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Take Advantage of Expanded QSB Stock Tax Benefits

Investors often look to small, emerging companies for portfolio diversification and growth potential, but these investments can offer more. Certain shares may also provide valuable tax advantages under the qualified small business (QSB) stock rules. Tax legislation signed into law in 2025, commonly known as the One Big Beautiful Bill Act (OBBBA), enhanced those benefits.

The Basics of QSB Stock

A QSB is a domestic C corporation that meets specific requirements. First, the company must be engaged in an active trade or business. Many professional service businesses are excluded, though certain health‑ and engineering‑related companies may qualify, depending on the nature of their activities.

There’s also a gross-asset limit. Before the OBBBA, a company’s aggregate gross assets generally couldn’t exceed $50 million. The OBBBA increases the asset ceiling to $75 million (adjusted for inflation after 2026) for stock issued after July 4, 2025.

Shorter Holding Periods

The major tax benefit of investing in QSB stock is the potential exclusion of capital gains when the stock is sold. Before the OBBBA changes went into effect, you generally needed to hold QSB stock for at least five years to qualify for a capital gains exclusion, with the exclusion percentage ranging from 50% to 100%, depending on when the stock was acquired.

Under the OBBBA, a new tiered system with smaller exclusions applies to QSB stock acquired after July 4, 2025. It provides a 50% exclusion for stock held for at least three years and a 75% exclusion for stock held for at least four years. Any gain not excluded under these partial exclusions is generally taxed at a special 28% federal rate, plus the 3.8% net investment income tax, if applicable.

QSB stock acquired on or before July 4, 2025, generally remains subject to the prior rules, including eligibility for a 100% exclusion after five years for stock acquired on or after September 28, 2010.

Expanded Gain Exclusion Limits

The OBBBA also increased the limit on the amount of gain you can exclude. For QSB stock acquired after July 4, 2025, the per-issuer exclusion limit is the greater of $15 million (adjusted for inflation after 2026) or 10 times the aggregate adjusted basis of stock sold during the tax year. Before the OBBBA change went into effect, the dollar limit was $10 million. (Both amounts are halved for married taxpayers filing separately.)

To qualify for the exclusion, you generally must acquire the stock at original issuance — directly from the corporation or through an underwriter — in exchange for cash, property (other than stock) or services. Limited exceptions apply, including certain transfers by gift or inheritance.

If you reinvest proceeds from a QSB stock sale into other QSB stock within 60 days, you may be able to defer the gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.

Moving Forward

QSB stock can offer valuable tax benefits. But the rules are complex and require careful planning. Additionally, some states don’t conform to federal treatment, so state income taxes may still apply, depending on the state. Contact the office if you have questions.

Reducing IRS Audit Risk for Small Businesses

When business owners think about risk, they often focus on market pressures or operational challenges. An IRS audit usually isn’t top of mind — but it can be costly, disruptive and time-consuming. Although some taxpayers are randomly selected for an audit, many audits occur because the IRS has identified certain patterns or inconsistencies. Understanding where these risks typically arise can help you limit your business’s exposure.

5 Key Audit Risk Areas

The following risk areas can result in additional IRS scrutiny:

1. Inconsistent or unreported income. Drastic shifts in revenue from one year to the next can prompt IRS attention, especially when they conflict with industry trends or economic conditions. Income mismatches identified through third‑party reporting — including 1099 forms and payment‑platform data — may lead to follow‑up inquiries. Accurate records are critical when income fluctuates significantly.

2. Excessive or unusual deductions. Deductions that appear disproportionate to income or far outside industry norms may raise IRS concerns. Only expenses that are “ordinary and necessary” for business operations are deductible. Personal expenses — including personal vehicle use, clothing and nonbusiness travel — are common audit issues. Careful records are especially important for meal, travel and vehicle-related deductions.

3. Repeated business losses. Consistently reporting losses may signal that a business isn’t operated for profit. While legitimate losses occur — particularly during startup phases or economic downturns — ongoing losses should be supported by strong documentation, financial planning and a clear profit motive.

4. Weak recordkeeping practices. Incomplete or disorganized records increase both audit risk and audit difficulty. Missing receipts, inconsistent financial statements or unclear bookkeeping practices can jeopardize deductions. Digital accounting tools make it easier and more defensible than ever to maintain accurate, well-organized records.

5. Worker misclassification. Misclassifying employees as contractors can result in back payroll taxes, penalties and interest. The key factor is the degree of control the business exercises over how the work is performed, not how the worker is paid or labeled.

Staying Ahead of Audit Risk

No business is immune to audit risk, but consistent reporting, accurate records and informed guidance can significantly reduce exposure — and put your business in a better position if you are audited. Contact the office to help your business stay compliant, identify potential issues early and respond effectively if the IRS requests information.

How an Educational Assistance Program Can Strengthen Your Company's Benefits Package

If your business is like many today, you’re seeking more ways to attract and retain talent. One option is to offer tax-advantaged educational assistance under Internal Revenue Code Section 127. Recent legislative changes have expanded the value of this benefit.

How the Plans Work

Employer-sponsored Sec. 127 educational assistance programs allow employees to receive tax-free educational benefits up to an annual limit ($5,250 for 2026). The benefits are excluded from the employee’s gross income for federal tax purposes. For employers, the amounts paid are deductible as business expenses.

But the plan doesn’t have to be prefunded. You can pay or reimburse expenses as they’re incurred.

Eligible expenses include tuition, books, fees, supplies and equipment for coursework. However, certain expenses, such as meals, lodging or transportation — as well as tools or supplies that employees retain after completing a course — don’t qualify. Also ineligible are expenses for courses involving sports, games or hobbies unless they’re required as part of a degree program.

To qualify as a Sec. 127 program, the plan must be established in writing and meet specific requirements. The plan can benefit only employees — not their spouses or dependents.

Recent Enhancements

Tax legislation signed into law in 2025, commonly known as the One Big Beautiful Bill Act (OBBBA), made two important changes to Sec. 127 plans. First, it introduced an inflation adjustment to the annual cap. For tax years beginning after 2026, the $5,250 limit will be indexed for inflation (rounded down to the nearest $50), helping maintain the benefit’s value over time.

Second, the OBBBA made permanent the eligibility of employer payments for qualified student loans as a Sec. 127 expense. This means you can pay up to the annual cap toward an employee’s qualified student loan, and those payments will be excluded from the employee’s income.

Compliance Considerations

Sec. 127 plans must follow additional rules. For example, you can’t offer educational assistance as a choice between this tax-free benefit and taxable compensation, such as wages. And you must provide employees reasonable notice of the plan’s availability and terms.

Additionally, nondiscrimination requirements and ownership‑concentration limitations apply. For example, no more than 5% of total plan benefits for the year may be provided, in the aggregate, to employees who are more‑than‑5% owners of the business or to their spouses or dependents.

Rules for Family Employees

Sec. 127 plan benefits can extend to employees who are related to business owners, including children, as long as they’re bona fide employees and the plan satisfies applicable nondiscrimination requirements and ownership‑concentration limitations.

Ownership attribution rules may affect whether an individual is treated as a more‑than‑5% owner for these purposes, particularly in closely held businesses.

Taking the Next Step

Properly implemented Sec. 127 plans can help employers attract, develop and retain talent. Contact the office to discuss whether such a plan makes sense for your business.

Get Ahead With a Midyear Tax Review

Life changes can affect your tax picture more than you might expect. Taking time now to review key areas can reduce the risk of certain penalties and uncover tax savings opportunities.

Start by reviewing your withholding and estimated tax payments. If your income has changed, you may need to update your Form W-4 so that your withholding accurately reflects your current circumstances. If you’re self-employed or have significant income not subject to withholding (such as dividends or capital gains), you may need to make quarterly estimated tax payments to avoid underpayment penalties.

Next, revisit deductions and credits. Changes in your filing status, dependents, education expenses or homeownership can affect eligibility. Additionally, increased charitable giving may create tax-saving opportunities. Keep organized records of charitable contributions, medical expenses, and, if you’re self-employed, business costs to substantiate claims and maximize benefits.

It’s also a good time to reevaluate retirement contributions. Increasing contributions to employer plans or IRAs can reduce taxable income and strengthen long-term savings. If you’re eligible to contribute to a Health Savings Account, consider funding it as well to take advantage of its triple tax benefits (deductible contributions, tax‑deferred growth and tax‑free withdrawals for qualified medical expenses).

Contact the office if you need guidance.

IRS Penalties During the Pandemic Could Be Refundable

A landmark court ruling, Kwong v. United States, found that the IRS improperly assessed certain penalties and interest during the COVID-19 pandemic. If you were charged penalties or interest for missing tax filing or payment deadlines from Jan. 20, 2020, through July 10, 2023, you may be eligible for a refund or abatement. But further litigation is expected, and other courts could interpret the law differently.

For affected taxpayers, filing a protective claim by July 10, 2026, is critical to preserving their rights while pending cases are resolved. Contact the office to review your eligibility and next steps.

Employers Face New Limits on Meal Expense Deductions

Does your business provide complimentary on-site food and beverages for employees? The rules for deducting certain business meals have changed. Beginning in 2026, employers generally can’t deduct 1) meals treated as de minimis fringe benefits, or 2) employer-provided meals that are excludable from an employee’s income and provided for the employer’s convenience on business premises.

For the 2025 tax year, generally, the former were 100% deductible, and the latter were 50% deductible. Contact the office to discuss how this change may affect your business and how to plan accordingly.

Upcoming Tax Due Dates

June 15

Individuals: File a 2025 individual income tax return (Form 1040 or Form 1040-SR) or file for a four-month extension (Form 4868) if you live outside the United States and Puerto Rico or you serve in the military outside those two locations. Pay any tax, interest and penalties due.

Individuals: Pay the second installment of 2026 estimated taxes (Form 1040-ES) if not paying income tax through withholding or not paying sufficient income tax through withholding.

Calendar-year corporations: Pay the second installment of 2026 estimated income taxes, completing Form 1120-W for the corporation's records.

Employers: Deposit Social Security, Medicare and withheld income taxes for May if the monthly deposit rule applies.

Employers: Deposit nonpayroll withheld income tax for May if the monthly deposit rule applies.

July 10

Individuals: Report June tip income of $20 or more to employers (Form 4070).

How to Develop a Scalable Business Model from Day One

Starting a business is exciting, but without a scalable model, your success may be limited. Growth is not just about selling more, but about building a foundation that can support expansion without sacrificing quality, customer experience, or profitability. Whether you’re a solo entrepreneur or launching a team, planning for scale early on will make future growth smoother and more sustainable.

What Does Scalability Really Mean?

A scalable business can grow revenue faster than it increases costs. This means you can serve more customers, offer more products, or open new locations without needing to double your staff or triple your expenses. Scalable businesses often use systems, automation, or repeatable processes to support this type of efficient growth. For example, a digital product like an online course can be sold to thousands of customers with minimal additional labor. A service business, on the other hand, might need to hire and train more people to scale, but as long as the training and systems are efficient, it can still grow profitably.

H2 Start With a Clear Value Proposition

Scalability doesn’t just happen. It requires careful planning, smart systems, and a mindset that balances long-term vision with day-to-day efficiency. From day one, you need to know exactly what problem you are solving and for whom. A clear value proposition helps you refine your offer and streamline your operations. The more focused you are on your core audience and their needs, the easier it becomes to build repeatable systems around delivering that value. If your offer is too broad, you may end up stretching your resources too thin. A scalable model often starts by doing one thing very well, then expanding strategically from there.

Build Repeatable Processes

One of the best ways to prepare for growth is to standardize how things are done. Whether it’s onboarding new clients, fulfilling orders, or handling customer service, consistent systems allow others to step in and keep things running smoothly. Document your workflows as you go. Use tools like checklists, templates, and software that make tasks easier to replicate. This both increases efficiency and also reduces errors, freeing up your time to focus on strategy.

Embrace Technology and Automation

Scalable businesses lean on technology to increase productivity. Look for software tools that streamline time-consuming tasks, such as scheduling, invoicing, inventory management, or communication. Automation can reduce your dependency on manual labor, especially for routine activities. Customer relationship management (CRM) systems, email marketing platforms, and cloud-based accounting tools are just a few examples of systems that support scale. Choose platforms that can grow with you, so you do not have to constantly switch tools as your business expands.

Outsource and Delegate Strategically

You do not need to do everything yourself. In fact, trying to wear all the hats will likely slow your growth. Outsourcing non-core tasks such as bookkeeping, customer support, or social media management can free up your time and ensure specialized work is handled by experts. When hiring, look for people or partners who understand your vision and are willing to grow with your business. Focus on building a team culture that supports collaboration, problem-solving, and continuous improvement.

Monitor Metrics That Matter

Scalable businesses rely on data. From the beginning, track key performance indicators (KPIs) that reflect your financial health, customer satisfaction, and operational efficiency. These might include customer acquisition cost, lifetime value, profit margins, and churn rates. Knowing your numbers helps you make informed decisions, identify bottlenecks, and allocate resources wisely. As you grow, these metrics become even more valuable in forecasting and managing future expansion.

Lay the Groundwork for Sustainable Growth

Developing a scalable business model is not about growing fast at any cost, but about building something that lasts and can grow steadily without falling apart under pressure. By focusing on systems, automation, and a clear value proposition, you give yourself the tools and flexibility to adapt as your market and customer base evolve. Start with scale in mind, even if your business is small today. The actions you take now will determine how far you can grow tomorrow.

Identifying Hidden Costs That Affect Business Profitability 

When you review your business finances, it’s easy to focus on obvious expenses such as payroll, rent, and inventory. However, many businesses lose profitability because of hidden costs that quietly reduce margins over time. These expenses may seem small individually, but together, they can significantly affect your bottom line. Without careful monitoring, hidden costs can grow unnoticed and make it harder to achieve financial goals. Knowing where these expenses appear allows you to make smarter operational and budgeting decisions. 

Why Hidden Costs Are Often Overlooked 

Hidden costs are usually not dramatic or unexpected. Instead, they develop gradually through inefficiencies, outdated processes, or overlooked spending habits. Because they become part of daily operations, businesses may stop noticing them altogether. 

For example, excessive overtime, unused subscriptions, or frequent equipment repairs may not seem alarming at first. Over time, however, these recurring costs can create substantial financial strain and reduce profitability. 

Common Areas Where Hidden Costs Appear 

Hidden expenses can affect almost every part of a business. Even small inefficiencies can become expensive when repeated consistently across months or years. Identifying them often requires reviewing operations in detail and looking beyond basic financial statements.  

Some common sources include: 

• Employee turnover and repeated training costs 

• Software subscriptions or services that are rarely used 

• Inefficient inventory management leading to waste or overstocking 

• Frequent equipment downtime or maintenance expenses 

• Poor workflow processes that reduce productivity 

How Hidden Costs Affect Growth 

Profitability is not only determined by revenue. It also depends on how efficiently your business operates. Hidden costs reduce the amount of money available for expansion, hiring, or investment opportunities. 

If these expenses remain unchecked, they can create the illusion that your business is growing more slowly than expected. You may increase sales without seeing a meaningful improvement in profits because unnecessary costs continue to consume resources behind the scenes. 

Reviewing Financial Data More Carefully 

One of the best ways to uncover hidden costs is through regular financial analysis. Reviewing profit margins, operational expenses, and productivity metrics helps identify areas where spending may not align with results. 

Comparing current expenses to historical trends can also reveal gradual increases that might otherwise go unnoticed. In some cases, bringing in an outside accountant or consultant provides a fresh perspective and helps identify inefficiencies more objectively. 

Creating Better Cost Awareness 

Reducing hidden costs does not always require major operational changes. Sometimes small adjustments create significant improvements over time. Eliminating unused services, improving employee training, or upgrading inefficient systems can strengthen profitability without reducing quality or growth potential. 

Creating a culture of financial awareness within your business also helps. When employees understand the importance of efficiency and resource management, they often contribute valuable ideas for reducing unnecessary expenses. 

Strengthening Long-Term Profitability 

Hidden costs can quietly erode profits even in otherwise successful businesses. By reviewing operations carefully and staying proactive about expense management, you can identify problems before they become larger financial burdens. 

Understanding where money is being lost allows you to make more informed decisions and strengthen your overall financial position. Over time, reducing hidden costs can improve stability, increase flexibility, and create more opportunities for long-term growth. 

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