Tax Planning

Secure Your Business Partnership with a Buy-Sell Agreement
Secure Your Business Partnership with a Buy-Sell Agreement 150 150 smolinlupinco

Buying a business with co-owners or already sharing the reins? A buy-sell agreement isn’t just a smart move–it’s essential. It gives you a more flexible ownership stake, prevents unwanted changes in ownership, and avoids potential IRS complications. 

The basics

There are two main types of buy-sell agreements: cross-purchase and redemption agreements (also known as liquidation agreements).

  • Cross-purchase agreements. This contract between co-owners specifies what happens if one co-owner leaves due to a trigger event, like death or disability. In these cases, the remaining co-owners are required to purchase the departing owner’s interest in the business.
  • Redemption agreements. This is a contract between the business and co-owners which outlines that if one co-owner leaves, the business itself buys their stake.

Triggering events

Co-owners work together to outline what triggering events to include in the buy-sell agreement. Common triggers like death, disability, or reaching retirement age are standard but you can also opt to include other scenarios like divorce.

Valuation and payment terms

Make sure your agreement includes a solid method for valuing ownership stakes. This could be a set price per share, an appraised fair market value, or a formula based on earnings or cash flow. It should also spell out how amounts will be paid out–whether a lump sum or installments–to withdrawing co-owners or their heirs upon a triggering event.

Using life insurance to fund the agreement

The death of a co-owner is a common triggering event, and life insurance is often used to fund buy-sell agreements. 

In a basic cross-purchase agreement between two co-owners, each buys a life insurance policy on the other. If one co-owner dies, the survivor uses the payout to buy the deceased co-owner’s share from the estate, surviving spouse or another heir (s). These insurance proceeds are tax-free as long as the surviving co-owner is the original purchaser of the policy.

Things get complicated when there are more than two co-owners because each co-owner must have life insurance policies on all the other co-owners. In this scenario, the best decision is often to use a trust or partnership to buy and maintain one policy on each co-owner. 

That way, if a co-owner dies, the trust or partnership collects the death benefit tax-free and distributes it to the remaining owners to fund the buyout.

In a redemption agreement, the business buys policies on the co-owners and uses the proceeds to buy out the deceased’s share.

Be sure to specify in your agreement what to do if insurance money does not cover the cost of buying out a co-owner. By clearly outlining that co-owners are allowed to buy out the rest over time, you can ensure some breathing room to come up with the needed cash instead of having to fulfill your buyout obligation right away.

Create certainty for heirs 

If you’re like many business owners, your business is likely a big chunk of your estate’s value. A buy-sell agreement ensures that your heirs can sell your share under the terms you approved. It also locks in the price for estate tax purposes, helping you avoid IRS scrutiny. 

A well-drafted buy-sell agreement protects you, your heirs, your co-owners, and their families. But remember, buy-sell agreements can be tricky to handle on your own.

Reach out to your Smolin advisor to set up a robust agreement that protects the interests of everyone involved.

6 Smart Ways to Earn Income Without Paying Taxes
6 Smart Ways to Earn Income Without Paying Taxes 850 500 smolinlupinco

Believe it or not, there are effective strategies to generate income and gains without triggering federal income tax. Here are some tips to keep your money in your pocket, tax-free:

Roth IRAs 

Roth IRAs are among the most powerful tools for generating tax-free income. Unlike traditional IRAs, qualified withdrawals from a Roth IRA are exempt from federal income tax. 

To qualify, you must be at least 59½ years old and have had your Roth IRA open for at least five years, or you must be disabled or deceased. With proper planning, your heirs can also enjoy withdrawals free from federal income tax from your Roth IRA after your passing.

Home sale profits

Selling your home can come with a huge tax break. Unmarried sellers can exclude up to $250,000 in profit from federal income tax, while married couples filing jointly can exclude up to $500,000. 

However, to qualify for this benefit, you’ll need to meet certain criteria: 

  • You must have owned the property for at least two years within the five years before the sale.
  • The home must have been your principal residence for at least two of those years.
  • For the $500,000 exclusion, one spouse must meet the ownership requirement, and both must pass the use test.

Capital gains and dividends

Individuals with incomes below a certain threshold can collect long-term capital gains and qualified dividends tax-free. The federal tax rate on these gains and dividends can be as low as 0%. 

In 2024, single filers can have up to $47,025 in taxable income and still fall into the 0% bracket. For married couples filing jointly, that limit jumps to $94,050. It’s a smart way to potentially keep more of your investment earnings.

Gifts and inheritances 

Gifts and inheritances generally receive tax-free treatment, meaning the amount itself isn’t taxable. However, any income generated by the gifted or inherited property, such as interest, dividends, or rent, is subject to taxes. There may also be tax implications for the person giving the gift. 

Additionally, if you inherit assets like stocks, real estate, or mutual funds, the tax basis is stepped up to the fair market value on the date of the benefactor’s passing (or six months later, if chosen by the estate executor). This means you’ll only owe capital gains tax on any appreciation after that date if you decide to sell the asset.

Small business stock gain

Gains from selling qualified small business corporation (QSBC) stock can be entirely tax-free. If you hold the stock for over five years, you may qualify for federal-income-tax-free treatment on any gains.

College saving accounts

You can accumulate tax-free income through Section 529 college savings plans, where earnings grow free from federal income tax. When it’s time for your child or grandchild to attend college, withdrawals for education expenses are also tax-free. 

Alternatively, you can contribute up to $2,000 annually to a Coverdell Education Savings Account (CESA) for a beneficiary under 18. CESA earnings grow tax-free, and withdrawals for qualified college expenses–like tuition, fees, books, and room and board–are also tax-free. 

Keep in mind, CESA contributions phase out if your income exceeds certain limits.

Advance planning for better results 

You may have more opportunities to collect income and gains free from federal income tax than you realize. For instance, life insurance payouts due to an insured person’s death are generally not taxable. Don’t assume every source of income will be taxed.

Before making any major financial moves, consult your Smolin advisor–advance planning could help you secure tax-free income or gains that might otherwise be subject to tax.

Your Need-to-Know Tax Guide for Inherited IRAs
Your Need-to-Know Tax Guide for Inherited IRAs 850 500 smolinlupinco

A 2019 change to tax law ended the “stretch IRAs” strategy for most inherited IRAs. This means that beneficiaries now have 10 years to withdraw all of the funds. Since then, there’s been a lot of confusion about required minimum distributions (RMDs).

Thankfully, the IRS has now issued final regulations clarifying the “10-year rule” for inherited IRAs and defined contribution plans, like 401(k)s. In a nutshell, the final regulations largely align with proposed rules released in 2022.

The SECURE Act and 10-Year Rule

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, most heirs except surviving spouses must withdraw the entire balance within 10 years of the original account owner’s death. In 2022, the IRS proposed regulations to clarify the rule. It outlines that beneficiaries must take their taxable RMDs over the course of the 10-year period after the account owner dies. 

They are not permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement significantly limits beneficiaries’ tax planning flexibility and, depending on their situations, could push them into higher tax brackets during those years.

Confused beneficiaries reached out to the IRS trying to determine when they needed to start taking RMDs on recently inherited accounts. The uncertainty posed risks for both beneficiaries and the defined contribution plans. 

This is because beneficiaries could have been assessed a tax penalty on amounts that should have been distributed but weren’t. And the plans could have been disqualified for non-compliance.

In response, the IRS waived penalties for taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs due to the death of the account owner in 2020 or 2021, respectively. 

The waiver guidance also stated that the IRS would issue final regulations no earlier than 2023. When 2023 rolled around, the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022.

As of April 2024, the IRS again extended the relief, this time for RMDs in 2024. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs for these years, and plans will be safe from disqualification based solely on the missed RMDs.

2024 final regulations

The final regulations require certain beneficiaries to take annual RMDs from inherited IRAs or defined contribution plans within ten years following the account owner’s death. These regulations will take effect in 2025.

If the deceased hadn’t begun taking their RMDs before their death, beneficiaries have more flexibility. They can take annual RMDS or wait until the end of the 10-year period and take a lump-sum distribution. Ultimately, the IRS eliminated the requirement to take annual distribution, allowing beneficiaries greater tax planning flexibility. 

For instance, if Ken inherited an IRA in 2021 from his father, who had already begun taking RMDs, under the IRS-issued waivers, Ken doesn’t need to take RMDs for 2022 through 2024. Under the final regulations, he must take annual RMDs for 2025 to 2030, with the account fully distributed by the end of 2031.

If Ken’s father had not started taking RMDs, Ken could have waited until the end of 2031 to take a lump-sum distribution. As long as the account is fully liquidated by the end of 2031, Ken remains in compliance with the rules.

Contact us with questions

If you’ve inherited an IRA or defined contribution plan in 2020 or later, it’s understandable to feel confused about the RMD rules. Reach out to your Smolin advisor for help understanding these regulations and developing a personalized tax-saving strategy.

Tax Implications of Disability Income
Tax Implications of Disability Income 850 500 smolinlupinco

If you are one of the many Americans who rely on disability benefits, you might be wondering how that income is taxed. The short answer is it depends on the type of disability income you receive and your overall earnings.

Taxable Disability Income

The key factor is who paid for the benefit. When the income is paid to you directly from your employer, it’s taxable like your ordinary salary and subject to federal income tax withholding. Depending on your employer’s disability plan, Social Security taxes may not apply. 

Often, disability income isn’t paid by your employer but rather from an insurance policy that provides the disability coverage. Depending on whether the insurance is paid for by you or by your employer, the tax treatment varies. If your employer paid, the income is taxed the same as if it was paid directly to you by the employer as above. But if you paid for the policy, payments received are usually tax-free.

Even if the insurance is offered through your employer, as long as you pay the premiums instead of them, the benefits are not taxed. However, if your employer pays the premiums and includes that amount as part of your taxable income, your benefits may also be taxable. Ultimately, tax treatment of benefits received depends on tax treatment of paid premiums.

Illustrative example

Scenario 1: 

If your salary is $1,050 a week ($54,600 a year) and your employer pays $15 a week ($780 annually) for disability insurance premiums, your annual taxable income would be $55,380. This total includes your salary of $54,600 plus $780 in disability insurance premiums. 

The insurance premiums are considered paid by you so any disability benefits received under that policy are tax-free.

Scenario 2:

If the disability insurance premiums are paid for by your employer and not included in your annual wages of $54,600, the amount paid is excludable under the rules for employer-provided health and accident plans.

The insurance premiums are considered paid for by your employer and any benefits you receive under the policy, are taxable income as ordinary income.

If there is permanent loss of a body part or function, special tax rules apply. In such cases, employer-paid disability might be tax-free, as long as they aren’t based on time lost from work.

Social Security disability benefits 

Social Security Disability Insurance (SSDI) benefits have their own tax rules. Payments are generally not subject to tax as long as your annual income falls under a certain threshold. 

For individuals if your annual income exceeds $25,000, a portion of your SSDI benefits are taxable. The threshold for married couples is $32,000. 

State Tax Implications

Though federal law treats disability payments as taxable income as outlined above, state tax laws vary. It’s wise to seek out professional support to determine if disability payments are taxed or exempt in your state. 

As you determine your disability coverage needs, remember to consider the tax implications. If you purchase a private policy yourself, the benefits are generally tax free since you are using your after-tax dollars to pay the premium. 

On the other hand, if your employer pays for the benefit, you will lose a portion of the benefits to taxes. Plan ahead and look at all your options. If you think your current coverage will be insufficient to support you should the unthinkable happen, you might consider supplementing any employer benefits with an individual.

Reach out to your Smolin advisor to discuss your disability coverage and how drawing benefits might impact your personal tax situation.

Understanding Taxes on Real Estate Gains
Understanding Taxes on Real Estate Gains 850 500 smolinlupinco

If you own real estate held for over a year and sell it for a profit, you typically face capital gains tax. This applies even to indirect ownership passed through entities like LLCs, partnerships, or S corporations. You can expect to pay the standard 15% or 20% federal income tax rate for long-term capital gains.

Some real estate gains can be taxed at even higher rates due to depreciation deductions. Here are some potential federal income tax implications of these gains.

Vacant land

Specifically for high earners, the current maximum federal long-term capital gain tax on vacant land is 20%. For 2024, the 20% rate kicks in for 

  • Single filers with taxable income exceeding $518,900
  • Married joint-filing couples with taxable income exceeding $583,750
  • Head of household with taxable income exceeding $551,350. 

If your income is below these thresholds, you’ll only owe 15% federal tax on vacant land gains. Remember that you may also owe the 3.8% net investment income tax (NIIT) on some or all of the gain.

Gains from depreciation

Depreciation-related gains from real estate, also known as unrecaptured Section 1250 gains, are generally taxed at a flat 25% federal rate. However, if the gain would be taxed at a lower rate without this special treatment, this 25% rate does not apply. However, you could owe the 3.8% NIIT on some or all of the unrecaptured Section 1250 gain.

Gains from qualified improvement property

Qualified improvement property or QIP, refers to improvements to the interior of nonresidential buildings after being placed in service. QIP excludes enlargements such as elevators, escalators, and structural changes.

You can claim tax deductions for QIP through Section 179 deductions or bonus depreciation. When you sell QIP for which you’ve claimed Section 179 deductions, part of the gain may be taxed as ordinary income at your regular tax rate rather than the lower long-term capital gains rate. This is known as Section 1245 recapture. You may also owe the 3.8% NIIT on this portion of the gain.

If you sell QIP for which first-year bonus depreciation has been claimed, part of the gain might be taxed as ordinary income at your regular tax rate via Section 1250 recapture, rather than lower long-term gain rates. This applies to the portion of the gain that exceeds the depreciation calculated using the applicable straight-line method. Again, you may still owe the 3.8% NIIT on some or all of the recapture gain.

Tax planning point: Choosing straight-line depreciation for real property, including QIP, there won’t be any Section 1245 or Section 1250 recapture. You will only have unrecaptured Section 1250 gain from the depreciation taxed at a federal rate below 25%. The 3.8% NIIT on all or part of the gain may still apply.

Handling the complexities

The federal income tax rules for real estate gains are obviously very complex. There’s a lot to consider: different tax rates applied to different categories of gain, the possibility of owing the 3.8% NIIT, and potential state income tax. 

Our team of skilled tax advisors can help you understand the intricacies and minimize the tax liability of capital gains. Contact a Smolin advisor to discuss your specific situation.

Cash or Accrual Accounting: Which is Right for Your Business?
Cash or Accrual Accounting: Which is Right for Your Business? 850 500 smolinlupinco

Your business can choose between cash or accrual accounting for tax purposes. While the cash method can provide certain tax advantages to those that qualify, the accrual method might be a better fit for some businesses. 

To maximize tax savings, you need to weigh both methods before deciding on one for your business. 

Small business tax benefits

Small businesses, as defined by the tax code, generally enjoy the flexibility of using either cash or accrual accounting. Various hybrid approaches are also allowed for some businesses. 

Before the Tax Cuts and Jobs Act (TCJA), the gross receipts threshold to classify as a small business was $1 million to $10 million depending on factors like business structure, industry, and if inventory significantly contributed to business income.

The TCJA established a single gross receipts threshold and increased it to $25 million (adjusted for inflation), expanding small business status benefits to more companies. In 2024, a small business is defined as having average gross receipts of less than $30 million for the preceding three-year period, up from $29 million in 2023.

Small businesses also benefit from simplified inventory accounting and exemptions from the uniform capitalization rules and business interest deduction limit.  S corporations, partnerships without C corporation partners, and farming businesses and certain personal service corporations may still use the cash accounting method, regardless of their gross receipts. 

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

Potential advantages

Since cash-basis businesses recognize income when it’s received and deduct expenses when they’re paid, they have more control over their tax liability. This includes deferring income by delaying invoices or shifting deductions forward by accelerating expense payments.

Accrual-basis businesses, on the other hand, recognize income when earned and expenses are deducted as they’re incurred, regardless of cash flow. This limits their flexibility to time income and deductions for tax purposes.

The cash method can improve cash flow since income is taxed in the year it’s received. This helps businesses make their tax payment using incoming funds. 

If a company’s accrued income is lower than accrued expenses though, the accrual method can actually result in a lower tax liability than the cash method. The accrual method also allows for a business to deduct year-end bonuses paid in the first 2½ months of the following tax year and tax deferral on some advance payments.

Considerations when switching methods

If you’re considering a switch from one method to the other, it’s important to consider the administrative costs involved. If your business follows the U.S. Generally Accepted Accounting Principles (GAAP), you’ll need to maintain separate books for financial and tax reporting purposes. You may also be required to get IRS approval before changing accounting methods for tax purposes. 

Reach out to your Smolin advisor to learn which method is best for your business.

Six Tax Issues to Consider During a Divorce
Six Tax Issues to Consider During a Divorce 850 500 smolinlupinco

Divorce is a complex legal process, both financially and emotionally. Taxes are likely the farthest thing from your mind. But, you need to keep in mind the tax implications and consider seeking professional assistance to minimize your tax bill and navigate the separation process more smoothly. 

Here are six issues to keep top of mind as you move through the divorce process.

1. Planning to sell the marital home 

When a divorcing couple chooses to sell their home, they can possibly avoid paying tax on up to $500,000 of gain if they owned the home and lived there for two of the previous five years. If the living situation is such that one spouse continues living in the home while the other moves out, as long as they both remain owners, they might be able to avoid gains on future sale of the home for up to $250,000 each. In this instance, there may need to be special wording in the divorce decree or separation agreement to protect this exclusion for the spouse who moves out.

If the couple doesn’t meet strict two-year ownership and use requirements to qualify for the full $250,000 or $500,000 home sale exclusion, they might still be eligible for a reduced exclusion due to unforeseen circumstances.

2. Dividing retirement assets

Pension benefits often represent a significant portion of a couple’s marital assets. To ensure fair division of property, a “qualified domestic relations order” or QDRO is typically necessary. A QDRO is a legal document that outlines how pension benefits will be split between divorcing parties and whether one former spouse has the right to share in the benefits.

Without a QDRO, the spouse who earned the benefits remains solely responsible for associated taxes, even though they’re paid to the other spouse. A QDRO essentially transfers a portion of the pension benefits to the non-earning spouse along with the tax liability for their share. 

3. Determining your filing status

If you’re still legally married as of December 31st, you still need to file taxes as married jointly or married separately, even if you are in the process of getting divorced. However, if you’ve finalized your divorce by year-end, you could potentially qualify for “head of household” status if you meet certain requirements, such as having dependent children reside with you for more than half the year. 

4. Understanding alimony and spousal support 

The Tax Cuts and Jobs Act of 2017 made significant changes to the way alimony and spousal support are treated regarding taxes. For divorce or separation agreements executed after December 31, 2018, alimony and support payments are no longer deductible by the payer and are not taxable income for the recipient. This means alimony and spousal support are now treated similarly to child support payments for tax purposes. 

It’s important to note that divorce or separation agreements executed before 2019 generally still follow the old tax rules, where alimony is deductible for the payer and taxable for the recipient.

5. Claiming dependents

Unlike alimony, regardless of when the divorce or separation agreement was executed, child support payments are neither tax-deductible for the payer nor taxable income for the recipient. 

Determining which parent claims the child as a dependent or tax purposes often depends on standing custody agreements. Generally the custodial parent —the one the child lives with the majority of the year—can claim the child as a dependent; however, there are a few exceptions.

For instance, if the non-custodial parent provides more than half of the child’s support, they may be able to claim the child. It’s essential to coordinate with your ex-spouse to determine who will claim the child and thus access any related tax breaks.

6. Dividing business assets 

Divorcing couples who own a business together face unique tax challenges. The transfer of business interests in connection with divorce, can trigger significant tax implications.  For instance, if one spouse owns shares of an S corporation, transferring the shares could result in loss of valuable tax deductions such as forfeiting suspended losses ie. when losses are carried over into future tax years rather than being deducted for the year they’re incurred. 

Similarly, transferring a partnership interest can lead to even more complex tax issues  involving partnership debt, capital accounts, and valuation of the business. 

Seeking professional guidance

These are just some of the tax-related issues you may face when getting a divorce. You may need to adjust your tax withholding to reflect your new filing status. Be sure to also notify the IRS of any address or name changes. You likely also need to re-evaluate your estate plans to align with your new circumstances.

Proper planning is essential to ensure a fair division of assets while minimizing your tax liability. Our skilled team of Smolin advisors can help you navigate the complex financial issues involved with your divorce.

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

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

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

FAST funding options

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

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

4 decision-making entities

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

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

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

Bridging the leadership gap

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

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

Tax Treatment of Business Website Expenses
Tax Treatment of Business Website Expenses 850 500 smolinlupinco

Most businesses today rely on websites, but despite their widespread use, the IRS hasn’t provided formal guidelines for deducting their costs.

However, some guidance can be gleaned from existing tax laws that offer business taxpayers insights into the proper treatment of website cost deductions. 

Tax implications of hardware versus software

The hardware costs you might need to operate a website fall under the standard rules for depreciable equipment. For 2024, you can deduct 60% of the cost in the first year they are operational under the first-year bonus depreciation break.

This bonus depreciation rate was 100% for property placed in service in 2022, 80% in 2023, and will continue to decrease until it’s fully phased out in 2027 unless Congress acts to extend or increase it.

On the other hand, you may be able to deduct all or most of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. These deductions are subject to certain limitations.

For tax years beginning in 2024, the maximum Section 179 deduction is $1.22 million, subject to a phaseout rule. If more than $3.05 million in 2024 of qualified property is placed in service during the year, the deduction is phased out.

You also need to consider the limit on taxable income as your Sec. 179 deduction can’t be in excess of your business taxable income. The Section 179 deductions can’t create or increase an overall tax loss. However, any portion of Section 179 that can’t be claimed in the current year can be carried forward to future tax years, subject to applicable limitations.

Purchased software is generally treated similarly to hardware for tax purposes but there is a key difference when it comes to software licenses. Payments for licenses used on your website are typically considered ordinary and necessary business expenses, which means they can usually be deducted as business expenses for the current tax year.

What about software developed internally?

If you develop your website in-house or hire a contractor with no financial risk for the software’s performance, bonus depreciation might apply as explained above. If bonus depreciation doesn’t apply, taxpayers have two options:

  1. Immediate deduction. Deduct the entire cost in the year you pay or incur it.
  2. Amortization. Spread the cost over a five-year period,  starting from the middle of the tax year when the expenses were paid or incurred. This is generally the only option if bonus depreciation does not apply. 

There is an exception for advertising, though. If your website’s primary purpose is advertising, you can typically deduct the full development cost as an ordinary business expense.

What if you pay a third party?

Many businesses outsource website management to third-party providers. In these instances, payments made to those providers are typically considered ordinary and necessary business expenses and are deductible.

What about expenses before business begins?

Start-up costs can include website development expenses. You can generally claim up to $5,000 of these expenses in the year your business begins. However, if your total start-up costs exceed $50,000, this $5,000 is gradually reduced. Any remaining start-up costs must be capitalized and spread out (amortized) over 60 months, starting from the month your business officially launches. 

Determining business expenses and deductions can be a complex process. Reach out to your Smolin advisor for help finding the appropriate tax treatment of your website costs. 

Self-Directed IRAs: A Double-Edged Sword
Self-Directed IRAs: A Double-Edged Sword 850 500 smolinlupinco

Traditional and Roth IRAs are already powerful tools for estate planning, but a “self-directed” IRA can take their benefits to the next level. They can allow you to invest in alternative assets that might offer higher returns but they also come with their own set of risks that could lead to unfavorable tax consequences. 

It’s important to handle these investments with caution.

Exploring alternative investments

Unlike traditional IRAs, which usually offer a narrow selection of stocks, bonds, and mutual funds, self-directed IRAs allow for a variety of alternative investments. These can include real estate, closely held business interests, commodities, and precious metals. However, they can’t hold certain assets like S corporation stock, insurance contracts, and collectibles (like art or coins).

From an estate planning perspective, self-directed IRAs are particularly appealing. Imagine transferring real estate or stock into a traditional or Roth IRA and allowing it to grow on a tax-deferred or tax-free basis for your heirs.

Risks and tax traps

Before diving in, it’s crucial to have an understanding of the significant risks and tax traps of self-directed IRAs:

  • Prohibited Transaction Rules. These rules restrict interactions between an IRA and disqualified persons, including yourself, close family members, businesses you control, and your advisors. This makes it challenging for you or your family members to manage or interact with business or real estate interests within the IRA without risking the IRA’s tax benefits and incurring penalties.
  • Unrelated Business Income Taxes. IRAs that invest in operating companies may face unrelated business income taxes, payable from the IRA’s funds.
  • Unrelated Debt-Financed Income. Investing in debt-financed property through an IRA could create unrelated debt-financed income, leading to current tax liabilities.

Proceed with caution

Remember, if you’re considering a self-directed IRA, it might offer increased flexibility, but it also demands a higher level of due diligence and oversight. 

Assess the types of assets you’re interested in carefully and weigh the potential benefits against the risks. Reach out to your Smolin advisor to determine if a self-directed IRA is right for you.

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