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Avoiding inadvertent S corp termination

Management Advisory Services & Business Consulting|March 5, 2026

S corporation structure provides most of the tax benefits of a partnership plus the liability protection of a corporation. But because of the strict requirements that apply to these entities, preserving S corporation status requires due diligence.

Reap the benefits

Like a traditional C corporation, an S corporation shields its shareholders from personal liability for the corporation’s debts. Like a partnership, an S corporation is a “pass-through” entity, which means that all of its profits and losses are passed through to the owners, who report their allocable shares on their personal income tax returns. This allows S corporations to avoid the double taxation of C corporations, whose income is taxed at the corporate level and again when distributed to shareholders.

To qualify as an S corporation, all of a corporation’s shareholders must file an election with the IRS on Form 2553, Election by a Small Business Corporation. In addition, the corporation must:

Be a domestic (U.S.) corporation,
Have no more than 100 shareholders (certain family members are treated as a single shareholder for this purpose),
Have only “allowable” shareholders (see below),
Have only one class of stock (generally, that means that all stock confers identical rights to distributions and liquidation proceeds; differences in voting rights are permissible), and
Not be an “ineligible” corporation, such as an insurance company, a domestic international sales corporation (DISC) or a certain type of financial institution.

Allowable shareholders include individuals, estates and certain trusts, such as a qualified Subchapter S trust (QSST) and an electing small business trust (ESBT). Partnerships, corporations and nonresident aliens are ineligible.

Preserve and protect

To avoid inadvertent termination of S corporation status, among other things, you should:

Continually monitor the number and type of shareholders, scrutinize the terms of any trusts that hold shares, and ensure that QSSTs or ESBTs have filed timely elections,
Include provisions in buy-sell agreements that prevent transfers to ineligible shareholders,
Make sure that if shares are transferred to an ESBT, all potential current beneficiaries are eligible shareholders, and
Be aware that if shares are held by grantor or testamentary trusts, these types of trusts are eligible shareholders for only two years after the grantor dies or the trust receives the stock. So track the two-year eligibility period and make sure trusts convert into QSSTs or ESBTs or transfer their shares to an eligible shareholder before the period expires.

Also, avoid actions that may be deemed to create a second class of stock, such as making disproportionate distributions.

Stay focused

Avoiding inadvertent termination of your company’s S corporation status is critical. Termination generally will result in the loss of substantial tax benefits. You may be able to get the IRS to retroactively restore your S status, but it can be an expensive, time-consuming process. So stay focused on maintaining compliance with all S corporation requirements. Contact us if you have questions.

There’s still time to set up a SEP and reduce your 2025 taxes

Tax Prep, Planning & Strategy|February 26, 2026

If you own a business or are self-employed and haven’t already set up a tax-advantaged retirement plan, consider establishing one before you file your 2025 tax return. If you choose a Simplified Employee Pension (SEP), you’ll be able make deductible 2025 contributions to it, saving you taxes. Not only is the SEP deadline favorable, but SEPs are easy to set up and the contribution limits are generous. If you have employees, you’ll generally have to include them in the SEP and make contributions on their behalf, which are also deductible.

Deadlines in 2026 for 2025

A SEP can be established as late as the due date (including extensions) of the business’s income tax return for the tax year for which the SEP is to first apply. For example:

A calendar-year partnership or S corporation has until March 16, 2026, to establish a SEP for 2025 (September 15, 2026, if the return is extended).
A calendar-year sole proprietor or C corporation has until April 15, 2026 (October 15, 2026, if the return is extended) because of their later filing deadlines.

The deadlines for limited liability companies (LLCs) depend on the tax treatment the LLC has elected. The business has until these same deadlines to make 2025 contributions and still claim a deduction on its 2025 return.

Simple setup

A SEP is established by completing and signing the very simple Form 5305-SEP, “Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement.” Form 5305-SEP isn’t filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.

You’ll then make deductible contributions to your SEP account, called a “SEP-IRA,” and, if you have employees, to each eligible employee’s SEP-IRA. Employee accounts are immediately 100% vested. Your contributions on behalf of employees will be excluded from their taxable income. When SEP distributions are taken, likely in retirement, they’ll be taxable.

Discretionary, potentially large contributions

Contributions to SEPs are discretionary. You, as the business owner, can decide what amount of contribution to make each year. But be aware that, if your business has employees other than yourself, contributions must be made for all eligible employees using the same percentage of compensation as for yourself.

For 2025, the maximum contribution that can be made to a SEP is 25% of compensation (or approximately 20% of net self-employed income) of up to $350,000, subject to a contribution cap of $70,000. (The 2026 limits are $360,000 and $72,000, respectively.)

Right for you?

While SEPs are much simpler than most other tax-advantaged retirement plans, they’re subject to additional rules and limits beyond what’s discussed here. To learn more, contact us. We can help you determine whether a SEP is right for you and, if so, assist you with setting it up — and maximizing your 2025 tax savings.

When medical expenses are — and aren’t — tax deductible

Tax Prep, Planning & Strategy|February 24, 2026

If you had significant medical expenses last year, you may be wondering what you can deduct on your 2025 income tax return. Income-based thresholds and other rules can make it hard to claim the medical expense deduction. At the same time, more types of expenses may be eligible than you might expect.

Limits on the deduction

Medical expenses are deductible only if they weren’t reimbursable by insurance or paid via tax-advantaged accounts (such as Flexible Spending Accounts or Health Savings Accounts). In addition, they’re deductible only to the extent that, in aggregate, they exceed 7.5% of your adjusted gross income (AGI).

For example, if your 2025 AGI was $100,000, your eligible medical expenses during the year would have to total more than $7,500 for you to claim the deduction — and only the amount in excess of that floor would be deductible. If you had $10,000 in eligible expenses, your potential deduction would be $2,500.

In addition, medical expenses are deductible only if you itemize deductions. For itemizing to be beneficial, your itemized deductions must exceed your standard deduction. Due to changes under the Tax Cuts and Jobs Act that were made permanent by last year’s One Big Beautiful Bill Act (OBBBA), many taxpayers no longer itemize.

However, some taxpayers who hadn’t been itemizing recently may benefit from itemizing for 2025 because of the OBBBA’s quadrupling of the state and local tax deduction limit. If you fall into that category, you should also revisit whether you can benefit from the medical expense deduction on your 2025 income tax return.

What expenses are eligible?

If you do expect to itemize deductions on your 2025 income tax return, now is a good time to review your medical expenses for the year and see if you had enough to exceed the 7.5% of AGI floor. Eligible expenses include many costs besides hospital and doctor bills. Here are some other types of expenses you may have had in 2025 that could be deductible:

Transportation. The cost of getting to and from medical treatment is an eligible expense. This includes taxi fares, public transportation or using your own vehicle. Your vehicle costs can be calculated at 21 cents per mile for medical miles driven in 2025, plus tolls and parking. Alternatively, you can deduct certain actual vehicle-related costs, including gas and oil, but not general costs such as insurance, depreciation and maintenance.

Insurance premiums. The cost of health insurance is a medical expense that can total thousands of dollars a year. Even if your employer provides you with coverage, you can deduct the portion of the premiums you paid — as long as it wasn’t paid pretax out of your paychecks.

Long-term care insurance premiums also qualify, subject to dollar limits based on age. Here are the 2025 limits:

40 and under: $480
41 to 50: $900
51 to 60: $1,800
61 to 70: $4,810
Over 70: $6,020

Therapists and nurses. Services provided by individuals other than physicians can qualify if they relate to a medical condition and aren’t for general health. For example, the cost of physical therapy after knee surgery qualifies, but the cost of a personal trainer to help you get in shape doesn’t. Also qualifying are amounts paid for acupuncture and those paid to a psychologist for medical care. In addition, certain long-term care services required by chronically ill individuals are eligible.

Eyeglasses, hearing aids, dental work and prescriptions. Deductible expenses include the cost of glasses, contacts, hearing aids, dentures and most dental work. Purely cosmetic expenses (such as teeth whitening) don’t qualify, but certain medically necessary cosmetic surgery is deductible. Prescription drugs qualify, but nonprescription drugs such as aspirin don’t, even if a physician recommends them.

Smoking-cessation programs. Amounts paid to participate in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible expenses. However, nonprescription gum and certain nicotine patches aren’t.

Weight-loss programs. A weight-loss program is a deductible expense if undertaken as treatment for a disease diagnosed by a physician. This could be obesity or another disease, such as hypertension, for which a doctor directs you to lose weight. It’s a good idea to get a written diagnosis. In these cases, deductible expenses include fees paid to join a weight-loss program and attend meetings. However, foods for a weight-loss program generally aren’t deductible.

Dependents and others. You can deduct the medical expenses you pay for dependents, such as your children. Additionally, you may be able to deduct medical expenses you pay for an individual, such as a parent or grandparent, who would qualify as your dependent except that he or she has too much gross income or files jointly. In most cases, the medical expenses of a child of divorced parents can be claimed by the parent who pays them.

Determining if you can benefit

After reviewing this list of eligible expenses, do you think you had enough in 2025 to exceed the 7.5% of AGI floor? Or do you have questions about whether specific expenses qualify? Contact us. We can determine if you can benefit from the medical expense deduction — and other tax breaks — on your 2025 income tax return.

Tax filing update for pass-through entities

Tax Prep, Planning & Strategy|February 19, 2026

Do you operate a business as a partnership, a limited liability company (LLC) treated as a partnership for tax purposes or an S corporation? In tax lingo, these are called “pass-through” entities because their taxable income items, tax deductions and tax credits are passed through to their owners and taken into account on the owners’ federal income tax returns. These entities generally don’t owe any federal income tax themselves. Here are some important things to know about tax filing for pass-through entities.

March 16 deadline

Even though pass-through entities generally don’t owe federal income tax at the entity level, they still must file a federal income tax return. Partnerships and LLCs treated as partnerships for tax purposes file Form 1065, “U.S. Return of Partnership Income.” S corporations file Form 1120-S, “U.S. Income Tax Return for an S Corporation.”

If your pass-through entity uses the calendar year for tax purposes, as most do, the deadline for filing the federal income tax return for its 2025 tax year is March 16, 2026 (because March 15 falls on a Sunday).

The March 16 deadline can be extended by six months to September 15, 2026, by filing IRS Form 7004, “Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns,” by March 16.

Keep in mind that if you file an extension for the pass-through entity’s return, you (and any other owners) will also likely also need to file extensions to October 15, 2026, for your individual 2025 return.

Schedules K-1

For each tax year, pass-through entities must send out Schedules K-1 to their owners. These forms report each owner’s share of the entity’s tax items. Schedules K-1 can be sent to owners electronically. And they must be included with the entity’s federal income tax return for the year.

Because pass-through entity owners rely on Schedules K-1 to prepare their returns, it’s desirable to get them out as early as possible. However, if an entity’s 2025 return filing deadline is extended to September 15, 2026, that also becomes the deadline for providing Schedules K-1 to the owners.

3 tax law changes to note

The One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025, included several tax changes that will affect 2025 returns of pass-through entities. Here are three of the most important:

1. First-year depreciation. The OBBBA permanently restored 100% first-year depreciation for eligible assets acquired and placed in service after January 19, 2025. Before the OBBBA, 100% bonus depreciation was last allowed for eligible assets placed in service in 2022.

For eligible assets placed in service in tax years beginning in 2025, the OBBBA increased the maximum amount that can be immediately deducted via the first-year Section 179 expensing election to $2.5 million (up from $1.25 million before the OBBBA). The deduction begins to phase out dollar for dollar when asset acquisitions for 2025 exceed $4 million (up from $3.13 million before the OBBBA).

The OBBBA also established 100% first-year depreciation for nonresidential real estate that’s classified as qualified production property. That basically means factory buildings.

2. R&E expenditures. The OBBBA allows businesses to immediately deduct eligible domestic research and experimental (R&E) expenditures that are paid or incurred in tax years beginning in 2025 and beyond. Before the OBBBA, these expenditures had to be amortized over five years.

Eligible small businesses can elect to apply the new immediate deduction rule retroactively to pre-2025 tax years beginning in 2022, 2023 or 2024. Also, all taxpayers that made R&E expenditures in tax years beginning in 2022 through 2024 can elect to write off the remaining unamortized amount of their R&E expenditures over a one-year or two-year period starting with the tax year beginning in 2025.

3. Business interest expense deductions. For tax years beginning in 2025 and beyond, the OBBBA permanently installed more favorable rules for determining how much business interest expense can be currently deducted. While most small and midsize businesses are exempt from the business interest expense deduction limitation rules, check with us regarding the status of your pass-through entity.

Time to get rolling

The filing deadline for the 2025 federal income tax returns of most pass-through entities is looming. While the deadline can be extended by six months, you must take action by March 16, at minimum, to file for an extension. Contact us to get things rolling.

Before claiming a charitable deduction for 2025, make sure you can substantiate it

Tax Prep, Planning & Strategy|February 17, 2026

If you itemize deductions on your 2025 individual income tax return, you potentially can deduct donations to qualified charities you made last year. But your gifts must be substantiated in accordance with IRS requirements. Exactly what’s required depends on various factors. In some cases, you must have a written acknowledgment from the charity.

Substantiating cash donations

If you made a cash gift of under $250, documentation such as a canceled check, bank statement or credit card statement is adequate. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and you must have received a “contemporaneous written acknowledgment” from the charity.

Likewise, for a donation of $250 or more, you must obtain such an acknowledgment. In it, the charitable organization must state the amount of the donation, whether you received any goods or services in consideration for the donation and, if you did, the value of those goods or services.

The “contemporaneous” requirement can sometimes trip up taxpayers. It means the earlier of:

The date you file your tax return, or
The due date of your return, including extensions.

Therefore, if you made a donation last year that requires a contemporaneous written acknowledgment but you haven’t yet received it from the charity, it’s not too late — as long as you haven’t filed your 2025 return. Contact the charity now and request a written acknowledgment.

Substantiating property donations

Gifts of property worth $250 or more also generally require a contemporaneous written acknowledgement from the charity. Rather than listing a dollar value for the donation, it must simply include a description of the property. But as with cash donations of $250 or more, it must state whether you received any goods or services in consideration for the donation and, if you did, the value of those goods or services.

Some types of donations require additional substantiation. For example, if you donate property valued at more than $500, you must attach a completed Form 8283, “Noncash Charitable Contributions,” to your return. And for donated property with a value of more than $5,000, you generally must obtain a qualified appraisal and attach an appraisal summary to your tax return. But donations of publicly traded securities don’t require an appraisal.

Tax-smart charitable giving

Many other rules and limits can affect your charitable deductions. We can help you determine what you can claim on your 2025 return and plan a tax-smart charitable giving strategy for 2026. Contact us to get started.

Tax filing FAQs for individuals

Tax Prep, Planning & Strategy|February 12, 2026

The IRS is opening the filing season for 2025 individual income tax returns on January 26. This is about the same time as when the agency began accepting and processing 2024 tax year returns last year, despite IRS staffing having been significantly reduced since then. Here are answers to some FAQs about filing.

When is my 2025 return due?

For most individual taxpayers, the deadline to file a 2025 return or an extension is April 15. Individuals living outside the United States and Puerto Rico or serving in the military outside those two locations have until June 15.

When must 2025 W-2s and 1099s be provided to me?

To file your tax return, you need all your Forms W-2 and 1099. February 2 is the deadline for employers to issue 2025 W-2s to employees and, generally, for businesses to issue Forms 1099 to recipients of any 2025 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

Normally these forms must be furnished by January 31. But this year, that date falls on a Saturday. So the deadline is the next business day, which is Monday, February 2.

If you haven’t received a W-2 or 1099 by the deadline, contact the entity that should have issued it. But remember that if a form is provided to you via mail instead of digitally, February 2 is the postmark deadline. So you might not receive it until several days after that.

Are there benefits to filing early?

One benefit is that if you’re getting a refund, you’ll likely get it sooner. The IRS expects to issue most refunds in less than 21 days from filing, as it has in recent years.

However, it’s possible that the reduced IRS staffing could cause delays during tax season this year. Other factors could also impact refund timing. The IRS cautions taxpayers not to rely on receiving a refund by a certain date, especially when making major purchases or paying bills.

How can filing early reduce my tax identity theft risk?

Tax identity theft occurs when someone uses your personal information — such as your Social Security number — to file a fraudulent tax return and claim a refund in your name. One of the simplest yet most effective ways to protect yourself from this type of fraud is to file your tax return as early as possible.

The IRS processes returns on a first-come, first-served basis. Once your legitimate return is in the system, thieves will have a tougher time filing a false return under your identity.

What’s the impact of the paper check phaseout for refunds?

As required by Executive Order 14247, the IRS is phasing out paper tax refund checks for individual taxpayers. For the 2025 tax year, the IRS will request banking information on all tax returns when filed to issue refunds via direct deposit or electronic funds transfer (EFT). For taxpayers without bank accounts, options such as prepaid debit cards, digital wallets or limited exceptions will be available.

Direct deposits and EFTs generally speed up refunds. They also avoid the risk that a paper check could be lost, stolen or returned to the IRS as undeliverable.

If I file early and owe tax, will I have to pay it when I file?

Even if you file early, your deadline for paying tax owed is April 15. However, if you didn’t pay enough in withholding and estimated tax payments for 2025 to meet certain rules (or didn’t make estimated tax payments on time), you could still owe penalties and interest. Paying before April 15 may reduce them.

What if I can’t pay my tax bill in full by April 15?

If you don’t pay what you owe by April 15, you’ll likely be subject to penalties and interest even if you met the withholding and estimated tax payment requirements for 2025. You should still file your return on time (or file for an extension) because there are failure-to-file penalties in addition to failure-to-pay penalties.

Paying as much as possible by April 15 will reduce interest and penalties because a smaller amount will be outstanding. Then request an installment payment plan for the rest of the liability.

Under what circumstances can I file for extension?

Generally, anyone is eligible to file an automatic extension to October 15 for individual tax returns; you don’t have to provide a reason why you can’t file on time. But you must file Form 4868 to request the extension by April 15 to avoid being subject to a failure-to-file penalty.

Remember that an extension of time to file your return doesn’t grant you any extension of time to pay your taxes. You should estimate and pay any taxes owed by April 15 to help avoid, or at least minimize, late payment penalties and interest.

What should I do next?

Contact us to answer any other tax filing questions you have or to discuss getting started on your 2025 return. We can prepare your return accurately and on time while helping to ensure you claim all the tax breaks you’re entitled to.

Important 2026 tax figures for businesses

Management Advisory Services & Business Consulting|February 10, 2026

A new year brings many new tax-related figures for businesses. Here’s an overview of key figures for 2026. Be aware that exceptions or additional rules or limits may apply.

Depreciation-related tax breaks

Bonus depreciation: 100%
Section 179 expensing limit: $2.56 million
Section 179 phaseout threshold: $4.09 million

Qualified retirement plan limits

401(k), 403(b) and 457 plan deferrals: $24,500
401(k), 403(b) and 457 plan catch-up contributions for those age 50 or older: $8,000
401(k), 403(b) and 457 plan additional catch-up contributions for those age 60, 61, 62 or 63: $3,250
SIMPLE deferrals: $17,000
SIMPLE catch-up contributions for those age 50 or older: $4,000
SIMPLE additional catch-up contributions for those age 60, 61, 62 or 63: $1,250
Contributions to defined contribution plans: $72,000
Annual benefit limit for defined benefit plans: $290,000
Compensation defining highly compensated employee: $160,000
Compensation defining key employee (officer) in a top-heavy plan: $235,000
Compensation triggering Simplified Employee Pension contribution requirement: $800

Other benefits limits

Health Savings Account (HSA) contributions: $4,400 for individuals, $8,750 for family coverage
Health Flexible Spending Account (FSA) contributions: $3,400
Health FSA rollover: $680
Child and dependent care FSA contributions: $7,500
Employer contributions to Trump account: $2,500
Monthly commuter highway vehicle and transit pass: $340
Monthly qualified parking: $340

Miscellaneous business-related limits

Income range over which the Section 199A qualified business income deduction limitations phase in: $201,750 – $276,750 (double those amounts for married couples filing jointly)
Threshold for the excess business loss limitation: $256,000 (double that amount for joint filers) — note that this is a reduction from 2025
Limitation on the use of the cash method of accounting: $32 million (also affects other tax items, such as the exemption from the 30% interest expense deduction limit)

Planning for 2026

We can help you factor these changes and others into your 2026 tax planning. Contact us to get started.

A new year means new tax figures for individuals

Estate & Wealth Transfer Planning|February 3, 2026

Many tax figures are annually adjusted for inflation and typically increase each year (or at least every few years). For 2026, some additional changes are going into effect under the One Big Beautiful Bill Act, signed into law July 4, 2025. Here’s an overview of some important limits and other tax figures for 2026. Keep in mind that exceptions or additional rules or limits may apply.

Standard deduction

Single and married filing separately: $16,100
Head of household: $24,150
Married couples filing jointly: $32,200
Additional standard deduction for those age 65 or older and/or blind: $2,050 ($1,650 per spouse if married). For taxpayers both 65 or older and blind, the additional deduction is doubled.

Itemized deduction limits

Casualty loss deduction: only for eligible losses from federally or (new for 2026) state-declared disasters
Charitable deduction floor (new for 2026): 0.5% of adjusted gross income (AGI)
Mortgage interest deduction: interest on qualified debt up to $750,000
Medical expense deduction floor: 7.5% of AGI
State and local tax deduction: $40,400
Overall limit for higher-income taxpayers (new for 2026): Generally, the tax benefit from itemized deductions for taxpayers in the 37% bracket will be as if they were in the 35% bracket

Retirement plan limits

Traditional and Roth IRA contributions: $7,500
Traditional and Roth IRA catch-up contributions for those age 50 or older: $1,100
401(k), 403(b) and 457 plan deferrals: $24,500
401(k), 403(b) and 457 plan catch-up contributions for those age 50 or older: $8,000
401(k), 403(b) and 457 plan additional catch-up contributions for those age 60, 61, 62 or 63: $3,250
SIMPLE deferrals: $17,000
SIMPLE catch-up contributions for those age 50 or older: $4,000
SIMPLE additional catch-up contributions for those age 60, 61, 62 or 63: $1,250
Contributions to defined contribution plans: $72,000
Annual benefit limit for defined benefit plans: $290,000

Other tax-advantaged savings limits

Health Savings Account (HSA) contributions: $4,400 for individuals, $8,750 for family coverage
Health Flexible Spending Account (FSA) contributions: $3,400
Child and dependent care FSA contributions: $7,500
Trump account contributions: $5,000

Estate planning

Gift and estate tax exemption: $15 million
Generation-skipping transfer tax exemption: $15 million
Annual gift tax exclusion: $19,000 (unchanged from 2025)

2026 tax planning

These are only some of the figures and limits that could affect your 2026 taxes. To learn more and begin planning for the new year, contact us.

Not all “business” expenses are tax deductible

Management Advisory Services & Business Consulting|January 29, 2026

Valuation professionals often use discounted cash flow (DCF) techniques to determine the value of a business or estimate economic losses. A critical input in a DCF model is the cost of capital — the rate that’s used to discount future earnings to today’s dollars. Modest changes in this rate can have a major impact on the expert’s conclusion, so it’s important to get it right.

Financing options

The cost of capital represents the expected rate of return that the market requires to attract funds to a particular investment. It’s based on the perceived risk of the investment. All else equal, as risk increases, the discount rate rises, and the value of the business or investment falls (and vice versa).

The cost of capital depends in part on whether the business is financed with 100% equity or a combination of equity and debt. In most cases, debt financing costs less than equity capital. Why? Debt holders receive regular economic benefits (principal and interest payments). But equity investors receive dividends only at management’s discretion, and they must wait until a sale to receive any capital appreciation, making their returns inherently less certain and thus the cost of equity higher.

Estimating the cost of equity

Several market-based components can be used to estimate the cost of equity. These typically include:

A risk-free rate, based on U.S. Treasury securities,
A market risk premium, based on historical returns for a stock index over the risk-free rate, and
A company-specific risk premium, based on the subject company’s financial performance, industry and other attributes.

The cost of equity is used as the cost of capital when the subject company is financed entirely with equity or when the valuation expert discounts earnings available only to equity investors.

Calculating the WACC

When discounting the earnings available to both equity investors and creditors, valuators typically use a weighted average cost of capital (WACC). This rate incorporates the costs of both equity and debt financing, based on an assumed capital structure.

The cost of debt is generally derived from market-based borrowing rates available to the subject company, taking into account credit risk, collateral and prevailing lending conditions. As leverage increases, creditors typically demand higher interest rates to compensate for incremental risk. Interest expense is generally tax-deductible, which reduces the effective cost of debt. But valuators must consider current limitations on interest deductibility, particularly for larger companies subject to earnings-based caps under current tax law.

Selecting the appropriate capital structure

When using WACC as the discount rate, a valuator can choose various capital structures. What’s appropriate depends on the characteristics of the company and the applicable valuation standard.

For example, an expert might apply the subject company’s historical or expected percentages of debt and equity capital when valuing a business interest that lacks control over financing decisions. Alternatively, an expert might choose an industry average capital structure when calculating lost profits or valuing a controlling interest in the business.

What’s appropriate for your situation?

The cost of capital is a critical input in DCF models. The appropriate rate is determined on a case-by-case basis, depending on the facts and circumstances. Contact us for more information on developing and supporting cost of capital assumptions in today’s uncertain marketplace.

New deduction for QPP can save significant taxes for manufacturers and similar businesses

Management Advisory Services & Business Consulting|January 22, 2026

The One Big Beautiful Bill Act (OBBBA) allows 100% first-year depreciation for nonresidential real estate that’s classified as qualified production property (QPP). This new break is different from the first-year bonus depreciation that’s available for assets such as tangible property with a recovery period of 20 years or less and qualified improvement property with a 15-year recovery period. Normally, nonresidential buildings must be depreciated over 39 years.

What is QPP?

The statutory definition of QPP is a bit complicated:

QPP is the portion of any nonresidential real estate that’s used by the taxpayer (your business) as an integral part of a qualified production activity.
A qualified production activity is the manufacturing, production or refining of a qualified product.
A qualified product is any tangible personal property that isn’t a food or beverage prepared in the same building as a retail establishment in which the property is sold. (So a restaurant building can’t be QPP.)

In addition, an activity doesn’t constitute manufacturing, production or refining of a qualified product unless the activity results in a substantial transformation of the property comprising the product.

To sum up these rules, QPP generally means factory buildings. But additional rules apply.

Meeting the placed-in-service rules

QPP 100% first-year depreciation is available for property whose construction begins after January 19, 2025, and before 2029. The property generally must be placed in service in the United States or a U.S. possession before 2031. In addition, the original use of the property generally must commence with the taxpayer.

There’s an exception to the original-use rule. The QPP deduction can be claimed for a previously used nonresidential building that:

Is acquired by the taxpayer after January 19, 2025, and before 2029,
Wasn’t used in a qualified production activity between January 1, 2021, and May 12, 2025,
Wasn’t used by the taxpayer before being acquired,
Is used by the taxpayer as an integral part of a qualified production activity, and
Is placed in service in the United States or a U.S. possession before 2031.

Also, the IRS can extend the before-2031 placed-in-service deadline for property that otherwise meets the requirements to be QPP if an Act of God (as defined) prevents the taxpayer from placing the property in service before the deadline.

Pitfalls to watch out for

While potentially valuable, 100% first-year deprecation for QPP isn’t without pitfalls:

Leased-out buildings. To be QPP, the building must be used by the taxpayer for a qualified production activity. So, if you’re the lessor of a building, you can’t treat it as QPP even if it’s used by a lessee for a qualified production activity.

Nonqualified activities. You can’t treat as QPP any area of a building that’s used for offices, administrative services, lodging, parking, sales activities, research activities, software development, engineering activities or other functions unrelated to the manufacturing, production or refining of tangible personal property.

Ordinary income recapture rule. If at any time during the 10-year period beginning on the date that QPP is placed in service the property ceases to be used for a qualified production activity, an ordinary income depreciation recapture rule will apply.

IRS guidance expected

QPP 100% first-year depreciation can be a valuable tax break if you have eligible property. However, it could be challenging to identify and allocate costs to portions of buildings that are used only for nonqualifying activities or for several activities, not all of which are qualifying activities. Also, once made, the election can’t be revoked without IRS consent. IRS guidance on this new deduction is expected. Contact us with questions and to learn about the latest developments.

Avoiding inadvertent S corp termination

There’s still time to set up a SEP and reduce your 2025 taxes

When medical expenses are — and aren’t — tax deductible

Tax filing update for pass-through entities

Before claiming a charitable deduction for 2025, make sure you can substantiate it

Tax filing FAQs for individuals

Important 2026 tax figures for businesses

A new year means new tax figures for individuals

Not all “business” expenses are tax deductible

New deduction for QPP can save significant taxes for manufacturers and similar businesses

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Weyrich Cronin Sorra

Weyrich Cronin Sorra