taxes

Navigating Tax Implications Restricted Stock Awards

Navigating the Tax Implications of Restricted Stock Awards
Navigating the Tax Implications of Restricted Stock Awards 850 500 smolinlupinco

Equity-oriented executive compensation can take many forms, but restricted stock awards are a popular option. In fact, many businesses offer them as an alternative to stock option awards in light of the fact that options can lose most or all of their value if the price of the underlying stock decreases. This is less of an issue with restricted stock. If the price declines, companies can issue additional restricted shares to balance the difference. 

If you’re in a position to receive a restricted stock award, it’s important to know what to expect in regard to your taxes. 

Restricted stock: How it works 

Typically, when a company grants an employee restricted stock, the shares are subject to certain limitations. The restricted shares are transferred to the employee, but the employee won’t actually own them until they become vested.

Oftentimes, you must continue working for the company for a particular length of time. If you leave the job before the designated date, you may be forced to forfeit the restricted shares. 

Tax rules for awards of restricted stock

Before the shares become vested, you won’t have taxable income from a restricted share award. In other words, there won’t be an immediate tax obligation associated with the shares.

Once the shares become vested, however, you’ll receive taxable compensation income equal to the difference between the value of the shares on the vesting date and the amount they paid for them (if anything).

Federal income tax for compensation is up to 37%, and you may also owe an additional 3.8% net investment income tax (NIIT). You could also owe state income tax on the income.

Appreciation occurring after the shares are vested will be treated as capital gain. If you hold the stock for a year or more after vesting date, you’ll be subject to a lower-taxed, long-term capital gain on that appreciation. For long-term capital gains, the current maximum federal tax rate is 20%, but you may also be subject to state income tax and the 3.8% NIIT. 

Section 83(b) election

You’ll also have the option to make a special Section 83(b) election, which gives you the option to be taxed at the time they receive the restricted stock award rather than when the shares vest. In this case, income will equal the difference between the amount that you paid for the shares (if anything) and the value of them.

This income will still be treated as compensation and subject to federal employment taxes, federal income tax, and state income tax. However, making a Section 83(b) election offers the benefit that further appreciation in the value of the stock will be treated as lower-taxed, long-term capital gain if the stock is held for over a year. It also provides a level of protection against higher tax rates that could be in place when the shares become vested. 

However, recognizing taxable income the year the restricted stock award is received does come at a risk. The election can be a financial disadvantage in the event that the shares are later forfeited or decline in value. If you do go on to forfeit the shares, you may be able to claim a capital loss for the amount paid for them (if anything).

To make a Section 83(b) election, you must notify the IRS either before the stock is transferred or within the following 30 days. 

Questions? Smolin can help. 

While the tax rules for restricted stock awards are fairly simple, deciding whether to make a Section 83(b) election is still a time-sensitive decision that has the potential to impact the true financial benefit of your award.

Before making the decision to opt for a Section 83(b) election, contact your accountant for more personalized guidance. 

Determining Business Entity Tax-Favorable

Determining Which Business Entity is Most Tax-Favorable
Determining Which Business Entity is Most Tax-Favorable 850 500 smolinlupinco

Are you planning to start a business? Perhaps you have already and are now thinking about changing your business entity. In either circumstance, careful evaluation is needed to determine which business structure works best for you. From C-corporations to sole proprietorships, there are many issues to consider.

At present, individual federal income tax rates begin at 10% and range up to 37%. Meanwhile, corporate federal income tax is evaluated at a flat 21% rate. For some pass-through entity owners that are individuals (and some trusts and estates), the qualified business income (QBI) deduction may ease these differences in rates. 

Comparing corporate rates to individual rates

Unless Congress acts to extend it, the QBI deduction will end in 2026. By contrast, the 21% corporate rate isn’t scheduled to expire. It’s also worth considering that noncorporate taxpayers with modified adjusted gross incomes that exceed certain levels face an additional 3.8% tax on net investment income.

For some, opting to organize a business as a C-corporation rather than a pass-through entity could soften federal income tax impacts on the business’s income. Of course, the corporation will still pay interest on loans from shareholders, as well as reasonable compensation to those shareholders. Although that income will be taxed at higher individual rates, the corporation’s overall tax burden may be lowered in comparison to if the business was operated as a pass-through entity instead.

Other tax-related factors to take into consideration 

If most of the profits from the business will be distributed to the owners…

Structuring the business as a pass-through entity instead of a C-corporation may be preferable because shareholders will be taxed on dividend distributions from the corporation leading to double taxation.

Owners of a pass-through entity are only taxed once—at the personal level—on income from the business. Meanwhile, the true cost of double taxation must be evaluated based on projected income levels for both the owners and the business. 

If the value of the assets is likely to increase… 

Typically, conducting business as a pass-through entity can help owners avoid corporate tax in the event that assets are sold or the business is liquidated. When the corporation’s shares (rather than its assets) are sold, corporate tax may be avoided. 

However, the buyer may attempt to negotiate a lower price since the tax basis of appreciated business assets can’t be stepped up to reflect the purchase price. This can secure lower post-purchase depreciation and amortization deductions for the buyer.

If the business is a pass-through entity…

An owner’s basis in his or her interest in the entity is stepped up by the entity income that’s allocated to the owner. When his or her interests in the entity are sold, structuring the business as a pass-through entity could lead to less taxable gain for the owner.

If the business is expected to incur tax losses for a while…

Structuring the business as a pass-through entity may be favorable because it makes it possible to deduct the losses against other income.

On the other hand, it may be preferable for the business to operate as a C-corporation if you have insufficient other income or those losses aren’t usable. (For example, losses aren’t usable when they’re limited by passive loss rules.)

If the owner of a business is subject to the alternative minimum tax (AMT)…

AMT rates can range from 26%-28%. Since corporations aren’t subject to AMT, it may be preferable to organize the business as a C-corporation in this situation. 

Questions? Smolin can help.

As you can tell, there is much nuance involved in choosing a business entity. This article covers some general information, but we recommend consulting with a knowledgeable accountant before making your final decision.

For more details about the best way to structure your business, consult with Smolin.

Owning Assets Jointly Child Estate Planning

Is owning assets jointly with your child an effective estate planning strategy? 
Is owning assets jointly with your child an effective estate planning strategy?  850 500 smolinlupinco

Are you considering sharing ownership of an asset jointly with your child (or another heir) in an effort to save time on estate planning? Though appealing, this approach should be executed with caution. This is because it can open the door to unwelcome consequences that might ultimately undermine your efforts.

There are some advantages to owning an asset, such as a car, brokerage account, or piece of real estate, with your child as “joint tenants with right of survivorship.” The asset will automatically pass to your child without going through probate, for example. 

Still, it may also lead to costly headaches down the line, such as the following,

Preventable transfer tax liability

When your child is added to the title of property you already own, they could become liable for a gift tax on half of the property’s value. When it’s time for them to inherit the property, half of the property’s value will be included in your taxable estate.

Higher income taxes

As a joint owner of your property, your child won’t be eligible to benefit from the stepped-up basis as if the asset were transferred at death. Instead, they could face a higher capital gains tax. 

Risk of claims by creditors

Does your child have significant debt, such as student debt or credit card debt? Joint ownership means that the property could be exposed to claims from your child’s creditors.

Shared use before inheritance

By making your child an owner of certain assets, such as bank or brokerage accounts, you legally authorize them to use those assets without your knowledge or consent. You won’t be able to sell or borrow against the property without your child’s written consent, either.

Unexpected circumstances

If your child predeceases you unexpectedly, the asset will be in your name alone. You’ll need to revisit your estate plan to create a new plan for them. 

Less control 

If you believe your child is too young to manage your property immediately, making them a joint owner can be a risky move. When you pass, they’ll receive the asset immediately, whether or not they have the financial maturity—or ability—to manage it.   

Questions? Smolin can help.

Even if joint ownership isn’t the best strategy for your estate planning needs, it may still be possible to save time and money on the estate planning process with a well-designed trust. Contact the friendly team at Smolin to learn more about the estate planning measures available to you. 

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.

Tax Depreciation Rules Business Automobiles

How do tax depreciation rules apply to business automobiles?
How do tax depreciation rules apply to business automobiles? 850 500 smolinlupinco

If you use an automobile in your trade or business, you may question how depreciation tax deductions are determined. The rules are complex. In particular, special limitations apply to business vehicles classified as passenger autos (which include many pickups and SUVs). Often, these limitations result in longer-than-expected wait times to depreciate a vehicle completely.

As you review the details below, remember that the rules are different if you lease an expensive passenger auto you use for business. (Reach out for more details.) 

The cents-per-mile rate includes the cost of depreciation

For passenger autos, separate depreciation calculations only apply if you use the actual expense method to determine your deductions. If you use the standard mileage rate instead, depreciation is already included in that rate. For 2023, the standard mileage rate is 65.5 centers per business mile driven. 

Using the actual expense method to calculate depreciation for passenger automobiles

You must make a separate depreciation calculation for each year until the vehicle is fully depreciated if you choose to use the actual expense method to calculate your allowable deductions for a passenger automobile.

Generally, you can calculate depreciation over a six-year span as follows:

Year 1: 20% of the cost

Year 2: 32% of the cost

Year 3: 19.2% of the cost

Year 4: 11.52% of the cost

Year 5: 11.52% of the cost

Year 6: 5.76% of the cost

Note: If 50% or less of the use of the vehicle is for business purposes, you MUST use the straight-line method to calculate depreciation deductions, NOT the percentages listed above.

Depreciation ceilings

You’re limited to specified annual depreciation ceilings for passenger autos that cost more than the applicable amount for the year the vehicle is placed in service. These ceilings may change annually and are indexed for inflation.

For example, for a passenger auto placed in service in 2023 that cost more than a certain amount, the Year 1 depreciation ceiling is $20,200 if you choose to deduct first-year bonus depreciation. The annual ceilings for later years are as follows: Year 2, $19,500; Year 3, $11,700; and for all later years, $6,960 until the vehicle is fully depreciated.

To account for non-business use, these ceilings are proportionately reduced depending on the amount the vehicle is used for business vs. personal use. 

Reminder: Bonus depreciation will be phased out

Under the Tax Cuts and Jobs Act, bonus depreciation will be phased down to zero in 2027 unless Congress acts to extend it. 

In 2023, the deduction is 80% of eligible property. In 2024, it’s scheduled to decrease to 60%. 

Pickups, Heavy SUVs, and vans

If you have heavy SUVs, vans, or pickups that you use for business purposes over 50% of the time, you may be able to take advantage of more favorable depreciation rules. That’s because vehicles with a gross vehicle weight rating (GVWR) of over 6,000 pounds are treated as transportation equipment for depreciation purposes.

To determine whether your vehicle falls into this category, check the inside edge of the driver’s side door for the vehicle’s GVWR.

Depreciation limits change the after-tax cost of passenger autos used for business

These depreciation limits impact the after-cost tax of your business vehicles. The true cost of business assets is decreased in proportion to the tax savings from related depreciation deductions.

To the extent depreciation deductions are reduced and thereby deferred to future years, so is the value of the related tax savings, thanks to time-value-of-money considerations. Therefore, the true cost of the asset may be that much higher.

Questions? Smolin can help.

As you can see, tax depreciation rules for business automobiles are complex and constantly evolving. If you’re considering purchasing a new business vehicle soon, please contact us for the most personalized, up-to-date guidance.

Listing home vacation rental tax impacts

Listing your home as a vacation rental? Here are the tax impacts to watch for
Listing your home as a vacation rental? Here are the tax impacts to watch for 850 500 smolinlupinco

Whether in the mountains or a waterfront community, many Americans dream of owning their perfect vacation home. If you already own a second house in a desirable area, you might consider renting it out for part of the year.

Before you post that listing, though, take a moment to learn about the tax implications. Taxes for these transactions can be complicated. They are determined based on how many days the home is rented, as well as a few other factors.

Vacation use by yourself and family members (even if you charge them rent) may impact that amount of taxes you pay. Use by nonrelatives will also affect your rate if market rent isn’t charged.

Tax rates for short-term rentals

Did you know that if you rent a property out for less than 15 days during the year, it’s not treated as “rental property” at all? For tax purposes, any rent you receive for this timeframe won’t be included in your income. This can lead to revenue and significant tax benefits in the right circumstances.

There is a drawback to this, though. You can only deduct property taxes and mortgage interest—not depreciation or operating costs. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

Tax rates for longer rentals

You must include rent received for property rented out more than 14 days in your income for tax purposes. In this scenario, you may deduct part of your depreciation and operating expenses (subject to certain rules). 

However, navigating the numbers can prove challenging. You must allocate which portion of certain expenses are incurred via personal use days vs. rental days, such as: 

  • Maintenance
  • Utilities
  • Depreciation allowance 
  • Taxes
  • Interest

Both the personal use portion of taxes and the personal use part of interest on your second home may be deducted separately. To be eligible, the personal use part of interest must exceed the greater of 14 days or 10% of the rental days. Depreciation on the personal use portion of time is not deductible. 

Losses may be deductible

If allocable deductions are lower than your rental income, you must report the deductions and the rent to determine the amount of rental income you should add to your other income. If expenses exceed the income, it may be possible to claim a rental loss.

The number of days you use the house for personal purposes is important here. If you used the home for more than the greater of 14 days or 10% of the rental days, you used it “too much” to claim your loss.

In this instance, you may still be able to wipe out the rental income using your deductions. However, you can’t create a loss. Deductions you can’t claim will be carried forward, and you may even be able to use them in future years. 

If you can only deduct rental expenses up to the amount of rental income you received, you must prioritize the following deductions:

  • Interest and taxes
  • Operating costs
  • Depreciation

Even if you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, though, rental deductions that exceed rental income may be claimed as a “passive” loss (and will be limited under passive loss rules.) 

Questions? Smolin can help.

Tax rules regarding vacation rental homes can be confusing. We only discuss the basic rules above, and additional rules may apply to you if you’re considered a small landlord or real estate professional.

That’s why it’s best to consult with a tax professional before planning your vacation home use. Contact the friendly tax experts at Smolin to learn more.

Tax Considerations Merger Acquisition Transactions

Important Tax Considerations with Merger and Acquisition Transactions
Important Tax Considerations with Merger and Acquisition Transactions 850 500 smolinlupinco

Many industries have seen an increase in merger and acquisition activity in recent years. Is there potential for your business to merge with or acquire another? 

If so, you’ll need to understand the potential tax implications of that decision.

Assets vs. stocks

These transactions can be structured in two ways for taxes:

1. Stock (or ownership interest) sale 

If the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) treated as a partnership, the buyer may directly purchase a seller’s ownership interest.

Purchasing stock from a C-corp is a particularly attractive option because the 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) is now permanent.

The corporation will generate more after-tax income and pay less tax overall. Additionally, any built-in gains from appreciated corporate assets will be taxed at a lower rate should you eventually decide to sell them in the future.

Ownership interests in S corporations, partnerships, and LLCs are also made more attractive by the TCJA’s reduced individual federal tax rates. On the buyer’s personal tax return, the passed-through income from these entities also will be taxed at lower rates.

Keep in mind that the TCJA’s individual rate cuts are scheduled to expire at the end of 2025. Depending on future changes in Washington, only time will tell if they’ll be eliminated earlier or extended.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask us if this would be beneficial in your situation.

2. Asset sale

A buyer may also purchase assets of a business. For example, a buyer may only be interested in certain assets or product lines. If the target business is a sole proprietorship or single-member LLC treated as a sole proprietorship for tax purposes, an asset sale is the only option. 

Buyer vs. seller preferences

Buyers often prefer to purchase assets instead of ownership interests for many reasons. Typically, the buyer’s primary goal is to generate enough cash flow from an acquired business to cover the debt of acquiring it, as well as provide a pleasing return on the investment (ROI). 

As such, buyers are reasonably concerned about minimizing exposure to undisclosed and unknown liabilities and achieving favorable tax rates after the deal closes.

One option is for the buyer to step up (increase) the tax basis of purchased assets to reflect the purchase price. This can lower taxable gains for certain assets, like inventory and receivables when they’re sold or converted into cash. It can also increase amortization deductions and depreciation deductions for some qualifying assets. 

In contrast, many sellers prefer stock sales for both tax and nontax reasons. They strive to minimize the tax bill from a sale. This can often be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Of course, it’s worth bearing in mind that areas, like employee benefits, can cause unanticipated tax conundrums when acquiring or merging with another business. 

Pursuing professional advice is crucial for both buyers and sellers. 

Questions? Smolin can help.

For many people, selling or buying a business is the largest and most important financial transaction they’ll make in a lifetime. That’s why it’s essential to seek professional tax advice as you negotiate this situation. Once the deal is done, it could be too late to achieve a favorable tax result.

If you’re considering merging with another business or acquiring a new asset, contact the knowledgeable staff at Smolin to discuss the most favorable way to proceed.

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. 

Key Q4 Deadlines Employers Businesses

Key Q4 Deadlines for Employers and Businesses 
Key Q4 Deadlines for Employers and Businesses  850 500 smolinlupinco

In the fourth quarter of 2023, businesses and employers should be aware of these key tax-related deadlines.

(Note: Additional deadlines may apply. Please contact your accountant directly to ensure you’re meeting all filing requirements.) 

While certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas, the following dates act as a general guideline: 

October 2 (Monday): Final day to set up a SIMPLE IRA plan

If you (or a predecessor employer) did not previously maintain a SIMPLE IRA plan, October 2nd is the final day to initially set up one.

Exception: If you’ve become a new employer after October 1st, you can establish a SIMPLE IRA as soon as administratively feasible after your business is established. 

October 16 (Monday): C Corporations and automatic six-month extensions

If you run a C corporation, this is your final date to:

  • Establish and contribute to a SEP for 2022, (if an automatic six-month extension was filed)
  • Make contributions to certain employer-sponsored retirement plans for 2022
  • File a 2022 income tax return (Form 1120) and settle any remaining tax, interest and penalties due.

October 31 (Tuesday): 3rd quarter reporting

This is the last day to report third-quarter 2023 income tax withholding and FICA taxes using Form 941 and pay any remaining tax due.

(See exception below under “November 13.”)

November 13 (Monday): Exception for 3rd quarter reporting

If you deposited on time (and in full) all of the associated taxes due, this is the last day to report income tax withholding and FICA taxes for third quarter 2023 using Form 941. 

December 15 (Friday): 4th installment of 2023 estimated income taxes

Calendar-year C corporation must pay the fourth installment of 2023 estimated income taxes by this date.

Questions? Smolin can help.

For more information about filing requirements and personal guidance on the deadlines applicable to your business, contact the friendly accountants at Smolin.

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