Tax Filing Update for Pass-Through Entities

Do you operate a business as a partnership, a limited liability company (LLC) treated as a partnership for tax purposes or an S corporation? In tax lingo, these are called “pass-through” entities because their taxable income items, tax deductions and tax credits are passed through to their owners and taken into account on the owners’ federal income tax returns. These entities generally don’t owe any federal income tax themselves. Here are some important things to know about tax filing for pass-through entities.

March 16 deadline

Even though pass-through entities generally don’t owe federal income tax at the entity level, they still must file a federal income tax return. Partnerships and LLCs treated as partnerships for tax purposes file Form 1065, “U.S. Return of Partnership Income.” S corporations file Form 1120-S, “U.S. Income Tax Return for an S Corporation.”

If your pass-through entity uses the calendar year for tax purposes, as most do, the deadline for filing the federal income tax return for its 2025 tax year is March 16, 2026 (because March 15 falls on a Sunday).

The March 16 deadline can be extended by six months to September 15, 2026, by filing IRS Form 7004, “Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns,” by March 16.

Keep in mind that if you file an extension for the pass-through entity’s return, you (and any other owners) will also likely also need to file extensions to October 15, 2026, for your individual 2025 return.

Schedules K-1

For each tax year, pass-through entities must send out Schedules K-1 to their owners. These forms report each owner’s share of the entity’s tax items. Schedules K-1 can be sent to owners electronically. And they must be included with the entity’s federal income tax return for the year.

Because pass-through entity owners rely on Schedules K-1 to prepare their returns, it’s desirable to get them out as early as possible. However, if an entity’s 2025 return filing deadline is extended to September 15, 2026, that also becomes the deadline for providing Schedules K-1 to the owners.

3 tax law changes to note

The One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025, included several tax changes that will affect 2025 returns of pass-through entities. Here are three of the most important:

1. First-year depreciation. The OBBBA permanently restored 100% first-year depreciation for eligible assets acquired and placed in service after January 19, 2025. Before the OBBBA, 100% bonus depreciation was last allowed for eligible assets placed in service in 2022.

For eligible assets placed in service in tax years beginning in 2025, the OBBBA increased the maximum amount that can be immediately deducted via the first-year Section 179 expensing election to $2.5 million (up from $1.25 million before the OBBBA). The deduction begins to phase out dollar for dollar when asset acquisitions for 2025 exceed $4 million (up from $3.13 million before the OBBBA).

The OBBBA also established 100% first-year depreciation for nonresidential real estate that’s classified as qualified production property. That basically means factory buildings.

2. R&E expenditures. The OBBBA allows businesses to immediately deduct eligible domestic research and experimental (R&E) expenditures that are paid or incurred in tax years beginning in 2025 and beyond. Before the OBBBA, these expenditures had to be amortized over five years.

Eligible small businesses can elect to apply the new immediate deduction rule retroactively to pre-2025 tax years beginning in 2022, 2023 or 2024. Also, all taxpayers that made R&E expenditures in tax years beginning in 2022 through 2024 can elect to write off the remaining unamortized amount of their R&E expenditures over a one-year or two-year period starting with the tax year beginning in 2025.

3. Business interest expense deductions. For tax years beginning in 2025 and beyond, the OBBBA permanently installed more favorable rules for determining how much business interest expense can be currently deducted. While most small and midsize businesses are exempt from the business interest expense deduction limitation rules, check with us regarding the status of your pass-through entity.

Time to get rolling

The filing deadline for the 2025 federal income tax returns of most pass-through entities is looming. While the deadline can be extended by six months, you must take action by March 16, at minimum, to file for an extension. Contact us to get things rolling.

Do your company’s 2026 strategic plans include a business acquisition? Whether you already have your eye on a target or are still weighing options, plan now for extensive financial due diligence. To help ensure a successful transaction, it’s critical to review a seller’s statements and other records for signs of owner or employee fraud.

Subtle warning signs

Forensic accountants can add significant value during mergers and acquisitions (M&A) due diligence. Fraud professionals generally scour financial statements for subtle warning signs, including:

Excess inventory,
Significant write-offs of inventory, accounts receivable or other assets,
An unusually high number of voided transactions or excessive returns,
Insufficient documentation of sales,
Increased purchases from new vendors, and
Progressively higher accounts payable and receivable combined with dropping or stagnant revenues and income.

Suspicious revenue, cash flow and expense patterns, as well as unreasonable-seeming growth projections, warrant further investigation.

Note: Although findings such as these can prove to be the tip of the fraud iceberg, they might also indicate unintentional errors. Some small businesses may lack the internal financial expertise to prepare reliable statements and may not engage external auditors to review them. But whether financial irregularities are accidental or intentional, you’ll want to know exactly what you’re getting into.

Insider activity

To determine whether unusual income figures indicate systematic manipulation, forensic professionals usually consider whether insiders had the opportunity to commit fraud — for example, if the business has failed to implement and enforce solid internal controls. Regulatory disapproval, customer complaints and suspicious supplier relationships can also raise red flags. If warranted, an expert may perform background checks on a target company’s principals.

It’s important to know that some sellers adopt legitimate accounting practices to present a selling business in the best possible light. However, if your forensic accountant finds misrepresentations — especially by executives — you’ll probably want to rethink your acquisition offer. In less serious cases, you may need to make purchase price adjustments or change the deal’s structure. In severe cases, you may need to walk away.

One way to protect your transaction, even if a seller successfully hides financial manipulation and other illegal activities, is to include an indemnification clause in your purchase agreement. Your M&A advisors may have to negotiate with the seller over liability limits and other details, such as the definition of “fraud.” But such clauses can help you manage acquisition risk.

Professional expertise

M&As are transactions you never want to attempt without the guidance and expertise of professional advisors. Effective deal teams typically include investment bankers or brokers, attorneys and accountants with various specialties. To avoid M&A fraud, make sure you include a forensic accountant on your team.

The balance sheet shows your company’s financial condition — its assets vs. liabilities — at a specific point in time. However, the balance sheet is more than a static report. It can also serve as a diagnostic tool for managers and other stakeholders to analyze historical performance and plan for future growth. Taking your balance sheet to the next level requires context, judgment and forward-looking analysis.

Look beyond what’s reported

Under U.S. Generally Accepted Accounting Principles (GAAP), not everything that creates value or risk for a business appears on the balance sheet. For example, internally generated intangible assets (such as brands, proprietary processes or customer relationships) are often critical to business operations. But they’re generally excluded on a GAAP-basis balance sheet unless acquired from third parties.

Likewise, accounting for potential obligations — such as pending litigation, governmental investigations and other contingent losses — depends on the circumstances. These “contingencies” may be reported on the balance sheet as an accrued liability, disclosed in the footnotes or omitted from the financial statements, depending on how they’re classified under GAAP. Accounting Standards Codification (ASC) Topic 450, Contingencies, requires companies to classify contingent losses as “probable” (likely to occur), “remote” (chances that a loss will occur are slight), or “reasonably possible” (falling somewhere between remote and probable). These determinations rely heavily on professional judgment.

Identify what matters most

Once you understand the limitations of reported numbers, the next step is determining which balance sheet items matter most to your business model. A “common-sized” balance sheet — where each line item is expressed as a percentage of total assets — can help highlight concentrations and priorities.

Items with the largest percentages often warrant the most attention, both from an operational and risk perspective. For example, inventory may dominate a retailer’s balance sheet, while accounts receivable may be more critical for professional services firms.

Use ratios to assess strength

Ratios compare line items on your company’s financial statements. They may be grouped into four categories: 1) profitability, 2) liquidity, 3) asset management and 4) leverage. While profitability ratios focus on the income statement, the others compare items on the balance sheet. Common examples include:

The current ratio (current assets ÷ current liabilities), a short-term liquidity measure that helps assess whether your company has enough current assets to meet current obligations,
The days-in-receivables ratio (accounts receivable ÷ annual sales × 365), which measures collection efficiency, and
The debt-to-equity ratio (interest-bearing debt ÷ equity), which reflects the use of debt vs. equity to finance growth.

Tracking these ratios over time — and against industry benchmarks — can reveal emerging issues before they become problems.

Set goals and forecast the impact

After identifying key metrics, establish realistic targets based on your strategy and risk tolerance. For instance, you may aim to increase cash reserves, improve liquidity or reduce your debt-to-equity ratio.

Importantly, forecast how these changes will flow through the financial statements. Strengthening one area often constrains another — for example, building up cash reserves may limit debt reduction. Forecasting helps test whether goals are achievable and highlights trade-offs early in the process.

A clearer, stronger financial picture

Reinforcing your balance sheet isn’t just about increasing assets or reducing liabilities. It’s about understanding what’s missing, evaluating risk with informed judgment and proactively managing key drivers. With thoughtful analysis and planning, your balance sheet can become a powerful tool for resilience. Contact us to learn more.

Earned wage access (EWA) has been getting increased attention in recent months. In December 2025, for example, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion on how employer-sponsored EWA programs should be treated under federal lending law. As adoption grows and regulatory guidance evolves, many employers are assessing the potential role of this benefit in their payroll strategies.

Many names, same concept

EWA goes by several other names — including early pay, same-day pay, instant pay and daily pay. Whatever its moniker, the perk allows employees to access some or all earned but unpaid wages before their next payday. Participants can usually receive the funds within one to three business days, free of charge, or sooner if they pay a fee. Funds can be disbursed as a direct deposit to the worker’s bank account, a prepaid card or a digital wallet.

Although employees may engage an EWA provider directly, employer-sponsored programs are becoming more common. Under this model, an employer usually contracts with a third-party provider to fund early payroll disbursements based on time and attendance records. Because the provider typically funds the early payments, these arrangements usually don’t significantly affect the employer’s cash flow and may require minimal changes to payroll operations. Generally, providers are repaid through deductions from participants’ paychecks, but some also charge fees for setup, integration, maintenance or transactions.

Demand for EWA has been driven in part by the fact that many workers are paid weekly, biweekly or semi-monthly. The delay between payments can create a cash crunch for some employees, who may turn to payday loans, credit cards, cash advances, bank overdrafts or other costly options for relief.

Advantages for both parties

The benefits of EWA for employees are fairly obvious. EWA can help them manage short-term liquidity needs and reduce reliance on high-cost alternatives. And it doesn’t involve a traditional credit check or meeting an income requirement. Even when instant-access fees apply, EWA is typically less expensive than a payday loan. Perhaps best of all, participants don’t have to worry about collection agencies, high interest rates or damage to their credit scores.

The advantages for employers might not be as apparent, but they can be significant. For starters, personal financial troubles are a leading cause of stress for workers. These worries often undermine performance, causing distraction and lowering productivity. They may even drive employees to look for new jobs. In short, employees’ financial concerns affect your organization. EWA can help alleviate some of that stress.

Additionally, in today’s on-demand world, some workers now expect employers to offer EWA. And many applicants prioritize job offers that include it. So, offering EWA could give your organization a competitive hiring edge — especially with younger applicants who are accustomed to the concept.

Risks and practical considerations

Despite these potential benefits, EWA also presents risks that you must consider before rolling out a program. First, employees may hold unrealistic expectations about the benefit and grow disgruntled if it doesn’t solve their financial woes. To guard against this, you’ll need to design your program carefully and clearly communicate all its features and limitations. In other words, implementing and administering EWA will consume time and internal resources.

Second, if you partner with a third-party EWA provider and participants encounter problems, your organization will take the blame. It’s critical to carefully vet potential vendors and choose one you can trust and work with comfortably. Also, as mentioned, some providers charge various fees for their services. Before entering into an agreement, identify all the costs involved and project their impact on cash flow and operations.

In the news

As mentioned, EWA made the news recently when the CFPB published its advisory opinion in the Federal Register on December 23, 2025. Essentially, the agency stated that certain EWA products offered through “employer-partnered” arrangements aren’t loans under the Truth in Lending Act — provided they meet certain criteria. (Note: Advisory opinions aren’t statutes or regulations; state requirements may still apply.) The bureau also formally rescinded a July 2024 proposed rule that would have subjected most EWA payments to federal lending law.

“The U.S. EWA market is set to expand by about 300% between 2024 and 2034,” the agency stated in the opinion, citing a November report from research firm Market.us. Indeed, this benefit is expected to become an increasingly popular employer payroll tool. If you decide to implement a program, consult a qualified attorney to ensure it complies with applicable federal and state laws.

Workforce investment

EWA can be a meaningful benefit for employees — and potentially a strategic advantage for your organization. However, before rolling out a program, evaluate whether and how it would integrate with your existing payroll structure, identify the total and true costs, and carefully vet prospective providers. We can help you assess EWA and other workforce investments to ensure they align with your budget, operations and strategic objectives.

The Qualified Opportunity Zone (QOZ) program, created by the Tax Cuts and Jobs Act, was slated to expire after 2026. The One Big Beautiful Bill Act (OBBBA), however, extends and expands it.

The QOZ program incentivizes business investment in designated low-income communities around the country. Manufacturers that are considering re-shoring operations to the United States or building new facilities may find it easier to attract funding if they locate in a QOZ, especially one in a rural area.

QOZ program overview

The QOZ program generally allows taxpayers to defer eligible short- or long-term capital gains on sales of their investments by reinvesting those gains in a qualified opportunity fund (QOF) within 180 days. The main requirement to be a QOF is that the fund must maintain at least 90% of its assets in QOZ property. This includes investments in QOZ businesses, as well as new or substantially improved commercial buildings and equipment in a QOZ.

A manufacturer that’s set up as a corporation or partnership generally can become a QOZ business — and in turn qualify for QOF funding — if:

At least 50% of its gross income comes from business activities within a QOZ,
At least 70% of the tangible property it owns or leases is QOZ business property used in the business,
At least 40% of its intangible property is used for business activities within a QOZ, and
Less than 5% of the average unadjusted bases of its property is attributable to nonqualified financial property.

QOF investors receive an equity interest in the fund, plus valuable tax perks. For example, under the original program, capital gains tax on the “rolled over” gains from the investment the investor sold are deferred until the earlier of 1) the sale or exchange of the taxpayer’s QOF investment, or 2) December 31, 2026. After five years, the taxpayer receives a 10% step-up in tax basis, so only 90% of the rollover gain is taxable. After seven years, the step-up in tax basis increases to 15%. If a QOF investment is held for at least 10 years, gains attributable to appreciation of the QOF investment itself are fully excludable.

OBBBA changes

The OBBBA establishes a permanent QOZ program that features rolling 10-year QOZs that will first be available for investment on January 1, 2027. It also amends certain tax advantages.

Rollover gains can still be deferred temporarily, and taxpayers will continue to receive the 10% step-up in tax basis on the fifth year of the QOF investment. They must recognize the gain at that point, though, and no additional step-up is triggered after seven years. The permanent exclusion of gains attributable to appreciation of the QOF investment itself if the QOF is held for at least 10 years remains intact. It’s available for up to 30 years after investment in the QOF.

Notably, the OBBBA also creates a new type of QOF, the qualified rural opportunity fund (QROF). Similar to a standard QOF, it must invest at least 90% in a rural QOZ. But it offers more generous tax benefits. Specifically, after five years, investors will receive a 30% step-up in tax basis on their rollover gain, rather than just 10%.

New guidance

The IRS has released Notice 2025-50, which addresses two critical aspects of the new QROF program:

1. “Rural area” definition. It defines “rural area” as any area other than:

A city or town with a population greater than 50,000, and
Any urbanized area contiguous and adjacent to such a city or town.

The IRS reports that over 3,300 of the more than 8,700 existing QOZs in the United States are entirely rural areas.

2. Threshold for satisfying the “substantial improvements” requirement for existing buildings. For standard QOZs, existing buildings are considered substantially improved if, during any 30-month period after the property is acquired, investments in the building exceed 100% of its initial adjusted basis. For rural areas, though, these investments need only exceed 50% of the building’s initial adjusted basis.

More to come

Additional IRS guidance on QROFs is expected, but existing regulations already provide useful insights into standard QOFs. We can help you explore how the program could benefit your manufacturing company.

Your income statement indicates whether your business is profitable — but it doesn’t always explain why. For many small businesses, traditional cost accounting can mask where time and money are really being spent. Activity-based costing offers a practical way to understand the true cost of the work you perform, helping you make better decisions about pricing, profitability and operational efficiency.

How does activity-based costing work?

With activity-based costing, you assign costs to specific activities based on the resources they consume. Think of activities as the building blocks of your operations — such as setting up equipment, processing invoices, completing service calls or performing quality checks. Implementing activity-based costing generally involves four steps:

1. Identify activities. Create a list of tasks your company performs to deliver a product or service. Define each activity in such a way that there’s no overlap and everyone understands what’s included.

2. Allocate resources. For each activity, identify the resources used, such as materials, equipment time, labor hours and subcontracted services.

3. Calculate the per-unit cost of each resource. Choose a standard, measurable unit for each resource and calculate the cost per unit. For example, if a box of 100 screw anchors costs $30, the per-unit cost is 30 cents per anchor. For labor, the unit is typically an hourly wage or fully burdened labor rate.

4. Determine resource consumption and allocate indirect costs. Estimate how many units of each resource each activity consumes, then multiply by the per-unit cost. Indirect costs — such as rent, equipment leases, administrative salaries and software subscriptions — are allocated using reasonable cost drivers, such as square footage, machine hours or transaction volume, to arrive at the total cost of each activity.

What insights can activity-based costing provide?

Activity-based costing can provide meaningful insights into what’s working — and what’s not. For example, if a job or service line is consistently less profitable than expected, whether from excessive labor time, inefficient processes or underutilized equipment, it can help pinpoint where costs are accumulating. This approach can help management identify inefficiencies early and take corrective action before margins erode.

You may also uncover spending patterns that lead to better purchasing decisions and improved cost control. From a strategic standpoint, activity-based costing provides a clearer picture of which products, services and customers contribute most to profitability — and which may need to be repriced, redesigned or discontinued.

Estimating and pricing can also improve with activity-based costing. By breaking work into well-defined activities, businesses can build more accurate estimates and adjust them more easily when scope changes. Activities essentially become flexible line items that can be added, removed or refined as projects evolve.

Is it right for your business?

Activity-based costing is designed to supplement, not replace, your traditional accounting system. It works best for businesses with multiple offerings, significant overhead or processes with varying complexity. While the methodology can seem intimidating at first, modern accounting and project management software can significantly reduce your data burden. Contact us to discuss whether activity-based costing is a good fit for your business and how it can be implemented in a practical, scalable way based on your operations, goals and resources.

With 2025 in the rear view mirror and the tax filing deadline on the road ahead, it’s a good time for businesses to start gathering information about their deductible expenses for 2025. But what’s deductible (and what’s not) might not be as clear-cut as you think.

Most business deductions aren’t specifically listed in the Internal Revenue Code (IRC). The general rule is what’s stated in the first sentence of IRC Section 162, that you can write off “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” In addition, you must be able to substantiate the expenses.

Ordinary and necessary

In general, an expense is ordinary if it’s considered common or customary in the particular trade or business. For example, a landscaping company’s costs for fuel and routine maintenance on its lawn equipment would typically qualify as ordinary expenses because such costs are customary for that type of business.

A necessary expense is defined as one that’s helpful or appropriate. For instance, a retail store that invests in security cameras may be able to operate without them, but the expense is helpful for reducing theft and protecting employees and customers.

To be deductible, an expense must be both ordinary and necessary. An ordinary expense may be unnecessary because the amount isn’t reasonable in relation to the business purpose. For example, let’s say a construction business upgrades to premium, top-of-the-line tools when standard professional-grade tools already meet job requirements. Tool purchases are ordinary, but excessive upgrades may be unreasonable and, thus, unnecessary.

Cases in point

The IRS and courts don’t always agree with taxpayers about what qualifies as a deductible business expense. Often substantiation is the primary issue. Sometimes the question hinges not on the expense itself, but on whether the taxpayer was actually operating a trade or business.

For example, the U.S. Tax Court denied deductions claimed by an engineering firm owner for the value of his own time spent developing a program. Self-performed labor isn’t “paid or incurred,” the court noted. Therefore, it’s not deductible. The court disallowed other deductions due to insufficient records and lack of a clear business purpose.

In another case, a taxpayer engaged in real estate activities. His business expense deductions were denied by the Tax Court. The court ruled that the activities didn’t constitute an active trade or business. Instead, the real estate was held for investment purposes. In addition, the deductions weren’t substantiated because adequate records weren’t kept. The taxpayer appealed. The U.S. Court of Appeals for the Ninth Circuit agreed with the Tax Court. The court ruled the taxpayer “failed to provide sufficient evidence of his claimed deductions.”

What can you deduct for 2025?

Determining the deductibility of business expenses can be complicated, and proper substantiation is critical. We can help you determine what you can deduct on your 2025 tax return.

The IRS has increased the standard mileage rate for business use of cars, vans, and pickup or panel trucks by 2.5 cents for 2026. The rates for vehicle use for certain other purposes will decline or remain the same. (IR 2025-128, 12/29/2025)

The standard mileage rates provide an optional method that taxpayers can use to calculate the deductible costs of operating a vehicle for business, charitable, medical, and certain moving purposes. Taxpayers can also use the actual-costs method.

2026 Standard Mileage Rates

Beginning January 1, 2026, the standard mileage rates for the use of a car, van, or pickup or panel truck will be:

72.5 cents per mile driven for business use, up 2.5 cents from 2025.
20.5 cents per mile driven for medical purposes, down a half cent from 2025.
20.5 cents per mile driven for moving purposes for certain active-duty members of the Armed Forces (and now certain members of the intelligence community), reduced by a half cent from last year.
14 cents per mile driven in service of charitable organizations, equal to the rate in 2025.

Note. These rates apply to fully-electric and hybrid automobiles, as well as gasoline and diesel-powered vehicles.

Other Vehicle Deduction Amounts

The IRS has also provided other amounts that taxpayers will use to calculate their deductible vehicle expenses in specific circumstances in 2026.

Basis reduction amount: For taxpayers calculating their basis reduction for depreciation taken under the business standard mileage rate, the portion of the business standard mileage rate treated as depreciation is 35 cents per mile.

Maximum cost under FAVR plan: The maximum standard automobile cost for computing the allowance under a fixed and variable rate (FAVR) plan is $61,700 for automobiles (including trucks and vans).

Maximum value for employer-provided vehicles: For purposes of the fleet-average valuation rule and the vehicle cents-per-mile valuation rule, the maximum fair market value for employer-provided automobiles first made available to employees for personal use in 2026 is $61,700.

Miscellaneous Itemized Deductions Under OBBBA

The notice also reminds taxpayers that the One Big Beautiful Bill Act (OBBBA) permanently suspends all miscellaneous itemized deductions that are subject to the 2% of adjusted gross income floor, including unreimbursed employee travel expenses. As a result, the business standard mileage rate can’t be used to claim an itemized deduction for unreimbursed employee travel expenses.

However, certain educator expenses are excepted. In addition, deductions for expenses that are deductible in determining adjusted gross income are still permitted.

Does your business let regulars run tabs? Customers who maintain tabs in restaurants, bars and retail shops are often profitable, and it may be in your best interest to offer them credit. Yet unpaid balances, informal notes and missing records can quickly become unmanageable — and unprofitable. So it’s important to monitor customer credit, set limits and collect overdue amounts.

Smart business?

When customers can conveniently access credit from your business, they may spend more time and money at your establishment than they otherwise would. Nonetheless, the informal nature of tabs can make it hard to identify who’s overdue and how much they owe. Worse, some may disappear without settling their accounts.

To avoid confusion and potential financial losses, make your tab policy easy to understand with a simple statement posted prominently near your register and on any menus. For example, you might state: “We cap tabs at $250 and settle weekly.”

Also, decide who qualifies for the program. In most cases, a tab makes sense for regulars who visit often — and you should define “often” in your policy. Those individuals should be willing to provide proof of basic contact information, such as their full name, phone number and email address. You might also ask whether you can run a default debit or credit card to settle their tab if they don’t do so in person by your due date.

Advantages of one method

Track customers’ tabs using one method consistently. This could be as simple as a spreadsheet or as sophisticated as the latest point-of-sale system tools. Include such key data fields as the customer’s:

Name,
Contact information,
Tab start and due date,
Current balance,
Credit limit, and
Status, such as current, due or overdue.

Employees should update the tabs in your system after each shift, and you should review the top balances, tabs nearing their limit and overdue accounts weekly. Color-coding — with green indicating “under limit or current,” yellow indicating “near limit or due soon,” and red indicating “overdue or over limit” — can make management easier. Also consider starting small with new customer credit. As customers make on-time payments and give you more of their business, you might increase their limits.

Collecting overdue accounts

Staying on top of payment due dates is critical to running a tab program. For one to three days past due, text or call customers to confirm they know their balance and offer easy ways to pay. For seven to 10 days past due, text or call, clearly stating the amount owed and date due, and ask customers to settle within 24 hours. For accounts more than 14 days past due, contact customers and let them know you won’t extend additional credit until the balance is cleared.

If you have good reason to think a tab customer is a bad actor who has no intention of paying you, file a police report, notify your insurance company and talk to your tax advisor. You may be able to deduct the loss from your federal business tax return.

When collecting on past-due accounts, make it as easy as possible for customers by texting a link to an online payment system. Or, if you have a customer’s card on file, simply request approval to charge it. Just keep in mind that all communications to collect debt should take place via private messaging (such as email and text) and discreet face-to-face conversations. Don’t reveal the existence of outstanding balances to anyone beyond the customer and your employees.

Don’t get scammed

Running tabs doesn’t mean you have to risk being scammed. Establish a simple policy, track balances and follow a consistent collections process. And to ensure your program is fair and straightforward, apply the same terms to every customer. Following these simple steps will help you protect cash flow without alienating repeat customers.

A new year brings many new tax-related figures for businesses. Here’s an overview of key figures for 2026. Be aware that exceptions or additional rules or limits may apply.

Depreciation-related tax breaks

Bonus depreciation: 100%
Section 179 expensing limit: $2.56 million
Section 179 phaseout threshold: $4.09 million

Qualified retirement plan limits

401(k), 403(b) and 457 plan deferrals: $24,500
401(k), 403(b) and 457 plan catch-up contributions for those age 50 or older: $8,000
401(k), 403(b) and 457 plan additional catch-up contributions for those age 60, 61, 62 or 63: $3,250
SIMPLE deferrals: $17,000
SIMPLE catch-up contributions for those age 50 or older: $4,000
SIMPLE additional catch-up contributions for those age 60, 61, 62 or 63: $1,250
Contributions to defined contribution plans: $72,000
Annual benefit limit for defined benefit plans: $290,000
Compensation defining highly compensated employee: $160,000
Compensation defining key employee (officer) in a top-heavy plan: $235,000
Compensation triggering Simplified Employee Pension contribution requirement: $800

Other benefits limits

Health Savings Account (HSA) contributions: $4,400 for individuals, $8,750 for family coverage
Health Flexible Spending Account (FSA) contributions: $3,400
Health FSA rollover: $680
Child and dependent care FSA contributions: $7,500
Employer contributions to Trump account: $2,500
Monthly commuter highway vehicle and transit pass: $340
Monthly qualified parking: $340

Miscellaneous business-related limits

Income range over which the Section 199A qualified business income deduction limitations phase in: $201,750 – $276,750 (double those amounts for married couples filing jointly)
Threshold for the excess business loss limitation: $256,000 (double that amount for joint filers) — note that this is a reduction from 2025
Limitation on the use of the cash method of accounting: $32 million (also affects other tax items, such as the exemption from the 30% interest expense deduction limit)

Planning for 2026

We can help you factor these changes and others into your 2026 tax planning. Contact us to get started.

Strategic planning can feel overwhelming for business owners juggling sales goals, cash flow challenges, staffing needs and day-to-day operational issues. Although you may rely heavily on financial reports to make key decisions, numbers alone don’t always tell the full story. Introduced in the early 1990s, the balanced scorecard approach still offers a practical framework for translating vision into action that’s worth revisiting.

4 critical areas

The balanced scorecard approach was unveiled in a 1992 Harvard Business Review article entitled “The Balanced Scorecard — Measures That Drive Performance.” Essentially, it segments strategic planning into four critical areas:

Customers. Every business owner understands the importance of customer satisfaction. However, to truly understand and meet their needs, you must identify the right metrics. Just as critical is determining which customer segments your company is best equipped to serve. Under the balanced scorecard approach, you consider how your business can attract, retain and deepen relationships with customers that are most likely to support sustainable profitability.
Finance. Many companies rely on financial results as the sole indicator of overall stability and success. However, the results that show up in, say, your financial statements are typically lagging indicators; they reflect past events rather than future performance. To be clear, you should continue generating accurate financial statements. But the balanced scorecard approach encourages businesses to track metrics, such as sales growth and workforce efficiency, that reveal more timely financial outcomes.
Processes. To operate more productively and efficiently, business owners and their leadership teams must identify and solve process-related problems. Simply paying closer attention to a shortcoming isn’t enough. For example, measuring productivity won’t automatically increase it. The balanced scorecard approach motivates you to analyze the internal components of your operations — from design and production to delivery, billing and collections — and implement process improvements that support strategic objectives.
Learning and professional growth. Continuing education often calls for more time and effort than companies are willing or able to devote. Learning must go beyond training new hires to include, for instance, mentoring and knowledge sharing through performance management programs. For many businesses, success largely depends on the development and preservation of intellectual capital. The balanced scorecard approach focuses strategic planning on better retaining institutional knowledge, encouraging ongoing learning and preparing employees for future roles.

Best practices

Following the balanced scorecard approach involves clearly defining your strategic objectives in each of the four areas, choosing a few metrics to track and expressing the results on a “scorecard.” Many leadership teams use a simple table or spreadsheet for their scorecards, while others use digital dashboards that update key metrics in real time.

Remember, too many measures can dilute focus and obscure what truly drives business performance. The most effective scorecards concentrate on a small set of meaningful indicators aligned directly with the company’s strategic objectives in each area.

For instance, suppose a growing manufacturing company wants to improve profitability while maintaining quality and on-time delivery. To support this strategic objective, leadership develops a balanced scorecard to track:

On-time delivery and customer complaints (customers),
Operating margin and cash flow (finance),
Production cycle time and scrap rates (processes), and
Safety incidents and workforce training hours (learning and professional growth).

Another best practice is to ensure balance among leading and lagging indicators. As mentioned, financial results show what has already happened. In contrast, customer surveys, employee engagement data and operational benchmarks can highlight emerging opportunities or risks before they appear in financial statements. Reviewing these measures together can help you and your leadership team identify connections across the business rather than evaluating each area in isolation.

Finally, consistency and accountability are essential. Review your scorecard regularly — quarterly at a minimum — and integrate it into leadership meetings and performance discussions. Assign clear ownership to each metric so responsibilities are clear and progress can be monitored. As your business evolves, revisit your scorecard to ensure it continues to reflect your strategy and priorities.

An intriguing concept

When exercised diligently and properly, the balanced scorecard approach can become a vibrant business practice that supports better decisions and keeps strategic objectives front and center. But it’s not for every company. If you’re intrigued by the concept, explore it further before committing. And no matter what strategic planning approach you choose, we’re here to help organize your financials and support measured, long-term growth.

The One Big Beautiful Bill Act (OBBBA) creates a new type of tax-advantaged account for eligible children. Section 530A accounts, also known as “Trump accounts,” can be established for children under age 18 who have a Social Security Number (SSN). Contributions to properly established accounts can begin on July 4, 2026.

The IRS has released guidance that sheds more light on the accounts and a temporary pilot program that will contribute $1,000 tax-free for certain children. Here’s what you need to know.

A different kind of IRA — initially

A Trump account is established for the exclusive benefit of an eligible child, who’s the account owner. While the account is essentially a type of IRA, it’s subject to special rules that don’t apply to other IRAs. Most of these rules are in effect only during the period that ends before January 1 of the calendar year in which the child reaches age 18 — what’s referred to as the “growth period.”

During the growth period:

The account funds can be invested only in eligible investments — generally, mutual funds or exchange-traded funds (ETFs) that track an index of primarily U.S. companies, such as the Standard and Poor’s 500, and meet other criteria,
The account has a lower contribution limit, generally $5,000 per year (adjusted for inflation after 2027),
The account generally can’t make distributions (including hardship distributions), and
Individuals can’t claim a tax deduction for their contributions.

After the child turns 18, traditional IRA rules kick in, including those regarding contributions, distributions (as well as the 10% early withdrawal penalty), required minimum distributions (RMDs), taxation and Roth IRA conversions.

Account election

Unlike regular IRAs, Trump accounts must be created initially by the U.S. Treasury Secretary. To have an account established for your child, you must make an election, and the child must not have reached age 18 before the close of the calendar year when the election is made. The child also must have an SSN before the election is made.

According to the IRS guidance, the election can be made on the forthcoming Form 4547, Trump Account Election(s), or through an online tool that isn’t yet available. You can file the form with your 2025 tax return. An account can be established at the same time you elect to receive a pilot program contribution (see below) or any time before January 1 of the year the child turns 18. Only one account can be opened per child.

After the election is made, the Treasury Department will send you the necessary information to activate the account. The IRS says this information will be available in May 2026.

Pilot program participation

A one-time $1,000 government-provided contribution is available for children born after December 31, 2024, and before January 1, 2029, who are U.S. citizens with SSNs. The pilot program election can be made on Form 4547 or through the online tool.

The Treasury Department will contribute to accounts eligible for the pilot program as soon as practicable after the election is made. Note that no contributions will be made before July 4, 2026.

Contributions to the account

Trump accounts can receive several types of contributions during the growth period besides contributions from parents, other loved ones or the children themselves. For example, an account can accept a “qualified general contribution” funded by states and political subdivisions, the federal government, Indian tribal governments, or certain nonprofits. These contributions, which will funnel through the Treasury Department, can be made only to “qualified classes,” such as those residing in certain areas and born in specific years. Michael and Susan Dell’s recently announced donation totaling $6.25 billion is an example of this type of contribution.

Employers can contribute up to $2,500 per year (adjusted for inflation after 2027) to the accounts of employees or their dependents, with contributions generally excluded from the employee’s taxable income. The limit applies on a per-employee basis. Trump accounts can also accept qualified rollover contributions.

Pilot program contributions, qualified general contributions and qualified rollover contributions don’t count toward the annual contribution limit. However, employer contributions do count toward the limit. Notably, contributions must be made within the calendar year to count toward that year’s limit — the contribution deadline doesn’t extend to April 15 of the following year as it does for traditional and Roth IRAs.

Education savings alternatives

Trump accounts might not be the best option when it comes to building savings for your child’s education. Both 529 plans and Coverdell Education Savings Accounts (ESAs) also allow tax-deferred growth, but withdrawals for qualified education expenses are tax-free. On the other hand, Trump account distributions are taxed as ordinary income to the extent that they aren’t attributable to after-tax contributions.

There are other 529 plan advantages: Contributions may qualify for state tax deductions. And they aren’t subject to an annual limit, provided they don’t exceed the amount needed to cover the beneficiary’s qualified expenses. (Note that gift tax rules might apply, depending on the contribution amount.)

Moreover, up to $35,000 of funds left in a 529 plan account held for at least 15 years in one beneficiary’s name can be rolled over into the beneficiary’s Roth IRA without incurring the normal 10% penalty for nonqualified withdrawals or resulting in taxable income. Roth IRAs don’t have RMDs, and withdrawals are tax-free. Certain restrictions on 529 plan rollovers apply, but this rollover option could be a significant advantage over Trump accounts, which eventually become traditional IRAs.

Investment options for 529 plans are limited to those permitted by the plan administrator, typically mutual funds and ETFs. But they may offer greater choice than Trump accounts. ESAs allow a wider range of investments, typically everything a broker offers. However, the maximum contribution to an ESA is limited to $2,000 per beneficiary per year, and contributors are subject to income-based contribution limits.

Stay tuned

The IRS expects to issue additional guidance on Trump accounts. We’ll keep you up to date on important developments in this and other OBBBA-related areas.

If your business does contract-based work, you know that change orders are a fact of life. This holds true regardless of whether you provide construction, engineering, information technology, manufacturing or other custom services.

Although change orders are inherently disruptive and stressful, they’re also often prime opportunities to increase project revenue and go the extra mile for customers. The key is to follow disciplined accounting practices so you capture the extra revenue without compromising your company’s financial position or the reliability of your financial statements.

Track the numbers

As you may have experienced, a customer’s needs or preferences can change after the contract is signed but before work is complete — or even before it begins. To keep projects on schedule, many contractors begin out-of-scope work before a change order is approved. But failing to properly track and account for the associated costs and revenue can distort your financial results.

For example, suppose you record costs attributable to a change order in total incurred job costs to date. But you don’t make a corresponding adjustment to the total contract price and total estimated contract costs. To a lender or surety, this may indicate excessive underbillings.

On the other hand, let’s say you increase the total contract price to account for out-of-scope work but are unable to obtain approval for the change order. In such an instance, there’s a distinct risk of profit fade — when a contractor’s expected profit on a project decreases over time as actual costs rise or anticipated revenue fails to materialize. This can shake the confidence of financial statement users such as lenders, sureties and investors.

Check the contract

Most business contracts include some form of change order language. Unfortunately, many contractors fail to follow the precise terms of those agreements when a customer requests or demands a change. The exact verbiage will vary, but change orders generally fall into three categories:

1. Approved. For this category, it’s typically appropriate to adjust incurred costs, total estimated costs and the total contract price. Depending on the contract’s change order provisions, this may increase your estimated gross profit.

2. Unpriced. If the parties agree on the scope of work but defer price negotiations, the accounting treatment depends on the probability that the contractor will recover its costs. If improbable, change order costs are treated as costs of contract performance in the period during which they’re incurred — and the contract price is not adjusted. As a result, estimated gross profit decreases.

If it’s probable that you’ll recover the costs through a contract price adjustment, you can either:

Defer revenue recognition until you and the customer have agreed on the change in contract price, or
Treat them as costs of contract performance in the period incurred and increase the contract price to the extent of the costs incurred (resulting in no immediate change to estimated gross profit).

To determine whether recovery is probable, assess the customer’s profile and financial history. Also, draw on your past experience in negotiating change orders and other factors. If you’ll likely raise the contract price by an amount that exceeds the costs incurred (increasing estimated gross profit), you may recognize more revenue only when it’s highly probable that a significant reversal of that revenue won’t occur.

3. Unapproved. Treat these as claims. Recognize additional contract revenue only if, under the applicable accounting rules, it’s probable the claim will generate such revenue, and you can reliably estimate the amount.

Ask for assistance

Change orders can support revenue growth and strengthen customer relationships — but only when managed and accounted for correctly. Without disciplined tracking and a clear understanding of the accounting rules, you risk misstated financials, profit fade, and strained relationships with customers and other stakeholders. We can help you evaluate and refine your business’s change order procedures and ensure your financial statements accurately reflect the economics of your projects.

Reducing or eliminating waste in your manufacturing company is fundamental to building a more efficient, profitable and resilient operation. Waste — whether it appears as excess material, unnecessary motion, overproduction or defects — can directly erode margins and distract resources from value-creating work. By identifying and removing these inefficiencies, you can generate strategic cost savings and improve throughput, consistency and overall performance.

Efficient operations are essential

Preventive maintenance, routine physical inspections and effective quality control are the keys to operational efficiency. For example, do you conduct ongoing maintenance on equipment? Doing so can ensure that each machine is properly calibrated and running smoothly. Maintenance schedules can prevent breakdowns that slow productivity and may be costly to repair.

Another component of preventive maintenance is replacing equipment regularly. New equipment can help speed up production, minimize defects and lower energy costs.

Other ways to help reduce waste include:

Updating workspaces. Pay attention to whether locations are clearly delineated. You may occasionally need to update signage or repaint floor markings to help employees work more efficiently. Likewise, look for broken, dusty or expired inventory items. Slow-moving inventory is a waste of working capital.

Scheduling walkthroughs. Walk your plant floor at least monthly to observe the production process. Focus on issues such as how much time machines and employees are idle and whether the workflow is organized. Examine the flow of materials. Revising the flow to be more linear and moving raw materials closer to the production line are simple ways to minimize idle time and transport.

Managing inventory. Consider ordering only the materials needed for production for a specific period. This will require reviewing past years’ sales data to estimate how much you need to produce.

Determining defect causes. Always identify the underlying causes of quality issues and resolve them. For example, link defects to a specific employee (who may need better training) or to a machine (that may need repair or replacement).

Reusing or recycling when possible. Determine whether you can reuse rinse water in the cooling system. Or whether metal scrap can be melted and returned to raw materials — or sold to a recycling yard — rather than thrown in the trash.

Tracking waste. Most manufacturers already track energy and water use at their facilities. Tracking waste isn’t so different. Start by creating a team — including representatives from all levels of your company — that gathers and analyzes waste-related data and implements waste reduction goals. The team should then monitor progress and report back to employees. You can promote the goals to employees and offer monetary incentives or noncash awards for achieving them.

Conducting a professional waste audit. Every manufacturer needs quality inspections to detect waste and prevent defects from reoccurring. It may make sense to hire an outside professional to conduct a waste audit. The auditor can review your operations and provide guidance on reducing waste. Consider conducting the audit immediately after your year-end inventory count as you’ll have your inventory organized and can identify potential waste.

Strive for excellence

Ultimately, waste reduction is more than just a cost-saving strategy: It’s a long-term investment in operational excellence. By committing to identifying and removing inefficiencies, your manufacturing company can enhance profitability, elevate product quality and remain adaptable in an increasingly competitive global marketplace. Contact us for fresh perspectives on waste reduction and other ways to boost your bottom line.

If your business has employees or uses independent contractors, you have associated annual information reporting obligations. The One Big Beautiful Bill Act (OBBBA) makes changes impacting these rules, but not for the 2025 tax year.

Tips and overtime income

For 2025 through 2028, the OBBBA creates new deductions for employees who receive qualified tips income or qualified overtime income. Importantly, these breaks aren’t income exclusions. Therefore, federal payroll taxes and federal income tax withholding rules still apply to this income. Also, qualified tips and qualified overtime may still be fully taxable for state and local income tax purposes where applicable.

The issue for employers and payroll management firms is reporting qualified tips and qualified overtime amounts so eligible workers can claim their rightful federal income tax deductions. In August, the IRS announced that, for tax year 2025, there will be no OBBBA-related changes to federal information returns for individuals, federal payroll tax returns or federal income tax withholding tables. So, the 2025 versions of Form W-2, Forms 1099, Form 941 and other payroll-related forms and returns aren’t being changed.

In November, the IRS issued guidance on how taxpayers who’ve received tips or overtime in 2025 can determine their eligibility and calculate their deductions, considering that employers and others aren’t required to provide information reporting specific to qualified tips income or qualified overtime income for the 2025 tax year.

Employers and payroll management firms may voluntarily report 2025 qualified tips in Box 14 (“Other”) of Form W-2 or a separate statement. Those that pay overtime, at minimum, should be prepared to answer employee questions about whether they’re considered to be Fair Labor Standards Act employees and thus potentially eligible for the qualified overtime deduction for 2025.

Eligible occupations for the tips deduction

In September 2025, the IRS released proposed regulations that include a list of dozens of occupations that are eligible for the OBBBA deduction for qualified tips income. Eligible occupations have been given a three-digit code to be used by employers for information return purposes.

Eligible occupations are grouped into eight categories: beverage and food service, entertainment and events, hospitality and guest services, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery.

Draft 2026 Form W-2

In September 2025, the IRS also released a draft of the 2026 Form W-2. The draft form incorporates changes to support the new employer reporting requirements for employee deductions for qualified tips income and qualified overtime income, as well as employer contributions to Trump accounts (which will become available in 2026 to provide a tax-advantaged savings opportunity for children).

For Box 12 of the draft form, new codes are provided for the following:

“TA” to report employer contributions to Trump accounts,
“TP” to report the total amount of an employee’s qualified tips income, and
“TT” to report the total amount of an employee’s qualified overtime income.

Box 14b has been added for employers to report the occupation of an employee who receives qualified tips income.

Eased information return rules

While the deductions for qualified tips and overtime will add to the information reporting requirements for businesses, the OBBBA also provides some reporting relief. This relief also starts with the 2026 tax year.

Businesses generally must report on annual information returns, such as Form 1099-MISC, payments made during the year that equal or exceed the threshold for rents, royalties, premiums, annuities, remuneration, emoluments, or other fixed or determinable gains, profits, and income. In addition, businesses that receive business services generally must report on annual information returns, such as Form 1099-NEC, payments made during the year for services rendered that equal or exceed the statutory threshold.

For many years, the threshold for Forms 1099-MISC and 1099-NEC has been $600. Effective for payments made after 2025, the OBBBA increases the reporting threshold to $2,000, with inflation adjustments for payments made after 2026. This change will impact information returns that should be filed in early 2027 to report affected 2026 payments.

Stay up to date

Additional guidance on reporting requirements for qualified tips income and qualified overtime income is expected, and eventually final 2026 information reporting forms will be released. Contact us to keep up to date on developments and what you need to do to ensure your business is compliant with evolving reporting requirements.

As 2025 winds down, it’s important to review your company’s accounting for unused paid time off (PTO). Many employers allow employees to carry forward unused vacation, sick leave or personal time. This policy may create liabilities under U.S. Generally Accepted Accounting Principles (GAAP) — and, if your staff tends to bank time off, your PTO accrual may be larger than expected. Here’s what to consider as you finalize your financials.

What PTO represents on the balance sheet

Compensated absences include paid time off that employees have earned but not yet taken. These absences may include:

Paid vacation,
Paid holidays,
Paid sick leave, and
Other forms of PTO earned by employment.

Under GAAP, when time off carries forward or must be paid out upon termination, your company generally must record a short-term liability on its balance sheet. It represents future compensation the company is obligated to provide. PTO accruals also typically create a related deferred tax asset because PTO isn’t deductible for tax purposes until it’s paid.

Quantifying PTO accruals

Start by reviewing your PTO policy and applicable state laws. Under GAAP, a liability must be recorded when:

Employees have earned the time,
The rights vest or accumulate,
It’s probable employees will use or be paid for the time, and
The amount can be reasonably estimated.

For hourly employees, the accrual is generally based on the employee’s hourly rate multiplied by unused hours and adjusted for employer taxes and benefits. For salaried employees, the calculation typically converts annual compensation into a daily or hourly rate and applies it to the unused balance.

Employers also may adjust for “breakage.” This is the portion of PTO that employees historically don’t use. Your estimate should be supported by past trends and updated periodically.

PTO accruals are a common area of auditor focus. To minimize surprises during audit fieldwork, establish a clear policy for recording PTO, apply a consistent method for calculating accruals and provide auditors with detailed supporting schedules for your estimates. Consider reviewing your methodology now to ensure it reflects current pay rates, updated policies and recent workforce trends.

Incorporate PTO into your year-end checklist

Growing PTO balances aren’t just an accounting matter. They may point to employee burnout, workload pressures or scheduling challenges. To help support your employees’ well-being and productivity, encourage them to use their earned time off, especially as year end approaches.

Contact us if you need assistance determining whether a PTO accrual is required and, if so, how to report it properly. We can also advise on best practices for managing PTO policies and monitoring the related financial impact.

Yeo & Yeo, a leading Michigan CPA and advisory firm, announces the election of Rebecca Millsap, CPA, PFS, and the re-election of Jacob Sopczynski, CPA, to Yeo & Yeo’s Board of Directors effective January 1, 2026.

Yeo & Yeo’s Board of Directors guides the firm’s long-term direction, upholds its mission and values, and ensures strategic alignment across all service lines and offices. Looking ahead to 2026 and beyond, the Board is focused on initiatives that strengthen our ability to anticipate industry trends, deliver exceptional client experiences, and support the growth of our people. This commitment reflects Yeo & Yeo’s ongoing dedication to continuous improvement and future-focused leadership.

Rebecca Millsap, CPA, PFS, has been with Yeo & Yeo since 1994 and serves as the Managing Principal of the Flint office. Her background is in tax and business consulting. She utilizes her skills to assist clients in taxation, financial reporting, business consulting, and strategic planning. She leads the firm’s Estate & Trust Group and is a member of the Tax Services Group. Millsap also serves as leader of the firm’s Career Advocacy Team and is a dedicated mentor and champion for our people. Colleagues describe her as a steady and trusted advisor who brings clarity to strategic conversations and an unwavering commitment to client service. Beyond her professional role, Millsap is dedicated to her community, serving as treasurer of the Flint Rotary Club, a member of the Finance Committee for Holy Family Catholic Church in Grand Blanc, and a member of the Endowment Committee for the Humane Society of Genesee County.

“Becky brings a genuine passion for people — our clients, our teams, and our communities — and she leads in a way that lifts others up,” said Dave Youngstrom, President & CEO. “Her insight, collaborative spirit, and commitment to those we serve will make her an exceptional addition to the Board.”

Jacob Sopczynski, CPA, is a Principal and leader of the firm’s Manufacturing Services Group. He serves clients as a consultant and specialist in applying AI and data extraction techniques, tax planning, and assurance services. He is involved in several professional organizations, including serving as the former chair of the Manufacturing Task Force for the Michigan Association of CPAs, and is a member of the Michigan Manufacturers Association, the Mid-Michigan Manufacturers Association, and Automation Alley. In the community, he serves as a member of the board of trustees for the International Academy of Flint and as treasurer of Pinconning Plays, Inc. He is a lifetime member of the 100 Club of Genesee, Shiawassee, and Lapeer Counties. He joined Yeo & Yeo in 2005 and has served on the Board of Directors since 2022.

Millsap and Sopczynski are joined on the Board by Dave Jewell, CPA, Managing Principal in Yeo & Yeo’s Kalamazoo office, and Jamie Rivette, CPA, CGFM, Principal in Yeo & Yeo’s Saginaw office, who will serve the second year of their two-year terms.

For employers that sponsor qualified retirement plans, it’s essential to stay on top of annual IRS inflation adjustments to contribution limits and other amounts. These changes affect everything from plan design to employee communication to payroll processes. For 2026, many commonly used qualified plans will see updates that you’ll need to incorporate into administration and planning. Here are some highlights:

Elective deferrals to defined contribution plans. The annual limit on elective deferrals to 401(k), 403(b) and 457 plans will increase to $24,500 (up from $23,500). Meanwhile, the annual limit for Savings Incentive Match Plan for Employees (SIMPLE) IRAs will rise to $17,000 (up from $16,500). The limit on total contributions to defined contribution plans will increase to $72,000 (up from $70,000).

Catch-up contributions to defined contribution plans. The annual limit on catch-up contributions to 401(k), 403(b) and 457 plans, which are available to participants age 50 or over, will generally rise to $8,000 (up from $7,500). However, under the SECURE 2.0 Act, a higher catch-up contribution limit of $11,250 (unchanged from 2025) applies to participants who are 60, 61, 62 or 63 in 2026.

Starting next year, SECURE 2.0 also requires that catch-up contributions of higher-income taxpayers be treated as post-tax Roth contributions rather than pretax salary deferrals. Generally, for 2026, the requirement will apply to taxpayers who earned more than $150,000 in the previous year. However, new final regulations state that the deadline for plan amendments to implement this change is December 31, 2026.

The annual catch-up contribution limit for SIMPLE IRAs will increase to $4,000 (up from $3,500). However, under SECURE 2.0, a higher catch-up contribution limit of $5,250 (unchanged from 2025) will apply to SIMPLE IRA owners who are 60, 61, 62 or 63 in 2026.

Annual limit for defined benefit plans. Commonly known as pensions, these plans may not promise an annual benefit that exceeds the lesser of 100% of a participant’s average compensation for the individual’s highest three consecutive years or a dollar limit set annually by the IRS. That dollar limit will rise to $290,000 (up from $280,000).

Contribution and participation limits for Simplified Employee Pension Individual Retirement Accounts (SEP-IRAs). The annual limit for SEP-IRAs will be 25% of an employee’s total compensation, up to $72,000 (increased from $70,000). Catch-up contributions aren’t allowed for these accounts. The threshold for determining participation in a SEP-IRA will increase to $800 (up from $750).

Compensation for qualified retirement plan purposes. The annual limit on the maximum compensation that can be taken into account for certain retirement plan contributions and deductions will rise to $360,000 (up from $350,000).

Highly compensated employees. The threshold for determining who’s a highly compensated employee will remain at $160,000.

Key employees. The threshold for defining who’s a key employee under the top-heavy rules will rise to $235,000 (up from $230,000).

The retirement savings contributions credit. The adjusted gross income limit for determining whether certain individuals are eligible for this tax credit, which is also known as the saver’s credit, will increase to:

$80,500 (up from $79,000) for married taxpayers filing jointly,
$60,375 (up from $59,250) for heads of household, and
$40,250 (up from $39,500) for all other taxpayers.

“Control” employees. The amounts used to determine who’s a control employee, a classification relevant to valuing employer-sponsored fringe benefits, will increase to $145,000 (up from $140,000) for officers and $290,000 (up from $285,000) for other employees.

Social Security taxable wage base. The annual cost-of-living adjustment to the maximum amount of earnings subject to Social Security tax, which is relevant for various benefit purposes, will increase to $184,500 (up from $176,100).

As 2026 approaches, these IRS-issued inflation adjustments give employers a chance to revisit their retirement plan strategies, update payroll and administrative systems, and communicate new savings opportunities to employees. Contact us for help interpreting the new limits and other amounts, reviewing qualified plan documents, and assessing how these changes could affect your workforce.

The One Big Beautiful Bill Act (OBBBA) creates new income tax deductions for tax years 2025 through 2028 for qualified cash tips and overtime compensation. If you receive tips or overtime pay, you likely have questions about whether you’re eligible for a deduction and how big it might be.

The IRS has issued guidance on how workers can determine the amount of their deductions for 2025, because employers aren’t required to provide detailed information on tips income or overtime compensation until the 2026 tax year. Here’s an overview of what you need to know.

The new deductions

Rather than eliminating taxes on all tips income and overtime compensation, the OBBBA establishes partial deductions available to both itemizers and nonitemizers, subject to income-based limitations. Qualified tips income and overtime compensation remain subject to federal payroll taxes and state income and payroll taxes where applicable. Moreover, because the tax breaks are in the form of deductions claimed at tax time, employers must continue to withhold federal income taxes from employees’ paychecks.

For qualified tips, you may be able to claim a deduction of up to $25,000. “Qualified tips” generally refers to cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024. The tips must be paid voluntarily, without any consequence for nonpayment, in an amount determined by the payor and without negotiation.

Proposed IRS regulations identify 68 eligible occupations within the following categories:

Beverage and food service,
Entertainment and events,
Hospitality and guest services,
Home services,
Personal services,
Personal appearance and wellness,
Recreation and instruction, and
Transportation and delivery.

The tips deduction begins to phase out if your modified adjusted gross income (MAGI) exceeds $150,000, or $300,000 if you’re married filing jointly. The deduction is completely phased out if your MAGI reaches $400,000, or $550,000 if you’re a joint filer.

The overtime deduction is limited to $12,500, or $25,000 if you’re a joint filer. A phaseout begins if your MAGI exceeds $150,000, or $300,000 if you’re a joint filer. The deduction is completely phased out if your MAGI reaches $275,000, or $550,000 if you’re a joint filer.

The overtime deduction is available for overtime pay required by the Fair Labor Standards Act (FLSA), which generally mandates “time-and-a-half” for hours that exceed 40 in a workweek. Notably, though, the deduction applies only to the pay that exceeds the regular pay rate — that is, the “half” component.

Because the FLSA definition of overtime varies from some state law definitions, overtime pay under state law might not be deductible. And the deduction doesn’t apply to overtime paid under a collective bargaining agreement or that an employer pays in excess of time-and-a-half (for example, double-time).

The tips deduction calculation

Employers won’t be required to include the total amount of cash tips reported by the employee and the employee’s occupation code on Form W-2 until the 2026 tax year. So, for 2025, according to the IRS, if you’re an employee, you can calculate your tips deduction using:

Social Security tips reported in Box 7 of Form W-2,
The total amount of tips you reported to your employer on Forms 4070, “Employee’s Report of Tips to Employer,” or similar forms, or
The total amount of tips your employer voluntarily reports in Box 14 (“Other”) of Form W-2 or a separate statement.

You may also include any amount listed on Line 4 of the 2025 Form 4137, “Social Security and Medicare Tax on Unreported Tip Income,” filed with your 2025 income tax return (and included as income on that return). Note that you’re responsible for determining whether the tips were received as part of an eligible occupation. If your employer opts to provide this or other relevant information in Box 14 (“Other”) of Form W-2, you may rely on it.

Tips also won’t be required to be reported on Forms 1099 until the 2026 tax year. For 2025, if you’re an independent contractor, you can corroborate the calculation of your qualified tips with:

Earnings statements,
Receipts,
Point-of-sale system reports,
Daily tip logs,
Third-party settlement organization records, or
Other documentary evidence.

Note: Nonemployees must confirm that their tips were received from an eligible occupation.

The overtime deduction calculation

Employers won’t be required to include eligible overtime pay on Form W-2 until the 2026 tax year. So for 2025, if you’re an employee, you can self-report your overtime compensation for the overtime deduction.

According to the IRS, you must make a “reasonable effort” to determine whether you’re considered to be an FLSA-eligible employee. The IRS says this may include asking your employers or other service recipients about your FLSA status.

To calculate the deduction amount, you must use “reasonable methods” to break out the amount of overtime pay that qualifies. For example, if you were paid time-and-a-half and receive a statement with your total amount for overtime (regular wages plus the overtime premium), then you can use one-third of the total. If you were paid double-time and receive such a statement, you can multiply the total dollar amount by one-fourth to compute the qualifying overtime pay.

A tax-saving opportunity

If you might be eligible for the tips or overtime deduction, don’t miss out on this tax-saving opportunity just because your deduction may be difficult to calculate. We’re here to help. If you’re an employer with employees who receive tips or overtime income, we can also provide guidance on how to answer employee questions for 2025 and how to ensure you’re in compliance with reporting requirements for 2026.

Even the most carefully managed retirement plans are susceptible to mistakes during navigation of complex ERISA laws and regulations. The good news is that plan sponsors may avoid plan disqualification by correcting eligible failures through the Employee Plans Compliance Resolutions System (EPCRS). Understanding how EPCRS functions and the types of errors it addresses can help maintain plan qualification and manage compliance. In this article, we explore EPCRS fundamentals and share practical guidance for using the system effectively.

Self-Correction Programs
EPCRS (Employee Plans Compliance Resolution System)	Agency: Internal Revenue Service Purpose: Correcting eligible plan qualification errors EPCRS overview \| Internal Revenue Service
VFCP (Voluntary Fiduciary Correction Program)	Agency: U.S. Department of Labor Purpose: Correcting certain fiduciary violations, including certain prohibited transactions Voluntary Fiduciary Correction Program Fact Sheet
DFVCP (Delinquent Filer Voluntary Compliance Program)	Agency: U.S. Department of Labor Purpose: Correcting late or missing Form 5500 filings Delinquent Filer Voluntary Compliance (DFVC) Program \| U.S. Department of Labor

EPCRS Fundamentals and Practical Benefits

The Employee Retirement Income Security Act of 1974 (ERISA) sets standards for many tax-qualified retirement plans offered in the private sector. The Internal Revenue Service (IRS) and Department of Labor (DOL) enforce ERISA provisions and plan compliance with reporting requirements. Each agency offers self-correction programs, with the IRS administering EPCRS.

The SECURE 2.0 Act of 2022 (SECURE 2.0) expanded EPCRS, allowing self-correction of certain eligible inadvertent failures and extending the timeline for correction from three years to a reasonable period after the mistake is discovered. Plans seeking to remediate errors through EPCRS may choose from three options, each tailored to different circumstances or situations:

Self-Correction Program (SCP): Plans can correct eligible plan errors through the SCP without IRS involvement or fees and are not required to file an application.
Voluntary Correction Program (VCP): To use the VCP, the plan provides a written application to the IRS and pays a fee. Eligible errors can then be corrected with IRS approval.
Audit Closing Agreement Program (Audit CAP): Mistakes found during an audit or IRS investigation can be corrected through Audit CAP. Fees generally are higher than VCP but typically are more favorable than the potential consequences of failing to correct the error.

Whether EPCRS may be used to self-correct plan qualification failures depends on the type of error discovered and the surrounding circumstances.

Errors Eligible for Self-Correction

EPCRS applies to all “eligible inadvertent failures.” For fiduciaries responsible for plan operations and maintenance, the question becomes: “What constitutes an eligible inadvertent failure?” Such an error “is an operational, document or demographic failure that violates the IRS qualification requirements” that occurs despite the plan’s thorough and rigorous oversight. This term does not include actions that constitute flagrant errors, diversion or misuse of plan assets, or participation in abusive tax avoidance transactions.

Currently, some of the eligible inadvertent failures listed in SECURE 2.0 cannot be self-corrected through EPCRS. These include:

Failure to initially adopt a written plan
Correction of an operational failure by plan amendment that conforms the plan document to the plan’s prior operations in a manner that is less favorable for a participant or beneficiary than the original plan terms
Significant failures in a terminated plan
Certain demographic failures
Failures in orphan (abandoned) plans
Employee stock ownership plan (ESOP) failures involving IRC Section 409
Excess contributions to a SEP or SIMPLE IRA that allows the excess to remain in the plan
Failures in SEPs or SIMPLE IRAs that do not use the IRS model plan documents and even for model plans when excess contributions remain in the IRA account

Identifying errors and choosing the best path to remediation is challenging, especially as laws evolve. Implementing proactive policies that promote constant oversight of plan documents and operations can be an effective way to support this important responsibility.

Best Practices to Follow When Using EPCRS

Reaping the benefits of self-correction requires both proactive and reactive measures. The following best practices can help plan sponsors identify and correct errors, as well as serving as preventive measures:

Assess Initial Plan Qualification: Confirm that the plan meets all IRS qualification requirements for a tax-qualified retirement plan.
Set Up Error Identification Processes: Develop and implement procedures that promote ongoing review of plan documents and operations. Train fiduciaries and third-party providers on plan requirements to help mitigate the risk of future errors.
Avert Disclosure Pitfalls: Avoid mentioning potential self-correction in your financial statements and disclosures unless corrective action is already being taken.
Choose the Right Self-Correction Program: Once an error has been discovered, evaluate it thoroughly to determine whether it qualifies for self-correction. Remember that only errors related to plan qualification can be corrected through the EPCRS.
Watch the Timing: Correct eligible inadvertent errors within a reasonable time, which is generally 18 months after the plan identifies the failure.
Line Up Documentation: When self-correcting through the EPCRS, maintain thorough documentation that confirms attempted correction and compliance.

Finding an error that could disqualify an ERISA plan is alarming but can be managed when plan fiduciaries take prompt and thorough action.

Some content borrowed with permission from BDO USA. Our firm is an independent member of the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting, and service firms.