Medical and Recreational Revenue: Two Streams, Two Sets of Rules

For licensed cannabis dispensaries operating in states that permit both medical and recreational sales, the distinction between those two revenue streams is more than a bookkeeping detail. It affects tax treatment, regulatory reporting, licensing compliance, and in some states, the applicable excise tax rate. Getting it right from the start saves significant time during audits and tax filings.

Many dispensary operators underestimate how much their point-of-sale system, general ledger structure, and state reporting obligations need to work in concert to produce accurate, defensible revenue records.

The Regulatory Foundation: Why States Require Separate Tracking

Most dual-license states require dispensaries to report medical and recreational (adult-use) revenue separately to their cannabis regulatory authority. The reasons vary by state but generally include:

• Excise tax rate differences. In many states, medical cannabis sales carry a lower excise tax rate or a full exemption. Recreational sales are taxed at a higher rate. Comingled revenue makes it impossible to apply the correct rate to each transaction.
• License-specific caps and reporting. Some states tie purchase limits, product type permissions, or compliance thresholds to the license category under which a sale was made.
• Patient registry verification. Medical sales typically require verification of a valid patient registry card or physician recommendation. Your recordkeeping needs to reflect that verification occurred at the point of sale.
• Potential 280E implications. How you classify revenue at the transaction level flows directly into your cost of goods sold calculation. Comingled records make it difficult to defend your COGS allocation to the IRS, which is the one deduction cannabis businesses can still take under federal law.

If your state requires separate reporting and your records cannot support it, you face potential license jeopardy in addition to tax exposure.

Common Tracking Failures

The most frequent problems HBK CPAs & Consultants sees in cannabis dispensary financials relate to systems that technically track both streams but fail to keep them cleanly separated at the ledger level.

Shared SKUs or product codes. When the same product is sold under either license depending on the customer, some POS systems default to a single SKU. Without a flag or separate transaction code distinguishing the license type at time of sale, the data cannot be cleanly separated after the fact.

Revenue posted to a single GL account. Even when POS data is accurate, an accountant or bookkeeper who posts all cannabis revenue to one account creates a reconciliation problem. Medical and recreational revenue should live in separate general ledger accounts from day one.

Discounts and returns not tracked by category. If you offer medical patient discounts, those adjustments need to reduce medical revenue specifically. Applying a blanket discount line across all revenue distorts both streams.

Failure to reconcile POS data to the general ledger. POS reports and GL reports should tie out by revenue category, not just by total. Monthly reconciliation at the category level catches classification errors before they compound.

Building a Compliant Tracking System

A sound tracking structure does not require a complex or expensive system overhaul. It requires consistent configuration and discipline at each point in the data flow.

Point-of-sale configuration. Work with your POS vendor to confirm that every transaction is tagged to a license type at the time of sale. Medical and recreational sales should produce distinct transaction records, not just a customer type flag that can be overridden. Verify that your POS exports segregated data rather than forcing you to sort it after the fact.

General ledger structure. Set up separate revenue accounts for medical cannabis sales and adult-use cannabis sales. If your state also taxes different product categories at different rates (flower vs. concentrates vs. edibles), you may need sub-accounts within each revenue category as well. Your chart of accounts should mirror your state’s reporting requirements.

Excise tax mapping. Excise taxes collected from customers should also be tracked by sale type. In states where medical sales are exempt, collecting or remitting excise tax on those transactions is an error that creates both a refund obligation and a compliance question.

Documentation for medical sales. Each medical transaction should be supported by a record of patient registry verification. This does not need to be a paper file, but your system needs to associate the verification with the transaction in a way that can be produced during a regulatory inspection.

Monthly close process. Before closing each month, reconcile your POS sales report to your general ledger by category. Any variance between what the POS recorded as medical revenue and what the GL shows as medical revenue needs to be resolved, not carried forward.

Tax Implications: IRC Section 280E

Under Internal Revenue Code Section 280E, cannabis businesses cannot deduct ordinary business expenses on their federal tax return because cannabis remains a Schedule I controlled substance under federal law. However, the cost of goods sold (COGS) calculation is still permitted.

Accurate revenue tracking by category matters in the 280E context because it informs your gross profit calculation and affects how you structure allowable deductions. Some advisors working with multi-license dispensaries have developed allocation methodologies that separate expenses by business function. The accuracy of those methodologies depends entirely on how cleanly the underlying revenue and cost data are classified.

The 2023 DEA rescheduling proposal to move cannabis to Schedule III has generated significant discussion about the potential elimination of 280E for cannabis businesses. However, as of the date of this article, 280E remains in effect, and dispensaries should continue to operate and report as if it applies. HBK will continue to monitor developments in this area.

State-Specific Considerations

Revenue tracking requirements are not uniform across licensed states. Some specific variations to be aware of:

• Excise tax exemptions. States including California, New Jersey, and New Mexico have at various times modified or exempted medical cannabis from state excise taxes. Confirm the current rules in each state where you operate.
• Dual-license vs. co-located operations. Some states require medical and recreational operations to be run under separate license numbers, which simplifies tracking by creating a physical and transactional separation. Others permit a single retail license to serve both markets, which places the entire classification burden on your internal systems.
• Local taxes. Several municipalities layer local cannabis taxes on top of state excise taxes, sometimes with different rates or exemptions for medical sales. These local obligations need to be mapped into your tracking system as well.

If you operate in multiple states, your tracking system needs to be configured for each jurisdiction separately.

Working with HBK Cannabis Solutions

HBK CPAs & Consultants works with licensed dispensaries across the country on financial reporting, tax strategy, and compliance infrastructure. If your current tracking system does not produce clean, defensible revenue records by sale type, our team can help you assess the gaps and build a structure that holds up under regulatory scrutiny.

Contact HBK Cannabis Solutions to discuss your current setup and where improvements may be warranted.

Manufacturers operate in a capital-intensive, margin-sensitive environment where even small inefficiencies can quietly erode profitability and cash flow. Volatile input costs, longer production cycles, inventory requirements, and customer payment terms all place pressure on working capital. Financial clarity isn’t a back-office function here. It’s a practical advantage that helps leaders protect liquidity and make confident decisions as they grow.

With the right financial discipline, manufacturers can turn their numbers into operational insight and build a stronger foundation for sustainable performance.

Profit vs. Cash Flow: A Common Manufacturing Blind Spot

One of the most common misconceptions in manufacturing is that profitability automatically translates into available cash. In practice, the two often move in different directions. Profit measures performance over time, while cash flow determines survivability day to day. Working capital dynamics cause the two to diverge more often than most leaders expect, which is why long-term success depends on both profitability and liquidity, not just one or the other.

Key Cash Flow Drivers to Monitor

• Accounts receivable timing. Delayed collections limit available cash for operations. Consistent invoicing, aging report reviews, KPI tracking, and disciplined credit policies improve visibility and control.
• Inventory levels. Raw materials, work in process, and finished goods all tie up cash. Overstocking, slow-moving inventory, and obsolete or damaged goods reduce flexibility and create financial drag.
• Vendor payment terms. Managing payment timing can preserve cash, but it should be done in partnership with suppliers to protect those relationships.
• Capital investments. Equipment purchases create significant cash outflows. Management should weigh the balance between down payments and financing against expected return, payback period, internal rate of return, and net present value.
• Debt service. Principal repayments reduce available cash even though they don’t appear on the income statement. Understanding repayment schedules is essential to liquidity planning.

The Manufacturing Reality

Revenue growth often increases receivables and inventory before cash is collected, which can cause liquidity to decline even as profits rise. Before accepting a large order or expanding production volume, manufacturers should understand how that growth will be funded. Lines of credit, structured receivable terms, and well-negotiated payable terms can support growth without creating unnecessary cash pressure.

Many businesses focus first on revenue and profitability. Cash flow discipline is often what actually determines whether that growth can be sustained. Two tools help manufacturers build visibility here:

1. Cash Conversion Cycle. This measures the number of days it takes to convert inventory and production activity into cash. It’s calculated as Days Inventory Outstanding plus Days Sales Outstanding, minus Days Payable Outstanding. The shorter the cycle, the faster cash returns to the business, and the easier it becomes to fund growth.
2. 13-Week Cash Flow Model. Updated weekly, this rolling forecast gives leaders a practical view of near-term liquidity. Unlike accrual-based reporting, it tracks actual cash inflows and outflows, helping leaders anticipate payroll, accounts payable, and debt service before timing gaps become urgent.

Financial discipline isn’t about chasing perfect numbers. It’s about building reliable systems that lead to better decisions. When manufacturing leaders connect financial clarity with operational execution, they create a stronger platform for resilience and profitable growth.

Ready to strengthen your cash flow strategy? If your manufacturing business is preparing for growth, evaluating capital investments, or looking for greater visibility into working capital, now is a good time to review your financial planning tools. Contact HBK’s Manufacturing Solutions team to assess your cash flow drivers and build a practical roadmap for more confident decision-making.

Businesses that invest in research and development just got a reason to look closely at their New York filings. Recent federal legislation restored immediate deductibility for qualifying domestic research and experimental (R&E), also often referred to as R&D or research & development, expenditures beginning in 2025, reversing years of mandatory capitalization under Section 174. New York, however, did not follow suit.

If your company incurs R&E costs and files a New York return, the gap between federal and state treatment now requires attention.

What Changed at the Federal Level

Under prior law, businesses generally could not deduct Section 174 research expenditures in the year incurred. Instead, they were required to capitalize those costs and amortize them over several years, which pushed out tax benefits and often inflated taxable income in the near term.

Recent federal legislation reversed that requirement for domestic research activity. Starting in 2025, qualifying U.S.-based R&E expenditures can once again be deducted immediately, giving companies faster access to tax savings and improved cash flow.

For businesses concentrated in product development, engineering, software, or other research-intensive work, this is a meaningful shift in how R&E investment translates to tax outcomes.

Where New York Parted Ways

As part of its Fiscal Year 2027 Budget legislation, New York opted not to conform to the federal restoration of immediate expensing. The state established its own treatment of research expenditures instead, and that treatment applies to tax years beginning on or after January 1, 2025.

The practical effect: a research expense that’s fully deductible on your federal return this year may need a separate adjustment on your New York return. Federal and New York taxable income are no longer aligned for companies engaged in R&E activity.

Where This Creates Complexity

For businesses with New York filing obligations, the disconnect shows up in several places.

• Divergent taxable income calculations. Federal and New York returns may now differ with respect to the same expenditures.
• New state-specific modifications. Additional adjustments are required to reconcile the two treatments.
• Heavier documentation requirements. Tracking R&E costs separately by jurisdiction becomes necessary, not optional.
• More complex return preparation and projections. Estimated payments and forecasts need to account for the divergence.
• Possible amended return considerations. Returns already filed for affected years may need a second look.

Technology firms, manufacturers, life sciences companies, engineering firms, and startups with substantial research spending are likely to feel this most directly, given the scale of their R&E investment relative to overall tax position.

Reviewing What’s Already Been Filed

If your business has already filed a New York return for an affected tax year, it’s worth evaluating whether an amendment is warranted under the new rules. For returns not yet filed, incorporating the required New York adjustments up front reduces the likelihood of notices or assessments down the line.

New York has also provided some relief from penalties and interest tied to these legislative changes. Whether your business qualifies depends on specific facts, so it’s important to evaluate your situation rather than make assumptions.

Building This Into Your Planning

A federal-state disconnect like this rewards businesses that plan ahead  rather than react to it. Companies with ongoing research activity should consider:

• Reviewing Section 174 expenditures on an annual basis
• Tracking federal and New York differences as a separate line item, not an afterthought
• Evaluating the cash-flow impact of differing deduction schedules
• Assessing whether an amended return would produce a net benefit
• Updating forecasts and estimated payments to reflect the New York-specific treatment

Accurate, jurisdiction-by-jurisdiction records are what make this manageable. Without them, the gap between federal and state numbers can lead to unexpected tax outcomes at filing time.

Frequently Asked Questions

State and federal tax law don’t always move together, and New York’s approach to R&E expensing is a clear example. For manufacturers investing in product development, process improvement, and engineering work, that gap can carry real cash-flow consequences.

HBK Manufacturing Solutions works with manufacturers to identify where state and federal treatment diverge, determine what adjustments are required, and build those changes into ongoing tax planning.

If your company incurs research and development expenses and files in New York, our team can help you assess the impact and determine next steps. Contact HBK Manufacturing Solutions at 330-758-8613 or manufacturing@hbkcpa.com to schedule a consultation.

If you’ve ever paid a tax penalty on time and then had to fill out paperwork just to get it waived, the IRS has some good news. Starting this summer, a new program called the Automatic Exemption from Penalty (AEP) will remove certain penalties for eligible taxpayers without requiring a request at all.

For business owners who have built a solid compliance history, this is a welcome adjustment. But like most IRS changes, it’s worth understanding the fine print, especially during the transition period.

What Is the Automatic Exemption from Penalty?

AEP is a new IRS program announced July 8, 2026, that automatically waives certain penalties for taxpayers with a track record of filing and paying on time. It replaces First Time Abate, the manual relief process many businesses have relied on for years.

Under the old system, a taxpayer with a clean compliance history had to contact the IRS and request that a penalty be removed. Under AEP, the IRS applies the relief on its own and sends a notice confirming it.

In plain terms: if you have a history of paying on time, the IRS will now recognize that automatically instead of making you ask for credit.

Who Qualifies

To qualify for AEP, a taxpayer needs a history of timely filing and paying in the three prior years, or across 12 consecutive quarters for quarterly returns. When that history holds up, the IRS will not assess penalties during processing for:

• Failure to file
• Failure to pay
• Failure to deposit

AEP applies to eligible original returns starting with tax year 2025, plus 2026 quarterly returns and future periods going forward.

Not every return qualifies. Information returns and filings tied to one-time events, such as estate or gift tax returns, are generally excluded.

When the Change Takes Effect

The IRS will begin transitioning from First Time Abate to AEP during the summer of 2026. This is a phase-in, not an overnight switch, so a few things to expect:

• Some taxpayers who qualify may still receive a penalty notice on 2025 or 2026 returns during the transition.
• If that happens, you can still contact the IRS and request First Time Abate directly.
• AEP becomes the standard replacement for First Time Abate on returns with original due dates on or after January 1, 2027.

What This Doesn’t Change

AEP prevents certain penalties from being assessed. It does not erase the underlying tax bill. Taxpayers are still responsible for any tax owed, interest, and any penalties that fall outside AEP’s scope.

If you don’t qualify for AEP, reasonable cause relief is still available. That process requires a request and IRS review, the same as before.

A clean compliance history is quickly becoming one of the most valuable assets a business can have with the IRS.

One Trade-Off Worth Understanding

AEP is an administrative form of relief, the same category First Time Abate falls into. Reasonable cause relief, by contrast, is a statutory waiver under the tax code. That distinction carries real planning implications for how a penalty is handled.

Because AEP applies automatically, a practitioner no longer has the option to make that call. Reasonable cause has no limit on how often it can be used. Administrative relief like AEP generally does. If AEP is applied automatically to a penalty that could have qualified under reasonable cause instead, it may use up that administrative relief for no reason, leaving a taxpayer without it in a future year when reasonable cause doesn’t apply and the administrative option would have been the better fit.

In practice: the automation that makes AEP convenient is the same automation that removes a layer of strategic choice. Business owners working with an advisor should ask whether AEP is being applied in a way that preserves their options, not just whether a penalty was removed.

What Business Owners Should Do Now

If your filing and payment history has been reliable, you’re likely already positioned to benefit. If it hasn’t, this is a good moment to talk through what a stronger compliance track record could mean for how your business is treated going forward, penalties included.

We can review your recent filing history, flag any exposure during the transition period, and help you understand where you stand under the new rules. Schedule a consultation with our tax team to talk through what AEP means for your business.

Frequently Asked Questions

Do I need to apply for the Automatic Exemption from Penalty?

No. If you qualify, the IRS applies the relief automatically and sends a confirmation notice. There’s no form to file or request to submit.

What happens if I get a penalty notice during the transition period?

You can still request First Time Abate directly from the IRS while the two programs overlap during summer 2026.

Does AEP reduce the amount of tax I owe?

No. AEP only addresses certain penalties. Any tax owed, along with interest, still needs to be paid.

What if my business doesn’t qualify for AEP?

You can still request penalty relief based on reasonable cause. The IRS reviews these requests individually and notifies you of the outcome.

Which penalties does AEP cover?

Failure to file, failure to pay, and failure to deposit penalties, provided your return type is eligible and your compliance history qualifies.

AI is not something nonprofits should be afraid of.

In fact, for many organizations, it may be one of the more practical tools available to help stretched teams gain capacity. Nonprofits are constantly being asked to do more with less: write more grants, communicate with more stakeholders, analyze more data, report to more funders, and respond to more community needs. AI can help with that.

It can help draft donor communications, summarize board materials, organize grant narratives, analyze trends, create first drafts of policies, translate content, and reduce time spent on routine administrative work. For finance and operations teams, AI may also help with variance explanations, forecasting support, contract summaries, documentation, and internal process improvement. That is the opportunity. But the opportunity needs structure.

The real issue is not whether nonprofits should use AI. Many already are. The better question is whether the organization has any governance around how it is being used. Because unmanaged AI use is where the risk starts.

AI Is Already in the Organization

A lot of organizations are treating AI as a future policy issue. That is probably a mistake.

In many nonprofits, staff are already experimenting with AI tools. Some may be using them for harmless first drafts or brainstorming. Others may be using them with donor information, employee data, grant reports, board materials, financial information, or program-related content.

Leadership may not have a full picture of what is happening, and that uncertainty carries risk.

From an audit and governance perspective, this starts to look like a control environment issue. If a tool is being used to support work that affects financial reporting, grant compliance, donor communications, program decisions, or board materials, then management should understand how that tool is being used, what information is being entered, and who is reviewing the output.

That does not mean AI use should be discouraged. It means the organization needs basic guardrails. Good policy does not slow down innovation. It makes innovation safer and more repeatable.

The Policy Should Be Practical

An AI governance policy does not need to be complicated. In fact, if the first version is too long, too technical, or too restrictive, people may ignore it.

The policy should be clear enough that staff understand what is allowed, what is not allowed, and when they need to ask for approval.

At a minimum, a nonprofit AI policy should answer a few basic questions:

• Who is allowed to use AI tools?
• Which tools are approved?
• What information should never be entered into an AI platform?
• When is human review required?
• Can AI-assisted content be used in grant reporting, financial reporting, board materials, donor communications, or program materials?
• Who owns the final output?

 At their core, those are governance questions. The most important principle is simple: AI can assist the work, but it should not own the conclusion. Management still owns the output. The organization still owns the communication. The board still relies on leadership’s judgment. A policy should make that clear.

Where Nonprofits Should Be Careful

Nonprofits have a few risk areas that deserve special attention.

The first is confidential information. Many nonprofits hold donor data, employee records, beneficiary information, grant agreements, board materials, and sensitive financial information. Staff should not be entering that information into public AI tools without clear approval and an understanding of how the data may be used or retained.

The second is grant and compliance reporting. AI can be helpful in organizing information or drafting narrative language. But grant reports still need to be accurate, supported, and consistent with the award terms. AI should not replace management review of compliance requirements.

The third is financial analysis. AI-generated explanations can sound polished even when they are incomplete or wrong. If AI is used to help prepare variance explanations, forecasts, dashboards, or board commentary, someone still needs to verify the data, assumptions, and conclusions.

The fourth is program decision-making. If AI is used to help evaluate applications, prioritize services, assess needs, or allocate resources, the organization needs to think carefully about fairness, bias, transparency, and accountability.

 The right response is not avoidance but proportionate review, matched to the level of risk. Using AI to clean up a paragraph is different from using AI to support a compliance conclusion. Using AI to brainstorm fundraising language is different from uploading donor lists or relying on AI to summarize grant requirements.

A good policy helps people understand the difference.

The Audit Undertone: Trust, Review, and Evidence

For CPAs, auditors, and finance leaders, the concepts here should feel familiar.

AI governance is really about authorization, review, documentation, accountability, and evidence. Those are not new ideas.

If AI is being used in low-risk ways, the process can be simple. If it is being used in higher-risk areas, the expectations should be stronger.

For example, if AI helps draft a board financial summary, the organization should still be able to show that the underlying numbers were reviewed and the final commentary was approved by management. If AI helps summarize a grant agreement, someone still needs to compare the summary back to the actual agreement. If AI helps draft a policy, management still needs to determine whether the policy fits the organization.

 The real question isn’t whether AI touched the work. It’s whether the organization reviewed and owned the final product.

The Board’s Role

•  Board members aren’t expected to become AI experts, or to approve every tool or use case. They are expected to ask smart governance questions: How is AI being used today?
• What information is prohibited from being entered into AI tools?
• Who approves new tools?
• How does management review AI-assisted work?
• Are there higher-risk uses that require special approval?
• Does the policy align with the organization’s privacy, cybersecurity, grant compliance, and ethical obligations?

These questions are not meant to create fear. They are meant to create visibility=, which is  what good governance does.

Start With an Inventory

For many nonprofits, the best first step is not drafting the perfect policy. It is understanding current use.

• What tools are staff using?
• For what purposes?
• With what data?
• In what departments?
• Are those tools free, paid, public, private, or vendor-provided?

That inventory gives leadership a practical starting point. From there, the organization can decide what to allow, what to prohibit, what needs approval, and what requires documentation. The policy can evolve as the organization’s AI use matures. The worst approach is to wait until there is a problem.

The Takeaway

AI can be a real advantage for nonprofits. It can save time, expand capacity, and help teams move faster. For organizations dealing with limited resources, that matters.

But AI should not operate outside the organization’s governance structure.

The goal is not to make AI scary. The goal is to make AI usable, controlled, and aligned with the organization’s mission.

Nonprofits should be asking a practical question:

How do we use AI in a way that helps our people work better while still protecting data, judgment, accountability, and trust?

This is a governance question, not just an IT one, and it deserves a policy before it becomes a problem.

How HBK Can Help

HBK can assist nonprofits in developing practical AI governance policies that fit their operations, control environment, and compliance responsibilities. This can include helping leadership identify current AI use, evaluate higher-risk areas, define acceptable-use guidelines, and develop a policy that supports innovation while protecting the organization.

The Florida Department of Revenue has released guidance for two sales tax holidays affecting retailers and consumers in the second half of 2026: the annual Back-to-School Sales Tax Holiday and a new Hunting, Fishing, and Camping Sales Tax Holiday.

Retailers operating in Florida, or shipping to Florida customers, should confirm their point-of-sale systems are set up to apply these exemptions correctly during each window.

Back-to-School Sales Tax Holiday: July 20 – August 20, 2026

During this one-month period, Florida will exempt qualifying purchases of clothing, footwear, school supplies, learning aids, and personal computers or computer-related accessories, each subject to its own price cap. The exemption applies to both in-store and online purchases but does not extend to sales made within theme parks, entertainment complexes, public lodging establishments, or airports.

Hunting, Fishing, and Camping Sales Tax Holiday: September 1 – December 31, 2026

This four-month holiday exempts qualifying outdoor recreation items related to hunting, fishing, and camping from Florida sales tax. The exemption applies to retail sales only. It does not extend to rentals of eligible items or to purchases made for commercial use.

What Businesses Should Do Now

Because each holiday involves specific item categories and price thresholds, retailers should review the Florida Department of Revenue’s guidance in detail well before each starting date. This includes confirming which products qualify, updating tax settings in point-of-sale and e-commerce systems, and training staff on how the exemptions apply at checkout.

The Department of Revenue maintains a dedicated page with the complete list of qualifying items, price limits, and exclusions for both holidays: Florida Department of Revenue – Sales Tax Holidays and Exemption Periods.

How HBK Can Help

Sales tax holidays create real compliance exposure for retailers who don’t apply exemptions correctly, especially across multiple locations or online channels. HBK’s SALT Advisory team helps businesses interpret state guidance, update tax processes, and avoid costly missteps.

Contact HBK’s SALT Advisory team at hbksalt@hbkcpa.com to review how these Florida sales tax holidays affect your business.

A business owner’s company is often the largest asset on their personal balance sheet, making the value of the business a critical component of their overall financial plan. Unlike traditional employees who primarily rely on retirement accounts, pensions, or investment portfolios, business owners frequently expect the eventual sale or transition of their company to fund a significant portion of their retirement. Understanding how business value aligns with long-term financial goals is essential to planning effectively.

Retirement Needs

One of the most important considerations is determining retirement needs. A business owner should first establish how much capital is required to support their desired retirement lifestyle. Once that target is set, they can compare it to the estimated value of the business and other personal assets. Many owners assume their business will fully fund retirement, but without a formal valuation, that assumption can be risky. Market conditions, industry trends, and operational performance can all significantly affect the eventual sale price.

The Value Gap

This leads to the concept of the value gap. A value gap occurs when the estimated proceeds from a business sale fall short of the owner’s retirement needs. For example, if an owner requires $10 million to retire comfortably but the after-tax business value is projected at $6 million, there is a $4 million shortfall. Identifying this gap early gives the owner time to strategically improve business value through operational changes before a transition becomes imminent.

Runway to Retirement

Another key factor is runway — the amount of time remaining before the owner plans to exit. The closer the owner is to retirement, the more critical it becomes to maximize enterprise value and reduce risk. Owners with a longer runway may have time to implement growth strategies, strengthen management teams, improve recurring revenue, or increase profitability to support a higher valuation. Those nearing retirement with limited preparation may find themselves with reduced bargaining power and fewer options during a sale or transition.

Tax Implications

Tax planning plays a major role in any business owner’s financial plan. The gross sale price is rarely the amount an owner ultimately keeps. Federal and state capital gains taxes, depreciation recapture, and transaction costs can substantially reduce net proceeds. Strategies such as installment sales, trusts, gifting arrangements, or qualified small business stock treatment can help preserve wealth and improve after-tax outcomes.

Under the One Big Beautiful Bill Act (OBBBA), the lifetime estate and gift tax exemption has been permanently increased to $15 million per individual, or $30 million for a married couple, creating substantial wealth transfer planning opportunities. Transferring highly appreciating assets now can shift future appreciation outside of the owner’s taxable estate.

The OBBBA also increased the capital gains exclusion for qualifying C corporation shareholders to the greater of $15 million (up from $10 million) or ten times the tax basis. Owners of qualifying shares would not owe federal capital gains taxes on the sale, though the exclusion is graduated: 50% at a three-year holding period, 75% at four years, and 100% after five years. That graduation makes early planning essential ahead of any transaction.

Coordinating with financial advisors, accountants, and attorneys is critical to minimizing tax exposure during a transition.

Concentration Risk

Finally, business owners must address concentration risk. Many have a substantial portion of their net worth tied to a single illiquid asset — their business. This creates vulnerability, since economic downturns, industry disruptions, or company-specific challenges can simultaneously affect both income and wealth. Diversification is essential to reducing that exposure. Owners can gradually shift wealth from the business into diversified investments, retirement accounts, or other assets over time to build greater financial stability.

Planning Now Makes the Difference

The value of a business has a direct and significant impact on a business owner’s financial plan. By evaluating retirement needs, identifying value gaps early, planning for the runway to exit, managing tax implications, and reducing concentration risk, owners can better position themselves for a successful transition and long-term financial security.

To learn how HBK CPAs & Consultants can help you assess your business value and align it with your financial goals, contact us to schedule a consultation.

Software companies and their customers have operated for years under a simple assumption: cloud-based access isn’t a taxable sale in California. That assumption is now gone.

Under Senate Bill 122, signed as part of California’s 2026-27 budget package, the state has redefined “tangible personal property” to include prewritten computer software, regardless of how it’s delivered. Whether that software arrives on a disc, gets downloaded, or runs entirely in the cloud no longer matters for tax purposes. Beginning January 1, 2027, most of it is taxable.

For finance and tax leaders at software companies, and at any business that buys or resells SaaS products, this is a structural change, not a minor update. It affects pricing, invoicing, nexus exposure, and how contracts get sourced across state lines.

We work with companies navigating multistate tax complexity every day, and changes like this tend to catch even well-run finance teams off guard because the rules shift the underlying definitions, not just the rates.

What SB 122 Changes

Historically, California limited sales tax to items you could physically see or touch. Electronically delivered software and cloud access fell outside that definition. SB 122 removes that distinction.

The law now treats a “digital product” as taxable tangible personal property when it involves any transfer of the right to open, view, access, download, copy, update, possess, store, or manipulate prewritten software, whether that transfer happens on physical media, through a download, or via remote cloud access.

In practice, this language is broad enough to capture:

• Enterprise SaaS platforms
• Subscription-based software tools
• Hosted applications accessed by client devices

What Stays Exempt

SB 122 does not tax everything digital. The law carves out several categories, including:

• Custom software (as opposed to prewritten or “canned” software)
• Digital books, audio works, audiovisual works, and visual works
• Digital video game products
• Digital infrastructure

There’s also a service-based exemption for digital products where the value comes primarily from human effort performed after the customer requests it, such as consulting or data processing. That exemption has a hard limit: it does not extend to a customer’s right to use a provider’s software running on cloud infrastructure, even when a web browser or client interface is the point of access. If your offering blends software access with a service layer, this distinction deserves a closer look before January 2027.

The $5 Million Threshold

Retailers get some relief from direct liability, but it’s tied to volume, not intent.

A retailer is relieved of the obligation to collect sales or use tax on digital product sales if its gross receipts from those sales to a purchaser exceed $5 million in the aggregate in the current calendar year (or, starting in 2028, in the current or preceding year). Past that threshold, the purchaser becomes responsible for self-assessing and remitting use tax directly to the California Department of Tax and Fee Administration.

This shifts the compliance burden rather than eliminating it. Large software vendors may not have to collect on every transaction once they cross the threshold, but their customers inherit the obligation instead. That’s a meaningful change to model into contract terms and internal use-tax accrual processes.

Sourcing Rules for Remote Software

Because digital products don’t have a physical location, SB 122 adopts a customer-based sourcing approach. Key points:

• If the sale isn’t tied to tangible storage media and isn’t an in-person transaction, the sale is sourced to the purchaser’s known address on file with the seller.
• The place of use is wherever the purchaser exercises the right to access the product.
• A rebuttable presumption applies: if a digital product is purchased outside California and used in the state within 90 days of the sale, it’s presumed to have been purchased for use in California.

Retailers can be relieved of liability if they can show the CDTFA they made a reasonable, good-faith effort to obtain accurate purchaser address information. Address collection and documentation practices are worth reviewing now, before the rule takes effect.

Timeline

SB 122 was enacted as Chapter 23 of the Laws of 2026, effective June 29, 2026. The sales and use tax provisions apply starting January 1, 2027. Related income tax changes from the same legislation are addressed separately and are not part of this expansion.

Where This Leaves Finance Teams

SB 122 doesn’t just add a new tax line item. It changes how “sale” and “use” are defined for an entire category of products that many companies never expected to fall under sales tax rules. Getting ahead of the classification questions now, before the effective date, is far more manageable than untangling exposure after the fact.

If your company sells, resells, or purchases software that touches California customers, it’s worth reviewing your current setup against these new rules well before January 1, 2027.

Talk with an HBK advisor about how SB 122 affects your California tax exposure.

On June 11, Florida Governor Ron DeSantis signed HB 7031, the state’s annual Internal Revenue Code (IRC) conformity bill, after it passed both legislative chambers in March. The bill took effect immediately upon signing.

Florida generally updates its corporate income tax code each year to match the federal IRC as of January 1. This year’s bill adopts the IRC as it stood on January 1, 2026, with several specific exceptions tied to the federal One Big Beautiful Bill Act (OBBBA), enacted in July 2025. For those exceptions, Florida continues to treat them as it did on January 1, 2025, and in two cases it decouples from the new federal provisions entirely.

The result: several federal deductions available to Florida businesses this year will not reduce their state corporate income tax the same way. Florida imposes a 5.5% tax on the income of corporations and financial institutions doing business in the state, using federal taxable income as the starting point for that calculation.

Provisions Where Florida Retains Prior-Year Treatment

For the following provisions, Florida continues to apply the rules as they existed under the IRC on January 1, 2025, rather than adopting the OBBBA changes that followed.

Bonus depreciation, Sec. 168(k). OBBBA made 100% first-year bonus depreciation permanent for qualifying assets placed in service on or after January 20, 2025, replacing the phase-down schedule that would have dropped the allowance to 20% in 2026 and eliminated it in 2027. Florida does not follow this change. The state has required businesses to add back federal bonus depreciation and spread the deduction evenly over seven years since it first decoupled from the provision in 2018, and that treatment continues.

Amortization of research and experimental (R&E) costs, Sec. 174(a). Federal law required businesses to capitalize and amortize domestic R&E costs over five years (fifteen years for foreign research expenses) starting in 2022. OBBBA reversed that rule, allowing immediate deduction of domestic R&E costs again for tax years beginning after December 31, 2024. Florida retains the 2022 capitalization and amortization requirement, so businesses must still add back and spread these costs for state tax purposes even though they may deduct them immediately on their federal return.

Business interest expense deduction, Sec. 163(j). This is one of the more consequential decoupling provisions for capital-intensive businesses. From 2022 through 2024, the deduction limit was calculated using an EBIT-based measure of adjusted taxable income, a more restrictive standard than the EBITDA-based calculation used from 2018 through 2021. OBBBA reinstated the more generous EBITDA calculation for tax years beginning in 2025, increasing the federal interest deduction for many businesses with significant depreciation and amortization expense. Florida does not adopt this change and continues to apply the EBIT-based, 30%-of-ATI limitation. Businesses claiming a larger interest deduction federally under the OBBBA rules should expect a Florida addback for the difference.

Business meal deductions, Sec. 274. Florida retains its January 1, 2025 treatment of business meal deductions rather than adopting subsequent federal changes.

Section 179 expensing. Florida continues to follow the IRC as of January 1, 2025, for this provision. This is a meaningful distinction from the QPP and R&E deduction described below, because Florida’s Section 179 treatment already reflects the pre-OBBBA 2025 limits: a $1.25 million expensing cap with a $3.13 million phaseout threshold. OBBBA increased those figures for federal purposes to $2.5 million and $4 million for assets purchased after January 19, 2025, indexed to $2.56 million and $4.09 million for 2026. Florida businesses claiming the higher federal caps should expect the difference to be added back for state purposes.

Provisions From Which Florida Fully Decouples

Florida does not adopt these new OBBBA provisions, regardless of the conformity date used elsewhere in the bill.

Qualified production property, Sec. 168(n). OBBBA created a new 100% first-year deduction for certain nonresidential real property used in manufacturing, production, or refining activities, provided the property is constructed between January 20, 2025, and December 31, 2028, and placed in service before January 1, 2031. Florida has not adopted this provision and qualifying property continues to depreciate over the standard 39-year period for Florida tax purposes.

New domestic R&E deduction, Sec. 174A. This is the newly created code section that permits immediate deduction of domestic R&E costs at the federal level. Florida decouples from it entirely, consistent with of the prior Sec. 174(a) described above.

What This Means for Florida Businesses

Businesses filing Florida corporate income tax returns should not assume that a federal deduction under OBBBA carries through to the state return unchanged. Bonus depreciation, R&E costs, business interest expense, and Section 179 amounts will each require separate calculation and, in most cases, an addback modification on the Florida return to reconcile the federal and state treatment. Qualified production property and the new domestic R&E deduction receive no state-level benefit at all under current law.

Frequently Asked Questions

Does Florida have a personal income tax affected by this bill?

No. Florida does not impose a personal income tax. HB 7031 addresses only the corporate income tax, which applies to corporations and financial institutions with nexus in the state at a 5.5% rate.

Why does Florida decouple from certain federal provisions instead of adopting them automatically?

Florida’s conformity statute allows the Legislature to accept the federal IRC as updated each year, or to specify different treatment for particular provisions. Lawmakers often decouple from provisions with a significant state revenue impact, which is the case with several OBBBA changes addressed in this bill.

Is this treatment permanent?

No. Florida’s IRC conformity bill is enacted annually, and the Legislature could choose to adopt some or all of these federal provisions in a future year.

Where can I find the official bill text and analysis?

The Florida House of Representatives’ final bill analysis for HB 7031 is available through the Florida Legislature’s website.

If you have questions about how this legislation affects your Florida corporate tax filings or other state and local tax matters, contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

Governor Ron DeSantis signed Florida’s omnibus tax bill on June 29, 2026 (H7031E, S.S. 2026E). Most provisions take effect July 1, 2026, though several carry different effective dates noted below. The bill touches property tax, gaming tax, insurance premium tax, and tax credit programs, but the sales and use tax provisions are the ones most likely to affect day-to-day compliance for Florida retailers, contractors, and residents. Here is what changed.

Refund Provisions

State university and college contractors. Sales of tangible personal property to contractors working directly for, or as agents of, a state university or Florida College System institution are now exempt from sales and use tax when that property becomes part of public works owned by the institution. In practice, this exemption applies as a refund of tax already paid, not a point-of-sale exemption. The Florida Department of Revenue must issue the refund within 30 days of formally approving the taxpayer’s application.

Home hardening products. Through June 30, 2029, homeowners can claim a sales tax refund of up to $500 per residence for qualifying home hardening products, including impact-resistant doors, garage doors, and windows. To qualify, the property must carry a homestead exemption and have a just value of $700,000 or less. Applications are accepted between July 1, 2026, and September 30, 2029.

Sales Tax Holiday Changes

Back-to-school holiday moves off the calendar month. The annual back-to-school sales tax holiday no longer runs for the full month of August. It now runs from July 20 through August 20. Eligible purchases remain clothing up to $100, school supplies up to $50, and personal computers up to $1,500.

New holiday for hunting, fishing, and camping gear. A new sales tax holiday runs from September 1 through December 31, 2026, covering certain firearms, ammunition, bows, fishing gear, and camping supplies.

Exemptions

Admissions. An exemption is established for admissions to Association of Tennis Professionals’ ATP Masters or Women’s Tennis Association WTA tournaments until July 1, 2029.

Propane Tanks. An exemption is established for propane tanks with a capacity of 20 lbs. or less.

What Florida Taxpayers Should Do Now

Retailers should update point-of-sale systems ahead of the shifted back-to-school holiday dates and the new hunting, fishing, and camping holiday. Contractors working on state university or college projects should review whether projects with state universities will qualify for the new refund. Homeowners investing in storm-hardening upgrades have a multi-year window to claim the $500 refund, but the application must be made before September 30, 2029. We expect the Florida Department of Revenue will issue additional guidance related to these new exemptions and taxpayers should monitor the Department’s website for further guidance.

If you have questions about how these sales and use tax changes affect your business, contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.