HBK CPAs & Consultants (HBK) continues to win recognition as one of America’s leading accounting firms—and not just by size but by the quality of the work. The latest evidence is the USA Today 2025 list of “Most Recommended Accounting Firms.” The study separates firms into two categories: tax and accounting; HBK earned its way onto both lists.

As explained in the February 4, 2025 USA Today article announcing the lists:

“Last summer, Statista, an independent market research institute and statistics platform, conducted broad surveys of tax and accounting professionals and their clients. Peers were asked for up to 10 tax or accounting firms they would recommend if their company couldn’t take on a client. Clients were asked for up to 10 tax or accounting firms based on their professional experience over the past three years.

“The results – the top 100 tax and top 100 accounting firms – are based on the total number of recommendations from peers and clients and additional company data. To be considered, companies need a minimum number of recommendations for their tax or accounting services.”

The lists of the top 100 in each category, tax and accounting, were based on the total number of recommendations from peers and clients. The firms were not ranked, simply listed. HBK has enjoyed recognition in numerous studies over the years, including its current rank among the nation’s Top 50 accounting firms by Accounting Today magazine and as one of Forbes magazine’s “Best Tax and Accounting Firms.”

Governor Josh Shapiro presented his annual budget address on February 4, 2025. His fiscal year budget proposal of $51.5 billion represents a nearly $4 billion increase over the 2024-2025 fiscal year budget. The Governor intends to fund the budget from the state’s Rainy-Day fund and increased tax collections.

The main tax-related measures in the Governor’s proposal include:

• Reducing the Corporate Net Income Tax by 0.75% each year to reach 4.99% in 2029 two years ahead of the scheduled reductions that were part of the 2022 budget under former Governor Wolf.
• Adopting uniform filing requirements (combined reporting) for Pennsylvania Corporations effectively eliminates the “Delaware Loophole” whereby large businesses shift income outside the Commonwealth for tax purposes.
• Eliminating taxes on financial institutions including the bank and trust company shares tax, mutual thrift institutions tax, and private bank tax.
• Regulating skill games including video gaming terminals and imposing a 52% tax on the gross terminal revenue. The governor’s office estimates that 70,000 terminals in Pennsylvania can be regulated and taxed.
• Legalizing marijuana on July 1, 2025 and imposing a 20% tax on wholesale cannabis.

Republicans in the Pennsylvania Senate were critical of the proposed budget, including the 7% increase. Several republicans stated that the money is not there to fund the budget and approval of this budget will ultimately lead to higher taxes in Pennsylvania.

If you have questions on State and Local Tax matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

If you are a winery owner, you may have questions such as, “Do we need to hire more labor?” “Should we buy more equipment?”, “Do we have enough cash to buy equipment”, or “Should we take out a loan?”  To begin to answer these questions, winery owners should consider Key Performance Indicators (KPIs).

KPIs are assessments which can be used to provide insight into the health of a business. They can be quantitative or qualitative. Quantitative KPIs for wineries include labor-to-sales ratio, cash flow to capital expenditure ratio (CAPEX ratio), and the debt service coverage ratio. Qualitative KPIs include customer satisfaction and customer traffic.

Quantitative KPIs measure performance by the numbers, such as the labor-to-sales ratio. This ratio is calculated by dividing the labor cost by the total sales within a period. The ratio shows how much labor dollars went into producing those sales, and the lower the ratio, the more efficient the labor. Determining what your winery labor-to-sales ratio should be requires judgement and consideration and depends upon the size and location of the winery. If your labor-to-sales ratio seems too high, some ways to improve it would be to make sure employees are receiving enough training, making sure employees are properly scheduled, and considering if you have enough employees so that you can help prevent burnout. Direct labor is a crucial part of total production costs, directly affecting metrics like the cost of goods sold (COGS) and overall profitability.

Wineries should also keep and maintain adequate equipment that laborers need to operate the winery. While making sure employees have the equipment they need, winery owners should consider the CAPEX ratio, which measures if the company has enough cash flow from operations to be able to purchase equipment. The ratio is calculated by the cash flows from operations divided by the amount of fixed assets purchased in a period. A ratio of less than 1.0 means the fixed asset purchases exceeded cash flow from operations. If the ratio is more than 1.0, the n all fixed asset purchases were able to be funded by cash flow from operations. Determining the acceptable CAPEX ratio depends on the goals of the winery owner. If the goal is to grow the company, then a lower ratio may be desired as equipment and assets are purchased to expand operations. On the other hand, if the owner desires to pay down debt and has enough assets to meet current operational demand, then a higher ratio would be appropriate. Paying down debt would also affect the debt service coverage ratio. The costs incurred in purchasing equipment significantly impact financial planning and should be carefully tracked.

The debt service coverage ratio divides earnings before interest, taxes, depreciation, and amortization (EBITDA) by current liabilities to measure if earnings were enough to cover current payment obligations. A ratio of 1.0 indicates the company has earned $1 for each $1 of current liabilities. If you have a low ratio, below 1.0, it may indicate you aren’t generating enough cash to cover current payment obligations, and it would probably be best to wait until the ratio increases to take on any additional debt. The ratio can be raised by increasing income or decreasing debt.

While it is easy to focus on the numbers such as the debt service coverage ratio, it is also important to focus on qualitative KPIs such as customer satisfaction and customer traffic. Having higher customer satisfaction would draw in more repeat customers and additional customers from word of mouth. Bringing in more repeat customers and additional customers would help improve the previously mentioned Quantitative KPIs. Hosting live music, entertainment, and events in a tasting room or on the winery property can draw in additional traffic and provide a better experience to customers. Customer satisfaction can be measured using short surveys provided to customers on site. To increase customer satisfaction and traffic, wineries should focus on service, the purchasing experience, and appearance.

The service a customer experiences depends heavily upon the person serving the customers. Having a server knowledgeable about the wine, food pairings, and all the offerings goes a long way in helping them interact with customers in a positive way. Make sure to identify the popular wines and offerings and have enough on hand to serve customers to ensure a positive purchasing experience. Customers won’t be as happy if you run out of their favorite wine. The appearance of the winery and tasing room also contributes to customer satisfaction. Most customers are at the winery to unwind, relax, and drink wine while socializing. The atmosphere of the tasting room should lend itself to these qualities.

KPIs can assist winery owners with operating their winery. They can help guide decision making by providing insight into the financial performance of the winery. Quantitative KPIs provide numerical measurements and can help make decisions related to employees, equipment, and loans. Qualitative KPIs focus on nonnumerical data such as building positive experiences with customers. If you are looking to improve the results of your winery, using KPIs such as these can guide you to achieve better performance.

To contact a member of HBK Manufacturing Solutions, please contact us at 330-758-8613 or manufacturing@hbkcpa.com

Ideas for developing young leaders for your construction business.

Developing young leaders in any business is important for ensuring future growth and success. Labor shortages, advancing technology, and evolving project demands make it even more crucial for today’s construction companies. Following are key reasons to foster new leadership, ways to attract individuals who can become your next generation leaders, and strategies for developing the leaders your company will rely on for its future growth and success.

Why commit to developing new leaders

It is critical to develop new leaders to ensure the future success and sustainability of your construction firm. Some reasons to commit to developing new young leaders for your business:

• Succession Planning: An aging workforce, including within company leadership, is a common concern among construction businesses. Current management must commit to developing young talent to ensure seamless leadership transition, maintain operational continuity, and minimize disruption. Investing in young leaders creates a pipeline of professionals aligned with the company’s vision and culture, leaders capable of sustaining growth and overseeing a workforce equipped to tackle existing and future challenges.
• Innovation and Adaptability: Younger leaders can bring your company new perspectives and creativity, a fresh look at processes and practices. They tend to be open to adopting new technologies, such as aspects of artificial intelligence, to improve operations and outcomes. Change is essential to growth in our rapidly evolving industry, and young leaders are more willing to embrace and implement changes.
• Engaged Employees: Young employees who see an opportunity to develop into leaders in your company will be more engaged, more enthusiastic, and eventually make your company more successful. Leadership development opportunities boost morale, serve to retain your most productive workers, and build loyalty among employees. They signal that the company values their employee’s growth as well as the company’s, creating a positive and motivated work environment.
• Industry-Specific Challenges: Young leaders, equipped with the right training, can help you address and resolve your most pressing challenges, including labor shortages and a need for better project management. They can bring efficiency, better planning, and improved collaboration to your teams.
• Stronger Client Relationships: Younger leaders are more likely to be familiar with and understand today’s clients and their demands, including sustainability and innovation. Their ability to engage with clients on these levels can strengthen your firm’s relationships and enhance your reputation.

Attracting potential new leaders

Few college graduates joining the workforce today consider applying to a construction company because they are not tuned in to the leadership roles and opportunities that exist in the industry. Moreover, few construction companies are fortunate enough to hire young, talented people and keep them around long enough to make a difference because they don’t offer a clear path to a leadership role or don’t provide the education and training required to develop leadership skills. 

Attracting more college students to the construction industry requires a multi-faceted approach to addressing the image of the industry and the career opportunities it offers. Some effective strategies for attracting qualified candidates for leadership roles in your organization:

• Highlight Your Firm’s Career Growth Opportunities: Emphasize the potential for moving into a leadership or management position, such as project manager or company executive. Make candidates aware of the variety of career paths they can follow—engineering, architecture, environmental sustainability, technology integration.
• Showcase Your Use of Technology: Demonstrate your commitment to modern construction practices and tools like Building Information Modeling (BIM), drones, robotics, 3D printing, and green construction. Demonstrate how tech-savvy graduates can meaningfully impact your business and enjoy financially and personally rewarding careers.
• Detail Your Training and Development Programs: Talk with candidates about apprenticeships and mentorship programs you offer. Tell them about the certifications and credentials they can earn that will help them advance their careers.
• Change Outdated and Inaccurate Perceptions about the Industry: Consider a marketing campaign that corrects outdated stereotypes of construction as solely manual labor. Demonstrate how construction professionals shape communities and contribute to infrastructure in ways that substantially improve people’s lives.
• Reach Out on Social Media: Share details of particularly innovative projects and insights on what made certain projects successful. Use videos to convey what a day in the life of a construction leader is like. Ensure your content resonates with younger potential employees.

Strategies for developing new leaders

If you apply good hiring practices consistently over time, you should find more qualified candidates. But once you get them in the door, it is even more important to continuously train and develop them into the leaders you want them to become. Leaving new hires to figure things out on their own is not an option in today’s business environment. If you are really interested in developing future leaders (and how could you not be?), you need to invest time and resources to help them develop the skills and mindsets they need to succeed. Some strategies for developing young leaders:

• Mentorship: Assign experienced leaders to mentor young professionals, to share their knowledge and skills.
• Leadership Training: Aspiring construction firm leaders need valuable skills like communication, decision-making, and project management. Consider bringing in experts from outside your organization to improve your organization’s culture and provide professional leadership development training to the young professionals in your organization.
• Cross-Functional Exposure: Have your prospective new leaders gain broad industry experience by working in various departments. That will help them acquire a holistic understanding of your business and the construction industry and learn where they fit in best.
• Use of Technology: Equip your aspiring leaders with industry-leading technology, then ask them for their feedback on how that technology can be applied for greater efficiency or improved outreach, all the ways they see to improve your success in the marketplace.
• Encourage Innovation: Ensure that your organization’s culture is one that inspires and empowers young professionals to share and implement new ideas. Encourage them to come up with their own ideas on how to better market your brand and use technology in your business. 
• Celebrate successes: Give proper recognition to those who come up with effective new ways of doing business or perform particularly well. Recognizing them will encourage other team members to come up with new and innovative solutions.

By investing more in developing young leaders, your construction company will recreate your culture in a way that positions itself to thrive in an industry that demands resilience, uses technology to its advantage, and needs forward-thinking leadership. HBK High Performance can help you train and develop the young people in your organization to be better leaders. For more information, call me at 215-367-3032 or contact me by email at mrwolf@hbkcpa.com.

On January 23, the U.S. Supreme Court said it would allow the U.S. Government to implement the Corporate Transparency Act (CTA), which will require millions of U.S. businesses to file information to the U.S. Treasury on their “beneficial” owners, that is, individuals who directly or indirectly own or control those companies.

In so ruling, the justices stayed an injunction blocking the enforcement of the CTA, allowing the government to move ahead with enforcement of the law while its merits are being debated in the U.S. Court of Appeals for the Fifth Circuit, which has scheduled oral arguments on the issue for March 25.

Concurring with the decision, Justice Neil Gorsuch said that he would “go a step further and, as the government suggests, take this case now to resolve definitively the question whether a district court may issue universal injunctive relief.” Justice Ketanji Brown Jackson dissented, saying she didn’t see a need for intervention because the government hadn’t proven exigency.

Under the law, most incorporated business entities that existed before 2024 had until January 13 to file their ownership and control information with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). That bureau estimates 32.6 million U.S. businesses will need to disclose beneficial ownership information (BOI) or face penalties, as will an estimated five million new businesses incorporated annually.

Judge Amos L. Mazzant III of the US District Court for the Eastern District of Texas blocked enforcement of the CTA nationwide on December 3. That order was lifted on December 23 by the motions panel of the Fifth Circuit Court of Appeals. Enforcement was again halted when a different Fifth Circuit panel reinstated the injunction on December 27. On December 31, the U.S. Department of Justice asked the Supreme Court to weigh in on the matter.

FinCEN said after the injunction was reimposed that BOI can still be disclosed on a voluntary basis. If disclosure becomes mandatory, a business would face a $500 per day fine for knowingly failing to file. As of December 3, about 10 million businesses had submitted BOI, according to FinCEN information.

Tom O’Saben, a director of tax content and government relations at the National Association of Tax Professionals, told Bloomberg Law the group has advised that businesses should err on the side of caution by filing their BOI.

HBK is not a law firm and cannot provide legal advice to clients. We encourage business owners to consult with your attorneys regarding their CTA reporting requirements.

Watch on demand here.

As Cybersecurity concerns continue to impact businesses large and small, the individuals and teams who oversee their companies’ efforts to protect their data from cyber threats face many challenges, including determining the effectiveness of their cybersecurity approaches and reporting on those approaches to management.

IT security metrics enable organizations to prioritize projects, justify investments, demonstrate compliance, and work effectively. In our January 22 webinar, we will discuss what and how frequently to report to management and how to include IT security metrics in your presentation.

Join HBK Risk Advisory Services Senior Director Bill Heaven, CPA/CITP, CISA, CISM as he provides insights on cybersecurity reporting and how the use of IT security metrics can support your efforts to align your security function to your business.

Contracts are essential for anyone involved in the construction industry, from contractors, subcontractors, and project owners to accounting and legal professionals. A contract serves as a foundation for a construction project outlining the responsibilities of each party involved, the scope of work, timelines, and the payment terms. The appropriate contract for a particular construction project can help manage risks and expectations, and support communication and project execution. Contractors and owners have various types of contracts to choose from, each with relevant features and suitable applications depending on the project involved.

Cost-Plus Contracts

The cost-plus contract is a commonly used contract for construction projects. It states that the customer will reimburse the contractor for actual costs plus a fee, which can be a percentage of the costs or a fixed amount. Simple enough, but cost-plus contracts exist in a variety of forms, including (but not limited to):

• Cost-plus percentage fee
• Cost-plus fixed fee
• Cost-plus incentive fee
• Cost-plus guaranteed maximum price
• Cost-plus with fixed labor rates

The contractor and owner must agree on which form of cost-plus contract is best for the project. Owners often find the advantages of cost-plus jobs appealing, and contractors enjoy assurances, especially as related to how and what they will be paid. Advantages can include:

• Flexibility for changes and/or unforeseen conditions that arise during construction that might not have been considered during the initial planning phase of the project, spikes in project costs, changes in industry standards, or changes in federal, state and local laws and regulations.
• Transparency and reduced risk of disputes, as all costs are documented, and the owner can see exactly where money is being spent.
• A focus on quality, as the contractor is not incentivized to cut corners to stay on budget.
• A potentially earlier start time, as not all details need to be worked out to begin the project (especially advantageous for a time-sensitive project). However, care needs to be taken for projects that do not have all details.

While there are many advantages to cost-plus contracts, there are also disadvantages that should be considered by the contractor and owner, including:

• Cost and timeline uncertainty, as one of the main drawbacks is the lack of a fixed price. Owners can wind up paying more than they had anticipated and/or a project might take longer than the owner expects.
• Less motivation for the contractor to manage the budget, as all costs are to be reimbursed with a fee.
• Administrative burden to have meticulous documentation of all expenses, as the contractor must report all expenditures to the owner, and the owners must review and track all expenditures to ensure the contractor is staying within the expected project scope.
• Potential disputes over allowable costs even given the increased transparency, as the owner may consider certain costs unreasonable while the contractor is just expecting payment for work performed.
• Project performance risk, as the owner is responsible for covering all actual costs plus the contractor’s fee, even if costs are more than what the owner expected.

Without proper consideration and attention by the contractor and owner, such disadvantages can result in a failed project.

Custom home contractors and commercial building projects use cost-plus contracts regularly as their projects can be complex and have an uncertain scope. Even when the contractor and owner agree on a budget and plans for the project, it is not uncommon for the owner to have significant change orders to meet their vision for the project. Change orders can easily increase a budget by two or three times.

Lump-Sum Contracts

A lump-sum contract is an agreement that states a fixed price for the entire project where the contractor has a well-defined scope to allow for accurate estimation of job costs. Even though the owner may have a well-defined scope and has a fixed price for the project, there can still be situations or unexpected conditions that require the need for change orders.

Benefits from various aspects of a lump-sum contract:

• Predictable costs, as the total cost of the project is agreed to by the parties at the start of the project, thus specifying the owner’s financial commitment.
• A simplified bidding process, as the owner can send a request for proposal (RFP) with specific details, then compare proposals and decide which is best for the project.
• Significantly less administrative burden than a cost-plus contract, as the owner does not need to track expenses closely or require detailed documentation from the contractor.
• Incentive for contractors to complete the project within the agreed-upon budget and timeline, that is, to manage the project efficiently.
• Reduced financial risk to owners, as the contractor bears the risk of any cost overruns and the owner is protected from unexpected cost increases, supply chain issues, labor shortages, or even contractor mistakes.

With such advantages, why wouldn’t an owner insist on a lump-sum contract? The disadvantages to this contract can be significant: a project that ends without meeting the expectations of the owner, damage to the contractor’s reputation, and even having the contractor take a loss on the job. Disadvantages include:

• Change orders will increase the overall job cost for the owner, potentially lead to additional time to finish the project, and can result in disputes if not properly reviewed and approved.
• All risks borne by the contractor for cost overruns, which can occur with any construction project due to unforeseen issues and costs exceeding estimates, resulting in decreased profitability or even recognition of a loss.
• A potential for less-than-expected quality due to the contractor working to meet the project deadlines or to cover unexpected cost overruns, which may cause the contractor to cut corners or use lower quality materials to maintain the anticipated profit margin and timeline.
• The potential for higher initial bids due to the contractor building in contingency funds for any potential cost overruns.

Lump-sum contracts work well for projects with clearly defined scopes, specifications, and timelines, such as municipal projects, bridge contractors or potentially planned communities. For planned communities, there are a set number of homes for customers to choose from, let us consider 5 as an example. The contractor can clearly define the scope of each of the 5 homes, the contractor can charge a fixed price for each variation of home to be built as they will be the same except for minor differences that can easily be accounted for in the project cost. For municipal projects or bridge contractors, there is a clearly defined scope of the project and normally a penalty (or default provision) for completing after the agreed upon project completion date, thus, the contractor is incentivized to complete the project on time.

Time and Materials (T&M) Contracts

In a T&M contract the buyer pays for the actual time spent on the job by the contractor’s team and for the actual materials used in the project. Often there is an agreed-upon hourly rate the contractor’s team based on the skill involved. In general, the owner bears the risk due to the uncertainty of the work to be performed and what the contractor might encounter doing the work. On the other hand, the contractor need not be concerned about underbidding or underestimating the job and can be confident all hours worked, and materials used, will be paid for by the owner.

A T&M contract can be advantageous to both contractor and owner if they are scrupulous about the details of the job. Advantages include:

• Extreme flexibility to adjust the scope, the tasks involved, and the deliverable, as the work progresses without concern for changes, and if unforeseen problems arise, the contractor and the owner can quickly adapt.
• Lack of concern about the contractor cutting corners, as the contractor can allocate the correct resources or trade skills to the project.
• The owner’s option to halt the work or adjust the pace based on their own budget, or if they decide, to pivot the project completely and find a new contractor.
• A more immediate start time, as a finalized cost or detailed estimate is not always needed, which can be especially valuable when time is of the essence, allowing the work to be completed in a timelier manner.

As with any other contract, the disadvantages of T&M contracts can sink a job for an owner or leave the owner regretting ever considering it, such as:

• No fixed price, leaving the project exposed to higher-than-expected costs, taking longer than anticipated, or an inability to manage a predetermined budget.
• A lack of incentive for the contractor to be efficient, as the owner is paying for all time and materials involved.
• Difficulty obtaining financing due to the lack of an estimated price makes it riskier for a lender.
• A high potential for disputes between the contractor and owner regarding the hours charged and the materials used, requiring the contractor to maintain meticulous records and to be transparent with time tracking and material purchases.

T&M contracts work well with jobs where the scope, timeline, or materials may be difficult to define at the onset of the job. This type of contract generally works well for renovation and remodeling, repair and maintenance work, specialized building or installations, or emergency and disaster recovery jobs. For the project to be a success for the contractor and the owner, they must collaborate closely, communicate regularly to review progress on the job and the spending involved, and work toward avoiding budget overruns and inefficiencies.

Unit-Price Contracts

Payments on unit-price contracts are based on the contractor’s pre-determined price for the unit of work involved, for example a cubic yard or square foot. The project cost is calculated by multiplying the number of units needed by the agreed-upon unit price. These contracts can have advantages similar to the other contracts, which can include:

• Increased flexibility, as the contract is based on the unit price of the work and is easier for a contractor to adapt to unforeseen circumstances or conditions, such as more excavation or materials being required.
• More accurate and transparent costing and budgeting, as each unit of work has a prearranged price and there is a more predictable unit cost.
• An incentive to the contractor for creating efficiencies to complete the project on time, or ahead of schedule, as the payment of work is directly tied to the number of units completed.
• A simplified bidding process for contractors and owners, as the bids reflect an established unit price.

Although the advantages make this type of contract appealing, the disadvantages, as with any contract, must be reviewed carefully to make the best contract decision:

• The potential for unusual or unexpected fluctuations of material price increases to impact the agreed-upon unit price leading to renegotiations of the unit price. Depending on how the contract is written, this can saddle the owner with an unexpected budget increase, or the reverse, leave the contractor to eat the increase in costs.
• A high risk of cost manipulation, where the contractor may intentionally overstate the quantity of units to inflate the revenue earned, unless properly monitored or audited.
• Measuring and verifying the units of work to determine progress can be difficult for the owner. Generally, owners hire a third party that can be relied upon to certify quantities completed, but the third party can be an additional cost and potentially delay the project while the third party verifies the units.

Unit-price contracts work well for heavy highway paving, excavation and earthmoving, pipeline construction, and railroad construction. Projects based on unit-price contracts are successful when the project is well defined, but quantities can be uncertain or variable and may not be known until the work begins or the project evolves. These contracts help to mitigate the risk of underestimating or overestimating the work and are useful for unforeseen site conditions, weather, or geological surprises.

Conclusion

Employing the right contract is crucial to ensuring the success of a project. Owners and contractors need to review a project thoroughly to determine which contract is appropriate as each type has its advantages and disadvantages. The project size, flexibility of changes, and the level of risk each party is willing to assume must be reviewed thoroughly or a project will fail for the owner, contractor or both parties. On the other hand, selecting the correct contract can lead to better budgeting, fewer disputes, and in the end, a successful project.

On November 25, 2024, President-elect Donald Trump announced his intention to impose tariffs on Canada, China, and Mexico. The President-elect stated these tariffs would be one of his first executive orders after being inaugurated, and he would impose a 25% tariff on all imports from Canada and Mexico, and up to a 100% tariff on all imports from China. This article will explain what a tariff is, examine what goods the U.S. imports from Canada, China, and Mexico, discuss the potential effects on manufacturers, and provide options to help manufacturers prepare.

What is a tariff?

A tariff is a tax imposed by a government on imported goods. This tax is paid by the American company importing foreign goods. When a country puts a tariff on an imported good, the intent is to protect domestic industry from international competition for a strategic purpose. The protection of the less competitive domestic industry causes an increase in the cost of that product making the foreign goods more expensive. The increased cost of protecting a domestic industry is paid for by all other consumers and businesses of the importing country.

What goods do the United States import from Canada, China, and Mexico?

Per the U.S. Census Bureau, Canada, China, and Mexico are the United States’ largest trading partners and account for about 40% of all imports. Major imports from Canada include crude oil and natural gas, machinery, lumber, and iron. The U.S. is greatly dependent on Canada to meet our energy needs. Additionally, about 25% of all lumber consumed in U.S. construction is imported from Canada. Major imports from China include electronics (smartphones, laptops, tablets, semiconductors, etc.), toys, and lithium batteries. Almost every single American has a smartphone, but no tech company manufactures them domestically. Major imports from Mexico include vehicles (including parts and equipment), electronics and appliances, crude oil, fruits and vegetables, and beer. Not only does the U.S. import a significant number of cars and trucks (and related parts) from Mexico, but many of the top U.S. automakers have production facilities in Mexico that ship into the U.S.

What will the effects be on manufacturers and how can you prepare?

With nearly half of all U.S. imports being affected, no industry will be immune from the impacts of the tariffs. Transportation, shipping, energy, construction, food, electronics, communications, and many other sectors will be impacted. The tariffs and supply chain restructuring that would follow will lead to many challenges for manufacturers including increased costs on both domestic and foreign goods at all stages of production. Manufacturers should review their supply chains to evaluate direct vulnerabilities to tariffs on imports from these countries. Manufacturers should also consider identifying domestic or alternative foreign suppliers for these goods. If stockpiling goods is an option, manufacturers should consider evaluating the cost/benefit of procuring goods from these countries now before the tariffs are put in place. Alternatively, manufacturers could consider increasing the safety stock of their most critical imported components in case of supply chain disruption or price volatility. To reduce price volatility, manufacturers could consider negotiating long-term contracts with fixed pricing or exploring bulk purchasing options with their suppliers.

The most immediate impact of the tariffs will be cost increases on nearly every good sold in the U.S. which will disrupt production and send ripples through the supply chain. Manufacturers will need to evaluate their options quickly as Trump has pledged that enacting tariffs would be one of his first executive orders upon taking office. This is before considering that Canada, China, and Mexico have all indicated they would retaliate with tariffs against U.S. exports if President-elect Trump followed through on his campaign pledge and recent announcements to impose tariffs. The situation is still developing and there will surely be more to follow.

To discuss the Trump tariffs and strategies for your company, contact a member of HBK Manufacturing Solutions at 330-758-8613 or manufacturing@hbkcpa.com.

Section 280E of the Internal Revenue Code (§ 280E) poses significant challenges for cannabis businesses by prohibiting them from deducting ordinary and necessary business expenses due to the federal illegality of marijuana. In simple terms, this means cannabis businesses can only deduct cost of goods sold (COGS). (Some states, including New Jersey, have decoupled from the IRS and allow the deduction of all ordinary and necessary business expenses for state income tax filings.)

Impact of IRC § 280E

Filing a federal tax return in accordance with § 280E can result in significant tax burdens, as demonstrated in the charts below. It can result in negative cash flow for otherwise profitable businesses. Hardest hit by § 280E are dispensaries.

According to Brotherly Bud (https://brotherlybudnj.com) dispensary co-owner Matthew Sirois, “As a small, family-owned dispensary, the burden of 280E is crushing. While we operate legally under New Jersey’s state laws, we’re treated like criminals under federal tax rules. We can’t deduct ordinary business expenses like rent, utilities, or employee wages—costs that every other small business takes for granted. This makes it nearly impossible to reinvest in our business, support our staff, and compete in the market. We’re paying tax rates that are excessively high and for a family-run operation, that’s not sustainable. It is deeply disheartening to work so hard to follow the rules and still be penalized simply because federal law hasn’t caught up with state progress.”

IMPACT ON § 280E FOR CORPORATIONS

IMPACT OF § 280E FOR PASSTHROUGH ENTITIES

Until cannabis is rescheduled to Schedule III or below, or descheduled, operators have a few options when filing their returns:

1. Apply § 280E using the normal inventory rules.
2. Apply § 280E using the special § 471(c) inventory rules for small businesses. This may require filing Form 8275-R to appropriately disclose the position.
3. Do not apply § 280E, relying on your tax attorney’s opinion that the disallowance rule is not applicable to you under various legal theories. This would require filing Form 8275 to appropriately disclose the position.

IRC § 471: a Potential Strategy

What is included in COGS is relatively simple for retailers, but more complex for cultivators and manufacturers. We recommend they consult a cannabis industry-savvy tax advisor.

IRC § 471(a) and the regulations thereunder set forth specific rules regarding inventory. Cultivators are generally required to use the full absorption method¹, while dispensaries use landed cost². Because the full absorption method permits the capitalization of various indirect costs into inventory, cultivators have that as a tax advantage over dispensaries in most cases.

Internal Revenue Code § 471(c), introduced by the Tax Cuts and Jobs Act of 2017, has emerged as a potential strategy for small cannabis businesses (those with less than $27 million in revenue) to mitigate the impact of § 280E. Businesses of that size are not required to use the normal inventory rules. Instead, they can report inventories in accordance with the method they use in their books and records, which might not comply with the normal rules under § 471(a). In short, costs otherwise disallowed under § 280E may be treated as inventory then recovered through COGS. 

Brotherly Bud’s Sirois believes this method will at least allow for more flexible inventory methods, including allocating indirect costs (like certain rent or utilities) to COGS. “We are forced to get creative as normal inventory rules would result in a devastating tax bill,” he said.

Treasury Regulations indicate that § 471(c) cannot be used to circumvent § 280E³, but these regulations have been viewed as dubious by much of the tax community. Additionally, the Treasury’s deference in court has been cast in doubt after the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo⁴. In any case, any time a taxpayer takes a position contrary to the regulations they must file a Form 8275-R to mitigate the risk of accuracy-related penalties.

In 2024, some prominent operators took the position, with the support of their attorneys’ opinion letters, that they have “reasonable basis” to believe § 280E is not applicable to their specific operation. Reasonable basis is key to protecting the taxpayer from potential penalties for underpayment of taxes or accuracy-related penalties related to negligence, disregard of rules or regulations, substantial understatement of income tax, or a substantial valuation misstatement Those companies filed amended tax returns without the application of 280E and received significant refunds. There is no guarantee the companies will be able to keep these refunds. And if they have to pay the IRS back because the IRS doesn’t accept their tax position under audit, they will also have to pay interest on the refund.

Taking the position that § 280E is not applicable requires filing Form 8275. Obtaining an opinion letter does NOT guarantee the Internal Revenue Service will accept the taxpayer’s treatment of the expense. The benefit of obtaining the letter is the penalty protection. As well, the attorney letters may not be an ideal option for everyone as they can be expensive. It may be worth determining the savings from taking the position and comparing it against the cost. 

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[1] Treas. Reg. § 1.471-11.

[2] Treas. Reg. § 1.471-3(b).

[3] Treas. Reg. § 1.471-1(b)(6) “ . . . However, an inventory cost does not include a cost that is neither deductible nor otherwise recoverable but for paragraph (b)(5) of this section, in whole or in part, under a provision of the Internal Revenue Code . . . “

[4] 603 U.S. 369 (2024).

The manufacturing industry in the United States is a critical part of the nation’s economy. This industry is important due to job creation, increasing innovation, and exports. Despite this importance, manufacturers face complex issues, including skilled labor shortages, supply chain issues, technological advancements, new regulations, and changing global conditions.

Talent Shortages and Workforce Development

Manufacturers continue to face skilled labor shortages. Some predict that within the next decade, U.S. manufacturers could require nearly 4 million new team members but struggle to fill those positions due to an expanding talent gap. This is based on the number of baby boomers retiring and a shortage of individuals entering the industry.

Manufacturers will need to address this skills gap, likely with a multi-pronged approach. The first step will be to analyze current team members’ skills. Next, manufacturers must provide training to their team to continuously develop and upskill them. The development of higher-level skills will continue to be necessary. This includes technical, digital, and soft skills. Simultaneously, it will be imperative to implement new recruitment strategies that attract highly skilled team members.

Manufacturers should consider collaborating with high schools, local trade schools, and community colleges on curriculum options as well as internship and apprenticeship programs. This is an outstanding way to develop the talent channel but can also support current team members. For instance, offering current team members training in advanced manufacturing and Industry 4.0 technologies including automation, robotic and digital skills, as well as soft skills like leadership and management training can better prepare the workforce to contribute at a high level. Further, this can not only provide the company with a higher-skilled labor force but can also create a sense of loyalty and pride amongst team members who benefit from the company’s investment in them.
Manufacturers can also benefit from federal and state tax credits and incentives for training and hiring programs. One example is the Work Opportunity Tax Credit (WOTC), which incentivizes employers to hire and employ individuals from certain targeted groups.

For manufacturers looking for assistance, HBK can help. For instance, HBK can help with the federal and state tax credit and incentive programs. In addition, HBK has resources to help explore the competitiveness of a manufacturer’s compensation and benefits package to attract top talent. Another HBK company, HBK High Performance, can implement training in leadership and management to help your team members who could benefit from that training.

Supply Chain Issues

Supply chains will continue to remain complex throughout 2025. Material shortages, increased shipping costs, and geopolitical tensions are expected to persist into 2025. Supply chain disruptions that troubled many businesses during the COVID-19 pandemic have lessened but are still seen. Relying on just-in-time inventory strategies or certain foreign suppliers can cause considerable risk, as a single disruption can cease production and lower related revenue. That, coupled with the potential of looming tariffs, will continue to affect the supply chain. Also, the talent gap in the United States is not unique to the United States. Many other countries are experiencing the same issue, which can cause further delays and complications.

Manufacturers have been rethinking strategies related to their supply chain. Shipping delays related to the Longshoremen’s strike and labor shortages in the trucking industry will continue to plague the supply chain. Near-shoring and reshoring are items to options that may lessen the impact of some of these issues.

Technologies like artificial Intelligence, automation, robotics, and digital tools are becoming increasingly important to predict, analyze, and manage these challenges. This allows manufacturers to streamline their supply chain operations in real-time. Certain ERP systems can incorporate these technologies or provide other data to support inventory management and supply chain initiatives. Vertilocity, an HBK sister company, can help manufacturers with their ERP system and data analysis tools that can help you with these issues. HBK Manufacturing Solutions can also support forecasting and analysis needs.

Technological Advancements

There are many areas in which technology will affect manufacturing. Smart manufacturing, cybersecurity, the Internet of Things (IOT), and others will continue to be important to the manufacturing industry.

While technology will continue to play a critical role, it is not a magic bullet; instead, technology should be viewed as one of the critical tools necessary for transformation and growth. Manufacturers who embrace technology solutions will be better equipped to stay ahead of their competition.

However, as mentioned, technology alone will not solve the issues that manufacturers face. The human component continues to be important. Upskilling employees to better work with technology along with establishing a continuous improvement culture will determine how well manufacturers can thrive and meet the requirements of the future. Emphasizing the human element in leveraging technology and the strengths of the organization will help create opportunities for the team. The confluence of innovative technologies, skilled labor, and a forward-thinking strategy is what will allow manufacturers to flourish in 2025 and beyond. Those who can harness these elements effectively will be the ones leading the next phase of the manufacturing revolution.

As mentioned, Vertilocity can help with technology implementation including breaking down data silos, adopting cybersecurity processes, and implementing ERP software. Deploying the most recent innovative technologies is not always as effective as implementing high value pieces that align with your business strategy. This strategy will come from integrated programs that work together rather than single-point solutions.

New Regulations and Changing Global Conditions

The regulatory standards for manufacturers are constantly changing. Adhering to anticipated changes to tax laws, tariffs, and trade policies is becoming complex. Regulations are rapidly evolving. One must look no further than the recent changes with the Corporate Transparency Act to see this. Complying with regulatory requirements is a challenge for small to mid-sized manufacturers that do not have internal compliance teams.

The President-elect has discussed new global trade policies. Other countries have seen governmental changeover in the past year. Countries around the world are experiencing leadership changes and restructuring. The current U.S.-China trade frictions could intensify as a result of the proposed tariffs by the new administration. This would increase the cost of materials for manufacturers. As a result, some manufacturers both domestic and abroad are ordering supplies and materials currently to avoid possible price hikes later.

Conclusion

Manufacturers will face challenges in 2025 and beyond. Addressing work force development, supply chain resilience, innovative technologies and forward-thinking strategies will certainly help manufacturers to succeed. Manufacturers who address these elements effectively and efficiently will be the ones leading the next phase of the manufacturing revolution, or Industry 4.0. With our experienced insights and innovative strategies, HBK Manufacturing Solutions can assist manufacturers to overcome challenges and become the manufacturer of the future. To contact a member of HBK Manufacturing Solutions or one of the companies noted, please contact us at 330-758-8613 or manufacturing@hbkcpa.com.