Davidson Pargman

Tackling risk management with a proactive approach

February 21, 2025

Risks are unavoidable in today’s volatile, uncertain marketplace. However, proactive owners and executives can manage business risks more effectively with an enterprise risk management (ERM) framework. A structured approach helps organizations anticipate risks, seize opportunities and build resilience.

Think holistically, not reactively

ERM goes beyond simply identifying risks — it’s a comprehensive, enterprise-wide process. Internal control is just one small part of ERM. It also may encompass strategy setting, governance, stakeholder communications and performance measurement. These principles apply at all business levels, across all functions and to organizations of any size.

ERM frameworks help managers anticipate risks so they can get ahead of them, with an understanding that change creates opportunities, not simply the potential for crises. In short, ERM helps increase positive outcomes and reduce negative surprises from risk-taking activities.

Stay ahead of risks with COSO’s guidance

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) was formed in July 1985. It’s a joint initiative of the American Institute of Certified Public Accountants, Financial Executives International, Institute of Internal Auditors, American Accounting Association and Institute of Management Accountants.

COSO’s original goal was to combat fraudulent financial reporting, but its scope has expanded over the years. Today, COSO’s Enterprise Risk Management – Integrated Framework serves as the cornerstone for modern risk management practices. COSO continuously updates its guidance to address emerging risks. Recent updates include:

Guidance for Applying ERM to Environmental, Social and Governance (ESG)-related Risks (2018). This update highlights developing ESG risks, such as extreme weather events, product safety recalls, workplace discrimination, unethical labor practices and corporate corruption. Integrating ESG risks into the ERM framework helps businesses proactively mitigate threats and capitalize on sustainability-driven innovation and competitive advantages.

Managing Cyber Risk in a Digital Age (2019). Cybersecurity threats aren’t just IT concerns — they’re strategic business risks affecting financial performance, reputation and regulatory compliance. This guidance emphasizes protecting critical digital assets, assessing vulnerabilities, implementing internal controls and developing incident response plans. A key focus is the increased vulnerability of remote work environments, which often lack the security measures of corporate networks, making them prime targets for cybercriminals.

Compliance Risk Management: Applying the COSO ERM Framework (2020). This update provides a structured approach to integrating compliance risk into an organization’s overall risk management strategy. By aligning compliance with the broader ERM approach, companies can anticipate regulatory changes, reduce legal exposure and maintain ethical business practices.

Fraud Risk Management Guide: Second Edition (2023). This update builds on COSO’s 2016 fraud risk guidance, incorporating lessons learned from recent fraud cases and advancements in detection methods. It highlights key elements of fraud prevention, including risk governance, internal controls and a strong “fraud risk culture.” The guide also emphasizes ethical leadership, whistleblower protections and employee training as essential elements of a robust fraud prevention program.

Alternative Data: The COSO Perspective (2024). This guidance explores the benefits and risks of using nontraditional data sources — such as satellite imagery, social media analytics and geospatial tracking — for risk management. While these sources can enhance predictive analytics and decision-making, COSO also warns of potential pitfalls, including privacy concerns, regulatory compliance risks and data integrity issues.

The best defense against business risks is a strong offense

Although companies aren’t legally required to apply an ERM framework, many choose to adopt COSO’s principles to improve risk management, enhance decision-making and add value. A recurring theme in COSO’s recent guidance is the growing role of technology and data analytics in risk management. Leveraging automation, artificial intelligence and real-time data insights can help businesses enhance monitoring, improve reporting and strengthen resilience.

Managing risk effectively requires expertise, strategic foresight and a well-structured ERM framework. Our accounting professionals can help you identify, assess and optimize risks. Contact us today to discuss cost-effective ERM strategies tailored to your business needs.

Do you have an excess business loss?

February 19, 2025

If an individual taxpayer has substantial business losses, unfavorable federal income tax rules can potentially come into play. Here’s what you need to know as you assess your 2024 tax situation.

Disallowance rule

The tax rules can get complicated if your business or rental activity throws off a tax loss — and many do during the early years. First, the passive activity loss (PAL) rules may apply if you aren’t very involved in the business or if it’s a rental activity. The PAL rules generally only allow you to deduct passive losses to the extent you have passive income from other sources. However, you can deduct passive losses that have been disallowed in previous years (called suspended PALs) when you sell the activity or property that produced the suspended losses.

If you successfully clear the hurdles imposed by the PAL rules, you face another hurdle: You can’t deduct an excess business loss in the current year. For 2024, an excess business loss is the excess of your aggregate business losses over $305,000 ($610,000 for married joint filers). For 2025, the thresholds are $313,000 and $626,000, respectively. An excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carryforwards explained below.

Deducting NOLs

You generally can’t use an NOL carryover, including one from an excess business loss, to shelter more than 80% of your taxable income in the carryover year. Also, NOLs generally can’t be carried back to an earlier tax year. They can only be carried forward and can be carried forward indefinitely. The requirement that an excess business loss must be carried forward as an NOL forces you to wait at least one year to get any tax-saving benefit from it.

Example 1: Taxpayer has a partial deductible business loss

David is unmarried. In 2024, he has an allowable loss of $400,000 from his start-up AI venture that he operates as a sole proprietorship.

Although David has no other income or losses from business activities, he has $500,000 of income from other sources (salary, interest, dividends, capital gains and so forth).

David has an excess business loss for the year of $95,000 (the excess of his $400,000 AI venture loss over the $305,000 excess business loss disallowance threshold for 2024 for an unmarried taxpayer). David can deduct the first $305,000 of his loss against his income from other sources. The $95,000 excess business loss is carried forward to his 2025 tax year and treated as part of an NOL carryover to that year.

Variation: If David’s 2024 business loss is $305,000 or less, he can deduct the entire loss against his income from other sources because he doesn’t have an excess business loss.

Example 2: Taxpayers aren’t affected by the disallowance rule

Nora and Ned are married and file tax returns jointly. In 2024, Nora has an allowable loss of $350,000 from rental real estate properties (after considering the PAL rules).

Ned runs a small business that’s still in the early phase of operations. He runs the business as a single-member LLC that’s treated as a sole proprietorship for tax purposes. For 2024, the business incurs a $150,000 tax loss.

Nora and Ned have no income or losses from other business or rental activities, but they have $600,000 of income from other sources.

They don’t have an excess business loss because their combined losses are $500,000. That amount is below the $610,000 excess business loss disallowance threshold for 2024 for married joint filers. So, they’re unaffected by the disallowance rule. They can use their $500,000 business loss to shelter income from other sources.

Partnerships, LLCs and S corporations

The excess business loss disallowance rule is applied at the owner level for business losses from partnerships, S corporations and LLCs treated as partnerships for tax purposes. Each owner’s allocable share of business income, gain, deduction, or loss from these pass-through entities is taken into account on the owner’s Form 1040 for the tax year that includes the end of the entity’s tax year.

The best way forward

As you can see, business losses can be complex. Contact us if you have questions or want more information about the best strategies for your situation.

You may be able to make a deductible IRA contribution for last year this year

February 18, 2025

Easter Gold egg in nest on black background. Minimal concept.

If you’re getting ready to file your 2024 tax return and your tax bill is higher than you’d like, there may still be a chance to lower it. If you’re eligible, you can make a deductible contribution to a traditional IRA until this year’s April 15 filing deadline and benefit from the tax savings on your 2024 return.

Who’s eligible?

You can make a deductible contribution to a traditional IRA if:

You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or
You (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (MAGI) doesn’t exceed certain levels that vary from year-to-year by filing status.

For 2024, if you’re a married joint tax return filer and you’re covered by an employer plan, your deductible traditional IRA contribution phases out over $123,000 to $143,000 of MAGI. If you’re single or a head of household, the phaseout range is $77,000 to $87,000 for 2024. The phaseout range for married individuals filing separately is $0 to $10,000. For 2024, if you’re not actively participating in an employer retirement plan but your spouse is, your deductible IRA contribution phases out with MAGI of between $230,000 and $240,000.

Deductible IRA contributions reduce your current tax bill, and earnings in the IRA are tax deferred. However, every dollar you withdraw is taxed (and subject to a 10% penalty before age 59½, unless one of several exceptions apply).

Traditional IRAs are different from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59½ or older. (There are also income limits to make contributions to a Roth IRA.)

If you’re married, you can make a deductible IRA contribution even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if one spouse has earned income and the other is a homemaker or not employed. In this case, you may be able to take advantage of a spousal IRA.

What are the contribution limits?

For 2024, if you’re eligible, you can make a deductible traditional IRA contribution of up to $7,000 ($8,000 if you’re age 50 or older). For 2025, these amounts remain the same.

In addition, small business owners can set up and contribute to Simplified Employee Pension (SEP) plans up until the due date for their returns, including extensions. For 2024, the maximum contribution you can make to a SEP is $69,000 (increasing to $70,000 for 2025).

How can you maximize your nest egg?

If you want more information about IRAs or SEPs, contact us. Or ask about tax-favored retirement saving when we’re preparing your return. We can help you save the maximum tax-advantaged amount for retirement.

7 common M&A due diligence pitfalls

February 17, 2025

In 2025, global merger and acquisition (M&A) volume is expected to surge to the highest level in four years, according to Reuters. M&As require thorough due diligence to minimize risks and maximize long-term value. Some business combinations fail to achieve expected results due to financial missteps, overlooked liabilities and integration challenges.

Here’s an overview of seven common mistakes that inexperienced buyers might make when vetting deals — and how to avoid them:

1. Overlooking financial red flags. Buyers may fail to critically assess financial statements, which can lead to unexpected financial burdens. Pay special attention to potential tax liabilities, including unpaid payroll or sales tax, pending audits and evasive tax practices. Also, consider obtaining a quality of earnings report to help identify nonrecurring revenue, accounting inconsistencies and working capital needs. Site visits may help shed light on details you might not notice from reviewing the seller’s financials, such as old, obsolete or damaged equipment and inventory.

2. Missing hidden liabilities. Unreported liabilities may result in costly post-acquisition surprises. Forensic accounting techniques can help buyers identify and quantify off-balance-sheet items, such as undisclosed property liens, environmental violations, pending litigation and golden parachute clauses.

3. Overestimating projected financial results. Overly optimistic seller representations and financial projections can cause an unwary buyer to overpay. Carefully assess revenue and cash flow projections, including their underlying assumptions, to ensure they’re realistic and supported by historical trends. Stress-testing projections and evaluating customer concentration risks can help ensure revenue sustainability.

4. Failing to assess internal controls. Weak controls expose businesses to fraud and financial mismanagement. Issues such as lack of segregation of duties or poor inventory tracking can result in operational inefficiencies. Due diligence should include an internal control assessment to identify deficiencies and develop a proactive plan to correct them.

5. Misjudging tax implications. The structure of an M&A deal — whether an asset or stock purchase — can significantly affect tax outcomes. If properly structured, creative deal terms, such as earnouts and installment sales, may provide tax advantages. It’s critical to structure a deal that optimizes tax benefits while complying with state and federal tax regulations.

6. Rushing due diligence. Hasty due diligence can result in costly oversights. Buyers should conduct comprehensive, methodical reviews of financial statements, legal agreements and operational structures before finalizing deals. Reading the fine print of key contracts may help buyers anticipate restrictions related to franchise agreements, insurance policies, and equipment and property leases. Some agreements require renegotiation before closing.

7. Flying solo. Do-it-yourself due diligence can be risky. M&As are complex undertakings, and the financial nuances may be unfamiliar to business owners and managers.

If you’re contemplating buying or merging with another company, contact us early in the M&A process. Our experienced accounting professionals can help you avoid financial surprises, negotiate favorable terms, address post-deal accounting and tax issues, and build long-term value.

2025 adjusted penalty amounts for health and welfare plans

February 14, 2025

Last month, the U.S. Department of Labor (DOL) announced its annual inflation adjustments to the civil monetary penalties for a wide range of violations related to health and welfare plans. Legislation enacted in 2015 requires annual adjustments to certain penalty amounts by January 15 of each year. This year, the DOL beat that deadline by five days.

The adjustments are effective for penalties assessed after January 15, 2025. Here are some potential foibles to watch out for:

Failure to file Form 5500, “Annual Return/Report of Employee Benefit Plan.” Employers must file this form annually for most plans subject to the requirements of the Employee Retirement Income Security Act. It provides the IRS and DOL with information about a plan’s operation and compliance with government regulations. The maximum penalty for failing to file Form 5500 has increased to $2,739 per day that the filing is late (up from $2,670 per day in 2024).

Failure to provide a summary of benefits and coverage (SBC). Under the Affordable Care Act, employers must provide this disclosure to each eligible employee. Its purpose is to provide a clear and concise overview of a health or welfare plan’s coverage and costs. The maximum penalty for failing to provide an SBC has increased to $1,443 per failure (up from $1,406 per failure in 2024).

Failure to comply with the Genetic Information Nondiscrimination Act (GINA) and/or the Children’s Health Insurance Program (CHIP). Violations of GINA may include establishing eligibility rules based on genetic information or requesting genetic data for underwriting purposes. CHIP violations may include failure to disclose Medicaid or CHIP assistance availability. Any such violations may result in penalties of $145 per participant per day (up from $141 per participant per day in 2024).

Violations of reporting requirements for Multiple Employer Welfare Arrangements (MEWAs). A MEWA is generally defined as a single plan that covers the employees of two or more unrelated employers. MEWAs must, among other things, file Form M-1, “Report for Multiple Employer Welfare Arrangements (MEWAs) and Certain Entities Claiming Exception (ECEs).” Penalties for failure to meet applicable filing requirements for such arrangements, which include annually filing Form M-1 and filings upon origination, have increased to $1,992 per day (up from $1,942 per day in 2024).

Other penalties related to health and welfare plans, including those for failing to provide certain information requested by the DOL, as well as for certain defined benefit plan compliance failures, have also been adjusted. For example, the penalty for failing to provide DOL-requested documents has increased to $195 per day (up from $190 per day in 2024). This penalty amount, however, can’t exceed $1,956 per request.

As you might have noticed, every penalty amount we’ve mentioned has increased when adjusted for inflation — making each one more onerous for employers. The good news is that violations don’t always trigger the highest permitted penalty. In some instances, such as under programs designed to encourage Form 5500 filing, the DOL has the discretion to impose lower penalties.

Contact us for further information about all of this year’s penalties related to health and welfare plans, as well as for assistance in managing the costs of your benefits.

Financial relief for families: The benefits of the Child Tax Credit

February 12, 2025

The Child Tax Credit (CTC) has long been a valuable tax break for families with qualifying children. Whether you’re new to claiming the credit or you’ve benefited from it for years, it’s crucial to stay current on its rules and potential changes. As we approach the expiration of certain provisions within the Tax Cuts and Jobs Act (TCJA) at the end of 2025, here’s what you need to know about the CTC for 2024, 2025 and beyond.

Current state of the credit

Under the TCJA, which took effect in 2018, the CTC was increased from its previous level of $1,000 to $2,000 per qualifying child. The TCJA also made more taxpayers eligible for the credit by raising the income threshold at which the credit begins to phase out.

For both 2024 and 2025, the CTC is $2,000 per child under age 17. Phaseout thresholds in 2024 and 2025 will continue at the levels established by the TCJA:

$200,000 for single filers, and
$400,000 for married couples filing jointly.

Refundable portion

The refundable portion of the credit for 2024 and 2025 is a maximum $1,700 per qualifying child. With a refundable tax credit, you can receive a tax refund even if you don’t owe any tax for the year.

Credit for other dependents

A nonrefundable credit of up to $500 is available for dependents other than those who qualify for the CTC. But certain tax tests for dependency must be met. The credit can be claimed for:

Dependents of any age,
Dependent parents or other qualifying relatives supported by you, and
Dependents living with you who aren’t related.

What’s scheduled after 2025?

If Congress doesn’t act to extend or revise the current provisions of the TCJA, the CTC will revert to the pre-TCJA rules in 2026. That means:

The maximum credit will drop down to $1,000 per qualifying child.
The phaseout thresholds will drop to around $75,000 for single filers and $110,000 for married couples filing jointly (inflation indexing could alter these figures).

In other words, many taxpayers will see their CTC cut in half if the current law sunsets in 2026. Consequently, families could experience a larger federal tax liability starting in 2026 if no new law is enacted.

Proposals in Washington

When it comes to the future of the CTC, there have been various proposals in Washington. During the campaign, Vice President J.D. Vance signaled support for expanding the CTC. While specifics remain unclear, there have also been indications that President Trump favors extending the current $2,000 credit beyond 2025 or even increasing it.

Many Congressional Republicans have voiced support for maintaining the credit at the $2,000 level or making it permanent. However, in a 50-page menu of options prepared by Republicans on the House Budget Committee, there’s a proposal that would require parents and children to have Social Security numbers (SSNs) to claim the CTC. (Currently, only a child needs a valid number.) That would make fewer families eligible for the credit.

Because these proposals haven’t yet been enacted (and may not be), taxpayers should keep an eye on legislative developments.

Claiming the CTC

To claim the CTC, you must include the child’s SSN on your return. The number must have been issued before the due date for filing the return, including extensions. If a qualifying child doesn’t have an SSN, you may currently claim the $500 credit for other dependents for that child.

To claim the $500 credit for other dependents, you’ll need to provide a taxpayer identification number for each non-CTC-qualifying child or dependent, but it can be an Individual Taxpayer Identification Number, Adoption Taxpayer Identification Number or SSN.

Stay tuned

The CTC remains a critical resource for millions of families. For the 2024 and 2025 tax years, you can still benefit from up to $2,000 per qualifying child. The future of the credit after that is uncertain. As always, you can count on us to keep you informed of any changes. Contact us with any questions about your situation.