Construction Accounting That Reveals Problems Early: Job Costing, Change Orders, and WIP Reporting

Posted on September 25, 2026

A contractor can have a full backlog, crews working overtime, and plenty of invoices going out while profitability quietly gets worse. That is one of the challenges of running a construction business. Revenue, costs, and cash rarely move in a clean sequence. You may incur labor and material costs weeks before you can bill for them. A project manager may authorize extra work while the customer is still reviewing the price. A job that looked like a 20% gross-margin project at kickoff may be headed toward 12% by the time anyone notices. Good construction accounting should make those problems visible early. For established contractors, three disciplines are especially important: job costing, change-order management and work-in-progress reporting. When those systems work together, management gets a much clearer picture of the business.

Start with job costs you can actually trust

Every useful construction report starts with accurate job costing. At a basic level, that means assigning costs to the project that created them. But you’ll usually need more detail than one expense bucket for each job. You may track field labor, materials, subcontractors, equipment and other direct costs separately. You may also break them down by phase or cost code. That detail matters because knowing that a project is $80,000 over budget does not tell you what went wrong.

For example, suppose a $2 million mechanical project was estimated to produce a $400,000 gross profit. Halfway through the job, labor is $70,000 over budget while materials and subcontractor costs remain close to plan. That points management toward labor productivity, overtime, or an estimating problem.

Timing matters too. A job can appear more profitable than it really is when vendor invoices, payroll, or subcontractor commitments have not reached the system yet. So the goal is not just detailed job costing; you want complete and timely job costing. Review your cost codes and reporting process with project managers. The categories you track should be detailed enough to explain why a job is gaining or losing margin, not merely whether it is.

Make the estimate to complete a management responsibility

Historical cost tells you what happened, but management also needs to know what’s likely to happen next. That’s where the estimated cost to complete becomes critical. Consider a project with $1 million of costs incurred so far. The original budget called for another $500,000 of cost. But the project manager now expects the remaining work to cost $700,000. If accounting continues using the old estimate, the job may appear more profitable than the operating team expects it to be. That can distort WIP reporting and delay recognition of deteriorating performance.

Project managers usually know first when productivity is slipping, material requirements have changed, or a subcontractor issue is likely to increase costs. Finance needs that information on a regular schedule. For many contractors, a monthly review is a practical way to do that. Project managers can update costs to complete and explain significant changes in labor assumptions, subcontractor commitments, unrecorded costs, or expected gross margin. Pay particular attention to margin fade. If a job begins at an expected 18% margin, falls to 15%, and then drops to 12%, management should understand why. The issue may be estimating, execution, scope control, or several factors at once. Require meaningful changes in projected cost or gross profit to be explained while there is still time to respond.

Keep change orders from becoming invisible work

Change orders sit directly between project operations, billing, and accounting. That makes them a common source of financial surprises. The problem is easy to recognize: a customer asks for additional work; the field team needs to keep the project moving, so the contractor performs it. Pricing gets worked out later. Meanwhile, labor, materials, and subcontractor costs start accumulating. If those costs reach the job-cost system but the potential contract adjustment is not tracked properly, the project can appear to be deteriorating. If the change is never approved or billed, the contractor may end up funding work it cannot fully recover. A disciplined process keeps that work visible. One change-order log used by both operations and accounting can show whether an item is proposed, submitted, approved, rejected, or still being negotiated. It can also track expected revenue and cost, the responsible person, and how long the item has been outstanding. That gives management a clearer view of how much work is being performed without final approval and whether unresolved changes are creating billing or collection problems. The accounting treatment of pending or disputed changes may depend on the facts of the contract and the applicable revenue-recognition guidance. But the operating objective is simpler: do not let added scope disappear between the jobsite, project management, and accounting.

Use the WIP report to connect the pieces

The WIP schedule is where job costs, current estimates, revenue, and billing come together. Suppose a contractor has completed roughly half the work on a $1 million project. Based on current estimates, the company has earned about $500,000 of revenue. If it has billed $425,000, there is a $75,000 gap between earned revenue and billing. If it has billed $575,000, the gap runs in the other direction. Those differences are commonly described as underbilling and overbilling. The calculation matters, but the more useful question is why the difference exists.

Underbilling can point to a cash-flow problem

An underbilling does not automatically mean a job is in trouble. There may be a reasonable timing difference between when work is performed and when the contract allows billing. Management should understand the cause. A billing milestone may have been missed. Work may be proceeding under an unapproved change order. Costs may have been recorded faster than expected. The current forecast may also be too optimistic. Sustained underbilling can create cash pressure because the contractor may be funding work before collecting for it. For significant underbilling, identify the reason, who owns the next step, and when the amount is expected to become an invoice and then cash.

Overbilling is not the same as profit

Billing ahead can improve cash flow, but the extra cash does not necessarily represent profit. Suppose a job is $200,000 overbilled. That cash may help fund current operations. But if the projected cost to finish the job increases materially, part of that apparent cushion may already be spoken for. Large overbillings therefore need context. They may reflect favorable billing terms and good cash management. They can also create a false sense of available cash if management is not considering the remaining cost to finish the job. A WIP review should ask what is driving each position and whether it points to a billing issue, forecasting problem, change-order problem, or genuine cash advantage.

Make WIP review an operating meeting, not an accounting task

A useful WIP process requires people outside the accounting department. Accounting knows what has been recorded and billed. Project managers know what is happening in the field. Estimators know the assumptions behind the original budget. Leadership understands cash requirements and portfolio risk. Those perspectives need to come together. A monthly WIP meeting does not have to give every project equal attention. Focus on jobs with the largest exposure, biggest change in projected margin, significant underbilling or overbilling, or large amounts of unresolved change-order work.

For those jobs, management should ask:

• Has the estimated cost to complete changed?
• Is projected gross margin moving?
• Are material costs or commitments missing?
• Are there unresolved change orders?
• What is driving the billing position?
• Does the current forecast still make sense to the project manager?

The point is not to make accounting responsible for predicting construction outcomes. It’s to ensure information from the field reaches the financial reporting process while there is still time to act.

Make sure all three systems tell the same story

Job costing, change-order controls, and WIP reporting solve different parts of the same problem: understanding what a job is really worth before it ends. Job costing shows where the money is going. Updated forecasts show where the job appears to be headed. Change-order controls keep changes in scope and price visible. WIP reporting shows how those developments affect revenue, billing, expected profit, and cash. When one piece is weak, the others become less reliable. A well-prepared WIP schedule cannot compensate for incomplete job costs. Accurate job costs cannot compensate for a six-month-old estimate to complete. And neither will protect your margin if significant extra work is being performed without a disciplined change-order process. One useful test is to take your five largest active projects and compare the job-cost report, change-order log, current estimate to complete, and WIP schedule side by side. If they do not tell the same story, the differences are worth investigating.

For more personalized guidance, please feel free to reach out to your trusted TBC advisor. They can help you evaluate whether your construction accounting and WIP process are giving management a reliable view of job performance. The best time to have that conversation is during the year, while you still have time to address margin erosion, billing issues, and forecasting problems before they become year-end surprises.

Divorce and Your Tax Return: What the Settlement May Not Resolve

Posted on September 09, 2026

A divorce settlement can divide every major asset and still leave many tax questions unanswered. The underlying mistake is treating the settlement agreement like a set of tax instructions, when it is not. A settlement agreement establishes legal rights between two people, but tax law decides how the IRS treats the result. Here are a few areas that deserve a separate tax review before the first post-divorce return gets filed.

Your filing status and child-related tax benefits follow different rules

First, understand that your filing status and child-related tax benefits follow different rules. Your filing status generally depends on your marital status on the last day of the year. Let’s say your divorce becomes final on December 30th. Even though you were married for almost the entire year, you are generally considered unmarried for federal tax purposes. You’ll likely file as single now, but you may also qualify to file as head of household if you have dependents. To qualify, you typically have to pay more than half the cost of maintaining the home and the home must also be the dependent’s primary home for more than half the year. However, other requirements can apply depending on the qualifying person.

A child’s tax treatment is more complicated. The divorce decree might say that each parent can claim the child in alternating years, but the IRS does not treat the decree itself as controlling. The custodial parent is generally the parent with whom the child spent more nights during the year. They normally have the initial right to claim the child. But when parents alternate the claim, the tax treatment isn’t automatic and the custodial parent will usually need to sign Form 8332. The noncustodial parent then attaches the required release to their tax return. The release is important because the tax benefits do not all move together.

For example, the noncustodial parent may be allowed to claim the child tax credit, which is based on claiming an eligible child. The custodial parent may still qualify for head of household status. The custodial parent may also qualify for the child and dependent care credit if they paid eligible care expenses so they could work. In other words, one parent does not necessarily receive every tax benefit connected to the child. That distinction makes coordination essential. Both parents should confirm who will claim each benefit and whether Form 8332 is required. When both returns claim the same child incorrectly, the IRS may review the competing claims. The parent whose claim is denied could owe additional tax and interest. Penalties may also apply when a benefit was claimed improperly.

Equal asset values can produce unequal tax results

Property division creates a different problem. Transfers of property between spouses are generally not taxable at the time of transfer. Transfers to a former spouse can receive the same treatment when they are “incident to the divorce.” That phrase matters. A transfer generally qualifies if it occurs within one year after the marriage ends. A later transfer can also qualify when it is tied to the divorce instrument, generally within six years. Transfers delayed beyond those rules deserve additional review rather than an assumption that they remain tax-free.

But there may still be tax considerations even if the transfer isn’t taxed at the time of transfer. Suppose one spouse receives $500,000 in cash as part of the property settlement. The receipt of that cash is generally not federal taxable income. The spouse making the payment generally does not receive a deduction either. Now compare that with an investment account worth the same $500,000, but the original cost basis was only $200,000. In this case, the receiving spouse absorbs about $300,000 of unrealized gain. The transfer itself generally doesn’t trigger that gain, but when the investments are eventually sold, the receiving spouse may recognize some or all of that built-in gain. The eventual tax rate will depend on income, filing status, the type of investment, how long it was held, and other factors.

The point is that $500,000 in cash and an investment account may look equal on the settlement statement, but they aren’t necessarily equal after tax. The same problem can appear with rental property, a business interest, or any other appreciated asset. The divorce balance sheet shows current value, but your tax review should also consider the embedded future liability.

The home needs a post-divorce tax plan

The marital home adds another layer. A married couple filing jointly may qualify to exclude up to $500,000 of gain upon selling their house if they satisfy the applicable ownership and use requirements. After the divorce, the maximum exclusion is generally $250,000 for each qualifying former spouse. But divorce creates special rules around ownership and occupancy. If one spouse receives the home, that spouse can generally count the former spouse’s ownership period toward the ownership requirement. In some cases, a former spouse’s continued occupancy under the divorce agreement can also count toward the owner’s use requirement. That means the title alone doesn’t answer the tax question.

If the divorce is already final, the practical step is to reconstruct the records before listing the home. Confirm the original purchase price. Locate documentation for major improvements. Review any prior refinancing or partial business use. Confirm when each spouse owned and occupied the property. For someone still negotiating the settlement, the likely sale timing and responsibility for maintaining those records should be discussed before the agreement is signed.

Retirement awards require implementation

Retirement assets create a different gap between the settlement and tax return. A settlement may award one spouse part of the other spouse’s workplace retirement plan. But the plan administrator doesn’t simply read the divorce decree and transfer the money. Most qualified employer plans require a qualified domestic relations order (QDRO). Governmental, church, and certain other plans may use different procedures. Suppose the agreement awards a former spouse $200,000 from a 401(k). If the distribution is made under a QDRO, the spouse receiving the money generally reports the taxable distribution, rather than the original plan participant. However, the receiving spouse may be able to roll the money into an IRA or another eligible plan without immediate tax.

There is another important option. A taxable distribution made directly to a spouse or former spouse under a QDRO can generally avoid the additional 10% early-distribution tax, even if that person is under age 59.5. That can create a valuable liquidity opportunity for someone who needs part of the retirement award in cash.

IRAs work differently. An IRA transfer incident to divorce can generally be completed without current tax if handled correctly. But IRAs do not use QDROs, and the special QDRO exemption from the 10% early-distribution tax does not apply. Essentially, the settlement creates the legal right to the retirement asset but it’s the account-level paperwork that determines whether the transfer receives the intended tax treatment. Beneficiary designations also need a separate review. Divorce doesn’t automatically update every retirement plan, life insurance policy, or transfer-on-death account.

Support payments and old tax obligations follow their own rules

The settlement can also create ongoing payments, and those payments do not all receive the same tax treatment. For divorce or separation instruments executed after 2018, alimony is generally not deductible by the person paying it and is not taxable income to the person receiving it. Older agreements can follow the prior rules, unless they were later modified in a way that expressly adopts the newer treatment. Child support is different but simpler. It is generally neither deductible by the payer nor taxable to the recipient.

Prior joint tax returns create another loose end. When spouses file a joint return, both people are generally responsible for the tax, interest, and penalties connected with that return. A settlement might require one former spouse to pay an old tax balance. That can establish an obligation between the former spouses. It does not necessarily stop the IRS from pursuing either person. Relief may be available under the innocent spouse rules, but eligibility is fact-specific. Other tax items may also survive the divorce. Capital loss carryforwards, estimated payments, overpayments, and certain business or investment tax attributes may require separate review. Withholding should also be revisited. A withholding strategy designed around a joint return may no longer work once income and deductions are divided.

What to do now

A divorce settlement is the starting point, not the finish line, on your taxes. Before filing, confirm your filing status and coordinate each child-related benefit. Document the basis of every asset you received. Review the ownership, occupancy, and basis records for the home before a sale. Make sure every retirement transfer was completed through the correct account-level process. Review how support payments are treated under the date and terms of the agreement. Finally, revisit prior joint returns, current withholding, and any tax attributes that may carry forward. The goal is to avoid finding the tax consequences after the return is filed or an asset is sold. If you have questions or would like to discuss your unique situation, please contact our office to speak with one of our expert advisors.

This article is for general informational purposes only and is not legal advice. It focuses on selected federal income tax considerations related to divorce and separation. It does not address state or local tax consequences, state family-law issues, or every federal tax rule that may apply. Tax treatment can vary based on the specific facts, timing, assets involved, and terms of the divorce or separation agreement. For more information on what a settlement may not resolve please feel free to contact your trusted TBC advisor.

IRS Raises the Standard Mileage Rates for the Second Half of 2026

Posted on August 26, 2026

If you use your vehicle for business, medical care, or certain qualifying moves, the standard mileage rate increased on July 1st, 2026. The IRS said the increases reflect recent increases in fuel prices.

The midyear change means 2026 has two sets of mileage rates, so taxpayers will need to distinguish between qualifying mileage from the first and second halves of the year.

2026 mileage rates changed on July 1st

For miles driven from January 1st through June 30th, 2026, the standard mileage rates are:

• 72.5 cents per mile for business use
• 20.5 cents per mile for medical purposes
• 20.5 cents per mile for qualifying moving purposes for eligible active-duty members of the Armed Forces and certain members of the intelligence community
• 14 cents per mile for charitable service

For miles driven from July 1st through December 31st, 2026, the rates are:

• 76 cents per mile for business use
• 23.5 cents per mile for medical purposes
• 23.5 cents per mile for qualifying moving purposes for eligible active-duty members of the Armed Forces and certain members of the intelligence community
• 14 cents per mile for charitable service

The charitable mileage rate did not change because it is set by federal law. If you track mileage through an app or accounting system, ensure the new rates were applied beginning July 1st.

The standard mileage rate is optional

Eligible taxpayers do not have to use the standard mileage method. The business rate is used by self-employed taxpayers and businesses and may also be used for qualifying employer reimbursements. With that being said, most employees cannot deduct unreimbursed business mileage on their individual returns. Depending on their situation, eligible taxpayers can instead deduct the business portion of actual vehicle expenses. Those expenses can include items such as gas, insurance, repairs, registration fees and depreciation.

There are also rules that can limit your ability to switch between the standard mileage and actual-expense methods. For example, if you own a vehicle and want to use the standard mileage rate, the IRS can require you to choose that method in the first year the vehicle is available for business use. If you lease a vehicle and choose the standard mileage rate, for the most part you must continue using that method for the entire lease period, including renewals. Before changing methods, compare the potential deduction and confirm that you remain eligible to make the switch.

Good mileage records still matter

The higher mileage rate does not change the need for good documentation. Your records should show the date, destination, business purpose, and number of miles for each trip. For example, an entry that says “client meeting, 42 miles, August 12th” is much more useful than trying to reconstruct months of driving at tax time.

If employees use personal vehicles for company business, businesses should also review their mileage reimbursement policies and systems. For the revised rate to apply to a mileage allowance, both the employee’s underlying transportation expense and the employer’s reimbursement must occur on or after July 1st. Review your mileage log and reimbursement settings now rather than waiting until year-end.

Compare your options before year-end

The standard mileage rate keeps the calculation relatively simple, but it is not always the best choice. A vehicle with high depreciation, insurance, repairs, or other operating costs may produce a different result under the actual-expense method. Feel free to contact your trusted TBC advisor, we can help you review your vehicle expenses, mileage records, and reimbursement policies to determine how the 2026 changes apply to you.

When and Why Every Business Owner Needs a Business Valuation

Posted on July 14, 2026

Most business owners have a rough number in their heads of what they think the business is worth. That number is usually based on some combination of what a competitor sold for, what a banker once mentioned, or a gut sense built over years of reinvestment. It is not a valuation, and the gap between that mental estimate and a defensible, documented figure has cost business owners real money in taxes, negotiations, and disputes.

A formal business valuation is an independent, methodology-based determination of what your business is worth under a specific standard of value at a specific point in time. “Fair market value,” for example, is considered the price at which a business would change hands between a willing buyer and a willing seller, neither under compulsion, both with reasonable knowledge of the relevant facts. While that definition may seem like legalese, it matters – because the IRS, courts, and lenders all hold valuations to it.

Here is when you need one, and why.

Sale, succession, or exit

The most obvious trigger is also the one most business owners think about too late. If you are planning to sell your business, whether to a third party, a private equity buyer, or a family member, you need a valuation before you enter negotiations, not during them.

A buyer will come with their own number, supported by their own analysis. Without an independent valuation in hand, you are negotiating from memory and instinct. With one, you have documentation of your earnings, a reasoned view of what drives your value, and the foundation to push back when a buyer’s adjustments do not hold up.

The same applies to succession planning. If you are transferring ownership to a co-owner, a key employee, or a next-generation family member through a structured buyout, the purchase price has to be grounded in something. A valuation protects both sides and reduces the likelihood that the transaction gets challenged later by the other party, or the IRS.

Buy-sell agreements

If your business has more than one owner, you almost certainly have (or should have) a buy-sell agreement. That document governs what happens when an owner wants to leave, becomes disabled, dies, or is forced out. It is one of the most important contracts a business can have.

The problem is that many buy-sell agreements are written with valuation language that becomes unworkable over time. A fixed price set years ago no longer reflects current reality. A formula tied to a multiple of earnings may produce a number that is easy to calculate but difficult to defend. And when the triggering event actually happens, that is exactly the wrong time to be arguing about what the business is worth.

A current, third-party valuation, updated on a regular schedule, eliminates most of that friction. It also gives life insurance coverage a defensible target, which matters when funding a buyout.

Estate planning and gifting

Revenue Ruling 59-60, which the IRS has used since 1959 to evaluate closely held business interests for estate and gift tax purposes, sets out factors for determining fair market value. When a business interest transfers at death or through a gifting strategy, the IRS can, and does, challenge valuations it considers aggressive.

If you are transferring business interests to family members, establishing a family limited partnership, or using a trust structure that includes a business stake, the valuation underlying those transfers will be scrutinized. In this context, a well-supported valuation is not a formality. It’s the documentation that helps the transaction withstand IRS review.

Discounts for lack of marketability and lack of control, which reflect the reality that a minority interest in a closely held business is worth less than a proportionate share of the whole, are legitimate and recognized under federal tax law. But they require professional support to withstand IRS review. An undocumented discount is not a discount; it’s an audit finding waiting to happen.

Consider a business owner with an estate that includes a 40% interest in an S corporation worth $5 million as a whole. A properly supported valuation with applicable discounts might value that 40% interest at $1.6 million rather than $2 million – a $400,000 difference in the taxable estate. That difference, at the federal estate tax rate, is material. But, without documentation, it does not exist.

SBA and commercial lending

When a business is acquired using an SBA loan, the lender is required in many cases to obtain an independent business valuation. This protects the lender and, indirectly, the buyer, from overpaying for a business relative to its actual income-producing capacity.

Even outside of SBA transactions, commercial lenders often request valuations when a business is pledged as collateral, when a significant change of ownership is involved, or when the loan amount is large relative to verifiable business income. Having a current valuation on file can accelerate this process and reduce friction at closing.

Divorce and shareholder disputes

A business interest is a marital asset in most states. When a business owner divorces, the business has to be valued by someone. If both spouses commission their own valuations, those numbers frequently differ by significant margins, and litigation becomes the mechanism for resolving the gap.

The same dynamic plays out in shareholder disputes. When a minority shareholder claims they are being squeezed out, or when a departing partner disputes the buyout price, the absence of a current, agreed-upon valuation turns a business disagreement into prolonged legal conflict.

A periodically updated valuation (ideally one that all owners have reviewed and accepted) reduces that exposure. It does not eliminate the possibility of conflict, but it can remove the question of value from the center of the dispute.

Equity compensation

If your business grants stock options or other equity-based compensation to employees, IRC Section 409A requires that the strike price of those options be set at no less than the fair market value of the underlying stock at the time of grant. For private companies, that typically requires a properly supported independent appraisal or valuation process that meets the applicable 409A requirements.

Getting this wrong has consequences for both the employee and the company: accelerated income recognition, excise taxes, and penalties. A 409A valuation is not expensive relative to those risks, and it needs to be updated whenever there is a material change in the business.

Strategic planning and benchmarking

Valuations are not exclusively triggered by transactions or legal requirements. A business owner who understands what drives their company’s value is in a better position to make decisions.

If your business relies heavily on a single customer, employee, or product line, a valuator can reflect that concentration risk in the number. If your EBITDA margins are below what buyers in your industry typically pay for, that gap will be visible. Understanding these factors while you have time to address them is different from learning about them at the closing table.

Some owners commission informal valuations every three to five years simply to track progress and understand where they stand relative to an eventual exit goal. This isn’t excessive; it is the kind of planning that makes exits go smoothly.

What makes a valuation defensible

Not every valuation carries the same weight. The level of support needed depends on the purpose. A valuation used for estate or gift tax planning, a shareholder dispute, divorce, SBA financing, or equity compensation generally needs more formal documentation than an internal planning estimate.

A defensible valuation will apply one or more standard approaches – the income approach, based on earnings capacity; the market approach, based on comparable transactions or public company multiples; or the asset approach, based on the fair value of underlying assets. It should also explain why the selected methodology is appropriate for your business, document key assumptions, address risk factors, and produce a written report that can be reviewed by the relevant parties, whether that is a buyer, lender, court, tax authority, or other stakeholder.

An informal estimate from a broker, banker, or industry rule of thumb may be useful as a starting point for discussion. But when the number will be relied on for tax, legal, lending, or transaction purposes, it should be supported by appropriate valuation analysis and documentation.

How your CPA fits in

Your CPA is often the right starting point when a valuation is needed. A CPA who knows your business can help you understand why the valuation is being requested, what type of report or analysis may be appropriate, and what financial information will be needed to support the process.

If you have not had a business valuation performed, it’s worth a conversation. The right time to know what your business is worth is before you need to act on that number. For more personalized guidance, please contact your trusted TBC advisor.

S-corporations 101: FAQs for business owners

Posted on July 14, 2026

S-corporations are one of the most frequently discussed (but often misunderstood) tax structures for small business owners. You’ve likely heard that they can help reduce taxes, especially self-employment taxes. And in some cases, that’s true. But the rules are nuanced, and the benefits aren’t automatic.

An S-corporation (or S-corp) isn’t a separate type of business entity. It is a tax classification that eligible businesses can elect by filing Form 2553 with the IRS.

Many small businesses are already taxed as pass-through entities, meaning their income is reported on the owners’ personal tax returns and taxed at individual rates. Electing S-corp status doesn’t change that pass-through treatment. What it changes is how the income flowing through is characterized for tax purposes, particularly for owners who are actively involved in the business.

This is a 101-level overview designed to answer common questions and clear up misconceptions about S corporations. It’s not a substitute for tax or legal advice. The goal is to help you understand the basics so you can have a more informed, productive conversation with your advisor if you’re thinking about making the election.

What is an S-corporation?

An S-corporation isn’t a separate type of legal entity. It’s a tax election made under Subchapter S of the Internal Revenue Code. Both corporations and limited liability companies (LLCs) can apply for S-corp status if they meet eligibility requirements.

With an S-corp election, a business is treated as a pass-through entity for federal income tax purposes. But unlike a sole proprietorship or default LLC, an S-corp allows owner-employees to split income between:

• Wages (subject to payroll/FICA taxes), and
• Distributions (which avoid FICA taxes and are generally not subject to income taxes unless they exceed the shareholder’s stock basis)

This structural split is what creates potential tax advantages, particularly for profitable businesses with actively involved owners.

Can I convert my LLC to an S-corp?

Many business owners start out as single-member LLCs and later elect S-corp status once the economics make sense for their situation. You’re not changing your legal entity; just how it’s taxed.

There’s no hard threshold for when to make the switch, but the structure typically starts making sense when:

• You’re consistently earning net profit above what would be considered a reasonable salary
• You’re actively working in the business and prepared to take reasonable compensation as wages for your services
• You’re ready to take on the added responsibilities of running payroll and filing a separate corporate return (Form 1120-S)

If your income is modest, inconsistent, or your reasonable salary would consume most of your profit, it may make sense to wait before making the election.

Quick note on LLCs: “LLC” refers to a legal entity under state law, but for federal tax purposes, an LLC can be treated as a sole proprietorship (single-member), a partnership (multi-member), or a corporation (if an election is made). Most examples in this article assume a single-member LLC scenario to keep the math simple. If your LLC is taxed as a partnership, the same concepts apply, but the mechanics can differ – so you’ll want to model the election with your advisor.

Why do some business owners elect S-corp status?

The primary reason for electing S-corp status is the opportunity to reduce self-employment taxes, though the actual benefit depends heavily on the nature and profitability of the business.

This is especially true for business owners who are currently taxed as sole proprietors or default LLCs, where all net income is subject to self-employment tax.

If your business is taxed as a C-corporation, the motivation can be different: C-corps generally pay tax at the corporate level, and shareholders can pay tax again when profits are distributed as dividends. An S-corp election (for eligible corporations) is one way to shift from a “two-level” tax structure to a pass-through structure, where income is generally taxed once at the shareholder level. For many closely held corporations that expect to distribute most of their profits to owners, that shift (moving away from double taxation) can be a primary reason to elect S-corp status.

Understanding FICA taxes

To understand an S-corp, it helps to understand how FICA (Federal Insurance Contributions Act) taxes work. These taxes fund Social Security and Medicare and work the same way whether you’re an employee or self-employed – but who pays them differs.

For W-2 employees, FICA taxes are split: the employee pays % (6.2% for Social Security, % for Medicare), and the employer matches that with another %.

For self-employed individuals (sole proprietors and single-member LLC owners), you pay both the % employee and employer shares, since you are considered both the employee and the employer, resulting in a total of 15.3% self-employment tax.

Note: Social Security tax applies only to wages up to an annual cap ($184,500 for 2026), while Medicare tax applies to all earnings. An additional 0.9% Medicare surtax may apply to higher earners.

How an S-corp changes the tax structure

An S-corp allows owners who actively work in the business to pay themselves a reasonable W-2 salary and then take additional profits as distributions. Here’s how that affects FICA taxes:

• The salary is treated just like any other employee’s wages – subject to payroll tax (FICA), split between the employee and employer (though both portions are ultimately paid from your business).
• The distributions, however, are not subject to FICA taxes.

This allows a business owner to limit FICA exposure to only the portion of income paid as wages, potentially reducing total payroll tax liability, as long as the salary is reasonable for the work performed.

Side-by-side comparison

Let’s say a business generates $150,000 in net income, and the owner is actively working in the business.

Sole Proprietor/Default LLC:

• Entire $150,000 subject to self-employment tax (15.3%)
• Self-employment tax: $22,950
• The full $150,000 is also included in the owner’s taxable income and subject to federal (and possibly state) income tax, based on the owner’s individual tax situation.

S-Corporation (with $100,000 reasonable salary):

• $100,000 salary subject to payroll tax (15.3%): $15,300
• $50,000 distribution: $0 in FICA taxes
• The full $150,000 is still included in the owner’s taxable income, just as it would be in the sole proprietor scenario.

Payroll tax savings (before other adjustments): approximately $7,650.

Note: sole proprietors generally receive an above-the-line deduction for half of their self-employment tax, which can slightly reduce taxable income and narrow the net difference when comparing total tax cost.

This split doesn’t necessarily reduce income tax; it changes how payroll taxes apply. That distinction can create planning opportunities for businesses that consistently earn more than what would be considered a reasonable wage for the owner’s role.

Reasonable compensation is non-negotiable

If you’re an S-corp owner who actively works in the business, the IRS expects you to pay yourself a reasonable salary before taking any distributions. This is one of the most important (and most scrutinized) requirements of the S-corp structure.

But what exactly counts as “reasonable”?

The IRS doesn’t provide a fixed formula or salary table. Instead, it expects business owners to base compensation on what they would pay someone else to do the same job under similar circumstances. Factors to consider include:

• Industry standards for comparable roles
• Geographic location and cost of living
• The size, complexity, and profitability of the business
• Your role and responsibilities
• Time spent actively working in the business

For example, a solo consultant generating $150,000 in net income might reasonably take a salary of $70,000–$90,000, depending on their experience, hours worked, and market norms. But a physician earning the same amount may be expected to take a significantly higher salary due to specialized training and licensing.

There’s no bright-line test, but undercompensating yourself increases the risk of IRS scrutiny. If the IRS determines that your salary is unreasonably low, it can reclassify prior distributions as wages, assess back payroll taxes, and impose penalties.

Determining your reasonable salary

To support your salary, it’s helpful to research market compensation using resources like the Bureau of Labor Statistics (BLS), Glassdoor, or industry-specific surveys – and to document factors such as your role, hours worked, credentials, and the complexity and profitability of your business. A CPA can help you develop a defensible salary figure that balances tax efficiency with compliance.

How do I pay myself from an S-corp?

When paying yourself from an S-corp, you’ll need to run payroll, just like a regular employer – even if you’re the only employee. That means withholding federal and state income and unemployment taxes, Social Security and Medicare taxes, and issuing yourself a W-2 at year-end. Most S-corp owners use a payroll service to manage this.

After your salary is paid, any remaining business profit can be taken as distributions. These are not subject to self-employment tax, but they do reduce your basis in the S-corp.

Distributions are generally a return of previously taxed earnings and don’t trigger additional tax unless they exceed your basis. Here’s what that means:

Your basis in an S-corp starts with your initial investment and increases when the company earns income (which you pay taxes on) or you contribute additional capital. It decreases when you take distributions or the company has losses. If you take out more than your basis, the excess is taxed as a capital gain.

What are the limitations of an S-corp?

While S-corps can offer tax planning opportunities in the right context, the structure isn’t suitable for every business. There are several important limitations to be aware of.

First, only U.S. citizens or resident aliens can be shareholders. S-corps are also limited to a maximum of 100 shareholders and may only issue one class of stock, which can limit flexibility in ownership structures and profit-sharing arrangements. Certain types of businesses, such as some financial institutions and insurance companies, are not eligible to elect S-corp status at all.

Beyond these eligibility restrictions, the S-corp structure may not be a good fit for businesses that are operating at a loss, because losses can only be deducted to the extent of your basis, which does not include entity-level debt.

If your business is still ramping up, operating at a loss, or reinvesting heavily in growth, the tax benefits of an S-corp may be limited or nonexistent in the short term.

Administrative requirements

S-corps require maintenance, including:

• Monthly or quarterly payroll processing
• Separate corporate tax return (Form 1120-S) in addition to your personal return
• Stricter bookkeeping and accounting requirements, including maintaining corporate records such as meeting minutes
• Potential state-level taxes or fees in some jurisdictions

These ongoing costs and complexity mean S-corp status only makes financial sense when the tax savings outweigh the additional administrative burden.

Is an S-corp right for you?

S-corps offer a unique blend of pass-through taxation and structured compensation. But they’re not automatically advantageous, and they’re not designed for every business.

If you’re earning strong profits, actively involved in your business, and ready to formalize how you pay yourself, it may be worth exploring the switch. But like most tax strategies, it’s not one-size-fits-all.

Before you file anything with the IRS, feel free to contact your trusted TBC advisor. We’ll help you run the numbers, weigh the trade-offs, and determine whether an S-corp election makes sense for your goals.

It’s Wedding Season! The Tax Changes Couples Miss

Posted on June 15, 2026

Are you newly married or about to get married this year? Congratulations! But somewhere between the honeymoon and unpacking, there’s a list of tax changes that most couples simply don’t think about. And that’s exactly the problem. The IRS treats marriage as a significant life event, which means your tax situation changes whether you’re ready for it or not. For many couples, especially dual-income earners, missing these changes can mean a surprise tax bill in April.

The good news is that many of these issues are straightforward to address now, before the year ends. Handling them proactively keeps you from scrambling in March or discovering problems when you file. Here’s what you need to know.

Your filing status just changed, even if nothing else did

Your marital status on December 31st determines your filing status for the entire tax year. Even if you get married later this year, you’ll file as married for 2026. This single change affects your tax brackets, standard deduction, and eligibility for certain credits, which is why it matters far more than most couples realize.

For most married couples, filing jointly is the right move. You’ll benefit from wider tax brackets, a higher standard deduction, and access to valuable credits like the child tax credit and education credits that may not be available if you file separately. Filing jointly also simplifies your return and often results in a lower overall tax bill.

However, there are situations where married filing separately deserves consideration. If one spouse is pursuing income-driven repayment on federal student loans, filing separately can keep that spouse’s income lower on their individual return, which directly lowers their monthly payment obligation. Similarly, if one spouse has significant liability concerns or anticipates collection issues, filing separately can provide a layer of protection. These scenarios are nuanced, and the decision hinges on your specific circumstances. Before you choose to file separately, talk to your TBC advisor. The tax savings or liability protection may be real, but so are the downsides you might not see coming.

The withholding problem no one warns you about

Once your filing status is settled, the next thing to address is your withholding. And for two-income couples, this is where the most expensive surprises tend to hide.

Federal income tax is a pay-as-you-go system. Your employer withholds tax from each paycheck based on the information you provide on Form W-4, and the default withholding tables were designed with a single income in mind. When two earners file jointly, their combined income gets taxed at rates that reflect the full household total, but each employer is only withholding based on one salary in isolation.

Here’s what that looks like in practice: if you each earn $70,000, your household income is $140,000. The marginal rate that applies to the top portion of $140,000 is higher than what either employer assumed when calculating withholding for a $70,000 earner on their own. Unless you both update your W-4s to account for this, you will likely end up owing money next April.

The IRS has a free withholding estimator at that walks through this calculation. It takes about ten minutes and tells you exactly how much additional withholding to request on each spouse’s W-4. Federal underpayment penalties are modest but entirely avoidable, and discovering a large tax balance due on April 15th is a stressful way to start a marriage.

One additional note for couples with self-employment income or significant non-W-2 earnings: estimated quarterly payments may also need to be revisited. Underpaying throughout the year can trigger penalties even if you settle the full balance when you file.

Update your name and address in the right order

If you changed your name after marriage, the Social Security Administration needs to hear about it before you file your tax return. Your name on the return must match what is on file with Social Security. A mismatch will delay your refund and can generate a notice that takes time and paperwork to resolve.

The fix is straightforward: file Form SS-5 with the SSA to update your records. Do this first, then update your name with your employer for W-2 purposes.

Address changes are simpler. If you moved, file Form 8822 with the IRS to update your address on file. This is not just administrative tidiness. Notices, refund checks, and correspondence go to the address the IRS has on record. If a notice sits undelivered at an old address, response deadlines keep running regardless.

Healthcare coverage gets more complicated

Marriage is a qualifying life event that allows both spouses to make mid-year changes to employer-sponsored health plans. That flexibility is valuable, but the decisions that follow it have real tax implications.

If you both carry employer-sponsored coverage, consider whether it makes more financial sense to consolidate onto one plan or maintain separate coverage. The answer depends on the quality and cost of each plan, but do not overlook the tax treatment of premiums. Employer-paid premiums are excluded from your taxable income. If one spouse’s employer offers a significantly better or cheaper plan, consolidating may reduce your combined tax liability in addition to simplifying your coverage.

If either spouse has a Health Savings Account (HSA), marriage changes the contribution limits and household eligibility rules in ways that are easy to mishandle. HSA eligibility requires enrollment in a High Deductible Health Plan (HDHP). If one spouse moves to a non-HDHP plan, they can no longer contribute to their HSA going forward, and the timing of that change matters for calculating the annual contribution limit. Excess HSA contributions carry a 6% excise tax, so getting this right before year-end is worth a quick review.

Dependents: who claims whom, and what changes

If either spouse has children from a prior relationship, the dependency picture becomes more layered. Dependency exemptions have been eliminated under current law, but the child tax credit, the child and dependent care credit, and head-of-household filing status all hinge on who qualifies as a dependent on whose return.

Generally, the custodial parent claims the child unless there is a written agreement or court order directing otherwise. That arrangement may have worked cleanly when each parent filed as a single individual, but it interacts with your new joint return and your spouse’s income in ways that can affect credit eligibility. The child tax credit, for instance, phases out at higher income levels. Adding a second income to the household may reduce or eliminate credits that were previously available.

If your spouse has no children but you do, updating your W-4 to reflect dependent-related credits is one of the withholding adjustments that often gets missed in the transition.

A note on state taxes

This article focuses on federal taxes, but your state may have its own wrinkles. Some states do not conform to federal filing status rules. A small number of states require or allow separate returns regardless of federal treatment. If you moved to a new state in connection with your marriage, you may have a part-year residency situation on both state returns. These scenarios are worth confirming before you assume your federal approach carries over cleanly.

What to do now

The adjustments covered here are time-sensitive because withholding corrections and benefits elections need to happen before year-end to affect your current-year return. Waiting until you sit down to file in February or March means absorbing any underpayment consequences rather than preventing them.

Getting these details right in year one sets a much cleaner foundation for everything that follows. If you have questions about what you need to do contact your TBC Advisor to help you to work through it.

Filed an Extension? How to Use the Time Between Now and October 15th

Posted on May 12, 2026

Filing an extension can be a practical decision. If your return is complex, extending can give you time to file accurately instead of rushing a return that may later need to be corrected.

But an extension is only useful if you use the extra time well.

The IRS grants individuals a six-month extension to file, generally moving the federal filing deadline to October 15th. What it does not do is extend the time to pay. Your taxes were still generally due by April 15th, and interest and failure-to-pay penalties will continue to accrue on any unpaid balance after that date.

Federal extension rules also do not automatically extend state filing deadlines. State requirements vary, so it is important to confirm the rules that apply to you.

That’s why the period between now and October 15th shouldn’t be treated as extra time to set your return aside. It is a useful planning window. Used well, it gives you time to organize records, refine payment estimates, address open questions, evaluate payment options, and make better current-year tax decisions while there is still time for those decisions to matter.

Start by confirming the extension details

You can request an extension using Form 4868. The IRS also treats certain electronic payments designated as extension payments as a valid extension request without a separate Form 4868 (if the payment is made through an approved IRS channel by the original due date).

With the payment obligation clearly in view, the most useful post-extension question shifts. The question is not how long you can wait. It is what you should address now so that October is smoother, more accurate, and less costly.

Use the extension period to improve the return, not just finish it

For many filers, the value of the extension period is quality control.

This is the time to clean up K-1 reporting, reconcile brokerage statements, verify basis schedules, confirm deductible expenses, and collect missing support for credits and deductions. The IRS requires you to maintain records that support income, deductions, and credits appearing on your return. Those records generally need to be kept until the applicable statute of limitations expires, which is typically three years from filing but can be longer in certain circumstances.

It’s also worth remembering that the IRS matches third-party information, including Forms 1099, corrected 1099s, and K-1s, against filed returns. Reconciling those documents carefully during the extension window is one of the most practical ways to reduce the risk of a notice after filing.

This is especially important if your return involves more than a W-2 and a standard deduction. A closely held business, rental activity, investment sales, multi-state filing obligations, charitable gifts, or pass-through income can all add layers of complexity. In those cases, the extension period can be the difference between a return that is simply filed and a return that is filed correctly.

The extension period can also be the right moment to evaluate whether any remaining elections or adjustments can still be made for the year in question. Retirement contributions are one common example, depending on the type of account and your situation.

That is where CPA guidance becomes especially valuable. The point is not to stretch out the filing process. It’s to use the extra months to reduce errors, strengthen support, and identify opportunities before the window closes.

Revisit the payment estimate before the balance grows further

If you extended and still owe, this is the moment to revisit the estimate used in April.

The amount paid with the extension is often just that: an estimate. Once better information is available, you should compare the extension payment with the more complete tax picture rather than waiting until October to find out that the shortfall is larger than expected. Interest and failure-to-pay penalties will generally continue to accrue on unpaid tax after the original due date.

That makes the extension period a cash-flow exercise as much as a tax exercise. In many cases, the better move is to make an additional payment now rather than wait until filing. Even when the final number is not yet known, reducing the unpaid balance earlier can help limit the cost of waiting.

If you cannot pay in full, address it directly

If you cannot pay your full balance, you shouldn’t wait passively for the problem to grow.

The IRS offers structured resolution options, including short-term and long-term payment arrangements. Individuals who owe $50,000 or less in combined tax, penalties, and interest may be eligible to apply online for a long-term payment plan. The IRS also provides resources covering offers in compromise, collection delays, and penalty relief.

This is another plan where professional guidance can be helpful. A CPA can help you evaluate whether it makes sense to pay down the balance immediately, set up an installment arrangement, adjust current-year estimates, or preserve business liquidity while still avoiding a deeper compliance issue.

The right answer is often more than procedural. It depends on your full financial picture.

Don’t let the extension distract you from the current tax year

One of the most common mistakes after an extension is treating the prior-year return as the only tax issue in play. It is not.

Federal income tax is a pay-as-you-go system, and withholding and estimated tax obligations continue throughout the current year. This is particularly important if your income was volatile in the first place.

A profitable business year, pass-through income, capital gains, a bonus, or multiple income sources may have prompted the extension. If those same conditions are continuing in 2026, then resolving the 2025 issue without recalibrating 2026 withholding or estimated payments can simply recreate the same problem.

Use this time to review whether withholding or payments are still on track to meet either 90% of the current year’s tax liability or 100% of the prior year’s liability (or 110% for certain higher-income taxpayers).

Treat October 15 as a hard planning deadline, not a soft reminder

The least productive use of an extension is to let it create a false sense that the tax issue has been postponed. In practice, an extension should create a schedule.

By mid-summer, you should know what documents are still missing. By early fall, you should know whether the extension payment was adequate, whether records are sufficient, and whether any open questions require technical review. October 15th is a real filing deadline, not an informal target. Treating it that way can make the difference between a managed process and a repeat of the April rush.

The extension window is also a genuine advisory opportunity. If you extended because your situation is complex, you may benefit from a mid-year conversation that covers the prior-year return, the adequacy of current-year payments, and any planning considerations that are still actionable before year-end.

Used intentionally, an extension can become the starting point for better ongoing tax planning, not just a sign that the return took longer than usual.

A practical checklist if you filed an extension

The months ahead should focus on five priorities:

• Revisit your April payment. Assess whether the payment made with your extension was adequate, and consider making an additional payment now if the picture has become clearer.
• Gather the documents that affect your return. This may include late-arriving K-1s, corrected 1099s, brokerage confirmations, cost basis records, charitable acknowledgments, and business expense support. Reconciling those documents before filing can reduce the risk of post-filing notices.
• Decide whether the return needs technical review, not just completion. This is especially important if you have business interests, rental activity, investment transactions, multi-state filing issues, or unusually large deductions. In those areas, the facts often need to be interpreted, not just entered.
• Review the current year at the same time. Withholding, estimated taxes, safe-harbor adequacy, and cash-flow planning for 2026 should not wait until the 2026 filing season.
• Address payment issues early. If full payment is not realistic, evaluate IRS resolution options before the problem grows. Payment arrangements tend to work best when approached deliberately and with a clear understanding of your full financial picture.

Using the extension window well

If you filed an extension, the goal is not simply to get your return out by October 15th. The goal is to use the extension window to file accurately, reduce avoidable costs, and prevent the same issues from carrying into the current year.

If your return is complex, your income is volatile, or you still have unresolved payment questions, this is a good time to pause, review the full picture, and make sure the next few months are used intentionally. A well-managed extension period can turn a stressful filing delay into a more thoughtful and effective planning opportunity.

If you are in need of assistance or are looking for more information on what needs to be done after you filed your extension, please feel free to reach out to your trusted TBC advisor.

A Financial Guide for Heirs Navigating Inherited Assets

Posted on May 12, 2026

Inheriting significant assets often comes at a time of grief and uncertainty. Beyond the emotional weight, the financial responsibilities can feel overwhelming, especially when the next steps aren’t clearly defined.

It’s not always as simple as receiving a check or taking ownership. Depending on the type of asset and how it was held, you could be facing complex tax rules, legal requirements, and time-sensitive decisions that directly affect your financial outcome.

While much of the guidance out there focuses on how to prepare your estate for others, very little is written for those who actually inherit it. Whether it’s real estate, investment accounts, or personal property, the way assets transfer, and how you respond, can have lasting consequences.

This guide will walk through several common asset types and what you should know as an heir.

Initial considerations: legal and financial realities are deeply connected

While this article is not legal advice, and the legal administration of an estate is beyond its scope, we do reference legal terms that affect how heirs receive assets and what the financial outcomes may be. Estate law and financial planning are inherently connected – and understanding that connection is key.

Inheritance is rarely as simple as being “handed” something. Every transfer of wealth involves a legal structure, be it a Will, Trust, or state intestacy laws, that shapes what heirs receive, when, and under what conditions.

The way assets are titled also matters. Some may transfer automatically, such as joint accounts or assets with a transfer-on-death (TOD) designation, while others require formal administration. These distinctions impact access, taxes, and timelines.

A note on taxes: it’s not just about the estate tax

Many heirs are told not to worry about taxes because the estate falls below the federal estate tax exemption. In practice, however, most of the tax consequences of inheritance happen elsewhere. Retirement accounts like IRAs often generate ordinary income when withdrawn. Real estate and investment assets can trigger capital gains if sold after appreciation. Medicaid estate recovery can reduce or reclaim inherited value, depending on how care was funded. And several states impose estate or inheritance taxes with much lower thresholds than the federal level.

The bottom line is that inheritance is not a passive event. It’s a series of legal, tax, and financial decisions that require coordination.

Inheriting real estate

Real estate can be one of the most valuable and financially involved assets an heir receives.

The way a property is titled determines how it transfers. Jointly held assets or those in a Trust may avoid probate, while solely owned property typically requires court administration. If real estate exists in multiple states, additional legal processes may apply, potentially complicating timelines and costs.

Financial responsibilities often begin immediately. Even without a mortgage, heirs may need to cover property taxes, insurance, maintenance, and utilities. In some states, inheritance may trigger a property tax reassessment, increasing the cost of ownership. If you’re also the executor, these expenses may need to be paid from estate funds before the estate is settled and the real estate is re-titled. Failing to do so can jeopardize property value or your fiduciary role.

From a tax standpoint, inherited real estate generally receives a step-up in basis to its fair market value at the date of death. That means if sold soon after inheritance, capital gains taxes may be minimal. But if the property is held and appreciates further, any future gain will be measured from the stepped-up value. A qualified appraisal or documentation at the time of inheritance is key to supporting that basis.

If the property is inherited jointly (often among siblings), disagreements over whether to sell, hold, or rent are common. When a consensus isn’t reached, partition actions (court-ordered sales) can force liquidation, often at less-than-optimal terms.

Bank accounts and personal belongings

Bank accounts and personal property may appear simple, but can involve different transfer rules depending on how they’re owned.

Accounts with a payable-on-death (POD) or transfer-on-death (TOD) designation generally bypass probate and go directly to the named beneficiary. Joint accounts usually pass to the surviving co-owner, though state laws (especially in community property states) can influence how these transfers are treated.

Accounts held solely in the decedent’s name without a designated beneficiary typically require probate. These funds are often inaccessible until the court appoints an executor and authorizes distributions. In the meantime, banks may freeze the account, even for close family members.

While less complex than real estate or investment assets, these accounts still benefit from early attention, especially when cash flow or liquidity is a concern.

Personal property

Personal belongings like vehicles, collectibles, artwork, and furniture often carry both emotional and financial weight. These items can become flashpoints among heirs if expectations aren’t clearly communicated.

Some assets may require appraisal, especially if the estate is subject to federal or state estate taxes. But even in modest estates, documenting value can prevent conflict. For example, if a Will directs equal shares among heirs, disputes may arise if one receives a high-value item like a classic car without a valuation to support its worth.

Most everyday items have no tax consequence. However, higher-value assets sold later may trigger capital gains, though they generally receive a step-up in basis to fair market value at the date of death.

The executor is typically responsible for inventorying, securing, and distributing personal property. If you’re both executor and heir, it’s important to manage potential conflicts of interest and document your decisions carefully. Without careful attention, disputes can arise that often undermine the overall fairness of the estate settlement.

Investment and retirement accounts

Non-retirement investment accounts

Brokerage accounts (holding stocks, bonds, or mutual funds) generally receive a step-up in cost basis at death. This means gains are reset to the fair market value on the date of death, often allowing heirs to sell assets shortly after inheriting with little or no capital gains tax.

However, once the assets are retitled to a new account in the heir’s name, any future appreciation will be taxable when sold.

Retirement accounts

The tax treatment for retirement accounts is very different. Traditional IRAs and 401(k)s do not receive a step-up in basis, and distributions are generally taxed as ordinary income. For many heirs, this turns a large inherited account into a potential tax trap if not managed carefully.

Under the SECURE Act, most non-spouse beneficiaries must fully withdraw inherited IRA funds within 10 years. While annual distributions aren’t required, lump-sum withdrawals can trigger higher tax brackets (something worth modeling out with your CPA).

Spousal beneficiaries have more options: they can roll the account into their own IRA or treat it as an inherited IRA and follow a different distribution schedule, depending on age and income needs.

Regardless of beneficiary type, inherited IRAs must be retitled, and this isn’t automatic. The process typically involves submitting a death certificate and other estate documentation to the custodian. Improper titling or delays can limit distribution options or trigger unintended tax consequences.

Employer-sponsored plans, such as 401(k)s, follow similar tax rules but may have additional administrative requirements. Some plans restrict rollover options or mandate lump-sum distributions. Early coordination with the plan administrator and your advisor is key.

Inheritance demands intention

Every type of inherited asset comes with its own set of rules, risks, and decisions. Often, the most costly mistakes aren’t due to negligence; they happen because heirs don’t know what questions to ask or when to act.

There’s no one-size-fits-all approach. What makes sense for one heir may be the wrong move for another. That’s why early coordination with a CPA, estate attorney, and financial advisor is so important. These professionals can help you evaluate not just what you’ve inherited, but how it fits into your broader financial picture.

If you’ve recently inherited assets (or expect to), don’t wait to start the conversation. The goal isn’t just to protect what you’ve received. It’s to use it well, with the same care and intention that likely went into building it in the first place. If you are in need of assistance or are looking for more information on a financial guide for heirs naviagting inherited assets, please feel free to reach out to your trusted TBC advisor.