Is Your Business Vulnerable to Payroll Fraud?

Payroll fraud schemes can be costly — and for small businesses, devastating. The Association of Certified Fraud Examiners (ACFE) has found that the median loss from payroll fraud schemes is $50,000. However, some long-term payroll frauds, particularly when perpetrated by upper management, have produced losses in the millions of dollars. Can your company afford that? Probably not.

Payroll fraud incidents can also result in bad publicity, weakened employee morale and, potentially, an IRS investigation. It’s critical that your business take steps to protect its payroll function.

Illegal self-enrichment

There are several ways for fraud perpetrators to illegally manipulate payroll to enrich themselves. For example, cybercriminals often target payroll functions. They might use phishing emails to trick your workers into providing sensitive information, such as bank login credentials. This becomes a form of payroll fraud if they divert payroll direct deposits to accounts they control. Criminals might also target you and accounting department managers by sending fake emails from “employees” requesting changes to their direct deposit instructions.

Also watch out for occupational payroll fraud. In the absence of appropriate internal controls, crooked accounting staffers could add invented “ghost” employees to the payroll. The wages of those ghost employees might then be deposited in accounts controlled by the fraudsters.

And any employee who files for expense reimbursement may inflate expenses, submit multiple receipts for the same expense or claim fictitious expenses. This is considered payroll fraud because reimbursements are often added to paychecks. By the same token, workers eligible for overtime who artificially inflate their work hours are also generally considered payroll fraud perpetrators.

Effective internal controls

To prevent payroll fraud — and uncover it quickly if it occurs — implement and enforce strong internal controls. For instance, require two or more employees to make payroll changes, such as increasing pay rates or adding or removing employees. Payroll staffers should be alert for excessive or unusual pay rates, hours or expenses. And if they receive a request to change an employee’s direct deposit information, they should verify the request with the worker before proceeding.

For their part, department managers must closely monitor employee expense reimbursement requests. They should ask employees to explain discrepancies, such as totals that don’t add up or expense claims that lack receipts.

Other effective controls include:

Audits. Regularly conduct payroll audits to detect anomalies. Also audit automatic payroll withdrawals to confirm proper transfers are made.

Training. Educate employees about payroll schemes, phishing attacks and the importance of not sharing sensitive information.

Confidential hotlines. Offer an anonymous hotline or web portal to employees, customers and vendors to report fraud suspicions. Be sure to investigate every report.

Tax responsibilities

Finally, a scheme that’s most often perpetrated by business owners and executives is deliberately failing to pay required payroll tax. Ensure that upper management and payroll department employees understand their tax responsibilities and that no one individual has the ability to divert funds intended for payroll tax to a personal account. Contact FMD for more information and assistance with internal controls.

How Auditors Evaluate Accounting Estimates

Financial statements aren’t built solely on fixed numbers and historical facts. Many reported amounts rely on accounting estimates — management’s best judgments about uncertain future outcomes. Estimates are inherently subjective and can significantly affect reported results. How do external auditors evaluate whether amounts reported on financial statements seem reasonable?

Understanding management’s assumptions and data

External auditors pay close attention to accounting estimates during audit fieldwork. They review the methods and models used to create estimates, along with supporting documentation, to ensure they’re appropriate for the specific accounting requirements. In addition, auditors examine the company’s internal controls over the estimation process to ensure they’re robust and designed to prevent errors or manipulation.

For instance, they may inquire about the underlying assumptions (or inputs) used to make estimates to determine whether the inputs seem complete, accurate and relevant. Estimates based on objective inputs, such as published interest rates or percentages observed in previous reporting periods, are generally less susceptible to bias than those based on speculative, unobservable inputs. This is especially true if management lacks experience making similar estimates.

Challenging estimates and assessing bias

When testing inputs, auditors assess the accuracy, reliability and relevance of the data used. Whenever possible, auditors try to recreate management’s estimate using the same assumptions (or their own). If an auditor’s independent estimate differs substantially from what’s reported on the financial statements, the auditor will ask management to explain the discrepancy. In some cases, an external specialist, such as an appraiser or engineer, may be called in to estimate complex items.

Auditors also may conduct a “sensitivity analysis” to see if management’s estimate is reasonable. A sensitivity analysis shows how changes in key assumptions affect an estimate, helping to evaluate the risk of material misstatement.

In addition, auditors watch for signs of management bias, such as overly optimistic or conservative assumptions that could distort the financial statements. They also consider the objectivity of those involved in the estimation process, ensuring there’s no undue influence or pressure that could affect the estimate’s outcome.

Auditors also may compare past estimates to what happened after the financial statement date. The outcome of an estimate is often different from management’s preliminary estimate. Possible explanations include errors, unforeseeable subsequent events and management bias. If management’s estimates are consistently similar to actual outcomes, it adds credibility to management’s prior estimates. But if significant differences are found, the auditor may be more skeptical of management’s current estimates, necessitating the use of additional audit procedures.

Why estimates matter

Accounting estimates are a key focus area for auditors because small changes in management’s assumptions can have material effects on a company’s financial statements. Through rigorous testing, professional skepticism and independent analysis, auditors can help promote accurate, reliable financial reporting.

As audit season gets underway for calendar-year businesses, now’s a good time to review significant accounting estimates and address gaps in documentation. Taking these proactive measures can help streamline the audit process and reduce the risk of unnecessary delays. Contact FMD with questions or for assistance preparing for your audit.

Take Steps to Help Ensure Your Estate Plan Won’t be Challenged after Your Death

It’s not uncommon for family members to contest a loved one’s will or challenge other estate planning documents. But you can take steps now to minimize the likelihood of such challenges after your death and protect both your wishes and your legacy.

Family disputes often arise not from legal flaws, but from confusion, surprise or perceived unfairness. By preparing a well-structured estate plan and clearly communicating your intentions to loved ones, you can reduce the risk of misunderstandings that can lead to challenges. There are also specific steps you can take to help fortify your plan against challenges.

Demonstrate a lack of undue influence

Family members might challenge your will by claiming that someone asserted undue influence over you. This essentially means the person influenced you to make estate planning decisions that would benefit him or her but that were inconsistent with your true wishes.

A certain level of influence over your final decisions is permissible. For example, there’s generally nothing wrong with a daughter encouraging her father to leave her the family vacation home. But if the father is in a vulnerable position — perhaps he’s ill or frail and the daughter is his caregiver — a court might find that he was susceptible to the daughter improperly influencing him to change his will.

There are many techniques you can use to demonstrate the lack of any undue influence over your estate planning decisions, including:

Choosing reliable witnesses. These should be people you expect to be available and willing to attest to your testamentary capacity and freedom from undue influence years or even decades down the road.

Videotaping the execution of your will. This provides an opportunity to explain the reasoning for any atypical aspects of your estate plan and can help refute claims of undue influence (or lack of testamentary capacity). Be aware, however, that this technique can backfire if your discomfort with the recording process is mistaken for duress or confusion.

In addition, it can be to your benefit to have a medical practitioner conduct a mental examination or attest to your competence at or near the time you execute your will.

Follow the law for proper execution

Never open the door for someone to contest your will on the grounds that it wasn’t executed properly. Be sure to follow applicable state laws to the letter.

Typically, that means signing your will in front of two witnesses and having your signature notarized. Be aware that laws vary from state to state, and an increasing number of states are permitting electronic wills.

Consider a no-contest clause

If your net worth is high, a no-contest clause can act as a deterrent against an estate plan challenge. Most, but not all, states permit the use of no-contest clauses.

In a nutshell, a no-contest clause will essentially disinherit any beneficiary who unsuccessfully challenges your will. For this strategy to be effective, you must leave heirs an inheritance that’s large enough that forfeiting it would be a disincentive to bringing a challenge. An heir who receives nothing has nothing to lose by challenging your plan.

Be proactive now to avoid challenges later

Other aspects of your estate plan, such as trusts and beneficiary designations for retirement plans and life insurance, could also be challenged. Taking steps now to minimize the risk of successful challenges to any of your estate planning documents can help protect your legacy and provide clarity and peace of mind for your loved ones. FMD can help you draft an estate plan that will meet legal requirements and accurately reflect your intentions, reducing the risk of challenges.

What to Look for on Your Balance Sheet — and How to Strengthen It

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

Look beyond what’s reported

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

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

Identify what matters most

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

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

Use ratios to assess strength

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

• The current ratio (current assets ÷ current liabilities), a short-term liquidity measure that helps assess whether your company has enough current assets to meet current obligations,

• The days-in-receivables ratio (accounts receivable ÷ annual sales × 365), which measures collection efficiency, and

• The debt-to-equity ratio (interest-bearing debt ÷ equity), which reflects the use of debt vs. equity to finance growth.

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

Set goals and forecast the impact

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

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

A clearer, stronger financial picture

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

Leverage Your Gift Tax Annual Exclusion using a Crummey Trust

A Crummey trust provides a key tax benefit of an outright gift without some of the downsides. Although the mechanics can seem technical, the concept is straightforward. And the benefits can be significant for families looking to reduce estate taxes and provide long-term financial security.

How does a Crummey trust work?

A Crummey trust (named after the 1968 court case that first authorized its use) is a special type of trust that allows gifts to it to qualify for the gift tax annual exclusion. Yet unlike with an outright gift, you still determine, through the trust terms, how the assets will be managed and when they’ll  ultimately be distributed to beneficiaries.

Generally, assets placed in a trust are treated as future interests and, therefore, don’t qualify for the annual exclusion ($19,000 per beneficiary in 2026). So you normally would have to use some of your lifetime gift and estate tax exemption ($15 million for 2026) to make tax-free gifts to a trust. However, a Crummey trust overcomes this limitation by granting beneficiaries a temporary right to withdraw contributions made to it.

Here’s how it works: Each time you contribute assets to the trust, the trustee must send a Crummey notice to the trust’s beneficiaries. This notice informs them that they have a limited window — typically 30 to 60 days — to withdraw their shares of the contribution. Because the beneficiaries technically have immediate access to the funds, the IRS treats the gift as a present interest, allowing it to qualify for the annual exclusion.

After the withdrawal period expires, the funds remain in the trust (assuming the beneficiaries didn’t exercise their withdrawal rights) and are managed and eventually distributed according to the trust terms, such as when beneficiaries reach specific ages or to fund certain types of expenses.

A Crummey trust is an irrevocable trust, meaning once assets are transferred into it, you, the grantor, generally can’t reclaim them. You determine the trust terms when you set up the trust. But, with limited exceptions, you can’t change them after the trust is initially funded. Because the trust is irrevocable, the trust assets won’t be included in your taxable estate, provided all applicable rules are met. This also effectively removes future appreciation on those assets from your taxable estate.

When can they be particularly beneficial?

Crummey trusts are often used in conjunction with irrevocable life insurance trusts (ILITs). An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. An ILIT keeps insurance proceeds, which could otherwise be subject to estate tax, out of your estate (and possibly your spouse’s).

You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiaries. But the trust can be structured to make a loan to your estate for liquidity needs, such as paying estate tax.

Structuring ILITs as Crummey trusts allows annual exclusion gifts to fund the ILIT’s payment of insurance premiums. There’s an incentive for beneficiaries not to exercise their withdrawal rights so that the premiums can be paid to maintain the policy. The trust can potentially provide beneficiaries with a much larger payout later from the life insurance death benefit.

Any tax traps?

Before using a Crummey trust, it’s important to consider potential tax traps. One involves inadvertent taxable gifts from one beneficiary to another. Suppose, for example, that you set up a trust that provides income for your spouse for life, with any remaining assets passing to your daughter. To take advantage of the annual exclusion, you provide your spouse with Crummey withdrawal rights. Each time your spouse allows these rights to lapse without exercising them, he or she in effect has made a gift to your daughter by increasing the value of her future interest in the trust.

There are a couple of ways to avoid this result. One is to rely on the IRS’s “5&5” rule, which doesn’t count lapsing rights as a taxable gift as long as the withdrawal right doesn’t exceed the greater of $5,000 or 5% of the trust’s principal. So long as the trust principal is at least $380,000, you’ll be able to make $19,000 annual gifts without violating the 5&5 rule. Another option is to make the holder of Crummey withdrawal rights the sole beneficiary of the trust, which eliminates the gift tax concern.

Need help?

While a Crummey trust can be a powerful estate planning tool, it must be properly drafted and administered, including timely notices of withdrawal and careful recordkeeping. If you’re considering a Crummey trust, contact FMD. We can help ensure this trust type aligns with your broader financial and estate goals.

Consider these Issues Before Providing (or Reimbursing) Mobile Phones

For many employees, mobile phones are no longer a perk — they’re an essential business tool. However, issuing company phones or reimbursing employees for use of their personal devices can create hidden security risks, unexpected tax consequences and productivity concerns for business owners. Here are some key issues to consider before rolling out or revising your company’s mobile phone policy.

Security risks

In general, the biggest security risk associated with mobile phones is that they may lack robust protections against phishing, malware and other cyberthreats. Hackers could use an employee’s phone to access your business’s IT network, leading to theft of customer payment details, payroll data, intellectual property and other sensitive information. An illicit entry could even result in a ransomware incident.

If you allow employees to use phones to access company data, use a mobile device management system that enforces strong security protocols. And instruct phone users to avoid using public Wi-Fi networks (such as those in airports) that could expose them to data interception and malware.

Tax rules for work-issued phones

Another consideration is taxes. Business use of an employer-provided phone typically is treated as a nontaxable working condition fringe benefit if it’s provided “primarily for noncompensatory business purposes.” For example, you may need to reach employees at any time for work-related emergencies.

If the noncompensatory business purposes test is met, the value of any personal use of an employer-provided smartphone will generally be treated as a nontaxable “de minimis” fringe benefit. However, these phones will trigger taxable income if they’re provided to replace compensation, attract new hires or boost staff morale.

Guidelines for employee-owned devices

The IRS has indicated that it analyzes expense reimbursement for employees’ personal phones similarly to how it treats employer-provided phones. So reimbursements generally won’t be considered additional income or wages if:

• You have substantial business reasons for requiring employees to use their personal phones and reimbursing them for doing so,

• Reimbursements are reasonably related to the needs of your operations and calculated not to exceed the expenses that employees typically incur in maintaining their phones, and

• Reimbursements aren’t made as a substitute for a portion of employees’ regular wages.

Employer reimbursements for employees’ actual expenses must usually be made under a so-called accountable plan (contact us for more information). Alternatively, you could provide employees with flat monthly stipends. But stipends that exceed reasonable amounts may be treated as taxable wages.

Formal usage policies

To protect productivity, it’s critical to create written phone-usage policies. Discourage employees from using company-owned phones or their personal devices to make long personal calls, access their social media accounts or stream non-work-related videos during work hours.

If you allow employees to use their own phones at work, be sure to establish a bring-your-own-device (BYOD) policy. In addition to proper usage, it should address such issues as security, data ownership, privacy (for example, your ability to view employee phone data) and proper use. Your BYOD policy might also detail procedures for wiping personal devices when employees leave your employment.

Pros and cons

Many positions call for the frequent use of mobile phones — your executives, salespeople and other “road warriors” are only a few who probably need them. Depending on the nature of your business, it may make sense to issue or reimburse the use of personal phones as a fringe benefit to other employees. FMD can help you review the pros and cons related to equipment costs, security, taxes and productivity.        

How Auditors Evaluate Key Person Risks

From technical know-how to charisma and innovation, the skills and personal attributes of a company’s leaders are often critical to its success. But those same traits can become a source of risk if the business relies too heavily on its founder or another top manager.

If a so-called “key person” becomes incapacitated, retires or unexpectedly leaves, it can disrupt day-to-day operations, unsettle customers and lenders, and strain working capital. As you plan for the new year, take a moment to consider whether your business faces key person risks — and, if so, how to think like an auditor to proactively manage them.

No organization is immune

Financial statement auditors are required to perform a risk assessment as part of audit planning and execution. One potential source of risk is overreliance on one or two individuals for leadership, revenue generation or institutional knowledge.

Key person risks are usually associated with small businesses, but they can also impact large multinationals. Consider the stock price fluctuations that Apple experienced following the death of innovator Steve Jobs. Fortunately for Apple and its investors, the company had a deep management bench, a strong pipeline of technology and sufficient working capital to bridge the transition period. However, many small businesses lack those buffers and may take years to recover from the sudden loss of a key leader.

Factors to consider

Does your business rely heavily on one or two individuals, or is your management team sufficiently decentralized? Key people typically:

• Handle broad duties,

• Possess specialized training or industry knowledge,

• Have extensive experience that isn’t formally documented, or

• Make significant contributions to annual sales or customer relationships.

Auditors also consider whether an individual has signed personal guarantees for business debts, as well as the depth and qualifications of other management team members. Generally, companies that sell products tend to be better positioned to withstand the loss of a key person than service-based businesses, where relationships and expertise are harder to transfer. That said, a product-based company that relies heavily on technology may be at risk if a key person possesses specialized technical knowledge.

Customer and supplier relationships are also important factors. When those relationships are concentrated in a single individual, the departure of that person can create instability and lost business. Companies are better able to retain relationships when they’re shared across multiple team members.

Mitigating your exposure

An audit risk assessment can help identify where key person risk may exist and prompt discussions about business continuity and resilience. While auditors don’t design succession plans or internal controls, the process often highlights vulnerabilities that management may want to address through training programs and succession planning options. Contact FMD to help assess key person risks and brainstorm practical solutions to strengthen your company’s long-term stability.

Address Your Elderly Parents in Your Estate Plan in 5 Steps

When creating or updating your estate plan, it’s important to address your elderly parents with both clarity and sensitivity. If you provide financial support, share housing or anticipate future caregiving responsibilities, your plan should reflect these realities.

Clearly documenting any ongoing assistance, loans or shared assets can help prevent misunderstandings among heirs later. In addition, if your parents have designated you to act on their behalf through powers of attorney or health care directives, your estate plan should align with those roles so there are no conflicting instructions or expectations.

5 steps

To incorporate your parents’ needs into your own estate plan, you first must understand their financial situation and any arrangements they’ve already made. Some may require tweaking. Here are five action steps:

1. List and value their assets. If you’re going to manage the financial affairs of your parents, having knowledge of their assets is vital. Compile and maintain a list of all their assets. These may include not only physical assets like their home and other real estate, vehicles, and any collectibles or artwork, but also investment holdings, retirement accounts and life insurance policies. You’ll need to know account numbers and current balances. Be sure to add in projections for Social Security benefits. When all is said and done, don’t be surprised if their net worth is higher or lower than what you (or they) initially thought. You can use this information to determine the appropriate planning techniques.

2. Identify key contacts. Compile the names and addresses of professionals important to your parents’ finances and medical conditions. This may include stockbrokers, financial advisors, attorneys, tax professionals, insurance agents and physicians.

3. Open the lines of communication. Before going any further, have a discussion with your parents, as well as other family members who may be involved, such as your siblings. Make sure you understand your parents’ wishes and explain the objectives you hope to accomplish.

4. Execute documents. Assuming you can agree on next steps, develop a plan that incorporates several legal documents. If your parents have already created one or more of these documents, they may need to be revised or coordinated with new ones. Some documents commonly included in an estate plan include:

• Wills. Your parents’ wills control the disposition of their assets and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically passes to the survivor.) Notably, a will also appoints an executor for your parents’ estates. If you’re the one lending financial assistance, you’re probably the optimal choice.

• Living trusts. A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust doesn’t have to go through probate, which can save time and money while avoiding public disclosure.

• Beneficiary designations. Your parents probably have filled out beneficiary designations for retirement accounts and life insurance policies. These designations supersede references in a will, so it’s important to keep them up to date.

• Powers of attorney. A power of attorney authorizes someone to legally act on behalf of another person, such as to handle financial matters or make health care decisions. With a durable power of attorney, the most common version, the authorization continues should the person become unable to make decisions for him- or herself. This enables you to better handle your parents’ affairs.

• Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. Make sure your parents’ physicians have copies.

5. Make gifts. If you decide the best approach for helping your parents is to give them monetary gifts, it’s relatively easy to avoid gift tax liability. Under the gift tax annual exclusion, you can give each recipient up to $19,000 for 2026 without incurring gift tax, doubled to $38,000 per recipient if your spouse joins in the gift. If you give more, the excess may be transferred tax-free under your available lifetime gift and estate tax exemption ($15 million for 2026, less any exemption you’ve already used during your life).

Be wary, however, of giving gifts that may affect eligibility for certain government benefits. The availability of these benefits varies by state.

Plan for contingencies

Your estate plan should specify how you want to assist aging parents should they outlive you. For example, consider setting aside funds for their care or naming a trusted individual to manage those resources. Thoughtful provisions can reduce stress for your family and ensure your parents are treated with dignity and respect.

These situations often involve emotional and financial complexity. Contact FMD to help develop a comprehensive plan that addresses your family’s needs.

What Business Owners should Know about Debt Restructuring

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

Making debt more manageable

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

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

• Extending repayment periods,

• Modifying payment schedules in other ways,

• Adjusting interest rates, and

• Consolidating multiple loans.

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

Warning signs

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

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

Timing and perspective

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

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

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

Guidance is essential

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

How Activity-based Costing Can Improve Business Performance

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

How does activity-based costing work?

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

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

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

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

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

What insights can activity-based costing provide?

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

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

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

Is it right for your business?

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

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

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

The benefits

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

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

2 documents do the heavy lifting

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

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

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

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

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

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

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

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

Be proactive

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

IRS Issues Guidance on Trump Accounts

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

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

A different kind of IRA — initially

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

During the growth period:

• The account funds can be invested only in eligible investments — generally, mutual funds or exchange-traded funds (ETFs) that track an index of primarily U.S. companies, such as the Standard and Poor’s 500, and meet other criteria,

• The account has a lower contribution limit, generally $5,000 per year (adjusted for inflation after 2027),

• The account generally can’t make distributions (including hardship distributions), and

• Individuals can’t claim a tax deduction for their contributions.

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

Account election

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

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

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

Pilot program participation

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

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

Contributions to the account

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

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

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

Education savings alternatives

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

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

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

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

Stay tuned

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

Change Orders Require Careful Accounting

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

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

Track the numbers

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

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

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

Check the contract

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

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

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

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

• Defer revenue recognition until you and the customer have agreed on the change in contract price, or

• Treat them as costs of contract performance in the period incurred and increase the contract price to the extent of the costs incurred (resulting in no immediate change to estimated gross profit).

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

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

Ask for assistance

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

Should You Own Assets Jointly with an Adult Child?

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

Positives and negatives

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

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

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

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

Right move for you?

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

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

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

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

What PTO represents on the balance sheet

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

• Paid vacation,

• Paid holidays,

• Paid sick leave, and

• Other forms of PTO earned by employment.

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

Quantifying PTO accruals

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

• Employees have earned the time,

• The rights vest or accumulate,

• It’s probable employees will use or be paid for the time, and

• The amount can be reasonably estimated.

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

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

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

Incorporate PTO into your year-end checklist

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

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

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

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

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

Understanding the law

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

• Convicted felons,

• Fugitives,

• Unlawful drug users or addicts,

• Mentally incompetent persons,

• Illegal or nonimmigrant aliens, and

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

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

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

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

Consider a gun trust

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

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

Seek professional estate planning advice

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

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

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

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

The new deductions

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

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

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

• Beverage and food service,

• Entertainment and events,

• Hospitality and guest services,

• Home services,

• Personal services,

• Personal appearance and wellness,

• Recreation and instruction, and

• Transportation and delivery.

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

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

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

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

The tips deduction calculation

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

• Social Security tips reported in Box 7 of Form W-2,

• The total amount of tips you reported to your employer on Forms 4070, “Employee’s Report of Tips to Employer,” or similar forms, or

• The total amount of tips your employer voluntarily reports in Box 14 (“Other”) of Form W-2 or a separate statement.

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

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

• Earnings statements,

• Receipts,

• Point-of-sale system reports,

• Daily tip logs,

• Third-party settlement organization records, or

• Other documentary evidence.

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

The overtime deduction calculation

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

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

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

A tax-saving opportunity

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

Using the Audit Management Letter as a Strategic Tool

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

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

What to expect

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

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

How audit insights can drive business improvements

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

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

A collaborative tool, not a performance review

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

• Identify risks before they become bigger problems,

• Help your team adopt best practices,

• Strengthen the effectiveness of your control environment, and

• Improve audit efficiency over time.

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

Elevate your audit

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

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

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

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

How can you leverage the annual exclusion?

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

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

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

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

What’s the lifetime gift tax exemption?

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

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

Are some gifts exempt from gift tax?

Yes. These include gifts:

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

• To a qualified charitable organization,

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

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

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

Review your estate plan before making gifts

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

Protect Business Continuity with an Emergency Succession Plan

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

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

Naming the right person

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

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

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

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

Empowering your pick

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

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

• Signatory authority for bank accounts,

• Access to accounting and payroll systems, and

• The ability to execute contracts and approve expenditures.

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

Centralizing key information

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

• Banking credentials,

• Vendor and customer contracts,

• Payroll records and procedures,

• Human resources data,

• Tax filings and financial statements, and

• Login details for essential systems.

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

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

Getting the word out

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

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

Acting now

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