether to remove or replace trustees.

Questions? Smolin can help.

For additional information on the role a trustee plays—and what your beneficiaries can do in the event that your person of choice fails to perform the job—contact a knowledgeable Smolin accountant.

Preparing Year-End Inventory Counts

Preparing for Year-End Inventory Counts
Preparing for Year-End Inventory Counts 850 500 smolinlupinco

Year-end is approaching quickly. If your business operates according to the calendar year, it’s time for a physical inventory account. While this task can feel tedious and time-consuming, it’s also a key chance to further develop your business’s operational efficiency.

As you prepare to undertake the count, let’s review some best practices that will help you make the most of the process. 

The Importance of Accuracy

Accuracy is crucial for many reasons. After all, why bother going through the process of a physical inventory count only to wind up with inaccurate numbers? In addition, you’ll need a trustworthy estimate of ending inventory in order to accurately estimate your company’s annual profits. 

For your income statement

For manufacturers, retailers, and myriad other businesses, the cost of sales is a major expense on the income statement. Calculating it is simple at the basic level. Simply subtract your ending inventory from the beginning inventory plus purchases during the year. 

However, things can become far more complicated without an accurate count. If the inventory balance for the end or the beginning of the year is incorrect, it’s impossible to determine how profitable your company truly is. 

For your balance sheet

When it comes to your company’s balance sheet, inventory is a major line item. In fact, inventory is often viewed as a form of loan collateral by lenders. Plus, stockholders review inventory-based ratios to evaluate the financial strength of your organization. 

And, of course, determining the amount of insurance coverage you’d need in the event of a major loss isn’t possible without an understanding of your true inventory. 

Importance of a Physical Count

Many companies use a computerized perpetual inventory. In it, value increases as you purchase goods (or raw materials are transformed into finished goods.) By contrast, it decreases as those goods are sold.

While this is a great first step, this method doesn’t always lead to an accurate count. This is why it’s so crucial to conduct physical counts at key times of the year as part of a strong internal control system.

In addition to double-checking the system’s accuracy, a physical count also signals to potential thieves and fraudsters that your company takes theft seriously and keeps a firm watch on its assets. 

Challenges Involved in Estimating Inventory Values

Your balance sheet might include inventory that consists of finished goods, works-in-progress, and raw materials, depending on the nature of your company’s origins. Under U.S. Generally Accounting Principles, inventory items are recorded at the market value or the lower of cost.

Subjective judgment calls could be involved when it comes to estimating the market value of inventory, particularly if your business creates and sells finished goods from raw materials. For works-in-progress, assessing value objectively can be particularly challenging because it includes overhead allocations. Percentage of completion assessments could also be needed.

Prepping for the count

Completing some tasks before you begin counting will help the entire process run more smoothly. Steps include:

  1. Create (or order) inventory tags that are prenumbered
  2. Examine inventory ahead of time and look for potential challenges that should be addressed prior to counting
  3. Create two-person teams of workers and assign them to specific count zones
  4. If any inventory items are defective or obsolete, write them off. 
  5. If any items are slow-moving, count them ahead of time and separate them into sealed, clearly marked containers. 

Additional procedure for companies that issue audited financial statements 

Arrange for at least one member of your external audit team to be present throughout your physical inventory count. However, don’t expect them to help with the counting.

Instead, they’ll be responsible for: 

  • witnessing your procedures (including any statistical sampling methods employed)
  • evaluating inventory processes
  • assessing internal controls over inventory
  • running an independent count to compare counts made by your employees with your inventory listing 

Questions? Smolin can help.

Over the years, we’ve witnessed the best (and worst) practices you could imagine when it comes to physical inventory counts. If you’re looking for more specific guidance on how to conduct a physical inventory count at your company—or simply additional recommendations on how to manage your inventory more efficiently year-round—we can help.

Contact your accountant to learn more.  

Accounting M&As

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

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

Understanding the purchase price allocation process

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

Estimate the purchase price

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

Identify assets and liabilities

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

Determining the fair value of acquired assets and liabilities

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

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

Testing for impairment

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

Straight-line amortization

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

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

Questions? Smolin can help.

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

Hit the jackpot? Tax bill

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

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

Money earned from gambling 

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


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

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

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

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

Lottery winnings

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

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

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

Winnings over $5,000

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

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

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

Questions? Smolin can help.

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

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

could you benefit health savings account

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

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

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

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

Who is eligible for an HSA? 

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

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

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

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

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

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

Limits on deductions

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

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

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

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

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

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

HSA Distributions

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

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

Questions? Smolin can help.

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

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

Understanding Percentage-of-Completion Method

Understanding the Percentage-of-Completion Method
Understanding the Percentage-of-Completion Method 850 500 smolinlupinco

If your business handles projects that take longer than a year to complete, you’ll need the “percentage-of-completion” method to recognize the associated revenue.

Let’s get into how and why to do this.

Percentage-of-completion vs. completed contract

Individuals and businesses who perform work on long-term contracts—like developers, engineering firms, creative agencies, and homebuilders—typically report financial performance with one of the two following methods:

  • Percentage-of-completion: Revenue recognition is tied to the incurrence of job costs.
  • Completed contract: Revenue and expenses are recorded upon completion of the contract terms.

Per U.S. Generally Accepted Accounting Principles (GAAP), companies that can make a “sufficiently dependable” estimate must use the more complicated percentage-of-completion method.

Those who use this method for reporting typically use the same method for taxes, as well. 

However, the federal tax code makes an exception for certain small contractors with average gross receipts of less than a certain amount over the previous three years.

For 2023, this amount is $29 million, and the number is adjusted annually for inflation. 

Estimating percentage-of-completion

Typically, companies that use the percentage-of-completion method report income sooner than those that use the completed contract method.

To estimate how much of a project is complete, companies usually compare the actual costs incurred to their total expected cost. Job cost allocation policies, change orders, and changes in estimates can complicate the process.

As an alternative, some companies choose to estimate the percentage completed via an annual completion factor.

In either scenario, the IRS requires detailed documentation to support estimates used in the percentage-of-completion method. 

Balance sheet impacts 

If your company uses the percentage-of-completion method, you’ll see an impact on your balance sheet.

You’ll report an asset for costs in excess of billings if you underbill customers based on the percentage of costs incurred. On the other hand, you’ll report a liability for billings in excess of costs if you overbill based on the costs incurred.

Imagine you’re working on a two-year projected valued at $1 million. You incur half of the expected costs in Year 1 ($400,000) and bill the customer $450,000. From a cash perspective, it appears as if you’re $50,000 ahead because you’ve collected more than the costs you’ve incurred. In reality, you’ve underbilled based on the percentage of costs incurred.

At the end of Year 1, you would have reported $500,000 in revenue, $400,000 in costs, and an asset for costs in excess of billings of $50,000. However, if you’d billed the customer $550,000, you’d report a $50,000 liability for billings in excess of costs.

Questions? Smolin can help.

The percentage-of-completion method can be complicated. Still, if your estimates are reliable, this method provides a more accurate picture of the financial performance of your long-term contracts.

If you’d like extra help navigating the percentage-of-completion method and interpreting the insights it provides, contact the helpful team at Smolin.

Start Typing
in NJ & FL | Smolin Lupin & Co.