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Tax Briefs

Demystifying Like-Kind Exchanges

June 20, 2026by admin

If you’re a real estate developer or a small business owner who owns commercial real estate, you might be thinking about selling a property. If it has appreciated significantly, a Section 1031 like-kind exchange may allow you to defer tax on some or all of the gain. With this transaction, you exchange one property for another qualifying property rather than sell the property outright. You generally don’t pay tax on the gain on the relinquished property until you sell the replacement property.

You may be familiar with the basics of a Sec. 1031 exchange, but you might not understand all the rules and restrictions. Here are four common myths to be aware of so you can avoid missing planning opportunities or facing unexpected taxes.

Myth 1: The replacement property must be identical to the property you give up

The definition of like-kind property is surprisingly broad. To qualify for Sec. 1031 exchange treatment, you may exchange any real property held for investment or productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).

For these purposes, most real property is considered like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.

Myth 2: You never have to pay current-year tax in a like-kind exchange

A properly structured Sec. 1031 exchange can defer gain. But that doesn’t mean every exchange is completely tax-free.

If it’s a straight property-for-property exchange, you generally won’t have to recognize any gain from the exchange. You’ll take the same basis (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you must report it on Form 8824, “Like-Kind Exchanges.”

However, the properties aren’t always equal in value. In these situations, some cash may be added to the deal. This cash is known as “boot.” If you receive boot, you’ll have to recognize gain up to the amount of boot received.

For example, let’s say you exchange a building with a basis of $100,000 for a building valued at $125,000, plus $10,000 in cash. Your realized gain on the exchange is $35,000 because you received $135,000 in value for an asset with a basis of $100,000. However, because it’s a Sec. 1031 exchange, you have to currently recognize (and pay tax on) only $10,000 of your gain — the amount of cash (boot) you received.

It’s also important to remember that no matter how much boot you receive, you’ll never recognize more than your actual realized gain on the exchange. In addition, your basis in the like-kind replacement property you receive equals the basis you had in the relinquished property reduced by the amount of boot you received but increased by the amount of any gain recognized.

Myth 3: Cash is the only type of boot

Boot can take forms other than cash. If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is generally treated as boot. The reason is that if someone takes over your debt, it’s equivalent to that person giving you cash.

Of course, if the replacement property is also subject to debt, then you’re treated as receiving boot only to the extent of your net debt relief — the amount by which the debt you become free of exceeds the debt you pick up.

Myth 4: You must have the replacement property lined up immediately

It’s possible — but rare — to find someone who wants to simultaneously swap like-kind properties with you. Fortunately, you don’t have to acquire the replacement property from the same party you relinquish your property to. And you don’t have to acquire the replacement property on the same day you transfer the relinquished property.

In most Sec. 1031 exchanges, the relinquished property is sold first, and the taxpayer uses the exchange proceeds to acquire a replacement property. However, a qualified intermediary must hold the proceeds from the relinquished property until they’re transferred to acquire the replacement property. And deadlines apply: Generally, you must 1) identify a potential replacement property within 45 days after transferring the relinquished property, and 2) complete the acquisition of the replacement property within 180 days.

These deadlines are strictly enforced. Missing either one can cause the entire transaction to lose tax-deferred treatment. While you don’t need to have the replacement property lined up immediately, you do need a plan. Begin evaluating replacement property options as early as possible and work closely with your professional advisors throughout the process.

Don’t let misconceptions derail your Sec. 1031 exchange

Like-kind exchanges can be a tax-savvy way to dispose of investment or business real property — and retain working capital for your business or investment activities. But you’ll need to meet all the requirements. If you’re considering selling investment or business real estate, contact us to discuss this strategy further.

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Business BriefsTax BriefsTax Planning

Self-Employed? Don’t Overlook Valuable Tax Deductions

June 20, 2026by admin

If you’re self-employed, you probably have questions about deducting business expenses on your federal income tax return. Here’s a quick overview of the filing requirements for sole proprietors and independent contractors, and five examples of expense deductions that are commonly overlooked or misunderstood.

Filing basics

Sole proprietors and independent contractors must report their business activity on Schedule C, “Profit or Loss From Business,” of their personal tax returns (Form 1040). Business income includes money earned from customers, side gigs, online sales and other self-employment activities. Income may be reported on Forms 1099-NEC or 1099-K, but you must report all taxable business income, even if you don’t receive a tax form.

Although employees can no longer deduct unreimbursed business expenses, self-employed individuals can offset their business income with various deductions for business-related expenses. This is a major tax advantage for the self-employed.

When evaluating whether costs are deductible, follow this golden rule: Business expenses must be ordinary (common in your industry) and necessary (helpful and appropriate for the business). Of course, you’ll need to keep detailed records to support your business deductions. Obvious examples of potentially deductible expenses are supplies, materials, and, if you have employees, payroll and benefits. Other business-related expenses may also be deductible on Schedule C, though the rules are sometimes confusing. Below are five common examples.

1. Home office

Unlike employees who work remotely, you can deduct the costs for a workspace in your home that’s used regularly and exclusively as your principal place of business. This can include a portion of actual indirect home expenses — such as rent or mortgage interest, insurance, utilities and repairs — based on your business-use percentage. For instance, if you use 10% of your apartment’s square footage for business, you can deduct 10% of your rent.

You can also fully deduct direct expenses (for example, the cost of painting your office) and, if you own your home, claim a depreciation allowance under IRS tables. In lieu of tracking your actual expenses, the IRS also offers a simplified method of $5 per square foot for up to 300 square feet.

2. Education

The costs of refresher courses, continuing education classes, vocational training and other education programs may be deductible if you’re required to take them to maintain or improve skills required for your current trade or business. Qualifying expenses include tuition, books, supplies and fees, and potentially travel costs to attend education programs.

However, costs of education that’s needed to meet the minimum requirements for a trade or business or that qualifies you for a new trade or business generally aren’t deductible. For example, you can’t claim the cost to obtain an undergraduate degree as a business expense.

3. Business meals

You generally can deduct 50% of the costs of business meals if they aren’t “lavish or extravagant.” This applies to food and beverages provided to customers, clients, suppliers, employees, agents, partners or professional advisors — whether established or prospective.

Although entertainment costs aren’t deductible under current law, food and beverages might be deductible even if they’re provided at a nondeductible entertainment activity. But such a deduction is available only if:

  • The food and beverage items are separately purchased or identified from the entertainment costs on bills, invoices or receipts, and
  • The amount charged for food or beverages reflects the venue’s usual selling price for those items if purchased separately from the entertainment or approximates the reasonable value of those items.

Say, for example, that you take a customer to a World Cup match this summer. The ticket costs aren’t deductible. But if you buy the customer popcorn, nachos and drinks while there, you can deduct half of those costs as long as you have proper documentation, such as the itemized receipt, and records showing who attended and the business purpose.

4. Business travel

If you travel to a temporary location for business purposes, you can deduct your travel expenses, including round-trip airfare, hotel costs and other incidentals (such as tips and cab fares). However, the primary purpose of your trip must be business related. For instance, you might travel to a different city or country to attend a trade show or educational conference.

Beware: Some allocations may be required if a trip combines business and pleasure — for example, if you fly to a location for four days of business meetings and stay for an additional three days of vacation. Only the reasonable cost of lodging and 50% of meals incurred during the business days are deductible. Lodging and meal costs incurred for the personal vacation days aren’t deductible.

On the other hand, with respect to the cost of the travel itself (for example, plane fare), if the trip is primarily for business purposes, the travel cost can be deducted in its entirety, and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible.

If your spouse joins you, his or her travel expenses generally aren’t deductible, unless your spouse is your employee and has a bona fide business reason to be there. But the restrictions apply only to additional costs incurred by having your nonemployee spouse travel with you. For example, the expense of a hotel room or for traveling by car would likely still be fully deductible because the cost to rent the room or travel by car alone vs. with another person would be the same, even in a rented car.

5. Business vehicle expenses

If you drive your personal vehicle for business purposes, you may be eligible to deduct some auto-related expenses on Schedule C. The amount of your deduction is based on the percentage of business use.

For example, suppose you use your car 60% for business driving in 2026. That means you can deduct 60% of your vehicle costs — such as gas, repairs and insurance — plus a generous depreciation allowance, subject to certain limits for “luxury cars.” And, if you buy the vehicle in 2026, you may also qualify for a Section 179 deduction and 100% bonus depreciation, subject to applicable eligibility requirements and limitations.

Be aware that the IRS is a stickler for documentation. Briefly stated, you must keep a contemporaneous log listing every business trip and proof of your expenses. Alternatively, you can cut down on recordkeeping by using the standard mileage rate of 72.5 cents per business mile (plus business-related tolls and parking fees) in 2026.

Don’t leave tax savings on the table

Many self-employed taxpayers miss legitimate deductions because they fail to keep adequate records or misunderstand the rules. Tracking expenses throughout the year can make tax filing easier, help ensure you don’t miss legitimate deductions and strengthen your position if the IRS questions a deduction.

We can help you identify qualifying business expense deductions and establish recordkeeping practices that support them. Contact us to start discussing a tax strategy tailored to your small business.

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Business BriefsTax Briefs

Beware of Potential Tax Issues When Selling Self-Created Intangibles

June 20, 2026by admin

Many modern businesses rely on intangible assets, such as goodwill, trademarks and customer lists. But the IRS doesn’t treat all intangibles the same way. Questions about how these assets are taxed often arise when a business is sold, ownership changes hands, or intellectual property is licensed or transferred.

Generally, intangibles qualify as capital assets that generate capital gains or losses when sold. This treatment is beneficial because federal long-term capital gains tax rates (typically 15% or 20%) are lower than ordinary income tax rates (which can be as high as 37%). However, certain “self-created” intangibles don’t qualify for this favorable treatment. Here’s an overview of this issue.

Close-up on self-created intangibles

Under current federal income tax rules, “self-created” means created by the personal efforts of the taxpayer. Specifically, an intangible asset is considered to be created, in whole or in part, by the personal efforts of the taxpayer if:

  • The taxpayer’s efforts affirmatively contributed to the creation of the asset, or
  • The taxpayer directed and guided others in performing the work that created the asset.

That’s easy to understand when the taxpayer is a human. It can also extend to corporations, partnerships and limited liability companies (LLCs) that receive contributions of intangible assets from the individuals who created them.

Whether a self-created intangible is treated as a capital or noncapital asset depends on the specific type of intangible.

Self-created noncapital intangibles

When you sell a self-created intangible that’s treated as a noncapital asset for federal income tax purposes, the transaction produces ordinary income or loss rather than capital gain or loss. This unfavorable treatment may apply if, through your personal efforts, you create and personally hold the following types of intangibles:

  • Patents,
  • Inventions, models or designs (patented or not),
  • Proprietary formulas or processes,
  • Copyrights, and
  • Literary, musical or artistic compositions.

This treatment also applies to letters, memorandums or similar property prepared or produced for you, even though you didn’t actually “create” them.

Substituted basis principle

What happens when the self-created noncapital intangibles listed above are contributed to another taxable entity? The same unfavorable treatment applies if the new owner’s tax basis in the noncapital intangible is determined, in whole or in part, by reference to the basis of the person who created it (or who had letters or memorandums prepared or produced). This is referred to as “substituted basis.”

For instance, when an affected self-created intangible asset is contributed by the creator to a partnership in a tax-free transaction, the partnership takes over the creator’s tax basis in the asset under the substituted basis principle. In this situation, the asset is treated as a noncapital asset owned by the partnership. The same treatment applies to tax-free contributions of noncapital intangibles to LLCs that are treated as partnerships and corporations. Subsequent sales of affected assets will result in ordinary income or losses rather than capital gains or losses.

Self-created capital intangibles

The following types of self-created intangibles are treated as favorably taxed capital assets:

  • Goodwill or going concern value,
  • Workforce in place,
  • Business books and records,
  • Business operating systems,
  • Customer-based intangibles, such as client or customer lists and lists of prospective clients or customers, and
  • Supplier-based intangibles, such as favorable supplier contracts.

Sales of these assets will result in capital gains or losses, not ordinary income or loss. Often, these intangibles are sold with other business assets, so it’s important to properly allocate the total purchase price among the assets acquired — including both capital and noncapital intangibles — based on their fair market values. These allocations should be well supported and documented because buyers and sellers may have differing tax objectives. The IRS may also scrutinize allocations involving intangible assets.

Non-self-created intangibles

How an intangible asset is developed and held affects whether it’s considered a self-created intangible and the tax treatment when it’s sold. IRS Revenue Ruling 55-706 addressed a situation involving a corporate taxpayer that held intangible assets created by several of its employees. According to the guidance, the C corporation’s intangibles were not considered to have been created by the taxpayer’s personal efforts.

Therefore, the intangibles were capital assets owned by the business. The rules regarding varying tax treatment based on the specific type of intangible that apply to self-created intangibles didn’t come into play. Presumably, the result would be the same for intangibles created and owned by a partnership, an LLC treated as a partnership for tax purposes or an S corporation.

Tread carefully

The tax rules for self-created intangible assets are complicated. You can’t do much to avoid the unfavorable federal income tax treatment of self-created noncapital intangibles. But many self-created intangibles are treated as favorably taxed capital assets. If you’re planning to sell or transfer intangible assets, we can help you understand how the rules apply to your situation and identify the potential tax implications before a deal is finalized. Contact us to learn more.

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Business BriefsTax Briefs

Self-Employed? Don’t Overlook a Roth IRA

June 20, 2026by admin

Some small business owners overlook Roth IRAs because they assume their income is too high for them to qualify to make Roth contributions. Others may think their current tax rate is higher than it will be in retirement, making current tax deductions more valuable than future tax-free distributions. However, if you don’t at least consider contributing to a Roth IRA, you may be missing a potentially valuable tax-saving opportunity.

Rules and restrictions

Roth IRA contributions aren’t deductible, but they’re beneficial because you reap tax savings on the back end. (More on that later.) For 2026, the annual contribution limit is $7,500 (up from $7,000 for 2025). If you’ll be 50 or older by the end of the tax year, you can make an additional $1,100 catch-up contribution. The same limits apply to traditional IRAs, and your Roth IRA limit is reduced by any traditional IRA contributions you make for the year.

But your ability to make Roth IRA contributions is phased out if your modified adjusted gross income (MAGI) exceeds certain levels. For 2026, the phaseout ranges are:

  • $153,000 to $168,000 for single individuals and heads of households, and
  • $242,000 to $252,000 for married couples filing jointly.

If your MAGI falls within the range, your contribution limit is reduced. If it equals or exceeds the top of the range, your ability to contribute is eliminated.

Married individuals who file separately and live apart for the full year are treated as single individuals for the income limitations. However, separate filers who live together at any time during the year are subject to a phaseout range of $0 to $10,000.

Is your income too high to qualify?

At first glance, these figures may cause you to assume you’re ineligible for Roth contributions. But take another look.

When calculating MAGI for Roth IRA eligibility purposes, self-employed individuals may be able to significantly reduce their taxable income through deductions for:

  • Certain business expenses, such as rent, home office expenses and computer costs,
  • Contributions to a tax-deferred retirement plan, such as a solo 401(k), SEP IRA or SIMPLE,
  • Health insurance premiums, and
  • Self-employment tax.

These deductions, along with others, are subtracted when calculating MAGI. Therefore, a self-employed person can have relatively high gross income from his or her business while having a much lower MAGI.

The choice between contributing to a Roth IRA or a tax-deferred account isn’t an all-or-nothing proposition. Depending on your situation, you may decide to contribute to both types of accounts, subject to applicable limits. Contributing to a tax-deferred retirement plan provides immediate tax savings. And, because these contributions lower your MAGI, they may put your taxable income below the phaseout limits for Roth IRA contributions.

Additional benefits

The main upside of contributing to a Roth IRA is that qualified withdrawals won’t be taxed. This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase. Moreover, withdrawals from Roth accounts aren’t counted when calculating the taxable portion of your Social Security benefits.

Another Roth IRA advantage is that you don’t have to take withdrawals at any age, meaning the account can continue to grow tax-free. With a traditional IRA (and other tax-deferred retirement accounts), at age 73, you generally must begin to take required minimum distributions or face a penalty equal to 25% of the amount you should have withdrawn but didn’t. In addition, if your Roth IRA is passed on to your heirs, it can continue to grow tax-free, and their withdrawals generally will be tax-free. However, most nonspouse beneficiaries will be required to deplete the account within 10 years of inheriting it.

Bottom line

A Roth IRA offers many potential benefits, and self-employed individuals may be more likely to qualify to make Roth IRA contributions than other taxpayers with similar gross incomes. But they aren’t right for every situation. We can help evaluate your eligibility and develop a long-term retirement strategy that aligns with your personal and financial goals. Contact us to learn more.

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