Balance Retirement Income and Your Family’s Financial Future with a Split Annuity Strategy

Whether you’re approaching retirement or have settled into your golden years, you may find yourself balancing two important financial goals: maintaining your current lifestyle and preserving wealth for your loved ones. Achieving both can be challenging, particularly when your retirement savings may need to last for several decades. One possible solution is a split annuity strategy.

ABCs of annuities

An annuity is a contract with an insurance company that provides income, tax-deferred growth or both. Generally, you purchase an annuity with a lump sum or a series of payments. Depending on the contract, the insurer may provide payments for a specified period or for life.

Annuities come in several forms. For purposes of the split annuity strategy, we’ll focus on “fixed” annuities, which generally provide a guaranteed minimum rate of return. (Other types of annuities include “variable” and “equity-indexed,” which may offer greater upside potential but also involve greater risk.)

Annuities also differ in when payments begin. An immediate annuity typically starts making payments within one year of purchase. A deferred annuity allows funds to accumulate before withdrawals or income payments begin later.

From a tax perspective, annuity earnings are tax-deferred — that is, they grow tax-free until they’re paid out or withdrawn. A portion of each payment is subject to ordinary income taxes, and a portion is treated as a tax-free return of principal (premiums). The ability to accumulate earnings on a tax-deferred basis allows deferred annuities to grow more quickly than comparable taxable accounts, which can help offset their usually modest interest rates.

Annuities offer some flexibility to withdraw funds or reallocate them if your circumstances change. However, withdrawing money during the early years of an annuity contract may trigger fees imposed by the insurance company, known as surrender charges. Most annuities provide some exceptions to these charges under certain circumstances, such as withdrawals attributable to disability, loss of employment or death of the annuity owner. Withdrawals before age 59½ may also be subject to a 10% federal tax penalty.

A split annuity strategy in action

A split annuity isn’t a single financial product. Rather, it’s a strategy that divides an investment between two annuities serving different purposes.

The first portion purchases an immediate annuity designed to provide regular payments over a predetermined period, such as 10 years. These payments can supplement Social Security benefits, pensions or other retirement income.

The remaining funds purchase a deferred annuity that accumulates interest during the same period. Ideally, the deferred annuity grows sufficiently to replace some or all of the original investment.

For example, suppose you invest $200,000 in a split annuity strategy. A portion purchases an immediate annuity providing monthly income for 10 years, while the balance funds a deferred annuity. If the deferred annuity earns sufficient interest, its value at the end of the period could approach the original $200,000. At that point, you could begin receiving payments, withdraw funds or continue accumulating earnings.

Benefits and drawbacks

The primary advantage of a split annuity strategy is its ability to provide predictable income while allowing other assets to grow on a tax-deferred basis. This may reduce the need to sell investments during market downturns and help preserve assets for future needs. Certain deferred annuities also offer death benefits that allow remaining contract values to pass to designated beneficiaries.

However, there are limitations. Immediate annuities generally restrict access to the funds used to purchase them, and deferred annuities may impose surrender charges on withdrawals. Fixed payments also lose purchasing power over time because of inflation.

Finding the right balance

A split annuity strategy may help you generate reliable retirement income while preserving assets for your loved ones. However, it’s important to consider how this approach fits into your overall estate plan, including your wealth transfer goals and potential tax consequences. Contact FMD to discuss whether a split annuity or other planning strategies can help you maintain financial security throughout retirement while protecting your family’s financial future.

How will the 2027 Inflation-Adjustment Numbers Affect your Year-End Tax Planning?

The IRS has released various inflation-adjusted amounts for 2027. These annual adjustments affect a wide range of tax provisions, including income tax brackets, the standard deduction and various tax benefits.

Take these 2027 amounts into consideration as you implement year-end tax planning strategies for 2026 and prepare for the coming year.

Individual income tax rates

Tax-bracket thresholds increase for each filing status, but because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket will increase by 400–800, depending on filing status, but the top of the 35% bracket will increase by 12,475–24,950, depending on filing status.

2027 ordinary-income tax brackets
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
10%	$0 – $12,800	$0 – $18,250	$0 – $25,600	$0 – $12,800
12%	$12,801 – $52,025	$18,251 – $69,650	$25,601 – $104,050	$12,801 – $52,025
22%	$52,026 – $109,125	$69,651 – $109,100	$104,051 – $218,250	$52,026 – $109,125
24%	$109,126 – $208,325	$109,101 – $208,300	$218,251 – $416,650	$109,126 – $208,325
32%	$208,326 – $264,550	$208,301 – $264,550	$416,651 – $529,100	$208,326 – $264,550
35%	$264,551 – $661,375	$264,551 – $661,350	$529,101 – $793,650	$264,551 – $396,825
37%	Over $661,375	Over $661,350	Over $793,650	Over $396,825

Last year’s One Big Beautiful Bill Act (OBBBA) made the rates permanent. The income tax brackets will continue to be annually indexed for inflation.

Standard deduction

The OBBBA made permanent the approximate doubling of the standard deduction amount for each filing status that went into effect back in 2018. The amounts will continue to be annually adjusted for inflation.

In 2027, the standard deduction will be $33,200 for married couples filing jointly, $24,925 for heads of households, and $16,600 for single filers and married taxpayers filing separately. These are increases of $1,000, $775 and $500, respectively.

Long-term capital gains rate

The long-term gains rate applies to realized gains on investments held for more than 12 months. For most types of assets, the rate is 0%, 15% or 20%, depending on your income. While the 0% rate applies to most income that would be taxed at 12% or less based on the taxpayer’s ordinary-income rate, the top long-term gains rate of 20% kicks in well before the top ordinary-income rate does.

2027 long-term capital gains brackets*
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
0%	$0 – $51,050	$0 – $68,350	$0 – $102,100	$0 – $51,050
15%	$51,051 – $563,200	$68,351 – $598,400	$102,101 – $633,600	$51,051 – $316,800
20%	Over $563,200	Over $598,400	Over $633,600	Over $316,800
* Higher rates apply to certain types of assets.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability exceeds your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. In 2027, the threshold for the 28% bracket will increase by $8,000 for all filing statuses except married filing separately, which will increase by half that amount.

2027 AMT brackets
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
26%	$0 – $252,500	$0 – $252,500	$0 – $252,500	$0 – $126,250
28%	Over $252,500	Over $252,500	Over $252,500	Over $126,250

The OBBBA made the AMT exemption amounts permanent, and the amounts continue to be indexed for inflation. The exemption amounts in 2027 will be $93,000 for singles and heads of households, $144,700 for joint filers, and $72,350 for separate filers, increasing by $2,900, $4,500 and $2,250, respectively, over 2026 amounts.

The AMT exemption phases out over certain income ranges. It’s completely phased out if AMT income exceeds the top of the applicable range. The exemption phaseout ranges in 2027 will be 515,950–701,950 for singles and heads of households and 1,031,900–1,321,300 for joint filers. Amounts for married couples filing separately are half of those for joint filers.

Child-related breaks

Certain child-related breaks are annually adjusted for inflation but don’t necessarily go up every year. In addition, these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

Here are the 2027 figures for two important child-related breaks:

The Child Tax Credit. The OBBBA made this credit permanent and adjusts it annually for inflation. For 2027, the credit increases by $100 to $2,300.

The OBBBA also made permanent the annual inflation adjustments to the limit on the refundable portion of the credit. For 2027, the refundable portion increases by $100 to $1,800.

Be aware that the Child Tax Credit phases out for higher-income taxpayers, and the phaseout thresholds aren’t inflation-indexed. Under the OBBBA, they’re permanently $200,000 for singles and heads of households and $400,000 for joint filers.

The adoption credit. The maximum credit will increase by $580, to $18,250 in 2027. Under the OBBBA, a portion of the credit is refundable, and that portion is annually indexed. For 2027, the refundable portion is $5,280 (up from $5,120 for 2026).

The MAGI phaseout range for eligible taxpayers adopting a child will increase in 2027 — by $8,600. It will be 273,680–313,680 for joint, head of household and single filers.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer tax exemption are both adjusted annually for inflation. In 2027, the amount will be $15.48 million (up from $15 million in 2026).

The gift tax annual exclusion increases by $1,000, to $20,000 per giver per recipient in 2027.

Make informed tax planning decisions

The impact of the 2027 inflation adjustments will vary based on taxpayers’ individual circumstances. Understanding how these changes affect your tax situation is essential to identifying potential tax-saving opportunities. Contact FMD to discuss strategies for minimizing your tax liability in 2026 and beyond.

Build Better Financial Insight with a Well-Organized Chart of Accounts

The chart of accounts is one of your business’s most important bookkeeping tools. It provides the framework for classifying and tracking financial transactions. The challenge is finding the right level of detail. Categories that are too broad can obscure important information, while excessive detail can make bookkeeping cumbersome and inconsistent. A well-designed chart balances those competing concerns and gives your business a reliable foundation for financial reporting and decision-making.

Give financial data structure

A chart of accounts is a structured list of general ledger accounts that are used to record and organize financial transactions. An organized chart simplifies the preparation of tax returns and financial statements that comply with formal accounting standards, such as U.S. Generally Accepted Accounting Principles (GAAP). However, the chart alone doesn’t ensure compliance. Transactions must also be recognized, measured and presented correctly.

Additionally, a well-designed chart provides insight into profitability and asset management. It can help you identify financial and operational areas in need of improvement and make better-informed strategic decisions.

In turn, these insights can help you communicate with stakeholders, such as lenders and potential investors, about your business’s financial performance. This can be useful, for example, when applying for new loans, seeking additional capital contributions or selling your business.

Organize accounts logically

Essentially, the chart of accounts mirrors the financial statements; it includes major balance sheet and income statement accounts. Each account is assigned an account name and, if your business uses account numbering, a unique identification number.

There’s no universal numbering requirement under GAAP. One possible structure is:

• 1000–1999 for assets, such as cash on hand, cash in checking, accounts receivable, equipment, furniture, vehicles, buildings, land and inventory,

• 2000–2999 for liabilities, including accounts payable, accrued expenses and loans,

• 3000–3999 for equity, for example, retained earnings and capital accounts,

• 4000–4999 for revenue,

• 5000–5999 for job costs or cost of goods sold, and

• 6000–6999 for operating expenses, such as administrative payroll and benefits, rent, utilities, marketing and insurance.

Subcategories are generally created for key accounts within each main category. For example, current assets could start at 1100, fixed assets at 1200 and other assets at 1300. As your business grows or its reporting needs change, you might add more accounts within a range.

Keep the structure useful

There’s no one-size-fits-all format for the chart of accounts. The appropriate structure will depend on the number, nature and complexity of your business’s financial transactions. Many businesses start with industry-specific templates provided by their accounting software packages. Then, they customize those templates to fit the business’s needs.

When setting up your chart, consider these best practices:

• Leave space between account numbers (if you use numbering) to accommodate business growth.

• Use simple, easy-to-understand naming conventions.

• Add a description for each account to help accounting personnel enter transactions into the correct general ledger account.

• Select the correct account type (asset, liability, etc.) to facilitate financial statement and tax return preparation.

• Review the chart at least annually and make any necessary adjustments.

A simple chart of accounts may work initially, but your business may need more complexity as it evolves. For example, management might want to track results by department, project or region. Depending on your software, you may be able to use classes, locations or project-tracking features instead of creating additional general ledger accounts. Other systems may use account segments to support this reporting. A new business line might also require changes to an existing chart. More complex charts are common in certain industries, such as health care or construction.

Strengthen your reporting foundation

Like a foundation beneath a building, your chart of accounts supports everything built on top of it — from financial statements and tax returns to budgeting and business planning. Taking time to keep that structure organized can make it easier to track performance, identify trends and monitor costs. Whether you’re building your chart of accounts from the ground up or revamping an existing one, contact FMD to discuss a structure that supports your current reporting needs and provides room for future business growth.

Family Banks: A Structured Framework for Intrafamily Lending

For families with significant wealth, lending money to children, grandchildren or other relatives can be an effective way to provide financial assistance while preserving family assets. But informal arrangements can create complications. Without clear expectations, loans between relatives may lead to misunderstandings, strained relationships and unintended tax consequences. One way to avoid these problems is to create a family bank, a formal arrangement designed to manage intrafamily lending in an organized manner.

Benefits of intrafamily loans

Intrafamily loans can serve various purposes, such as purchasing a home, pursuing higher education, starting a business or addressing temporary financial difficulties. And they offer several advantages. For borrowers, they may provide access to financing that’s difficult to obtain through traditional lenders, often with more flexible repayment terms or lower interest rates. For lenders, they provide an opportunity to help loved ones achieve financial goals without making outright gifts. Assuming the loans are repaid, the funds can eventually be used to assist other family members.

Intrafamily loans can also be valuable estate planning tools. For example, if a borrower invests loan proceeds and earns a return that exceeds the interest rate charged, the excess appreciation generally remains with the borrower rather than becoming part of the lender’s estate.

However, it’s essential to structure these transactions properly to avoid having loans characterized as taxable gifts. Generally, lenders should document loans with written promissory notes, establish realistic repayment schedules and maintain records of payments. In addition, they should charge interest at least equal to the applicable federal rate (AFR) for the loan’s term. Borrowers also must have a reasonable ability and genuine intention to repay their loans.

How a family bank works

Although individual intrafamily loans can be effective, managing multiple loans to different relatives can become complicated. Questions may arise about who qualifies for assistance, how much each person can borrow and whether some family members receive preferential treatment. A family bank addresses these concerns by creating a centralized system for making and administering loans. By evaluating requests according to predetermined standards, it can help preserve family wealth, encourage financial responsibility and reduce disputes.

Despite its name, a family bank typically isn’t a chartered financial institution. Rather, it’s a family-funded arrangement that operates under established lending policies. Depending on the circumstances, it may be organized as a limited liability company, partnership or another legal structure.

Set clear lending policies

A family bank’s success depends largely on its governance structure. Clear policies and consistent administration help ensure that lending decisions are made objectively and borrowers understand their obligations.

For example, a family bank should define eligibility requirements, maximum loan amounts, acceptable uses of borrowed funds and repayment expectations. It should also specify how loan requests are evaluated and what happens if borrowers encounter financial difficulties.

Families may appoint a committee to oversee lending activities and involve independent advisors to provide objectivity. Transparency is also important. Family members should understand the bank’s purpose and lending guidelines, even if individual borrowers’ financial information remains confidential.

A strategy worth considering

Beyond providing financial support, a family bank can teach younger generations about borrowing, budgeting and responsible money management. It can also help families promote fairness and shared financial values. However, this approach isn’t appropriate for every family. Creating and administering one involves legal, tax and practical considerations. Contact FMD to discuss whether intrafamily loans or a family bank might fit into your family’s wealth transfer strategy.

6 Ways to Uncover your Business’s Profit Potential

Rising costs and inefficient operations can leave your business earning less than it should. A thorough review of how you make and spend money can reveal where potential profitability improvements may have the greatest impact. Consider these six tips:

1. Base goals on opportunity. Last year’s sales results may provide useful context, but they shouldn’t be the sole basis for next year’s targets. Examine current customer demand, market conditions, competitive strength and staffing levels. Make those objectives challenging but achievable. And instead of rewarding sales volume alone, consider incentivizing profitable individual sales to discourage sales staff from closing deals through excessive discounts.

2. Clarify why customers choose you. Ask employees what your business does best, then compare their answers with customer feedback. Identify specific strengths that matter to buyers — for example, lower prices, dependable delivery, specialized expertise or responsive service. Once you’ve identified your strongest advantages, communicate them consistently in employee training, sales conversations and marketing materials.

3. Train nonsales staff to recognize needs. Employees outside the sales department often hear about customer needs before anyone else, so teach them how to share that information. Keep the referral process simple, and consider offering a reward when a lead results in a sale. Employees should understand their role is to be helpful and observant, not to pressure customers or make promises they can’t fulfill.

4. Review underperforming products. Examine the profitability of offerings, accounting for the labor, materials, delivery and support each one requires. If an activity consistently consumes resources without providing sufficient revenue, consider dropping it. But before discontinuing anything, decide whether a price increase, process improvement or different way of providing it might improve profitability.

5. Check for earned but unbilled revenue. Audit contracts, completed work and invoices for any omitted charges, unbilled items, and unauthorized discounts. With clear agreements and accurate invoices, you can reduce costly customer disputes.

6. Look closely at recurring expenses. Subscriptions, vendor agreements and other ongoing costs for unused services, duplicate purchases and unfavorable terms could be undermining profits. Consider alternatives and negotiate where appropriate. But weigh potential savings against a possible impact on quality, reliability and customer service.

Keep in mind that a profitability review is most valuable when it leads to specific conclusions. You should prioritize changes according to their likely financial benefit. And contact FMD. We can help you conduct a profitability review and identify ways to strengthen your business’s bottom line.

IRS Finalizes Regulations for the Auto Loan Interest Deduction

A new deduction for qualified passenger vehicle loan interest became available in 2025. Now, the IRS has released final regulations for the deduction. They include several important tweaks to the proposed regs issued at the end of 2025. Here’s what you need to know, especially if you hope to claim the deduction on your 2026 federal income tax return.

Basics of the deduction

The new deduction was created by the One Big Beautiful Bill Act (OBBBA). You don’t have to itemize deductions to claim it — it’s available both to nonitemizers who claim the standard deduction and to itemizers.

The OBBBA defines qualified passenger vehicle loan interest as interest paid or accrued during the tax year on debt incurred by a taxpayer after December 31, 2024, for the purchase of a qualifying vehicle for personal use. The debt must be secured by a “first lien,” meaning the lender generally has priority over other creditors’ claims to the vehicle until the loan is paid off.

Under the OBBBA, a qualifying vehicle must be a car, minivan, van, sport utility vehicle, pickup truck or motorcycle with a gross vehicle weight rating of less than 14,000 pounds. The original use of the vehicle must begin with the taxpayer; leased or used vehicles don’t qualify.

The deduction is also limited to vehicles assembled in the United States, as determined by the final assembly location. Remember that not every vehicle sold by an American manufacturer necessarily has its final assembly in this country. Conversely, some “foreign” vehicles may have their final assembly in the United States.

Dollar and income-based limits

The deduction is generally limited to $10,000 per year. If the deduction is a primary motivator in purchasing a new vehicle, bear in mind that most taxpayers won’t qualify for the full $10,000.

For example, assume you purchase a new vehicle before year end and finance $50,000 of the price at a 6.5% interest rate for five years. The total interest over that time will be approximately $8,700. But your deduction for each eligible tax year would be limited to qualifying interest paid that year. Also, the deduction is available only through 2028, unless lawmakers extend it. So your annual deduction would be only a fraction of the total $8,700 of interest. And you’d be able to deduct the total amount only if the tax break is extended beyond 2028.

Your annual deduction could be further reduced based on your income. The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $100,000, or $200,000 for married couples filing jointly. The otherwise allowable deduction is reduced by $200 for every $1,000 — or fraction of $1,000 — of MAGI above those thresholds.

Once MAGI reaches $150,000 or $250,000, respectively, the deduction isn’t available. Depending on how much qualifying interest you pay, your deduction could be fully phased out at a MAGI that’s substantially less than $150,000 (or $250,000 if you’re a joint filer).

Finally, keep in mind that deductions reduce your taxable income, not your taxes dollar-for-dollar. So your tax savings will be only a portion of the amount deducted.

The final regs

Like the proposed regs, the final regs address a range of issues related to the deduction. The following may be the most notable if you might be eligible for it:

Qualifying debt. The proposed regs specified that debt qualified only to the extent incurred for a qualifying vehicle purchase. It also qualified for other items or amounts directly related to the purchase and “customarily financed” in the same transaction, including vehicle service plans, extended warranties, sales taxes and vehicle-related fees.

In response to comments received on the proposed regs, the final regs identify additional examples of costs that can be included in a qualifying vehicle loan:

• Guaranteed asset protection coverage,

• Credit insurance products,

• Repair plans,

• Vehicle protection products,

• Key fob replacement plans, and

• Certain vehicle accessories.

The final regs make clear that whether items or amounts are customarily financed in a qualifying vehicle purchase transaction and are directly related to the purchase of the vehicle is determined on an industry-wide basis and not by reference to the financing terms of a particular lender. Interest on credit card debt related to a vehicle purchase, however, generally doesn’t qualify because the debt usually isn’t secured by the vehicle.

Negative equity. So-called negative equity occurs when you trade in a vehicle that still has debt exceeding that vehicle’s value and you roll that excess debt into the financing for a qualifying new vehicle. The proposed regs would have excluded this amount from qualifying debt. Industry commenters cited the administrative burden of tracking the separate loan components when requesting that the entire loan count for purposes of the deduction.

The IRS was unmoved, though. Interest attributable to the negative-equity portion of the loan doesn’t qualify for this deduction under the OBBBA. The final regs retain the requirement to allocate interest and principal payments proportionately between qualifying and nonqualifying debt. But any down payment is applied first against negative equity and any other amounts that aren’t incurred for the purchase of the vehicle or directly related to the purchase and customarily financed in such a transaction.

Original use and personal use. The final regs recognize that some states require dealers to title or register demonstrator vehicles. Under the proposed regs, this could have resulted in the original use commencing with the dealer and not a subsequent purchaser. The final regs therefore provide that the original use of a vehicle held by a dealer won’t commence with the dealer if the vehicle is held primarily for sale to customers. But original use of a vehicle begins with a purchaser only if the loan documentation treats the vehicle as a new vehicle.

The final regs retain the proposed regs’ provision establishing that the personal use requirement applies only when you incur the debt. At that time, you must expect that you, your spouse or certain relatives will use the vehicle for personal purposes more than 50% of the time over your anticipated ownership period. But if it turns out the actual use varies from the expected use at the time you incur the debt, it won’t change the personal use determination.

Cover your bases

Taxpayers hoping to take advantage of this temporary deduction, especially for 2026, should tread carefully. A single misstep in vehicle choice, documentation requirements or another area could cost you. For example, you must include the vehicle identification number (VIN) on your return for each year you claim the deduction. Contact FMD to discuss whether you qualify for the deduction and, if so, how to maximize its benefits.

Profitability Matters: Why Book Profits Don’t Always Match Taxable Income

Many owners assume the pretax profit reported on their financial statements should equal the business’s taxable income. In practice, those metrics often differ, sometimes significantly. Book-tax differences may result from differences in timing, tax law requirements and accounting treatment. Understanding those differences can help you evaluate financial performance, maintain accurate accounting records and make informed business decisions.

Pretax profit vs. taxable income

Under U.S. Generally Accepted Accounting Principles (GAAP), pretax profit includes all revenue and expenses (except income taxes) for the accounting period. Accrual-basis accounting generally recognizes revenue when earned and expenses when incurred, rather than when cash changes hands. Higher pretax profits generally indicate stronger financial performance, though accounting methods and estimates can affect comparisons.

In contrast, taxable income is calculated under applicable tax laws. Higher taxable income generally increases tax obligations, though credits and other provisions can affect the amount owed.

The tax rules and accounting standards may differ in how certain items are treated, including depreciation and other business deductions. This may lead to differences in timing and amounts between the two metrics.

Hypothetical example

Consider a hypothetical C corporation that uses the accrual method for tax purposes. In 2026, it earns $8 million of revenue and incurs $4 million of general operating expenses for both book and tax purposes. How do the company’s pretax profit and taxable income compare?

Pretax profit. Its GAAP income statement reports $1 million of straight-line depreciation, $500,000 of bad debt expense based on estimated credit losses and $700,000 of fines payable to the Environmental Protection Agency (EPA). So, its pretax profit is 1.8 million(8 million − $4 million − $1 million − $500,000 − $700,000).

Taxable income. The company’s Form 1120 claims $1.6 million of accelerated depreciation (including first-year write-offs for eligible assets) and $300,000 for specific bad debts that became worthless and were written off during 2026. However, the EPA fines were penalties for legal violations, rather than qualifying restitution, remediation or compliance payments, so they’re nondeductible for tax purposes. As a result, its taxable income is 2.1 millionfor2026(8 million − $4 million − $1.6 million − $300,000), assuming no other adjustments.

Timing differences, such as those related to depreciation and bad debt deductions, generally reverse over time. But permanent differences, including nondeductible EPA fines, don’t reverse. State tax rules may differ from federal rules, adding complexity.

Potential bookkeeping pitfalls

Some book-tax differences stem from internal bookkeeping practices. For example, businesses may estimate bad debt expense, record accrued liabilities or write down obsolete inventory for financial reporting purposes before those items become deductible for tax purposes. Because accounting rules sometimes require recognizing certain losses and expenses sooner than tax law permits, these items can create differences between pretax profit and taxable income. Inaccurate estimates may also distort reported profitability.

In addition, misclassified transactions, owners’ personal expenses recorded through the business and other bookkeeping errors can complicate year-end tax reporting. Reviewing book-tax differences often helps uncover these issues before they become larger financial reporting or compliance problems.

Inaccurate tax estimates

Book-tax differences can have real-world tax and cash-flow consequences. For C corporations, they may affect estimated tax payments. For pass-through businesses, they can affect owners’ individual tax-planning decisions and estimated tax obligations.

If the hypothetical corporation had based its estimated tax payments on its $1.8 million pretax profit instead of its $2.1 million taxable income, it would underpay its 2026 federal income tax. The $300,000 gap between pretax profit and taxable income could leave an unexpected balance due. An underpayment penalty also could apply, depending on the required installments and available exceptions. Coming up with funds when the balance is due could be challenging.

Be especially careful when certain timing differences reverse in subsequent tax years. This commonly happens when businesses claim first-year write-offs for bonus depreciation and Section 179 expensing. Continuing with the hypothetical example, let’s assume that the company doesn’t buy additional assets that qualify for accelerated depreciation deductions in 2027.

If management relies solely on its 2027 pretax profit to make estimated tax payments, it could owe a significant balance when it files its return, along with potential underpayment penalties. That’s because the company already claimed larger tax deductions upfront. As available depreciation deductions decline in future years, taxable income may rise even if operating profit remains relatively stable.

Why it matters

Book-tax differences are a normal part of doing business. However, significant or unexpected differences may signal accounting issues that warrant closer review. Understanding why pretax profit and taxable income may differ helps business owners improve financial reporting, strengthen cash-flow planning and avoid surprises at tax time. Contact FMD for help reconciling book-tax differences and preparing financial records that accurately reflect your business’s profitability.

Is Your Estate Plan Vulnerable to these 5 Pitfalls?

Creating an estate plan is an important step toward protecting your assets and providing for your loved ones. But even a carefully designed plan can fall short if you overlook certain details. Whether you’re developing an estate plan for the first time or reviewing an existing one, avoid these five common pitfalls.

1. Overlooking beneficiary designations

Your will doesn’t necessarily control how all your assets are distributed. Retirement accounts, life insurance policies, annuities, and certain bank and investment accounts generally pass directly to the beneficiaries named on those accounts, regardless of what your will says.

Suppose you named your spouse as the beneficiary of your retirement account years ago but have since divorced and remarried. If you haven’t updated the designation, your former spouse might receive those assets instead of your current spouse or children. The outcome depends on applicable law and the type of account.

Review beneficiary designations regularly, particularly after major life events such as marriage, divorce, the birth of a child or the death of a loved one. Also, consider naming contingent beneficiaries in case your primary beneficiaries predecease you.

2. Establishing a trust but neglecting to properly fund it

Trusts can serve several purposes, from controlling how assets are distributed to protecting beneficiaries and potentially reducing estate taxes. A revocable living trust, for example, can help your estate avoid probate, maintain privacy and provide for the management of assets if you become incapacitated.

However, simply signing trust documents isn’t enough. To accomplish its intended purposes, a trust generally must be properly funded. This means transferring ownership of designated assets to the trust or, when appropriate, arranging for assets to pass to it through beneficiary designations.

3. Failing to consider how assets are titled

The way you hold title to property can significantly affect what happens to it after your death. Various forms of ownership carry different legal, tax and estate planning consequences.

For instance, property owned jointly with rights of survivorship generally passes automatically to the surviving owner, bypassing probate. By contrast, an interest in property held as tenants in common generally passes according to the deceased owner’s will or applicable intestacy laws.

Adding an adult child as a joint owner of a home or financial account might seem like a convenient way to simplify an inheritance. However, doing so can create unintended gift tax consequences, expose the property to the child’s creditors and complicate your estate plan.

Review how your real estate, bank accounts and other significant assets are titled. Make sure your ownership arrangements support your estate planning objectives rather than inadvertently overriding them.

4. Not coordinating your estate planning documents and decisions

An effective estate plan involves more than a will or trust. It may also include beneficiary designations, powers of attorney, health care directives and other financial arrangements. These components should work together to accomplish your goals.

For example, leaving substantial assets to a trust for your children may provide valuable protections. But if your retirement accounts name the children directly as beneficiaries, those assets generally will bypass the trust, potentially defeating your intentions.

Tax considerations also play an important role. Traditional IRAs and other tax-deferred retirement accounts can create income for beneficiaries that’s taxed at their ordinary income rates, while appreciated assets held in a taxable account generally receive more favorable tax treatment if sold.

Coordinating beneficiary designations, trust provisions, and distribution strategies can help manage taxes and preserve more wealth for your heirs. The key is to evaluate your estate plan as a whole, rather than making decisions about individual assets or documents in isolation.

5. Allowing your estate plan to become outdated

Marriage, divorce, births, deaths, changes in family relationships, and significant increases or decreases in wealth can all affect your estate plan. And changes in federal or state tax laws may also create opportunities or require adjustments.

Review your estate plan every three to five years — or sooner if you experience a significant life event or there’s a major tax law change. FMD can help identify potential weaknesses in your estate plan and determine whether revisions are needed to help you achieve your goals.

Act Fast if a Customer Files for Chapter 11 Bankruptcy

If a customer with outstanding bills files for Chapter 11 bankruptcy, an ordinary receivable could become an urgent financial problem. Although a customer’s filing doesn’t necessarily mean your business will go unpaid, recovery depends on the debtor’s resources — as well as your claim’s status and the bankruptcy case’s outcome. To protect your business’s rights and prevent possible financial losses, act immediately.

Legal procedures

When you hear about a customer’s bankruptcy, contact your attorney. Then gather contracts, invoices, delivery confirmations and payment records. You or your legal counsel will want to find out the customer’s filing date and track court notices and deadlines.

Bankruptcy generally triggers an “automatic stay,” which prohibits most collection efforts for debts arising before the filing. So you shouldn’t make collection calls, pursue litigation or repossess property without legal guidance. However, if you’re a secured creditor, you may ask the court for permission to enforce your collateral rights.

Determine how the debtor lists your business’s debt in its bankruptcy schedules. If your claim is omitted or listed as disputed, contingent or unliquidated, you generally must file a proof of claim to participate in any financial distributions.

Also, review any payments you received from the customer during the 90 days before they filed. Certain payments may be recoverable by the debtor as “preferences,” but repayment isn’t automatic. You may have legal grounds to keep a payment even if the bankruptcy trustee asks you to return it. Preserve supporting records and have counsel evaluate any repayment demand.

Special protections

Your business should always track order delivery dates because the priority of your claim can depend on when a customer received an order. An order might fall into one of two categories that allow for special protections:

1. Administrative expense claims. These are goods the customer received within 20 days before filing for bankruptcy. The goods may qualify for administrative expense priority if they were sold in the ordinary course of the customer’s business. This priority generally places the claim ahead of general unsecured claims. It only concerns the receipt of goods, not services.

2. Reclamation demands. You may have a right to reclaim goods received by an insolvent debtor within 45 days before their Chapter 11 filing. You usually must make a written demand within 45 days after delivery. If that period expires after the customer’s bankruptcy filing, you’re allowed to make a demand within 20 days after filing. Prior secured interests can limit your recovery.

Note that neither of these protections guarantees that your customer will make a full or immediate payment.

Unsecured creditor committees

In some Chapter 11 cases, unsecured creditors form a committee to investigate the debtor’s affairs and help develop a repayment plan. Membership often includes creditors holding the largest unsecured claims and must be appointed by the trustee.

If your business is appointed to a committee, know that it doesn’t give your claim special priority. Committee members represent all unsecured creditors collectively.

Protecting your financial position

A customer’s bankruptcy is a good excuse to review your business’s cash flow, customer concentration and credit extension practices. If warranted, implement new policies that will help prevent future losses. Also be sure to weigh your likely financial recovery against the expense of pursuing it. Legal matters call for an attorney’s advice. But FMD can help you adjust financial projections, update controls and make loss remediation plans.

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.