Back to Basics: A Practical Playbook for Reporting PPE

Under U.S. Generally Accepted Accounting Principles (GAAP), property, plant and equipment (PPE) assets aren’t immediately expensed. Instead, they’re capitalized on your company’s balance sheet and gradually depreciated over their useful lives. While that sounds easy enough, subtle nuances may trip up small businesses. Here are some tips to help get it right.

Capitalize the full cost

PPE is reported on the balance sheet at historical cost. You should capitalize all costs incurred during an asset’s construction or acquisition that can be directly traced to preparing the asset for service. Historical costs include the amount of cash or cash equivalents paid for an asset, as well as the expenses incurred to relocate the asset and bring it to working condition. Examples of capitalizable costs include:

The purchase price,
Sales tax,
Shipping, and
Installation costs.

Additionally, you must capitalize any costs incurred to replace PPE or enhance its productivity. However, you can expense repairs and maintenance costs as incurred.

GAAP doesn’t prescribe a dollar threshold for when to capitalize an asset. Instead, management can establish a capitalization threshold for efficiency, provided it doesn’t materially misstate the financial statements. Assets that fall below management’s threshold can be expensed immediately.

Determine the asset’s useful life

An asset’s useful life is the estimated period it contributes to your company’s operations and cash flow. To determine this, consider:

The asset’s expected use,
Any legal or contractual time constraints,
The entity’s historical experience with similar assets, and
Obsolescence or other economic factors.

Getting this estimate right is crucial. It affects your depreciation schedule — and your company’s reported profits.

What happens if a PPE asset is sold, damaged or otherwise impaired? Under GAAP, you must remove it from the balance sheet and recognize any resulting gain or loss on the income statement.

Select the right depreciation method

Depreciation is meant to allocate the cost of an asset (less any salvage value) over the period that it’s in use. Four common depreciation methods under GAAP are:

Straight-line,
Sum-of-the-years-digits,
Units-of-production, and
Declining-balance.

For simplicity, some small businesses deviate from GAAP by using the same depreciation method for tax and financial statement purposes. In this situation, the company would issue tax-basis financial statements that would disclose that they haven’t been prepared in accordance with GAAP. The IRS prescribes specific recovery periods for different categories of PPE and provides accelerated depreciation methods.

Under current tax law, instead of using the standard Modified Accelerated Cost Recovery System (MACRS) depreciation method, certain entities may choose to immediately deduct a qualified PPE purchase under Section 179 or the bonus depreciation program. This treatment minimizes taxable income in the years the asset is placed in service.

However, it may have some unintended consequences for financial reporting purposes. Using accelerated depreciation methods may create a large spread between the asset’s book value and fair market value. Assets contributing to future business operations may have no value on your balance sheet. First-year depreciation write-offs may also artificially reduce profits in the year of acquisition, making it hard to compare a company’s performance over time or against competitors. In years when your business makes significant PPE investments, these effects may raise red flags to lenders or investors.

We can help

PPE reporting involves judgment calls that can impact your financials and tax strategy. Our team can help you navigate these nuances, ensure compliance with the accounting rules and align your PPE strategy with broader financial goals.

Suppose you’re thinking about setting up a retirement plan for yourself and your employees. However, you’re concerned about the financial commitment and administrative burdens involved. There are a couple of options to consider. Let’s take a look at a Simplified Employee Pension (SEP) and a Savings Incentive Match Plan for Employees (SIMPLE).

SEPs offer easy implementation

SEPs are intended to be an attractive alternative to “qualified” retirement plans, particularly for small businesses. The appealing features include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.

If you don’t already have a qualified retirement plan, you can set up a SEP just by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on your employees’ behalf. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are received, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS approved. The maximum amount of deductible contributions you can make to an employee’s SEP-IRA in 2025, and that he or she can exclude from income, is the lesser of 25% of compensation or $70,000. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s contributions to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

You’ll have to meet other requirements to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens associated with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination rules aren’t required for SEPs. And employers aren’t required to file annual reports with the IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE plans meet IRS requirements

Another option for a business with 100 or fewer employees is a Savings Incentive Match Plan for Employees (SIMPLE). Under these plans, a SIMPLE IRA is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a SIMPLE 401(k) plan, with similar features to a SIMPLE IRA plan, and avoid the otherwise complex nondiscrimination test for traditional 401(k) plans.

For 2025, SIMPLE deferrals are allowed for up to $16,500 plus an additional $3,500 catch-up contribution for employees age 50 or older.

Unique advantages

As you can see, SEP and SIMPLE plans offer unique advantages for small business owners and their employees. Neither plan requires annual filings with the IRS. Contact us for more information or to discuss any other aspect of your retirement planning.

Annual fraud risk assessments can be very effective in finding obvious fraud threats and documenting internal controls that are in place to minimize them. However, these assessments can overlook evolving and behavioral risks that could cause significant financial losses if bad actors exploit them. You can help boost the power of your risk-reduction program by actively looking for potential blind spots.

Here are several examples of possible threats and how you can mitigate them:

Performance pressure. Unrealistic performance targets that employees can’t achieve legitimately may create a “win at all costs” culture that encourages cheating. This is particularly true if you tie compensation to overly aggressive goals. You can reduce this risk by ensuring performance metrics include integrity-related measures. In addition, performance outliers should be analyzed, and employees should be required to detail how they met their stretch goals.

Cultural shortcomings. Low utilization of confidential fraud hotlines and whistleblower channels can indicate cultural problems. For example, your workers may not trust that their tips will be taken seriously or worry they’ll be subject to retaliation. So track all tips your business receives (via anonymous mechanisms, direct reporting to managers and other methods), including how they’re investigated and their ultimate resolution. While maintaining confidentiality, communicate such resolutions to employees to promote confidence in your system.

Poor tone at the top. Not every executive models ethical behavior. For instance, a company leader might routinely override internal controls or ignore safety precautions. In such cases, workers may resent executive “privilege,” and some could use their grievances to justify fraud. Your business’s policies must apply equally to all employees, including executives. It’s critical to demand integrity of your executives and to thoroughly investigate complaints about them. Executives found to be culpable of serious infractions must suffer consequences.

Accepted noncompliance. When minor policy exceptions become commonplace, standards across an entire organization can gradually erode. At that point, workers may regard compliance as an obstacle to overcome, rather than a mechanism to protect their employer and fellow employees. Reduce such risk by tracking policy compliance, noting the exceptions and monitoring trends. Also, regularly retrain workers on compliance procedures and any acceptable rationalizations for overriding them.

The bottom line: Take steps now to address any policy pitfalls or employee behavior that might promote unethical or criminal activity. For most businesses, the best defense is proactive leadership, transparency, well-designed incentives and demonstrated respect for honesty and following rules. We can help you develop internal controls that address your company’s most significant risks.

Wellness programs are a firmly established way for employers to educate employees about physical, mental and emotional well-being while providing ways to engage in healthful behaviors. These programs typically include:

Physical health initiatives (such as fitness challenges and gym access),
Nutrition and lifestyle support (such as dietary consultations and smoking cessation classes), and
Mental and emotional initiatives (such as an employee assistance program and stress management seminars).

Although results are far from guaranteed, a well-implemented wellness program can improve an organization’s financial performance by boosting morale and engagement, reducing absenteeism, and increasing productivity. However, there are risks to consider — not the least of which is compliance.

The big five

Various federal laws may apply to a wellness program. Five of the most important are the:

Employee Retirement Income Security Act,
Consolidated Omnibus Budget Reconciliation Act,
Health Insurance Portability and Accountability Act,
Americans with Disabilities Act, and
Genetic Information Nondiscrimination Act.

It’s critical to know whether and how these laws affect your organization’s specific program design and administration. Be sure to consult a qualified attorney.

Other impactful laws

Believe it or not, beyond those five laws, there are others to consider. These include:

The Age Discrimination in Employment Act (ADEA). The ADEA prohibits employers from discriminating against employees and job applicants because of age in relation to employment and the compensation, terms, conditions or privileges thereof — including benefits. The ADEA’s protections apply to people who are age 40 or older and could affect wellness programs that decrease incentives, impose surcharges, or otherwise discriminate against these employees or groups of employees.

Title VII of the Civil Rights Act. A wellness program that makes distinctions based on race, color, sex (including pregnancy), religion or national origin would likely violate Title VII. Also, historically, the Equal Employment Opportunity Commission has taken the position that sexual orientation is inherently a “sex-based consideration,” and that an allegation of discrimination based on sexual orientation is an allegation of sex discrimination under Title VII.

The Fair Labor Standards Act (FLSA). The FLSA requires that covered, nonexempt employees be paid at least time and one-half the employee’s regular pay rate for time worked over 40 hours in a workweek. As employers promote participation in their wellness programs — particularly when health risk assessments are involved — they must carefully review whether the program could be considered mandatory. If it is, time spent completing the program may be deemed compensable under the FLSA.

The Internal Revenue Code. Although health benefits provided under a wellness program (such as diagnostic tests) are likely to be tax-free, rewards for participating in these programs might be taxable.

For example, plan premium subsidies or employer contributions to health Flexible Spending Accounts, Health Reimbursement Arrangements or Health Savings Accounts can be excluded from an employee’s income. Moreover, they aren’t subject to wage withholding or employment taxes if applicable nondiscrimination requirements are satisfied.

However, other rewards such as cash or cash equivalents — for instance, gift cards or gift certificates — are includible in employees’ income and subject to wage withholding and employment taxes.

Exceptions possible

Bear in mind that certain exceptions may apply to some of the laws we’ve mentioned. These are particularly worth exploring for smaller employers.

As mentioned, work closely with a qualified attorney when designing and administering your wellness program. Contact us for help assessing the costs and tax impact of such a program, whether it’s theoretical or already up and running.

If you’re considering making asset transfers to your grandchildren or great grandchildren, be sure your estate plan addresses the federal generation-skipping transfer (GST) tax. This tax ensures that large estates can’t bypass a round of taxation that would normally apply if assets were transferred from parent to child, and then from child to grandchild.

Because of the complexity and potential tax liability, careful estate planning is essential when considering generation-skipping transfers. Trusts are often used as a strategic vehicle to allocate the GST tax exemption amount effectively and ensure that assets pass tax-efficiently to younger generations.

ABCs of the GST tax

The GST tax applies at a flat 40% rate — in addition to otherwise applicable gift and estate taxes — to transfers that skip a generation. “Skip persons” include your grandchildren, other relatives who are more than one generation below you and unrelated people who are more than 37½ years younger than you. There’s an exception, however, for a grandchild whose parent (your child) predeceases you. In that case, the grandchild moves up a generation and is no longer considered a skip person.

Even though the GST tax enjoys an annual inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption (currently, $13.99 million), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

3 transfer types trigger GST tax

There are three types of transfers that may trigger the GST tax:

A direct skip — a transfer directly to a skip person that is subject to federal gift and estate tax,
A taxable distribution — a distribution from a trust to a skip person, or
A taxable termination — such as when you establish a trust for your children, the last child beneficiary dies and the trust assets pass to your grandchildren.

The GST tax doesn’t apply to transfers to which you allocate your GST tax exemption. In addition, the GST tax annual exclusion — which is similar to the gift tax annual exclusion — allows you to transfer up to $19,000 per year (for 2025) to any number of skip persons without triggering GST tax or using up any of your GST tax exemption.

Transfers to a trust qualify for the annual GST tax exclusion only if the trust 1) is established for a single beneficiary who’s a grandchild or other skip person, and 2) provides that no portion of its income or principal may be distributed to (or for the benefit of) anyone other than that beneficiary. Additionally, if the trust doesn’t terminate before the beneficiary dies, any remaining assets will be included in the beneficiary’s gross estate.

If you wish to make substantial gifts, either outright or in trust, to your grandchildren or other skip persons, allocate your GST tax exemption carefully. Turn to us for answers regarding the GST tax.

Many balance sheet items are reported at historical cost. However, current accounting standards require organizations that follow U.S. Generally Accepted Accounting Principles (GAAP) to report certain assets and liabilities at “fair value.” This shift aims to enhance transparency and reflect an entity’s current financial position more accurately. However, estimating fair value can involve significant judgment and subjectivity, especially when observable market data is unavailable.

Defining fair value

Under GAAP, fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Examples of assets that may be reported at fair value are asset retirement obligations, derivatives and intangible assets acquired in a business combination.

Accounting Standards Codification Topic 820, Fair Value Measurement, explains how companies should estimate fair value using available, quantifiable market-based data. It provides the following three-tier valuation hierarchy for valuation inputs:

Quoted prices in active markets for identical assets or liabilities,
Inputs other than quoted prices that are observable, such as prices for similar assets in active markets or identical assets in inactive markets, and
Nonpublic information and management’s estimates.

Fair value measurements, especially those based on the third level of inputs, may involve significant judgment, making them susceptible to misstatement. Therefore, these estimates usually require more auditor focus.

Additionally, fair value measurements require detailed footnote disclosures about the valuation techniques, inputs and assumptions used. These disclosures help financial statement users understand how fair value was determined and evaluate its impact on earnings, financial position and risk exposure.

Auditing estimates

To substantively test fair value measurements, external auditors evaluate the reasonableness and consistency of management’s assumptions. They also assess whether the underlying data is complete, accurate and relevant. Using management’s assumptions (or alternate assumptions), auditors may develop an independent estimate to compare to what’s reported on the internally prepared financial statements.

Another way auditors test the reasonableness of fair value estimates is by reviewing subsequent events that occur after the balance sheet date but before the audit report is issued. For example, ABC Co., a calendar-year entity, acquired a competitor in October 2024 and allocated $500,000 of the purchase price to a trademark. With no active market for trademarks, management used the relief-from-royalty method to estimate its fair value. On February 1, 2025, ABC licensed the trademark to a third party. The company’s external auditor compared the licensing terms to management’s assumptions and found the royalty rates aligned. As a result, no further audit procedures were needed to support the fair value estimate.

In today’s uncertain marketplace, accounting estimates may face increased scrutiny from auditors. Measuring fair value is outside the comfort zone of most in-house accounting personnel. Outside appraisal professionals can provide objective, market-based evidence to support the fair value of assets and liabilities.

We’re here to help

Fair value is one of the gray areas in financial reporting. Approach fair value estimates with diligence, documentation and, where necessary, third-party support. Contact us for guidance on complying with the complex fair value measurement and disclosure rules.

Yeo & Yeo’s Education Services Group professionals are pleased to present several sessions during the April 29 – May 1 MSBO Conference & Exhibit Show at the Amway Grand Plaza and DeVos Place in Grand Rapids.

We are excited to share our insights to help districts navigate the complexities of school financial management. We look forward to seeing you there and working together to support MSBO and the broader education community.

Tuesday, April 29

Accounting and Auditing Update – 9:20-10:00 a.m.
- Jennifer Watkins, CPA, Yeo & Yeo Principal, shares insights on the latest accounting pronouncements, including the complicated MPSERS funding, and preparing for this audit season.

Cash Management – 9:20-10:00 a.m.
- Kristi Krafft-Bellsky, CPA, Yeo & Yeo Principal, joins Michael Barry, MILAF+/PFM Asset Management, and Mary Beth Rogers, Clarkston Community Schools, to help you master cash management, including fund balance reports, legal compliance, and identifying and dealing with fraud.

Thursday, May 1

School Nutrition Program Financial Reporting and Auditing Considerations – 8:20-9:20 a.m.
- Kristi Krafft-Bellsky, CPA, Yeo & Yeo Principal, joins Michelle Needham, MDE, to help you learn about the main compliance and audit issues in the food service fund and how to navigate them.
Allowable Expenditures – 8:20-9:20 a.m.
- Jacob Walter, Yeo & Yeo Senior Accountant, Dana L. Abrahams or Jeremy S. Motz, Clark Hill PLC, share insights on reviewing guidelines for allowable expenditures.
Year-End and Annual Reporting & Contractor vs. Employee Relationships – 9:40-10:40 a.m.
- Jennifer Watkins, CPA, Yeo & Yeo Principal, shares how to understand the basics of required year-end reporting, including processing Form 1099.
Frequently Found Audit Issues – 1:15-1:45 p.m.
- Jennifer Watkins, CPA, Yeo & Yeo Principal, joins Joselito Quintero and Gloria Jean Suggitt, MDE, to help you understand common audit findings, including compliance and internal controls issues.

Visit our booth!

Stop by Yeo & Yeo’s booth #401 and enter our prize drawing! Our K-12 Education Services Group members welcome the opportunity to hear about challenges your district may be facing and share helpful insights. Hope to see you there!

Register and learn more about the MSBO Conference sessions.

A strong board of directors provides financial guidance, develops long-term priorities, and appoints executives to run the operation. Ultimately, they work to ensure that the organization utilizes its resources appropriately. To accomplish these goals, directors must have the appropriate knowledge, skills, and abilities. While each director will bring their own set of strengths to the table, board members must understand their responsibilities and obligations.

Consider implementing consistent training efforts for board members to ensure that your board has the knowledge required to guide the organization toward its mission. Providing training for board members allows them to:

Start on the same page – Providing board orientation training allows you to set expectations and explain responsibilities. When board members know what to expect and what is expected of them at the outset, you’ll have more success getting what you need from an actively engaged board.
Make better-educated decisions – Most nonprofit board members are volunteers from the community who join the board to make a difference. Although they have good intentions, they may not have the fundamental knowledge to make educated decisions on finances or policies. Training board members equips them with the tools to make decisions that positively impact your organization.
Protect the organization – Nonprofits are held to a high standard of government regulation. As public charities, they are exempt from federal corporate taxes and may have access to public funding. Training your board on compliance requirements, like filing Form 990, protects the organization’s public charity status and keeps it running as intended.
Stay on top of industry changes – Rules and regulations are continually changing. Training helps keep board members up to date on shifts in legislation that can impact how your organization operates.
Understand policies and procedures – Policies provide guidance and protect the organization from legal challenges, ensure compliance with regulations and funding agencies, and set the tone for ethical and transparent conduct by employees. The policies you have in place will be effective only if the board is trained on their significance.

Members of your community agree to become board members because they believe in the organization’s mission and want to make a difference. It’s up to you to supply them with the information and training they need to understand their responsibilities, make informed decisions, and succeed in their roles.

Enhance your board’s impact – register for Yeo & Yeo’s free Nonprofit Board Training!

Gain the knowledge and tools to make informed decisions, ensure compliance, and drive your organization’s mission forward.

President Trump’s “Liberation Day” announcement of global tariffs caught businesses, as well as foreign countries and worldwide financial markets, off guard. While the president has long endorsed the imposition of tariffs, many businesses expected him to take a targeted approach. Instead, Trump rolled out a baseline tariff on all imports to the United States and higher tariffs on certain countries, including some of the largest U.S. trading partners. (On April 9, Trump announced a 90-day pause on some reciprocal tariffs, with a 10% baseline tariff remaining in effect for most countries and a 145% tariff on imports from China.)

The tariff plan sent businesses, both large and small, scrambling. Even companies accustomed to dealing with tariffs have been shaken because this round is so much more extensive and seemingly subject to change than those in the past.

Proponents of tariffs say they can be used as a negotiating tool to get other countries to lower their tariffs on U.S. imports, thereby leveling the global trade playing field. They also argue that if foreign companies relocate to the United States, it’ll create jobs for Americans, fuel construction industry growth and provide additional tax revenue.

Since more changes are expected as countries and industries negotiate with the administration for reduced rates and exemptions, some degree of uncertainty is likely to prevail for at least the short term. In the meantime, businesses have several areas they should focus on to reduce the tariff hit to their bottom lines.

1. Financial forecasting

No business should decide how to address tariff repercussions until they’ve conducted a comprehensive financial analysis to understand how U.S. and retaliatory tariffs will affect costs. You might find, for example, that your business needs to postpone impending plans for capital asset purchases or expansion.

Modeling, or scenario planning, is often helpful during unpredictable periods. Begin by identifying all the countries involved in your supply chain, whether you deal with them directly or through your suppliers, and the applicable tariffs, whether you’re importing or exporting goods.

You can then develop a model that projects how different sourcing scenarios might play out. The model should compare not only the costs of foreign vs. domestic options but also the resulting impact on your pricing, labor costs, cash flow and, ultimately, profitability. This information can allow you to build contingency plans to help reduce the odds of being caught flat-footed as new developments unfurl.

Modeling can provide valuable guidance if you’re considering reshoring your operations. Of course, reshoring isn’t a small endeavor. Moreover, U.S. infrastructure may not be adequate for your business needs.

Manufacturers also should note the shortage of domestic manufacturing workers. According to pre-tariff analysis from the National Association of Manufacturers, the U.S. manufacturing industry could require some 3.8 million jobs by 2033, and more than 1.9 million may go unfilled.

2. Pricing

Perhaps the most obvious tactic for companies incurring higher costs due to tariffs is to pass the increases along to their customers. It’s not that simple, though.

Before you raise your prices, you must take into account factors such as your competitors’ pricing and how higher prices might affect demand. The latter is especially critical for price-sensitive consumer goods where even a small price jump could undermine demand.

Consumers have already been cutting back on spending based on rising fears of inflation and a possible recession. Price increases, therefore, are better thought of as a single component in a more balanced approach.

3. Foreign Trade Zones

You may be able to take advantage of Foreign Trade Zones (FTZs) to minimize your tariff exposure. In these designated areas near U.S. ports of entry, a company can move goods in and out of the country for operations (including assembly, manufacturing and processing) but pay reduced or no tariffs.

Tariffs are paid when the goods are transferred from an FTZ into the United States for consumption. While in the zone, though, goods aren’t subject to tariffs. And, if the goods are exported, no tariff applies.

Note: Trump already has narrowed some of the potential benefits of FTZs, so avoid making them a cornerstone of your tariff strategy.

4. Internal operations

If your company’s suppliers are in high-tariff countries, you can look into switching to lower-cost suppliers in countries that have negotiated lower tariffs.

You may not be able to escape higher costs stemming from tariffs, but you can take steps to cut other costs by streamlining operations. For example, you could invest in technologies to improve efficiency or trim worker hours and employee benefits. You also should try to renegotiate contracts with suppliers and vendors, even if those relationships aren’t affected by tariffs. Such measures might make it less necessary to hike your prices.

You can control your overall costs as well by breaking down departmental silos so the logistics or procurement department isn’t making tariff-related decisions without input from others. Your finance and tax departments need to weigh in to achieve the optimal cost structures.

5. Tax planning

Maximizing your federal and state tax credits is paramount in financially challenging times. Technology investments, for example, may qualify for Section 179 expensing and bonus depreciation (which may return to 100% in the first year under the upcoming tax package being negotiated in Congress). Certain sectors may benefit from the Sec. 45X Advanced Manufacturing Production Credit or the Sec. 48D Advanced Manufacturing Investment Credit. Several states also offer tax credits for job creation, among other tax incentives.

This may be a wise time to consider changing your inventory accounting method, if possible. The last-in, first-out (LIFO) method assumes that you use your most recently purchased materials first. The cost of the newer, pricier items is charged first to the cost of goods sold, boosting it and cutting both your income and taxes. Bear in mind, though, that LIFO isn’t permitted under the International Financial Reporting Standards and is more burdensome than the first-in, first-out method.

6. Compliance

Regardless of the exact percentages of U.S. and retaliatory tariffs, you can count on tighter scrutiny of your compliance with the associated rules and requirements. These probably will become more complicated than they’ve been in the past.

For example, expect greater documentation requirements and shifting rules for identifying an item’s country of origin. The higher compliance burden alone will ramp up your costs — but the costs of noncompliance could be far greater.

Stay vigilant

The tariff landscape is rapidly evolving. You need to monitor the actions by the Trump administration, the responses of other countries and how they affect your business operations. You may have to pivot as needed to keep costs low (by reshoring or switching to suppliers in low-tariff countries). If you don’t have the requisite financial expertise on staff to keep up with it all, we can help. Contact us today about how to plan ahead — and stay ahead of the changes.

A well-rounded benefits package is an imperative for most employers. Although health insurance and retirement plans are the mainstays, many other fringe benefits are available for consideration. For example, dependent care Flexible Spending Accounts (FSAs) are among the most popular for organizations that employ workers who also happen to be parents, caregivers or both.

Purpose and features

Sponsoring dependent care FSAs begins with implementing a dependent care assistance program (DCAP). Under this program, an employer sponsors — and retains ownership of — FSAs for employees to pay for eligible expenses that generally include:

Daycare,
Before- and after-school care,
Summer day camps, and
Care for dependent adults who can’t care for themselves.

Any qualifying expense must enable a participant (and, if applicable, a spouse) to work or seek employment.

DCAP participation is voluntary. Employees need to opt in, typically during the employer’s open enrollment period or after experiencing a qualifying life event. Once they do, participants make pretax compensation deferrals to their accounts, up to $5,000 annually per household or $2,500 for those married but filing separately. (These amounts aren’t indexed for inflation.)

Important: Because dependent care FSAs are employer owned, they aren’t “portable” if employees leave their jobs. Moreover, under the “use it or lose it” rule, account balances don’t roll over from year to year. Unused account funds generally revert to the employer at year end. (IRS rules govern such forfeitures. Contact us for a detailed explanation.)

Mutual advantages

For employers, sponsoring dependent care FSAs offers several potential advantages. First, like any desirable fringe benefit, these accounts can help attract strong job candidates and retain employees — especially working mothers and fathers, as well as those caring for adult dependents such as elderly parents or others.

Second, because participants’ contributions occur pretax, they’re exempt from Social Security and Medicare taxes. That reduces the payroll tax burden for the employer and the employees. To increase participation, you may make contributions to employees’ accounts. However, the $5,000/$2,500 contribution limit still applies to combined employer-employee contributions. Also, you can’t deduct contributions as a business expense.

Of course, dependent care FSAs also offer significant advantages for eligible employees. Using pretax dollars to fund their accounts allows them to pay for qualifying care while reducing their taxable incomes. Additionally, learning how to operate their FSAs enables participants to more mindfully manage dependent care expenses, making them more informed consumers.

Responsibilities and risks

Sponsoring dependent care FSAs for employees who want them does come with considerable administrative and compliance responsibilities.

You’ll need to ensure that your DCAP complies with IRS regulations. These include nondiscrimination rules that prevent benefits provided under the program from disproportionately favoring highly compensated employees over non-highly compensated ones. Failure to comply can jeopardize the program’s tax-advantaged status.

In addition, proper recordkeeping, timely reimbursements and clear communication are critical. Regarding that last point, educating and reminding participants about the “use it or lose it” rule is particularly important. Many novice dependent care FSA users can be frustrated, if not completely demoralized, by losing their account balances at year end. Training participants on how to estimate expenses and submit claims can promote mindful and fulfilling account usage.

Perhaps the greatest risk, however, is investing time and resources into designing a DCAP and launching FSAs — only to find minimal employee interest. So, use a benefits survey and other feedback methods to ensure the effort will be worthwhile.

Intriguing strategy

For many employers — especially those with relatively stable full-time workforces — dependent care FSAs can serve as a practical, valued feature of their benefits packages. If you’re considering implementing a DCAP that offers FSAs, or another type of DCAP, we’re here to help. Let us assist you and your leadership team in assessing the strategy and learning more about a program’s setup, administration and tax impact.

Small to midsize businesses have valid reasons for incorporating, not the least of which is putting that cool “Inc.” at the end of their names. Other reasons include separating owners’ personal assets from their business liabilities and offering stock options as an employee incentive.

If you’re considering incorporation for your company, however, it’s essential to be aware of the associated risks. One of them is the reasonable compensation conundrum.

How much is too much?

Let’s say you decide to convert your business to a C corporation. After completing the incorporation process, you can pay owners, executives and other highly compensated employees some combination of compensation and dividends.

More than likely, you’ll want to pay your highly compensated employees more in compensation and less in dividends because compensation is tax deductible and dividends aren’t. But be careful — the IRS may be watching. If it believes you’re excessively compensating a highly compensated employee for tax avoidance purposes, it may challenge your compensation approach.

Such challenges typically begin with an audit and may result in the IRS being allowed to reclassify compensation as dividends — with penalties and interest potentially tacked on. What’s worse, if the tax agency succeeds with its challenge, the difference between what you paid a highly compensated employee and what the tax agency considers a reasonable amount for the services rendered usually isn’t deductible.

Of course, you can contest an IRS challenge. However, doing so usually involves considerable legal expenses and time — and a positive outcome is far from guaranteed.

Note: S corporations are a different story. Under this entity type, income and losses usually “pass through” to business owners at the individual level and aren’t subject to payroll tax. Thus, S corporation owners usually prefer to receive distributions. As a result, the IRS may raise a reasonable compensation challenge when it believes a company’s owners receive too little salary.

What are the factors?

There’s no definitive bright-line test for determining reasonable compensation. However, over the years, courts have considered various factors, including:

The nature, extent and scope of an employee’s work,
The employee’s qualifications and experience,
The size and complexity of the business,
A comparison of salaries paid to the sales, gross income and net worth of the business,
General economic conditions,
The company’s financial status,
The business’s salary policy for all employees,
Salaries of similar positions at comparable companies, and
Historical compensation of the position.

It’s also important to assess whether the business and employee are dealing at an “arm’s length,” and whether the employee has guaranteed the company’s debts.

Can you give me an example?

Just a few years ago, a case played out in the U.S. Tax Court illustrating the risks of an IRS challenge regarding reasonable compensation.

The owner of a construction business structured as a C corporation led his company through tough times and turned it into a profitable enterprise. When the business recorded large profits in 2015 and 2016, primarily because of the owner’s personal efforts and contacts, it paid him a bonus of $5 million each year in addition to his six-figure salary. The IRS claimed this was excessive.

The Tax Court relied heavily on expert witnesses to make its determination. Ultimately, it decided against the business, finding that reasonable amounts for the bonuses were $1.36 million in 2015 and $3.68 million in 2016, respectively. (TC Memo 2022-15)

Who can help?

As your business grows, incorporation may help your company guard against certain risks and achieve a greater sense of stature. However, there are tax complexities to consider. If you’re thinking about it, please contact us for help identifying the advantages and risks from both tax and strategic perspectives.

Maintaining compliance with fiduciary responsibilities is a primary task for plan sponsors. Yet mistakes occur, especially given the complexity of the Employee Retirement Income Security Act (ERISA) of 1974. When certain fiduciary breaches or prohibited transactions are identified related to ERISA benefits, plan sponsors may look for remedies that can right the wrong. The Voluntary Fiduciary Correction Program (VFCP) provided by the Department of Labor (DOL) since 2006 is an option, but only for 19 specified prohibited transactions. A recent update to the VFCP, effective March 17, 2025, added a new self-correction component to the program. This article describes the VFCP and the update in its current form.

What is the Voluntary Fiduciary Correction Program?

The DOL offers this program to encourage fiduciaries to voluntarily fix losses suffered by employee benefit plans due to breaches of ERISA fiduciary duties. According to a DOL Fact Sheet, employers and plan sponsors that apply to the VFCP may benefit in several ways, including:

Avoiding potential DOL civil enforcement.
Gaining a better understanding of legal responsibilities.
Strengthening the security of employee benefits.

Any fiduciary under ERISA can apply to the VFCP, as long as they are not currently “under investigation” as defined by program guidelines. To participate in the original program, plan sponsors compile information and submit a completed application to the DOL. If the DOL agrees with the application, the DOL issues a “no action” letter confirming that the remediation is complete.

How Does the VFCP Update Affect a Fiduciary’s Voluntary Correction?

Among other improvements, the updated VFCP provides an additional opportunity for plan sponsors and other fiduciaries of ERISA-related benefit plans known as the “Self-Correction Component” (SCC). Under the SCC, rather than complete the longer process, plan sponsors and other fiduciaries can self-correct errors made in two types of transaction:

Delinquent Participant Contributions and Loan Repayments to Pension Plans (if lost earnings total $1,000 or less). This error occurs when an employer does not remit contributions or loan payments to the plan within the time allowed.
Eligible Inadvertent Participant Loan Failures. Under ERISA, retirements plans may allow participants to take loans from their retirement accounts. However, plan sponsors and employers must follow very specific rules while administering these loans. For example, plan sponsors are required to follow the retirement plan’s loan policy, repayment schedule, and permissible loan amount.

Instead of submitting a VFCP application, the self-corrector submits an SCC Notice to the DOL through its web tool. The DOL simply acknowledges receipt of the notice without commenting on it.

Several things to note:

The notification provided by the DOL during self-correction does not carry the same weight as the DOL’s “no action” letter. However, it does document the plan sponsor’s good faith effort to resolve the issue.
In order to use the SCC, plan sponsors must self-correct within 180 days from when the amounts were withheld. Thus, instead of reviewing remittances only after the end of the plan year (for example, during the annual Form 5500 plan audit), employers should implement a procedure to identify late deposits on a more regular basis — by payroll date, monthly, or quarterly. Otherwise, delinquent loan repayments and contributions may not be identified in time to qualify for the new self-correction program.
In order to obtain relief under the SCC, the plan sponsor must complete a SCC Record Retention Checklist and provide the completed checklist and the related documentation to the plan administrator (typically the employer sponsoring the plan), including the following:
- A brief statement explaining why the error occurred.
- Proof of payment for the correction, including lost earnings.
- Printable results page from the Online Calculator.
- A statement describing policies and procedures to prevent future issues.
- SCC Notice Acknowledgement and Summary page received after submission.
- Signed Penalty of Perjury Statement.

Regardless of the method used, prohibited transactions involving ERISA benefit plans must be corrected. It is also important to learn from the error and consider changing processes to help avoid the problem in the future.

Is Self-Correction through VFCP a Plan Sponsor’s Only Option?

Plan sponsors and employers who identify a mistake can correct it without applying for the VFCP or using the self-correction component. Generally, to correct a prohibited transaction, the employer would put everyone back in the position they would have been in had the error not occurred. This typically involves restoring amounts to the plan, plus lost earnings and paying an excise tax to the IRS using Form 5330. Taking those two steps will fully correct the prohibited transaction in the eyes of the IRS. However, even after taking those steps, the DOL could assert that the prohibited transaction was also a breach of ERISA fiduciary duty. To alleviate such exposure, employers may wish to participate in the VFCP.

It’s crucial that all fiduciaries managing employee benefit plans monitor the plan closely to ensure compliance and swiftly rectify errors that occur.

The Path Ahead

Clarification may be forthcoming, specifically regarding whether the SCC component applies to transactions that occurred before March 17, 2025, or only to transactions that occur after that date. On March 18, 2025, the DOL published a model Notice to Interested Parties that can be used for the SCC. Plan sponsors should determine which method of correction is most beneficial for their plan to ensure any errors are fully corrected in a timely manner.

Understanding your business’s financial health is essential for long-term success. QuickBooks® offers a powerful reporting tool suite that can provide critical insights to support decision-making and help you comply with accounting and tax rules.

Accrual-basis QuickBooks users should get in the habit of reviewing the following five reports monthly to keep their finances in check and be proactive instead of reactive when challenges arise. Note: Before running reports, confirm that QuickBooks is set to display accrual-basis (not cash-basis) results.

1. The profit and loss statement: Scoring your monthly performance

The profit and loss statement summarizes your business’s revenue and expenses over a given period. Also known as the income statement, it serves as a “scorecard” of whether your business is profitable and how income compares to spending.

This report can also highlight trends. Compare the current month to prior months or the same period last year to evaluate performance over time. Monthly reviews allow you to track whether revenue is increasing, expenses are under control and margins are healthy.

QuickBooks allows you to break down this report by business segment, location or class. A customized breakdown shows which parts of your business drive profitability — and those that may be underperforming.

2. The balance sheet: Taking a snapshot of financial health

The balance sheet shows your financial position at a specific point. It lists assets, liabilities and equity. This helps you understand what your business owns versus what it owes. Compare your current balance sheet with previous periods to identify any material changes. Reviewing this report monthly helps evaluate whether your business is:

Maintaining adequate working capital,
Investing in long-term assets, and
Managing debt responsibly.

It can also reveal imbalances — such as unpaid liabilities or aging inventory — that may need management’s attention. With QuickBooks, you can filter or group the report by class or department to gain deeper insights into how different parts of your business affect your overall financial standing.

3. Accounts receivable aging summary: Staying on top of customer payments

Unpaid invoices can severely impact cash flow. The accounts receivable aging summary categorizes outstanding customer balances by how long the invoices have been due. QuickBooks uses the due date fields from recorded invoices to group receivables into 30-, 60-, 90- and 90-plus-day buckets. Reviewing this report each month allows you to quickly identify which customers are behind on payments and how much is at risk. Timely follow-up on overdue invoices can significantly improve cash inflows and reduce bad debt write-offs.

QuickBooks users with multiple customer types or sales channels can customize this report by customer type, region or sales rep. This helps pinpoint trends in slow-paying clients or potential areas for process improvement in billing or collections.

4. Accounts payable aging summary: Managing cash outflows

The accounts payable aging summary shows outstanding bills and categorizes them based on the due date field in QuickBooks. This report helps ensure that bills are paid on time, avoiding late fees and protecting vendor relationships. Reviewing payables monthly also helps manage cash flow more strategically. For instance, you can defer some payments without penalty, while others may need to be prioritized to maintain supply chains or essential services.

QuickBooks users with complex supply chains can tailor this report to show spending by vendor category. This pinpoints where your money is going and whether there may be opportunities to consolidate or renegotiate terms.

5. Statement of cash flows: Following the money

The statement of cash flows tracks how cash moves in and out of your business. Cash flows are reported under the following categories:

Operating activities,
Investing activities, and
Financing activities.

A profitable business may still struggle to pay bills if its cash flow is weak. That’s why it’s so important to review this report regularly. It helps you understand whether your operations generate enough cash to sustain the business and whether large outflows, such as equipment purchases or debt repayments, are straining liquidity.

QuickBooks lets you view this report over time. For instance, viewing it on a month-by-month or rolling 12-month basis can reveal seasonal trends and help you anticipate upcoming cash needs. This is especially useful when making strategic plans for capital investments, hiring and financing.

Beyond standard reports: Customizing for deeper insights

While the standard versions of these five reports are helpful, tailoring them to your specific needs can yield even more valuable insights. With just a few clicks, you can filter reports by class, customer, vendor or location. You can also add or remove columns, sort data differently, or apply custom date ranges. These options make it easier to understand business unit performance.

To save time and ensure consistency in your review process, QuickBooks allows you to “memorize” customized reports and schedule them to be automatically generated and emailed to your management team each month. You can also use the management reports feature to bundle multiple reports into a branded, presentation-ready package. This can facilitate internal meetings and discussions with lenders or investors.

Small habits lead to big insights

Reviewing monthly financial reports doesn’t have to be overwhelming. After you make journal entries in QuickBooks, the software handles most of the legwork. However, if you’re unsure how to customize your reports or need help interpreting them, contact us. We can help you leverage QuickBooks to its fullest potential.

Fraud schemes are always evolving. Once frauds are widely publicized and consumers and businesses learn to spot common scams, enterprising criminals change their tactics. So even if you were able to recognize the red flags of fraud a couple of years ago, you may be vulnerable to new or tweaked scams in 2025. For the health of your business, it’s essential to stay on top of fraud developments.

1. From phone to text

Although the phone used to be fraudsters’ preferred device, perpetrators are now more likely to scam victims via email or text. According to credit bureau Experian, imposter scams (where a crook often pretends to be someone the victim already knows) perpetrated via phone calls have decreased, from 67% in 2020 to 32% in 2023, and migrated to emails and texts.

Your employees should be wary if they receive messages in their work or personal accounts about security alerts, renewal notices, invoices that require payment or available discounts. Even if they think they know the sender, they must verify messages before clicking any links. Instruct your workers to:

Hover over links to ensure URLs match the purported sites,
Check if links use an HTTPS encrypted protocol,
Copy and paste suspicious URLs into an app such as Google Safe Browsing or VirusTotal, or
Phone the supposed sender.

And, of course, make sure your IT network’s security software is up to date.

2. A growing threat

You may remember several years ago when many Americans received unsolicited packets of seeds in the mail — purportedly from China. The U.S. Department of Agriculture eventually found that the “gifts” were part of a “brushing” scam that shady companies sometimes use to create fake customers and post higher ratings and sales numbers online.

Although the initial scam seems to have stopped, three states (Alabama, New Mexico and Texas) recently warned that their residents are again receiving mysterious seed packets. This time, authorities are warning about the risk of planting the seeds. Packets could contain weed and invasive species seeds that, if allowed to grow, might harm U.S. farming businesses and ecosystems. If you’re in the agricultural sector or live in an agricultural region and receive unsolicited seeds, promptly send unopened packets to your state agriculture agency.

3. Financial warnings

In a “Top 5 Fraud Trends of 2025” blog post, the Association of Certified Fraud Examiners (ACFE) warns about the acceleration of AI, cryptocurrency and digital fraud schemes in 2025. It claims increased losses from such schemes are likely to disproportionately hurt financial institutions, money service businesses and telecommunications companies as fraud victims look for “new places to point fingers.”

Fraud revenues usually pass through financial institutions or money service businesses, and perpetrators generally employ at least some form of electronic communication. The ACFE predicts that these industries “will likely face increased pressure from governments, regulators and victims,” including lawsuits. If you operate in these areas, review and shore up your organization’s defenses now to reduce threats.

Some tax sins are much worse than others. An example is failing to pay over federal income and employment taxes that have been withheld from employees’ paychecks. In this situation, the IRS can assess the trust fund recovery penalty, also called the 100% penalty, against any responsible person.

It’s called the 100% penalty because the entire unpaid federal income and payroll tax amounts can be assessed personally as a penalty against a responsible person, or several responsible persons.

Determining responsible person status

Since the 100% penalty can only be assessed against a so-called responsible person, who does that include? It could be a shareholder, director, officer or employee of a corporation; a partner or employee of a partnership; or a member (owner) or employee of an LLC. To be hit with the penalty, the individual must:

Be responsible for collecting, accounting for, and paying over withheld federal income and payroll taxes, and
Willfully fail to pay over those taxes.

Willful means intentional, deliberate, voluntary and knowing. The mere authority to sign checks when directed to do so by a person who is higher-up in a company doesn’t by itself establish responsible person status. There must also be knowledge of and control over the finances of the business. However, responsible person status can’t be deflected simply by assigning signature authority over bank accounts to another person in order to avoid exposure to the 100% penalty. As a practical matter, the IRS will look first and hard at individuals who have check-signing authority.

What courts examine

The courts have examined several factors beyond check-signing authority to determine responsible person status. These factors include whether the individual:

Is an officer or director,
Owns shares or possesses an entrepreneurial stake in the company,
Is active in the management of day-to-day affairs of the company,
Can hire and fire employees,
Makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, and
Exercises daily control over bank accounts and disbursement records.

Real-life cases

The individuals who have been targets of the 100% penalty are sometimes surprising. Here are three real-life situations:

Case 1: The operators of an inn failed to pay over withheld taxes. The inn was an asset of an estate. The executor of the estate was found to be a responsible person.

Case 2: A volunteer member of a charitable organization’s board of trustees had knowledge of the organization’s tax delinquency. The individual also had authority to decide whether to pay the taxes. The IRS determined that the volunteer was a responsible person.

Case 3: A corporation’s newly hired CFO became aware that the company was several years behind in paying withheld federal income and payroll taxes. The CFO notified the company’s CEO of the situation. Then, the new CFO and the CEO informed the company’s board of directors of the problem. Although the company apparently had sufficient funds to pay the taxes in question, no payments were made. After the CFO and CEO were both fired, the IRS assessed the 100% penalty against both of them for withheld but unpaid taxes that accrued during their tenures. A federal appeals court upheld an earlier district court ruling that the two officers were responsible persons who acted willfully by paying other expenses instead of the withheld federal taxes. Therefore, they were both personally liable for the 100% penalty.

Don’t be tagged

If you participate in running a business or any entity that hasn’t paid over federal taxes that were withheld from employee paychecks, you run the risk of the IRS tagging you as a responsible person and assessing the 100% penalty. If this happens, you may ultimately be able to prove that you weren’t a responsible person. But that can be an expensive process. Consult your tax advisor about what records you should be keeping and other steps you should be taking to avoid exposure to the 100% penalty.

April is Financial Literacy Month—a time to assess financial habits, set goals, and expand money management skills. From budgeting and investing to managing debt and planning ahead, strong financial knowledge empowers you to navigate challenges and seize opportunities.

No matter where you start, here are 10 strategies that can help you grow and secure your financial future:

Set Clear Financial Goals – Define short-term and long-term financial objectives, whether it’s buying a home, retiring early, or starting a business.
Create and Stick to a Budget – Track your income and expenses to ensure you’re saving and investing strategically.
Build an Emergency Fund – Having three to six months’ worth of expenses in savings can help you handle unexpected financial setbacks.
Invest Wisely – Diversify your investments to grow wealth over time while managing risk.
Minimize and Manage Debt – Focus on paying down high-interest debt first and avoid unnecessary borrowing.
Maximize Retirement Savings – Take advantage of employer-sponsored retirement plans or IRAs to build long-term financial security.
Develop Multiple Income Streams – Supplement your earnings through side businesses, investments, or passive income sources.
Prioritize Tax Planning – Work with a tax professional to maximize deductions and optimize your tax strategy.
Continuously Improve Financial Knowledge – Stay informed about market trends, investment opportunities, and personal finance strategies.
Seek Professional Guidance – Financial advisors, CPAs, and business consultants can provide insights tailored to your specific situation.

Take Charge of Your Financial Future

Financial literacy is a lifelong journey that requires continuous learning and smart decision-making. Whether you’re an individual looking to strengthen your personal finances or a business owner seeking sustainable growth, taking proactive steps toward financial well-being can lead to long-term success.

At Yeo & Yeo, we are committed to empowering individuals and businesses with the financial knowledge and strategies needed to build a stronger future. This Financial Literacy Month, take the time to evaluate your financial health and implement changes that will set you on the path to success.

For federal income tax purposes, the general rule is that rental real estate losses are passive activity losses (PALs). An individual taxpayer can generally deduct PALs only to the extent of passive income from other sources, if any. For example, if you have positive taxable income from other rental properties, that generally counts as passive income. You can use PALs to offset passive income from other sources, which amounts to being able to currently deduct them.

Unfortunately, many rental property owners have little or no passive income in most years. Excess rental real estate PALs for the year (PALs that you cannot currently deduct because you don’t have enough passive income) are suspended and carried forward to future years. You can deduct suspended PALs when you finally have enough passive income or when you sell the properties that generated the PALs.

Exception for professionals

Thankfully, there’s a big exception to the general rule that you must have positive passive income to currently deduct rental losses. If you qualify for the exception, a rental real estate loss can be classified as a non-passive loss that can usually be deducted currently.

This exception allows qualifying individual taxpayers to currently deduct rental losses even if they have no passive income. To be eligible for the real estate professional exception:

You must spend more than 750 hours during the year delivering personal services in real estate activities in which you materially participate, and
Those hours must be more than half the time you spend delivering personal services (in other words, working) during the year.

If you can clear these hurdles, you qualify as a real estate professional. The next step is determining if you have one or more rental properties in which you materially participate. If you do, losses from those properties are treated as non-passive losses that you can generally deduct in the current year. Here’s how to pass the three easiest material participation tests for a rental real estate activity:

Spend more than 500 hours on the activity during the year.
Spend more than 100 hours on the activity during the year and make sure no other individual spends more time than you.
Make sure the time you spend on the activity during the year constitutes substantially all the time spent by all individuals.

If you don’t qualify

Obviously, not everyone can pass the tests to be a real estate professional. Thankfully, some other exceptions may potentially allow you to treat rental real estate losses as currently deductible non-passive losses. These include the:

Small landlord exception. If you qualify for this exception, you can treat up to $25,000 of rental real estate loses as non-passive. You must own at least 10% of the property generating the loss and actively participate with respect to that property. Properties owned via limited partnerships don’t qualify for this exception. To pass the active participation test, you don’t need to do anything more than exercise management control over the property in question. This could include approving tenants and leases or authorizing maintenance and repairs. Be aware that this exception is phased out between adjusted gross incomes (AGIs) of $100,000 and $150,000.

Seven-day average rental period exception. When the average rental period for a property is seven days or less, the activity is treated as a business activity. If you can pass one of the material participation tests, losses from the activity are non-passive.

30-day average rental period exception. The activity is treated as a business activity when the average rental period for a property is 30 days or less and significant personal services are provided to customers by or on behalf of you as the property owner. If you can pass one of the material participation tests, losses from the activity are non-passive.

Utilize all tax breaks

As you can see, various taxpayer-friendly rules apply to owners of rental real estate, including the exceptions to the PAL rules covered here. We can help you take advantage of all available rental real estate tax breaks.

Financial statements tell a powerful story about your business. However, they can seem like an overwhelming collection of figures without proper analysis. Financial benchmarking studies can help you identify historical trends, pinpoint areas for improvement and forecast future performance with greater confidence.

Gauging profitability

Profitability ratios help evaluate how effectively a company generates profits from its revenue. These metrics are crucial in assessing operating performance and the effects of economic or industry forces. Examples of key profitability ratios are:

Gross margin. This ratio is the percentage of revenue remaining after deducting the cost of goods sold; it reflects how effectively a company controls direct costs, such as materials and labor.

Net profit margin. This shows how much of each dollar in revenue turns into net income after all expenses, including taxes and interest.

Earnings per share. Investors often use this metric, which assesses profitability on a per-share basis, to gauge a company’s operating performance.

Beyond these top-level indicators, a deeper dive into individual income statement line items can provide additional insights into financial performance and cost control. Key operating expenses to evaluate include rent, payroll, commissions, owners’ compensation, utilities and interest.

Optimizing resources

Liquidity refers to a company’s ability to meet short-term obligations. Commonly used liquidity ratios include:

Current ratio, or the ratio of current assets to current liabilities,
Quick ratio, which only considers cash and other assets that you can readily liquidate, such as accounts receivable,
Days in receivables outstanding, which estimates the average collection period for credit sales, and
Days in inventory, which estimates the average time it takes to sell a unit of inventory.

It’s also important to consider long-term assets, such as equipment, with the total asset turnover. This ratio tells how many dollars in revenue a company generates from each dollar invested in assets. It’s particularly relevant for capital-intensive businesses that invest heavily in equipment, property and other long-term assets. Striking the right balance between lean operations and maintaining enough working capital to meet customer demand and supplier expectations is critical to long-term success.

Balancing financial leverage

Debt can be a powerful tool for growth, but excessive amounts can expose a company to financial distress. Debt management ratios help businesses assess their ability to handle existing obligations and determine whether they can responsibly borrow more money. Some short-term leverage metrics include:

Times interest earned. This ratio evaluates a company’s ability to cover its interest payments with earnings before interest and taxes.

Debt service coverage. This metric compares available cash flow to total debt obligations, providing a broader picture of a company’s repayment capacity than the times interest earned ratio.

For long-term stability, companies must also monitor the debt-to-equity ratio, which reflects how much of their assets are financed through long-term debt versus shareholder equity. Businesses seeking financing must carefully analyze these metrics to understand how lenders might perceive their financial health.

Putting ratios in context

Comparing current results to historical performance can reveal whether a company is improving or facing new financial challenges. Benchmarking against industry averages provides a broader perspective, helping business owners understand how they measure up to competitors. Similarly, comparing financial ratios to peer businesses of similar size and structure can highlight potential inefficiencies and competitive advantages.

To make the most of financial benchmarks, consider creating a financial scorecard based on year-end financials and updating it regularly using preliminary numbers. This approach provides a proactive way to track financial performance throughout the year, make informed decisions and address minor issues before they become major problems.

Maximizing your business’s potential

Many business owners and managers struggle to extract meaningful insights from their balance sheets, income statements and cash flow reports. However, interpreting financial data doesn’t have to be overwhelming. Contact us to explore the right metrics for your business and discover how you can transform raw data into a strategic roadmap for success.

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.

With the federal gift and estate tax exemption amount set at $13.99 million for 2025, most people won’t be liable for these taxes. However, capital gains tax on inherited assets may cause an unwelcome tax bite.

The good news is that the stepped-up basis rules can significantly reduce capital gains tax for family members who inherit your assets. Under these rules, when your loved one inherits an asset, the asset’s tax basis is adjusted to the fair market value at the time of your death. If the heir later sells the asset, he or she will owe capital gains tax only on the appreciation after the date of death rather than on the entire gain from when you acquired it.

Primer on capital gains tax

When assets such as securities are sold, any resulting gain generally is a taxable capital gain. The gain is taxed at favorable rates if the assets have been owned for longer than one year. The maximum tax rate on a long-term capital gain is 15% but increases to 20% for certain high-income individuals.

Conversely, a short-term capital gain is taxed at ordinary income tax rates as high as 37%. Gains and losses are accounted for when filing a tax return, so high-taxed gains may be offset wholly or partially by losses.

The amount of a taxable gain is equal to the difference between the basis of the asset and the sale price. For example, if you acquire stock for $10,000 and then sell it for $50,000, your taxable capital gain is $40,000.

These basic rules apply to capital assets owned by an individual and sold during his or her lifetime. However, a different set of rules applies to inherited assets.

How stepped-up basis works

When assets are passed on through inheritance, there’s no income tax liability until the assets are sold. For these purposes, the basis for calculating gain is “stepped up” to the value of the assets on the date of your death. Thus, only the appreciation in value since your death is subject to tax because the individual inherited the assets. The appreciation during your lifetime goes untaxed.

Securities, artwork, bank accounts, business interests, investment accounts, real estate and personal property are among the assets affected by the stepped-up basis rules. However, these rules don’t apply to retirement assets such as 401(k) plans or IRAs.

To illustrate the benefits, let’s look at a simplified example. Dan bought XYZ Corp. stock 10 years ago for $100,000. In his will, he leaves all the XYZ stock to his daughter, Alice. When Dan dies, the stock is worth $500,000. Alice’s basis is stepped up to $500,000.

When Alice sells the stock two years later, it’s worth $700,000. She must pay the maximum 20% rate on her long-term capital gain. On these facts, Alice has a $200,000 gain. With the 20% capital gains rate, she owes $40,000. Without the stepped-up basis, her tax on the $600,000 gain would be $120,000.

What happens if an asset declines in value after the deceased acquired it? The adjusted basis of the asset the individual inherits is still the value on the date of death. This could result in a taxable gain on a subsequent sale if the value rebounds after death, or a loss if the asset’s value continues to decline.

Turn to us for help

Without the stepped-up basis rules, your beneficiaries could face much higher capital gains taxes when they sell their inherited assets. If you have questions regarding these rules, please contact us.