Connect with us

Accounting

Small firm AI plans must balance budget with ambition

Published

on

Some firms, the ones that constantly grab headlines, are spending billions of dollars to create bespoke artificial intelligence systems to service their Fortune 500 clients who need complex compliance and advisory services to support their global footprint. 

In contrast, the vast majority of firms are spending maybe a few thousand dollars to license commercially available models, and perhaps a few thousand more to train staff and integrate systems. Overall, if someone is not building billion-vector custom models housed on a massive server farm, AI is actually quite cheap, especially considering the capacity upgrades it can present. 

Firms with about one to 200 people are mostly engaging with the subscription model products right now, according to TJ Lewis, innovation strategist with Rightworks, an accounting-specialized cloud provider. “They’re not building out their own models,” he added. “They’re not securing a bunch of server time or things like that to spin up their own things by and large.”

AI money balance budget

Andrey Popov/stock.adobe.com

Part of this is because smaller firms don’t have the resources to construct their own custom AI models, especially the oceans of data to feed them, as well as the technical experts to bring it all together, according to Donny Shimamoto, head of IntrapriseTechKnowlogies, a tech advisory practice specializing in CPA firms. 

“It kind of makes sense,” he added. “In order for AI to work to a good extent, you need a high volume of data, and smaller firms just don’t have that volume. They need to teach the AI. And they also don’t have simply the teams to be able to build that out cost effectively.”  

Another reason is they really don’t need to, he added. Huge sophisticated AI models are generally used for highly complex tasks for highly complex companies, which is why the international-scale firms tend to invest in them. Conversely, the tasks most local accountants are handling for their clients are simpler by many orders of magnitude. In the majority of cases, said Shimamoto, a commercially available model will work fine for their purposes. 

“There’s personal AI or personal LLMs that, if a practitioner had a decent amount of content that they wanted to have readily searchable, they could use those LLMs like [Google’s] Notebook [LLM] or something. Those personal LLMs are designed to run off of a laptop, so you won’t see these huge incremental costs coming along,” he said. The cost of commercial AI solutions has also been going down over the years, he added, and many of the ongoing costs of these products are now at the vendor level. 

Furey Financial Services, a 38-employee firm in Hoboken, New Jersey, that was also named one of this year’s Best Firms for Technology, can relate. A highly tech-focused firm, with IT taking up 29.5% of its total operating budget, Furey has been an enthusiastic adopter of AI, making sure to equip all its staff with the latest available tools. It invests in both its own proprietary AI solutions as well as AI-enabled commercial products. However Chip Waller, the firm’s chief operating officer, said Furey aims to be judicious in its AI spending. While Furey’s tech ops team is “focused on building for the future,” he conceded it’s “a balancing act of investment versus being too reactionary.” 

“From our perspective we’re not trying to build our own LLMs or infrastructure,” he said. “It was really about how do we from a low-cost perspective leverage some of these models out there and plug them into our workflow, so you can differentiate AI into that platform component. … We’re going to really focus on the application layer and see where we can put these things to use while not trying to build the new AI model ourselves.”

This falls in line with the general advice Shimamoto had for smaller firms looking to invest in AI. It is the same as it is for any other major tech purchase: Firms must start with the use case, then find technology to fill it. Too many firms, he believes, do it the other way around, much to their detriment. 

“It’s the same way we’ve prioritized IT spend for the last two decades at least,” he added. “It comes down to where is the business value? What is the business strategy? And how will AI contribute to that? We do have to be careful of AI being a solution looking for a problem, but I have been seeing that a bunch.”

Waller said that when Furey was first thinking through its approach to AI, it considered building its own proprietary model, or to train one using an open source model like Llama as a base. However the firm calculated that this would carry not just a significant one-time cost for development but ongoing expenses such as server space. “We decided not to go that route and really just say ‘Hey, let’s get it plugged into our workflow but let’s hold off on running our own model,'” said Waller. This has helped the firm gain efficiency and productivity bonuses from AI while keeping IT costs low. 

However, Furey is more than just a consumer of AI products. While it’s not prepared to drop millions of dollars on custom systems, it has found great cost savings in the form of creating its own API access point for OpenAI’s models. During the development process, Furey estimated its expenses would be hundreds of dollars per month, but as time went on and OpenAI introduced new capacities, the cost began to drop. While the cost savings are nice, Waller said the real benefit is in better quality client services. 

“That cost has gone to near zero,” he added. “Once we got our whole team up and running on it, all the clients, we’ve got thousands of [API] calls, [but] we’re in no more than 10 bucks a month. But the investment really is on our team knowing which way to go and connecting the API client to the API gateway in a secure way, doing all that dev work to plug that into our templates on a daily basis and go through that.”  

Doug Schrock, managing AI principal for Top 25 Firm Crowe, said small firms should be actively experimenting with AI beyond just buying or licensing a commercial solution, which he called “the homeowner level of AI.” While the investment is much less, there is an upper limit on the value it can create because it does not enable more significant redesigns to processes and tasks that are offered by more complex solutions. Overall, he said, firms should be seeking to innovate and make strategic relationships with some of the larger AI players out there. 

While it’s fine for now to stick mostly with what’s on the market, he warned that smaller firms will need to increase their AI capacities soon, or else be outcompeted by other firms. Smaller players who can’t or won’t make these investments, Schrock predicted, will start falling behind. They might need to do things like hire consultants to help get them to that next stage of AI development. “The market is moving and folks like us get a higher level of value allowing us to get more cost competitive and deliver value and speed they maybe can’t,” he added.

“In the next six to 12 months, get your people using the tools tied to your existing system,” Schrock said. “If everyone is running MS Suite, turn on Copilot. It’s $30 bucks a month per user. Have your people start using the AI features built into your core system, then maybe get some spot LLM tools like ChatGPT or some AI-based research tool. They need to get in the game now if they haven’t already.”

Continue Reading

Accounting

Tax savings for business owners hiring kids

Published

on

Business owners who employ their children in a reasonable but limited capacity at their firms can rake in tax savings and start their kids’ first retirement accounts in the process.

But the entrepreneurs and their financial advisors or tax professionals must ensure they’re diligently keeping the kids’ employment records, complying with some variation in state-level rules for business entities and addressing any other potential ramifications, according to Miklos Ringbauer, of Los Angeles-based MiklosCPA, and Kevin Thompson, CEO of Fort Worth, Texas-based RIA firm 9i Capital Group.

READ MORE: 24 tax tips for self-employed clients

Key benefits of hiring your child

For instance, Ringbauer usually advises clients to restrict their compensation for any summer jobs or other employment for their children to less than $15,000. That’s the standard deduction for 2025, the highest amount of income that, in most cases, doesn’t carry the requirement to file a return. 

In turn, the business may deduct the wages as an expense and often avoid Social Security, Medicare, Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, as well as estate and gift duties. 

And the child acquires some invaluable lessons about a day’s work, alongside potential investments such as a Uniform Transfers to Minors Act (UTMA) portfolio with a parent as the custodian or a Roth or traditional individual retirement account. But the benefits won’t accrue from brazen attempts by parents to give their kids money.

“There’s an incredible wealth of information out there and options a business owner and their children can take advantage of legally to help reduce taxes on the parents’ side,” Ringbauer said. “This could be an incredible wealth transfer, if it is done right and done appropriately.”

For advisors and their clients, that entails using the same payroll records as they do for any other employees and assigning the kids to perform actual work aligning with their hours and skills. And, of course, they need to “be careful” that they’re not running afoul of guidelines for child labor or the so-called kiddie tax on unearned income or investments, Thompson noted.

“You can’t pay your kid $15,000 over the summer for raking leaves. It has to be reasonable compensation, and you have to have them in your system,” he said. “Having the IRS come into your place just because you paid your kid some money over the summer is not a good look.”

READ MORE: The basics of S corporations — and the pitfalls for small businesses

Helpful lessons

Whether they’re working for their parents or another employer, a summer job can introduce young people to concepts such as the difference between an independent contractor and a W-2 employee and any wittholdings from their paycheck, according a recent guide to IRS rules for teens by Jill Kenady, a tax materials specialist with the University of Illinois Tax School. Documents like a tax checklist compiled by the school, and IRS releases for students and summer employees could aid parents and youngsters navigating the rules, Kenady wrote.

“Summertime is near, which means teens will start jobs, which is the initiation into adulthood,” she wrote. “These jobs offer a sense of independence along with a wonderful way to earn their own money. However, with great earnings come significant responsibilities, specifically tax responsibilities. It is your job as a tax practitioner to help teens and their parents navigate the tax laws and the impact of summer employment.”

The advantages to parents who employ their kids can pile up so high that Ringbauer said he begins speaking with business owners about the possibilities shortly after the child is born. As long as they comply with the rules, a pediatrician or a child dentist could consider hiring their kid to act as a model for advertisements or pictures on the website for the small business, he noted.

On the other hand, Ringbauer stressed that it’s important for the parents to talk through their ideas with an advisor or tax pro before putting anything in motion. The entity classifications of a business and independent contractor or W-2 employee status for the child could bring more complexity to their decisions. Then there are the more basic concerns about any potential for accidents on the job or the challenges of a parent working in the same office as their child.

READ MORE: 3 tax strategies for summer daycare, jobs and vacation rentals

Keep implications in mind

Among prospective clients, the most common problem is that it can look like a business owner is trying to simply transfer money to their child “without actual work or suitable work,” Ringbauer said.

“Eventually, they didn’t turn into my client, because they didn’t like the answers I gave them,” he said, recalling one business owner who was trying to skirt the rules. “After-the-fact errors are the biggest pitfalls, and it’s across the board.”

However, the array of potential strategies for small business owners provide “limitless reasons and opportunities to do it right, and the benefits significantly outweigh the immediate gratification of savings in dollars,” Ringbauer added.

The incentives explain why the method “makes a lot of sense” for many business owners and kids who could open their own retirement accounts, Thompson said. But there are some caveats. For example, those assets could affect possible financial aid for college or other benefit programs that take net worth into account.

“We have to look at the implications on them saving dollars under their own names,” Thompson said. “I have to be careful, because if they have too much money under their name it could ruin their benefits.”

Continue Reading

Accounting

One Big Beautiful Tax Bill full of impactful provisions

Published

on

The One Big Beautiful Tax Bill Act, as passed by the House and revised text was released Monday by the Senate, includes a number of significant tax provisions for both corporate taxpayers and nonprofits.

“Even before we saw the legislative text of the One Big, Beautiful Bill, we knew these would be the big provisions for most of our clients that they were interested to see what was going to happen,” said Jess LeDonne, director of tax technical at the Bonadio Group. “The big one that I get the most questions about right now would be the expensing of research and development costs, Section 174. That provision, specifically, allows for the temporary suspension of the amortization, so you would be able to immediately expense those costs. They also expanded that provision to include software development expenditures as well. Some of the provisions are kind of a permanent extension of some of the Tax Cuts and Jobs Act. This one specifically is a temporary suspension of the amortization requirement. Essentially it will allow for immediate expensing of R&D costs only for tax years 2025 through 2029. This isn’t permanent, but it still is for a lot of clients a welcome potential change.”

Another significant provision involves bonus depreciation, Section 168(k). “The bill, as written as it currently sits in the Senate, would allow for 100% bonus depreciation to be reinstated,” said LeDonne. “This would again be temporary, based on the placement service date of the equipment, and it would be for a property placed in service from essentially Inauguration Day. They picked Jan. 19 of this year, and before Jan. 1, 2030.”

She sees that as a welcome extension. “That was the one we have been watching phase down already, and was set to phase out completely by 2027,” said LeDonne. 

Another provision involves the qualified business interest deduction provision. “There’s an increase there from 20% to 23% and that one does not have a sunset date, so that would be more of a permanent potential increase to that QBI deduction,” said LeDonne. 

Business interest deductions would also be extended “The last one that I’m always being asked about would be the change in the calculation for the limitation on business interest expense deductions in 163(j),” said LeDonne. “There’s a temporary reinstatement in the bill to go back to the EBITDA-based calculation. And that would be for tax years 2025 through 2029. That was the other one that we’ve been watching those specific provisions to see what’s going to happen based on the Tax Cuts and Jobs Act expirations and phasedowns. Those were some of the biggest business-side provisions that we’ve been asked about.”

Nonprofit tax changes

Nonprofits such as foundations, colleges and universities would also see wide-ranging impacts from the bill that was passed by the House and whose amended text was released Monday from Senate Republicans.

“The tax bill, as it’s written right now out of the House, has a number of provisions that impact the nonprofit sector,” said Aaron Fox, a managing director at CBIZ. “We will see how many of them stay in effect after the Senate is done marking up the bill. Some of the more notable provisions in the bill, to my mind, are the private foundation increase in tax rates depending on the size of their asset base. That would mark a significant departure from historic norms, where previously the tax rate was only 1.39%, and the rationale was that it was there to pay for the cost of administering foundations. But the increased rates up to 10% for the very large foundations with $5 billion or more in assets really represents a change in approach and would pay for other parts of the bill.”

The increase in tax on investment income for colleges and universities could also have a major effect on larger educational institutions. “Right now, the current rate is 1.4%, but in certain instances where the student-adjusted endowment amount goes up to $2 million or more, then colleges could be looking at significant increases in that excise tax rate,” said Fox. “That’s a pretty significant one that would not impact all of higher education, but have a pretty broad impact on the bigger colleges that have very strong balance sheets.”

Other provisions involve royalty income and transportation tax fringe benefits. 

“Royalty income change is going to be pretty broad in application, because many nonprofits, especially in the social welfare space, have royalty contract arrangements, and some of those royalties relate to name and logo licensing or sales,” said Fox. “I think that has an opportunity to have a really broad impact as well. Finally, my fourth one would be what they’re thinking about doing with transportation tax benefits and bringing back the rule that created unrelated business income tax on the provision of those benefits, which is sort of a tricky area in the tax law. It created a lot of uncertainty and difficult filings for nonprofits back in 2017 and 2018 when this idea was first put into law and then later repealed.”

Continue Reading

Accounting

2024 deficiency rates remain high

Published

on

The Public Company Accounting Oversight Board reported that deficiency rates remain high across examination, review and audit engagements.

In the 2024 edition of its annual report on broker-dealer audits, the PCAOB found a slight improvement across firms’ examination engagements year over year. It found at least one deficiency in 17 (59%) of the 29 examination engagements it reviewed, a decrease of two from 2023. 

The largest audit firms performed 15 of the examination engagements reviewed, and deficiencies were identified in six, a decrease from the year prior. The remaining audit firms performed the other 14 engagements reviewed, and deficiencies were identified in 11, also a decrease from the year prior. 

PCAOB logo

Results were consistent year to year across firms’ review engagements. The PCAOB reviewed 64 engagements and found at least one deficiency in 27 (42%), consistent with the 2023 results. 

The largest audit firms performed 15 of the review engagements reviewed, and deficiencies were found on two, which is the same as 2023. Meanwhile, the remaining audit firms performed 49 of the review engagements, and deficiencies were identified in 25, also the same as the year prior. 

Finally, audit engagement deficiencies increased across all firms. The PCAOB found at least one deficiency in 68 (66%) of the 102 audit engagements it reviewed, an increase of 10 from 2023. 

The largest audit firms performed 31 of these audit engagements, and at least one deficiency was identified in 13 (42%0, three more than the year prior. The remaining audit firms performed the other 71 engagements, and at least one deficiency was identified in 55 (77%), an increase of seven from 2023.

The areas with the most deficiencies were revenue, journal entries and evaluating audit results. Deficiencies in revenue procedures included instances where firms did not sufficiently test whether recorded revenues were accurate, performance obligations were satisfied and disclosure requirements were met. For journal entries, firms did not consider the characteristics of potentially fraudulent journal entries when identifying and did not perform journal entry procedures. And for evaluating audit results, firms did not sufficiently evaluate whether the broker-dealer financial statements were presented fairly in accordance with Generally Accepted Accounting Principles.

Continue Reading

Trending