What Business Owners should Know about Debt Restructuring

Debt is inevitable for most small and midsize businesses. Loans are commonly used to help fund a company’s launch, expansion, equipment purchases and cash flow. When problems arise, it’s generally not because debt exists; it’s because the terms of that debt no longer match the operational realities of the business. In such instances, debt restructuring is worth considering.

Making debt more manageable

At its core, debt restructuring is the process of revisiting existing loan arrangements to make them more manageable for the company. It focuses on adjusting current obligations so they better align with the business’s projected cash flow and operating needs. This can be a more sustainable approach than, say, taking on new debt or ignoring the growing pressure.

For small and midsize businesses, debt restructuring is generally handled through direct negotiations with lenders. Options may include:

• Extending repayment periods,

• Modifying payment schedules in other ways,

• Adjusting interest rates, and

• Consolidating multiple loans.

The goal is to allow the business to continue operating normally while meeting its obligations.

Warning signs

If debt begins to consistently dictate operational decisions, step back and evaluate whether the structure of those obligations is a problem. Warning signs usually surface gradually. Monthly payments may start to limit the company’s ability to maintain adequate cash reserves, invest in growth or handle unexpected expenses. If you find yourself increasingly relying on short-term borrowing to cover routine costs or juggling payment due dates to stay current, it might be time to explore restructuring.

That said, many healthy businesses explore debt restructuring as a way to strengthen their overall financial positions. Changes in customer demand, economic conditions, interest rates and operating costs can all be valid reasons to consider it.

Timing and perspective

Among the most important aspects of debt restructuring are timing and perspective. From a timing standpoint, options are generally broader and more flexible when you address concerns early. Waiting until payments are missed or covenants are violated reduces your leverage with lenders.

Perspective matters just as much. Ideally, you should approach restructuring as a proactive strategic adjustment to financial obligations rather than a desperate last resort. Doing so will help you focus conversations with lenders on long-term sustainability rather than a short-term bailout.

However, be realistic. Although debt restructuring can ease cash flow pressure and create breathing room to reset strategic objectives, it can’t fix deeper operational or profitability issues. If your business model is no longer viable, restructuring may provide temporary relief but not a permanent solution. It tends to work best when paired with a clear understanding of a company’s financial position and future outlook.

Guidance is essential

If your business is facing increasing debt pressure, restructuring may be the right solution. But that doesn’t mean you should immediately pick up the phone and call your lender. Professional guidance is essential. FMD can help assess the implications of restructuring and whether better alternatives are available.

How Activity-based Costing Can Improve Business Performance

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 FMD 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.

Making Health Care Decisions while You’re still Healthy Benefits You and Your Family

Integrating health care decisions into your estate plan is important because it ensures they are thoughtful, informed and reflective of your values. When you make decisions in advance, you can clearly outline preferences for medical treatment, end-of-life care and quality-of-life considerations without the pressures of an illness or crisis. As with other aspects of your estate plan, the time to act is now, while you’re healthy.

The benefits

Making key health-care-related decisions now can prevent confusion, delays and disagreements among family members and medical providers at moments when emotions are already high. Advance planning also allows you to name someone to make health decisions on your behalf. You can choose someone who you know understands your wishes and can confidently advocate for you if you become unable to speak for yourself.

Equally important, making these decisions while healthy can protect both you and your family from unnecessary stress and financial risk. Without documented health care directives, your family may be forced to seek court intervention or make rushed decisions with limited information, possibly leading to outcomes you wouldn’t have wanted.

2 documents do the heavy lifting

To ensure that your health care wishes are carried out and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: a living will and a health care power of attorney (HCPA).

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA. For the sake of convenience, we’ll use the terms “living will” and “HCPA.”

It’s a good idea to have both a living will and an HCPA or, if allowed by state law, a single document that combines the two. Let’s take a closer look at each document:

Living will. This document expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, or invasive diagnostic tests. It also specifies the situations in which these procedures should be used or withheld. Living wills often contain a do not resuscitate order, which instructs medical personnel to not perform CPR in the event of cardiac arrest.

While a living will details procedures you want and don’t want under specified circumstances, no matter how carefully you plan, a document you prepare now can’t account for every possible contingency down the road.

HCPA. This authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap. An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.

Although an HCPA can include specific instructions, it can also be used to provide general guidelines or principles and give your representative the discretion to deal with complex medical decisions and unanticipated circumstances (such as new treatment options).

This approach offers greater flexibility, but it also makes it critically important to appoint the right representative. Choose someone who you trust unconditionally, who’s in good health, and who’s both willing and able to make decisions about your health care. And be sure to name at least one backup in the event your first choice is unavailable.

Be proactive

Proactive planning can support better coordination with overall estate and financial strategies, helping you manage potential medical costs and preserve assets. By addressing health care decisions early, you can take control of your future, reduce the burden on loved ones and create peace of mind knowing your wishes will be respected no matter what lies ahead. Contact FMD with questions regarding a living will or an HCPA.

IRS Issues Guidance on Trump Accounts

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.

Change Orders Require Careful Accounting

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. FMD can help you evaluate and refine your business’s change order procedures and ensure your financial statements accurately reflect the economics of your projects.

Should You Own Assets Jointly with an Adult Child?

Owning assets with your adult child as “joint tenants with right of survivorship” may seem like a simple way to streamline your estate plan. However, doing so can carry important legal, tax and practical implications that deserve careful consideration.

Positives and negatives

There are upsides to owning an asset — such as real estate, a bank or brokerage account, or a car — jointly with your child. For example, when you die, the asset will automatically pass to your child without the need for more sophisticated estate planning tools and without going through probate.

The downsides, however, can be considerable. When you add a child as a joint owner of an asset, he or she typically gains immediate ownership rights to the asset — not just a future interest. This means it may be subject to the child’s creditors, a divorce settlement or lawsuits. These external risks will be beyond your control and can jeopardize assets you’d planned to use to support yourself during retirement.

There can also be significant tax considerations. Adding a child as a joint owner may be treated as a taxable gift, depending on the asset and how ownership is structured. In addition, joint ownership can eliminate the step-up in cost basis that beneficiaries often receive at death, potentially increasing capital gains taxes when the asset is later sold. What appears to be a probate avoidance strategy can, in some cases, create a larger tax bill for the next generation.

Finally, joint ownership can override the intentions expressed in your will or trust. Assets held jointly with rights of survivorship generally pass directly to the surviving owner, regardless of what the estate plan says. This can unintentionally disinherit other children or beneficiaries and lead to family conflict. For many families, alternatives such as powers of attorney, beneficiary designations or revocable trusts provide greater flexibility and protection.

Right move for you?

Jointly owning assets with your child is a decision that you should make with care, not solely for convenience. While it may simplify access or avoid probate in some cases, it can also expose assets to unnecessary risk, create unintended tax consequences and undermine the goals of your otherwise well-structured estate plan.

Together with your estate planning attorney, FMD can help evaluate how joint asset ownership might fit into your broader estate plan and ensure that your assets are protected, family harmony is preserved and your wishes are carried out as intended.

Year-end Reminder: Don’t Overlook Your PTO Accruals

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 FMD 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.

Caution is Required when Addressing a Gun Collection in Your Estate Plan

For many, the primary reason for creating an estate plan is to ensure their assets are passed on to family members according to their wishes. But when it comes to estate planning, not all assets are created equal. One asset type that can be tricky to transfer to beneficiaries is firearms.

According to a Pew Research Center survey, nearly a third of adults (32%) said they own a gun. Another 10% replied that they don’t personally own a gun but someone in their household does. If you own one or more guns, careful planning is required to avoid running afoul of complex federal and state laws.

Understanding the law

Firearms are unique among personal property because federal and state laws prohibit certain persons from possessing them. For example, under the federal Gun Control Act, “prohibited persons” include:

• Convicted felons,

• Fugitives,

• Unlawful drug users or addicts,

• Mentally incompetent persons,

• Illegal or nonimmigrant aliens, and

• Persons convicted of certain crimes involving domestic violence or subject to certain domestic violence restraining orders.

Other persons may be prohibited from receiving firearms under state or local laws. These restrictions apply not only to your beneficiaries, but also to executors or trustees who come into possession of firearms.

In addition, under the federal National Firearms Act (NFA), certain firearms must be registered with the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), and transfers of such firearms must follow NFA procedures. The classification of some firearms has become more complex because of litigation and evolving ATF rules.

Furthermore, additional steps must be taken when transporting guns across state lines. States may also require registration and may impose mandatory background checks, permits and other requirements for firearms.

Consider a gun trust

Incorporating a gun trust into your estate plan can be an effective way to manage and transfer firearms. A gun trust allows multiple designated trustees to legally possess and use the firearms, helping families avoid the risk of accidentally violating federal law. By placing these assets in a trust, owners can also streamline how the firearms are handled if they become incapacitated, ensuring that only authorized individuals retain lawful access.

From an estate planning perspective, a gun trust can provide privacy, continuity and clearer instructions for heirs. Firearms transferred through a properly drafted trust often avoid the delays and potential complications of probate, while giving the grantor control over who receives the weapons and under what conditions.

Seek professional estate planning advice

If you own a valuable gun collection and want to pass it on to heirs, it’s critical to consult with a qualified estate planning attorney. Indeed, given the complexity of federal and state gun laws, a gun trust may be the proper vehicle to transfer this type of asset.

IRS Releases Critical Guidance on Calculating Tips and Overtime Deductions for 2025

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, FMD 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.

Using the Audit Management Letter as a Strategic Tool

Year end is fast approaching. Calendar-year entities that issue audited financial statements may be gearing up for the start of audit fieldwork — closing their books, preparing schedules and coordinating with external auditors. But there’s one valuable audit deliverable that often gets overlooked: the management letter (sometimes called the “internal control letter” or “letter of recommendations”).

For many privately held companies, the management letter becomes an “I’ll get to it later” document. But in today’s volatile business climate, treating the management letter as a strategic resource can help finance and accounting teams strengthen controls, improve operations and reduce risk heading into the new year. Here’s how to get more value from this often-underutilized tool.

What to expect

Under Generally Accepted Auditing Standards, external auditors must communicate in writing any material weaknesses or significant deficiencies in internal controls identified during the audit. A material weakness means there’s a reasonable possibility a material misstatement won’t be prevented or detected in time. A significant deficiency is less severe but still important enough to warrant management’s attention.

Auditors may also identify other control gaps, process inefficiencies or improvement opportunities that don’t rise to the level of required communication — and these frequently appear in the management letter. The write-up for each item typically includes an observation (including a cause, if known), financial and qualitative impacts, and recommended corrective actions. For many companies, this is where the real value lies.

How audit insights can drive business improvements

A detailed management letter is essentially a consulting report drawn from weeks of independent observation. Auditors work with many businesses each year, giving them a unique perspective on what’s working (and what isn’t) across industries. These insights can spark new ideas or validate improvements already underway.

For example, a management letter might report a significant increase in the average accounts receivable collection period from the prior year. It may also provide cost-effective suggestions to expedite collections, such as implementing early-payment discounts or using electronic payment systems that support real-time invoicing. Finally, the letter might explain how improved collections could boost cash flow and reduce bad debt write-offs.

A collaborative tool, not a performance review

Some finance and accounting teams view management letter comments as criticism. They’re not. Management letters are designed to:

• Identify risks before they become bigger problems,

• Help your team adopt best practices,

• Strengthen the effectiveness of your control environment, and

• Improve audit efficiency over time.

Once your audit is complete, it’s important to follow up on your auditor’s recommendations. When the same issues repeat year after year, it may signal resource constraints, training gaps or outdated systems. Now may be a good time to pull out last year’s management letter and review your progress. Improvements made during the year may simplify audit procedures and reduce risk in future years.

Elevate your audit

An external audit is about more than compliance — it provides an opportunity to strengthen your business. The management letter is one of the most actionable and strategic outputs of the audit process. Contact FMD to learn more. We can help you prioritize management letter recommendations, identify root causes of deficiencies and implement practical, sustainable solutions.

Planning on Making Year-end Gifts? Take Advantage of Your Gift Tax Annual Exclusion

As the year draws to a close, it’s a great time to revisit your gifting strategy — especially if you want to transfer wealth efficiently while minimizing future estate tax exposure. One of the simplest and most powerful tools available is the gift tax annual exclusion. In 2025, the exclusion amount is $19,000 per recipient. (The amount remains the same for 2026.)

Be aware that you need to use your annual exclusion by December 31. The exclusion doesn’t carry over from year to year. For example, if you don’t make an annual exclusion gift to your granddaughter this year, you can’t add the unused 2025 exclusion to the 2026 exclusion to make a $38,000 tax-free gift to her next year.

How can you leverage the annual exclusion?

Making annual exclusion gifts is an easy way to reduce your potential estate tax liability. For example, let’s say that you have four adult children and eight grandchildren. In this instance, you may give each family member up to $19,000 tax-free by year end, for a total of $228,000 ($19,000 × 12).

Furthermore, the gift tax annual exclusion is available to each taxpayer. If you’re married and your spouse consents to a joint gift, also called a “split gift,” the exclusion amount is effectively doubled to $38,000 per recipient for 2025 and 2026.

Bear in mind that split gifts and large gifts trigger IRS reporting responsibilities. A gift tax return is required if you exceed the annual exclusion amount or you give joint gifts with your spouse. Unfortunately, you can’t file a “joint” gift tax return. In other words, each spouse must file an individual gift tax return for the year in which they both make gifts.

Also, beware that some types of gifts aren’t eligible for the annual exclusion. For example, gifts must be of a “present interest” to qualify.

What’s the lifetime gift tax exemption?

If you make gifts in excess of the annual exclusion amount (or gifts ineligible for the exclusion), you can apply your lifetime gift and estate tax exemption. For 2025, the exemption is $13.99 million. The One Big Beautiful Bill Act permanently increases the exemption amount to $15 million beginning in 2026, indexing it for inflation after that.

Note: Any gift tax exemption used during your lifetime reduces the estate tax exemption amount available at death.

Are some gifts exempt from gift tax?

Yes. These include gifts:

• From one spouse to the other (as long as the recipient spouse is a U.S. citizen),

• To a qualified charitable organization,

• Made directly to a health care provider for medical expenses, and

• Made directly to qualifying educational institution for a student’s tuition.

For example, you might pay the tuition for a grandchild’s upcoming school year directly to the college. The gift won’t count against the annual exclusion or your lifetime exemption.

Review your estate plan before making gifts

If you’re considering year-end giving, it may be helpful to review your overall estate plan and determine how annual exclusion gifts can support your long-term goals. FMD can help you identify which assets to give, ensure proper documentation and integrate gifting into your broader wealth transfer strategy.

Protect Business Continuity with an Emergency Succession Plan

Unanticipated crises can threaten even the most well-run company. And the risk is often greater for small to midsize businesses where the owner wears many hats. That’s why your company needs an emergency succession plan.

Unlike a traditional succession plan — which focuses on the long-term and is certainly important, too — an emergency succession plan addresses who’d take the helm tomorrow if you’re suddenly unable to run the business. Its purpose is to clarify responsibilities, preserve operational continuity and reassure key stakeholders.

Naming the right person

When preparing for potential disasters in the past, you’ve probably been urged to devise contingency plans to stay operational. In the case of an emergency succession plan, you need to identify contingency people.

Larger organizations may have an advantage here. After all, a CFO or COO may be able to temporarily or even permanently replace a CEO relatively easily. For small to midsize companies, the challenge can be greater — particularly if the owner is heavily involved in retaining key customers or bringing in new business.

For this reason, an emergency succession plan should name someone who can credibly step into the leadership role if you become seriously ill or otherwise incapacitated. Look to a trusted individual whom you expect to retain long-term and who has the skills and personality to stabilize the company during a difficult time.

After you identify this person, consider the “domino effect.” That is, who’ll take on your emergency successor’s role when that individual is busy running the company?

Empowering your pick

After choosing an emergency successor, meet with the person to discuss the role in depth. Listen to any concerns and take steps to alleviate them. For instance, you may need to train the individual on certain duties or allow the person to participate in executive-level decisions to get a feel for running the business.

Just as important, ensure your emergency successor has the power and access to act quickly. This includes:

• Signatory authority for bank accounts,

• Access to accounting and payroll systems, and

• The ability to execute contracts and approve expenditures.

Updating company governance documents to reflect temporary leadership authority is a key step. Be sure to ask your attorney for guidance.

Centralizing key information

It’s also critical to document the financial, operational and administrative information your emergency successor will rely on. This includes maintaining a secure, centralized location for key records such as:

• Banking credentials,

• Vendor and customer contracts,

• Payroll records and procedures,

• Human resources data,

• Tax filings and financial statements, and

• Login details for essential systems.

Without this documentation, even the most capable interim leader may struggle to keep the business functioning smoothly.

Also, ensure your successor will have access to insurance records. Review your coverage to verify it protects the company financially in the event of a sudden transition. Key person insurance, disability buyout policies, and the structure of ownership or buy-sell agreements should align with your emergency succession plan’s objectives.

Getting the word out

A traditional succession plan is usually kept close to the vest until it’s fully formulated and nearing execution. An emergency succession plan, however, must be transparent and communicated as soon as possible.

When ready, inform your team about the plan and how it will affect everyone’s day-to-day duties if executed. In addition, develop a strategy for communicating with customers, vendors, lenders, investors and other stakeholders.

Acting now

If you haven’t created an emergency succession plan, year end may be a good time to get started. Already have one? Be sure to review it at least annually or whenever there are significant changes to the business. FMD would be happy to help you evaluate areas of financial risk, better document internal controls and strengthen the processes that will keep your company moving forward — even in the face of the unexpected.

Hiring a Bookkeeper for Your Small Business

Choosing the right bookkeeper is one of the most important staffing decisions your business will make. A skilled bookkeeper maintains accurate financial records, manages cash flow, and ensures compliance with accounting and tax requirements. But finding the right person can be challenging, especially in today’s competitive job market. Whether you’re replacing a long-time team member or hiring for the first time, here are some key factors to consider when interviewing candidates.

Education and experience

A good starting point is evaluating each candidate’s educational background. Some bookkeepers have degrees in accounting, finance or business, while others have completed bookkeeping training programs or earned software certifications. Advanced training isn’t required, but it can demonstrate professionalism and a commitment to maintaining current skills.

Experience and up-to-date accounting knowledge also matter. Most small businesses benefit from hiring someone with several years of bookkeeping experience, ideally in a similar industry or in a business of comparable complexity. Familiarity with U.S. Generally Accepted Accounting Principles and applicable tax laws is valuable, even if a candidate isn’t a formally trained accountant. Because accounting and tax rules change frequently, you’ll want someone who stays current on the latest developments.

Technical skills

Modern bookkeepers rely heavily on technology. Ask candidates about their experience with your specific accounting program and related tools, such as payroll systems, tax software, budgeting applications, artificial intelligence tools and spreadsheet programs.

If you’re open to changing systems, experienced bookkeepers can often recommend software solutions that improve efficiency and visibility. A bookkeeper’s ability to adapt to new technology or automate manual processes is often just as valuable as his or her ability to keep the books balanced.

Compliance awareness is another important factor. Many bookkeepers manage or assist with payroll filings, sales tax reporting, Form 1099 preparation and other compliance tasks. Even if you rely on a CPA firm for final tax returns, your bookkeeper’s understanding of the underlying rules drives the work’s accuracy and timeliness. Someone who’s handled these responsibilities in previous roles will likely require significantly less training and supervision.

Oversight and planning abilities

Strong bookkeepers do more than record transactions — they can also help streamline daily operations. Ask candidates about their experience closing the books each month, preparing timely financial statements, reconciling accounts, minimizing workflow bottlenecks and supporting audit requests.

Some bookkeepers also take on higher-level financial responsibilities. For instance, they may prepare budgets, forecasts or weekly management summaries. These skills can be particularly valuable because they may help relieve you of some strategic planning tasks and provide a sounding board for major business decisions. Some candidates may even have training in forensic accounting, which you can leverage to tighten internal controls and reduce fraud risks.

Soft skills

Technical skills are only part of the hiring equation. A bookkeeper works with sensitive financial data, so trustworthiness, confidentiality and sound judgment are essential.

A bookkeeper also interacts with vendors, employees, customers and your outside accounting firm, so strong communication and collaboration skills matter. Consider whether candidates can explain financial concepts clearly, are organized and proactive, and maintain professionalism. Discuss how they’ve handled reporting discrepancies or audit adjustments in previous roles. You might even present a recent accounting challenge from your business and ask how they’d address it. When assessing competency, you may find that a candidate’s problem-solving approach often reveals as much as his or her resumé.

Long-term potential

Even the most experienced bookkeeper may struggle if their working style doesn’t align with your business or mesh well with your existing staff. The ideal candidate will demonstrate leadership qualities, a willingness to take initiative and a desire to grow with your company.

When searching for the right candidate for this critical position, a thoughtful hiring process can prevent costly turnover, reporting errors and frustration down the road. In addition to helping brainstorm questions and referring qualified candidates, we can temporarily handle your bookkeeping tasks. Contact FMD for guidance during your search.

Pairing a Living Trust with a Pour-over will can Help Cover All Your Assets

A living trust is one of the most versatile estate planning tools available. It offers a streamlined way to manage and transfer assets while maintaining privacy and control. Unlike a traditional will, a living trust allows your assets to pass directly to your beneficiaries without going through probate. By placing assets into the trust during your lifetime, you create a clear plan for how they should be distributed, and you empower a trustee to manage them smoothly if you become incapacitated. This combination of efficiency and continuity can provide significant peace of mind for you and your family.

However, even the most carefully created living trust can’t automatically account for every asset you acquire later or forget to transfer into it. That’s where a pour-over will becomes essential.

Defining a pour-over will

A pour-over will acts as a safety net by directing any assets not already held in your living trust to be “poured over” into the trust at your death. Your trustee then distributes the assets to your beneficiaries under the trust’s terms. Although these assets may still pass through probate, the pour-over will ensures that everything ultimately ends up under the trust’s umbrella, following the same instructions and protections you’ve already put in place.

This setup offers the following benefits:

Convenience. It’s easier to have one document controlling the assets than it is to “mix and match.” With a pour-over will, it’s clear that everything goes to the trust, and then the trust document determines who gets what. That, ideally, makes it easier for the executor and trustee charged with wrapping up the estate.

Completeness. Generally, everyone maintains some assets outside of a living trust. A pour-over will addresses any items that have fallen through the cracks or that have been purposely omitted.

Privacy. In addition to conveniently avoiding probate for the assets that are titled in the trust’s name, the setup helps maintain a level of privacy that isn’t available when assets pass directly through a regular will.

Understanding the roles of your executor and trustee

Your executor must handle specific bequests included in the will, as well as the assets being transferred to the trust through the pour-over provision before the trustee takes over. (Exceptions may apply in certain states for pour-over wills.) While this may take months to complete, property transferred directly to a living trust can be distributed within weeks of a person’s death.

Therefore, this technique doesn’t avoid probate completely, but it’s generally less costly and time consuming than usual. And, if you’re thorough with the transfer of assets made directly to the living trust, the residual should be relatively small.

Note that if you hold back only items of minor value for the pour-over part of the will, your family may benefit from an expedited process. In some states, your estate may qualify for “small estate” probate, often known as “summary probate.” These procedures are easier, faster and less expensive than regular probate.

After the executor transfers the assets to the trust, it’s up to the trustee to do the heavy lifting. (The executor and trustee may be the same person, and, in fact, they often are.) The responsibilities of a trustee are similar to those of an executor, with one critical difference: They extend only to the trust assets. The trustee then adheres to the terms of the trust.

Creating a coordinated estate plan

When used together, a living trust and a pour-over will create a comprehensive estate planning structure that’s both flexible and cohesive. The trust handles the bulk of your estate efficiently and privately, while the pour-over will ensures that no assets are left out or distributed according to default state laws. This coordinated approach helps maintain consistency in how your estate is managed and can reduce stress and confusion for your loved ones.

Because living trusts and pour-over wills involve legal considerations, we recommend working with an experienced estate planning attorney to finalize the documents. We can assist you with the related tax and financial planning implications. Contact FMD to learn more.

Is it Time for Your Business to Start Outsourcing?

As a small to midsize business grows, demands on its time, talent and resources inevitably expand right along with it. Many business owners reach a point where continuing to do everything in-house — or even themselves — begins to slow progress or expose the company to unnecessary risk. Have you reached this point yet? If so, or even if you’re getting close, outsourcing could be a smart move.

Common candidates

Many business activities can be outsourced. The key is identifying functions that, if handled by an external provider, would improve efficiency, strengthen compliance, and give you and your team more time to focus on revenue-generating work. Here are some common candidates:

Accounting and financial reporting. A reputable provider can manage your books, collect payments, pay invoices and keep accounting technology up to date. It should also be able to prepare financial statements that meet the standards expected by lenders, investors and other outside parties.

Customer service. This may seem an unlikely candidate because you might believe that someone must work for your business to truly represent it. But that’s not necessarily true. Internal customer service departments often have high turnover rates, which drives up costs and reduces service quality. Outsourcing to a provider with a more stable, well-trained team can improve both customer satisfaction and operational consistency.

Information technology (IT). Bringing in an outside firm or consultant to manage your IT needs can provide significant benefits. For starters, you’ll be able to better focus on your mission without the constant distraction of changing technology. Also, a provider will stay current on the best hardware and software for your business, as well as help you securely access, store and protect your data.

Payroll and human resources (HR). These functions are governed by complex regulations that change frequently — as does the necessary software. A qualified vendor can help your business comply with current legal requirements while giving you and your employees a better, more secure platform for accessing payroll and HR information.

Downsides to watch out for

Naturally, outsourcing comes with potential downsides. You’ll need to spend time and resources researching and vetting providers. Then each engagement will involve substantial ongoing expenses.

You’ll also have to place considerable trust in providers — especially in today’s environment, where data breaches are common and cybersecurity is critical. Finally, even a solid outsourcing arrangement requires ongoing communication and management to maintain a productive relationship.

Not a one-size-fits-all solution

Every business owner must carefully consider when to outsource, which services are worth the money and how to measure return on investment over time. If you’d like help evaluating your options or better understanding the financial and tax implications of outsourcing, contact FMD.

Ready, Set, Count your Inventory

When businesses issue audited financial statements, year-end physical inventory counts may be required for retailers, manufacturers, contractors and others that carry significant inventory. Auditors don’t perform the counts themselves, but they observe them to evaluate the accuracy of management’s procedures, verify that recorded quantities exist and assess whether inventory is properly valued.

Even for businesses that aren’t subject to audit requirements, conducting a physical count is a smart end-of-year exercise. It provides an opportunity to confirm that the quantities in your accounting system reflect what’s actually on the shelves, uncover shrinkage or obsolescence, and pinpoint any weaknesses in your internal controls. Regular counts also support better purchasing decisions, more accurate financial reporting and improved cash flow management — making them a valuable exercise for companies of any size. Here are some best practices to help you prepare and maximize the benefits.

Streamlining the process

Planning is critical for an accurate and efficient inventory count. Start by selecting a date when active inventory movement is minimal. Weekends or holidays often work best. Communicate this date to all stakeholders to ensure proper cutoff procedures are in place. New inventory receipts or shipments can throw off counting procedures.

In the weeks before the counting starts, management generally should:

• Clean and organize stock areas,

• Order (or create) prenumbered inventory tags,

• Prepare templates to document the process, such as count sheets and discrepancy logs,

• Assign workers in two-person teams to specific count zones,

• Train counters, recorders and supervisors on their assigned roles,

• Preview inventory for potential roadblocks that can be fixed before counting begins,

• Write off any defective or obsolete inventory items, and

• Count and seal slow-moving items in labeled containers ahead of time.

If your company issues audited financial statements, one or more members of your external audit team will observe the procedures (including any statistical sampling methods), review written inventory processes, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

Handling discrepancies

Modern technology has made inventory counting far more efficient. Barcode scanners, mobile devices and radio frequency identification (RFID) tags reduce manual errors and speed up the process. Linking these tools to a perpetual inventory system keeps your records updated in real time, so what’s in your system more closely aligns with what’s on your shelves. However, even with automation, discrepancies can still happen.

When your books and counts don’t sync, quantify the magnitude of any inventory discrepancies and make the necessary adjustments to your records and financial statements. Evaluate whether your valuation and costing methods remain appropriate; if not, update them to ensure consistency and accuracy going forward.

Resist the temptation to simply write off the difference and move on. Instead, investigate the root causes, such as human counting errors, system data issues, mislocated items, theft, damage or obsolescence. Use the results to strengthen controls and processes. Possible improvements include revising purchasing and shipping procedures, upgrading inventory management software, installing surveillance in key areas, securing high-risk items, and educating staff on proper inventory handling and reporting procedures.

Also consider ongoing cycle counts that focus on high-value, high-turnover items to help detect issues sooner and reduce year-end surprises. For companies that issue audited financials, cycle counts complement — but don’t replace — year-end physical count requirements.

Formally documenting the inventory counting process, findings and outcomes helps management learn from past mistakes. And it provides an important trail for auditors to follow.

For more information

Physical inventory counts can enhance operational efficiency and financial reporting integrity. With the help of modern technology and advanced preparation, the process can be less disruptive and more valuable. When discrepancies arise, management needs to act decisively and systematically. Contact FMD for guidance on complying with the inventory accounting rules and optimizing inventory management.

Ease the Burden on Your Family Immediately after Your Death by Planning Now

Planning for the end of life is never easy, but including your funeral and memorial wishes in your estate plan can relieve a major burden from your loved ones. When your family is grieving, decisions about burial or cremation, service preferences, or even the type of obituary you’d like can feel overwhelming. By documenting these choices in advance, you not only help to ensure your wishes are honored but also give your family clarity and comfort.

Express your wishes

First, make your wishes known to family members. This typically includes instructions about where you’re to be buried or cremated, the type of memorial service you prefer (if any), and even the clothing you’ll be buried in. If you don’t have a next of kin or would prefer someone else to be in charge of arrangements, you can appoint another representative.

Be aware that the methods for expressing these wishes vary from state to state. With the help of your attorney, you can include a provision in your will, language in a health care proxy or power of attorney, or a separate form specifically designed for communicating your desired arrangements.

Whichever method you use, it should, at a minimum, state 1) whether you prefer burial or cremation, 2) where you wish to be buried or have your ashes interred or scattered (and any other special instructions), and 3) the person you’d like to be responsible for making these arrangements. Some people also request a specific funeral home.

Weigh your payment options

There’s a division of opinion in the financial community as to whether you should prepay funeral expenses. If you prepay and opt for a “guaranteed plan,” you lock in the prices for the arrangements, no matter how high fees may escalate before death. With a “nonguaranteed plan,” prices aren’t locked in, but the prepayment accumulates interest that may be put toward any rising costs.

When weighing whether to use a prepaid plan, the Federal Trade Commission recommends that you ask the following questions:

• What happens to the money you’ve prepaid?

• What happens to the interest income on prepayments placed in a trust account?

• Are you protected if the funeral provider goes out of business?

Before signing off on a prepaid plan, learn whether there’s a cancellation clause in the event you change your mind.

One alternative that avoids the pitfalls of prepaid plans is to let your family know your desired arrangements and set aside funds in a payable-on-death (POD) bank account. Simply name the person who’ll handle your funeral arrangements as the beneficiary. When you die, he or she will gain immediate access to the funds without the need for probate.

Incorporate your wishes into your estate plan

Thoughtful planning today can provide lasting peace of mind for the people you care about most. Don’t wait to incorporate your wishes into your estate plan — or to update your plan if needed. 

Businesses that Sponsor a 401(k) Must Stay on Top of It

If your business sponsors a 401(k) plan for employees, you know it’s a lot to manage. But manage it you must: Under the Employee Retirement Income Security Act (ERISA), you have a fiduciary duty to act prudently and solely in participants’ interests.

Once a plan is launched and operational, it may seem to run itself. However, problems can arise if you fail to actively oversee administration — even when a third-party administrator is involved. With 2025 winding down and a new year on the horizon, now may be a good time to review your plan’s administrative processes and fiduciary procedures.

Investment selection and management

Study your plan’s investment choices to determine whether the selections available to participants are appropriate. Does the lineup offer options along the risk-and-return spectrum for workers of all ages? Are any premixed funds, which are based on age or expected retirement date, appropriate for your employee population?

If the plan includes a default investment for participants who haven’t directed their investment contributions, look into whether that option remains appropriate. In the event your plan doesn’t have a written investment policy or doesn’t use an independent investment manager to help select and monitor investments, consider incorporating these risk management measures.

Should you decide to engage an investment manager, however, first implement formally documented procedures for selecting and monitoring this advisor. Consult an attorney for assistance. If you’re already using an investment manager, reread the engagement documentation to make sure it’s still accurate and comprehensive.

Fee structure

The fee structures of 401(k) plans sometimes draw media scrutiny and often aggravate employees who closely follow their accounts. Calculate the amount of current participant fees associated with your plan’s investments and benchmark them against industry standards.

In addition, examine the plan’s administrative, recordkeeping and advisory fees to understand how these costs are allocated between the business and participants. Establish whether any revenue-sharing arrangements are in place and, if so, assess their transparency and oversight.

It’s also a good idea to compare your total plan costs to those of similarly sized plans. This way, you can determine whether your overall fee structure remains competitive and reasonable under current market conditions.

Third-party administrator

Even if your third-party administrator handles day-to-day tasks, it’s important to periodically verify that their internal controls, cybersecurity practices and data-handling procedures meet current standards. Confirm that the administrator:

• Maintains proper documentation,

• Follows timely and accurate reporting practices, and

• Provides adequate support when compliance questions arise.

A proactive review of their service model can help ensure your business isn’t unknowingly exposed to risks from operational errors, data breaches or outdated administrative practices.

Overall compliance

Some critical compliance questions to consider are:

• Do your plan’s administrative procedures comply with current regulations?

• If you intend it to be a participant-directed individual account plan, does it follow all the provisions of ERISA Section 404(c)?

• Have there been any major changes to other 401(k) regulations recently?

Along with testing the current state of your plan against ERISA requirements, evaluate whether your operational practices align with your plan document — an area where many sponsors stumble. Double-check key items such as contribution timelines, eligibility determinations, vesting schedules and loan administration. Verify that procedures precisely follow the terms of your plan document.

Conducting periodic internal audits can help identify inconsistencies and operational errors before they become costly compliance failures. You might even discover fraudulent activities.

Great power, great responsibility

A 401(k) plan is a highly valuable benefit that can attract job candidates, retain employees and demonstrate your business’s commitment to participants’ financial well-being. However, with this great power comes great responsibility on your part as plan sponsor.

If your leadership team and key staff haven’t reviewed your company’s oversight practices recently, year end may be an ideal time to take stock. FMD can help you identify plan costs and fees, spot potential compliance gaps, and tighten internal controls.

Minimize Your Business’s 2025 Federal Taxes by Implementing Year-end Tax Planning Strategies

The One Big Beautiful Bill Act (OBBBA) shifts the landscape for year-end tax planning. The law has significant implications for some of the most tried-and-true tax-reduction measures. It also creates new opportunities for businesses to reduce their 2025 tax liability before December 31. Here are potentially some of the most beneficial ones.

Investments in capital assets

Thanks to bonus depreciation, businesses have commonly turned to year-end capital asset purchases to cut their taxes. The OBBBA helps make this strategy even more powerful for 2025.

Under the Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation declined by 20 percentage points each year beginning in 2023, falling to 40% in 2025. The OBBBA restores and makes permanent 100% bonus depreciation for qualified new and used assets acquired and placed in service after January 19, 2025. (Qualified purchases made in 2025 on or before January 19 remain subject to the 40% limit.)

The law also boosts the Section 179 expensing election limit for small and midsize businesses to $2.5 million, with the phaseout threshold lifted to $4 million. (Both amounts will be adjusted annually for inflation.)

Most assets eligible for bonus depreciation also qualify for Sec. 179 expensing. But Sec. 179 expensing is allowed for certain expenses not eligible for bonus depreciation — specifically, roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property, as well as depreciable personal property used predominantly in connection with furnishing lodging.

Sec. 179 expensing is subject to several limitations that don’t apply to first-year bonus depreciation, especially for S corporations, partnerships and limited liability companies treated as partnerships for tax purposes. So, when assets are eligible for either break, claiming allowable 100% first-year bonus depreciation may be beneficial.

However, Sec. 179 expensing is more flexible — you can take it on an asset-by-asset basis. With bonus depreciation, you have to take it for an entire class of assets (for example, all MACRS 7-year property). Business vehicles are popular year-end purchases to boost depreciation-related tax breaks. They’re generally eligible for bonus depreciation and Sec. 179 expensing, but keep in mind that they’re subject to additional rules and limits. Also, if a vehicle is used for both business and personal use, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use.

As an added perk, the OBBBA changes the business interest deduction — specifically, the calculation of adjusted taxable income — which could allow you to deduct more interest on capital purchases beginning in 2025.

Pass-through entity tax deduction

Dozens of states enacted pass-through entity tax (PTET) deduction laws in response to the TCJA’s $10,000 limit on the federal deduction for state and local taxes (SALT), also referred to as the SALT cap. The mechanics vary, but the deductions generally let pass-through entities (partnerships, limited liability companies and S corporations) pay an elective entity-level state tax on business income with an offsetting tax benefit for the owners. The organization deducts the full payment as a business expense.

Before year end, it’s important to review whether a PTET deduction is available to you and, if so, whether it’ll make sense to claim it. This can impact other year-end tax planning strategies.

The PTET deduction may be less relevant for 2025 because the OBBBA temporarily boosts the SALT cap to $40,000 (with 1% increases each year through 2029). The higher cap is subject to phaseouts based on modified adjusted gross income (MAGI); when MAGI reaches $600,000, the $10,000 cap applies.

But the PTET deduction may still be worthwhile in some circumstances. It could pay off, for example, if an owner’s MAGI excludes the owner from benefiting from the higher cap or if an owner’s standard deduction would exceed his or her itemized deductions so the owner wouldn’t benefit from the SALT deduction.

By reducing the income passed through from the business, a PTET deduction election could also help an owner reduce his or her liability for self-employment taxes and avoid the 3.8% net investment income tax. Moreover, lower income could unlock eligibility for other tax breaks, such as deductions for rental losses and the Child Tax Credit. Bear in mind, though, that while a PTET deduction could help you qualify for the Section 199A qualified business income (QBI) deduction despite the income limit (see below), it also might reduce the size of the deduction.

QBI deduction

Eligible pass-through entity owners can deduct up to 20% of their QBI, whether they itemize deductions or take the standard deduction. QBI refers to the net amount of income, gains, deductions and losses, excluding reasonable compensation, certain investments and payments to partners for services rendered.

The deduction is subject to limitations based on taxable income and, in some cases, on W-2 wages paid and the unadjusted basis of qualified property (generally, the purchase price of tangible depreciable property held at the end of the tax year). The OBBBA expands the phase-in ranges for those limits so that more taxpayers will qualify for larger QBI deductions beginning in 2026.

In the meantime, you can still take steps to increase your QBI deduction for 2025. For example, if your income might be high enough that you’ll be subject to the W-2 wage or qualified property limit, you could increase your W-2 wages or purchase qualified property. Timing tactics — generally, accelerating expenses into this year and deferring income into 2026 — might also help you avoid income limits on the deduction.

Research and experimental deduction

The OBBBA makes welcome changes to the research and experimental (R&E) deduction. It allows businesses to capitalize domestic Section 174 costs and amortize them over five years beginning in 2025.

It also permits “small businesses” (those with average annual gross receipts of $31 million or less for the previous three tax years) to claim the R&E deduction retroactive to 2022. And businesses of any size that incurred domestic R&E expenses in 2022 through 2024 can elect to accelerate the remaining deductions over either a one- or two-year period.

You don’t necessarily need to take steps before year end to benefit from these changes. But it’s important to consider how claiming larger R&E deductions on your 2025 return could impact your overall year-end planning strategies.

It’s also a good idea to start thinking about how you’ll approach the R&E expense deduction on your 2025 tax return. For example, it might make more sense to continue to amortize your qualified R&E expenses. You also should determine if it would be beneficial to recover remaining unamortized R&E expenses in 2025 or prorate the expenses across 2025 and 2026. And if you’re eligible to claim retroactive deductions, review your R&E expenses for 2022 through 2024 to decide whether it would be beneficial to do so.

Don’t delay

We’ve focused on year-end strategies affected by the OBBBA, but there are also strategies not significantly impacted by it that are still valuable. One example is accelerating deductible expenses into 2025 and deferring income to 2026 (or doing the opposite if you expect to be in a higher tax bracket next year). Another is increasing retirement plan contributions (or setting up a retirement plan if you don’t have one).

Now is the time to execute the last-minute strategies that will trim your business’s 2025 taxes. FMD can help you identify the ones that fit your situation.

Is your Accounting Software Working for Your Business — or Against it?

When buying new accounting software or upgrading your existing solution, it’s critical to evaluate your options carefully. The right platform can streamline operations and improve financial reporting accuracy. However, the wrong one can result in reporting delays, compliance risks, security breaches and strategic missteps. Here are some common pitfalls to avoid.

Relying on a generic solution

You might be tempted to choose a familiar, off-the-shelf software product. While this may seem like a practical solution, if the software isn’t tailored to your company and industry, you may be setting yourself up for inefficiencies and frustration later.

For example, construction firms often need job costing, progress billing and retainage tracking features. Not-for-profits need fund accounting and donor reporting features. Retailers may benefit from real-time inventory management and multi-channel sales integrations. Choosing a one-size-fits-all tool may result in a patchwork of manual fixes and workarounds that undermine efficiency and add risk.

Overspending or underspending

Accounting systems vary significantly in their features and costs. It’s easy to overspend on software with flashy dashboards and advanced add-ons — or to settle on a no-frills option that doesn’t meet the organization’s needs. Both extremes carry risk.

The ideal approach lies somewhere in the middle. Start by benchmarking your transaction volume, reporting complexity, staff skill levels and support infrastructure. Then build a prioritized feature “wish list” and set a realistic budget. Avoid paying for functions you’ll never use, but don’t underinvest in critical capabilities, such as automation, scalability or integration. Think strategically about where your business will be a year or two from now — not just today.

Clinging to legacy tools

Upgrading or moving to a new accounting platform is a major undertaking, so it’s easy to put these projects on the back burner. But waiting too long can lead to inefficiencies, data inaccuracies and missed opportunities. Modern platforms offer cloud-based access, AI-driven automation and mobile functionality — features that older systems can’t match. As more businesses shift to hybrid work and remote collaboration, staying current is essential for accuracy and speed.

If your financial closes take too long, if reports don’t reconcile easily or if you can’t view your numbers in real time, it may be time to modernize. Treat accounting software upgrades as part of ongoing business improvement — not an occasional “big project.”

Test your system periodically to ensure efficient data flows, accurate reconciliations and useful management reports. This exercise moves you from merely “keeping books” to driving financial insight.

Ignoring integration, mobility and security

In the past, accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. Your accounting system should integrate with the rest of your tech suite — including customer resource management (CRM), inventory and project management platforms — so data can be shared seamlessly and securely. If you’re manually entering data into multiple systems, you’re wasting valuable resources.

Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that allow users to access real-time data, approve transactions and record expenses from their smartphones or tablets.

Equally important is cybersecurity. With financial information increasingly stored online, prioritize systems with data encryption, secure cloud storage and multi-factor authentication. Protecting your data means protecting your business reputation.

Leaving your CPA out of the loop

Choosing the right accounting software isn’t just an IT project — it’s a strategic investment decision for your business. Our team has helped hundreds of companies select accounting technology tools that fit their needs. Let’s get started on defining your requirements, evaluating software features and rolling out a seamless implementation plan. Contact FMD to discuss your pain points, training needs and budget. We can help you find a solution that works for your business.