If this is the case for your company, an important issue to address is how to integrate estate planning and succession planning. Whereas a nonfamily business can simply be sold to new ownership with its own management, you may want to keep the company in the family. And that creates some distinctive challenges.

Question of control

From an estate planning perspective, transferring ownership of assets to the younger generation as early as possible allows you to remove future appreciation from your estate, thereby minimizing estate taxes. Proactive planning may be especially relevant today, given the federal estate and gift tax regime under the Tax Cuts and Jobs Act.

For 2025, the unified federal estate and gift tax exemption is $13.99 million ($27.98 million for a married couple). Absent congressional action, this lifetime exemption is scheduled to drop by about half after this year. As of this writing, Congress is working on tax legislation that could potentially extend the current high exemption amount.

However, when it comes to transferring ownership of a family business, you may not be ready to hand over the reins — or you may feel that your children (or others) aren’t yet ready to take over. You may also have family members who aren’t involved in the company. Providing these heirs with equity interests that don’t confer control is feasible with proper planning.

Vehicles to consider

Various vehicles may allow you to transfer family business interests without immediately giving up control. For example, if your company is structured as a C or S corporation, you can issue nonvoting stock. Doing so allows current owners to retain control over business decisions while transferring economic benefits to other family members.

Alternatively, there are several trust types to consider. These include a revocable living trust, an irrevocable trust, a grantor retained annuity trust and a family trust. Each has its own technical requirements, so you must choose carefully.

Then again, you could form a family limited partnership. This is a legal structure under which family members pool their assets for business or investment purposes while retaining control of the company and benefiting from tax advantages.

Finally, many family businesses are drawn to employee stock ownership plans (ESOPs). Indeed, an ESOP may be an effective way to transfer stock to family members who work in the company and other employees, while allowing owners to cash out some of their equity in the business.

You and other owners can use this liquidity to fund your retirements, diversify your portfolios or provide for family members who aren’t involved in the business. If an ESOP is structured properly, you can maintain control over the business for an extended period — even if the ESOP acquires most of the company’s stock.

Not easy, but important

For family businesses, addressing estate and succession planning isn’t easy, but it’s important. One thing all the aforementioned vehicles have in common is that implementing any of them will call for professional guidance, including your attorney. Please keep us in mind as well. We can help you manage the tax and cash flow implications of planning a sound financial future for your company and family.

© 2025

The post Family business focus: Addressing estate and succession planning first appeared on KSDT CPA.

If you’ve been pondering the purchase of a new or used electric vehicle (EV), you’ll want to buy sooner rather than later to take advantage of available tax credits. Here’s what you need to know.

The current credit

The Inflation Reduction Act (IRA) significantly expanded the Section 30D credit for qualifying clean vehicles placed in service after April 17, 2023. For eligible taxpayers, it extended the credit to any “clean vehicle,” including EVs, hydrogen fuel cell cars and plug-in hybrids, through 2032. It also created a new credit, Sec. 25E, for eligible taxpayers who buy used clean vehicles from dealers. That credit equals the lesser of $4,000 or 30% of the sale price.

The maximum credit for new vehicles is $7,500, based on meeting certain sourcing requirements for 1) critical minerals and 2) battery components. Clean vehicles that satisfy only one of the two requirements qualify for a $3,750 credit.

The Sec. 30D and Sec. 25E credits aren’t refundable, meaning you can’t receive a refund if you don’t have any tax liability. In addition, any excess credit can’t be carried forward if it’s claimed as an individual credit. A credit can be carried forward only if it’s claimed as a general business credit.

If you’re eligible for either credit (see below), you have two options for applying it. First, you can transfer the credit to the dealer to reduce the amount you pay for the vehicle (assuming you’re purchasing the vehicle for personal use). You’re limited to making two transfer elections in a tax year. Alternatively, you can claim the credit when you file your tax return for the year you take possession of the vehicle.

Buyer requirements

To qualify for the Sec. 30D credit, you must purchase the vehicle for your own use (not resale) and use it primarily in the United States. The credit is also subject to an income limitation. Your modified adjusted gross income (MAGI) can’t exceed:

• $300,000 for married couples filing jointly or a surviving spouse,
• $225,000 for heads of household, or
• $150,000 for all other filers.

If your MAGI was less in the preceding tax year than in the year you take delivery of the vehicle, you can apply that amount for purposes of the income limit.

Note: As initially drafted, the GOP proposal would retain the Sec. 30D credit through 2026 for vehicles from manufacturers that have sold fewer than 200,000 clean vehicles.

For used vehicles, you similarly must buy the vehicle for your own use, primarily in the United States. You also must not:

• Be the vehicle’s original owner,
• Be claimed as a dependent on another person’s tax return, and
• Have claimed another used clean vehicle credit in the preceding three years.

A MAGI limit applies for the Sec. 25E credit, but with different amounts than those for the Sec. 30D credit:

• $150,000 for married couples filing jointly or a surviving spouse,
• $112,500 for heads of household, or
• $75,000 for all other filers.

You can choose to apply your MAGI from the previous tax year if it’s lower.

Vehicle requirements

You can take advantage of the Sec. 30D credit only if the vehicle you purchase:

• Has a battery capacity of at least seven kilowatt hours,
• Has a gross vehicle weight rating of less than 14,000 pounds,
• Was made by a qualified manufacturer,
• Underwent final assembly in North America, and
• Meets critical mineral and battery component requirements.

In addition, the manufacturer suggested retail price (MSRP) can’t exceed $80,000 for vans, sport utility vehicles and pickup trucks, or $55,000 for other vehicles. The MSRP for this purpose isn’t necessarily the price you paid. It includes manufacturer-installed options, accessories and trim but excludes destination fees.

To qualify for the used car credit, the vehicle must:

• Have a sale price of $25,000 or less, including all dealer-imposed costs or fees not required by law (legally required costs and fees, such as taxes, title or registration fees, don’t count toward the sale price),
• Be a model year at least two years before the year of purchase,
• Not have already been transferred after August 16, 2022, to a qualified buyer,
• Have a gross vehicle weight rating of less than 14,000 pounds, and
• Have a battery capacity of at least seven kilowatt hours.

The sale price for a used vehicle is determined after the application of any incentives — but before the application of any trade-in value.

Don’t forget the paperwork

Form 8936, “Clean Vehicle Credits,” must be filed with your tax return for the year you take delivery. The form is required regardless of whether you transferred the credit or chose to claim it on your tax return. Contact us if you have questions regarding the clean vehicle tax credits and their availability.

© 2025

The post EV buyers, beware! House GOP bill ends clean vehicle tax credits after 2025 first appeared on KSDT CPA.

Understanding worker classification

Tax law requirements for businesses differ for employees and independent contractors. And determining whether a worker is an employee or an independent contractor for federal income and employment tax purposes isn’t always straightforward. If a worker is classified as an employee, your business must:

• Withhold federal income and payroll taxes,
• Pay the employer’s share of FICA taxes,
• Pay federal unemployment (FUTA) tax,
• Potentially offer fringe benefits available to other employees, and
• Comply with additional state tax requirements.

In contrast, if a worker qualifies as an independent contractor, these obligations generally don’t apply. Instead, the business simply issues Form 1099-NEC at year end (for payments of $600 or more). Independent contractors are more likely to have more than one client, use their own tools, invoice customers and receive payment under contract terms, and have an opportunity to earn profits or suffer losses on jobs.

Defining an employee

What defines an “employee”? Unfortunately, there’s no single standard.

Generally, the IRS and courts look at the degree of control an organization has over a worker. If the business has the right to direct and control how the work is done, the individual is more likely to be an employee. Employees generally have tools and equipment provided to them and don’t incur unreimbursed business expenses.

Some businesses that misclassify workers may qualify for relief under Section 530 of the tax code, but only if specific conditions are met. The requirements include treating all similar workers consistently and filing all related tax documents accordingly. Keep in mind, this relief doesn’t apply to all types of workers.

Why you should proceed cautiously with Form SS-8

Businesses can file Form SS-8 to request an IRS determination on a worker’s status. However, this move can backfire. The IRS often leans toward classifying workers as employees, and submitting this form may draw attention to broader classification issues — potentially triggering an employment tax audit.

In many cases, it’s wiser to consult with us to help ensure your contractor relationships are properly structured from the outset, minimizing risk and ensuring compliance. For example, you can use written contracts that clearly define the nature of the relationships. You can maintain documentation that supports the classifications, apply consistent treatment to similar workers and take other steps.

When a worker files Form SS-8

Workers themselves can also submit Form SS-8 if they believe they’re misclassified — often in pursuit of employee benefits or to reduce self-employment tax. If this happens, the IRS will contact the business, provide a blank Form SS-8 and request it be completed. The IRS will then evaluate the situation and issue a classification decision.

Help avoid costly mistakes

Worker classification is a nuanced area of tax law. If you have questions or need guidance, reach out to us. We can help you accurately classify your workforce to avoid costly missteps.

© 2025

The post Before You Hire That Contractor: Avoid These IRS Pitfalls first appeared on KSDT CPA.

The grim truth is cyberattacks are no longer only an information technology (IT) issue. They pose a serious risk to every level and function of a business. That’s why your company should take a holistic approach to cybersecurity. Let’s look at a few ways to put this into practice.

Start with leadership

Fighting the many cyberthreats currently out there calls for leadership. However, it’s critical not to place sole responsibility for cybersecurity on one person, if possible. If your company has grown to include a wider executive team, delegate responsibilities pertinent to each person’s position. For example, a midsize or larger business might do something like this:

• The CEO approves and leads the business’s overall cybersecurity strategy,
• The CFO oversees cybersecurity spending and helps identify key financial data,
• The COO handles how to integrate cybersecurity measures into daily operations,
• The CTO manages IT infrastructure to maintain and strengthen cybersecurity, and
• The CIO supervises the management of data access and storage.

To be clear, this is just one example. The specifics of delegation will depend on factors such as the size, structure and strengths of your leadership team. Small business owners can turn to professional advisors for help.

Classify data assets

Another critical aspect of cybersecurity is properly identifying and classifying data assets. Typically, the more difficult data is to find and label, the greater the risk that it will be accidentally shared or discovered by a particularly invasive hacker.

For instance, assets such as Social Security, bank account and credit card numbers are pretty obvious to spot and hide behind firewalls. However, strategic financial projections and many other types of intellectual property may not be clearly labeled and, thus, left insufficiently protected.

The most straightforward way to identify all such assets is to conduct a data audit. This is a systematic evaluation of your business’s sources, flow, quality and management practices related to its data. Bigger companies may be able to perform one internally, but many small to midsize businesses turn to consultants.

Regularly performed company-wide data audits keep you current on what you must protect. And from there, you can prudently invest in the right cybersecurity solutions.

Report, train and test

Because cyberattacks can occur by tricking any employee, whether entry-level or C-suite, it’s critical to:

Ensure all incidents are reported. Set up at least one mechanism for employees to report suspected cybersecurity incidents. Many businesses simply have a dedicated email for this purpose. You could also implement a phone hotline or an online portal.

Train, retrain and upskill continuously. It’s a simple fact: The better trained the workforce, the harder it is for cybercriminals to victimize the company. This starts with thoroughly training new hires on your cybersecurity policies and procedures.

But don’t stop there — retrain employees regularly to keep them sharp and vigilant. As much as possible, upskill your staff as well. This means helping them acquire new skills and knowledge in addition to what they already have.

Test staff regularly. You may think you’ve adequately trained your employees, but you’ll never really know unless you test them. Among the most common ways to do so is to intentionally send them a phony email to see how many of them identify it as a phishing attempt.

Of course, phishing isn’t the only type of cyberattack out there. So, develop other testing methods appropriate to your company’s operations and data assets. These could include pop quizzes, role-playing exercises and incident-response drills.

Spend wisely

Unfortunately, just about every business must now allocate a percentage of its operating budget to cybersecurity. To get an optimal return on that investment, be sure you’re protecting all of your company, not just certain parts of it. Let us help you identify, organize and analyze all your technology costs.

© 2025

The post Companies should take a holistic approach to cybersecurity first appeared on KSDT CPA.

Who qualifies?

The net operating loss (NOL) deduction levels the playing field between businesses with steady income and those with income that rises and falls. It lets businesses with fluctuating income to average their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

• Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
• Casualty and theft losses from a federally declared disaster, or
• Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:

• Capital losses that exceed capital gains,
• The exclusion for gains from the sale or exchange of qualified small business stock,
• Nonbusiness deductions that exceed nonbusiness income,
• The NOL deduction itself, and
• The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.

What are the changes and limits?

Before the Tax Cuts and Jobs Act (TCJA), NOLs could be carried back two years, forward 20 years, and offset up to 100% of taxable income. The TCJA changed the landscape:

• Carrybacks are eliminated (except certain farm losses).
• Carryforwards are allowed indefinitely.
• The deduction is capped at 80% of taxable income for the year.

If an NOL carryforward exceeds your taxable income of the target year, the unused balance may become an NOL carryover. Multiple NOLs must be applied in the order they were incurred.

What’s the excess business loss limitation?

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships and S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2025, that threshold is $313,000 ($626,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years through 2028. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Plan proactively

Navigating NOLs and the related restrictions is complex, especially when coordinating with other deductions and credits. Thoughtful planning can maximize the benefit of past losses. Please consult with us about how to proceed in your situation.

© 2025

The post Can you turn business losses into tax relief? first appeared on KSDT CPA.

Digging deeper into receivables

The AR aging report provides a structured breakdown of all outstanding customer invoices. Rather than simply listing balances owed, it categorizes AR based on how long each invoice has remained unpaid. The following time-based “aging buckets” are typically used:

• 0 to 30 days (current),
• 31 to 60 days,
• 61 to 90 days, and
• Over 90 days.

This breakdown helps management evaluate trends in customer payment behavior, identify chronic late payers and assess how credit policies are performing. The information can be used to prioritize collection efforts and determine when receivables should be written off. Management also might use it to modify overall credit practices (for instance, offering early-bird discounts or electronic payment methods to encourage faster payments) or tighten credit policies for certain slow-paying accounts.

Optimizing cash flows

By revealing how long invoices have been unpaid and identifying customer payment trends, the AR aging report helps businesses forecast future cash receipts. This can help management more accurately:

• Budget operating expenses,
• Determine the need for short-term borrowing or credit lines, and
• Plan investments or capital expenditures.

For instance, if a business sees that 40% of its receivables are older than 60 days, management can anticipate cash shortages in the next cycle and act preemptively. They may decide to delay certain discretionary expenditures or reevaluate vendor payment terms to maintain liquidity.

Using aging buckets to estimate write-offs

Starting in 2023, private entities that follow U.S. Generally Accepted Accounting Principles (GAAP) are required to implement new accounting rules for reporting credit losses on financial assets, including trade receivables. (The rules went into effect for most public companies in 2021.) The updated guidance requires companies to estimate an allowance for credit losses based on current expected credit losses (CECL) at each reporting date. The net amount reported on the balance sheet equals the amount expected to be collected. The CECL model essentially requires companies to estimate write-offs sooner than in the past.

Under prior accounting rules, a credit loss wasn’t recognized until it was probable the loss had been incurred, regardless of whether an expectation of credit loss existed beforehand. Under the CECL model, a loss allowance must be estimated based on historical information, current conditions, and reasonable and supportable forecasts. This estimate is often derived using historical default rates from aging buckets and adjusted for current and forecasted economic conditions. AR aging reports provide the historical and current data necessary to project the probability of default for various customer segments and invoice-age groups.

Estimated credit losses are recorded on the income statement as bad debt expense, directly reducing net income. Financial statement footnotes may also include detailed aging data and descriptions of how the loss estimate was developed, particularly if receivables represent a significant portion of the company’s assets.

It’s important to note that the Financial Accounting Standards Board is currently working on proposed guidance that, if approved, would allow private entities to use simpler assumptions to estimate credit losses on short-term receivables. However, regardless of whether the proposed simplification measures are approved, the AR aging report remains an essential tool. It helps quantify expected losses with or without complex forecasting.

A strategic management tool

QuickBooks® and many other accounting software platforms can generate real-time, customizable AR aging reports that integrate with customer relationship management systems for seamless tracking and follow-up.

If you’re unsure whether your current processes are CECL-compliant or you need assistance leveraging aging data to strengthen collections, credit policies and budgeting decisions, we’re here to help. Contact us to maximize the potential of your receivables data.

© 2025

The post Old invoices, new rules: Tap into the power of the AR aging report first appeared on KSDT CPA.

Casualty loss deduction basics

The federal tax code generally allows individuals to deduct the following types of losses, if they weren’t compensated for them by insurance or otherwise:

• Losses incurred in a business,
• Losses incurred in a transaction entered into for profit (but not connected to a business), or
• Losses not connected to a business or a transaction entered into for profit, which arise from a casualty or theft loss (known as personal casualty or theft losses).

A variety of fraud schemes may fall under the third category.

To deduct a theft loss, the taxpayer/victim generally must establish that:

• The loss resulted from conduct that’s deemed theft under applicable state law, and
• The taxpayer has no reasonable prospect of recovery of the loss.

From 2018 through 2025, though, the TCJA allows the deduction of personal casualty or theft losses only to the extent of personal casualty gains (for example, an insurance payout for stolen property or a destroyed home) except for losses attributable to a federally declared disaster. As a result, taxpayers who are fraud victims generally qualify for the deduction only if the loss was incurred in a transaction entered into for profit. That would exclude the victims of scams where no profit motive exists. The loss of the deduction can compound the cost of scams for such victims.

The IRS analysis

The IRS Chief Counsel Advice memo considers several types of actual scams and whether the requisite profit motive was involved to entitle the victims to a deduction. In each scenario listed below, the scam was illegal theft with little or no prospect of recovery:

Compromised account scam. The scammer contacted the victim, claiming to be a fraud specialist at the victim’s financial institution. The victim was induced to authorize distributions from IRA and non-IRA accounts that were allegedly compromised and transfer all the funds to new investment accounts. The scammer immediately transferred the money to an overseas account.

The IRS Chief Counsel found that the distributions and transfers were made to safeguard and reinvest all the funds in new accounts in the same manner as before the distributions. The losses, therefore, were incurred in a transaction entered into for profit and were deductible.

“Pig butchering” investment scam. This crime is so named because it’s intended to get every last dollar by “fattening up” the victim with fake returns, thereby encouraging larger investments. The victim here was induced to invest in cryptocurrencies through a website. After some successful investments, the victim withdrew funds from IRA and non-IRA accounts and transferred them to the website. After the balance grew significantly, the victim decided to liquidate the investment but couldn’t withdraw funds from the website.

The Chief Counsel determined that the victim transferred the funds for investment purposes. So the transaction was entered into for profit and the losses were deductible.

Phishing scam. The victim received an email from the scammer claiming that his accounts had been compromised. The email, which contained an official-looking letterhead and was signed by a “fraud protection analyst,” directed the victim to call the analyst at a provided number.

When the victim called, the scammer directed the victim to click a link in the email, giving the scammer access to the victim’s computer. Then, the victim was instructed to log in to IRA and non-IRA accounts, which allowed the scammer to grab the username and password. The scammer used this information to distribute all the account funds to an overseas account.

Because the victim didn’t authorize the distributions, the IRS weighed whether the stolen property (securities held in investment accounts) was connected to the victim’s business, invested in for profit or held as general personal property. The Chief Counsel found that the theft of property while invested established that the victim’s loss was incurred in a transaction entered into for profit and was deductible.

Romance scam. The scammer developed a virtual romantic relationship with the victim. Shortly afterwards, the scammer persuaded the victim to send money to help with supposed medical bills. The victim authorized distributions from IRA and non-IRA accounts to a personal bank account and then transferred the money to the scammer’s overseas account. The scammer stopped responding to the victim’s messages.

The Chief Counsel concluded this loss wasn’t deductible. The victim didn’t intend to invest or reinvest any of the distributed funds so there was no profit motive. In this case, the losses were nondeductible.

Note: If the scammer had directed the victim to a fraudulent investment scheme, the results likely would’ve been different. The analysis, in that situation, would mirror that of the pig butchering scheme.

Kidnapping scam. The victim was convinced that his grandson had been kidnapped. He authorized distributions from IRA and non-IRA accounts and directed the funds to an overseas account provided by the scammer.

The victim’s motive wasn’t to invest the distributed funds but to transfer them to a kidnapper. Unfortunately, these losses were also nondeductible.

What’s next?

It’s uncertain whether the TCJA’s theft loss limit will be extended beyond 2025. In the meantime, though, some scam victims may qualify to amend their tax returns and claim the loss deduction. Contact us if you need assistance or have questions about your situation.

© 2025

The post IRS clarifies theft and fraud loss deductions first appeared on KSDT CPA.

Here are three tax benefits.

1. You can transfer business earnings

Turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. For your business to deduct the wages as a business expense, the work done by the child must be legitimate. In addition, the child’s salary must be reasonable. (Keep detailed records to substantiate the hours worked and the duties performed.)

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 17-year-old daughter to help with office work full-time in the summer and part-time in the fall. She earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter, who can use her $15,000 standard deduction for 2025 (for single filers) to shelter her earnings.

Family taxes are cut even if your daughter’s earnings exceed her standard deduction. That’s because the unsheltered earnings will be taxed to her beginning at a 10% rate, instead of being taxed at your higher rate.

2. You may be able to save Social Security tax

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

3. Your child can save in a retirement account

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for up to 25% of your child’s earnings (not to exceed $70,000 for 2025).

Your child can also contribute some or all of his or her wages to a traditional or Roth IRA. For the 2025 tax year, your child can contribute the lesser of:

• His or her earned income, or
• $7,000.

Keep in mind that traditional IRA withdrawals taken before age 59½ may be hit with a 10% early withdrawal penalty tax unless an exception applies. (Several exceptions exist, including to pay for qualified higher-education expenses and up to $10,000 in qualified first-time homebuyer costs.)

Tax benefits and more

In addition to the tax breaks from hiring your child, there are nontax benefits. Your son or daughter will better understand your business, earn extra spending money and learn responsibility. Contact us if you have any questions about the tax rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

© 2025

The post Turn a summer job into tax savings: Hire your child and reap the rewards first appeared on KSDT CPA.

Complex valuation matters

Business valuators can provide answers to five critical financial questions in a divorce:

1. How much is my business interest worth? There are three ways to value a business: the cost, market and income approaches. All these techniques start with the company’s financial statements. But discovery shouldn’t stop there, particularly for spouses not involved in day-to-day business operations. Valuation experts should be given equal access to financial records and opportunities to tour the company’s facilities and interview management. Inadequate discovery can cause an expert to miss critical information, possibly leading to inaccurate value opinions.

2. How much value should be included in the marital estate? If the business interest was owned before the marriage, it might be appropriate to include in the marital estate only the appreciation in value over the course of the marriage, depending on the facts of the case and relevant state law. Estimating appreciation in value requires a comparison of the current value of the business interest vs. its value on the couple’s wedding day.

3. Does the asset allocation overlap with maintenance payments? Another reason to exclude a part of the business’s value from the marital estate relates to the concept of “double dipping.” This may happen when a spouse receives double recovery for a single asset. For example, courts in some states have decided it’s inequitable for a spouse to receive maintenance payments based on his or her spouse’s future income, along with half of the business’s value based on its ability to generate future income.

In states that find double dipping unfair, the value of the business’s goodwill (or a portion of it) may be specifically excluded from the marital estate. Before goodwill can be excluded, however, it must be valued. Often, this requires goodwill to be split between personal and business goodwill. The former is linked to the individual owners and their abilities to generate future income. Usually, personal goodwill can’t be transferred to a third party.

4. Is the controlling shareholder hiding anything? The spouse who controls the business may try to hide income or assets to achieve a more favorable divorce settlement. Downplaying assets and income (or, conversely, exaggerating liabilities and expenses) can lead to 1) lower business valuations, and 2) reduced payments for child support and maintenance — unless the valuation expert identifies the anomaly and makes an adjustment for the value of the missing or inaccurate item(s).

5. Do the financial statements need adjustments? Reasonable “replacement” compensation — based on the market value of the owner’s contribution to the business — is a common adjustment in divorce cases. Additionally, some business owners try to deduct their personal attorney’s fees or expert witness fees as business expenses. Running personal expenses through the business not only reduces the value of the business interest, but also could expose the noncontrolling spouse to IRS inquiry.

Other adjustments may be needed to normalize the business’s earnings to benchmark the subject company against comparable companies. Examples include adjustments for nonstandard accounting practices (such as cash-to-accrual basis of accounting changes) and for nonrecurring income or expenses (from, say, a discontinued product line or the sale of a nonoperating asset).

Case in point

The parties in a divorce case might not be required to present expert valuations of marital assets at trial. But Roberts v. Roberts, a recent Mississippi appellate court ruling, shows why it’s a good idea to hire an expert from the start (No. 2023-CA-00934-COA, Miss. Ct. App., Feb. 25, 2025).

In this case, the husband owned and operated a solo real estate appraisal firm. Although the business was the couple’s main asset and income source, neither spouse presented valuation evidence. However, the husband testified that his business had “zero” value — beyond the value of his personal computer — because he couldn’t guarantee that his customers would hire another appraiser who might buy his business.

Left to his own devices, the chancellor hearing the case valued the business at roughly $150,000, based on its average income from the prior four years. The court awarded the husband sole ownership of the business and ordered him to pay his ex-wife monthly maintenance, reasoning that she was left with a “deficit” because the husband received a greater share of the marital assets and his earning capacity greatly exceeded hers.

The husband appealed, arguing multiple flaws in the chancellor’s decision, including that the chancellor had erroneously valued the business. He also challenged the chancellor’s maintenance award.

The appellate court ruled that, under Mississippi law, the husband’s reputation and ability to earn income as an appraiser can’t be counted as both 1) an asset in the division of marital property, and 2) a continuing income stream for maintenance award purposes. Moreover, the wife presented no expert testimony that the business had any value separate and apart from the husband’s personal reputation and ability to work as a real estate appraiser.

As a result, the judgment was reversed, and the case was remanded to the trial court for a new valuation and equitable division of the marital estate. The maintenance award was also remanded for further consideration based on any changes to the equitable division of the marital estate.

The outcome in Roberts might have differed significantly if the parties had hired valuation experts. For instance, valuation evidence might have precluded the chancellor from performing a makeshift valuation using the business’s income, thereby avoiding the time and expense of an appeal. Or, valuation evidence supported by credible expert analysis might have established the presence of business goodwill — not solely tied to the husband’s personal reputation — that could have been included in the marital estate. However, without formal business valuations, equitable distribution of the marital estate was left to the court’s discretion.

Seek professional expertise

When a divorce case includes a business interest, it’s often one of the biggest line items on the marital balance sheet. While it may be tempting to perform a do-it-yourself business valuation in an attempt to save money, that approach can ultimately be costly. Shortcuts, such as industry rules of thumb, net book value and buy-sell formulas, often lack market-based support. Contact us for a formal valuation that will withstand court scrutiny. Our experienced valuation pros understand how courts handle challenging divorce issues in your jurisdiction.

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The post Divorcing business owners can’t afford to skimp on valuation expertise first appeared on KSDT CPA.

In a business context, however, concentration can refer to various aspects of your company’s operations. And examining different types of it may help you spot certain dangers.

Evaluate your customers

Let’s start with customer concentration, which is the percentage of revenue generated from each customer. Many small to midsize companies rely on only a few customers to generate most of their revenue. This is a precarious position to be in.

The dilemma is more prevalent in some industries than others. For example, a retail business will likely market itself to a relatively broad market and generally not face too much risk related to customer concentration. A commercial construction company, however, may serve only a limited number of clients that build, renovate or maintain offices or other facilities.

How do you know whether you’re at risk? One rule of thumb says that if your biggest five customers make up 25% or more of your revenue, your customer concentration is generally high. Another simple measure says that, if any one customer represents 10% or more of revenue, you’re at risk of having elevated customer concentration.

In an increasingly specialized world, many businesses focus solely on specific market segments. If yours is one of them, you may not be able to do much about customer concentration. In fact, the very strength of your company could be its knowledge and attentiveness to a limited number of buyers.

Nonetheless, know your risk and explore strategic planning concepts that may help you mitigate it. If diversifying your customer base isn’t an option, be sure to maintain the highest level of service.

Look at other areas

There are other types of concentration. For instance, vendor concentration refers to the number and types of vendors a company uses to support its operations. Relying on too few vendors is risky. If any one of them goes out of business or substantially raises prices, the company could suffer a severe rise in expenses or even find itself unable to operate.

Your business may also be affected by geographic concentration. This is how a physical location affects your operations. For instance, if your customer base is concentrated in one area, a dip in the regional economy or the arrival of a disruptive competitor could negatively impact profitability. Small local businesses are, by definition, subject to geographic concentration. However, they can still monitor the risk and explore ways to mitigate it — such as through online sales in the case of retail businesses.

You can also look at geographic concentration globally. Say your company relies solely or largely on a specific foreign supplier for iron, steel or other materials. That’s a risk. Tariffs, which have been in the news extensively this year, can significantly impact your costs. Geopolitical and environmental factors might also come into play.

Third, stay cognizant of your investment concentration. This is how you allocate funds toward capital improvements, such as better facilities, machinery, equipment, technology and talent. The term can also refer to how your company manages its investment portfolio, if it has one. Regularly reevaluate risk tolerance and balance. For instance, are you overinvesting in technology while underinvesting in hiring or training?

Study your company

As you can see, concentration takes many different forms. This may explain why business owners often get caught off guard by the sudden realization that their companies are over- or under-concentrated in a given area. We can help you perform a comprehensive risk assessment that includes, among other things, developing detailed financial reports highlighting areas of concentration.

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The post The Other Side of Focus: How Concentration Can Expose Your Business to Risk first appeared on KSDT CPA.