Expenses

Corporate officers, shareholders: Expenses paid personally

Corporate officers or shareholders: How should you treat expenses paid personally?
Corporate officers or shareholders: How should you treat expenses paid personally? 850 500 smolinlupinco

If you play a major role in a closely held corporation, you might occasionally spend personal funds on corporate expenses. Unless you take the necessary steps, these expenses could end up being nondeductible by either an officer or the corporation. This issue is more likely to occur with a financially troubled corporation.

What can’t you deduct?

Generally speaking, you’re not allowed to deduct an expense incurred on behalf of your corporation, even if it’s a legitimate “trade or business” expense, even if the corporation is struggling financially.

This is because taxpayers are only allowed to deduct expenses that are their own. Since your corporation’s legal status as a separate entity must be respected, its costs aren’t yours and can’t be deducted even if you pay them.

To further complicate matters, the corporation typically won’t be able to deduct these expenses because it didn’t pay them on its own. 

It’s important to note that it should be a practice of your corporation’s major shareholders or officers to not cover corporate expenses.

Which expenses may be deductible?

Alternatively, suppose a corporate executive incurs expenses that relate to an essential part of their duties as an executive. In that case, they may be deductible as ordinary or necessary expenses related to the “trade or business” of being an executive.

Suppose you want to create an arrangement that provides payments to you and safeguards their deductibility. In that case, a provision should be included in your employment contract with the corporation explicitly outlining the expenses that are part of your duties and authorizing you to incur them.

An excellent example of this kind of agreement would be out-of-town business conferences on the corporation’s behalf, where you would spend personal funds to do your work.

What’s the best alternative?

To avoid the complete loss of any deductions by the corporation or yourself, you should create an arrangement in which the corporation reimburses you for any relevant expenses you incur.

Provide receipts to the corporation and use an expense reimbursement claim form or system so that your corporation can deduct the amount of money they’ve reimbursed you.

Have questions? Smolin can help

If you want to know more about how to set up reimbursement arrangements at your corporation, or you have questions about deductible business costs, contact our professional team at Smolin, and we’ll walk you through the process.

Prepare for an Uncertain Federal Gift and Estate Tax Exemption Amount with a SLAT
Prepare for an Uncertain Federal Gift and Estate Tax Exemption Amount with a SLAT 1275 750 smolinlupinco

For 2023, the federal gift and estate tax exemption amount is set at $12.92 million (or $25.84 million for married couples). However, in the absence of action from Congress, on January 1, 2026, it’s scheduled to decrease to a mere $5 million ($10 million for married couples). 

According to current estimates, those numbers are expected to be adjusted for inflation to just over $6 million and $12 million, respectively.

If you anticipate the value of your estate will surpass estimated 2026 exemption thresholds, consider implementing planning techniques today that may assist in reducing or avoiding gift and estate tax liability in the future. 

One such planning technique is a spousal lifetime access trust (SLAT). In appropriate circumstances, a SLAT enables you to remove substantive wealth from your estate without incurring tax while also providing a safeguard if your circumstances change in the future.

SLAT fundamentals 

A SLAT is an irrevocable trust that permits the trustee to distribute funds to your spouse if a need arises during their lifetime. Usually, SLATs are designed to benefit your children or other beneficiaries while providing income to your spouse throughout their lifetime.

You can make completed gifts to the trust, thereby removing those assets from your estate. However, you can still maintain indirect access to the trust through your spouse if they are named a beneficiary of the trust. 

This is commonly achieved by appointing an independent trustee with complete discretion to distribute funds to your spouse.

Beware of potential complications

SLATs must be meticulously planned and drafted to avoid undesired consequences. For instance, to prevent the inclusion of trust assets in your spouse’s estate, your gifts to the trust must be made with your separate property. 

This may necessitate additional planning, particularly if you reside in a community property state. Additionally, after the trust is funded, it’s crucial to ensure that the trust assets aren’t commingled with community property or marital assets.

It’s essential to remember that the benefits of a SLAT rely on indirect access to the trust through your spouse, which means your marriage must be strong for this strategy to be successful.

There’s also a risk of losing the safety net a SLAT provides if your spouse passes away before you do. One way to mitigate this risk is to establish two SLATs: one created by you with your spouse as a beneficiary and one created by your spouse naming you as a beneficiary.

If both you and your spouse establish a SLAT, careful planning is required to avoid the reciprocal trust doctrine. Under this doctrine, if the IRS determines that the two trusts are interconnected and place you and your spouse in a similar economic position as if you had each created a trust for your individual benefit, it may invalidate the arrangement. To avoid this outcome, the terms of the trusts should be sufficiently varied.

Have questions? Smolin can help.

If you’re having issues wrapping your head around making a SLAT work for you or your spouse, contact the knowledgeable professionals at Smolin, and we’ll help you navigate this complex process.

Ease the Burden of Being a Member of the Sandwich Generation with these Action Steps
Ease the Burden of Being a Member of the Sandwich Generation with these Action Steps 1275 750 smolinlupinco

Are you raising children and supporting aging parents at the same time? If so, you can count yourself among those in the “Sandwich Generation,” a cohort “squeezed” by the demands of caring for children and older adults. 

While providing for your parents later in life may be gratifying, it can also be time-consuming. Deciding how best to handle the financial affairs of your parents as they age requires much thought.

You’ll need to incorporate their needs into your own estate plan. If necessary, you’ll also have to tweak some arrangements they’ve already made. Here are some essential steps you can take to manage your situation.

Identify key contacts

Just as you would do for yourself, you’ll need to collect the names and addresses of the professionals important to your parent’s medical and financial matters. Your list could include the following:

  • Stockbrokers 
  • Financial advisors
  • Attorneys
  • CPAs
  • Insurance agents
  • Physicians

List and value assets 

If you’re managing your parents’ financial matters, you’ll need an in-depth understanding of their assets. Maintain a list of their investment holdings, IRAs, other retirement accounts, and life insurance policies. Include current balances, account numbers, and projections for social security benefits.

Execute the proper estate planning documents. 

Make a plan to gather and review several legal documents involved in estate planning. If your parents already have some of this paperwork completed, be aware that it may need updating. 

Common elements in an estate plan include the following.

Wills. Your parents’ wills control where their possessions go and tie up other loose ends. (Jointly owned property with rights of survivorship automatically passes to the survivor.) It’s important to note that wills usually name an executor, and if you’re handling your parents’ financial matters, you may be the best choice.

Living trusts. A living trust can add to a will by providing for the distribution of selected assets. Unlike some of the assets in a will, a living trust isn’t required to go through probate, so you might be able to save time and money and avoid public disclosure.

Powers of attorney for health and finances. This authorizes someone to legally act on behalf of another person. A durable power of attorney is the most common version, and with this, the authorization continues after the individual becomes disabled. This document gives you the ability to better manage your parents’ affairs.

Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. It’s essential to make sure that your parents’ doctors and other relevant medical professionals have copies of advance directives so they can act in accordance with your parents’ wishes.

Beneficiary designations. If your parents have completed beneficiary designations for their retirement plans, IRAs, and life insurance policies, these designations will take precedence over any references in a will, so it’s critical to keep them current.

Spread the wealth

If you decide that the best way to help your parents is to provide them with monetary gifts, avoiding a gift tax liability is relatively easy. Under the annual gift tax exclusion, you can give any recipient up to $17,000 (for 2023) without being required to pay gift tax. 

Also, payments made to medical providers are not considered gifts, so you may make these payments on your parents’ behalf without using any of your yearly exclusion or lifetime exemption amounts.

Have questions? Smolin can help

If you’re a member of the Sandwich Generation, you’ve probably got plenty on your plate. If you have questions about handling your parent’s estate plans or managing your own, contact the knowledgeable professionals at Smolin, and we’ll help you navigate this complex process with ease.

Is QuickBooks Right for your Nonprofit?
Is QuickBooks Right for your Nonprofit? 1275 750 smolinlupinco

Nonprofit organizations are created to serve nonfinancial or philanthropic goals rather than to make money or build value for investors. But they still need to keep track of their financial health, paying attention to factors like:

  • How much funding is coming in from donations and grants
  • How much the organization is spending on payroll
  • How much it’s spending on rent and other operating expenses

Many nonprofits use QuickBooks® for reporting their results to stakeholders and handling their finances more efficiently. Here’s an overview of QuickBooks’ specialized features for nonprofits.

Features of QuickBooks for nonprofits

Terminology and functionality. QuickBooks for nonprofits incorporates language used in the nonprofit sector to make it more user-friendly for nonprofits.

For example, the software comes with templates for donor and grant-related reporting. Accounting team members can also use it to assign revenue and expenses to specific funds or programs.

Expense allocation and compliance reporting. Many nonprofits often receive donations and grants with particular requirements regarding the expenses that can be applied. 

These organizations can use QuickBooks to establish approved expense types and track budgets for specific funding sources. They can also use the software to satisfy compliance-related accounting and reporting regulations.

Streamlined donation processing. Everyone likes convenience, and donors to nonprofits are no exception. The easier it is to donate to a nonprofit, the more likely it is that people will do so. 

QuickBooks allows for electronic payments from donors. The software also integrates with charitable giving and online fundraising sites, enabling nonprofits to process in-kind contributions, such as office furniture and supplies.

Tax compliance and reporting. Failure to comply with IRS reporting regulations could cause an organization to lose its tax-exempt status. QuickBooks provides a customized IRS reporting solution for nonprofits, which includes the ability to create Form 990, “Return of Organization Exempt from Income Tax.”

Donor management. With QuickBooks, nonprofits can store donor lists. This function includes the ability to divide the data according to location, contribution, and status.

Using these filters can make connecting with and nurturing donors who meet specific criteria easier. One example is reconnecting with significant donors who’ve stopped making regular contributions to your organization.

Data security. Data security is critical to building trust and encouraging donors to support your organization again in the future. 

QuickBooks protects donors’ personal identification and payment information by allowing the account administrator to limit access for viewing, editing, or deleting donor-related data. 

With QuickBooks, team members can only access and share data with the administrator or owner’s permission.

Not just for for-profit businesses

QuickBooks may be known as an accounting solution for small and medium-sized companies, but it also provides solutions for the nonprofit sector. 

From streamlined processes and third-party integrations to security management and robust reporting, Quickbooks can help nonprofits improve their financial management and fulfill the mission of their organization.

Have questions? Smolin can help

If you’re unsure of whether QuickBooks is right for your organization or you require other accounting services, contact the knowledgeable team at Smolin, and we’ll help you choose the best option for your nonprofit.

What are the Advantages and Disadvantages of Claiming Big First-Year Real Estate Depreciation Deductions?
What are the Advantages and Disadvantages of Claiming Big First-Year Real Estate Depreciation Deductions? 850 500 smolinlupinco

Certain businesses may be allowed to claim large first-year depreciation tax deductions for eligible real estate costs instead of depreciating them over several years. Is this the right choice for your business? You may assume so, but the answer is not as simple as it seems.

Qualified improvement property

For eligible assets placed into service during tax years beginning in 2023, the maximum allowable first-year Section 179 depreciation deduction is $1.16 million. 

It’s important to note that the Sec. 179 deduction can be claimed for real estate qualified improvement property (QIP) up to the maximum yearly allowance.

QIP includes any improvement to an interior area of a nonresidential building that you placed in service after the building was first placed in service. 

For Sec. 179 deduction purposes, QIP also includes:

  • HVAC systems
  • Nonresidential building roofs
  • Fire protection and alarm systems
  • Security systems placed in service after the building was first placed in service

With that said, expenditures that are attributable to the enlargement of the building, such as elevators or escalators or the building’s internal structural frame do not count as QIP, and you must depreciate them over multiple years.

Mind the limitations

A taxpayer’s Sec. 179 deduction isn’t able to cause an overall business tax loss, and the maximum deduction is phased out if too much qualifying property goes into service within the tax year. 

The Sec. 179 deduction limitation rules can be complicated if you own a stake in a pass-through business entity (a partnership, an LLC treated as a partnership for tax purposes, or an S-corp). 

Last but not least, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face added restrictions.

First-year bonus depreciation for QIP

Aside from the Sec. 179 deduction, an 80% first-year bonus depreciation is also available for QIP that’s put into service in the calendar year 2023. If your aim is to maximize first-year write-offs, you’d want to claim the Sec. 179 deduction first. If you max out with 179, then you’d claim your 80% first-year bonus depreciation.

It’s essential to note that for first-year bonus depreciation purposes, QIP doesn’t include:

  • Nonresidential building roofs
  • HVAC systems
  • Fire protection and alarm systems
  • Security systems.

Consider depreciating QIP over time

There are two reasons why you should think carefully about claiming big first-year depreciation deductions for QIP.

1. Lower-taxed gain when the property is sold

First-year Sec. 179 deductions and bonus depreciation claimed for QIP can create what’s called depreciation recapture, which means your assets will be taxed at higher ordinary income rates when the QIP is sold. 

Under the current regulations, the maximum individual rate on ordinary income is 37%, but you may also end up owing the 3.8% net investment income tax (NIIT).

Conversely, for any QIP that’s held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if eligible.

2. Write-offs may be worth more in the future

If you claim large first-year depreciation deductions for QIP, your depreciation deductions for future years will be reduced accordingly. If federal income tax rates go up in the future, you’ll have essentially traded potentially more valuable future-year depreciation write-offs for less-valuable first-year write-offs.

Have questions? Smolin can help

The decision to claim first-year depreciation deductions for QIP or not claim them can be complicated. If you have questions about this process or need help navigating and other tax issues, contact the team at Smolin, and we’ll make sure you have the answers you need to make the best choice for your business.

Traveling for business this summer? Here’s what you can deduct
Traveling for business this summer? Here’s what you can deduct 1275 750 smolinlupinco

If you and your employees are hitting the road for work-related travel this summer, there are several considerations to keep in mind. To claim deductions under tax law, you must meet specific requirements for out-of-town business travel within the United States. These rules apply if the business you’re conducting reasonably requires an overnight stay.

Note that, due to the Tax Cuts and Jobs Act, employees are unable to deduct their unreimbursed travel expenses on their own tax returns until 2025. This is because unreimbursed employee business expenses fall under the category of “miscellaneous itemized deductions,” which aren’t deductible until 2025.

With that said it’s also important to note that self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Rules that come into play

The actual cost of travel—things like plane fare and rides to the airport—are deductible for out-of-town business trips. You can also deduct the cost of lodging and meals. Your meals are deductible while you’re on the road, even if they’re not connected to a business conversation or related function.

There was a temporary 100% deduction for business food and beverages provided by a restaurant in 2021 and 2022, however, it was not extended to 2023. This means that there’s once again a 50% limit on deducting your eligible business meals this year. 

Please be aware that no deduction is allowed for meal or lodging expenses that are categorized as “lavish or extravagant,” a term that’s generally interpreted to mean “unreasonable.”

Any personal entertainment costs on your trip aren’t deductible, but business-related costs like dry cleaning, computer rentals, and phone calls can be written off.

Mixing business with pleasure

If your trip includes a mix of business and pleasure, you may need to make allocations. For instance, if you fly to a destination for four days of business meetings and stay an additional three days for vacation, only the expenses for meals, lodging, and other related costs incurred during your business days are deductible.

Note that if your business activities spanned over a weekend (say you had meetings Wednesday through Friday and again on Monday), the costs incurred during the weekend portion of your trip can still be deducted.

On the other hand, if the trip is primarily for business purposes, the entire cost of the travel, including plane fare and other expenditures, may be deducted without any allocations required. 

Remember that if the trip is largely personal, none of the travel costs are deductible. The amount of time spent on each aspect of the trip is a significant factor in determining whether it is primarily a business or personal trip, though this is not the sole factor.

If the trip does not involve actual business activities but is intended for attending a convention, seminar, or similar events, the IRS may closely scrutinize the nature of the meeting to ensure it is not just a disguised vacation. Keep any documentation that will aid in establishing the business or professional nature of your travel.

Other expenses

The rules for deducting the costs of a spouse accompanying you on a business trip are quite restrictive. No deduction is allowed unless the spouse is your employee or an employee of your company, and their travel is also for business reasons.

Finally, please be aware that personal expenses incurred at home as a result of the trip are not deductible. For example, if you need to board a pet or pay for babysitting while you’re on the road, this cost cannot be claimed as a deduction. 

Have questions? Smolin can help.

If you’re looking for ways to get the most benefit from your travel deductions this summer, contact the knowledgeable professionals at Smolin, and we’ll help you navigate all of the ins and outs of deducting travel expenses for your business.

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