Tap Into the 20% Rehabilitation Tax Credit for Business Space Improvements

If your business occupies a large space and you’re planning to relocate, expand or renovate in the future, consider the potential benefits of the rehabilitation tax credit. This could be particularly valuable if you’re interested in historic properties.

The credit is equal to 20% of the qualified rehabilitation expenditures (QREs) for a qualified rehabilitated building that’s also a certified historic structure by the National Park Service. A qualified rehabilitated building is a depreciable building that has been placed in service before the beginning of the rehabilitation and is used, after rehabilitation, in business or for the production of income (and not held primarily for sale). Additionally, the building must be “substantially” rehabilitated, which generally requires that the QREs for the rehabilitation exceed the greater of $5,000 or the cost of acquiring the existing building.

Eligible expenses

A QRE is any amount chargeable to capital and incurred in connection with the rehabilitation (including reconstruction) of a qualified rehabilitated building. Qualified rehabilitation expenditures must be for real property (but not land) and can’t include building enlargement or acquisition costs.

The 20% credit is allocated ratably, to each year in the five-year period beginning in the tax year in which the qualified rehabilitated building is placed in service. Thus, the credit allowed in each year of the five years is 4% (20% divided by 5) of the QREs concerning the building. The credit is allowed against both regular federal income tax and alternative minimum tax.

Permanent changes to the credit

The Tax Cuts and Jobs Act, signed at the end of 2017, made some changes to the credit. Specifically, the law:

Now requires taxpayers to claim the 20% credit ratably over five years instead of in the year they placed the building into service, and
Eliminated the 10% rehabilitation credit for the pre-1936 buildings.

It’s important to note that while many individual tax cuts under the TCJA are set to expire after December 31, 2025, the changes to the rehabilitation tax credit aren’t among them. They’re permanent.

Maximize the tax benefits

Contact us to discuss the technical aspects of the rehabilitation credit. There may also be other federal tax benefits available for the space you’re contemplating. For example, various tax benefits may be available depending on your preferences regarding how a building’s energy needs will be met and where the building will be located. In addition, there may be state or local tax and non-tax subsidies available.

Beyond these preliminary considerations, we can work with you and construction professionals to determine whether a specific available “old” building can be the subject of a rehabilitation that’s both tax-credit-compliant and practical to use. And, if you find a building that you decide to buy (or lease) and rehabilitate, we can help you monitor project costs and substantiate the project’s compliance with the requirements of the credit and any other tax benefits.

The U.S. Senate passed its version of the One Big Beautiful Bill (OBBBA) by a vote of 51 to 50 on July 1. (Vice President J.D. Vance provided the tiebreaking vote.) At its core, the massive bill is similar to the bill passed by the U.S. House of Representatives last May. It includes extensions of many provisions of the Tax Cuts and Jobs Act (TCJA) currently set to expire on December 31.

Both the House and Senate bills include some new and enhanced tax breaks. For example, they contain President Trump’s pledge to exempt tips and overtime from income tax for eligible taxpayers.

Trump also made a campaign promise to eliminate tax on Social Security benefits. That isn’t included in either version of the bill. However, the Senate bill temporarily provides a $6,000 deduction for those age 65 and older for 2025 through 2028 for those with modified adjusted gross income of under $75,000 ($150,000 for married joint filers). The House bill expands the standard deduction for seniors but caps it at $4,000.

In addition, the Senate’s version of the bill introduces other significant changes, including in the state and local tax (SALT) deduction cap and the Child Tax Credit (CTC).

SALT deduction cap

A major sticking point in both branches of Congress is the SALT deduction cap. It’s currently set at $10,000 by the Tax Cuts and Jobs Act. Lawmakers in high-tax states such as California and New York have long sought to increase (or even repeal) the cap.

The House’s version of the bill proposes to permanently increase the cap to $40,000 for those making under $500,000. The Senate-passed bill also calls for increasing the cap to $40,000 for 2025, with an annual 1% increase through 2029. In 2030, the cap would revert to $10,000. It also calls for phasing out the deduction for individuals who earn more than $500,000 in 2025 and then annually increasing the income amount by 1% through 2029.

Child Tax Credit (CTC)

Under current law, the $2,000 per child CTC is set to drop to $1,000 after 2025. The income phaseout thresholds will also be significantly lower. And the requirement to provide the child’s Social Security number (SSN) will be eliminated.

The House’s version of the OBBBA would make the CTC permanent, raise it to $2,500 per child for tax years 2025 through 2028 and retain the higher income phaseout thresholds. It would also preserve the requirement to provide a child’s SSN and expand it to require an SSN for the taxpayer (generally the parent) claiming the credit. After 2028, the CTC would return to $2,000 and be adjusted annually for inflation.

The Senate’s version of the bill would also make the CTC permanent, but would increase it to $2,200, subject to annual inflation increases. It would require SSNs for both the parent claiming the credit and the child.

Next steps

These are just a few of the provisions in the massive tax and spending bill. The proposed legislation is currently back with the House of Representatives for further debate and a vote. President Trump has set a deadline to sign the bill into law by July 4, but it’s currently uncertain if the House can pass the bill in time. Stay tuned.

There are numerous factors to consider when you decide to pull up roots and relocate to another state. Your estate plan likely isn’t top of mind, but it’s wise to review and update it when you move across state lines. Let’s take a closer look at a few areas you should consider as you reexamine your estate plan.

Will’s language

Before you begin, know that you won’t have to throw out your existing plan and start from scratch. However, you may need to amend or replace certain documents to ensure they comply with your new state’s laws and continue to meet your estate planning objectives.

Begin by having your estate planning advisor review the text of your will. So long as it was properly drafted according to your previous state’s requirements, it generally will be accepted as valid in most other states.

Nevertheless, it’s important to review your will’s terms to ensure they continue to reflect your wishes. For example, if you’re married and you move from a noncommunity property state to a community property state (or vice versa), your new state’s laws may change the way certain property is owned.

Health care powers of attorney and advance directives

Many estate plans include advance medical directives or health care powers of attorney. Advance directives (often referred to as living wills) communicate your wishes regarding medical care (including life-prolonging procedures) in the event you become incapacitated. Health care powers of attorney appoint a trusted agent or proxy to act on your behalf. Often, the two are combined into a single document. Given the stakes involved, it’s critical to ensure that these documents will be accepted and followed by health care providers in your new state.

Although some states’ laws expressly authorize out-of-state advance directives and powers of attorney, others are silent on the issue, creating uncertainty over whether they’ll be accepted. Regardless of the law in your new state, it’s a good idea to prepare and execute new ones. Most states have their own forms for these documents, with state-specific provisions and terminology. Health care providers in your new state will be familiar with these forms and may be more likely to accept them than out-of-state forms.

Financial powers of attorney

Like wills, out-of-state financial powers of attorney will be accepted as valid in most states. Still, to avoid questions and delays, it’s advisable to execute powers of attorney using your new state’s forms, since banks and other financial service providers will be familiar with them.

Review your plan regardless of your location

When moving out-of-state, reviewing your estate plan can help safeguard your intentions and ensure your loved ones are protected. And even if you’re not moving to a new state, you should review your estate plan regularly to ensure it continues to meet your needs. Contact us with questions.

Navigating the financial reporting requirements in the cannabis industry can be complex. One critical component is the Annual Financial Statement (AFS) reporting mandated by the Cannabis Regulatory Authority (CRA). As a cannabis business owner, understanding how Certified Public Accountants (CPAs) play a crucial role in this process can help you stay compliant, avoid costly mistakes, and strengthen your business’s credibility.

Why Working with a CPA Matters

Cannabis AFS reporting is not just about preparing numbers — it’s about ensuring those numbers withstand regulatory scrutiny. CPAs bring specialized knowledge and expertise to this process, helping you meet the CRA’s strict requirements and avoid common pitfalls. Their role is more than a formality; it’s a vital partnership that supports your business’s financial integrity and regulatory compliance. Retaining a CPA to assist with accounting and bookkeeping is an excellent way to ensure accurate data and can make your AFS process much less painful.

What Type of Engagement are CPAs Performing?

The reporting process for cannabis AFS involves what’s known as an “agreed-upon procedures” engagement. Unlike a full audit or review, CPAs perform only the specific procedures the CRA requires. This means the CPA focuses on checking and verifying particular areas without offering an overall opinion on your financial statements. The procedures are strictly defined and designed to ensure accuracy and transparency in your reporting.

How Do CPAs Verify Your Data?

During the engagement, CPAs request information directly from you as the licensee and compare various data sources. This includes:

The general ledger
The point of sale (POS) system
METRC (the state’s cannabis tracking system)
Underlying documentation to support transactions and activities

The licensee must explain any discrepancies or deviations found during these comparisons. This step is crucial because the CRA relies on these reports to confirm that cannabis products are appropriately tracked and that their financial records are truthful.

Behind the Scenes: Internal Controls and Standards

CPA firms don’t just check your numbers; they follow strict attestation standards set by the American Institute of Certified Public Accountants (AICPA). These standards require multiple levels of internal control and quality checks within the CPA firm itself. Much of this effort happens behind the scenes to ensure the integrity and reliability of the report you submit. This means that while the AFS report may seem straightforward, significant expertise and process rigor go into producing it.

Why Organized Records and a Trusted CPA Are Essential

The key takeaway for cannabis business owners is that keeping organized, accurate, and easily accessible records isn’t just good practice — it’s essential. However, it is equally important to partner with a CPA firm experienced in the cannabis industry. CPAs guide you through the complexities of AFS reporting, help interpret regulatory requirements, and ensure your financial data is correctly reconciled and reported.

When CPAs request documentation or explanations for any irregularities, having your records in order speeds up the process, reduces the risk of errors, and helps maintain good standing with regulatory authorities. A knowledgeable CPA partner can identify potential issues early, offering proactive advice that can save time and money in the long run.

Disorganized records or working without an experienced CPA can cause delays, increase scrutiny, and potentially lead to fines or other penalties. Investing in organized recordkeeping and a trusted CPA relationship sets your business up for smoother compliance and less stress during AFS reporting.

Additional Considerations for Cannabis Business Owners

Understand the Specific Requirements: Each jurisdiction may have nuances in how cannabis financial reporting is conducted. Stay informed and rely on your CPA’s expertise to navigate these complexities.
Leverage Technology: Tools that integrate your sales, inventory, and accounting can reduce manual errors and help maintain consistency across records.
Choose a CPA Firm That Knows Cannabis: Not all CPAs understand the unique challenges of this industry. Working with a CPA who specializes in cannabis accounting ensures that your reporting is accurate and compliant, and that you benefit from tailored advice.

The role of CPAs in cannabis AFS reporting is more than just crunching numbers — it’s about applying rigorous, standardized procedures to ensure your financial data is accurate and trustworthy. For cannabis business owners, working with a knowledgeable CPA and maintaining organized records are critical steps to protect your business’s reputation and position it for future success.

If you need assistance navigating these requirements or want to ensure your records and reporting are audit-ready, Yeo & Yeo’s team is here to help. Contact us to learn how we can support your cannabis business with tailored accounting and compliance solutions.

Cannabis businesses operating in highly regulated markets face rigorous financial reporting requirements, particularly when preparing their Annual Financial Statement (AFS). The AFS is not only a compliance obligation but a critical reflection of the business’s financial integrity, governance, and operational soundness. This article outlines the major elements cannabis operators must address to ensure a complete and accurate AFS, emphasizing the importance of maintaining proper accounting records, reconciliation practices, and supporting documentation.

1. Revenue Reconciliation

Accurate and detailed revenue reconciliation is foundational to any AFS. Cannabis businesses must reconcile revenue reported in their accounting system with point-of-sale (POS) data, bank deposits, and state-mandated seed-to-sale tracking systems such as METRC or BioTrack. Inconsistencies—whether due to timing differences, unrecorded transactions, or data entry errors—can trigger compliance concerns. To substantiate reported income, businesses should implement monthly reconciliation procedures and retain all supporting documentation, including POS summaries, cash logs, and deposit slips.

2. Contracts and Agreements

The AFS requires disclosure and examination of various contractual obligations and rights. Cannabis operators must ensure that all executed agreements are correctly recorded, maintained, and updated. These typically fall into four categories:

Real Property Agreements: Leases or other real property agreements must be retained. Details regarding lease terms, payment schedules, and leasehold improvements should be thoroughly documented.
Financing Agreements: Debt arrangements, including convertible notes, loans from private lenders, and seller-financed arrangements, must be supported by executed documents outlining principal, interest terms, repayment schedules, and any associated covenants.
Management Agreements: In many vertically integrated cannabis operations, management service agreements govern the relationship between licensed and unlicensed entities. These agreements clearly define the scope of services, fees, and control structures to ensure regulatory compliance and avoid ownership entanglement.
Licensing Agreements: Intellectual property licensing, whether for brand use, product formulations, or proprietary technologies, must be categorized appropriately and supported by signed agreements. These contracts may have significant implications for revenue recognition and expense allocation.

3. Vendor Testing

All vendors reflected in the AFS should undergo testing to confirm legitimacy, proper classification, and completeness of recorded transactions.

Service Vendors include consultants, contractors, and professional service providers. Cannabis businesses must obtain W-9 forms, verify EINs, and appropriately categorize expenses (e.g., General & Administrative vs. Cost of Goods Sold). Special attention should be paid to related-party transactions requiring disclosure and additional documentation.
Other Vendors include suppliers of cultivation materials, packaging, security systems, and other operational inputs. Businesses must retain purchase orders, invoices, and proof of payment to support reported expenditures. In states with strict inventory tracking, vendor testing may also intersect with compliance audits of product intake procedures.

4. Ownership and Employee Information

AFS preparation also necessitates clear documentation regarding ownership structure and human resources data. For cannabis licensees, this is particularly important due to regulatory scrutiny of ownership thresholds, funding sources, and employee background requirements.

A detailed ownership ledger should be maintained, disclosing all equity holders, their respective percentages, and any changes during the reporting period.
Employee records should be up-to-date and reconciled with payroll registers, including payroll summaries, job descriptions, and I-9 forms.

Additional Considerations for Cannabis Businesses

Given the unique regulatory and financial environment of the cannabis industry, operators should be aware of the following:

Cash Controls and Security: Many cannabis operators transact in cash due to limited banking access. Internal controls over cash handling, armored transport services, and secure storage procedures should be documented and evaluated regularly.
Audit Readiness: Even if a third-party audit is not mandated, preparing for an AFS engagement of high-level quality ensures readiness for regulatory reviews, licensing renewals, and investor due diligence.

The cannabis industry doesn’t get the luxury of making accounting mistakes without consequences. Regulatory bodies expect cannabis companies to maintain meticulous financial records and to be accessible at any time. Your AFS is the culmination of this discipline. If the numbers don’t tie out, or if your contracts and documents don’t match what’s on the books, you risk fines, audits, or even loss of licensure.

If you’re preparing for your next AFS or want to strengthen your internal accounting processes, contact Yeo & Yeo. We’re here to help you perform the agreed-upon procedures for the AFS so you can stay compliant, confident, and focused on growth.

If someone were to suggest that you should have your business appraised, you might wonder whether the person was subtly suggesting that you retire and sell the company.

Seriously though, a valuation can serve many purposes other than preparing your business for sale so you can head to the beach. Think of it as a checkup that can help you better plan for the future.

Strategic planning

Today’s economy presents both challenges and opportunities for companies across the country. Chief among the challenges is obtaining financing when necessary — interest rates have risen, inflation is still a concern and many commercial lenders are imposing tough standards on borrowers.

A business valuation conducted by an outside expert can help you present timely, in-depth financial data to lenders. The appraisal will not only help them better understand the current state of your business, but also demonstrate how you expect your company to grow. For example, the discounted cash flow section of a valuation report can show how expected future cash flows are projected to increase in value.

In addition, a valuator can examine and state an opinion on company-specific factors such as:

Your leadership team’s awareness of market conditions,
What specific risks you face, and
Your contingency planning efforts to mitigate these risks.

As you go through the valuation process, you may even recognize some of your business’s weaknesses and, in turn, be able to address those shortcomings in strategic planning.

Acquisitions, sales and gifts

There’s no getting around the fact that, in many cases, the primary reason for getting a valuation is to prepare for a transfer of business interests of some variety — be it an acquisition, sale or gift. Even if you’re not ready to make a move like this right now, an appraiser can help you get a better sense of when the optimal time might be.

If you’re able to buy out a competitor or a strategically favorable business, a valuation should play a critical role in your due diligence. When negotiating the final sale price, an appraiser can scrutinize the seller’s asking price, including the reasonableness of cash flow and risk assumptions.

If you’re thinking about selling, most appraisers subscribe to transaction databases that report the recent sale prices of similar private businesses. A valuator also can estimate how much you’d net from a deal after taxes, as well as brainstorm creative deal structures that minimize taxes, provide you with income to fund retirement and meet other objectives.

In the eyes of a potential buyer, a formal appraisal adds credibility to your asking price as well. And if you want to gift business interests to the next generation in your family, a written appraisal is a must-have to withstand IRS scrutiny.

Going the extra mile

You probably have plenty of other things on your plate as you work hard to keep your business competitive. But obtaining an appraisal is a savvy way to go the extra mile to get all the information you need to wisely plan for the future. We can support your company throughout the valuation process and help you make the most of the information you receive.

The U.S. Census Bureau reports there were nearly 447,000 new business applications in May of 2025. The bureau measures this by tracking the number of businesses applying for an Employer Identification Number.

If you’re one of the entrepreneurs, you may not know that many of the expenses incurred by start-ups can’t currently be deducted on your tax return. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

How to treat expenses for tax purposes

If you’re starting or planning to launch a new business, here are three rules to keep in mind:

Start-up costs include those incurred or paid while creating an active trade or business or investigating the creation or acquisition of one.
Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions, including amortization deductions, are allowed until the year when “active conduct” of your new business begins. Generally, this means the year when the business has all the necessary components in place to start generating revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity with the intention of earning a profit? Was the taxpayer regularly and actively involved? And did the activity actually begin?

Expenses that qualify

In general, start-up expenses are those you incur to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To qualify for the limited deduction, an expense must also be one that would be deductible if incurred after the business began. One example is money you spend analyzing potential markets for a new product or service.

To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of these expenses are legal and accounting fees for services related to organizing a new business, and filing fees paid to the state of incorporation.

Plan now

If you have start-up expenses you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

Almost all (98%) of respondents to a recent survey conducted by Creditsafe expressed concern about being victimized by vendor fraud. Unfortunately, most business owners and managers aren’t well informed about the signs of this type of scam. However, familiarizing yourself with criminal methods, training employees to spot suspicious activities and working with your financial advisors can help prevent losses.

Price fixing and bid rigging

Vendor fraud can take several forms:

Price fixing is an agreement among competitors to set the same price for goods or services. It also refers to competitors jointly establishing a price range or minimum price. Such agreements violate the Sherman Antitrust Act, regardless of whether the prices are unreasonable.
A similar scheme is bid rigging, where two or more vendors agree to steer a company’s purchase of goods or services. Bid-rigging schemes might include:

Bid rotation, where dishonest vendors take turns as the low bidder,
Bid suppression, where two or more vendors illegally agree that at least one of them will withdraw a previously submitted bid (or not bid at all), and
Complementary bidding, where participants submit token bids with a high price or special terms that will make them unacceptable to the company.

Another way vendors might cheat is through market division. This occurs when competitors agree not to compete in a specific segment of a market. For example, if bids are solicited by a customer in a certain geographic region, the competitors either won’t bid or will submit complementary bids. This drives up the price for the soliciting company.

Bribery and invoice shenanigans

You’ve almost certainly heard of kickbacks, where suppliers bribe employees. Generally, these individuals or businesses pay for workers to submit or authorize payment of fraudulent invoices. They typically incorporate kickback payments in the invoice, thus compounding the amount companies are overbilled.

Vendors might also submit inflated invoices in more subtle ways. For instance, the price charged may exceed prices agreed upon in the contract or an invoice might reflect charges for more goods than the customer actually received. In other cases, a vendor could alter the date on a genuine invoice and submit it for duplicate payment.

Minimize fraud risk

It’s probably impossible to avoid every rogue vendor, but there are ways to minimize risk. Carefully screen new vendors to ensure they’re who they say they are and have good references. Also, watch employees who have regular contact with vendors. If their relationships seem unusually close or something doesn’t look right, investigate further. Contact us for help. We can conduct a vendor audit.

Although footnote disclosures appear at the end of reviewed or audited financial statements, they’re far more than a regulatory formality. They provide critical insight into a company’s accounting policies, unusual transactions, contingent liabilities and post-reporting events. The Financial Accounting Standards Board’s conceptual framework says footnotes “are intended to amplify or explain items presented in the main body of the statements.”

Here are answers to some questions that business owners and managers may have about complying with the disclosure requirements under U.S. Generally Accepted Accounting Principles (GAAP).

What are footnote disclosures?

Footnote disclosures are explanatory notes that accompany financial statements. They offer readers the clarity needed to assess risks and financial viability. The level of disclosure varies depending on the level of assurance provided.

Footnotes aren’t exclusive to audited financial statements. Under the American Institute of Certified Public Accountants’ Statements on Standards for Accounting and Review Services, full footnote disclosures are also required for reviewed financial statements under GAAP.

Footnotes aren’t required for compiled financial statements unless management requests them. If full disclosure is requested, the CPA assists in drafting them based on management’s representations. If footnotes are omitted, compiled financial statements must clearly communicate that management accepts responsibility for the omission.

Who’s responsible for the disclosures?

Management provides the underlying financial information for disclosures and is ultimately responsible for the content of footnotes. However, the CPA who prepares a company’s financial statements plays a critical role in drafting and reviewing them and ensuring they comply with applicable accounting frameworks.

For audited and reviewed statements, the CPA helps translate management’s data into clear, accurate disclosures that comply with GAAP or other applicable standards. When preparing compiled financials, the CPA drafts them only when they’re requested and approved by management.

Why do footnotes matter?

Footnote disclosures help readers “read between the lines.” They offer crucial information not readily apparent in the core financial statements and can alert users to hidden risks. Consider the following examples:

Going-concern issues. Financial statements are prepared under the general assumption that the business is a viable going-concern entity. Disclosures are required if management or the CPA believes the company may not survive the next 12 months. For example, a footnote might say, “Management has evaluated the company’s ability to continue as a going concern and determined that recurring operating losses and negative cash flows raise substantial doubt about its ability to continue operations beyond December 31, 2025. Management plans to secure additional funding to address this risk.”

Related-party transactions. Companies may give preferential treatment to, or receive it from, individuals or entities with close ties to the company’s management. Footnotes must disclose such related-party transactions to ensure users are aware of any favorable or non-arm’s-length arrangements. If these disclosures are omitted, the financial results may be misleading, especially if such arrangements are temporary or subject to change. For example, if a company rents property from the owner’s relatives at a below-market rate and fails to disclose this, it could appear more profitable than it truly is.

Accounting changes. Any switch in accounting methods must be disclosed, including the rationale and financial impact. While such changes may be required due to regulatory shifts, they can also be used to manipulate results. Transparent footnotes ensure stakeholders can discern whether changes are justified or opportunistic.

Contingent and unreported liabilities. Not all obligations show up on the balance sheet. Footnotes should disclose contingent liabilities, such as pending lawsuits, IRS inquiries and warranty obligations. Auditors often confirm contingent liabilities by reviewing legal correspondence and contracts, and proper disclosure helps prevent surprises that could derail financial performance.

Subsequent events. Significant events occurring after the balance sheet date but before financial statement issuance — such as a major customer loss or regulatory enforcement action — must be disclosed if they could materially affect the business. For instance, a company’s 2024 financial statement footnotes might say, “On February 20, 2025, the company’s largest customer filed for bankruptcy. The outstanding accounts receivable balance of $180,000 has been written off as uncollectible.” Such disclosures help users assess the company’s performance and avoid being blindsided by sudden downturns.

Transparency equals trust

Clear, tailored footnotes — free from boilerplate language — demonstrate that a business isn’t hiding anything. This fosters trust and credibility with external stakeholders, such as investors, lenders, and regulators, while equipping management with vital context to make strategic decisions.

In today’s high-risk marketplace, transparency isn’t just good practice; it can provide a competitive advantage. Contact us to learn more. We can help refine your company’s footnote disclosures and evaluate those of potential partners or competitors.

Colleges and universities across the country have held graduation ceremonies over the past month or so. For employers, that means a tidal wave of new talent hitting the labor pool.

Such “early-career” workers offer great potential. However, you must also consider the compliance risks that may be associated with overemphasizing the pursuit of candidates with minimal experience. Here are some important points to keep in mind.

Getting to know them

Generally, an early-career worker is someone with three years or fewer of experience in a full-time professional role. Often, this refers to a younger individual who has recently completed an undergraduate or graduate degree. But the term can also describe a person who has switched careers by completing a certificate program or some other form of education or training.

There are strong potential advantages of hiring people early in their careers. Typically, they’re eager to learn, grow and gain experience. They often bring fresh perspectives. And it’s probably safe to say that most, if not all, of today’s college grads have an innate familiarity with technology.

Above all, early-career workers represent an investment in the future. Properly onboarded and trained, these employees can play long-term, cost-effective roles in the productivity and success of your organization.

Staying on a safe path

However, there are risks to consider. Overly or clumsily focusing on early-career workers may lead an employer into trouble. For example, in 2022, the U.S. Equal Employment Opportunity Commission (EEOC) filed a lawsuit against a large pharmaceutical corporation alleging violation of the Age Discrimination in Employment Act. This law prohibits discrimination against applicants age 40 or over.

According to the lawsuit, the corporation favored millennials over older workers for sales jobs so its workforce would be “distributed … by generation” in a more advantageous manner. As evidence, the EEOC’s complaint cited a public statement by a company executive announcing a goal of 40% early-career hiring to add more millennials. The company never admitted liability, but it eventually agreed to a settlement that included:

Paying $2.4 million into a fund for claimants age 40 or over,
Offering annual equal employment training to managers and HR staff over a 30-month period, and
Updating their hiring practices.

Obviously, no employer wants to find itself embroiled in a legal action of this kind. Even if liability is never established, the costs and bad publicity can take a heavy toll.

Nevertheless, hiring those early in their careers is an important part of maintaining a stable workforce. To stay on safe ground, establish and regularly verify that your hiring practices are age neutral. Beware of using words such as “fresh,” “energetic” and “high potential” in job postings. Such words or phrases can indicate an age bias.

In addition, never discourage applicants above a certain age from applying. And don’t “grade them lower” for having minimal social media presence or a “dated” college degree.

Taking your time

If your organization is hiring or plans to, take the time to identify your ideal job candidates. Meanwhile, work with a qualified attorney to ensure your hiring practices are equitable and compliant with legal requirements. Contact us for help identifying and measuring your hiring costs.

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.

Yeo & Yeo CPAs & Advisors, a leading Michigan-based accounting and advisory firm, has been named one of Metro Detroit’s Best and Brightest Companies to Work For for the fourteenth consecutive year.

The Best and Brightest program recognizes companies that demonstrate excellence in human resource practices and a strong commitment to employee enrichment. Nominees are evaluated based on communication, work-life balance, employee education, diversity, recognition, and retention.

Over the past year, Yeo & Yeo has continued to grow its presence and capabilities across Michigan, integrating teams from Berger, Ghersi & LaDuke PLC and Amy Cell Talent. These acquisitions have enhanced the firm’s specialized expertise and broadened its talent base, totaling more than 275 professionals statewide. Amid this expansion, Yeo & Yeo remains committed to providing its people with the resources, support, and opportunities they need to succeed.

Yeo & Yeo offers competitive benefits, flexible work options, and award-winning programs that support professional growth and well-being. This year, the firm enhanced its parental paid leave and expanded other benefit inclusions in response to feedback from its annual employee pulse survey, demonstrating a commitment to continuously improving what matters most to its people. Yeo & Yeo also expanded its administrative teams to better support employees and drive innovation. To stay ahead in technology and enhance internal efficiency and client experience, the firm has implemented new software, including robotic process automation (RPA) and Copilot AI tools. Employees also benefit from personalized coaching through Boon Health, enjoy firmwide appreciation events such as the annual Detroit Tigers trips, and have the opportunity for added flexibility through summer half-day Fridays that promote work-life integration.

“This recognition reinforces the culture we’ve worked hard to build,” said Thomas O’Sullivan, managing principal of the firm’s Ann Arbor office. “We strive to create an environment where people feel empowered and inspired to grow—both personally and professionally.”

Tammy Moncrief, managing principal of the Troy office, adds, “At Yeo & Yeo, our people are the foundation of everything we do. Their passion and dedication are what make our culture strong and our client service exceptional. Being recognized as a Best and Brightest Company directly reflects their contributions.”

This recognition adds to the firm’s growing list of honors in 2025. Yeo & Yeo was also named one of West Michigan’s Best and Brightest Companies to Work For, ranked among the Top 200 firms on the Remarkabrand Index, and recognized by Accounting Today as a Regional Leader and a Firm to Watch.

The Metro Detroit Best and Brightest Companies will be honored at The Henry in Dearborn, Michigan, on Thursday, October 30.

Performing a mid-year QuickBooks® cleanup is a smart habit that small business owners and bookkeepers can adopt to stay ahead of their financial responsibilities. Waiting until year end to review your accounting records can lead to unnecessary stress, missed deductions and preventable errors.

When you need to update your QuickBooks lists — such as the chart of accounts, customers and vendors — the software provides methods for inactivating, deleting and merging list entries. Here’s how to freshen things up.

Inactivating: Hidden but still accessible

If your records have become cluttered with unused accounts, consider inactivating some list entries. QuickBooks will keep the information associated with an inactive entry. So you can still access the information if you decide to view or reactivate the item later. But the record is hidden in the list and won’t appear on any related drop-down lists. For example, if a job has been completed, making it inactive will shorten the customer list and prevent accidental use on an invoice or payment window.

However, there are some precautions for inactivating list entries that still have open balances. For instance, if you’d like to inactivate an inventory item, be sure to adjust the quantity on hand to zero. If a customer or vendor has an outstanding balance, resolve it and adjust the balance to zero before inactivating the name. Additionally, inactivating a list entry doesn’t prevent it from being included in a memorized transaction that was previously created. Be sure to update those recurring entries as well.

Deleting: A clean slate

If you’re sure you won’t need to access an unused item again, QuickBooks allows you to delete a list entry permanently. However, if you attempt to delete an item that’s used elsewhere in the company file, QuickBooks won’t allow you to delete it. Instead, a warning message will be displayed.

Important: To delete a customer, you must first delete or inactivate all associated jobs. However, if any job has linked transactions — such as invoices, time entries or payments — it’s generally advisable to inactivate the job instead of deleting it. Once all jobs are inactive or deleted, and the customer has no remaining linked transactions, the customer may be deleted.

Before an item is deleted, QuickBooks will ask you to confirm the deletion. And, if you delete a list entry in error, you can undo it — but this only works in the desktop version and immediately following the accidental deletion, before saving.

Merging: When less is more

Duplicate entries happen for many reasons. For instance, different users may inadvertently enter the same account into the software multiple times, or your supply chain partners might combine into one company. The merge feature in QuickBooks allows duplicate entries within the same list to be combined.

While this is a useful function, merging two list entries is an irreversible operation. To safeguard against any mistakes made during merging, consider backing up the file first in case you might need to restore it to its original state.

We’re here to help

Working with cluttered accounting records can be cumbersome and frustrating. A mid-year review can give you a fresh start and minimize headaches when it’s time to prepare your financial statements and tax returns. Contact us for help updating your QuickBooks lists. Our team can guide you through the steps to delete, inactivate and merge list items.

If your organization has been operational for a while, you’re no doubt well acquainted with employment taxes. However, it’s important to stay vigilant regarding compliance.

Adhering to the rules isn’t only about avoiding audits and financial penalties, which are ever-present possibilities. Compliance is essential for running a financially sound and trustworthy organization. Let’s look at some simple ways to tighten up your compliance process.

Make a checklist

As you know, employers must report and deposit certain employment taxes regularly. To ensure you don’t miss anything, create a checklist that includes your primary obligations:

Federal income tax withholding (FITW),
Social Security tax (both the employer and employee portions),
Medicare tax,
Additional Medicare tax, and
Federal unemployment tax (FUTA).

Typically, an organization reports FITW, Social Security, Medicare and Additional Medicare taxes on Form 941, “Employer’s Quarterly Federal Tax Return.” FUTA is reported on Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return.”

Mark your calendar

True to its name, Form 941 is filed quarterly and due by the last day of the month following the end of each quarter. So, be sure you’ve marked your calendar or, better yet, set up electronic reminders. Typically, the due dates for filing this form are:

April 30 (first quarter),
July 31 (second quarter),
October 31 (third quarter), and
January 31 (fourth quarter).

If any deposit due date falls on a Saturday, Sunday or legal holiday, you may deposit on the next business day.

For smaller employers with low employment tax liability, the IRS will allow for the annual deposit and filing of these taxes. Such employers use Form 944, “Employer’s Annual Federal Tax Return.”

Set a schedule

While Form 941 is filed quarterly, employment tax deposits are typically submitted more frequently unless the employer is a Form 944 filer. Be sure you’ve established a firm schedule appropriate for your organization.

Frequency can either be semiweekly or monthly. Which one is determined through a “lookback period.” This is the total tax liability for an employer for the previous four quarters — July 1 of the second preceding calendar year through June 30 of the preceding calendar year.

If an employer reports $50,000 or less of Form 941 taxes for the lookback period, it’s a monthly schedule depositor. On the other hand, if an employer reports more than $50,000, it’s a semiweekly schedule depositor.

Beware of higher liability

Make sure you’re aware of the “higher liability” exception. It applies to deposit schedules if an employer accumulates tax liability of $100,000 or more on any day during a deposit period. This often occurs around bonus time for some employers or when pay increases kick in.

When this happens, the employer must deposit the tax by the close of the next business day, regardless of whether it’s a monthly or semiweekly depositor. And if the employer is a monthly depositor, it becomes a semiweekly depositor.

Watch carefully

Mismanaging employment taxes can hurt your employer brand and damage your organization’s reputation in its industry or marketplace. So, keep a close eye on your compliance process to ensure it isn’t showing signs of breaking down. We can review your payroll system and procedures to identify potential sources of errors as well as opportunities to improve efficiency and accuracy.

Agility is key in today’s economy, where uncertainty reigns and businesses must be ready for anything. Highly skilled employees play a huge role in your ability to run an agile company. One way to put them on optimal footing is cross-training.

Multiple advantages

Simply defined, cross-training is teaching employees to understand and perform responsibilities and tasks outside the scope of their primary job duties. It has many advantages, including:

Reducing the impact of absences. The potential reasons for any employee missing work are seemingly countless. A staff member may become sick or disabled, have a baby, take a vacation, get called to active military duty, receive a jury summons, retire, suddenly resign or be terminated. Having someone else on staff ready to jump in and handle key duties can keep your company operating relatively smoothly.

Boosting productivity. If the workload in one area of the business temporarily becomes especially heavy, you can shift staff to ease the situation. Let’s say that, pleasantly enough, your company sees a sudden upswing in sales. Cross-training could enable you to move someone in marketing to accounting to help review invoices.

Gaining fresh perspectives. Putting a new set of eyes on any business process or procedure never hurts. Employees who fill in for colleagues on a short-term basis may catch something wrong or develop an idea that improves operations.

Going back to our previous example, say that the marketing staff member temporarily working in accounting notices that your company’s invoices look outdated and contain confusing wording. As a result, you ask for that person’s input and undertake a wider initiative to redesign your invoices. Ultimately, collections improve because customers can more easily read their bills.

Strengthening internal controls. Cross-training is also an essential internal control. This is particularly true in your accounting department but may apply to information technology, production and other areas as well. Ensuring one person’s job is periodically performed by someone else can prevent fraud. In fact, when coupled with mandatory vacations, cross-training is a major deterrent because potential fraudsters know that co-workers will be doing their jobs and could catch their crimes.

Career development

When “selling” cross-training to your staff, emphasize how it’s good for them, too. Learning new things broadens employees’ skill sets and experience levels. Help them understand this by explaining whether each staff member’s cross-training is “vertical” or “horizontal.”

If the task learned is vertical, it requires more responsibility or skill than that employee’s normal duties. Thus, vertical cross-training encourages employees to feel more valuable to the business. (And you know what? They are!)

If the task calls for the same level of responsibility or skill as an employee’s routine duties, it’s considered horizontal. This type of cross-training widens employees’ understanding of their departments or the company. Plus, horizontal cross-training builds camaraderie and is often a welcome change of pace.

Risks to consider

Although generally a good business practice, cross-training has some risks you should consider. First, not everyone is a prime candidate for it. If possible, pick employees who show an interest in working outside their stated roles and are open to change.

Important: You may want to require cross-training as an internal control for some positions. This is usually a good idea for jobs involving financial management, sensitive data or high-value customers.

Second, be cognizant of employees’ workloads and stress levels. Relying too much on cross-training can lead to burnout and lower morale. Also, decide whether and how cross-training should affect compensation. Some companies use incentives or profit sharing to build buy-in.

Slowly and carefully

If your business has yet to try cross-training, starting slowly is typically best. Discuss the concept with your leadership team and identify which positions are well suited for it. Then design a formal strategy for picking the employees involved, carrying out the training and monitoring the results. We can help you identify all the costs associated with developing and managing staff performance.

The treatment of research and experimental (R&E) expenses is a high-stakes topic for U.S. businesses, especially small to midsize companies focused on innovation. As the tax code currently stands, the deductibility of these expenses is limited, leading to financial strain for companies that used to be able to expense them immediately. But proposed legislation dubbed The One, Big, Beautiful Bill could drastically change that. Here’s what you need to know.

R&E expenses must currently be capitalized

Before 2022, under Section 174 of the Internal Revenue Code, taxpayers could deduct R&E expenses in the year they were incurred. This treatment encouraged investment in innovation, as companies could realize a current tax benefit for eligible costs.

However, beginning in 2022, the Tax Cuts and Jobs Act (TCJA) changed the rules. Under the law, R&E expenses must be capitalized and amortized over five years for domestic activities and 15 years for foreign activities. This means businesses can’t take an immediate deduction for their research spending.

The practical impact on businesses

Startups, tech firms and manufacturers, in particular, have reported significant tax hikes, even in years when they operated at a loss. The shift from immediate expensing to amortization has created cash flow issues for innovation-heavy firms and complicated tax reporting and long-term forecasting.

Lobbying groups, tax professionals and industry associations have been pushing for a reversal of the TCJA’s Sec. 174 provisions since they took effect.

What’s in The One, Big, Beautiful Bill?

The One, Big, Beautiful Bill is a comprehensive tax and spending package that narrowly passed in the U.S. House in May. It contains a provision that would restore the immediate deductibility of R&E expenses, among other tax measures.

Specifically, it would allow taxpayers to immediately deduct domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. This provision would also make other changes to the deduction.

If enacted, the bill would provide a lifeline to many businesses burdened by the amortization requirement — especially those in high-growth, innovation-focused sectors.

Legislative outlook and next steps

Passage of the current version of The One, Big, Beautiful Bill remains uncertain. The bill is now being debated in the U.S. Senate and senators have indicated they’d like to make changes to some of the provisions. If the bill is revised, it will have to go back to the House for another vote before it can be signed into law by President Trump.

However, it offers hope that lawmakers recognize the challenges businesses face and may be willing to act. If enacted, the bill could restore financial flexibility to innovators across the country, encouraging a new wave of research, development and economic growth.

Stay tuned, and contact us if you have questions about how these potential changes may affect your business.

Turnover in finance and accounting (F&A) leadership is on the rise. In 2024, CFO turnover among Standard & Poor’s 500 companies hit 17.8%, tying a record high in 2021, according to the Russell Reynolds Global CFO Turnover Index. This trend isn’t limited to large corporations. Closely held businesses are also feeling the pinch, as competition for experienced finance professionals intensifies and the accounting profession faces a well-documented talent shortage.

The departure of a CFO, controller or senior accountant can disrupt daily business operations. It often leaves the remaining staff stretched thin, creates gaps in institutional knowledge, and increases the risk of errors or compliance lapses, especially during time-sensitive reporting cycles.

However, if handled wisely, this disruption can also be a turning point. It gives business owners and managers time to re-evaluate the department, modernize processes and make strategic upgrades. Here are four critical steps to consider after a leadership change in your F&A department.

Redefine the role

Your business has likely evolved since the previous F&A leader was hired. Perhaps you’ve taken on debt, expanded into new markets, or needed to meet investor or regulatory reporting requirements. Now’s the time to ask: Does our original job description reflect the company’s current financial reporting needs?

You might need to replace a former bookkeeper-turned-controller with a CPA who has experience managing teams, scaling finance systems and working with external stakeholders. A fresh job description that aligns with your current and future goals helps ensure you hire (or outsource to) someone with the appropriate talent level.

Evaluate past performance

Leadership transitions are a natural opportunity to assess whether your accounting reports are timely, accurate and relevant. Your reports should provide insights to help you feel confident during tax season and when speaking with lenders.

If not, now is the time to improve internal processes, provide additional training for your remaining staff, and explore outsourced accounting and CFO services. An external partner can bring consistency, technical expertise and forward-looking insights, often at a lower cost than a full-time hire.

Assess technology

Outdated or underutilized accounting software can leave your business overly dependent on one person to “make it work.” Modern solutions can automate account reconciliations, track real-time performance metrics and reduce manual entry. Cost-effective upgrades can reduce errors, lower fraud risks and free your F&A staff for higher-value work.

Take stock of your systems. Are you using them effectively? Is it time for an upgrade or additional training on your existing software? If you’re unsure, we can assess your tech stack and help you make the most of your current platform or recommend more suitable options.

Look to the future

As your business grows and evolves, your F&A department needs to keep pace. For instance, if you’re planning a merger, seeking capital or expanding geographically, your F&A team must be equipped to support these moves.

In-house teams often lack the time or capacity to prepare for growth — and they might have outdated or biased ways of approaching change that could benefit from fresh insights. Outsourced CFOs can help by providing strategic support and financial clarity without the cost of a full-time executive. Likewise, streamlining the department’s policies and procedures can help improve performance and position it for the future.

For more information

Losing an F&A team leader is never convenient, but it doesn’t have to be chaotic. Contact us today to keep your finances on track — no matter who’s in charge. We can help you find an F&A professional with the right skills to help your business emerge from the leadership transition stronger, more agile and better prepared for what’s next.

Slow cash flow is one of the leading causes of insomnia for business owners. Even if sales are strong, a lack of liquidity to pay bills and cover payroll can cause more than a few sleepless nights. The good news is that you can rest easier by exercising sound cash flow management.

Scrutinize your cycles

Broadly speaking, nearly every business — no matter what it does — has two cycles that determine how the dollars flow. These are:

1. The selling cycle. This is how long it takes your business to:

Develop a product or service,
Market it, and
Produce the product or service, close a sale, and collect the revenue.

Good accounts receivable processes — from clearly and accurately invoicing to implementing online payment methods for faster access to money — are a major aspect of cash flow management.

Less experienced business owners often underestimate the length of the selling cycle. Many a start-up has been launched with a budding entrepreneur believing the company could get its wares to market, close deals and earn revenue quickly. Grim reality usually followed.

However, even business owners who’ve been around for a while can miss changes to their selling cycles. Regular customers on whom the company depends may start taking longer to pay, or a key employee might jump ship and be hard to replace. Inefficiencies such as these are often exposed when economic conditions deteriorate.

2. The disbursements cycle. This is how your business manages regular payments to employees, vendors, creditors (including short- and long-term financing) and other parties. As payments go out, cash flow is obviously affected.

Track the timing

The selling and disbursements cycles aren’t separate functions; they overlap. But if they don’t do so evenly, delayed cash inflows can create a crisis. You want them to match as evenly as possible. Or better yet, you want to convert sales to cash more quickly than you’re paying expenses.

How can you keep tabs on it all? First, study your statement of cash flows whenever your company’s financial statements are generated. But do more than that. Regularly create cash flow statements. Despite their similar-sounding name, these reports are run more frequently — usually monthly or quarterly. You can also use financial software to set up a digital dashboard that displays weekly or even daily cash flow metrics.

Take control

If you see warning signs of an imminent cash crunch, consider these options to better control the potential crisis:

Slow down growth. Rapid growth can be both a blessing (you’re selling more) and a curse (you’re spending more on production). Cash shortages often result from a substantial mismatch between the selling and disbursement cycles, which can easily occur during high-growth periods. Out-of-control growth can also impair quality, which, in turn, sours relationships with customers and hurts your company’s reputation in the marketplace.

Review expenses. Sometimes, you can lower monthly cash outflows by converting costs from fixed to variable. Fixed expenses include mortgage or lease payments, payroll, and insurance. When an employee quits, consider using an independent contractor to fill the position. Or if a key piece of equipment breaks, explore leasing rather than purchasing. In addition, review your company’s tax planning strategies. A lower tax bill can make a big difference in cash flow.

Address asset management. How much money are you making for each dollar that’s invested in working capital, equipment and other assets? By monitoring turnover ratios, you may be able to identify and reduce weaknesses in asset management. For example, an increase in “days outstanding” in accounts receivable might improve with tighter credit policies, early-bird discounts or incentives for employees who handle collections.

Essential skills

Strong cash flow management skills are essential to running a successful business. We can review your sales and disbursement cycles, improve your financial reporting, and identify ways to manage your company’s cash better.

As a closely held business owner, a substantial amount of your wealth likely is tied to the business. Of course, you want to retain as much of that wealth as possible to pass on to your family after you exit the business. If your business is structured as a corporation, the answer may be an employee stock ownership plan (ESOP). It can enhance tax efficiency, support business succession goals and help preserve wealth for future generations.

An ESOP in action

An ESOP is a qualified retirement plan that invests primarily in your company’s stock. ESOPs must comply with the same rules and regulations as other qualified plans, and they’re subject to similar contribution limits and other requirements.

One requirement that’s unique to ESOPs is the need to have the stock valued annually by an independent appraiser. Also, by definition, ESOPs are available only to corporations. Both C corporations and S corporations are eligible.

In a typical ESOP arrangement, the company makes tax-deductible cash contributions to the plan, which uses those funds to acquire some or all of the current owners’ stock. Alternatively, with a “leveraged” ESOP, the plan borrows the money needed to buy the stock and the company makes tax-deductible contributions to cover the loan payments.

As with other qualified plans, ESOP participants enjoy tax-deferred earnings. They pay no tax until they receive benefits, in the form of cash or stock, when they retire or leave the company. Participants who receive closely held stock have a “put option” to sell it back to the company at fair market value during a limited time window.

ESOP benefits

ESOPs offer many benefits for owners, companies and employees alike. Benefits for owners include:

Liquidity and diversification. An ESOP creates a market for your stock. By selling some or all of your stock to the plan, you can achieve greater liquidity and diversification, enhancing your financial security and estate planning flexibility. Acquiring a wider variety of nonbusiness assets with the sale proceeds can make it easier to share your wealth with loved ones, especially those who aren’t interested in participating in the business.

Tax advantages. If your company is a C corporation and the ESOP acquires at least 30% of its stock, it’s possible to defer capital gains on the sale of your stock by reinvesting the proceeds in qualified replacement securities. You can even avoid capital gains tax permanently by holding the replacement securities for life.

Control. Unlike certain other exit strategies, an ESOP allows you to tap your equity in the company without immediately giving up management control. You can continue to act as a corporate officer and, if you serve as the ESOP’s trustee, you’ll retain the right to vote the trust’s shares on most corporate decisions.

The company can benefit because its contributions to the plan are tax deductible. With a leveraged ESOP, the company essentially deducts both interest and principal on the loan. And, of course, both the company and its employees gain from the creation of an attractive employee benefit, one that provides a powerful incentive for employees to stay with the company and contribute to its success.

Beware of an ESOP’s cost

An ESOP can be a powerful estate planning tool for closely held business owners, but it’s important to consider the costs. In addition to the usual costs associated with setting up and maintaining a qualified plan, there are also annual stock valuation costs. Contact us to learn more about pairing an ESOP with your estate plan.

Most employer-sponsored retirement and welfare benefit plans are subject to the federal Employee Retirement Income Security Act (ERISA). These include health insurance coverage and qualified retirement plans.

ERISA requires applicable plans to have a plan document and a summary plan description (SPD). Everyone involved in benefits administration must understand and respect the importance of both.

The plan document

ERISA-compliant plans must be “established and maintained pursuant to a written instrument” called the plan document. It comprehensively sets forth the rights of the plan’s participants and beneficiaries by describing:

What benefits are available,
How those benefits are funded,
Who’s eligible to participate,
Who’s the named fiduciary,
How the plan can be amended, and
The procedures for allocating plan responsibilities.

The plan document also guides the plan sponsor and administrator in making decisions and executing their responsibilities.

The SPD

As mentioned, ERISA-compliant plans must also have an SPD. A key function of this document is clearly communicating plan information to participants. The SPD must include many specified items, such as:

Plan-identifying and eligibility information,
A description of plan benefits and circumstances causing loss or denial of benefits,
Benefit claim procedures, and
A statement of participants’ ERISA rights.

The SPD must be written so the average plan participant can understand it.

Obligation to furnish

Sponsors of ERISA-compliant plans must furnish SPDs to participants at specific times. These include when new participants join a plan (within 90 days) and upon a participant’s written request (within 30 days).

Failure to furnish the documents within the stated period may expose the plan administrator — typically the employer — to penalties of up to $110 per day. It’s particularly important to respond to participant requests in a timely manner because you can still be hit by a penalty if you’ve already provided the SPD but ignore the request.

Choose your delivery method carefully. U.S. Department of Labor (DOL) regulations require you to furnish SPDs in a way that’s “reasonably calculated to ensure actual receipt” and “likely to result in full distribution” to everyone required to receive them. Because of the nature of these rules, whether a delivery method is satisfactory depends on the facts and circumstances regarding the employer’s workplace and workforce.

The regulations include several examples of acceptable SPD distribution methods. While hand-delivery of SPDs to employees at the worksite is a specifically approved method, the regulations caution that it’s unacceptable “merely to place copies of the [SPD] in a location frequented by participants.” In other words, the DOL envisions a system designed to put SPDs into the hands of required recipients — not a system that relies on those hands reaching out for the SPDs.

The DOL may view an approach that requires employees to take action to receive their SPDs as unlikely to result in “full distribution.” Participants may be unaware of the importance of receiving an SPD or might not pick it up within the applicable timeframes.

Bottom line

Be aware of other forms of required plan documentation, too. For example, you must distribute a summary of benefits and coverage upon initial enrollment and annually during open enrollment. If you make significant changes to a plan, you need to provide participants with a summary of material modifications within 210 days after the end of the plan year during which the changes were made.

The bottom line is that failure to comply with ERISA may lead to costly penalties that undermine your organization’s financial performance. We can help you and your staff better understand the rules, as well as manage the costs and tax impact of retirement and welfare benefit plans or any other fringe benefit.