If you operate retail stores in New York City, Chicago, Seattle, San Francisco, Los Angeles, or Philadelphia, you are already subject to predictive scheduling laws that require you to post employee schedules a set number of days in advance and pay a financial premium when you make last minute changes. Oregon is the only state with a statewide version of the law, and 11 cities in total have local ordinances. Michigan, Connecticut, and Rhode Island have legislation under active consideration.

Most small and mid size retailers in these markets know these laws exist. Far fewer are tracking the actual financial exposure from schedule changes, cancellations, and insufficient rest periods. The penalties are not hypothetical compliance risk. They are a recurring payroll line item that shows up in every pay period where the schedule changes after the advance notice deadline.

New York City’s Fair Workweek Law requires retail employers to post schedules 72 hours in advance. Chicago’s Ordinance requires 10 days. Seattle and San Francisco require 14 days. When a change is made after the required advance notice period, the retailer must pay the affected employee a premium. In Chicago, a same day cancellation triggers a payment of 50% of the scheduled shift’s pay regardless of whether the employee works it. In Seattle, employees who do not get adequate rest between shifts earn time and a half for the short rest shift. These premiums accumulate across every affected employee, every pay period.

Predictive Scheduling Penalties by Jurisdiction

The retailers who manage this best are the ones who treat predictive scheduling compliance as a financial discipline, not just an HR discipline. That means your scheduling software needs to flag any change made after the advance notice deadline and calculate the associated premium in real time. If your managers are making schedule changes manually or through a general purpose spreadsheet, you probably have no visibility into how much you are paying in scheduling premiums each period.

From a tax and accounting perspective, scheduling premiums are wages subject to payroll taxes and should be captured in your payroll system as a distinct pay code so you can track the total cost. If you are not tracking them separately, you cannot measure whether better scheduling practices would reduce the expense which is exactly what these laws are designed to incentivize.

Bottom Line: Schedule change penalties in covered cities are not a legal technicality. They are a real payroll expense. If you operate in any of the 11 covered cities or Oregon, add a distinct pay code for scheduling premiums in your payroll system, start tracking the total, and share the number with your managers. The financial incentive to give earlier notice is built into the penalties. Make sure your team can see what the premiums are actually costing.

The Work Opportunity Tax Credit expired on December 31, 2025. That is the fact. Here is what is equally true: Congress has reauthorized WOTC retroactively after every previous lapse in the credit’s history. If you stop screening new hires now and Congress reinstates it in six months, every employee hired between January 2026 and the reinstatement date who would have qualified is a lost credit forever. You cannot go back and file Form 8850 retroactively after the reinstatement announcement.

WOTC is a federal tax credit for hiring employees who belong to one of ten target groups the government has identified as facing barriers to employment. Those groups include SNAP recipients, veterans, formerly incarcerated individuals, people referred from vocational rehabilitation programs, and individuals who have been long term unemployed. Retail and food service employers have some of the highest qualifying new hire rates in any industry because their labor pools overlap heavily with these groups.

The credit is worth 40% of the first $6,000 in first year wages for employees who work 400 or more hours, for a maximum of $2,400 per employee. For certain categories of qualifying veterans, the maximum credit reaches $9,600. For a retailer hiring 50 new employees per year with a 25% qualification rate, that is approximately $30,000 in federal tax credits per year at the standard rate before any state level WOTC equivalents are counted.

How to Preserve Eligibility During the Legislative Gap

The 28 day deadline is the critical operational detail. To qualify for WOTC (or for the retroactive credit when it is reinstated), the Form 8850 must have been submitted to the SWA within 28 calendar days of the employee’s first day of work. That is a business process requirement that does not care about the legislative gap. If you stop filing the forms now and Congress reinstates WOTC, the employees hired during the gap will not qualify because the 28 day window will have passed.

State Workforce Agencies are currently issuing certifications with ‘pending’ status noting that reauthorization is needed. That is the correct process. Those pending certifications will convert to full certifications when Congress acts. The paperwork filed during the gap is not wasted it is the mechanism that preserves the credit opportunity.

Bottom Line: Do not shut down your WOTC screening process because the credit lapsed. The 28 day filing deadline does not pause during the legislative gap, and Congress has a consistent track record of reinstating WOTC retroactively. Keep screening, keep filing Form 8850 within 28 days of every new hire, and do not give up a credit that may come back in your favor.

The federal Research and Development tax credit under IRC Section 41 is one of the most underutilized provisions available to CPG companies. Most founders assume R&D credits are for technology companies running labs with scientists in white coats. That is wrong. Formulation trials, shelf life testing, packaging performance testing, and production process improvement all qualify if the activity meets the IRS definition of qualified research.

The four part test for qualified research is: the activity must involve technological uncertainty (you do not already know the answer), it must involve a process of experimentation (trial and error, not just execution), the work must be technological in nature (relying on hard sciences, engineering, or biology), and it must have a permitted purpose (developing or improving a product or process). For a CPG brand testing new formulations, running stability studies, or optimizing a production line to improve yield, most of this work qualifies.

The exclusion that trips up food and beverage brands is the style, taste, and cosmetic exclusion. Activities undertaken for style, taste, cosmetic, or seasonal design purposes do not qualify. If you changed a flavor to make the product more appealing, that is excluded. If you changed a formulation to extend shelf life, improve nutritional profile, achieve gluten free certification, or reduce allergen contamination risk, that likely qualifies. The line runs between aesthetic choices (excluded) and technical performance improvements (included).

Qualifying vs. Non Qualifying CPG Research Activities

The financial impact is real. A case study from a $15 million CPG company showed $150,000 in combined federal and state R&D credits from qualifying formulation and process work. For early stage brands with less than $5 million in gross receipts and no more than 5 years of gross receipts history, the payroll tax offset provision is especially valuable: qualifying small businesses can apply up to $500,000 per year of the R&D credit against their payroll tax liability, creating a cash benefit even before the company is profitable.

The OBBBA added another layer: domestic research expenditures can now be immediately deducted in the year incurred rather than capitalized and amortized over 5 years as was required under the 2022 rules. That means a CPG brand doing qualifying R&D can both deduct the expense currently and claim a credit on a portion of it two tax benefits from the same dollars, with proper documentation.

Bottom Line: If your CPG brand is running formulation trials, shelf life studies, or production process experiments and you have not talked to your CPA about the R&D credit, you are probably leaving money on the table. The credit is available on qualifying work you are already doing. The only thing standing between you and the credit is documentation of what you tested, why you tested it, and what you learned.

The Federal Reserve’s 2026 Small Business Credit Survey put a number on something a lot of retail operators already feel: the financing market is tighter and more expensive than it looks from the outside. Among small employer firms that applied for financing in the past 12 months, only 42% received the full amount they sought. Another 36% received partial funding. And 22% received nothing at all.

Retail firms are feeling a specific pressure on top of the general credit tightening. The survey found that 69% of retail businesses reported tariff related cost increases as a financial challenge the highest rate of any sector, higher even than manufacturing at 62%. That is a sector dealing with rising inventory costs at the exact moment that working capital access is constrained. The combination is a cash flow squeeze that is forcing operators to make hard choices between maintaining inventory depth and protecting their bank balance.

The cost of credit picture is also messier than it appears at the point of application. The survey found that 60% of borrowers from online lenders paid more than they expected based on what they were told at origination. Compare that to 37% at small banks and 32% at large banks. The online lending market is faster and more accessible, but the gap between what you are told and what you pay is consistently wider.

Financing Options and What to Watch For

The most practical thing a retail business owner can do before applying for any financing is to make sure their financial statements tell a clear and consistent story. That means reconciling your accounting system, ensuring your tax returns match your reported revenue, and cleaning up anything that looks like a discrepancy between your books and what you are telling a lender. A lender who pulls your tax return and finds income materially different from what you projected is going to reprice the deal or walk away.

Your CPA should be involved before you sign a financing agreement, not after. The interest rate is not the only number that matters. Origination fees, prepayment penalties, personal guarantee requirements, covenant restrictions on distributions and capital spending all of these affect the true cost of the financing and your flexibility to run the business while the loan is outstanding.

Bottom Line: The financing market for small retailers is tighter and more expensive than the headline rates suggest. Know your true cost before you sign, have clean financials before you apply, and get your CPA in the room before you commit to any deal that restricts how you can run your business while you are repaying it.

US retailers lost an estimated $45 billion to shoplifting in 2024. Add employee theft and you are looking at roughly $75 billion in combined shrink losses across the industry. The per retailer picture is just as stark: shoplifting incidents increased 18% per retailer in 2024 versus 2023, and violence or threats connected to those incidents rose 17% at the same time.

Most operators think about shrink as a security problem. The better frame is a financial one. Shrink affects your gross margin directly, it affects your inventory accuracy, it affects your ability to serve customers, and it affects the tax deductions you can claim. The operator who treats it as a line item to manage not just a frustration to absorb is the one who comes out ahead on all of those dimensions.

From a tax perspective, inventory losses flow through cost of goods sold when your physical inventory count reflects the missing goods. If you are not doing physical counts, your ending inventory is overstated, your COGS is understated, and your taxable income is higher than it should be. In plain terms, you are paying tax on profits you never actually made because you did not document the losses.

For losses that go beyond normal shrink a break in, a robbery, a catastrophic loss event there is a separate deduction under IRC Section 165 for casualty and theft losses on business property. That deduction is available in the year the loss is discovered, must be reduced by any insurance reimbursement, and requires documentation like a police report or insurance claim. The deduction is based on the adjusted cost basis of the property lost, not the retail value.

The Real After Tax Cost of Shrink at Different Store Sizes

The technology picture for loss prevention is shifting in a way that also changes the tax analysis. AI driven camera systems, computer vision at self checkout, and electronic article surveillance technology are now available on SaaS subscription models starting below $500 per month. Those subscription costs are fully deductible as ordinary business expenses under Section 162. The capital expense era of buying a $50,000 camera system and depreciating it over 7 years has largely been replaced by a deductible monthly subscription.

Organized retail crime is adding a layer of complexity. The NRF reports that 67% of retailers have encountered involvement by transnational organized crime groups using AI for fraud automation and coordinating theft across channels. These are not random shoplifters. They are operating like businesses, and the losses they generate often happen too fast and in too large a quantity for normal inventory shrink tracking to catch in real time.

Bottom Line: Shrink is a margin problem, a tax problem, and an operational problem and the solution to all three starts with the same thing: accurate, documented inventory counts and a disposal log that records every loss at the time it happens. The tax deduction for your losses is real, but only if you can prove the losses occurred.

September retail sales came in at +0.8%, which most headlines called a win for the resilient consumer. But inflation ran 0.6% the same month, leaving real volume growth at just 0.1%. Consumers spent more dollars and bought nearly the same number of things. That is not resilience. That is inflation doing the math for you.

The bigger issue is where the spending went. Gas prices jumped 9.1% in September, and gasoline station receipts drove almost the entire headline gain. Strip out the pump and month-over-month retail spending was flat. Meanwhile, the category that covers gift shops, specialty stores, and independent boutiques fell 3.0%, the sharpest decline in the entire report. Apparel was unchanged. Sporting goods and hobby stores fell 0.5%. Bars and restaurants, however, rose 7% year over year. Consumers are still spending. They are choosing experiences over products.

Inflation is also reaccelerating. CPI came in at 3.7% year over year in September, up from 3.4% in August. Energy is driving it, but core inflation (excluding food and energy) is still running at 0.3% monthly, which annualizes near 3.6%. Rate cuts are not coming fast enough to matter for Q4. Your cost of goods, operating expenses, and your customer’s purchasing power are all still moving in the wrong direction at the same time.

The October report, released in mid-November, will be the first look at whether this softness carries into peak season. The conditions that produced September’s numbers, falling real incomes, depleted savings, and rising energy costs, are not improving. Plan your Q4 around a customer who is spending more carefully, buying fewer things, and increasingly choosing a dinner out over a gift.

Bottom Line: September retail sales looked solid on the surface. Under it, specialty retail fell 3%, real volume barely moved, and inflation ticked back up to 3.7%. Tighten your open-to-buy, build your markdown budget, and make your store worth choosing over a restaurant.

Forty three percent of CPG companies are reporting gross margin compression of 1 to 5 points from 2025 tariff impacts. That average masks a wide range across different products within the same brand. A can of tomatoes is being hit by 15 to 20% aluminum tariff cost increases. A pouch of the same product might be seeing only 2 to 3% cost increases because polypropylene packaging is less exposed to the current tariff structure. If you are managing your tariff exposure at the portfolio level and not the SKU level, you are making pricing and sourcing decisions on bad data.

The effective China tariff rate as of 2026 is approximately 37.5%, combining a 12.5% forced labor tariff and a 25% Section 301 surcharge, down from a prior peak of 45% after the Supreme Court invalidated IEEPA tariffs in February 2026. The $800 de minimis exemption for Chinese goods was eliminated on May 2, 2025, which means every shipment from China now incurs full tariff charges regardless of value. If any part of your supply chain relies on smaller direct to warehouse shipments from Chinese manufacturers, your cost model needs to reflect full tariff exposure on every shipment.

The pass through math is brutal in price sensitive categories. Research suggests that every 5% price increase triggers 8 to 12% volume decline in categories where consumers have alternatives. For a CPG brand competing against store brands and value tier national brands, a price increase large enough to fully pass through the tariff cost may lose more volume than the margin it protects. The SKU level analysis forces you to make that trade off deliberately by product, not by instinct across the whole line.

SKU Level Tariff Triage Framework

The 18 month supplier contract lock is one of the most underappreciated constraints in the current tariff environment. Brands that want to diversify away from tariff exposed suppliers cannot do so immediately if they are contractually committed. The planning response is to run your SKU level exposure analysis now, identify which SKUs will still be in tariff exposed supply chains at renewal, and begin the sourcing diversification conversation before those contracts come up rather than scrambling when they do.

Bottom Line: Tariff management is not a one time adjustment to your cost model. It is an ongoing SKU level discipline. Build the exposure map for your current product line, identify the high exposure SKUs where packaging or sourcing alternatives exist, and start those conversations now while you have enough lead time to make changes before the next round of cost pressure arrives.

If you sell into grocery, mass, or specialty retail, your retail partners are almost certainly taking deductions from your invoices. Some of those deductions are legitimate promotional discounts you agreed to, co op advertising fees, volume allowances. A meaningful portion of them are not. Industry benchmarks suggest that 10 to 40% of retailer deductions are invalid, duplicate, or preventable. For a $10 million brand, that is between $80,000 and $320,000 in disputed charges sitting in your accounts receivable most of it never recovered.

Total retail deductions typically represent 5 to 15% of gross sales for CPG brands. For a mid size brand doing $10 million in gross sales, that means roughly $800,000 in deductions leaving the business every year. Even at the low end of the invalid deduction range say 10% that is $80,000 in charges you should not be paying. At 40%, it is $320,000. That is real margin leaving your business because nobody is fighting for it.

The accounting treatment matters here too. Deductions that you are disputing are not business expenses and should not be written off. They are contested receivables. The correct treatment is to maintain them in a separate disputed deductions receivable account until the dispute is resolved either the retailer reverses the deduction, you negotiate a settlement, or you make a deliberate decision to write it off as uncollectable. The distinction affects both your income statement and your cash flow projections, and it affects your tax return if the write off is treated as a bad debt.

Deduction Recovery Rates by Dispute Method

The math on investing in a deductions management system is usually straightforward. If your brand is doing $10 million in gross sales and your deductions run at industry average, improving your recovery rate from 31% (manual) to 55% (software) on $800,000 in annual deductions means recovering roughly $192,000 more per year. A deductions management platform typically costs $20,000 to $60,000 annually. The payback period is often measured in weeks, not years.

The disputes that are most recoverable are also the most tedious to fight manually: short shipment claims where your BOL shows full delivery, promotional deductions taken for promotions the retailer did not actually run, duplicate deductions for the same invoice, and deductions taken without a corresponding purchase order or promotional authorization. These are not complicated disputes. They are paper intensive disputes that systems handle better than people do.

Bottom Line: If your brand is writing off retailer deductions as a cost of doing business without disputing them, you are making a deliberate choice to give away margin. Review your deduction aging report this week. Identify what percentage are being disputed and what your recovery rate is. If the answer is ‘we don’t track that,’ you have found a cash flow problem that is hiding in plain sight.

If you run a CPG brand and your gross margin looks strong on paper, there is a question worth asking before you take that number to a bank, a broker, or a potential investor: where is your trade spending showing up on your P&L? For most early stage and mid market CPG brands, the answer is the wrong place. And that means your gross margin is overstated.

Trade spending is the money CPG brands pay to retailers to support distribution slotting fees, promotional allowances, off invoice discounts, co op advertising, and display fees. For a mid size CPG brand, trade spending commonly runs 15 to 25% of gross sales. For brands in competitive grocery categories, total gross to net deductions including promotional allowances can reach 30 to 40% of gross revenue, leaving you with net revenue of 60 to 70 cents on every gross dollar.

The accounting standard that governs this is ASC 606, the revenue recognition standard that applies to most businesses. Under ASC 606, payments you make to your customer (the retailer) are treated as a reduction of the transaction price. That means trade spending is contra revenue, it reduces your top line before you get to gross profit. It does not belong in marketing expense or in SG&A. When you put it there, your reported gross margin overstates what you are actually earning on the product itself.

What Happens When Trade Spending Is in the Wrong Place

Slotting fees deserve a specific mention because they involve a genuine IRS gray area. When a CPG brand pays a grocery chain $15,000 per SKU to place a new product on shelf, that payment creates a multi year benefit the shelf space for the duration of the arrangement. The INDOPCO doctrine, which governs capitalization of expenditures that create future benefits, raises the question of whether slotting fees should be capitalized and amortized rather than immediately expensed. The IRS has not issued formal guidance specifically for slotting fees, and practices vary. This is worth discussing with your CPA before you file.

The practical fix for the P&L is to work with your accounting system to create a contra revenue account structure that properly reflects trade spending above the gross profit line. This requires accruing expected trade spend monthly against gross revenue as it is earned, not after promotional invoices arrive from retailers. Most early stage brands are not doing this, which means their monthly P&L is distorted revenue looks too high early in the month and then drops sharply when deductions come in.

Bottom Line: If your gross margin looks better than your peers and you are not sure why, find out where your trade spending is sitting on your P&L before you share that margin number with anyone. Correcting the classification will lower your reported gross margin, but it will give you a number you can defend to a banker, a broker, or an acquirer and a P&L that actually helps you manage the business.

Retail sales were up 3.3% year over year in March 2026. That sounds healthy until you look underneath the number. Easter calendar shifts inflated the comparison. And the research firm Circana, which tracks actual consumer purchase behavior across mass retail categories, is describing a pattern that the top line number obscures: consumer spending is splitting in ways that should be making your Q4 inventory plan more conservative, not more aggressive.

The pattern that is emerging goes beyond the K shaped recovery narrative that described pandemic era spending. Circana is now calling it a ‘dipping E’ lower income households under strain at the bottom, upper income growth visibly slowing since late 2025, and middle income consumers who are newly cutting discretionary spending in the middle. The three rungs of the income ladder are all moving toward caution, just at different speeds.

The data point that should sit with every retail buyer and merchandise planner is this one: four in ten Americans now demonstrate structurally deal driven or cost conscious purchasing behavior, and 69% of retail executives believe this is a permanent shift, not a temporary inflation response. Customers who trained themselves to wait for a sale, compare prices online before buying, or buy only what is on their list are not going back to impulse buying at full price.

How the Spending Shift Translates to Inventory Risk

The financial implication of getting Q4 wrong is not just a missed sales number. It is a markdown liability. Every unit you buy for Q4 that does not sell at full price before January gets marked down, and that markdown is a margin event that flows directly into your P&L. In a tight margin retail environment, a 10 point markdown on 15% of your Q4 buy is enough to offset a meaningful portion of what looked like a good sales month.

The retailers Deloitte surveyed are responding in two ways: 73% are planning gradual price increases, and 72% are shifting their product mix toward higher margin items. Those two strategies work together in an environment where volume may be under pressure if you are going to sell fewer units, you want the units you do sell to carry more margin. That is a merchandise planning and buying decision, not just a pricing decision.

Bottom Line: Q4 inventory commitments made right now should reflect the reality that consumer demand is softer and more value driven than the top line retail sales numbers suggest. Tighten your open to buy, favor value over depth, and build your markdown plan before you need it rather than after. The financial protection from a conservative inventory plan in a cautious consumer environment is worth more than the upside from a deep buy if the market surprises on the downside.

A federal court has issued a significant ruling against Employee Retention Credit claims grounded in supply chain disruption. In Sevillo Fine Foods v. United States, the court rejected the argument that port congestion and upstream supplier shutdowns qualified a business for the ERC under the partial suspension test. The decision has direct implications for retail and CPG operators who filed ERC claims based on sourcing problems rather than a direct government order shutting down their own operations.

Quick Refresher: The ERC and the Partial Suspension Test

The Employee Retention Credit was available to employers whose operations were fully or partially suspended due to a governmental order limiting commerce, travel, or group meetings. Many businesses that stayed open during 2020 and 2021 but faced supply disruptions argued they were partially suspended because their suppliers were subject to shutdown orders, which prevented them from obtaining the goods or ingredients they needed to operate normally.

The IRS issued guidance in Notice 2021-20 acknowledging a supply chain theory but set a high bar: the supplier itself had to be subject to a government order that suspended its operations, and that suspension had to have a direct effect on the taxpayer’s ability to operate. Indirect or attenuated effects were not enough.

What Happened in Sevillo Fine Foods

Sevillo Fine Foods is a food manufacturer that argued it was partially suspended because port congestion during the pandemic delayed the delivery of ingredients sourced from overseas suppliers. The company built a six-step causal chain from government health orders to port operations to shipping delays to ingredient shortages to its own reduced production.

The court rejected this theory on several grounds:

The causal chain was too attenuated. A six-step sequence between a government order and the taxpayer’s operations does not satisfy the requirement of a direct governmental order limiting the taxpayer’s own commerce.

Advisory directives are not binding orders. The court distinguished between mandatory government orders that actually suspended operations and advisory or recommendatory guidance that did not legally compel any business to shut down. Port operations continued under health protocols, they were not ordered closed.

Operational slowdowns are not partial suspensions. Higher costs, longer lead times, and reduced throughput caused by market conditions, even conditions traceable back to pandemic policy, are not the same as a governmental order limiting commerce. The statute requires an order, not an economic consequence.

The taxpayer’s financial results were inconsistent with the claim. The court noted an internal inconsistency between the company’s claim of a significant operational suspension and its reported financial performance during the same quarters, which the court found undermined the credibility of the suspension theory.

The court also denied the taxpayer’s request to amend its complaint and entered a final order against the ERC claim.

Why This Matters for Retail and CPG Operators

A large number of retail and CPG businesses filed ERC claims under some version of the supply chain theory. Common fact patterns in this industry included:

Ingredient or raw material shortages caused by overseas factory closures. Port delays on imported goods from Asia, particularly for CPG brands sourcing packaging or product components. Supplier warehouse shutdowns that delayed fulfillment of purchase orders. Retail store operators who stayed open but experienced inventory disruptions from closed distribution centers.

Many of these claims were filed based on professional advice that the IRS supply chain framework in Notice 2021-20 supported the position. The Sevillo decision signals that courts are not sympathetic to indirect or multi-step causal theories, even where the supply disruption was real and significant.

What Still Qualifies

Businesses that were subject to direct government orders limiting their own operations remain on solid ground. This includes retailers that were ordered to close or limit capacity by state or local health orders during 2020 and 2021, restaurants limited to outdoor or delivery only, venues prohibited from holding group events, and businesses in states with explicit sector-specific closure mandates.

The key distinction is direct versus indirect. If a government order named your business or your industry and required you to close or significantly curtail operations, the ERC claim is defensible. If your connection to a government order runs through a supplier, a port, or a logistics network, Sevillo makes that claim substantially harder to sustain.

Bottom Line: Sevillo Fine Foods is a significant loss for businesses that claimed the ERC based on supply chain disruption rather than a direct government order. If you received the credit on that basis, now is the time to assess your exposure and explore resolution options before the IRS makes contact.

The IRS released Notice 2026-60 in late September, updating the standard per diem rates for business travel effective October 1, 2026. If your company reimburses employees or owners for travel using the high-low per diem method, and your policy still references the old rates, you are either underpaying your travelers or creating a taxable wage issue.

What Changed

How the High-Low Method Works

Instead of tracking actual lodging receipts city by city, employers can reimburse travelers using a flat per diem tied to whether the destination is on the IRS high-cost list. The full per diem covers lodging plus meals and incidentals. This simplifies bookkeeping significantly.

The per diem is considered substantiated for the amount paid so long as it does not exceed the federal rate. You still need to document the who, where, when, and business purpose of every trip. The per diem covers the dollar amount but never the fact of the trip itself.

The Accountable Plan Requirement

For per diem reimbursements to be tax-free to the employee and deductible to the employer, your plan must meet three tests:

1. Business connection. The expense must be incurred in performing services as an employee.

2. Adequate accounting. Employees must submit records showing business purpose, destination, and dates within a reasonable period (generally 60 days).

3. Return of excess. Any advance paid over the allowable rate must be returned within 120 days.

If your plan fails any of these tests, the entire reimbursement becomes taxable wages subject to withholding and payroll taxes. Many small retailers run informal expense arrangements that technically fail the accountable plan rules. If the IRS audits a travel expense, this is one of the first things they check.

Owner and Self-Employed Rules Are Different

Sole proprietors, partners, and S-corp shareholders who own more than 10% of the company cannot use the per diem for lodging. They must have actual lodging receipts. The per diem for meals and incidentals can still be used. This is a common mistake: an owner reimburses themselves the full per diem including lodging without keeping hotel receipts, then loses the deduction on audit.

The 50% Meal Limitation Still Applies

Even if you reimburse at the federal per diem rate, only 50% of the meals and incidentals portion is deductible to the business under Section 274(n). The M&IE rates are $86 (high-cost) and $74 (all other localities). Half of those amounts, $43 and $37 respectively, are the deductible portion. The rest is a permanent disallowance, not just a timing difference.

What to Do Before Year End

If your business sends buyers to trade shows, sales reps to retail accounts, or ops personnel to distribution centers, this update is directly relevant to your year-end expense reconciliation.

Bottom Line: The IRS raised travel per diem rates October 1. If your expense reimbursement policy still references last year’s numbers, fix it now before year end creates a payroll tax problem or a disallowed deduction on audit.

If you sell across state lines and have been tracking sales tax nexus based on both revenue and transaction count, you need to update your compliance model. As of August 1, 2026, seventeen states eliminated the 200 transaction economic nexus threshold. These states now use only the $100,000 annual revenue threshold to determine whether a remote seller must collect and remit sales tax.

This is actually good news for small volume sellers. If you have been required to register and collect in a state solely because you crossed 200 transactions at low dollar amounts, you may no longer have nexus there. A seller doing 250 small transactions totaling $40,000 in one of these states no longer has a filing obligation. That is a meaningful simplification for businesses with a lot of small ticket online orders that happened to cross the transaction threshold before reaching significant revenue.

The seventeen states that eliminated the transaction threshold as of August 1, 2026 include California, Illinois, Indiana, and Washington, among others. For each of these states, your nexus is now determined entirely by whether your annual sales into that state exceeded $100,000. Review your current registrations and consider whether deregistration is appropriate in states where you have nexus only through the transaction count.

For food and grocery retailers specifically, there are two additional state level changes that require attention. Illinois eliminated its 1% state grocery tax in 2026, reducing the sales tax on qualifying grocery items. Arkansas removed its state level food tax effective January 1, 2026. If you operate in either state, your POS system needs to reflect the updated rate for exempt food items.

Key Sales Tax Changes by State in 2026

The Utah change is the one most likely to catch food retailers off guard. Utah expanded its prepared food and customized food tax to apply to grocery stores and gas stations categories that were previously treated differently from traditional food service operations. If you run a grocery store with a deli counter, a hot food station, or any customized food orders, those sales may now be subject to sales tax in Utah where they were not before.

A reminder about the practical compliance side: deregistering from a state where you no longer have nexus does not eliminate your filing obligations for the period when you did have nexus. You may owe final returns and any unpaid balances for the registration period before deregistration. Work with a sales tax specialist, not your income tax CPA, to handle deregistration properly.

Bottom Line: If you sell across state lines, pull your nexus schedule and your state registrations and review them against the August 2026 threshold changes. If you only had nexus in a state due to the transaction count, you may no longer be required to file there. If you are in Illinois, Arkan

sas, or Utah, your POS rates need to be checked today.

The Employee Retention Credit was one of the most significant pandemic era tax benefits available to retail employers, and it was also one of the most aggressively marketed by firms that told business owners they qualified when they did not. The IRS closed ordinary ERC processing by the end of 2025. What remains in 2026 is not a backlog it is an audit pipeline.

The IRS processed roughly 5 million ERC claims totaling approximately $235 billion. If you filed and received your payment, you are not done. The OBBBA extended the statute of limitations for ERC audits to 6 years, which means returns that included ERC claims are now open to examination through 2031 or later depending on when you filed. You need to retain every piece of documentation supporting your eligibility claim for that entire window.

Claims still pending in 2026 are in a different situation than backlog cases from 2023 or 2024. According to reporting from multiple tax practices, open cases now typically reflect heightened scrutiny rather than administrative delay. If you have a pending claim that has not moved, the most likely explanation is that it has been flagged for audit review rather than sitting in a processing queue.

The OBBBA also added a hard filing cutoff for claims covering Q3 and Q4 of 2021 that were filed after January 31, 2024. If you missed that window on those quarters, the opportunity is permanently closed regardless of eligibility.

What to Do If You Received ERC Payments

The penalty exposure for improperly claimed ERC is significant. The credit itself must be repaid with interest calculated from the original payment date. Additional penalties for negligence or substantial understatement of tax can add 20% or more on top of the principal. For credits claimed based on promoter representations that were not grounded in the actual eligibility rules, the exposure can be substantial.

If you used a promoter who guaranteed you qualified without a detailed review of your specific business operations, government orders, and revenue decline, now is the time to get an independent second opinion. The IRS is not primarily going after well documented claims filed by CPAs who did the work. They are focused on the high volume promoter filings where the eligibility analysis was cursory or fabricated.

Bottom Line: The ERC is closed, but the audit risk for claims already paid is open until at least 2031. Pull your documentation today, review it with an independent CPA, and make sure you can defend every quarter you claimed. If you used a promoter and have any doubt about the quality of the eligibility analysis, get ahead of it before the IRS does.

There is a change that took effect on January 1, 2026 that most retail and CPG business owners have not adjusted for yet, and it is showing up in budgets as a silent cost increase. The employer provided meals deduction that has been phasing down since 2018 finally hit zero. If your company provides snacks, beverages, or meals to employees at the workplace, you are now paying those costs with after tax dollars and you cannot deduct them.

Here is the history. Before the Tax Cuts and Jobs Act of 2017, employer provided meals on business premises were 100% deductible when provided for the convenience of the employer. The TCJA reduced that to 50% starting in 2018 and scheduled it to drop to zero starting in 2026. It dropped. No restoration was included in the One Big Beautiful Bill Act. The breakroom coffee and the snack bar you stock for your team are now non deductible fringe benefits for your business.

The bigger exposure is for employers who run more structured food programs. Office cafeterias, employer subsidized meals, catered working lunches for employees, and overtime meal policies where the company buys dinner for staff working late all of these had partial deductibility before 2026. Now they have none, and in many cases the value is now taxable to the employee as a fringe benefit as well.

What You Can Still Deduct and What You Cannot

If your 2026 budget still reflects a 50% deduction for employee meal programs, you have a variance building up right now. The simplest fix is to reforecast the after tax cost of any employee food program and decide whether the benefit still justifies the full unsubsidized cost. In some markets and industries, the benefit is worth it for retention. In others, it made sense only because of the subsidy.

One alternative worth considering: convert your informal snack program into a formal Section 132 de minimis fringe benefit with a documented value low enough to still meet the threshold. The IRS has not updated the specific dollar limit for de minimis fringe benefits in years and the guidance is fact specific, but a genuinely minimal snack allowance may still qualify. Get your CPA to confirm the current parameters before relying on this.

Bottom Line: January 1, 2026 was the end of the employer provided meals deduction. If your budget still shows a 50% deduction for employee food programs, fix it now. The cost is real and the deduction is gone. The company holiday party is still 100% deductible. The breakroom snacks are not.

If you held off on equipment purchases in 2024 or 2025 because the bonus depreciation rules were getting worse every year, the situation has changed. The One Big Beautiful Bill Act restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. That reverses a phase down that had taken the rate to 40% in 2025 and was scheduled to hit zero by 2026.

Under prior law, every year that passed cost you more. A $100,000 piece of equipment bought in 2024 generated an $80,000 first year deduction at the 80% rate. In 2025 that dropped to $40,000 before the OBBBA restored it. Starting with purchases made after January 19, 2025, the full $100,000 is deductible in the year you place the equipment in service.

Section 179 also got a significant upgrade. The deduction limit doubled from $1.25 million to $2.5 million, and the phase out threshold was raised to $4 million. For most small and mid size retail and CPG businesses, the Section 179 limit was never the constraint, but the higher ceiling matters for growing businesses and multi location operators making large capital investments.

There is a new provision worth knowing about if you run a CPG manufacturing operation or are considering building one. The OBBBA created a 100% first year deduction for qualified production property which includes buildings used in manufacturing or production activities if construction begins before January 1, 2029. This is a significant change from the standard 39 year depreciation schedule for commercial buildings and creates a compelling planning window for CPG brands considering facility investments.

What Qualifies and When You Need to Act

One nuance worth knowing: bonus depreciation can create or increase a net operating loss, which carries forward indefinitely. Section 179 cannot create a loss it is limited to your taxable income for the year. For a retailer in a year with strong profits, both tools work. For a retailer in a marginal year, bonus depreciation may be the better choice because it does not have the taxable income limitation.

The December 31 deadline is the placed in service date, not the purchase date. Equipment ordered in December and delivered in January does not qualify for 2026. If you are planning a significant purchase and need it to count this year, work backward from your vendor’s lead time and get your order placed with enough runway to have the equipment installed and operational before year end.

Bottom Line: The window to deduct 100% of a qualifying asset purchase in the year of purchase is open and has no current expiration for equipment. If you have been putting off a capital investment, the tax math has never been better than it is right now. Run the numbers with your CPA and make the placed in service deadline work for you, not against you.

Here is something that is going to catch a lot of retail and food service employers off guard this coming January: the One Big Beautiful Bill Act changed how tips and overtime must appear on Form W 2, and the change applies to the 2026 tax year. That means the W 2s you issue to your employees in early 2027 need to reflect a new reporting format. Many payroll systems are not there yet.

The OBBBA introduced individual income tax deductions for qualifying tip income (up to $25,000 per year) and FLSA overtime premium pay (up to $12,500 for single filers or $25,000 for joint filers). Those deductions sound great for employees. The catch is that employees can only claim those deductions if their employer reports the amounts separately and correctly on their W 2. If your W 2 does not break out qualified tips and qualifying overtime, your employees lose the deduction entirely.

The definition of qualifying overtime matters. Only FLSA required overtime counts. That is the extra half time premium on hours worked beyond 40 in a workweek under federal law. State mandated daily overtime (common in California) does not qualify. Contractual overtime that exceeds what FLSA requires does not qualify. Your payroll system needs to distinguish between FLSA overtime and non FLSA overtime, which is not a distinction most systems were built to track separately before this law passed.

There is another wrinkle for retailers who have added digital tipping at checkout in the last few years. The OBBBA’s tip deduction is tied to employees who work in occupations that have historically received tips. The IRS will define these occupations in forthcoming guidance. Employees who receive tips at a digital checkout in a retail setting where tipping was not historically customary may not qualify. If you added tipping to your POS to boost employee pay, that income may not be deductible for the employees even though it is still tip income for other purposes.

What Employers Need to Do Before Year End

The practical consequence of getting this wrong is that your employees miss a deduction they were entitled to take. For a tipped employee earning $20,000 in qualifying tips, the missed deduction at a 22% effective rate is $4,400 in extra federal tax. That is not a small number for an hourly worker, and it is going to come back to you as an employer when employees find out their W 2 did not reflect the qualifying amounts.

The IRS issued initial guidance in January 2026 (IR 2026 10) and has provided transition relief from penalties for good faith compliance efforts in the first year. That relief will not be indefinitely available. Get your payroll vendor on the phone now, not in December.

Bottom Line: The W 2 changes from the OBBBA are live for the 2026 tax year. Call your payroll provider today and ask specifically whether they have updated for qualified tip reporting and FLSA overtime separation on W 2s. If they have not, you have a problem to solve before January. Your employees are counting on you to get this right.

If you run a food, beverage, or perishable goods business, product losses are not a question of if, but when. Spoilage, expiration, contamination, and recalls are part of operating in consumer goods. The tax code treats these as real business losses, but only if they are documented correctly at the right time. Most small CPG operators and specialty retailers do not have the documentation processes in place to capture the full deduction.

Spoilage and expiration losses for businesses using an accrual based inventory system flow through cost of goods sold when the inventory is written down to zero or to its net realizable value. That means the deduction is captured when you dispose of the product or write it off on the books not when you first realize it is going bad, and not in a prior period when you purchased it. The write off needs to happen before your fiscal year closes to count in that year.

For a CPG company dealing with a product recall, the tax treatment can involve multiple expense categories. The cost of the recalled inventory itself flows through COGS as the inventory is written off. Expenses incurred to retrieve, transport, store, and destroy recalled product are deductible as ordinary and necessary business expenses in the year incurred. Legal costs related to the recall are also deductible. Costs that create a future benefit reformulation of the product, new packaging, testing protocols that improve ongoing safety may need to be capitalized.

Tax Treatment by Type of Product Loss

One documentation practice that separates prepared businesses from unprepared ones: a physical destruction log signed by a responsible employee or manager at the time of disposal. The IRS does not require a notarized document or a third party witness for routine spoilage, but a signed, dated log showing the product, quantity, reason for disposal, and the person who authorized and executed it creates a contemporaneous record that is nearly impossible to challenge.

For larger destruction events, particularly recalls, consider retaining a licensed destruction company that provides a certificate of destruction. This is standard practice in food and beverage, pharmaceutical, and personal care product industries, and the certificate creates an independent third party record of the destruction event, date, and quantity.

Bottom Line: Product losses are a real cost of operating in consumer goods and retail. They are also a real deduction but only if they are documented at the time they happen, not reconstructed afterward. Build the disposal log into your receiving and inventory management process now, before you need it in an audit.

If you are planning to invest in your business this year, the tax rules on when and how much you can deduct have a hard deadline: December 31. The difference between buying and placing a piece of equipment in service before year end versus after is one full year of accelerated deductions. For retail and CPG operators, the purchases that qualify are broader than most people realize.

Section 179 allows businesses to deduct the full cost of qualifying property in the year it is placed in service, rather than depreciating it over time. For 2026, the Section 179 deduction limit is $1,160,000, and it phases out dollar for dollar once total qualifying purchases exceed $2,890,000. This means the deduction is designed for small and mid size businesses and phases out entirely for very large capital spenders.

Bonus depreciation under the OBBBA works differently. It is a percentage based deduction applied to the cost of qualifying property placed in service during the year. In 2026, bonus depreciation is 60%. In 2027 it drops to 40%. In 2028 it drops to 20%. If you have been waiting to make equipment purchases, the economics of waiting are getting worse each year as the bonus percentage steps down.

What Retail and CPG Operators Can Deduct Under Section 179 and Bonus

The key distinction between Section 179 and bonus depreciation is that Section 179 cannot create or increase a net operating loss. If your business is not profitable enough to absorb the Section 179 deduction, the excess carries forward to a future year. Bonus depreciation has no such limitation it can create or increase a net operating loss, which then carries forward indefinitely under current law.

For retailers making significant investments in store remodels, technology upgrades, or equipment, the placed in service rule is the most important practical deadline. Equipment that is ordered in December but not delivered and operational until January does not qualify for the current year deduction. If you are working with vendors on lead times, get the equipment installed and operational before December 31 or accept that the deduction moves to next year.

Qualified improvement property which covers interior improvements to nonresidential leased buildings is one of the most useful provisions for retail tenants. If you remodeled your store this year, added new lighting, reconfigured the floor layout, or upgraded the customer facing areas of your space, those costs may qualify for 60% bonus depreciation in 2026, with the remainder depreciating over 15 years. This is far better than the 39 year treatment that applied before this provision was clarified.

Bottom Line: Year end equipment and improvement planning is one of the most reliable tax strategies available to retail operators. Know your December 31 deadline, make sure assets are placed in service before it, and work with your CPA to maximize the combination of Section 179 and bonus depreciation that produces the best result for your specific tax position.

Most retail operators are reasonably comfortable with sales tax on a standard transaction. Product goes to the customer, tax is collected at the register, and the state gets paid. Where the compliance breaks down is in the transactions that are not standard: the return, the gift card redemption, the loyalty program reward, the promotional discount. These are common daily events in retail, and each one has sales tax implications that vary by state.

Returns are the most frequent issue. When a customer returns merchandise, they are entitled to a refund of the sales tax they paid on the original purchase. You collect that tax back from the state through a credit on your next sales tax return, or in some states through a refund claim. The complication arises when the return is made in a different period than the original sale, when it involves a gift receipt with no original receipt, or when partial returns happen on mixed taxable and non taxable purchases. Most retail POS systems handle straightforward returns correctly. The edge cases often go wrong.

Gift cards create a different issue. No sales tax is due at the time of gift card purchase because no transfer of goods has occurred. The tax is collected when the gift card is redeemed for merchandise. The tax is based on the taxable selling price at the time of redemption, not the face value of the card. When a gift card is partially redeemed, the tax applies only to the portion redeemed. When a gift card is never redeemed, it becomes subject to unclaimed property (escheatment) rules in most states, which is a separate compliance obligation entirely.

Sales Tax Treatment Across Common Retail Scenarios

Multi state retailers face the most complexity because the rules on promotions, coupons, and loyalty programs are not uniform. In some states, sales tax applies to the full pre discount price when a coupon is reimbursed by a third party (like a manufacturer). In others, the taxable price is the amount the customer actually pays. The Streamlined Sales Tax Project has worked to harmonize many of these rules among member states, but not all states participate and even member states have exceptions.

The audit exposure here is real. Sales tax auditors are well trained to look at these scenarios because they know most retailers handle them inconsistently. A state audit that identifies systematic under collection on promotional transactions can result in liability for multiple years of back taxes, interest, and penalties on a volume of transactions that makes the total exposure significant.

Bottom Line: Sales tax compliance in retail is not just about the standard transaction. It is about every edge case that happens every day: the return, the gift card, the promo. Review your POS configuration and your policies for these scenarios with your sales tax advisor, not your income tax CPA, who may not specialize in this area.