When it comes to running a business, having outstanding invoices that turn into uncollectible receivables or simply bad debt is a fact of life. The Internal Revenue Service (IRS) has a safe harbor that permits businesses to reduce consideration of such bad debt from taxation if it qualifies. However, understanding how to determine if a business is eligible is essential to making the most of it when a business files its taxes.
Defining the Nonaccrual Experience Method (NAE)
When businesses perform a service, they expect to be paid. However, they sometimes have unpaid invoices that are uncollectible. One provision within the IRS’s Internal Revenue Code (IRC) is that of the nonaccrual experience method (NAE) and how it intersects with bad debts.
How It Works
Once a company sees bad debt in its system after customers fail to pay their invoices, it calculates the amounts it projects it won’t be able to collect. Projecting bad debt is accomplished by the company looking at previous experiences with its payees. It’s important to note that this accounting is used by businesses for only a portion of their projected uncollectable customer bad debt; businesses similarly project the remaining percentage they expect to collect from outstanding invoices in the future.
One important step for businesses to determine their eligibility for relief from the accrual segment of uncollectible revenue, per the U.S. Securities & Exchange Commission (SEC), is by determining their industry classification. Sample industries include legal professionals, engineers, performance art professionals, architects, and actuaries.
It’s important to note that if businesses don’t use this method, they may charge off such debts. Charge-offs are when a company writes the debt off its balance sheet and expenses the uncollectible funds on the income statement. Companies must also adhere to the following criteria to take advantage of the safe harbor:
The company must currently use the accrual method of accounting when recording revenues, and not the cash method to account for revenue.
The company, in a single year, within the past 36 months, has earned up to, but no more than $5 million in gross receipts.
IRS Guidance
Beginning in September 2011, the Internal Revenue Service permitted taxpayers to use the NAE method to determine applicability by applying a factor of 95 percent to their allowance for bad debts via their past 60 months of financial documents. This permits businesses to exclude qualifying uncollectible revenues from their taxable income, which is beneficial for lowering the amount of taxes owed. It is often easier for NAE-specific designated industries to qualify; however, only companies with the appropriate amount of historical information to substantiate are eligible.
Further Considerations and Conclusion
One example of this safe harbor includes having financial information that’s expertly tracked for the past 60 months via financial statements. If the company can’t substantiate it, they won’t be able to qualify. Similarly, eligible services provided or the resulting receivables that have interest and/or financial penalties attached are ineligible.
When it comes to navigating the IRS code, the NAE can provide another way for eligible companies to maximize filings and tax obligations.
Alan F Burke CPA
A Look at the Nonaccrual Experience Method
October 1, 2025 · Accounting News, Blog
⏱ 3 min read
When it comes to running a business, having outstanding invoices that turn into uncollectible receivables or simply bad debt is a fact of life. The Internal Revenue Service (IRS) has a safe harbor that permits businesses to reduce consideration of such bad debt from taxation if it qualifies. However, understanding how to determine if a business is eligible is essential to making the most of it when a business files its taxes.
Defining the Nonaccrual Experience Method (NAE)
When businesses perform a service, they expect to be paid. However, they sometimes have unpaid invoices that are uncollectible. One provision within the IRS’s Internal Revenue Code (IRC) is that of the nonaccrual experience method (NAE) and how it intersects with bad debts.
How It Works
Once a company sees bad debt in its system after customers fail to pay their invoices, it calculates the amounts it projects it won’t be able to collect. Projecting bad debt is accomplished by the company looking at previous experiences with its payees. It’s important to note that this accounting is used by businesses for only a portion of their projected uncollectable customer bad debt; businesses similarly project the remaining percentage they expect to collect from outstanding invoices in the future.
One important step for businesses to determine their eligibility for relief from the accrual segment of uncollectible revenue, per the U.S. Securities & Exchange Commission (SEC), is by determining their industry classification. Sample industries include legal professionals, engineers, performance art professionals, architects, and actuaries.
It’s important to note that if businesses don’t use this method, they may charge off such debts. Charge-offs are when a company writes the debt off its balance sheet and expenses the uncollectible funds on the income statement. Companies must also adhere to the following criteria to take advantage of the safe harbor:
The company must currently use the accrual method of accounting when recording revenues, and not the cash method to account for revenue.
The company, in a single year, within the past 36 months, has earned up to, but no more than $5 million in gross receipts.
IRS Guidance
Beginning in September 2011, the Internal Revenue Service permitted taxpayers to use the NAE method to determine applicability by applying a factor of 95 percent to their allowance for bad debts via their past 60 months of financial documents. This permits businesses to exclude qualifying uncollectible revenues from their taxable income, which is beneficial for lowering the amount of taxes owed. It is often easier for NAE-specific designated industries to qualify; however, only companies with the appropriate amount of historical information to substantiate are eligible.
Further Considerations and Conclusion
One example of this safe harbor includes having financial information that’s expertly tracked for the past 60 months via financial statements. If the company can’t substantiate it, they won’t be able to qualify. Similarly, eligible services provided or the resulting receivables that have interest and/or financial penalties attached are ineligible.
When it comes to navigating the IRS code, the NAE can provide another way for eligible companies to maximize filings and tax obligations.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Contribution margin after marketing (CMAM) measures how much money is generated per unit retailed after factoring in a company’s variable costs, along with marketing costs.
It’s analogous with contribution margin, however, a business must factor in marketing costs the company experiences when publicizing a good to likely consumers with details on the business’ wares. This metric determines how well net sales can satisfy expense obligations and what percentage of net sales may remain to satisfy fixed expenses.
Comparing Variable Versus Fixed Costs
Variable costs, as the name implies, are expenses that rise and fall according to output quantities. Fixed costs, conversely, are expenses that don’t change despite variation of production quantities. Understanding these concepts is helpful when calculating CMAM to see how both types of expenses impact the different calculations.
It can also be determined on a per-unit basis to help a business understand how a single product unit contributes to the company’s comprehensive profits. One can calculate the CMPU (contribution margin per unit) as follows to provide a more granular analysis:
What separates variable costs (including marketing expenses) from the sales revenue is CMAM. The balance is profit along with fixed costs. To calculate if a business saw a net loss or profit, the formula is:
Net Operating Profit = CMAM – fixed costs
If a profit is reported after subtracting variable costs, costs to market, plus fixed costs, it means a business or specific department is profitable. If it’s negative, the business sees a loss that won’t enable it to pay its bills.
Illustrating CMAM
When it comes to a company producing widgets, the following is already known. Variable costs for production for a single widget are detailed below:
$2.25 for unprocessed inputs
$1.80 firsthand production expenses
$0.50 power
$0.40 freight expenses
$4,500 business equipment rentals
$6,000 factory rent
$30,000 management salary
$10,000 marketing costs
Each widget costs $10, and the business sold 30,000 last year. Therefore, it’s calculated as follows:
Variable Costs = ($2.25 + $1.80 + $0.50+ $0.40) x 30,000 = $4.95 x 30,000 = $148,500
CMAM = $300,000 = $148,500
The next step is to calculate net operating loss or profit: we take CMAM ($148,500), then subtract fixed costs:
$148,500 – ($4,500 + $6,000 + $30,000)
$148,500 – $40,500 = $108,000
Based on that calculation, the company producing widgets realized $108,000 for its net operating profit last year. The next section will discuss how businesses can use this information to improve their operations.
Using CMAM for Business Analysis
Managers use this metric to determine the viability of a product. If there are multiple iterations or options of a product, it can help managers determine which product sells the best and rank them if there are multiple versions of a widget. Businesses can analyze each unit’s contribution margin for each version of a widget to determine which versions provide the greatest option for profitability. Depending on the outcome, the company may choose to produce only the most profitable one or two widgets.
When it comes to the CMAM, businesses that use it for analysis can increase their sales efficiency for the present and future.
Alan F Burke CPA
Understanding Contribution Margin After Marketing
October 1, 2025 · Blog, General Business News
⏱ 3 min read
Contribution margin after marketing (CMAM) measures how much money is generated per unit retailed after factoring in a company’s variable costs, along with marketing costs.
It’s analogous with contribution margin, however, a business must factor in marketing costs the company experiences when publicizing a good to likely consumers with details on the business’ wares. This metric determines how well net sales can satisfy expense obligations and what percentage of net sales may remain to satisfy fixed expenses.
Comparing Variable Versus Fixed Costs
Variable costs, as the name implies, are expenses that rise and fall according to output quantities. Fixed costs, conversely, are expenses that don’t change despite variation of production quantities. Understanding these concepts is helpful when calculating CMAM to see how both types of expenses impact the different calculations.
It can also be determined on a per-unit basis to help a business understand how a single product unit contributes to the company’s comprehensive profits. One can calculate the CMPU (contribution margin per unit) as follows to provide a more granular analysis:
What separates variable costs (including marketing expenses) from the sales revenue is CMAM. The balance is profit along with fixed costs. To calculate if a business saw a net loss or profit, the formula is:
Net Operating Profit = CMAM – fixed costs
If a profit is reported after subtracting variable costs, costs to market, plus fixed costs, it means a business or specific department is profitable. If it’s negative, the business sees a loss that won’t enable it to pay its bills.
Illustrating CMAM
When it comes to a company producing widgets, the following is already known. Variable costs for production for a single widget are detailed below:
$2.25 for unprocessed inputs
$1.80 firsthand production expenses
$0.50 power
$0.40 freight expenses
$4,500 business equipment rentals
$6,000 factory rent
$30,000 management salary
$10,000 marketing costs
Each widget costs $10, and the business sold 30,000 last year. Therefore, it’s calculated as follows:
Variable Costs = ($2.25 + $1.80 + $0.50+ $0.40) x 30,000 = $4.95 x 30,000 = $148,500
CMAM = $300,000 = $148,500
The next step is to calculate net operating loss or profit: we take CMAM ($148,500), then subtract fixed costs:
$148,500 – ($4,500 + $6,000 + $30,000)
$148,500 – $40,500 = $108,000
Based on that calculation, the company producing widgets realized $108,000 for its net operating profit last year. The next section will discuss how businesses can use this information to improve their operations.
Using CMAM for Business Analysis
Managers use this metric to determine the viability of a product. If there are multiple iterations or options of a product, it can help managers determine which product sells the best and rank them if there are multiple versions of a widget. Businesses can analyze each unit’s contribution margin for each version of a widget to determine which versions provide the greatest option for profitability. Depending on the outcome, the company may choose to produce only the most profitable one or two widgets.
When it comes to the CMAM, businesses that use it for analysis can increase their sales efficiency for the present and future.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
The IRS has released draft Schedule 1-A, introducing four new temporary deductions within the One Big Beautiful Bill Act. If you are wondering what the new form looks like and how the calculations work, read on as we explore each below.
Modified Adjusted Gross Income (MAGI)
It is important to note that all four deductions require calculating your MAGI first, which determines eligibility and phaseout amounts for each deduction.
The Four New Deductions and How the Calculations Work
These deductions are all referred to on the schedule by their colloquial names, for example: “No Tax on Tips,” “No Tax on Overtime” and “No Tax on Car Loan Interest.” The sole exception, however, is popularly referred to as the “No Tax on Social Security” provision, which is called the “Enhanced Deduction for Seniors” on the form.
1. Tips Deduction
Maximum: $25,000 annually
Eligibility: Must receive qualified tips in customarily tipped occupations
Phaseout: Begins at $150,000 MAGI ($300,000 joint filers)
Rate: $100 reduction per $1,000 over threshold
Requirements: Valid Social Security number; married couples must file jointly
2. Overtime Deduction
Maximum: $12,500 single ($25,000 joint filers)
Eligibility: Only the premium portion of overtime pay (the “half” of time-and-a-half)
Phaseout: Same as tips deduction – begins at $150,000 MAGI
Rate: $100 reduction per $1,000 over threshold
3. Car Interest Deduction
Maximum: $10,000 annually
Eligibility: Interest on loans for new vehicles under 14,000 pounds and assembled in the United States
Phaseout: Begins at $100,000 MAGI ($200,000 joint filers)
Rate: $200 reduction per $1,000 over threshold
Requirements: Must provide VIN; loan must originate after Dec. 31, 2024
4. Enhanced Deduction for Seniors
Amount: $6,000 fixed deduction
Eligibility: All taxpayers (replaces “No Tax on Social Security” promise)
Phaseout: Begins at $75,000 MAGI ($150,000 joint filers)
Rate: 6 percent reduction of excess income over threshold
Key Points to Remember
All deductions are available whether you itemize or take the standard deduction
All require valid Social Security numbers
Married couples must file jointly to claim these benefits
Income limits mean higher earners receive reduced or no benefits
These are deductions, not exclusions – income is still reportable for state/local taxes
Final Steps
After you have calculated everything applicable for the four possible deductions, you will enter the total on the new line 13b on Form 1040. The total amount of the deductions entered here is removed from your income prior to calculating your tax. Remember, these are deductions and not credits, so they only reduce your taxable income and are not a direct reduction in your tax due.
You can see an example of the new draft Form 1040 illustrating this below.
Screenshot of new Form 1040
Conclusion and Draft from Status – and IRS Warning
The above provides guidance to taxpayers and professionals on how both the deductions calculations work and flow through Form 1040. The IRS warns, however, that the forms and instructions currently released are in draft form at this point. Before any forms or instructions can be released in their final state, they need to be approved by the OMB. It is not unusual for draft releases of instructions and publications to have some changes before their final release, even if only minor.
Alan F Burke CPA
Initial Look at the New Tax Form Schedule 1-A: Four Key Deductions for 2025
October 1, 2025 · Blog, Tax and Financial News
⏱ 3 min read
The IRS has released draft Schedule 1-A, introducing four new temporary deductions within the One Big Beautiful Bill Act. If you are wondering what the new form looks like and how the calculations work, read on as we explore each below.
Modified Adjusted Gross Income (MAGI)
It is important to note that all four deductions require calculating your MAGI first, which determines eligibility and phaseout amounts for each deduction.
The Four New Deductions and How the Calculations Work
These deductions are all referred to on the schedule by their colloquial names, for example: “No Tax on Tips,” “No Tax on Overtime” and “No Tax on Car Loan Interest.” The sole exception, however, is popularly referred to as the “No Tax on Social Security” provision, which is called the “Enhanced Deduction for Seniors” on the form.
1. Tips Deduction
Maximum: $25,000 annually
Eligibility: Must receive qualified tips in customarily tipped occupations
Phaseout: Begins at $150,000 MAGI ($300,000 joint filers)
Rate: $100 reduction per $1,000 over threshold
Requirements: Valid Social Security number; married couples must file jointly
2. Overtime Deduction
Maximum: $12,500 single ($25,000 joint filers)
Eligibility: Only the premium portion of overtime pay (the “half” of time-and-a-half)
Phaseout: Same as tips deduction – begins at $150,000 MAGI
Rate: $100 reduction per $1,000 over threshold
3. Car Interest Deduction
Maximum: $10,000 annually
Eligibility: Interest on loans for new vehicles under 14,000 pounds and assembled in the United States
Phaseout: Begins at $100,000 MAGI ($200,000 joint filers)
Rate: $200 reduction per $1,000 over threshold
Requirements: Must provide VIN; loan must originate after Dec. 31, 2024
4. Enhanced Deduction for Seniors
Amount: $6,000 fixed deduction
Eligibility: All taxpayers (replaces “No Tax on Social Security” promise)
Phaseout: Begins at $75,000 MAGI ($150,000 joint filers)
Rate: 6 percent reduction of excess income over threshold
Key Points to Remember
All deductions are available whether you itemize or take the standard deduction
All require valid Social Security numbers
Married couples must file jointly to claim these benefits
Income limits mean higher earners receive reduced or no benefits
These are deductions, not exclusions – income is still reportable for state/local taxes
Final Steps
After you have calculated everything applicable for the four possible deductions, you will enter the total on the new line 13b on Form 1040. The total amount of the deductions entered here is removed from your income prior to calculating your tax. Remember, these are deductions and not credits, so they only reduce your taxable income and are not a direct reduction in your tax due.
You can see an example of the new draft Form 1040 illustrating this below.
Screenshot of new Form 1040
Conclusion and Draft from Status – and IRS Warning
The above provides guidance to taxpayers and professionals on how both the deductions calculations work and flow through Form 1040. The IRS warns, however, that the forms and instructions currently released are in draft form at this point. Before any forms or instructions can be released in their final state, they need to be approved by the OMB. It is not unusual for draft releases of instructions and publications to have some changes before their final release, even if only minor.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
When it comes to running a business, having outstanding invoices that turn into uncollectible receivables or simply bad debt is a fact of life. The Internal Revenue Service (IRS) has a safe harbor that permits businesses to reduce consideration of such bad debt from taxation if it qualifies. However, understanding how to determine if a business is eligible is essential to making the most of it when a business files its taxes.
Contribution margin after marketing (CMAM) measures how much money is generated per unit retailed after factoring in a company’s variable costs, along with marketing costs.
The IRS has released draft Schedule 1-A, introducing four new temporary deductions within the One Big Beautiful Bill Act. If you are wondering what the new form looks like and how the calculations work, read on as we explore each below.