Wealth Management

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.

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.

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.

Maximize Your Estate Planning with the Roth 401(k) Contributions
Maximize Your Estate Planning with the Roth 401(k) Contributions 850 500 smolinlupinco

When deciding on contributions to your 401(k) plan, you might wonder whether it’s better to choose pre-tax (traditional) contributions or after-tax (Roth) contributions.  The best choice depends on your current and anticipated future tax circumstances, as well as estate planning goals.

Traditional vs. Roth 401(k)s

The main difference between a traditional and a Roth 401(k) plan is how they are taxed. With a traditional 401(k), contributions are made with pre-tax dollars, which means you get a tax deduction when you contribute. Your money grows tax-deferred, but you’ll pay taxes on both your contributions and earnings when you withdraw them. 

In contrast, Roth 401(k) contributions are made with after-tax dollars, so you don’t get a tax break upfront but qualified withdrawals, including contributions and earnings, are tax-free. Plus you can contribute to a Roth 401(k) plan no matter how hight your income is.

For 2024, the salary deferral limits for both traditional and Roth 401(k) plans are the same: $23,000,  plus an additional $7,500 if you’re 50 or older by the end of the year. Combined employee and employer contributions can go up to $69,000, or $76,500 if you’re 50 or older.

The rules for taking distributions from traditional and Roth 401(k)s are similar. You may take penalty-free withdrawals when you reach age 59½, or if you die or become disabled (with some exceptions). For Roth 401(k)s, the account must be open for at least five years to take withdrawals.

One key difference is that traditional 401(k) accounts require a minimum distribution (RMD) at age 73 (or age 75 starting in 2032). Roth 401(k) accounts do not have RMDs starting in 2024.

From a tax perspective, with a Roth 401(k) means you pay taxes now, while a traditional 401(k) defers taxes until you withdraw the funds. Mathematically speaking, that means the best choice depends on whether you expect to be in a higher or lower tax bracket in retirement.

If you’re a high earner and expect a lower bracket when you retire, a traditional 401(k) might be more beneficial. On the other hand, if you expect to be in a higher tax bracket later (perhaps due to higher income or potential tax increases), a Roth 401(k) might be a better choice. 

Estate planning factors

Tax implications during your lifetime aren’t the only thing to think about. Estate planning factors are important too. Roth 401(k)s, with their elimination of RMDs, can be a powerful estate planning tool. If you don’t need the funds for living expenses, you can let the grow tax-free for as long as you want. And if the account is at least five years old, your heirs can withdraw the money tax-free.

On the other hand, a traditional 401(k) requires you to withdraw funds according to RMD rules, which might reduce the amount left for you heirs. Plus, their withdrawals will be taxable.

If you need help deciding which 401(k) account is best for your situation, reach out to a Smolin advisor to discuss your options. 

Maximize Giving and Minimize Taxes with the Power of Qualified Charitable Distributions
Maximize Giving and Minimize Taxes with the Power of Qualified Charitable Distributions 850 500 smolinlupinco

Are you a philanthropic person nearing or past retirement age and facing required minimum distributions (RMDs) from your traditional IRA? There is a smart strategy that allows you to support the causes you care about while reducing your tax burden: Qualified Charitable Distributions (QCDs).

Here’s how it works:

Once you reach age 70½, you can make a cash donation to an IRS-approved charity out of your IRA. This method of transferring assets to charity leverages the QCD provision so you can direct up to $105,000 of their distributions to charity in 2024 (or $210,000 for married couples). 

By making QCDs, the money given to charity counts toward your RMDs but won’t increase adjusted gross income (AGI) or generate a tax bill.

There are several important reasons to keep your donation amount out of your AGI. When distributions are taken directly out of traditional IRAs, federal income tax of up to 37% (in 2024) and possible state income taxes must be paid. A QCD avoids these taxes. 

Here are some other potential benefits:

  1. You might qualify for other tax breaks. A lower AGI can reduce the threshold for itemizers who deduct medical expenses, which are only deductible to the extent they exceed 7.5% of AGI.
  2. You can skip potential taxes on your Social Security benefits and investment income, avoiding the 3.8% net investment income tax.
  3. It might help you bypass a high-income surcharge for Medicare Part B and Part D premiums that are triggered when AGI falls above a certain level.

Note: You can’t claim a charitable contribution deduction for a QCD that is not included in your income. Also, remember that the age after which you must begin taking RMDs is now 73, but the age you can start making QCDs is 70½.

To benefit from a qualified charitable distribution for 2024, you must arrange for the payment from your IRA to go directly to a qualified charity before December 31, 2024. 

QCDs are truly a win-win. You can use them to fulfill all or part of your RMD for the year. 

Think of it as a double-duty approach, supporting a cause you care about while meeting your IRA withdrawal needs. For example, if your 2024 RMDs are $20,000 and you make a $10,000 QCD, you only need to withdraw another $10,000 to satisfy your requirement.QCDs aren’t right for everyone, though. Depending on your unique situation, additional rules and limits may apply. Contact a Smolin advisor to discuss whether this strategy makes sense for you.

21 Estate Planning Terms You Need to Know

21 Estate Planning Terms You Need to Know
21 Estate Planning Terms You Need to Know 850 500 smolinlupinco

Whether you’re making your first estate plan or need to update an existing one, it helps to speak the language. While most people are familiar with common terms like “trust” or “will,” the meanings of other estate planning terms may feel less clear. 

Keep this glossary of key terms handy to help you navigate the estate process with more confidence

  1. Administrator 

An individual or fiduciary appointed by a court to manage an estate if no executor or personal representative has been appointed or the appointee is unable or unwilling to serve.

  1. Ascertainable standard

This legal standard, typically relating to an individual’s health, education, maintenance, and support, is used to determine what distributions are permitted from a trust.

  1. Attorney-in-fact

The individual named under a power of attorney as the agent to handle the financial and/or health affairs of another person.

  1. Codicil 

A legally binding document that makes minor modifications to an existing will without requiring a complete rewrite of the document.

  1. Community property

A form of ownership in certain states in which property acquired during a marriage is presumed to be jointly owned regardless of who paid for it.

  1. Credit shelter trust

A type of trust established to bypass the surviving spouse’s estate to take full advantage of each spouse’s federal estate tax exemption. It’s also known as a bypass trust or A-B trust.

  1. Fiduciary

An individual or entity, such as an executor or trustee, who is designated to manage assets or funds for beneficiaries and is legally required to exercise an established standard of care.

  1. Grantor trust

A trust in which the grantor retains certain control so that it’s disregarded for income tax purposes and the trust’s assets are included in the grantor’s taxable estate.

  1. Inter vivos 

This is the legal phrase used to describe various actions (such as transfers to a trust) made by an individual during his or her lifetime.

  1. Intestacy

When a person dies without a legally valid will, a situation called “intestate,” the deceased’s estate is distributed in accordance with the applicable state’s intestacy laws.

  1. Joint tenancy

An ownership right in which two or more individuals (such as a married couple) own assets, often with rights of survivorship.

  1. No-contest clause

A provision in a will or trust that ensures that an individual who pursues a legal challenge to assets will forfeit his or her inheritance or interest.

  1. Pour-over will

A type of will that is used upon death to pass ownership of assets that weren’t transferred to a revocable trust.

  1. Power of appointment

The power granted to an individual under a trust that authorizes him or her to distribute assets on the termination of his or her interest in the trust or on certain other circumstances.

  1. Power of attorney (POA)

A legal document authorizing someone to act as attorney-in-fact for another person, relating to financial and/or health matters. A “durable” POA continues if the person is incapacitated.

  1. Probate

The legal process of settling an estate in which the validity of the will is proven, the deceased’s assets are identified and distributed, and debts and taxes are paid.

  1. Qualified disclaimer

The formal refusal by a beneficiary to accept an inheritance or gift or to allow the inheritance or gift to pass to the successor beneficiary.

  1. Qualified terminable interest property (QTIP)

Property in a trust or life estate that qualifies for the marital deduction because the surviving spouse is the sole beneficiary during his or her lifetime. The assets of the QTIP trust are therefore included in the estate of the surviving spouse, that is, the spouse who is the beneficiary of the trust, not the estate of the spouse who created the trust.

  1. Spendthrift clause

A clause in a will or trust restricting the ability of a beneficiary (such as a child under a specified age) to transfer or distribute assets.

  1. Tenancy by the entirety

An ownership right between two spouses in which property automatically passes to the surviving spouse on the death of the first spouse.

  1. Tenancy in common

An ownership right in which each person possesses rights and ownership of an undivided interest in the property.

Questions? Smolin can help. 

This brief roundup isn’t an extensive list of estate planning terms. If you have questions about these terms or others that aren’t listed here, reach out to us! We’re happy to provide additional context for any estate planning concepts you need more clarity on.

Read This Before Listing Your Property as a Vacation Rental

Read This Before Listing Your Property as a Vacation Rental
Read This Before Listing Your Property as a Vacation Rental 850 500 smolinlupinco

Whether you own a lakefront cottage, vacation beach home, or ski chalet, renting out your property for part of the year can have significant tax impacts.

Here’s what you need to know.

Your level of personal use impacts your taxes

The number of days the property is rented has a direct impact on your taxes.

However, there are certain scenarios that don’t count towards this total since your official “personal use” of the property includes more than your own vacations. It also includes vacation use by your relatives—even if you charge them market-rate rent. It also includes use by nonrelatives if you don’t charge them a market rate rent.

This is important because if you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all.

Under these circumstances, you could see significant tax benefits since even a significant amount of rental income received won’t be included in your income for tax purposes. However, you also won’t be able to deduct operating costs or depreciation﹘only property taxes and mortgage interest. 

(Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you do rent the property out for nonpersonal use for more than 14 days, the rent received must be included in your income and you will be able to deduct operating costs and depreciation (subject to several rules). To do this, you’ll need to allocate expenses between rental days and personal use days.

For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc. costs to rental. Additionally, you would allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. If the personal use exceeds the greater of 14 days or 10% of the rental days, the personal use portion of interest on a second home will also be deductible. In this case, though, depreciation on the personal use portion isn’t allowed.

Income and expenses

When rental income is greater than allocable deductions, you’ll need to report both in order to determine how much rental income you should add to your other income for tax purposes. 

When you may claim a loss

If the income is lower than the expenses and you don’t use the property personally for more than 14 days or 10% total percent of rental days, you could be able to claim a rental loss.

When calculating the loss, though, you must allocate your expenses between the rental and personal portions. It’s also important to keep in mind that the loss will be considered “passive” and may be limited under the passive loss rules.

When you cannot claim a loss

If rental income is higher than expenses or if the house is used personally for 10% of rental days or more than 14 days total (whichever is greater), you won’t be able to claim a loss. However, you’ll still be able to use your deductions to balance out rental income. Any unused deductions will be carried forward. This could be usable in future years.

While there are still multiple deductions up to the amount of rental income you can claim, you must use them in this order: 

  • Interest and taxes
  • Operating costs
  • Depreciation

Questions? Ask Smolin

Tax rules for vacation rentals can be complicated. If you plan to rent out your property, it pays to plan ahead. Contact your Smolin accountant to learn how you may be able to maximize deductions in your unique situation.

Stressed About Long-Term Care Expenses Here’s What You Should Consider.

Stressed About Long-Term Care Expenses? Here’s What You Should Consider
Stressed About Long-Term Care Expenses? Here’s What You Should Consider 850 500 smolinlupinco

Most people will need some form of long-term care (LTC) at some point in their lives, whether it’s a nursing home or assisted living facility stay.  But the cost of unanticipated long-term care is steep.

LTC expenses generally aren’t covered by traditional health insurance policies like Social Security or Medicare. A preemptive funding plan can help ensure your LTC doesn’t deplete your savings or assets.

Here are some of your options.

Self-funding

If your nest egg is large enough, paying for LTC expenses out-of-pocket may be possible. This approach avoids the high cost of LTC insurance premiums. In addition, if you’re fortunate enough to avoid the need for LTC, you’ll enjoy a savings windfall that you can use for yourself or your family. 

The risk here is that your LTC expenses will be significantly larger than what you anticipated, and it completely erodes your savings.

Any type of asset or investment can be used to self-fund LTC expenses, including:

  • Savings accounts
  • Pension or other retirement funds
  • Stocks
  • Bonds
  • Mutual funds
  • Annuities

Another option is to tap your home equity by selling your house, taking out a home equity loan or line of credit, or obtaining a reverse mortgage.

Both Roth IRAs and Health Savings Accounts (HSAs) are particularly effective for funding LTC expenses. Roth IRAs aren’t subject to minimum distribution requirements, so you can let the funds grow tax-free until they’re needed. 

HSAs, coupled with a high-deductible health insurance plan, allow you to invest pre-tax dollars that you can later use to pay for qualified unreimbursed medical expenses, including LTC. Unused funds may be carried over from year to year, which makes an HSA a powerful savings vehicle.

LTC insurance

LTC insurance policies—which are expensive—cover LTC services that traditional health insurance policies typically don’t cover. 

It can be a challenge to determine if LTC insurance is the best option for you. The right time for you to buy coverage depends on your health, family medical history, and other factors. 

The younger you are, the lower the premiums, but you’ll be paying for insurance coverage when you’re not likely to need it. Many people purchase these policies in their early to mid-60s. Keep in mind that once you reach your mid-70s, LTC coverage may no longer be available to you, or it may become prohibitively expensive.

Hybrid insurance

Hybrid policies combine LTC coverage with traditional life insurance. Often, these policies take the form of a permanent life insurance policy with an LTC rider that provides tax-free accelerated death benefits in the event of certain diagnoses or medical conditions.

Compared to stand-alone LTC policies, hybrid insurance provides less stringent underwriting requirements and guaranteed premiums that won’t increase over time. The downside, of course, is that the more you use LTC benefits, the fewer death benefits available to your heirs.

Potential tax breaks

If you buy LTC insurance, you may be able to deduct a portion of the premiums on your tax return.

If you have questions regarding LTC funding or the tax implications, please don’t hesitate to contact us.

Questions? Smolin can help. 

If you’re concerned about planning for long-term care, don’t put it off any longer. We’re here to help! Contact your Smolin accountant to learn more about your options for LTC expenses so you can rest easy.

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. 

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.

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