If you’re claiming deductions for business meals or vehicle expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case. (T.C. Memo. 2024-82) Facts of the case The taxpayer operated a software installation, training and consulting business. She claimed substantial deductions for several tax years. The IRS disallowed many of the deductions and the U.S. Tax Court agreed. Here’s a rundown of some of the disallowed expenses and the reasons why they couldn’t be deducted: Meals and entertainment. The business owner deducted nearly $9,000 for meal expenses in one tax year and testified the amount was for “working lunches” with the “person she worked for and the developer.” As documentation, she submitted bank statements. The court noted that “bank statements alone do not substantiate the ‘business purpose of the expense’ or the ‘business relationship’ between petitioner and the individuals with whom she dined.” It added: “The cost of eating lunch during the workday is not — without more — a deductible business expense.” Supplies. The taxpayer deducted more than $17,000 for supplies purchased during two tax years. She testified that these included “desks, monitors, office equipment, paper, printers, [and] anything that was pertinent to the business itself.” To substantiate her reported expenses, the taxpayer submitted receipts from office supply stores. However, the receipts were dated later than the tax years in question, and they covered (among other things) purchases of soda dispensers and gift cards. The court noted that “some of these purchases appear personal” and all were made after she terminated her consulting business. Home office expenses. Over two years, the taxpayer deducted $21,393 for the business use of a home office. But the court ruled that she “failed to prove that the ‘focal point’ of her software consulting business was her home.” At trial, she testified that she was required to be on site at a client’s office much of the time. In addition, she didn’t supply evidence to establish how much time she worked from home or what (if any) portion of her residence was used exclusively for business purposes. Other expenses the court disallowed included attorney’s fees, utilities, hotel stays and vehicle expenses. In all cases, the taxpayer didn’t substantiate with adequate records or sufficient evidence that the expenses were related to her business. Best practices This case exemplifies why it’s critical to maintain meticulous records to support business expense deductions. Here’s a list of DOs and DON’Ts to help meet the strict IRS and tax law substantiation requirements for these items: DO keep detailed, accurate records. For example, for each business meal, record the amount, date, place, business purpose, and the business relationship of any person you dine with. If you have employees whom you reimburse for meals, travel and vehicle expenses, make sure they’re complying with all the rules. DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of an event or soon after. Require employees to submit weekly or monthly expense reports. DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account and credit cards shouldn’t be used for personal expenses. DON’T be surprised if the IRS asks you to prove your deductions. Vehicle, travel, meal and home office expenses are attention magnets. Be prepared for a challenge. Stand up to scrutiny With organization and our guidance, your tax records can stand up to IRS inspection. There may be other ways to substantiate your deductions. In addition, there may be a way to estimate certain deductions (called “the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster. © 2025

What’s the most important type of software for your business? Your first thought may be whatever system you rely on most to produce or sell your company’s products or services. And that may well be true. However, more than likely, your accounting software comes in a close second. After all, this technological tool tracks every financial transaction related to your business. It needs to be secure, up to date, and appropriate for your company’s size and needs. To keep all those factors in line, you’ve got to handle accounting software upgrades with care. Let’s review some fundamental best practices. Plan upgrades strategically Among the most important aspects of managing an upgrade is knowing when to do it. You don’t want to unnecessarily disrupt operations and spend money, but you shouldn’t risk the downsides of outdated functionality by waiting too long. There’s no one-size-fits-all answer. Your financial statements are a potentially helpful source of information. A general rule of thumb says that, when annual revenues hit certain benchmarks — perhaps $1 million, $5 million, $10 million and so forth — a business may want to consider an upgrade seriously. However, the right tipping point depends on various factors. Look for an industry-specific solution Some companies rush into upgrades without considering all their options. Others resist change entirely, sticking with the same accounting software for years. Either way, you could miss out on something important: a product designed for your industry. For instance, construction companies can choose from many applications with built-in features tailored to how contract-based businesses work. Manufacturers also have industry-specific accounting software. If you’re ready to upgrade, check out whether there’s now a solution on the market that was developed for your industry’s accounting practices and standards. Mind all the details When upgrading, be sure to mind all the details. For instance, don’t overlook the importance of integration and mobile access. Older accounting software may still function only as a standalone application, meaning data from across the company has to be manually entered into the system. This creates all sorts of risks. Optimally, you should be able to integrate your accounting software with other critical applications to share data seamlessly and securely, reducing errors and redundancy. Also, if you haven’t already, add mobile access to your accounting system. Many solutions now include apps for smartphones or tablets. Set your budget carefully It’s easy to overspend on an accounting system upgrade. Those bells and whistles can be enticing. Then again, many frugal-minded business owners underspend — settling for a cheaper, less robust upgrade that may leave their employees dealing with headaches. The ideal approach generally lies somewhere in the middle. Perform a thorough review of your accounting needs, transaction volume and required reports. Also factor in the proficiency of everyone who’ll use the software and the availability of tech support. Then set a reasonable budget for an upgrade that checks all the right boxes. Ask for help It’s easy to grow accustomed to a certain kind of business accounting software. The trouble is, over time, that software can slow down your operations and deprive you of helpful functions and insights. If you’re unsure whether you’ve reached the point where an upgrade is imperative, we’re here to help. We can assess your current system and assist you in deciding whether now’s the time to act. If it is, we’ll partner with you and your leadership team to set a budget, choose the right solution and implement it properly. © 2025

5 tax breaks on the table: What business owners should know about the latest proposals

A bill in Congress — dubbed The One, Big, Beautiful Bill — could significantly reshape several federal business tax breaks. While the proposed legislation is still under debate, it’s already sparking attention across business communities. Here’s a look at the current rules and proposed changes for five key tax provisions and what they could mean for your business. 1. Bonus depreciation Current rules: Businesses can deduct 40% of the cost of eligible new and used equipment in the year it’s placed in service. (In 2026, this will drop to 20%, eventually phasing out entirely by 2027.) Proposed change: The bill would restore 100% bonus depreciation retroactively for property acquired after January 19, 2025, and extend it through 2029. This would be a major win for businesses looking to invest in equipment, machinery and certain software. Why it matters: A full deduction in the year of purchase would allow for faster depreciation, freeing up cash flow. This could be especially beneficial for capital-intensive industries. 2. Section 179 expensing Current rules: Businesses can “expense” up to $1.25 million of qualified asset purchases in 2025, with a phaseout beginning at $3.13 million. Under Section 179, businesses can deduct the cost of qualifying equipment or software in the year it’s placed in service, rather than depreciating it over several years. Proposed change: The bill would increase the expensing limit to $2.5 million and the phaseout threshold to $4 million for property placed into service after 2024. The amounts would be adjusted annually for inflation. Why it matters: This provision could help smaller businesses deduct more of the cost (or the entire cost) of qualifying purchases without dealing with depreciation schedules. Larger thresholds would mean more flexibility for expanding operations. 3. Qualified business income (QBI) deduction Current rules: Created by the Tax Cuts and Jobs Act (TCJA), the QBI deduction is currently available through 2025 to owners of pass-through entities. These include S corporations, partnerships, limited liability companies, sole proprietors and most self-employed individuals. QBI is defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. The deduction generally equals 20% of QBI, not to exceed 20% of taxable income minus net capital gain. But it’s subject to additional limits that can reduce or eliminate the tax benefit. Proposed change: Under the bill, the QBI tax break would be made permanent. Additionally, the deduction amount would increase to 23% for tax years beginning after 2025. Why it matters: The increased deduction rate and permanent extension would lead to substantial tax savings for eligible pass-through entities. If the deduction is made permanent and adjusted for inflation, businesses could engage in more effective long-term tax planning. 4. Research and experimental (R&E) expensing Current rules: Under the TCJA, businesses must capitalize and amortize domestic R&E costs over five years (15 years for foreign research). Proposed change: The bill would reinstate a deduction available to businesses that conduct R&E. Specifically, the deduction would apply to R&E costs incurred after 2024 and before 2030. Providing added flexibility, the bill would allow taxpayers to elect whether to deduct or amortize the expenditures. (The requirement under current law to amortize such expenses would be suspended while the deduction is available.) Why it matters: Many businesses — especially startups and tech firms — depend heavily on research investments. Restoring current expensing could ease tax burdens and encourage innovation. 5. Increase in information reporting amounts Current rules: The annual reporting threshold for payments made by a business for services performed by an independent contractor is generally $600. That means businesses must send a Form 1099-NEC to contractors they pay more than $600 by January 31 of the following year. Proposed change: The bill would generally increase the threshold to $2,000 in payments during the year and adjust it for inflation. This provision would apply to payments made after December 31, 2024. (The bill would also make changes to the rules for Form 1099-K issued by third-party settlement organizations.) Why it matters: This proposal would reduce the administrative burdens on businesses. Fewer 1099-NECs would need to be prepared and filed, especially for small engagements. If the provision is enacted, contractors would receive fewer 1099-NECs. Income below $2,000 annually would still have to be reported to the IRS, so contractors may have to be more diligent in tracking income. More to consider These are just five of the significant changes being proposed. The One, Big, Beautiful Bill also proposes changes to the business interest expense deduction and some employee benefits. It would eliminate federal income tax on eligible tips and overtime — and make many more changes. If enacted, the bill could deliver immediate and long-term tax relief to certain business owners. It narrowly passed in the U.S. House of Representatives and is currently being considered in the Senate. Changes are likely to be made there, at which point the new version would have to be passed again by the House before being sent to President Trump to be signed into law. The current uncertainty means business owners shouldn’t act prematurely. While these changes may sound beneficial, their complexity — and the possibility of retroactive provisions — make professional guidance essential. Contact us to discuss how to proceed in your situation. © 2025

Businesses can still choose to address sustainability

For many years, businesses of all shapes and sizes have at least considered sustainability when running their operations. Many people — including customers, investors, employees and job candidates — care about how a company impacts the environment. And reducing energy use, water consumption and waste generally lowers operational costs. However, the current “environment regarding the environment,” has changed. With the passage of the One, Big, Beautiful Bill Act (OBBBA), the federal government has disincentivized businesses from taking certain green measures. So, you may be reevaluating your company’s stance on sustainability. Apparent interest According to one survey, a serious interest in sustainability remains present among many businesses. In February, management consultancy Kearney, in association with climate action media platform We Don’t Have Time, released the results of a survey of more than 500 finance executives from companies in the United States, United Kingdom, United Arab Emirates and India. Of those respondents, 93% said they saw a clear business case for sustainability. Meanwhile, 92% expected to invest more in sustainability this year — with 62% of respondents saying they planned to allocate more than 2.1% of revenue to sustainability in 2025. Now whether and how fully these investments come to fruition this year is hard to say. However, the fact remains that sustainability has been and will likely continue to be a strategically significant factor in many industries. Vanishing tax breaks As mentioned, the OBBBA has thrown a wrench into tax relief related to certain sustainable measures. For example, the Section 179D Energy Efficient Commercial Buildings Deduction has been around since 2006. It got a big boost from the Inflation Reduction Act (IRA) of 2022, which increased the potential size of the deduction and expanded the pool of eligible taxpayers. However, the OBBBA permanently eliminates this tax break for buildings or systems on which construction begins after June 30, 2026. The OBBBA also nixes an incentive for the business use of “clean” vehicles. The Qualified Commercial Clean Vehicle Credit, under Sec. 45W of the tax code, hadn’t been previously scheduled to expire until after 2032. However, it’s now available only for vehicles acquired on or before September 30, 2025. Depending on vehicle weight, the maximum credit is up to $7,500 or $40,000. Has your company installed an electric vehicle charger or another qualified dispenser of or storage facility for clean-burning fuel? If so, you may be able to claim the Alternative Fuel Vehicle Refueling Property Credit under Sec. 30C of the tax code. The IRA had scheduled the credit — which is worth up to $100,000 per item — to sunset after 2032. But under the OBBBA, eligible property must be placed in service on or before June 30, 2026, to qualify. Tailored strategy Where does all this leave your business? Well, naturally, it’s up to you and your leadership team whether you want to address sustainability and, if you decide to do so, precisely how. Typically, when devising or revising a strategy in this area, your company should: Conduct an up-to-date baseline assessment of energy use, water consumption, waste generation and your business’s overall carbon footprint, Set clear goals and metrics based on reliable data and the input of professional advisors, Address the impact of logistics, your supply chain and employee transportation, and Communicate effectively with staff to gather feedback and build buy-in. And don’t necessarily give up on tax incentives. Although some federal tax breaks may be going away in the near future, state and local ones might exist that could benefit your business. Your call Again, as a business owner, you get to make the call regarding your company’s philosophy and approach to sustainability. If it’s something you intend to prioritize, we can help you review your operations and identify cost-effective and possibly tax-saving ways to make a positive environmental impact. © 2025

When many small to midsize businesses are ready to sponsor a qualified retirement plan, they encounter a common obstacle: complex administrative requirements. As a business owner, you no doubt already have a lot on your plate. Do you really want to deal with, say, IRS-mandated testing that could cause considerable hassles and expense?

Well, you may not have to. If that’s the only thing holding you back, consider a safe harbor 401(k) plan. These plans are designed to simplify administration and allow highly compensated employees to contribute the maximum allowable amounts. Of course, you still must read the fine print.

Simple trade-off

Under IRS regulations, traditional 401(k) plans are subject to annual nondiscrimination testing. It includes two specific tests:

1. The actual deferral percentage (ADP) test, and
2. The actual contribution percentage (ACP) test.

Essentially, they ensure that a company’s plan doesn’t favor highly compensated employees over the rest of the staff. If a plan fails the testing, its sponsor may have to return some contributions to highly compensated employees or make additional contributions to other participants to correct the imbalance. In either case, the end result is administrative headaches, unhappy highly compensated employees and unexpected costs for the business.

Safe harbor 401(k)s offer an elegant solution to the conundrum, albeit with caveats of their own. Under one of these plans, the employer-sponsor agrees to make mandatory contributions to participants’ accounts. In exchange, the IRS agrees to waive the annual requirement to perform the ADP and ACP tests.

With nondiscrimination testing off the table, you no longer need to worry about failing either test. And highly compensated employees can max out their contributions. Under IRS rules, these generally include anyone who owns more than 5% of the company during the current or previous plan year or who makes more than $160,000 in 2025 (an amount annually indexed for inflation).

Important caveats

Regarding the caveats we mentioned, the primary one to keep in mind is that you must make compliant contributions to each participant’s account. Generally, you may choose between:

• A nonelective contribution of at least 3% of each eligible participant’s compensation, or
• A qualifying matching contribution, such as 100% of the first 3% of compensation deferred under the plan plus 50% of the next 2% deferred.

There’s also the matter of timing. Let’s say you want to set up and launch a safe harbor 401(k) plan this year. If so, you’ll need to complete all the requisite paperwork and deliver notice to employees by October 1, 2025, and contributions must begin no later than November 1, 2025.

Providing proper notice is critical. You must follow specific IRS rules to adequately inform employees of their rights and accurately describe your required employer contributions.

Potential pitfalls

Perhaps you’ve already spotted the major pitfall of safe harbor 401(k)s. That is, you must commit to making qualifying employer contributions. And once you do, you generally can’t reduce or suspend them without triggering additional IRS requirements or risking plan disqualification. There are exceptions, but qualifying for them is complex and requires careful planning.

In addition, your contributions are immediately 100% vested, and participants own their accounts. That means once you transfer the funds, they belong to participants — even if they leave their jobs.

Bottom line

The bottom line is safe harbor 401(k) plans can be risky for businesses that experience notable cash flow fluctuations throughout the year. However, if you’re able to manage the mandatory contributions, one of these plans may serve as a relatively simple vehicle for amassing retirement funds for you and your employees. We can help you evaluate whether a safe harbor 401(k) would suit your company.

© 2025

Running a successful business calls for constantly balancing the revenue you have coming in with the money you must pay out to remain operational and grow. Regarding that second part, careful accounts payable (AP) management is critical to strengthening your company’s financial position.

Proper AP management enables you to maintain strong relationships with vendors, suppliers and other key providers. It also helps ensure you avoid costly mistakes, prevent fraud and maintain a steady cash flow. Underperforming at AP management may hamper your ability to obtain the materials or services you need to operate, damage your business’s reputation, and trigger financial penalties or other losses.

3 building blocks

No matter the size or type of company, most businesses’ AP management rests upon three fundamental building blocks. The first is documentation. You’ve got to accurately track how much your company owes and to whom.

Every invoice must be matched with a purchase order and proof of receipt. Mistakes can be costly in ways that aren’t always obvious. For example, overpaying or double paying invoices drains cash flow unnecessarily, and these amounts can be difficult to recover. Implementing, maintaining and continuously improving a top-notch AP management system helps ensure you know exactly what you owe and when payments are due.

The second building block is control of approvals. Before any invoice is paid, an authorized party in your business — whether it’s you or a trusted manager or other employee — should confirm it’s legitimate and matches the items ordered or services provided. This simple step is crucial to preventing payments for goods or services you never received, as well as to stopping fraud.

The third building block is the timing of payments. Many new business owners want to pay invoices as soon as they arrive. However, doing so can consume liquidity and leave you in a difficult cash flow situation. Of course, waiting too long to pay can strain relationships with creditors, trigger late fees and force your company into suboptimal payment terms down the line. Striking the right balance is key.

Best practices

For small to midsize companies, adhering to just a few best practices can stabilize AP management and set you on a path toward refining your approach over time. Begin by centralizing your AP processes with a secure, consistent system for receiving, recording and approving invoices.

Digitizing your AP records should make them easier to track and reduce the chances that an important invoice or document gets lost. Moreover, the right technology can help you analyze your payables to spot troubling trends or seize opportunities.

AP software enables you to track key metrics over time. One example is days payable outstanding (DPO). It measures how many days it takes your business, on average, to pay creditors. Generally, the formula goes:

DPO = (average AP / cost of goods sold) × 365 days

By regularly monitoring and benchmarking these and other relevant metrics, you can pinpoint optimal timing of payments, better manage cash flow and build your cash reserves.

It’s also worth reiterating the importance of clear, comprehensive and strictly enforced payment approval policies. Carefully vet who within your business has the power to approve invoices. Some companies require more than one person to approve bills exceeding a certain dollar amount.

To help prevent fraud, segregate or rotate duties related to receiving, recording and approving invoices. Regularly reconcile your AP ledger with supporting documentation, such as vendor statements, to catch signs of wrongdoing or errors.

Improve, strengthen, optimize

Many business owners avoid or underemphasize AP management because, let’s face it, no one likes paying the bills. However, allowing this area of your company to languish can lead to any number of financial misfortunes. We can review your AP processes and identify ways to improve data capture and efficiency, strengthen internal controls, and optimize payment timing to benefit cash flow.

© 2025

If you or your employees are heading out of town for business this summer, it’s important to understand what travel expenses can be deducted under current tax law. To qualify, the travel must be necessary for your business and require an overnight stay within the United States.

Note: Under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses on their own tax returns through 2025. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025. In the “One, Big, Beautiful Bill,” passed by the U.S. House and now being considered by the Senate, miscellaneous itemized deductions would be permanently eliminated. Keep in mind that pending legislation could still change.

However, self-employed individuals and businesses can continue to deduct business expenses, including expenses for away-from-home travel.

Deduction rules to know

Travel expenses like airfare, taxi rides and other transportation costs for out-of-town business trips are deductible. You can deduct the cost of meals and lodging, even if meals aren’t tied directly to a business discussion. However, meal deductions are limited to 50% in 2025.

Keep in mind that expenses must be reasonable based on the facts and circumstances. Extravagant or lavish meals and lodging aren’t deductible. However, this doesn’t mean you have to frequent inexpensive restaurants. According to IRS Publication 463, Travel, Gift and Car Expenses, “Meal expenses won’t be disallowed merely because they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels or resorts.”

What other expenses are deductible? Items such as dry cleaning, business calls and laptop rentals are deductible if they’re business-related. However, entertainment and personal costs (for example, sightseeing, movies and pet boarding) aren’t deductible.

Business vs. personal travel

If you combine business with leisure, you’ll need to divide the expenses. Here are the basic rules:

• Business days only. Meals and lodging are deductible only for the days spent on business.
• Travel costs. If the primary purpose of the trip is business, the full cost of getting there and back (for example, airfare) is deductible. If the trip is mainly personal, those travel costs aren’t deductible at all.
• Time matters. In an audit, the IRS often considers the proportion of time spent on business versus personal activities when determining the primary purpose of the trip.

Note: The primary purpose rules are stricter for international travel.

Special considerations

If you’re attending a seminar or conference, be prepared to prove that it’s business-related and not just a vacation in disguise. Keep all relevant documentation that can help prove the professional or business nature of the travel.

What about bringing your spouse along? Travel expenses for a spouse generally aren’t deductible unless he or she is a bona fide employee and the travel serves a legitimate business purpose.

Maximize deductions

Tax rules can be tricky, especially when business and personal travel overlap. To protect your deductions, keep receipts and detailed records of dates, locations, business purposes and attendees (for meals). Reach out to us for guidance on what’s deductible in your specific situation.

© 2025

Creating a marketing strategy for any company isn’t a “one and done” activity. As you’ve no doubt experienced, the approach you use to connect with your audience needs to adapt to factors such as the economy, marketplace changes, and customer and prospect preferences. Let’s take a step back and review some of the big-picture tasks associated with sharpening your marketing strategy.

Refine target selection

Consider each prospect, existing customer and target group as an investment. Estimate your net profit after subtracting production, sales and customer service costs.

More desirable customers will buy in sizable volumes with enough frequency to provide a steady income stream over time rather than serve as one-time or infrequent buyers. They’ll also be potential targets for cross-selling other products or services to generate incremental revenue.

Bear in mind that you must have the operational capacity to fulfill a prospect’s demand. If not, you’ll need to expand your operations to take on that customer, which will cost you more in resources and capital.

Also, be wary of becoming too dependent on a few large customers. They can use this status as leverage to lowball you. Or, if they decide to pull the plug, it could be financially devastating.

Adjust price points

Your price points are another key factor. It’s a tricky balance: Setting prices low may help attract customers, but it can also minimize or even eliminate your profit margin.

In addition, think about what payment terms you’re prepared to offer. Sluggish accounts receivable can strain cash flow. Establishing a timely payment schedule with customers is critical to sustaining operations and supporting the bottom line.

If you must spend a substantial amount of cash to set up a new customer, such as buying new equipment, consider offering initial pricing that includes a surcharge for a specified period. After you’ve recovered the cost of the equipment plus carrying charges, you might offer the customer a volume- or loyalty-based discount.

Craft your messaging

When you know who you want to sell to and what you’re going to charge, it’s time to craft your messaging. This is obviously the key step — literally marketing your products or services. So, clarity and consistency are key.

Begin by identifying your core value proposition. This is what sets your business apart from competitors. Communicate it in simple, direct language. Generally, you want to avoid jargon unless you’re working in a very specific context where industry terminology or technical knowledge is critical to sales. Be persuasive by providing remedies for your audience’s pain points.

You may need to tailor messaging to different market segments. For example, established customers usually respond best to a marketing message that reminds them of your company’s reliability and the total value of your mutually beneficial relationship. Meanwhile, prospects and newer customers probably need more persuasion and “proof of value.” Carefully choose the right marketing channels as well. These may include print, email, social media and in-person outreach.

Finally, watch out for inconsistency. Even if you vary your exact wording when addressing different market segments, your overall messaging needs to be uniform in look, tone and details. Disjointed communication — especially when it comes to things like pricing and product or service specifications — can sink a marketing strategy fast.

Today and tomorrow

An ineffective approach to marketing can quietly sap a company’s financial strength as sales leads diminish in number or value and competitors gain more attention in the marketplace. Conversely, a strong and timely marketing strategy can be a real revenue driver. We can analyze your marketing costs, as well as your price points, and help you develop a viable strategy for today and tomorrow.

© 2025

Determining “reasonable compensation” is a critical issue for owners of C corporations and S corporations. If the IRS believes an owner’s compensation is unreasonably high or low, it may disallow certain deductions or reclassify payments, potentially leading to penalties, back taxes and interest. But by proactively following certain steps, owners can help ensure their compensation is seen as reasonable and deductible.

Different considerations for C and S corporations

C corporation owners often take large salaries because they’re tax-deductible business expenses, which reduce the corporation’s taxable income. So, by paying themselves higher salaries, C corporation owners can lower corporate taxes. But if a salary is excessive compared to the work performed, the IRS may reclassify some of it as nondeductible dividends, resulting in higher taxes.

On the other hand, S corporation owners often take small salaries and larger distributions. That’s because S corporation profits flow through to the owners’ personal tax returns, and distributions aren’t subject to payroll taxes. So, by minimizing salary and maximizing distributions, S corporation owners aim to reduce payroll taxes. But if the IRS determines a salary is unreasonably low, it may reclassify some distributions as wages and impose back payroll taxes and penalties.

The IRS closely watches both strategies because they can be used to avoid taxes. That’s why it’s critical for C corporation and S corporation owners to set compensation that reflects fair market value for their work.

What the IRS looks for

The IRS defines reasonable compensation as “the amount that would ordinarily be paid for like services by like enterprises under like circumstances.” Essentially, the IRS wants to see that what you pay yourself is in line with what you’d pay someone else doing the same job.

Factors the IRS examines include:

• Duties and responsibilities,
• Training and experience,
• Time and effort devoted to the business,
• Comparable salaries for similar positions in the same industry and region, and
• Gross and net income of the business.

Owners should regularly review these factors to ensure they can defend their pay levels if challenged.

How to establish reasonable compensation

Several steps should be taken to establish reasonable compensation:

1. Conduct market research. Start by gathering data on what other companies pay for similar roles. Salary surveys, industry reports and reputable online compensation databases (such as the U.S. Bureau of Labor Statistics) can provide valuable benchmarks.

Document your findings and keep them on file. This shows that your compensation decisions were informed by objective data, not personal preference.

2. Keep detailed job descriptions. A well-written job description detailing your duties and responsibilities helps justify your salary. Outline the roles you perform, such as CEO-level strategic leadership, day-to-day operations management and specialized technical work. The more hats you wear, the stronger the case for higher compensation.

3. Maintain formal records. Hold regular board meetings and formally approve compensation decisions in the minutes. This adds an important layer of corporate governance and shows the IRS that compensation was reviewed and approved through an appropriate process.

4. Document annual reviews. Perform an annual compensation review. Adjust your salary to reflect changes in the business’s profitability, your workload or industry trends. Keep records of these reviews and the rationale behind any changes.

Strengthen your position

Determining reasonable compensation isn’t a one-time task — it’s an ongoing process. We can help you benchmark your pay, draft necessary documentation and stay compliant with tax law. This not only strengthens your position against IRS scrutiny but also supports your broader business strategy.

If you’d like guidance on setting or reviewing your compensation, contact us.

Many business owners take an informal approach to controlling costs, tackling the issue only when it becomes an obvious problem. A better way to handle it is through proactive, systematic cost management. This means segmenting your company into its major spending areas and continuously adjusting how you allocate dollars to each. Here are a few examples.

Supply chain

Most supply chains contain opportunities to control costs better. Analyze your company’s sourcing, production and distribution methods to find them. Possibilities include:

• Renegotiating terms with current suppliers,
• Finding new suppliers, particularly local ones, and negotiating better deals, and
• Investing in better technology to reduce wasteful spending and overstocking.

If you haven’t already, openly address what’s on everyone’s mind these days: global tariffs. Work with your leadership team and professional advisors to study how current tariffs affect your company. In addition, do some scenario planning to anticipate what you should do if those tariffs rise or fall.

Product or service portfolio

You might associate the word “portfolio” with investments. However, every business has a portfolio of products and services that it sells to customers. Review yours regularly. Like an investment portfolio, a diversified product or service portfolio may better withstand market risks. But offering too many products or services exhausts resources and exposes you to high costs.

Consider simplifying your portfolio to eliminate the costs of underperforming products or services. Of course, you should do so only after carefully analyzing each offering’s profitability. Focusing on only high-margin or in-demand products or services can reduce expenses, increase revenue and strengthen your brand.

Operations

Many business owners are surprised to learn that their companies’ operations cost them money unnecessarily. This is often the case with companies that have been in business for a long time and gotten used to doing things a certain way.

The truth is, “we’ve always done it that way” is usually a red flag for inefficiency or obsolescence. Undertake periodic operational reviews to identify bottlenecks, outdated processes and old technology. You may lower costs, or at least control them better, by upgrading equipment, implementing digital workflow solutions or “rightsizing” your workforce.

Customer service

Customer service is the “secret sauce” of many small to midsize companies, so spending cuts here can be risky. But you still need to manage costs proactively. Relatively inexpensive technology — such as website-based knowledge centers, self-service portals and chatbots — may reduce labor costs.

Perform a comprehensive review of all your customer-service channels. You may be overinvesting in one or more that most customers don’t value. Determine where you’re most successful and focus on leveraging your dollars there.

Marketing and sales

These are two other areas where you want to optimize spending, not necessarily slash it. After all, they’re both critical revenue drivers. When it comes to marketing, you might be able to save dollars by:

• Refining your target audience to reduce wasted “ad spend,”
• Embracing lower-cost digital strategies, and
• Analyzing customer data to personalize outreach.

Data is indeed key. If you haven’t already, strongly consider implementing a customer relationship management (CRM) system to gather, organize and analyze customer and prospect info. In the event you’ve had the same CRM system for a long time, look into whether an upgrade is in order.

Regarding sales costs, reevaluate your compensation methods. Can you adjust commissions or incentives to your company’s advantage without disenfranchising sales staff? Also, review travel budgets. Now that most salespeople are back on the road, their expenses may rise out of proportion with their results. Virtual meetings can reduce travel expenses without sacrificing engagement with customers and prospects.

The struggle is real

Cost management isn’t easy. Earlier this year, a Boston Consulting Group study found that, on average, only 48% of cost-saving targets were achieved last year by the 570 C-suite executives surveyed. Beating that percentage will take some work. To that end, please contact us. We can analyze your spending and provide guidance tailored to your company’s distinctive features.

© 2025

Even well-run companies experience down years. The federal tax code may allow a bright strategy to lighten the impact. Certain losses, within limits, may be used to reduce taxable income in later years.

Who qualifies?

The net operating loss (NOL) deduction levels the playing field between businesses with steady income and those with income that rises and falls. It lets businesses with fluctuating income to average their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

• Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
• Casualty and theft losses from a federally declared disaster, or
• Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:

• Capital losses that exceed capital gains,
• The exclusion for gains from the sale or exchange of qualified small business stock,
• Nonbusiness deductions that exceed nonbusiness income,
• The NOL deduction itself, and
• The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.

What are the changes and limits?

Before the Tax Cuts and Jobs Act (TCJA), NOLs could be carried back two years, forward 20 years, and offset up to 100% of taxable income. The TCJA changed the landscape:

• Carrybacks are eliminated (except certain farm losses).
• Carryforwards are allowed indefinitely.
• The deduction is capped at 80% of taxable income for the year.

If an NOL carryforward exceeds your taxable income of the target year, the unused balance may become an NOL carryover. Multiple NOLs must be applied in the order they were incurred.

What’s the excess business loss limitation?

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships and S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2025, that threshold is $313,000 ($626,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years through 2028. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Plan proactively

Navigating NOLs and the related restrictions is complex, especially when coordinating with other deductions and credits. Thoughtful planning can maximize the benefit of past losses. Please consult with us about how to proceed in your situation.

© 2025

To get the most from any team, its leader must establish a productive rapport with each member. Of course, that’s easier said than done if you own a company with scores or hundreds of workers. Still, it’s critical for business owners to make “the leadership connection” with their employees.

Simply put, the leadership connection is an authentic bond between you and your staff. When it exists, employees feel like they genuinely know you — if not literally, then at least in the sense of having a positive impression of your personality, values and vision. Here are four ways to build and strengthen the leadership connection with your workforce.

1. Listen and share

Today’s employees want more than just equitable compensation and benefits. They want a voice. To that end, set up an old-fashioned suggestion box or perhaps a more contemporary email address or website portal for staff to share concerns and ask questions.

You can directly reply to queries with broad implications. Meanwhile, other executives or managers can handle questions specific to a given department or position. Choose communication channels thoughtfully. For example, you might share answers through company-wide emails or make them a feature of an internal newsletter or blog. Video messages can also be effective.

2. Stage formal get-togethers

Although leaders at every level need to be careful about calling too many meetings, there’s still value in getting everyone together in one place in real time. At least once a year, consider holding a “town hall” meeting where:

• The entire company gathers to hear you (and perhaps others) present on the state of the business, and
• Anyone can ask a question and have it answered (or receive a promise for an answer soon).

Town hall meetings are a good venue for discussing the company’s financial performance and establishing expectations for the immediate future.

You could even take it to the next level by organizing a company retreat. One of these events may not be feasible for businesses with bigger workforces. However, many small businesses organize off-site retreats so everyone can get better acquainted and explore strategic ideas.

3. Make appearances

Meetings are useful, but they shouldn’t be the only time staff see you. Interact with them in other ways as well. Make regular visits to each unit, department or facility of your business. Give managers a chance to speak with you candidly. Sit in on meetings; ask and answer questions.

By doing so, you may gather ideas for eliminating costly redundancies and inefficiencies. Maybe you’ll even find inspiration for your next big strategic move. Best of all, employees will likely get a morale boost from seeing you take an active interest in their corners of the company.

4. Have fun and celebrate

All work and no play makes business owners look dull and distant. Remember, employees want to get to know you as a person, at least a little bit. Show positivity and a sense of humor. Share appropriate personal interests, such as sports or caring for pets, in measured amounts.

Above all, don’t neglect to celebrate your business’s successes. Be enthusiastic about hitting sales numbers or achieving growth targets. Recognize the achievements of others — not just on the executive team but throughout the company. Give shout-outs to staff members on their birthdays and work anniversaries.

It’s all about trust

At the end of the day, the leadership connection is all about building trust. The greater your employees’ trust in you, the more loyal, engaged and productive they’ll likely be. We can help you measure your business’s productivity and evaluate workforce development costs.

© 2025

Financial statements can fascinate accountants, investors and lenders. However, for business owners, they may not be real page-turners.

The truth is each of the three parts of your financial statements is a valuable tool that can guide you toward reasonable, beneficial business decisions. For this reason, it’s important to get comfortable with their respective purposes.

The balance sheet

The primary purpose of the balance sheet is to tally your assets, liabilities and net worth, thereby creating a snapshot of your business’s financial health during the statement period.

Net worth (or owners’ equity) is particularly critical. It’s defined as the extent to which assets exceed liabilities. Because the balance sheet must balance, assets need to equal liabilities plus net worth. If the value of your company’s liabilities exceeds the value of its assets, net worth will be negative.

In terms of operations, just a couple of balance sheet ratios worth monitoring, among many, are:

Growth in accounts receivable compared with growth in sales. If outstanding receivables grow faster than the rate at which sales increase, customers may be taking longer to pay. They may be facing financial trouble or growing dissatisfied with your products or services.

Inventory growth vs. sales growth. If your business maintains inventory, watch it closely. When inventory levels increase faster than sales, the company produces or stocks products faster than they’re being sold. This can tie up cash. Moreover, the longer inventory remains unsold, the greater the likelihood it will become obsolete.

Growing companies often must invest in inventory and allow for increases in accounts receivable, so upswings in these areas don’t always signal problems. However, jumps in inventory or receivables should typically correlate with rising sales.

Income statement

The purpose of the income statement is to assess profitability, revenue generation and operational efficiency. It shows sales, expenses, and the income or profits earned after expenses during the statement period.

One term that’s commonly associated with the income statement is “gross profit,” or the income earned after subtracting cost of goods sold (COGS) from revenue. COGS includes the cost of labor and materials required to make a product or provide a service. Another important term is “net income,” which is the income remaining after all expenses — including taxes — have been paid.

The income statement can also reveal potential problems. It may show a decline in gross profits, which, among other things, could mean production expenses are rising more quickly than sales. It may also indicate excessive interest expenses, which could mean the business is carrying too much debt.

Statement of cash flows

The purpose of the statement of cash flows is to track all the sources (inflows) and recipients (outflows) of your company’s cash. For example, along with inflows from selling its products or services, your business may have inflows from borrowing money or selling stock. Meanwhile, it undoubtedly has outflows from paying expenses, and perhaps from repaying debt or investing in capital equipment.

Although the statement of cash flows may seem similar to the income statement, its focus is solely on cash. For instance, a product sale might appear on the income statement even though the customer won’t pay for it for another month. But the money from the sale won’t appear as a cash inflow until it’s collected.

By analyzing your statement of cash flows, you can assess your company’s ability to meet its short-term obligations and manage its liquidity. Perhaps most importantly, you can differentiate profit from cash flow. A business can be profitable on paper but still encounter cash flow issues that leave it unable to pay its bills or even continue operating.

Critical insights

You can probably find more exciting things to read than your financial statements. However, you won’t likely find anything more insightful regarding how your company is performing financially. We can help you not only generate best-in-class financial statements, but also glean the most valuable information from them.

© 2025

Will your company be ready to add a health insurance plan for next year, or change its current one? If so, now might be a good time to consider your options. These things take time.

A popular benefits model for many small to midsize businesses is sponsoring a high-deductible health plan (HDHP) accompanied by employee Health Savings Accounts (HSAs). Like any such strategy, however, this one has its pluses and minuses.

Ground rules

HSAs are participant-owned, tax-advantaged accounts that accumulate funds for eligible medical expenses. To own an HSA, participants must be enrolled in an HDHP, have no other health insurance and not qualify for Medicare.

In 2025, an HDHP is defined as a plan with at least a $1,650 deductible for self-only coverage or $3,300 for family coverage. Also in 2025, participants can contribute pretax income of up to $4,300 for self-only coverage or $8,550 for family coverage. (These amounts are inflation-adjusted annually, so they’ll likely change for 2026.) Those age 55 or older can make additional catch-up contributions of $1,000.

Companies may choose to make tax-deductible contributions to employees’ HSAs. However, the aforementioned limits still apply to combined participant and employer contributions.

Participants can make tax-free HSA withdrawals to cover qualified out-of-pocket medical expenses, such as physician and dentist visits. They may also use their account funds for copays and deductibles, though not to pay many types of insurance premiums.

Pluses to ponder

For businesses, the “HDHP + HSAs” model offers several pluses. First, HDHPs generally have lower premiums than other health insurance plans — making them more cost-effective. Plus, as mentioned, your contributions to participants’ HSAs are tax deductible if you choose to make them. And, overall, sponsoring health insurance can strengthen your fringe benefits package.

HSAs also have pluses for participants that can help you “sell” the model when rolling it out. These include:

• Participants can lower their taxable income by making pretax contributions through payroll deductions,
• HSAs can include an investment component that may include mutual funds, stocks and bonds,
• Account earnings accumulate tax-free,
• Withdrawals for qualified medical expenses aren’t subject to tax, and the list of eligible expenses is extensive,
• HSA funds roll over from year to year (unlike Flexible Spending Account funds), and
• HSAs are portable; participants maintain ownership and control of their accounts if they change jobs or even during retirement.

In fact, HSAs are sometimes referred to as “medical IRAs” because these potentially valuable accounts are helpful for retirement planning and have estate planning implications as well.

Minuses to mind

The HDHP + HSAs model has its minuses, too. Some employees may strongly object to the “high deductible” aspect of HDHPs.

Also, if not trained thoroughly, participants can misuse their accounts. Funds used for nonqualified expenses are subject to income taxes. Moreover, the IRS will add a 20% penalty if an account holder is younger than 65. After age 65, participants can withdraw funds for any reason without penalty, though withdrawals for nonqualified expenses will be taxed as ordinary income.

Expenses are another potential concern. HSA providers (typically banks and investment firms) may charge monthly maintenance fees, transaction fees and investment fees (for accounts with an investment component). Many companies cover these fees under their benefits package to enhance the appeal of HSAs to employees.

Finally, HSAs can have unexpected tax consequences for account beneficiaries. Generally, if a participant dies, account funds pass tax-free to a spouse beneficiary. However, for other types of beneficiaries, account funds will be considered income and immediately subject to taxation.

Powerful savings vehicle

The HDHP + HSAs model helps businesses manage insurance costs, shifts more of medical expense management to participants, and creates a powerful savings vehicle that may attract job candidates and retain employees. But that doesn’t mean it’s right for every company. Please contact us for help assessing its feasibility, as well as identifying the cost and tax impact.

© 2025

A strong sales team is the driving force of most small to midsize businesses. Strong revenue streams are hard to come by without skilled and engaged salespeople.

But what motivates these valued employees? First and foremost, equitable and enticing compensation. And therein lies a challenge for many companies: Choosing the right sales compensation model isn’t easy and may call for regular reevaluation. Let’s review some of the most popular models and note a recent trend.

Straight salary (or hourly wages)

The simplest way to pay sales staff is to offer a “straight salary,” meaning no commissions or other incentives are involved. (Some businesses may pay hourly wages instead, though this generally occurs only in a retail environment.)

The straight salary model’s advantage is that it’s easy for the company to administer and keeps payroll expenses predictable. It also provides financial stability for employees. The approach tends to work best in industries with long sales cycles and for particularly collaborative sales teams.

As you may have guessed, the downside is that it offers no financial incentive for salespeople to go beyond the status quo. This can result in flat sales and difficulty drawing new customers.

Commission only

Quite the opposite is the commission-only model. Here, sales team members earn income as a predetermined percentage of sales revenue. There are various ways to do this, but the bottom line is that staffers are compensated purely through sales wins; they don’t receive salaries.

The advantage is that they’re strongly motivated to succeed — one could even say it’s a “do or die” approach. This model often suits start-ups or businesses looking for quick growth without a big payroll budget. The risk for companies is that commission-only positions tend to have high turnover rates because salespeople lack income stability and may change jobs frequently.

Salary plus commission

Traditionally, this has been among the most popular compensation models. It combines the stability of a salary with the financial incentive of commissions. Generally, the salary will be relatively lower because sales staffers can make up the difference through the commissions.

For the business, this model may reduce turnover while still helping motivate employees. Its chief downsides are that salaries add to payroll expenses, and there’s a relatively high degree of administrative complexity involved in tracking and calculating commissions.

Salary plus performance-based incentives (hybrid)

If you’re interested in “what’s hot” in sales compensation, look no further. This model is often called “hybrid” because it combines a salary with various performance-based incentives tailored to the company’s needs.

Just last month, cloud-based sales software provider Xactly released the results of its annual Sales Compensation Report. Of 160 companies surveyed, 62% identified performance-based pay structures for sales reps as the biggest factor driving changes to sales compensation.

Like “base salary plus commission,” a hybrid model offers employees income stability — but it allows them to earn much more through multiple incentives. For businesses, the model may strengthen employee retention while motivating sales team members to meet targeted strategic objectives, such as increasing market share or driving top-line growth.

Companies have a wide variety of performance-based incentives to choose from, including:

• Financial bonuses for acquiring new customers or expanding into new territories,
• Profit-sharing plans that tie additional compensation to the company’s overall success, and
• Long-term incentives, such as stock options, restricted stock units and performance shares.

However, it’s critical to design a hybrid model carefully. One major risk is becoming “a victim of your own success” — that is, running into cash flow problems because you must pay salespeople substantial amounts for earning the incentives offered.

No pressure

If your sales compensation model works well, don’t feel pressured to change it just to keep up with the Joneses. However, as your business grows, you may want to adjust or revise it to sustain or, better yet, increase that growth. We can help you evaluate your current model and make necessary adjustments that fit your company’s needs and budget.

© 2025

Today’s job seekers and employees have grown accustomed to having an incredible amount of information at their fingertips. As a result, many businesses find that failing to adequately disclose certain things negatively impacts their relationships with these parties.

Take pay transparency, for example. This is the practice, or lack thereof, of a company openly sharing its compensation philosophy, policies and procedures with job candidates, employees and even the public. It typically means disclosing pay ranges or rates for specific positions, as well as clearly explaining how raises, bonuses and commissions are determined.

You’re not alone if your business has yet to formalize or articulate its pay transparency strategy. In its 2024 Global Pay Transparency Report, released in January of this year, global consultancy Mercer reported that only 19% of U.S. companies have a pay transparency strategy. Here are five general steps to creating one:

1. Conduct a payroll audit. Over time, your company may have developed a relatively complex compensation structure and payroll system. By meticulously evaluating and identifying all related expenditures under a formal audit, you can determine what information you need to share and which data points should remain confidential.

You may also catch inconsistencies and disparities that need to be addressed. Ultimately, an audit can provide the raw data you need to understand whether and how your company’s compensation aligns with the roles and responsibilities of each position.

2. Define or refine compensation criteria. To be transparent about pay, your business needs clear and consistent criteria for how it arrived — and will arrive — at compensation-related decisions. If such criteria are already in place, you may need to refine the language used to describe them. Again, your objective is to clearly explain to job candidates and employees how your company makes pay decisions so you can reduce or eliminate any perception of bias or unfairness.

3. Develop a communications “substrategy.” Under your broader pay transparency strategy, your company must have a comprehensive substrategy for communicating about compensation with job candidates, employees and, if you so choose, the public. There are many ways to go about this, and the details will depend on your company’s size, industry, mission and other factors. However, common aspects of a communications substrategy include:

• Providing written guidelines explaining your compensation philosophy and structure,
• Supplementing those guidelines with an internal FAQs document,
• Holding companywide or department-specific Q&A sessions, and
• Using digital platforms to share updates and issue reminders.

4. Train and rely on supervisors. Your people managers must be the frontline champions and communicators of your pay transparency strategy. Unfortunately, many companies struggle with this. In the aforementioned Mercer report, 37% of U.S. companies identified managers’ inability to explain compensation programs as their biggest challenge in this area.

Naturally, it all begins with training. Once you’ve defined or refined your compensation criteria and developed a communications substrategy, invest the time and resources into educating supervisors (and higher-level managers) about them. These individuals need to become experts who can discuss your business’s compensation philosophy, policies, procedures and decisions. And it’s critical that their messaging be accurate and consistent to prevent misunderstandings and misinformation.

5. Get input from professional advisors. Before you roll out a formal pay transparency strategy, ask for input from external parties. Doing so is especially important for small businesses that may have only a few voices involved in the planning process.

For example, a qualified employment attorney can help ensure your strategy is legally compliant and limit your potential exposure to lawsuits. And don’t forget us — we’d be happy to assist you in conducting a payroll audit, identifying all compensation-related expenses and aligning your strategy with your business objectives.