Let’s Take a Closer Look at Accrued Expenses

At the end of the reporting period, most businesses have accumulated operating costs that won’t be paid until the next period. If your business prepares financial statements under U.S. Generally Accepted Accounting Principles (GAAP), certain unpaid costs may need to be reported as accrued expenses. Overlooking them can understate your business’s liabilities and overstate its profits. Accurate bookkeeping requires knowing which obligations to report on your financial statements and why recognizing an expense for accounting purposes doesn’t necessarily generate an immediate tax deduction.

Unpaid obligations

Businesses that issue GAAP financial statements use the accrual method of accounting. Accrual-basis accounting generally requires recognizing expenses when incurred, regardless of when you pay them. At the end of the accounting period, your business may have incurred expenses in the current period that it hasn’t yet paid or recorded in its financial statements. Unrecorded expenses incurred in the current period require adjusting entries.

For instance, if your business has borrowed money to finance operations or capital assets, it’s accumulating interest costs daily. An adjusting entry may be needed at the end of the accounting period to record the interest accumulated during that period. Interest payable generally appears on the balance sheet as a current liability if due within one year or the operating cycle, whichever is longer. The related cost generally appears on the income statement as interest expense, though interest incurred during the construction or production of qualifying assets may need to be capitalized.

Other common examples of expenses that may be owed but unpaid at the end of the period include taxes, utilities, professional fees, and employee wages, bonuses and benefits. By accruing expenses, a business matches revenue earned in the accounting period with the related expenses incurred in that period. Reporting many accrued expenses, such as accrued interest, is straightforward. However, reporting certain accrued expenses may be more complicated because it requires estimates.

Significant accruals

GAAP doesn’t require a separate footnote describing every accrued expense or every estimation method. Presentation and disclosure depend on materiality and the accounting guidance applicable to the underlying obligation. Significant accrued liabilities may warrant separate presentation on the balance sheet or additional detail in the footnotes.

For example, a business might provide the following disclosure for accrued wages and benefits:

As of December 31, 2026, the business has accrued $300,000 for wages and related benefits, representing employee compensation earned but unpaid as of the balance sheet date. The accrual includes salaries, bonuses and payroll taxes. These amounts are expected to be paid in the first quarter of the following fiscal year. Management regularly reviews and adjusts the accruals based on actual compensation and obligations.

Businesses must also disclose their use of estimates in preparing financial statements. Additional disclosure may be required when a significant estimate is subject to uncertainty and could change materially in the near term. Other guidance may require disclosures about particular obligations or material changes in estimates.

Book-tax differences

Some businesses apply different rules for recognizing income and expenses for tax purposes. Specifically, certain small businesses can choose to use cash-basis accounting for federal income tax purposes. For tax years beginning in 2026, the inflation-adjusted gross receipts threshold is $32 million in average annual gross receipts over the previous three tax years. Eligibility may be subject to additional rules and restrictions.

If your business chooses to use cash-basis accounting for tax purposes, some expenses recorded on your GAAP financial statements may not be deductible in the same tax year. Under the cash method, you generally report income when you actually or constructively receive it and deduct expenses when you pay them, rather than when you incur them (as under the accrual method). Using cash-basis accounting for tax purposes may defer taxable income, but it can also delay deductions for unpaid expenses. Exceptions apply, including rules requiring certain costs to be capitalized.

Special rules for accrued bonuses

Special tax rules apply to accrued employee bonuses. Cash‑basis employers generally must deduct bonuses in the year they’re actually paid, regardless of when they’re earned. However, accrual-basis employers can generally deduct accrued bonuses in the year employees earn them if the applicable requirements are satisfied, including:

• Bonus amounts are fixed obligations by the end of the tax year,

• Bonus amounts are reasonably determinable, and

• Bonuses are paid within 2½ months after the end of the tax year (generally March 15 for calendar-year businesses).

If the business delays bonus payment beyond this period, the deduction is generally deferred until the year the employee includes the payment in income, typically the payment year, under the deferred compensation rules.

Bonus plan terms also matter. For example, requiring employees to remain employed through the payment date may prevent a year-end deduction if forfeited bonuses revert to the employer. One possible workaround is to establish a bonus pool. If the other requirements are met, employers may deduct bonuses in the year they’re earned, as long as they reallocate any forfeited bonuses among the remaining employees in the pool. Under such a plan, the aggregate bonus amount is fixed at year end, even though amounts allocated to specific employees may not be determined until the payment date.

In addition, the favorable tax treatment for deducting accrued bonuses may be limited by the related-party rules. Under these rules, bonuses owed to cash-basis related parties generally aren’t deductible until the recipients include them in income, typically when paid. In general, this applies to shareholders who directly or indirectly own more than 50% of the value of a C corporation’s outstanding stock and to S corporation shareholders regardless of ownership percentage. These rules can be complicated, especially for partnerships and limited liability companies, so contact your tax advisor to discuss the appropriate treatment for your situation.

Errors and manipulation

Reporting accrued expenses can be challenging and requires meticulous recordkeeping, especially when a business follows different rules for recognizing expenses for book and tax purposes. Errors and omissions may happen when making estimates or matching expenses to the proper accounting period, resulting in under- or overstated liabilities. Some businesses may also misclassify accrued expenses, causing confusion in financial reporting.

In addition, accrued expenses can be vulnerable to fraud schemes. For instance, fake accruals for nonexistent expenses may be used to create a reserve that can be reversed to inflate future profits. Or management might hide bills or manipulate estimates to avoid recognizing accrued expenses in the current period, artificially inflating profits. External audits can help detect these schemes, but they provide reasonable, rather than absolute, assurance that financial statements are free of material misstatement due to fraud or error. Your accountant can also recommend antifraud controls to fortify your defenses.

Strengthen your review

A consistent closing process helps ensure your financial statements accurately reflect unpaid obligations. Giving accrued expenses the attention they need provides owners, lenders and investors with a clearer picture of profitability and financial health. Contact FMD for help reporting your business’s accrued expenses and related disclosures.

What are the Common Warning Signs of Financial Distress?

Owners, lenders, investors and other stakeholders often rely on a business’s annual financial statements to assess profitability, liquidity and overall financial health. However, the financials generally report what has already happened and may not fully reflect recent developments. Even when financial information is prepared regularly, stakeholders who rely solely on historical results may miss warning signs that emerge between reporting periods and could affect their financial interests.

That’s why it’s important to look beyond the numbers. Operational and behavioral changes can sometimes provide early clues that a business is under financial pressure. Here are some common red flags to watch for throughout the year — before the effects appear in the year-end financial statements.

Excessive employee turnover

Employees may recognize problems before they appear in financial statements. Some may seek other job opportunities when they’re aware of financial distress or feel pressure to meet unrealistic budget targets.

They may also jump ship if they think deteriorating performance could lead to pay cuts or layoffs. Likewise, concerns about declining bonuses or the value of stock incentives may motivate key employees to leave. Turnover is especially problematic when it involves top performers or hard-to-replace executives because it can ripple through the remaining staff and lower morale.

Financial reporting issues

Delays in the financial reporting process may signal unqualified accounting personnel, inadequate recordkeeping or even fraud. In some cases, a controller or CFO may be reluctant to report weak financial performance to owners who aren’t involved in the business’s day-to-day operations. Or management may delay reporting out of concern that lenders will call loans or refuse to waive covenant violations. Late financials can also reflect staffing shortages and difficulty resolving accounting issues. If the year-end close takes longer than usual, find out what’s causing the delay before relying on the results to make important business decisions.

Also watch for changes in accounting methods, unusual transactions or unexpected adjustments to the general ledger. In some situations, managers may use aggressive accounting practices to make financial performance appear stronger than it is. For example, a business may engage in related-party transactions at above- or below-market prices. Such transactions aren’t inherently improper, but you should carefully evaluate their terms and financial reporting implications. Management might also make aggressive accounting estimates to overstate asset values or earnings.

Reliance on nonoperating sources of cash

Financial distress often results in cash shortages. If operating activities don’t generate enough cash to cover working capital needs, management may borrow money or liquidate assets to make ends meet.

For instance, maxed-out credit lines and repeated loan applications may signal cash pressure. Each financing request should have a clear purpose and repayment plan. When cash is tight and loan requests are denied, business owners may turn to increasingly costly financing options. In some cases, they might take on debt with unfavorable terms or use their personal credit cards to fund the business’s working capital needs. As a business’s debt load increases, it’s critical to assess whether expected cash inflows from operations will support the incremental loan payments.

Healthy businesses routinely invest in new equipment and upgrades. However, those experiencing financial distress may sell fixed assets to meet short-term liquidity needs. This strategy can help bridge temporary cash shortages and allow a business to dispose of idle or outdated equipment. But it’s not viable over the long run because it could compromise the business’s ability to generate future income, especially if management liquidates valuable operating assets at fire-sale prices.

Stay alert

A single warning sign may have a reasonable explanation. Several appearing together, however, may suggest that a business is experiencing financial stress. Whether you’re an owner, lender, investor or other stakeholder with a financial interest in a business, paying attention to these developments can give you time to investigate further and act before problems become more serious. Contact FMD for assistance identifying potential warning signs and evaluating a business’s financial results.

A Family Education Trust can Benefit Generations to Come

Helping your children, grandchildren or other loved ones obtain a quality education can be one of the most meaningful ways to pass on your wealth. A tax-advantaged 529 plan is one effective tool for funding tuition and other educational expenses. But when the plan’s owner (typically a parent or grandparent) dies, the next owner might not continue to use it to fulfill the original owner’s goals. A family education trust may be the answer.

Creating the trust

A family education trust is an estate planning arrangement designed to support the educational needs of designated beneficiaries, potentially across multiple generations. You establish an irrevocable trust, fund it with assets and appoint a trustee to manage it. The trust document specifies who can receive distributions and which expenses qualify. These might include private K–12 school tuition, college expenses, graduate school and vocational training.

Unlike an outright bequest, a trust lets you decide how funds will be used. For example, you might authorize distributions based on each beneficiary’s educational needs rather than requiring equal distributions.

A one-two punch

A family education trust can be used in conjunction with 529 plans. Although 529 plan contributions aren’t federally tax-deductible, investments grow tax-deferred, and withdrawals are tax-free when used for qualified educational expenses. Some states also offer tax incentives for contributions.

Qualified expenses generally include college tuition, required fees, books, supplies and certain room-and-board costs. Recently, the definition of qualified expenses has expanded to include certain K–12 expenses, eligible apprenticeship programs and qualifying postsecondary credentialing expenses, subject to applicable limits.

A family education trust can own one or more 529 accounts, provided the particular 529 plan program permits trust ownership. Each account generally has one designated beneficiary, so a trust supporting several grandchildren might own separate 529 accounts for each child.

This arrangement offers several potential benefits. It allows you to:

• Establish guidelines identifying eligible beneficiaries,

• Specify how trust assets should be used,

• Fund the 529 plans as well as directly fund education expenses, and

• Appoint trustees and successor trustees to oversee the funds.

It may also preserve educational savings for future generations, subject to applicable rules.

Unlike a 529 account, which generally accepts only cash contributions and offers limited investment choices, a family education trust can hold a broader range of assets. These assets can supplement 529 savings and cover expenses that don’t qualify for tax-free 529 distributions.

Flexibility for changing circumstances

Suppose you establish a family education trust that benefits your three grandchildren. One attends college, another pursues vocational training and the third receives a scholarship.

The trustee may be able to adjust distributions to accommodate their needs. If a beneficiary doesn’t use all the money in a 529 account, the beneficiary generally can be changed to another qualifying family member without federal income tax consequences. However, gift and generation-skipping transfer tax consequences may arise in certain circumstances.

Estate planning considerations

In addition to benefiting your family, an irrevocable family education trust may provide estate tax benefits. If properly structured, assets you transfer to the trust, along with their future appreciation, generally can be excluded from your taxable estate.

This can be particularly valuable for families with substantial wealth or assets expected to increase significantly in value. However, contributions to the trust may be subject to federal gift tax reporting requirements and could be subject to gift tax. Also, gifts benefiting grandchildren may trigger generation-skipping transfer (GST) tax.

Create a lasting legacy

A family education trust can help preserve wealth while creating educational opportunities for future generations. Incorporating 529 plans may enhance these benefits through tax-advantaged savings. FMD can help you determine whether this strategy is right for your family.

What Business Owners Need to Know about the Accounting Cycle

The accounting cycle is used to record, organize and summarize financial activity for a specific period. Also known as the bookkeeping cycle, it’s designed to produce accurate data that will help business owners understand performance, manage cash flow and plan for the future. Properly prepared financial records can alert owners to operational issues before they become serious problems. Let’s take a look.

Follow multiple steps

Although the level of detail can vary by business, you’ll generally need to follow multiple steps to complete the accounting cycle. First, gather source documents, including receipts, invoices, bills, contracts, bank and credit card statements, and payroll reports. Keep documentation complete and organized to support accuracy.

Next, post transactions to your business’s general ledger. Financial transactions from your source documents are recorded using journal entries or automated feeds. Categorize each transaction correctly and post it to the appropriate accounts in your general ledger. Proper posting ensures income, expenses, assets and liabilities are reflected accurately.

Then, generate a trial balance. This summarizes all ledger accounts and confirms that debits equal credits. This step enables you to identify data entry errors or missing transactions.

After that, you may need to adjust the general ledger for items such as accrued expenses, depreciation, inventory and prepaid costs. These entries ensure that revenue earned in the accounting period matches the expenses incurred to generate it.

Next, prepare financial statements. These enable you, your managers and other stakeholders to evaluate financial performance and make informed business decisions. They typically include:

1. A balance sheet, which lists your business’s assets and liabilities as of the financial statement date,

2. An income statement, which shows revenue earned and expenses incurred during the accounting period, and

3. A statement of cash flows, which summarizes cash inflows and outflows from operating, financing and investing activities.

Financial statements reviewed or audited by external accountants also may include supplemental footnote disclosures.

Finally, close the books. At the end of each accounting period, close temporary accounts to retained earnings and finalize the books. This step provides a fresh start for the next accounting period.

Best practices

Whether you’re new to running a business or are a seasoned owner, following standard accounting procedures helps ensure accurate transaction records, balanced books and reliable financial statements. Be sure to clearly document in writing who in your organization (or, if you outsource any accounting work, which contractor) is responsible for each accounting task and when it should be completed.

Contact FMD to develop an easy-to-follow accounting cycle for your business. We can also help you address cash flow, tax compliance and other financial issues.

Finish 2026 Strong with these Year-End Tax Planning Strategies

Even though tax filing season is still several months away, the decisions you make before January 1, 2027, could have a significant impact on your 2026 federal income tax liability. Year-end tax planning is especially important this year because some new changes under 2025’s One Big Beautiful Bill Act (OBBBA) are taking effect. Plus, you may still be getting familiar with OBBBA changes that went into effect last year. Here are several tax-planning areas to consider before the calendar turns to 2027.

Standard deduction vs. itemizing

Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions when the total exceeds the standard deduction saves tax, but it makes filing more complicated.

For 2026, the standard deduction is:

• $16,100 for single filers (and married couples filing separately),

• $24,150 for heads of household, and

• $32,200 for married couples filing jointly.

Taxpayers who are age 65 or older or blind can claim an additional standard deduction of 2,050(1,650 per spouse if married). For taxpayers both over 65 and blind, the additional deduction is doubled.

With such large standard deduction amounts, you may not give much thought to itemizing. However, certain temporary OBBBA provisions (see below) could make itemizing more beneficial for some taxpayers this year.

But high earners should note that the OBBBA’s new limit on itemized deductions kicks in for the 2026 tax year. The limit effectively caps itemized deductions for taxpayers in the highest tax bracket (37%) at 35 cents per dollar (down from 37 cents per dollar).

The senior deduction

Through the 2028 tax year, taxpayers age 65 or older by the end of the tax year may qualify for an additional 6,000“senior”deduction(12,000 for joint filers if both spouses qualify). Eligible taxpayers can take this tax break whether they itemize or claim the standard deduction, and it’s in addition to the existing extra standard deduction for seniors.

However, the new deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $75,000 for single filers or $150,000 for joint filers. The deduction is reduced by 6% of MAGI exceeding these thresholds. Married taxpayers must file jointly to qualify, and each eligible individual must have a valid Social Security number.

If your MAGI might exceed the applicable phaseout threshold, you may be able to take steps before year end to reduce it and maximize your senior deduction. For example, if your budget allows and you’ve already taken your required minimum distribution for the year (if applicable), consider cutting back on taxable retirement plan distributions for the rest of the year.

If you’re still working, increasing your retirement plan contributions for 2026 can reduce your MAGI. Whether you’re retired or still working, loss harvesting (see below) and other investment-related strategies can also reduce your MAGI.

Changes to charitable giving deductions

Before the OBBBA, taxpayers who didn’t itemize generally couldn’t deduct their charitable contributions. Beginning in 2026, however, nonitemizers can deduct up to 1,000inqualifyingcashdonations(2,000 for joint filers). The deduction generally applies to cash contributions made directly to qualifying public charities. Donations to donor-advised funds and most private foundations, as well as noncash contributions, aren’t eligible.

Cash donations include not just actual cash but gifts made by check, debit or credit card, payment app, or payroll deduction. If you might be eligible for this new deduction, be sure to properly substantiate your cash donations. To be deductible, they must be:

• Supported by a bank record, receipt or written communication from the charity if they’re under $250, or

• Substantiated by the charity if they’re $250 or more.

The OBBBA also introduced a new limitation on charitable deductions for taxpayers who itemize. Beginning in 2026, only contributions exceeding 0.5% of adjusted gross income (AGI) are deductible. For example, if your 2026 AGI is $100,000, you can’t deduct the first $500 of your charitable contributions. Amounts disallowed by this floor generally can’t be carried forward unless the taxpayer also has contributions exceeding the applicable percentage-of-AGI deduction limits. (For instance, deductions for cash gifts to public charities generally can’t exceed 60% of your AGI.)

These changes make the strategy of “bunching” charitable contributions into a single tax year worth considering. Traditionally, taxpayers have used this approach to accumulate enough itemized deductions to exceed the standard deduction in alternating years. Now, concentrating donations in one year may also help reduce the impact of the new 0.5%-of-AGI floor. However, the potential benefits depend on your income, other itemized deductions and the timing of your contributions.

Increase in the SALT cap

The OBBBA temporarily increased the limit on state and local tax deductions (the SALT cap) through the 2029 tax year. For 2026, taxpayers who itemize can deduct up to 40,400(20,200 for married couples filing separately). Deductible expenses include:

• State and local real estate taxes,

• Qualifying personal property taxes, and

• Either state and local income taxes or general sales taxes, but not both.

The SALT cap is scheduled to return to 10,000(5,000 for separate filers) in 2030.

The higher limit may provide substantial tax savings, depending on your SALT expenses and MAGI. For 2026, the deduction cap is reduced by 30% of MAGI exceeding 505,000(252,500 for separate filers), but it can’t fall below 10,000(5,000 for separate filers). Both the higher cap and the income threshold are scheduled to increase by 1% annually through 2029.

If your 2026 SALT expenses are below the applicable cap, consider whether accelerating certain tax payments into 2026 could increase your deduction. For example, you may benefit from paying property taxes before year end, provided they’ve already been assessed, or making eligible state estimated income tax payments.

Tax loss harvesting

Although economic conditions have been mixed in 2026, the stock market generally has performed well. If you have underperforming investments in your taxable portfolio, consider selling them before year end to harvest capital losses that can offset taxable capital gains you’ve already recognized.

If your capital losses exceed your gains, you generally can deduct up to 3,000oftheexcessagainstordinaryincome(1,500 for separate filers), with unused losses carried forward to future tax years. Harvesting losses also may help reduce or eliminate your exposure to the 3.8% net investment income tax (NIIT). It applies to some or all net investment income when MAGI exceeds 200,000peryear(250,000 for joint filers and $125,000 for separate filers). The NIIT thresholds aren’t annually indexed for inflation, so more taxpayers are being hit by this tax.

Be mindful of the wash-sale rule, however. It generally disallows a loss deduction if you purchase substantially identical securities within 30 days before or after the sale. The rule can also apply to purchases made by your spouse or through an IRA. In most cases, a disallowed loss is added to the tax basis of the replacement securities, deferring the tax benefit rather than eliminating it.

Don’t delay

With the end of 2026 fast approaching, now is the time to take action to minimize your tax liability. Changes under the OBBBA, combined with longstanding tax-saving tactics, create both opportunities and challenges. The most effective approach depends on your income, investments, deductions and overall financial situation. Contact FMD to discuss your circumstances and develop a year-end tax strategy.

Take the Guesswork out of Gifting Hard-to-Value Assets with Defined-Value Gifts

Transferring wealth to family members can reduce your taxable estate. But when gifts involve assets that are difficult to value, such as interests in a closely held business or family limited partnership (FLP), unexpected tax consequences can arise.

The challenge is that the IRS may disagree with the value assigned to a gifted asset. If it determines that the asset is worth more than you reported, the resulting adjustment could trigger additional gift tax, interest and potentially penalties. One strategy to manage this uncertainty is to make defined-value gifts.

What is a defined-value gift?

Rather than transferring a fixed percentage of a business or a specific number of partnership units, a defined-value gift transfers an interest worth a predetermined dollar amount. For example, suppose you want to give your daughter a $2 million interest in your FLP, protected from gift tax by your lifetime gift and estate tax exemption. Based on a professional appraisal, you transfer a 20% interest. Later, the IRS determines that the FLP is worth more than the appraisal. It values the 20% interest at $2.5 million. That additional $500,000 of value will use up another $500,000 of your lifetime exemption. If you don’t have enough lifetime exemption left to cover that amount, it could be partially or fully subject to federal gift tax at a rate of 40%, plus interest and even penalties.

With a properly drafted defined-value formula, the percentage interest transferred would be adjusted to reflect the final value determined for federal gift tax purposes. Your daughter would still receive an interest worth $2 million, but the ownership percentage transferred would be smaller. This approach can help prevent an unexpected valuation adjustment from increasing the gift’s taxable value.

How do formula and savings clauses differ?

Not all provisions designed to protect against valuation adjustments are legally effective. Courts have distinguished between permissible formula clauses and problematic “savings” clauses.

A formula clause establishes the dollar value of the property being transferred and determines the corresponding ownership interest using a value finally determined for federal tax purposes. If that value changes, the ownership percentage adjusts under the original formula.

A savings clause, by contrast, attempts to reverse part of a completed gift if the IRS later determines that the transfer creates an unwanted tax liability. Courts generally have rejected such provisions.

Precise wording in the transfer document matters

For a defined-value gift to be effective, language in the transfer documents must be precise. In one case, the U.S. Tax Court rejected an intended defined-value gift of FLP interests and upheld the IRS’s gift tax assessment based on percentage interests. The documents called for transferring FLP interests with a defined fair market value “as determined by a qualified appraiser” within a specified time after the transfer.

The court found that the transfer documents failed to achieve a defined-value gift because a qualified appraiser determined the fair market value. The documents didn’t provide for an adjustment in the number of FLP units if their value “is finally determined for federal gift tax purposes to exceed the amount described.”

Consult an estate planning attorney for assistance drafting proper formula clauses for defined-value gifts.

Reducing valuation-related tax risks

Defined-value gifts are useful when transferring business interests or other assets without readily available market prices. If you’re considering substantial gifts of hard-to-value assets, contact FMD for help determining if a defined-value gift may be right for your situation. With appropriate planning and documentation, you may be able to reduce valuation-related tax risks while advancing your long-term wealth transfer goals.

5 Year-End Tax Planning Strategies for Businesses

The 2026 tax year is almost over, but you still have time to implement year-end tax planning strategies to reduce your business’s federal income tax liability. Let’s look at a few moves you may be able to make before New Year’s Day to trim your tax bill.

1. Invest in capital assets

If you acquire and place in service eligible new or used assets in 2026, you can benefit from the 100% first-year bonus depreciation deduction. Eligible assets include new and used machinery, equipment, certain vehicles, off-the-shelf computer software, and qualified improvement property (QIP).

Generally, bonus depreciation is automatically applied to your purchases of eligible assets placed in service during the tax year. You can elect out (which sometimes can be beneficial), but only for an entire asset class, such as all five-year assets or all seven-year assets. You can use bonus depreciation to create a net loss that you generally can carry forward to future tax years.

Another depreciation-related tax break is the Section 179 expensing election. For 2026, you can deduct up to $2.56 million of the cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software and QIP. The deduction begins to phase out dollar-for-dollar when qualifying purchases exceed $4.09 million. It’s limited to the taxable income from your business activity, so you can’t use it to create a net loss. But you can carry forward unused amounts or apply bonus depreciation to the excess.

Also, Sec. 179 expensing isn’t automatic, and it can be applied on an asset-by-asset basis — or even to only part of an asset’s cost. This flexibility can be a planning advantage over bonus depreciation.

Consider factors such as cash flow, revenue projections, financing terms and the impact on other tax breaks before buying a pricey capital asset. The related deduction may prove more valuable later.

2. Take advantage of the deduction for QPP

If you’re a manufacturer and you have new construction nearing completion, finishing it before the new year could provide a 2026 deduction. Your business may qualify for a temporary depreciation deduction for the construction of qualified production property (QPP) placed in service after July 4, 2025, and before January 1, 2031. This break lets eligible businesses claim a deduction equal to 100% of the QPP’s adjusted basis in the tax year it’s placed in service. Unlike bonus depreciation, the QPP deduction requires an election.

Among other requirements, QPP generally must be nonresidential real property located in the United States and used as an integral part of a “qualified production activity.” This means that manufacturing, production or refining activities must take place within the physical space of the property. Portions used for offices, administrative services, lodging, parking, sales, research, software development, engineering or storage of finished products generally are ineligible. Additional requirements apply, including restrictions on construction dates and property use.

3. Identify research expenses

The Sec. 174 deduction for research and experimental (R&E) expenses and the Sec. 41 research credit (often called the “research and development” credit) aren’t limited to businesses traditionally associated with cutting-edge experimentation and innovation. So it could pay off to investigate whether you’ve incurred qualified expenses. Keep in mind that the definition of qualified expenses is generally broader under the R&E deduction than under the research credit.

Under the R&E deduction, qualified expenses include costs related to activities intended to discover information that would eliminate uncertainty about the development or improvement of a product. You can deduct such domestic expenses in the tax year they’re incurred or paid — regardless of whether the associated project has been completed — or amortize them over at least five years. Foreign qualified expenses must be amortized over 15 years.

Your deduction expenses also might qualify for the research credit, but you can’t claim both for the same expense. Generally, if you claim the credit, you must reduce your deduction by the credit amount. Or you may be able to make a Sec. 280C election, which generally will reduce the credit by the maximum corporate tax rate (21%) and let you take the full deduction. Modeling can help you determine the optimal choice.

4. Maximize your QBI deduction

The Sec. 199A qualified business income (QBI) deduction allows owners of sole proprietorships and pass-through entities (including partnerships, S corporations and most limited liability companies) to deduct up to 20% of their QBI. QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business.

The amount of the allowable 199A deduction is subject to wage and investment limitations at higher income levels, so project your taxable income now to determine whether they might apply. The One Big Beautiful Bill Act (OBBBA) expanded the phase-in ranges for those limits beginning in 2026, meaning some taxpayers will qualify for larger deductions.

For 2026, the limits generally kick in when taxable income is within the range of $201,750 to 276,750(403,500 to $553,500 for married couples filing jointly). If your taxable income falls in the range, the limits will partially reduce your 199A deduction to the greater of:

• 50% of W-2 wages paid to employees, or

• 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified business property (for example, machinery, equipment, buildings and other depreciable property).

When taxable income exceeds the top of the range, the deduction is fully reduced to the greater of the above.

Another limit that’s phased in based on the income threshold is the 199A deduction being unavailable for income from a “specified service trade or business.” Examples include businesses that involve investment-type services and most professional practices (other than engineering and architecture).

If your projections suggest you’re close to the lower end of the phase-in range, consider measures to reduce your taxable income. You can, for example, maximize retirement plan contributions. Cash-basis businesses can defer income into 2027 and accelerate expenses into 2026.

If the limits are unavoidable, you may be able to boost your deduction by, for instance, increasing wages or purchasing qualified business property before year end. Keep in mind that such maneuvers can have additional consequences, such as higher payroll taxes.

5. Assess the impact of the “excess” business loss limitation

Noncorporate taxpayers generally can use business losses to offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains, but only up to an inflation-adjusted limit. Losses exceeding this limit generally can’t be deducted in the current year. Instead, they’re treated as net operating loss (NOL) carryforwards to subsequent tax years, generally subject to the 80% taxable income limitation on NOL deductions.

The OBBBA made this “excess” business loss limitation permanent. For 2026, the limit drops to $256,000, or $512,000 for joint filers, down from $313,000 and $626,000, respectively, for 2025. As a result, taxpayers generating substantial business losses from bonus depreciation, currently deductible research expenses or other deductions may be unable to claim the full tax benefits of those losses in 2026.

If your projected 2026 business losses are approaching or exceeding the limit, consider whether accelerating business income or deferring certain deductions could help maximize your current-year tax benefits. These strategies should be evaluated carefully because shifting income or deductions between tax years can affect future NOL deductions and overall tax liability.

Take a proactive approach

Year-end planning is important for any business looking to minimize income tax liability and strengthen its financial position. Implementing the right strategies can help you make the most of available deductions and credits — and avoid missed tax-saving opportunities. Need help? FMD can evaluate the implications of these and other potentially tax-cutting tactics.

Cost vs. Coverage: Renewing Your Business’s Employee Health Plan

If your business’s renewed employer-sponsored health insurance plan starts at the beginning of the calendar year, you’re probably negotiating next year’s rates now or will be soon. The stakes are high and rising: Preliminary survey results from Marsh (whose Mercer business advises employers on health benefits) project that employers’ health benefit costs per employee will increase an average of 8.2% in 2027. The renewal period is an opportunity for your business to determine what employees value, where expenses are growing and how you can balance cost vs. coverage.

Start with people

Before changing plan benefits, review enrollment and employee feedback. Are workers using the plans you offer? Do they understand their choices? You may be looking for ways to cut costs, but a lower-premium plan may be a poor fit if its deductible, prescription coverage or provider network makes care less affordable for employees.

Ask your benefits consultant for spending pattern and plan use data (that omits employees’ medical conditions). These reports can help you spot opportunities to improve plan design and communication. For example, employees may not use lower-cost care options because they aren’t aware of them. Be sure you compare the cost of plans you’re considering to what employees will pay, including premiums and likely out-of-pocket expenses.

Putting numbers in context

Your consultant or insurance broker can explain increases proposed by insurers and compare competing options on the same basis for the following:

• Provider networks,

• Deductibles,

• Prescription formularies,

• Administrative fees, and

• Any changes in covered services.

A lower quote may come with trade-offs that matter to your workforce. For instance, high-deductible health plans paired with Health Savings Accounts can appeal to some workers, but you shouldn’t assume everyone will embrace that option.

Give pharmacy coverage particular attention. Prescription drug benefits are among the fastest-growing expense categories. Ask what drives your costs, how rebates and fees are handled, and whether other contract arrangements offer better value.

If your health plan is self-funded, an independent review of claims payments and pharmacy contract terms may uncover errors or charges that warrant your follow-up. A benefits advisor can help determine whether potential savings justify the review’s cost. For any plan, request a clear explanation of proposed wellness or care-navigation programs, including how employees would use them and how you’d measure results.

Financial impact

The cheapest plan isn’t necessarily the best choice for your business and its workers. Changes that raise employees’ costs may affect their ability to get care and how they view your benefits package. That, in turn, can affect hiring and retention.

Before signing renewal papers, model several options using your expected enrollment, employer contributions and cash flow. Also, contact FMD. We can help you compare the financial impact of renewal proposals, test different cost-sharing approaches and insert the plan you choose into next year’s budget. If possible, get in touch before insurance negotiations begin so you can use our analysis in your decision.

IRS Guidance Clarifies Employer Contributions to 530A Accounts (Trump Accounts) and More

Getting children on the road to a financially secure future can be a challenge. To help, the One Big Beautiful Bill Act (OBBBA) created Section 530A accounts (also known as “Trump Accounts”), a new type of tax-advantaged savings vehicle for eligible children. Not only can parents and grandparents contribute, but so can businesses as an employee benefit.

The IRS and U.S. Treasury Department have been rolling out guidance on the nuances of these accounts, including regulations proposed in August for employer contribution programs and temporary regs released at the end of September that introduce automatic enrollment of eligible children.

Auto accounts

Under the September temporary regs, on October 1, 2026, the Treasury Dept. automatically established “auto accounts” for eligible children who didn’t already have a 530A account. (The regs also call for additional auto accounts to be established periodically.) Earlier regs didn’t provide this broad automatic enrollment and have been withdrawn and replaced by these new temporary regs.

An auto account can receive a $1,000 government-funded deposit available to U.S. citizen children born from January 1, 2025, through December 31, 2028 — but only if a parent, guardian or other eligible individual makes the required election. Auto accounts can also receive certain “qualified general contributions” by donors (more information below).

To accept other types of contributions, including employer, parent or other family contributions, the auto account must first be claimed by a parent, guardian or other eligible individual. The claimant must verify his or her identity and legal authority through an electronic process.

The temporary regs also provide a framework for the aforementioned qualified general contributions, under which eligible donors (governments or tax-exempt organizations) can fund accounts for a specified class of children through the Treasury Dept. These contributions generally must be made in equal amounts to the accounts of all eligible children in the designated class. The temporary regs also permit certain contributions of publicly traded stock to qualify.

Employer contribution basics

Under the OBBBA, employers can annually contribute up to $2,500 per employee (adjusted for inflation after 2027) to the 530A accounts of employees’ dependents (or of employees, if they’re young enough to still be eligible). Contributions generally are excluded from the employee’s federal taxable income. (Social Security, Medicare and federal unemployment taxes generally still apply.)

Under the August proposed regs, a qualified contribution program would have to be governed by a separate written plan for the exclusive benefit of its employees and satisfy several additional requirements. The plan would have to specify the:

• Classes of eligible employees,

• Rules governing employer contributions, including the amount of contributions and whether contributions may be made via a Sec. 125 cafeteria plan,

• Procedures for an employee to designate the account to receive contributions,

• Certification, notice and reporting procedures,

• Plan year, and

• Procedures for correcting administrative failures and furnishing notices to employees and trustees when amounts previously designated as employer contributions are subsequently determined not to be excludable.

A program that doesn’t adhere to its written plan wouldn’t constitute a 530A account contribution program under the proposed regs. So any contributions would be subject to federal income tax.

Notably, the proposed regs define “employee” more narrowly than some had expected. Self-employed individuals — including partners, sole proprietors and 2% S corporation shareholders — wouldn’t be able to participate in such a program under the regs. But these exclusions wouldn’t prevent sole proprietors, partnerships or S corporations from offering a program to their eligible employees.

Confirming eligibility

Employers can make contributions only to accounts whose beneficiaries are: 1) in their growth period, and 2) employees or employees’ dependents. A beneficiary’s growth period runs from the establishment of the account to December 31 of the calendar year in which the beneficiary reaches age 17.

The proposed regs would allow employers to rely on written employee certifications representing:

• That the beneficiary is the employee or anticipated to be the employee’s dependent for the taxable year the contribution is made,

• The beneficiary’s date of birth, and

• That no facts are known to the employee that would make the beneficiary ineligible to receive a contribution.

Employers could rely on such a certification unless they have actual knowledge that the certification is incorrect.

However, an employer couldn’t rely solely on an employee certification to establish that the recipient account is valid. The employer would have to use a method reasonably designed to verify that the contribution is made to a valid account. Verification could use information from the trustee, payroll processor or another service provider.

Fair access

Employer contribution programs can’t favor “highly compensated employees” (HCEs) or their dependents. The rules for compliance largely mirror those for dependent care assistance programs.

Among other things, programs must satisfy the contributions and benefits, eligibility, and average benefits tests. If a program doesn’t satisfy these tests, HCEs could lose the income exclusion for some or all contributions for federal tax purposes.

The August proposed regs recognize that some major employers have indicated that they intend to match the $1,000 government contributions for certain children. They’d permit employers to disregard such matching contributions for purposes of the contributions and benefits test, as well as the average benefits test, if the contributions are made available on the same terms and conditions to all employees who aren’t excluded for nondiscrimination test purposes. This relief wouldn’t eliminate the eligibility test.

Additional considerations

The August proposed regs address several other areas related to employer contributions, including:

Payroll deductions. The proposed regs would allow employees to make pretax contributions through a cafeteria plan to a dependent’s 530A account, but not to their own accounts. A cafeteria plan offering this benefit would have to specifically describe it and allow participants to prospectively change or revoke their salary-reduction elections at least monthly. Any change or revocation would have to take effect before the affected salary becomes currently available.

Shared limits. Employer-funded and salary-reduction contributions through a cafeteria plan share the $2,500 limit. These contributions also count toward the account’s general $5,000 annual contribution limit. (The $1,000 pilot program contribution and qualified general contributions don’t count toward the $5,000 limit.) The proposed regs clarify that, if an employee has multiple employers in a year, the total contributions the employee can exclude from income across all employers can’t exceed the applicable annual limit.

Employee notices. Under the proposed regs, employers would be required to provide eligible employees notification of the availability and terms of the contribution program. They also would be required to provide a statement showing the amount of contributions made for an employee in the previous calendar year (for example, on Form W-2).

Evaluate the benefit

The September temporary regs apply to tax years beginning on or after January 1, 2026, and expire on September 30, 2029. The August proposed regs would apply to plan years beginning on or after the date final regulations are published. A hearing on the proposed regs is tentatively scheduled for October 15, 2026.

These temporary and proposed regs provide important details for both families and businesses, but more guidance is expected. Parents should understand how an auto account works and what’s required to establish a receiving account before making additional contributions. Businesses considering an employer contribution program should also review the proposed rules and their administrative requirements. Contact FMD to discuss how the evolving guidance may affect you or your business.

Buying a Business? It Pays to Dig Deeper into the Financials

Whether you’re launching a new venture or expanding an existing one, it’s often easier to buy an established business than to build market share from scratch. Before signing a purchase agreement, however, you should review the seller’s financial records to understand what’s really driving the business’s profits and cash flow.

Comprehensive due diligence doesn’t just benefit buyers. Under recent U.S. Small Business Administration (SBA) guidance, certain SBA-financed business acquisitions may now require an independent quality of earnings (QoE) report as part of the underwriting process. The change underscores the importance of thorough financial due diligence. Here’s a closer look at what you should review to help identify risks, evaluate the sustainability of earnings and make a more informed decision.

Financial statements and tax returns

Start by asking the seller for financial statements and tax returns for the last three to five years. These records can help you evaluate trends in revenue, profitability and cash flow. Consistent growth and stable margins may indicate a healthy business. On the other hand, declining profits, volatile results or persistent cash flow challenges may warrant closer scrutiny.

Before you analyze performance, understand how the financial statements were prepared. Under U.S. Generally Accepted Accounting Principles (GAAP), the primary financial reports include:

• An income (or profit and loss) statement, which shows revenue and expenses for the accounting period,

• A balance sheet, which presents the book values of the business’s assets, liabilities and equity on the financial statement date, and

• A statement of cash flows, which summarizes cash inflows and outflows from operating, investing and financing activities during the accounting period.

GAAP statements follow accrual-basis accounting, meaning revenue and expenses are matched to the reporting periods in which they’re earned and incurred. Audited and reviewed financials may also include footnote disclosures that explain important information about the amounts reported in the financial statements.

Some businesses don’t prepare GAAP statements. Instead, they might use a special purpose framework or provide only internally prepared statements. These statements may exclude certain reports, line items and disclosures. Cash- or tax-basis statements may require accounting-method adjustments to analyze financial performance.

Also, compare financial statements with tax returns. Differences may be legitimate, but significant discrepancies should be explained. The objective is to determine whether the reported results accurately reflect the business’s economics.

Supporting records

Reports from the seller’s accounting software may help reveal issues that aren’t immediately obvious from the financial statements. During due diligence, consider requesting copies of:

• The current year’s budget,

• General ledger detail for selected accounts,

• Accounts receivable aging reports,

• Accounts payable aging reports, and

• Inventory summaries, if applicable.

For example, accounts receivable aging reports can show whether customers are paying on time or whether substantial amounts are overdue. Inventory reports may identify obsolete or slow-moving inventory.

You can also request bank reconciliations. Consistently reconciled accounts can indicate stronger bookkeeping practices and more reliable financial reporting. By contrast, incomplete or outdated reconciliations may signal that the records require additional verification.

Don’t overlook the importance of touring the business’s facilities. Observing operations firsthand may reveal inefficiencies, equipment concerns, excess inventory or other conditions that aren’t apparent from accounting records alone.

Normalizing adjustments

Many closely held businesses have expenses or financial arrangements that may not continue after a change in ownership. Examples may include:

• Above-market owner compensation,

• Personal expenses paid through the business,

• Family members on payroll,

• Above-market or below-market rent or related-party arrangements, and

• One-time gains or expenses.

During due diligence, these items are often adjusted to reflect what earnings would look like under typical operating conditions. This process is commonly referred to as “normalizing” the financial statements.

QoE reports

A common mistake buyers make is focusing on how much profit a business reports without considering the quality of those earnings. Effective October 1, 2026, certain SBA-financed acquisitions require an independent QoE report. This requirement generally applies to certain change-of-ownership loans when the purchase price is $3 million or greater, excluding applicable real estate. The new SBA requirement reflects growing recognition among lenders and investors that reviewing the acquisition target’s financial statements alone isn’t always enough.

A QoE report evaluates whether earnings and cash flow reflect the business’s ongoing operations and can support the acquisition debt. Such reports typically 1) analyze revenue, working capital, cash flow, and management’s earnings before interest, taxes, depreciation and amortization (EBITDA) figures and 2) verify various adjustments to the financial statements. In turn, the report may help reveal potential deal risks, such as:

• Customer or supplier concentration risks,

• Working capital shortfalls,

• Deferred equipment purchases and maintenance,

• Bad debts,

• Dependence on key personnel,

• Undisclosed liabilities and related-party transactions, and

• Pending litigation.

Even if you’re financing a deal yourself, an independent QoE report can help you interpret the business’s historical results in the context of today’s market conditions. If you commission your own report, you can customize it based on your needs and concerns.

For instance, you might want to break down gross profits by geographic region, salesperson or product line to understand what’s making money — and what’s not. Or you might ask for additional analysis of anomalies detected during your preliminary review of the financial statements and tax returns. A QoE report can also calculate relevant financial ratios and compare them with industry benchmarks for comparable businesses.

Professional support

If you’re thinking about buying a business, contact FMD for guidance through the due diligence process. We can help evaluate financial statements and tax returns, review supporting records, identify unusual transactions, assess financial and operational risks, and provide a QoE report if needed — before you sign on the dotted line.

Special Estate Planning Considerations may be Necessary if You have Nonbiological Children

Modern families come in many forms. A household may include biological children, adopted children, stepchildren or children of an unmarried partner. Even though family members may view all of these children equally, inheritance laws often do not.

That distinction can have significant consequences if your estate plan doesn’t clearly reflect your intentions. Whatever your family makeup, knowing how the law treats different parent-child relationships can help prevent unintended results.

Adopted children generally have the same inheritance rights

After an adoption is legally completed, an adopted child generally has the same inheritance rights as a biological child of the adoptive parent. This is particularly important when someone dies without a valid will. Under state intestacy laws, adopted children generally inherit from their adoptive parents just as biological children do.

Similar treatment typically applies to estate planning documents. For example, if a will or trust leaves assets to a person’s “children,” “grandchildren” or “descendants,” those terms will generally include legally adopted children unless the document provides otherwise.

Even so, relying on general terminology may not always be best, particularly in a complicated family. Clearly identifying beneficiaries and periodically reviewing your estate planning documents can reduce uncertainty and the risk of disputes.

Stepchildren usually are treated differently

A close relationship between stepparent and stepchild doesn’t automatically create inheritance rights. In most cases, a stepchild who hasn’t been legally adopted has no automatic right to inherit from a stepparent under intestacy laws.

This can produce an unwelcome surprise. Suppose you’ve helped raise a stepchild for decades and consider that person to be your child. If you die without a will or trust that specifically provides for the stepchild, he or she may receive nothing from your estate.

One option is legal adoption. In most states, even an adult child can be adopted, as long as he or she consents. Another option is to specifically name the stepchild as a beneficiary in your will or trust. Depending on your goals, you may also want to review beneficiary designations on retirement accounts, life insurance policies and other assets that pass outside your will.

Adopting a stepchild can provide important legal rights and formalize an existing family relationship, but consider inheritance issues before proceeding. Depending on state law and the circumstances of the adoption, a stepparent adoption may affect the child’s legal relationship with the other biological parent. In some situations, that could change the child’s intestate inheritance rights involving that parent and members of that side of the family.

Because adoption and inheritance laws vary by state, families should fully understand these consequences before deciding to adopt.

Unmarried couples may need additional planning

Estate planning can become even more important when unmarried partners are raising a child who’s legally related to only one partner, especially while the child is still a minor. Without an adoption or appropriate planning, the other partner likely will have no automatic parental rights and the child will likely have no inheritance rights from that partner.

A so-called “second-parent” adoption may provide a solution. This arrangement may allow an unmarried partner to adopt the other partner’s child without terminating the legal parent’s rights. However, availability and legal consequences vary by jurisdiction.

When adoption isn’t available or desired, other estate planning documents may help address some concerns. For example, the legal parent may be able to name the partner to serve as the child’s legal guardian if the parent dies. Keep in mind that a parent’s guardian nomination isn’t necessarily binding on a court. The ultimate decision generally will be based on applicable state law and the child’s best interests.

Make your intentions unmistakable

Blended and nontraditional families shouldn’t assume inheritance and other laws will produce the results they expect. Your estate plan should clearly identify the people you want to protect and explain how you want to distribute your assets. If your family includes adopted children, stepchildren or a long-term partner’s children, contact FMD. We can review your estate planning documents to ensure they reflect both your family relationships and your intentions.

Make More Timely Business Decisions with Interim Financial Reports

If you decide to hire new employees, adjust prices or expand operations, you shouldn’t rely on financial information that might be months out of date. And this may be the case if your business generates only one set of financial statements annually. Interim financial reports can provide a fresher picture of operational performance and strategic direction. Used consistently, such reports can help you spot emerging problems and potential opportunities.

Your reporting routine

Interim reporting covers periods shorter than one fiscal year, such as a month or quarter. The appropriate frequency depends on your business’s size, complexity, seasonal patterns and financing requirements. Rapid growth or cash flow problems may warrant more frequent updates than if your operations are steady and predictable.

To produce an interim report, start with your most recent set of financial statements. Then supplement it with other relevant information, such as inventory turnover rates or profitability by product or service. (We can help you gather what you need and set up an interim report template.)

Beyond revenue growth

Once you have an interim report, compare the results with your budget and your financial statements from that period of the previous year. Be sure to account for seasonality. A slow quarter may be normal for your business, but disappointing results during your historically busy months should probably ring alarm bells.

Revenue doesn’t tell the whole story. Because of higher labor costs, supplier price increases or excessive discounting, sales may rise while profit margins shrink. Understanding the cause can help you decide whether to adjust pricing, renegotiate purchasing terms, change your sales approach or take no action at all.

Don’t forget to review your balance sheet and statement of cash flows together. Growing accounts receivable may reflect increased sales, slower collections or both. Excess inventory can tie up cash, while shortages can delay orders. Increasing reliance on a line of credit deserves investigation, especially if you borrow to cover recurring operating shortfalls.

Dependable numbers

An unexpected result in an interim report doesn’t necessarily signal a crisis. But don’t dismiss it as something you can fix at year end. Immediately determine whether the anomaly reflects a business change, an accounting error or an outdated estimate.

Keep in mind that consistency matters in interim reports. Record revenue and expenses in the appropriate periods for your business’s accounting method. For accrual-based reports, evaluate applicable expense accruals throughout the year, including bonuses and profit-sharing obligations. Omitting these costs until year end can overstate interim profitability.

Inventory records and customer balances also need attention. Reconcile key accounts, investigate inventory discrepancies and assess whether outstanding receivables are collectible. Support any estimates and revise them if circumstances change. Although accounting software can speed report preparation, the quality of its output depends on accurate entries and review.

Following through on the findings

When you review interim reports, assign practical responses to them — for example, a conclusion, an action or a further investigation. Then use your next interim report to evaluate whether your response was effective. Contact FMD to set up an interim reporting schedule so you can translate financial results into more informed business decisions.

Prepare Now for a More Efficient Audit

Audit preparation should begin long before fieldwork starts. Giving your accounting team and external auditor time to address significant transactions, reconcile accounts and assemble supporting documents can help streamline the audit process and avoid financial-reporting delays.

Communicate significant developments

Internal and external changes may bring opportunities and risks that could affect your auditor’s procedures. Identify significant developments and discuss them with your auditor during the planning stage rather than waiting for fieldwork.

Examples of noteworthy internal events or transactions include:

• Major asset acquisitions or divestitures,

• New or expanded product lines,

• Business combinations, discontinued operations or restructuring activities,

• Relocation or a new lease for commercial space,

• New or refinanced debt, covenant issues or changes in financing arrangements,

• Addition or retirement of owners and other key employees,

• Losses and business interruptions from natural disasters, fraud or cyberattacks,

• Acquisition or loss of a key customer or supplier, and

• A change in accounting software.

Your auditor will also want to hear about external changes, such as pending lawsuits and tax audits, new sources of competition, and new regulatory developments. Also communicate financial pressures, liquidity concerns and events occurring after year end that could affect the financial statements or related disclosures. When in doubt, tell your auditor.

Address accounting issues early

To the extent possible, all transactions for the year should be entered into your accounting system before fieldwork begins. But your accounting personnel might not know exactly how to report certain items. New contracts, leases, financing arrangements, acquisitions and unusual transactions may require research or significant judgment under U.S. Generally Accepted Accounting Principles (GAAP) or another applicable financial reporting framework.

If your staff is uncertain how to account for a particular transaction or when a new rule goes into effect, ask for help before closing the books. Your auditor may be able to explain the applicable guidance and discuss possible approaches, subject to independence requirements.

However, management must make accounting decisions, oversee any assistance provided and accept responsibility for the financial statements. Resolving questions early can reduce audit inquiries and the need for adjusting journal entries during fieldwork.

Apply lessons from your prior audit

Start by looking at last year’s adjusting journal entries, control deficiency communications and management letter comments. Confirm that you’ve incorporated recurring adjustments into your year-end closing procedures and implemented agreed-upon corrective actions. Also evaluate whether key controls are being performed consistently and whether supporting documentation, approvals, and other audit evidence are being retained and organized appropriately.

For example, if your controller previously forgot to record accrued payroll and vacation, double-check that you recorded the necessary accruals for the current year. Likewise, if your auditor recommended stronger internal controls over purchasing, evaluate whether your processes for ordering and receiving goods, approving invoices, modifying vendor information, and authorizing payments are appropriately separated or independently reviewed.

Don’t limit your review to items that resulted in an adjustment. Consider delays, documentation gaps and difficult questions from the previous audit. Addressing those trouble spots before fieldwork can prevent the same issues from resurfacing.

Organize records and responsibilities

Financial statement balances should be supported by schedules or other documentation that reconcile to the general ledger and trial balance. Be prepared to substantiate significant judgments and estimates, such as allowances for credit losses, inventory obsolescence reserves, warranty obligations, impairment analyses and measures of progress used to recognize revenue over time.

Ask your auditor for an updated prepared-by-client request list and clarify the expected format and due date for each item. You’ll likely create many requested schedules — such as accounts receivable aging reports and fixed asset listings — when you reconcile your general ledger. A secure electronic audit portal or well-organized audit file can help your team submit documents efficiently and track outstanding requests.

It also helps to designate an internal liaison to field the audit team’s inquiries. Often, this is the business’s CFO or controller, but it can be anyone knowledgeable about your business’s operations and accounting systems. Make sure other employees understand their roles, preserve requested records and reserve time to answer questions. Prompt, complete responses can help keep fieldwork on schedule.

Reduce disruptions and avoid surprises

A well-planned audit is typically more efficient, less disruptive and easier to manage than one that relies on last-minute preparation. By addressing accounting questions early, organizing documentation and resolving potential issues before fieldwork begins, your team can spend less time responding to audit requests and more time running the business. Contact FMD to help coordinate the planning process and prepare for a smoother audit.

How Your Business Can Use AI to Strengthen Customer Service

These days, customers expect fast and personalized service and support from the businesses they patronize. AI can help you meet their high expectations without overburdening your employees. But as in other contexts, AI in customer service is usually only as effective as how it’s trained and used. To improve responsiveness and give employees more time to resolve complex issues, you must use AI properly.

5 potentially productive uses

AI can help your business:

1. Provide immediate answers, 24/7. AI-powered chatbots and virtual assistants can answer common questions, day or night. You might train them to explain return policies, provide store hours, check order status and troubleshoot simple problems. To deliver helpful answers, your AI tool should draw from accurate, regularly updated sources — such as your website and product or service instructions. To reduce the likelihood that AI will provide inaccurate or inappropriate responses, set clear limits on where it may gather information and what it may discuss with customers.

2. Classify and route requests. AI can analyze incoming phone calls, emails, chat messages and support tickets to help determine your customers’ needs, issue types and urgency levels. Then, it can route requests to employees who can address their concerns. A billing question, for example, might be routed to accounts receivable. Meanwhile, a technical problem might be assigned to a product specialist. Some AI systems feature sentiment analysis to identify frustrated customers and prioritize their cases.

3. Support customers on social media. Customers often turn to Facebook, Instagram and other social media platforms to ask questions, report problems or post complaints. AI tools can monitor direct messages and comments made to your accounts, provide automated greetings, and acknowledge messages. You might also instruct your AI model to draft responses for employee approval. Facebook, for instance, supports automated Messenger greetings. However, you should instruct your AI tools to alert an employee about any sensitive or confidential messages, rather than responding automatically.

4. Empower service staffers. AI doesn’t have to communicate directly with customers to be valuable to your business. It can work behind the scenes to summarize a customer’s history or locate answers for staffers to convey. During a live customer service interaction, AI may recommend troubleshooting steps or identify appropriate actions. It can also prepare call notes and update records. This support may shorten response times and help employees provide better service.

5. Identify recurring problems. Customer conversations generally contain many different pieces of information about your business’s products or services. AI can analyze these interactions to uncover recurring complaints, common questions and emerging trends. AI conclusions can help you take corrective action by improving your offerings, revising product instructions, and updating sales and support training. And AI can analyze which issues consume the most support time, helping you decide where improvements may yield the greatest return.

Understand potential shortcomings

Of course, AI isn’t always the best option for customer service. It can misunderstand requests, overlook context and generate confident-sounding but incorrect answers. And customers may become frustrated if they can’t reach a live person quickly. In addition, keep close tabs on privacy and security issues, particularly if conversations contain payment, health or other sensitive information.

Finally, your business should regularly test its AI systems, restrict their access to confidential data and establish escalation rules. Employee intervention is especially important if the system can’t resolve an issue or a supervisor believes something requires human judgment. Instruct employees to take any AI concerns to their managers immediately.

An extension, not a replacement

Ultimately, AI works best as an extension of — not a replacement for — your customer service team. Its greatest strength is automating routine tasks so employees can focus on nuanced or complicated matters. Contact FMD to discuss costs and potential savings of AI tools.

If You Have a Loved One with a Disability, Consider a Special Needs Trust

Estate planning can take on added significance when a child, spouse or other loved one has a disability. Leaving assets directly to that person — even with the best intentions — could interfere with his or her eligibility for certain means-tested government benefits. A special needs trust (SNT), sometimes called a “supplemental needs trust,” may be the answer.

Assist without jeopardizing eligibility

An SNT can help a loved one with a disability maintain eligibility for means-tested government programs while providing additional financial support. Supplemental Security Income (SSI) provides monthly payments to qualifying individuals with limited income and resources, while Medicaid can provide valuable health care coverage. For SSI purposes, an individual generally may have no more than $2,000 in countable resources. Medicaid eligibility rules vary by state and eligibility category.

Not all property counts toward the SSI resource limit. For example, a home used as the beneficiary’s principal residence generally is excluded, as is one vehicle used for transportation. Certain life insurance policies, burial funds and spaces, household goods, and personal effects may also be excluded, subject to applicable requirements. Because the rules governing which assets count can be complex, evaluate eligibility based on the beneficiary’s particular circumstances.

Word the trust carefully

A properly structured SNT allows assets to be held and managed by a trustee for the benefit of a person with a disability without being treated as the beneficiary’s countable resources for SSI purposes. The beneficiary generally can’t have unrestricted access to or control over the trust assets. Instead, the trustee determines when and how distributions are made according to the trust agreement and applicable benefit rules.

With those limitations in mind, an SNT’s assets can pay for virtually anything government benefits don’t cover, such as unreimbursed medical expenses, education and training, transportation (including wheelchair-accessible vehicles), insurance, computers, and home modifications. It can also pay for “quality-of-life” needs, such as travel, entertainment, recreation and hobbies.

Keep in mind that the trust must not pay money directly to the beneficiary. Rather, it must distribute funds — on behalf of the beneficiary — directly to the third parties providing goods and services to him or her.

Choose the right trustee

Selecting the right trustee is an important part of establishing an SNT. The trustee will manage and invest trust assets, make distributions, maintain records, and comply with the trust document.

Just as important, the trustee should understand your loved one’s individual circumstances and how trust distributions may interact with public benefits. You might choose a trusted family member, a professional trustee or a combination of individuals and professionals, depending on your situation.

Coordinate the trust with your estate plan

Creating an SNT is only one part of the process. Your other estate planning documents and beneficiary designations should be coordinated with the trust. For example, a will or revocable trust can direct a beneficiary’s inheritance into the special needs trust rather than to the individual outright. Life insurance and certain other assets may also be structured to provide funding for the trust.

Other family members and friends should also be aware of the plan. Those who want to make gifts or donations should do so directly to the trust and not to the loved one with special needs.

Plan for long-term support

An SNT can help provide financial security while preserving access to important benefits. But the rules governing these trusts and government programs are complex. FMD can help determine how an SNT fits into your overall plan and can best support your loved one for years to come.

Assessing Your Business’s Fraud Risks

Fraud risks change as your business and its external market conditions evolve. Controls that were previously effective may no longer be appropriate if, for example, you’ve added employees, revised your payment methods, switched vendors or opened new locations. Moreover, fraud perpetrators may use increasingly sophisticated schemes to gain access to your systems. A formal fraud-risk assessment can help you identify control gaps and fortify your defenses against asset misappropriation, financial misstatement and corruption schemes.

Review records and controls

Forensic accountants are often engaged to conduct a focused, objective review of fraud risks and the controls designed to address them. This assessment may include discussions with management and employees to understand how transactions are authorized, processed and recorded. Examples of documents that forensic accountants may review are:

• Bookkeeping records,

• Invoices,

• Bank statements,

• Payments,

• Journal entries, and

• Financial reports.

The assessment may also cover vendor and payroll files, electronic payment records and user-access logs. Management can assist by ensuring easy access to records and personnel. Unexplained delays, inconsistent explanations and missing or incomplete documents can be red flags that warrant further attention.

The engagement’s scope should reflect your business’s size, systems, industry and risks. Although a fraud-risk assessment can help you identify and address vulnerabilities, it won’t uncover every instance of fraud. So ongoing vigilance is essential.

Follow the transactions

Depending on the risks identified, forensic accountants may look for altered, forged or missing documents, management overrides, unusual transaction patterns, and other anomalies. For example, unusual or unsupported journal entries may warrant closer scrutiny, particularly if they’re inconsistent with normal business activity or posted by unexpected individuals. Unreconciled accounts and differences between the general ledger and subsidiary ledgers also warrant attention. An independent count of inventory or cash can help identify missing assets.

Payroll deserves particular attention. Missing or unaccounted-for workers could indicate “ghost” employees — nonexistent workers whose pay is diverted by a perpetrator. Management can help identify these schemes by reconciling payroll to human resources records and tax filings, confirming active workers with supervisors, reviewing duplicate bank accounts or addresses, and independently approving payroll changes.

Management should also watch for behavioral red flags. For instance, fraud perpetrators may avoid taking vacation or sick time for fear someone will uncover their activities, or they may become defensive. Such behavior isn’t necessarily proof of wrongdoing and should be evaluated alongside transactional evidence and other facts.

Protect the investigation

If a fraud-risk assessment uncovers suspicious activity, a separate investigation may be appropriate. Management should preserve relevant evidence and consult legal counsel and a qualified forensic specialist before confronting a suspected employee. A documented investigation plan can help maintain confidentiality, protect evidence, and address legal and employment considerations. Management also shouldn’t assume that one employee acted alone because fraud may involve collusion among employees or people outside the business.

Warning signs don’t always indicate fraud. Accounting irregularities may stem from genuine errors or an ill-designed process. Honest mistakes can be corrected and avoided in the future with better training, process improvements or more effective controls.

Make reporting safe and accessible

According to the Association of Certified Fraud Examiners’ Occupational Fraud 2026: A Report to the Nations, tips were the initial detection method in 43% of the cases studied, and more than half of those tips came from employees. The median fraud scheme lasted 12 months before detection, reinforcing the value of giving people practical ways to speak up.

If your business hasn’t established a process for employees, vendors, customers and others to report suspected misconduct, consider doing so. Your reporting process should provide accessible channels, route allegations away from anyone who may be implicated, prohibit retaliation consistent with applicable law and protect confidentiality to the extent reasonably possible.

Turn findings into stronger controls

A fraud-risk assessment should conclude with an action plan: Assign responsibilities, set deadlines for correcting deficiencies and follow up to confirm that revised controls are working. An external forensic accountant can provide an independent perspective, but management remains responsible for the business’s fraud controls and response procedures. Periodic reassessment can help those controls keep pace as the business and its fraud risks change. Contact FMD to discuss your business’s fraud risks and determine whether your existing controls adequately address them.

New Law Extends Tax Relief for Disaster-Related Personal Casualty Losses and More

President Trump recently signed the Doug LaMalfa Federal Disaster Tax Relief Certainty Act (LaMalfa Act) into law. Among other things, it extends tax relief for victims of certain federally declared disasters. That relief temporarily removes two significant barriers to claiming the personal casualty loss deduction. This means victims of presidentially declared disasters in recent years who normally couldn’t claim a casualty loss deduction may now be able to claim one. It also extends certain relief for wildfire victims.

Timing of the LaMalfa Act’s provisions

The LaMalfa Act generally extends tax relief provided by the Federal Disaster Tax Relief Act, signed into law in December 2024, and briefly extended by the One Big Beautiful Bill Act (OBBBA). Specifically, the new law extends the relief to qualifying disasters whose incident periods begin before January 1, 2027.

Important: Relief provided by the act doesn’t apply to disasters declared only at the state level, even if they now qualify as eligible disasters under the OBBBA for purposes of the personal casualty loss deduction in general.

Overall, the LaMalfa Act generally applies to tax years beginning after December 31, 2024, superseding the earlier temporary provisions for those years. It covers qualifying federally declared disasters whose incident periods begin on or after December 28, 2019, and before January 1, 2027.

Tax relief extended by the LaMalfa Act

A casualty loss deduction can offset some unreimbursed costs if an eligible disaster damages your home or personal property. However, there are several rules and limits to the deduction. For example, the deductible loss is generally the smaller of the property’s adjusted tax basis or decline in value, reduced by any insurance or other reimbursement. If reimbursement covers the entire loss, you can’t claim a casualty loss deduction.

If your insurance doesn’t cover the entire loss, then without the tax relief extended by the LaMalfa Act, you generally must subtract $100 (per casualty event) from the uncovered amount. But under the extended relief, you must subtract $500 per qualifying casualty event. This may sound like a negative, but the relief makes two other changes that, for many taxpayers, will provide tax benefits that far outweigh any negative impact of this $500 reduction.

First, the relief eliminates the income-based floor. Without the relief, a floor equal to 10% of adjusted gross income (AGI) applies. So you can deduct only the uncovered loss (reduced by $100 per casualty event) that exceeds 10% of your AGI for the year you claim the loss deduction. If, say, you had one casualty loss event, your AGI is $100,000 and your casualty loss (after subtracting insurance proceeds and $100) is $11,000, you can deduct only $1,000 on your federal income tax return.

For a qualified disaster-related personal casualty loss under the relief extended by the LaMalfa Act, the 10% floor doesn’t apply. So under the same example, your casualty loss deduction would be 10,600(11,000 − the additional $400 per casualty loss you must subtract).

Second, the relief allows taxpayers to claim a qualified disaster-related personal casualty loss without having to itemize deductions. Itemizing is beneficial only if your total itemized deductions exceed the standard deduction for your filing status. So without the relief, if your total itemized deductions don’t exceed your standard deduction, losses otherwise eligible for the casualty loss deduction won’t provide any tax benefit.

Expanded tax relief for wildfire payments

Generally, certain wildfire relief payments can be excluded from federal taxable income. Under the LaMalfa Act, the exclusion may apply even if you don’t receive compensation until years after the wildfire. Previously, qualifying payments generally had to be received in 2020, 2021, 2022, 2023, 2024 or 2025. The LaMalfa Act eliminates that 2025 payment cutoff, extending the potential tax benefit to later payments.

The exclusion generally covers qualifying payments made to compensate individuals for losses, costs or damages associated with certain federally declared wildfire disasters. Eligible expenses and losses may include additional living costs, wages lost and not reimbursed by an employer, and financial damages related to personal injury, death or emotional distress. To qualify, the wildfire must have been part of a federally declared disaster occurring after December 31, 2014, and before January 1, 2027.

There are important limitations. The exclusion applies only to losses or expenses not reimbursed by insurance or another source. In addition, taxpayers generally can’t receive a double tax benefit: Expenses covered by an excluded wildfire relief payment can’t also be used to claim a deduction or credit, and the tax-free payment can’t be used to increase the basis of affected property.

Do you qualify under the new law?

Recovering from a natural disaster can bring significant financial challenges, particularly when insurance doesn’t cover the full extent of the damages. The LaMalfa Act provides relief by allowing more affected taxpayers to deduct qualifying personal casualty losses or exclude wildfire relief payments. Because eligibility and timing depend on the circumstances of the disaster and the loss, contact FMD to determine whether a deduction or exclusion is available and how best to claim it.

Don’t Overlook the GST Tax when Transferring Wealth to Younger Generations

If your estate plan includes gifts, bequests or other transfers to grandchildren, great-grandchildren or other beneficiaries decades younger than you, the generation-skipping transfer (GST) tax deserves careful attention. Without proper planning, transfers that skip a generation can potentially trigger a significant federal tax in addition to gift or estate taxes.

GST tax rules at a glance

The GST tax is designed to prevent families from avoiding transfer tax at one or more generational levels. Generally, this tax applies to certain transfers to a “skip person.” A skip person may be a grandchild or another family member who’s two or more generations below the person making the transfer. An unrelated individual generally is considered a skip person if he or she is more than 37½ years younger than the transferor.

GSTs generally fall into three categories: direct skips, taxable distributions and taxable terminations. Depending on the circumstances, the GST tax may apply to an outright gift or bequest to a skip person, a distribution from a trust, or a termination of a beneficiary’s interest that leaves only skip persons with interests in the trust.

The GST tax rate is 40%. Fortunately, a $15 million GST tax exemption is available. It’s separate from the $15 million gift and estate tax exemption.

But under the annual gift tax exclusion, you can exclude from gift tax certain gifts of up to the annual exclusion amount — $19,000 per recipient for 2026 (twice that if your spouse elects to split the gift with you or you’re giving community property) — without using up any of your gift and estate tax exemption. And annual exclusion gifts are generally also exempt from the GST tax.

Beware of a few pitfalls

Automatic allocation rules for the GST tax exemption can reduce the risk that you’ll inadvertently fail to allocate it to GSTs. For example, the GST tax exemption generally will be automatically allocated to certain direct skips and to transfers to trusts that meet the definition of a “GST trust.”

Automatic allocation can be useful, but it doesn’t always produce the desired result. For example, depending on the trust’s beneficiaries and your estate planning objectives, the exemption may be allocated to a trust that has little chance of generating a GST tax, wasting your exemption.

To avoid this result — and preserve your exemption for transfers that are more likely to trigger GST taxes — elect to opt out of automatic allocation on a timely filed gift tax return. If you neglect to opt out, you may still be able to obtain relief from the IRS. Doing so allows you to make a late election so long as you can demonstrate that you acted reasonably and in good faith.

Another potential issue can arise when a trust has both skip-person and non-skip-person beneficiaries and the GST exemption has been allocated to only part of the trust. The trust then will have an “inclusion ratio” between zero and one.

A trust’s inclusion ratio refers to the portion of a trust’s assets that will be subject to the GST tax if a taxable event occurs. If you haven’t allocated any of your exemption to a trust, its inclusion ratio is 1.0. If the exemption protects a trust’s assets, its inclusion ratio is 0.0. So, if the inclusion ratio is, for example, 0.5, then only 50% of the distributions to skip persons will be exempt from the GST tax.

In some situations, it may be possible to divide, or sever, a trust into separate trusts so that one has an inclusion ratio of zero and the other has an inclusion ratio of one. This approach may make it easier to administer the trusts and direct GST-exempt assets toward skip persons.

Review your GST tax strategy regularly

If your estate plan includes multigenerational trusts or significant transfers to grandchildren or other younger beneficiaries, review your GST exemption allocation, trust provisions and previous gift tax returns periodically. FMD can help determine whether your current strategy is using the available exemption effectively and identify opportunities to minimize unnecessary GST tax exposure.

A Small Business Primer on Expense Deductions

Whether your small business is new or you’ve run it for decades, you may not fully understand which expenses are potentially tax-deductible and which aren’t. After all, that’s why you have a tax advisor! But it’s worth keeping up with tax law because your daily decisions could significantly reduce your business’s taxable income — and increase its profitability.

The basics

Deductible business expenses must be both ordinary (common and accepted in your field) and necessary (helpful and appropriate for your business). Expenses don’t, however, need to be indispensable to qualify as necessary.

The cost of inventory is recovered through “cost of goods sold,” so it’s not generally deducted immediately. And the cost of buildings, equipment and other capital assets is usually recovered over time through depreciation or amortization. Personal expenses aren’t deductible at all. However, the business portion of mixed-use expenses, such as internet and phone service or vehicle costs, may qualify as deductible if you can support your cost allocation.

Travel and vehicle costs

Reasonable expenses for business travel away from your tax home — including transportation, lodging and certain incidental costs — may be deductible. Convention expenses may also qualify when attendance benefits your business, but restrictions apply to events held outside North America.

If you use your own vehicle for business travel, you may deduct eligible costs using either the actual expense method or the IRS standard mileage rate method. Either way, maintain a mileage log that records dates, destinations, distances and business purposes. Note that ordinary travel between your home and regular workplace is considered a nondeductible personal commuting expense. This is true even if you work on your laptop or make business calls during the trip.

Historically, small business owners recovered the cost of vehicle purchases over several years through depreciation. Current tax law may allow certain qualifying vehicles to be written off more quickly and, in some cases, fully in the first year, through 100% bonus depreciation or Section 179 expensing. To claim either tax break for the 2026 tax year, you generally need to place the vehicle in service before year end. Passenger-vehicle limits, Sec. 179 limits and business-use requirements may restrict the deduction.

New meal and entertainment rules

Beginning in 2026, most meals provided to employees through an employer-operated eating facility or for the employer’s convenience aren’t deductible (with limited exceptions). Recreational events primarily benefiting non-highly compensated employees — such as holiday parties or company picnics — remain fully deductible under the applicable rules.

Business meals are typically 50% deductible so long as:

• They aren’t lavish or extravagant,

• The owner or an employee is present, and

• They have a valid business purpose.

However, entertainment expenses, including event tickets and most club dues, aren’t deductible. But if you purchase food during an entertainment activity with a business purpose, you may be able to deduct it if the bill itemizes costs separately.

Business gifts usually are deductible up to $25 annually per recipient. You may exclude incidental engraving, packaging and shipping costs from that limit if they don’t add substantial value to the gift.

Documentation is critical

We can apply these expense deduction rules for your business, but only you can supply the facts and documentation supporting each expense. Hold on to itemized receipts, mileage logs and other business records (and don’t rely solely on bank or credit card statements). Contact FMD for help claiming deductions available to you and identifying tax-saving opportunities throughout the year.

Non-U.S. Citizens Face Unique Estate Planning Challenges

Estate plans are often designed around rules that assume spouses and other family members are U.S. citizens. When one spouse isn’t a citizen — or when an individual owns U.S. property but lives abroad — those assumptions can create unexpected estate tax consequences.

Citizenship, domicile, and the location and type of property owned can all affect how U.S. gift and estate taxes apply. For families with international connections, understanding these distinctions is an important first step toward avoiding unnecessary taxes.

Domicile matters more than you might think

Noncitizens can become subject to U.S. gift and estate taxes if they’re domiciled in the United States. Under IRS guidelines, an individual becomes domiciled in a country “by living there, for even a brief period of time, with no definite present intention of later removing therefrom.”

The IRS considers several factors in determining “present intention,” including:

• The amount of time spent in the United States;

• Green card or visa status;

• Location of business interests and residences;

• Location of health care providers, jobs, places of worship and community ties;

• Place where vehicles are registered and where the individual is licensed to drive;

• Place where the person is registered to vote; and

• The domiciles of friends and family members.

Noncitizens who are deemed to be domiciled in the United States are subject to U.S. gift and estate taxes on their worldwide assets, much like U.S. citizens. And, like U.S. citizens, these U.S. “domiciliaries” are eligible for the federal gift and estate tax exemption ($15 million for 2026) and the gift tax annual exclusion ($19,000 per recipient for 2026).

Marriage to a noncitizen changes the rules

A significant difference between U.S. citizens and noncitizens, and a potential tax trap for the unwary, is that the marital deduction isn’t available for transfers to noncitizens, even if they’re U.S. domiciliaries. Ordinarily, married couples can transfer an unlimited amount of assets between each other — during their lifetimes or at death — without triggering gift or estate taxes. However, estate planning strategies that rely on the marital deduction may not be available to noncitizen domiciliaries.

There are ways to manage this limitation. For example, during life, an individual can make tax-free gifts to his or her noncitizen spouse using a special annual exclusion. For 2026, up to $194,000 of qualifying present-interest gifts may be transferred to a noncitizen spouse without gift tax. This is substantially higher than the regular $19,000 annual exclusion. Larger transfers may also be possible by using the donor spouse’s available gift and estate tax exemption.

Beware of a tax trap

A person who’s neither a U.S. citizen nor a U.S. domiciliary — that is, a “nonresident alien” — is subject to U.S. gift and estate taxes only on assets that are “situated” in the United States. Intangible property — such as corporate stock, bonds or promissory notes — is generally deemed to be situated in the United States for estate tax purposes (but typically not for gift tax purposes) if it’s issued by a domestic corporation or by a U.S. citizen or the U.S. government.

Here’s where the potential tax trap comes into play: The exemption amount for U.S.-situated assets owned by nonresident aliens is only $60,000, compared with $15 million for U.S. citizens or domiciliaries. Depending on the value of a person’s property in the United States, this can result in significant gift and estate taxes.

In some cases, tax treaties between the United States and a nonresident alien’s country of citizenship may provide some relief. Otherwise, one strategy to avoid these taxes may be holding the assets through a properly structured and operated foreign corporation.

Turn to us for help

If you or your spouse is a noncitizen, talk to us about the potential gift and estate planning ramifications. FMD can evaluate your citizenship, domicile, asset ownership and family circumstances and develop a plan that addresses the special tax rules that may apply.