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.
Avoid Costly Categorization Mistakes in QuickBooks Online
Data entry blunders in QuickBooks Online, such as invoicing errors, incorrect bill payments or misdirected statements, can cause temporary disruptions — but they’re usually straightforward to identify and fix. Incorrectly categorizing transactions poses a bigger problem. This issue can distort financial reports, affect tax filings and provide an inaccurate view of a business’s financial health. Ultimately, it can hinder planning, decision-making and overall business performance.
Where Categorization Errors Begin
Transactions can be miscategorized for a number of reasons. One of the most common is assigning a category too quickly without taking time to confirm it’s the best fit. Another is not fully understanding a category’s purpose or scope. For example, what expenses are appropriate for Office Supplies? Are you setting up categorization Rules but making them too broad or not revisiting them regularly? And do you use the Other Expenses category too frequently?
The Ripple Effect of Miscategorized Transactions
Incorrectly categorizing transactions can affect your QuickBooks Online files in many ways. Here are some of the biggest impacts:
Your income tax returns will have mistakes. When you run reports that include income and expenses in preparation for tax filing, they use data you’ve entered in transactions. If the data isn’t accurate, you could end up claiming deductions you shouldn’t or missing out on others you should claim. Plus, your business expenses could be scrutinized by the IRS in an audit. And you’re more likely to be audited if it looks like you might be claiming more deductions than you’re entitled to.
Your profit will appear higher or lower than it actually is. Do you ever record expenses as assets or fail to record them? If so, your profit will be overstated. If you include personal or duplicate assets, your profit will be understated. Either way, you’ll be basing your business decisions on faulty information.
You won’t have an accurate view of your business. Are you relying too often on categories like Uncategorized Expense? Do you assign expenses to Ask My Accountant and then forget to follow up? If so, you won’t know the answers to questions such as: Which expenses are driving down your profit? What are you really spending on advertising? Are you overspending on technology?
Common Errors to Watch For
There are several mistakes that are easy to make but can cause significant problems. These include:
Recording loan payments as a single entry. Loans are liabilities. Interest is an expense. Be sure to split your loan payments correctly.
Commingling business and personal expenses. It’s best to have dedicated business bank and credit card accounts, but if you’re combining business and personal, categorize personal expenses under Owner’s Equity accounts, such as Owner’s Draw.
Treating large purchases as immediate expenses, rather than assets. For example, if you spend $3,000 on a new computer, don’t categorize it as Office Supplies, as you might with a stapler. You may need assistance with this.
Duplicating income in your Bank Feed. For example, if you send an invoice and later receive the payment, QuickBooks Online should automatically match the two transactions. If it doesn’t, avoid adding the payment as a new transaction, because this will create a duplicate entry and lead to inaccurate records.
For users who are new to QuickBooks Online or would like additional guidance on managing the Bank Feed, training sessions are available.
4 Ways to Improve Categorization Accuracy
Accurate transaction categorization is essential to maintaining reliable financial records in QuickBooks Online. While it may not be realistic to review every past transaction, adopting a few consistent habits can reduce errors and improve reporting accuracy. Here are four tips to consider:
1. Review recent transactions. Set aside time to review activity from the last 60 to 90 days, especially if you manage a moderate transaction volume. Look for duplicate entries, transactions assigned to the wrong category, and records missing important details or notes. Catching and fixing issues early can help prevent larger reporting problems later.
2. Evaluate your Chart of Accounts. While QuickBooks Online allows users to modify this structure, changes should be made thoughtfully, because the Chart of Accounts is a foundational component of your accounting system. It’s best to seek guidance to help ensure accounts are organized effectively and properly aligned with your business activities.
3. Carefully manage your Bank Feed. Before adding or accepting transactions from the Bank Feed, take a moment to confirm what the transaction was for, whether it’s categorized correctly and whether it matches an existing transaction already recorded in QuickBooks Online. This extra review step can help prevent duplicates and misclassifications.
4. Monitor financial reports. Review your financial reports at least twice a month to spot unusual activity. Pay attention to large balances in broad categories like Miscellaneous, unexpected spikes or declines in your Profit & Loss report or significant month-to-month variances. These often signal categorization issues that need attention.
Build Better Processes
Accurate expense categorization is essential to maintaining organized, reliable financial records in QuickBooks Online. A thoughtful approach to this process can improve reporting accuracy and support better financial decision-making. Some of the concepts involved are more advanced, but additional guidance and training are available. Contact the office with questions.
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).
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
