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Private Equity’s Big Bet on Accounting Firms Is Starting to Look Shaky

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CBIZ stock has lost half its value in the past year. Starbucks just killed its AI inventory counting tool after nine months of miscounts. And Microsoft, after investing $13 billion in OpenAI, had to cut off its own engineers from AI coding tools because costs went through the roof.

These stories from the latest episode of The Accounting Podcast paint a picture of where the accounting profession is heading, and it’s not what private equity investors or AI vendors promised.

CBIZ’s Stock Tells a Story About Private Equity’s Future

CBIZ is the only publicly traded accounting firm in the U.S., so its stock price is the closest thing we have to a market report card on the profession’s consolidation strategy. Right now, that report card shows failing grades.

“The stock price of CBIZ, Inc. today is $34.68. That is down 51% over the past year,” host Blake Oliver noted during the episode. When CBIZ bought Marcum at the end of 2024, the stock was at $78. It hit $90 in early 2025, then crashed to about $27 by March before recovering slightly.

What makes this even more interesting is that CBIZ isn’t alone. Co-host David Leary asked Blake to pull up Intuit’s chart for comparison. “Similar chart,” Blake confirmed. Intuit is down 53-54% over the same period. Meanwhile, the S&P 500 is up 28%.

The problem is what’s behind the stock price. CBIZ forecasts only 2% – 5% revenue growth for 2026. “That’s less than inflation. So basically, no growth,” Blake explained. “Why would investors be excited about buying stock in a company that’s not really growing much?”

Blake sees a more serious threat to large firms from smaller, more nimble competitors. “The larger the organization, the harder it is to change a business model or to integrate new technology,” he said. “I see smaller, more agile firms becoming a real threat to the large accounting firms. The smaller ones can integrate AI into their systems and switch their billing models.”

The math is simple but meaningful. AI lets a 10-person firm work like a 100-person firm. The traditional advantage of midsize firms (having an expert for everything) disappears when smaller firms can use AI to expand their capabilities.

Private equity firms typically look for efficiencies, not complete reinvention. “They figure out how to get marginally more efficient. They don’t completely reinvent the business model. That’s not what private equity is all about,” Blake explained.

When AI Meets Reality: Starbucks and Microsoft Learn the Hard Way

Starbucks spent nine months trying to make AI inventory counting work. The idea was that employees would walk past shelves, filming with an iPad, and AI from a company called NomadGo would automatically count everything. The company claimed 99% accuracy.

Reality hit hard. “Reuters reported the app often miscounted or mislabeled inventory, including confusing similar milk varieties or failing to recognize them,” Blake noted. Starbucks killed the project. Stores went back to counting by hand.

These failures hit the bottom line. “They were getting product shortages because they thought they had coffee, but didn’t have coffee to sell,” David explained.

Meanwhile, Microsoft discovered that AI coding tools come with a shocking price tag. Despite investing $13 billion in OpenAI and using AI to write 30% of its code, Microsoft had to cut off engineers from these tools because costs exploded. The same thing happened at Uber, where the CTO said they burned through a year’s worth of budgeted tokens in just four months.

The token problem is growing. Blake shared a striking statistic from Forbes: “Anthropic’s annualized net dollar retention exceeds 500%.” That means customers end up spending five times more than they initially expected.

“Nobody knows what they’re buying,” David said. “If I sign up for a monthly plan that gives me 20,000 tokens a month, it feels like enough. And then I’m six days into the month and I have to spend another 40 bucks for more tokens.”

“We’re going to hear a story like this in the next year,” David predicted. “Some firm will say, ‘Our five-person firm spent $300,000 on AI tokens, and we didn’t know it until it was too late.'” 

The Small Firm Revolution: XeroForce and AI Architects

While big firms struggle with their business models and AI costs spiral, something interesting is happening with smaller practices. Xero just launched XeroForce, a tool that could change the game.

“It’s a no-code AI agent builder that lets small businesses and accountants automate repetitive financial tasks using plain language, no technical skills required,” David explained. Unlike chatbots that give one-time answers, these are permanent automations that run on schedule.

Blake immediately saw the potential. “Every week, look at all transactions over $75 in any expense account, and then search my email for receipts and attach those receipts to the transactions. That’s a whole category of apps right there.”

“Accountants have engineer brains. You just don’t know how to write code. And if this can let you create ‘permanent’ code that runs routinely for a client inside Xero, it’ll help you scale,” David said, putting it in terms every accountant can relate to.

But tools alone aren’t enough. Firms need someone to manage this transformation. Donnie Shimamoto, CPA and founder and managing director at Intraprise Techknowlogies, calls this role an “AI architect.”

“Every CPA firm that’s big enough should create an AI architect role,” Blake said, comparing it to the cloud transition. “All the leading firms created these technology roles that were not IT. They were basically operations roles.”

An AI architect would handle security reviews, evaluate different tools, monitor token spending, and train the team. Without this role, firms risk security issues or shocking year-end bills.

For young accountants, Blake had direct advice. “If you’re a student or a young accountant and you want a job, learn this AI stuff. Every firm is going to be hiring an AI architect.”

What History Tells Us About What’s Coming

Blake drew a parallel to when electronic spreadsheets arrived. “The number of bookkeepers employed at accounting firms dropped by about half. We lost like a million bookkeepers over a generation,” he said. “What happened? We had more accountants and, in particular, we had a whole new category of job: financial analysts.”

His prediction for AI follows the same pattern. The number of traditional accountants will decline, but new roles will emerge. “Small businesses will be able to afford controllers and CFOs. They’ve always wanted them but could never afford to hire one.”

Both hosts emphasized the importance of experimenting now. David spent Memorial Day building a production assistant that saves him four hours a week. Blake spent two months creating a tool that automatically reconciles bank accounts.

“Don’t try to build anything groundbreaking,” David advised. “Just solve a simple problem that you have to deal with week after week.”

The Bottom Line

The accounting profession is changing fast, but not in the ways many expected. Large firms with private equity backing face serious challenges if they can’t reinvent their business models. AI implementation is proving harder and more expensive than promised. But smaller, agile firms that experiment with new tools and create AI architect roles could gain a huge competitive advantage.

“If you’re a firm with a few dozen people, you can now compete with firms that have hundreds of staff,” Blake said. That’s an opportunity for firms ready to embrace it.

Want to hear the full discussion, including how the hosts are building their own AI tools? Listen to the complete episode of The Accounting Podcast.

One-Third of B2B Payments Still Arrive by Check. Here’s the Hidden Cost

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A $20 million windows business was doing what countless companies do every day: attaching their bank account information to invoices they emailed out. A bad actor intercepted one of those emails, swapped the bank details for an offshore account, hacked into the company’s system, and accessed their entire customer base. Then they blasted fake invoices to every client on the list. In just one month, they stole nearly $100,000.

What makes this story unsettling isn’t that it was sophisticated — it wasn’t. It was a predictable result of manual accounts receivable (AR) processes that millions of businesses still use today.

That story came from a recent webinar presented by Baxter Lanius, CEO and founder of Alternative Payments — a company focused on accounts receivable automation that has processed over $1 billion in payments and works with more than 1,000 customers, including around 100 accountants, bookkeepers, and controllers.

The session, hosted in partnership with Earmark, exposed something most of us know but rarely measure: the manual AR processes most businesses still rely on drain thousands of dollars from your clients’ bottom lines. Check processing, email-based invoice chasing, and hand-done reconciliation all add up. And with interest rates rising and margins getting squeezed, fixing these hidden payment costs through AR automation might be one of the best services you can offer clients right now.

The true cost of manual AR

Before you can fix a problem, you need to see it clearly. Most firms haven’t done the math on what manual payment processes actually cost their clients.

Let’s start with checks. Thirty-three percent of all B2B payments are still check-based. And each check costs between $10 and $15 to process when you factor in the time and manual labor needed to handle it. Think about a client processing a few hundred checks monthly. That’s thousands of dollars in hidden costs that never show up on the P&L, but they’re eating profits all the same.

Then there’s the security risk. As Baxter put it, “When you hand somebody a check, you hand them your bank account number and routing number.” It’s printed right there on the bottom of every check, and it’s a security hole hiding in plain sight. The $20 million windows company is an extreme case, but the risk exists every time a check changes hands. Add in lost packages and stolen mail, and checks become what Baxter called “a very inconsistent way to get paid.”

Another problem that compounds over time is days’ sales outstanding (DSO). When clients don’t pay for 30, 40, or 60 days, working capital gets locked up. And if your client pays their vendors quickly but waits forever to get paid themselves, they can wind up in a cash flow crunch.

“If clients aren’t paying you after 30 days or 40 days, don’t you think there’s a higher probability of bad debt expense or potential write-offs?” Baxter asked. When does a $50,000 receivable become a write-off? Day 60? Day 90? Every day increases the risk.

Manual reconciliation deserves its own spotlight. Baxter shared an example from a real Alternative Payments customer during the webinar. Before automation, the company had three people whose job was basically opening the bank account and refresh, refresh, refresh. If a customer paid, they’d try to match a $1,500 or $2,500 deposit to the right invoice. Then tie that to cash in the bank. All done by hand.

Then there’s the risk of human error. He admitted to fat-fingering bill payments himself and spent time chasing down overpayments. Some businesses still record credit card numbers on paper or store them in Excel files. That’s a PCI compliance violation waiting to happen.

Here’s what manual AR really costs your clients:

  • $10–$15 per check in processing labor
  • Locked-up working capital from long DSO
  • Fraud and compliance risks from exposed bank information
  • Hours of manual reconciliation every week
  • Higher bad debt risk on old receivables

The industry-wide context makes this worse. Only about 30% of B2B invoices get paid online today. Even among Alternative Payments’ established customers who’ve been on the platform for six months, only 70% of revenue flows online. The other 30% still moves offline, mostly through checks. The gap between where businesses are and where they could be is huge.

The macro environment makes this problem urgent now

These inefficiencies have been around forever. But today’s economic environment makes every one of them more expensive and more dangerous.

Start with the cost of capital. Everyone expected interest rates to fall, but that hasn’t happened. At the time of the webinar, Baxter estimated there was over a 50% chance rates would rise another 25 to 50 basis points in the year ahead. That changes everything about dollars sitting idle in your client’s AR pipeline. Money locked in unpaid receivables is expensive. Companies can’t reinvest it, use it to reduce debt, or earn returns elsewhere. What was a minor issue two years ago is now a real drag on profits.

Meanwhile, margins are getting squeezed everywhere. Minimum wages are climbing across the country. Hard goods costs are up. Revenue that can’t keep up with rising expenses magnifies every inefficiency. A manual AR process that was just annoying when margins were fat becomes truly threatening when they’re thin.

Small businesses are also failing faster. They’ve always been risky, but AI and automation, he noted, accelerate how fast weak businesses fail. Companies that don’t adopt efficient processes fall behind competitors who do. For accountants, this matters in two ways. First, your clients need help staying competitive. Second, if clients go under, you lose revenue. Helping them automate AR protects your own business.

Tying it all together, financial processes are, as he put it, “one of the last remaining components of our businesses that remain really manual.” We’ve automated marketing, sales, and big chunks of tax prep and bookkeeping. But actually moving and matching money still runs on manual effort in most firms.

AI is advancing rapidly as a tool for closing books and running operations. But Baxter made the point that it’s not about AI for AI’s sake. It’s about results. Whether automation comes from AI, workflow rules, or both, the goal is eliminating manual steps that waste time, create errors, and lock up capital. When all those costs are rising, there’s a clear return on automation.

The bottom line is, if your clients have capital tied up in inefficient AR, they’re paying more for that inefficiency than they were two years ago. If you’re not helping them fix it, someone else will.

Automation features that deliver measurable results

So the problem is real, and timing is urgent. What actually works, and by how much?

The webinar laid out specific features with hard numbers. This is the kind of data you can use to convince clients who are still on the fence.

  • Autopay is the biggest game-changer. When clients set up autopay, where a saved card or bank account gets charged automatically when invoices come due, their time-to-payment drops by 80% to 90%. That’s transformational. It kills the entire waiting-and-hoping cycle that makes DSO unpredictable. And it removes manual work on both sides. Customers don’t have to remember to pay, and your client doesn’t have to chase them.
  • Automated reminders are the second-most powerful tool. Alternative Payments’ data shows clients who get automated invoice reminders pay 66% faster than those who don’t. It makes sense. When reminders keep invoices top of mind, they never become those forgotten 120-day outliers that drag up average DSO. Modern platforms let you customize tone based on how overdue invoices are. A friendly nudge at five days. Firmer at 30. More edge at 45. They’re even launching an AI agent that can automatically customize these sequences.
  • Credit card surcharging saves money. About 80% of Alternative Payments’ clients pass credit card fees on to their customers, and it’s becoming the norm everywhere. Baxter shared a personal example from his insurance company, Chubb. The company told all policyholders they’d start charging 2.99% for credit card payments. So Baxter switched to ACH autopay. Problem solved. When 20% of payments are by credit card, 3% on that volume adds up fast.
  • Automated reconciliation eliminates the worst work. The platform handles daily payouts with full invoice-to-cash matching built in. When payments come through, it automatically matches them to invoices in QBO, Xero, NetSuite, or whatever system your client uses. No more marking invoices paid by hand. No more refreshing bank accounts, trying to match deposits. For audit prep, this automated documentation saves serious time.

Baxter shared a case study that put real numbers behind these features. S1 Technology was getting paid 30 days after due dates. Only 15% of clients paid electronically, and the other 85% wrote checks. They stored credit card numbers in Excel. After implementation, they cut collection times by 70% and drove major online adoption.

Two other features deserve attention because they solve common problems:

  1. Multi-tenancy lets you manage AR for all clients from a single dashboard. You can click between client accounts, adjust automations, check what’s outstanding, and run reports, all without logging in and out of different systems. For accountants managing 10, 50, or 100 clients, this makes AR management scalable instead of a bottleneck.
  2. Simple onboarding removes adoption friction. Many platforms require clients to fill out applications or create accounts before paying, and that’s where adoption stalls. The better approach is automatic. Alternative Payments creates accounts from integration data, ports over invoice history, and migrates payment methods so they’re ready when clients pay. The portal is white-labeled with your client’s brand, URL, and email, so it feels like their business rather than a third-party tool.

What this means for your practice—and your clients

Let’s bring this back to the numbers, the opportunity, and your next move.

  • Manual AR imposes a hidden tax that never shows up on financial statements — paper check processing, trapped working capital, fraud exposure, lost reconciliation hours, and growing bad debt risk. Each one is more expensive in today’s environment than it was two years ago.

Against that backdrop, the automation results speak for themselves. Autopay cuts payment time by 80% to 90%. Automated reminders speed collections by 66%. Firms using these workflows reduce overall collection times by up to 70%. Credit card surcharging is now standard for 80% of businesses on the platform, recovering about 3% on every card transaction. And automated reconciliation eliminates the most mind-numbing task in accounting.

For accountants, AR automation is a legitimate service line that delivers measurable value to clients while freeing your team from work that AI and automation are making obsolete. As traditional accounting services become increasingly commoditized, the ability to identify hidden financial drains and address them distinguishes advisory practices from commodity bookkeeping.

Alternative Payments also offers a referral program for accountants, with 10% lifetime commissions on referred clients, paid quarterly and managed directly through the platform. It’s another way AR automation can become a revenue stream, not just a cost-saver.

The full webinar goes deeper, including platform demos, workflow examples, and details on how multi-tenancy and integration with QBO, Xero, NetSuite, and other systems work in practice. If you want to see exactly what manual AR costs your clients and understand how to fix it, it’s worth watching.

Accountants Rush to Adopt AI While Ignoring the Security Risks That Come With It

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Nearly nine out of ten accountants using AI report positive returns. But another statistic is more troubling. Over half of accounting firms have experienced data breaches recently, yet fewer than half have guidelines for how AI handles sensitive financial data. The productivity gains are real, but so are the risks we’re ignoring.

Blake Oliver, host of the Earmark Podcast, recently sat down with David Jani, Senior Content Analyst at Capterra, to unpack Capterra’s 2026 Accounting Software Trends report. The survey of 500 U.S. accounting managers shows the profession has moved beyond testing AI and into territory where the gap between adoption speed and security readiness is becoming dangerous.

 

The Productivity Gains Are Real (With a Catch)

AI in accounting has crossed from experiment to standard practice. More than half of accountants now use AI in their accounting software, and it appears across all company sizes, not just enterprises with big tech budgets. As David noted, “We’ve gone beyond the point of it being companies testing the water with this stuff.”

The most common uses for AI are chatbots and AI assistants, followed by data entry automation and fraud detection. AI is also making headway in predictive analytics, cash flow forecasting, smart invoicing, and bank reconciliation. David described it as “a coalescence around analytics and process-driven tasks.”

The 89% positive ROI figure comes from two main benefits. Half of respondents cite productivity gains, and nearly as many report reduced errors. So firms see real time savings and quality improvements.

But 48% of accountants manually check every single AI output. Not spot-checking, but checking everything. And about a third catch errors in their AI outputs more than half the time.

How do you square 89% positive ROI with error rates that high? David’s practical take is AI is “creating some gains in some areas, creating some extra work in others,” but the net result stays positive. Even when you add review time, firms come out ahead. But he cautioned, “It’s important that businesses still keep a close eye on the ROI of these situations and confirm it is delivering those gains.”

Meanwhile, plenty of work remains manual. More than half of respondents still handle financial reporting through spreadsheets or manual processes. Accounts payable and receivable, billing, invoicing, and payroll are all heavily manual. And yes, 51% of accountants still use Excel or Google Sheets for financial data. As Blake observed, spreadsheets have survived 40 years and aren’t going anywhere soon.

The Security Gap No One’s Taking Seriously

While firms celebrate productivity wins, the security picture is alarming, and almost nobody seems concerned enough to act.

Consider 52% of accounting managers surveyed have experienced a data breach in the last two years. That’s more than half. While David doesn’t have data linking these directly to AI, what he found about AI and sensitive data should worry every firm leader.

“Most companies don’t have clear guidelines on how they use AI tools with sensitive data,” David revealed. Fewer than half (49%) have guidelines for employee and payroll information. Coverage of bank reconciliation and customer billing data is even lower.

The perception gap is striking. Nearly half view AI cybersecurity risk as “minor,” another 12% as “insignificant,” and only 3% as “critical.” This might be “why so many people don’t have guidelines. Unfortunately, they just don’t perceive the risks at play,” David said.

Blake painted a scenario that’s probably happening now. Someone uploads payroll reports into free ChatGPT, where the terms of service may allow the vendor to train on that data. “We really need to step up,” he said.

The risks go deeper. Blake raised the issue of prompt injection, which involves hidden text in documents that manipulates AI agents into leaking data or changing payment information. It’s sophisticated and hard to defend against. As David acknowledged, “It’s a very new and rather sophisticated way of extracting information from a company. We still don’t really know enough about it.”

David didn’t sugarcoat his advice. “Guidelines around this don’t seem like much, and obviously, everyone is rushing to get AI tools. But it’s a huge risk factor we need to address.”

AI Is Raising the Bar

If AI makes accountants more productive, you’d expect fewer jobs. But the data tells a different story, and it came as a surprise to David.

“Despite a lot of reports predicting the end of accountants, it’s not really what we found,” he said. Companies are adopting AI, but “it’s not necessarily affecting hiring decisions in the same way. A lot of companies are actually more focused on upskilling.”

Blake offered a historical perspective. The same panic hit when VisiCalc and Excel arrived 40 years ago, yet accounting jobs grew. When cloud computing transformed the industry, client accounting services didn’t shrink. Instead, it’s grown year over year for a decade.

The talent shortage persists, with 73% of firms reporting trouble with retention and hiring. The hardest roles to fill are mid-career positions. About a third struggle to find financial analysts, with specialized accountants (tax and cost accounting) close behind.

The paradox is AI actually increases the need for experienced professionals. Someone must review those AI outputs that are wrong half the time. Someone must understand the AI well enough to catch mistakes. Someone must manage the security implications. All that requires judgment and experience, and that’s exactly what’s hardest to hire right now.

The data backs this up. Upskilling existing staff is the dominant strategy at 40%, double the 21% using AI to fill staffing gaps. Traditional hiring sits at 31%, with graduate programs at 23%. The profession is betting on people, not automation, to solve its workforce problem.

Looking Ahead: Challenges and Choices

What keeps accountants up at night? Budgeting and forecasting in an uncertain economy tops the list, followed by figuring out how to use AI effectively. As David put it, firms are trying to understand AI “in a way that makes sense.”

David has specific advice for where firms should invest their AI dollars. Map investments to your particular needs rather than chasing trends. For general guidance, he pointed to data entry automation and predictive modeling tools, especially cash flow forecasting and analysis dashboards, as areas delivering the most value.

When asked to predict what might change by the 2027 survey, David hopes to see more firms with updated security guidelines. “I think as these tools become more mature, more people will update their guidelines, especially for handling sensitive data like payroll and cash flow,” he said.

A Gap Between Speed and Safety

The Capterra data shows the profession is getting AI both right and dangerously wrong. The 89% positive ROI is genuine. Firms are saving time and reducing errors, even after factoring in review burdens. But that headline obscures the fact that over half have experienced breaches, fewer than half have AI data guidelines, and most dismiss the cybersecurity risk as minor, even with threats like prompt injection that the profession barely understands.

AI isn’t solving the talent crisis either. It’s raising the bar for what accountants need to know, making experienced reviewers more critical while the mid-career talent shortage intensifies.

Firms must build guardrails, write guidelines, and invest in upskilling their people to successfully work alongside technology that’s powerful but imperfect.

Want to dig deeper into these findings? Listen to Blake’s full conversation with David on the Earmark Podcast, and earn free NASBA CPE while you’re at it. 

Why an S Corporation’s Retained Earnings, AAA, and Stock Basis Rarely Match

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S corporations sit at an awkward intersection of tax law. As Jeremy Wells, EA, CPA, explains in Episode 28 of Tax in Action, they’re hybrid entities that blend the tax and accounting rules of corporations with pass-through entities like partnerships. This blending creates something that exists solely in federal tax law. There’s no such thing as an “S corporation” in everyday business activity. It’s a creation of Subchapter S of the Internal Revenue Code, a tax fiction that forces us to track three different ledgers, often confusing even experienced practitioners.

Jeremy frames these three ledgers with a simple framework: retained earnings answers what happened, AAA (Accumulated Adjustments Account) determines what kind, and stock basis tells us how much. Each serves a distinct purpose, and understanding their differences is critical to avoiding costly errors in S corporation taxation.

Three Measures, Three Different Questions

The confusion starts because these ledgers often produce identical numbers, especially in simple scenarios. This similarity lulls practitioners into thinking they should always match. But as Jeremy emphasizes throughout the episode, each ledger answers a fundamentally different question about the S corporation and its shareholders.

Retained Earnings: What Happened Over Time

Retained earnings is the most familiar concept. It shows accumulated undistributed profits over the corporation’s lifetime. At the end of each accounting period, net income and distributions close out to retained earnings, leaving you with a running total of everything the corporation earned but didn’t pay out.

Critically, retained earnings has no floor. It can be a negative number if a corporation distributes more than it ever earned, or if it has accumulated losses over time. As Jeremy notes, some GAAP rules suggest calling negative retained earnings “accumulated losses.”

Unlike the C corporation’s Form 1120, Form 1120-S doesn’t include a retained earnings reconciliation. The IRS knows this. Jeremy points to IRM 4.10.3.8.2.2, which instructs examiners to review retained earnings for unexplained increases, as such jumps often indicate unreported income. If you can’t explain every change in retained earnings, an examiner will ask you to.

AAA: What Kind of Income

The Accumulated Adjustments Account might be, as Jeremy calls it, “one of the most misunderstood concepts of the S corporation as a whole.” It tracks the accumulated undistributed pass-through taxable income of the S corporation. That doesn’t include all profits, just the S corporation’s pass-through earnings.

History can explain why this distinction matters. Subchapter S was added to the tax code in the late 1950s, roughly two decades before Wyoming passed the first LLC law. Most early S corporations weren’t LLCs electing S status. They were C corporations converting to S status. AAA exists to separate the old C corporation earnings (which generate taxable dividends when distributed) from the S corporation’s pass-through income (which comes out tax-free).

Jeremy hammers home that AAA is a corporate-level measure. Even with a single 100% shareholder, AAA tells you nothing about how distributions affect that specific person’s tax return. It only tells you whether the corporation is distributing S corp earnings or C corp dividends.

Stock Basis: How Much

Only stock basis determines actual tax consequences for individual shareholders. This ledger answers the questions that matter to your clients, such as whether their losses will be deductible or suspended and whether their distributions are tax-free or trigger capital gain.

Stock basis differs from the other two ledgers because it’s shareholder-specific. While retained earnings and AAA belong to the corporation, basis belongs to the person. Since around 2021, it’s been reported on Form 7203, with Part 3 being especially critical for tracking allowable losses, deductions, and carryover amounts.

Jeremy notes that Form 7203 is filed at the shareholder level, not the corporate level. Even if the K-1 package includes a corporate version of the form, the official filing happens with the shareholder’s return, and the preparer needs to verify every number.

Where the Three Ledgers Split Apart

To demonstrate how easily these ledgers diverge, Jeremy walks through a first-year example. Jessica registers Lighthouse LLC as the sole member, funds it with $1,000 from her savings, and elects S corporation status. In year one, the corporation earns $84,000 of ordinary income, receives $500 in municipal bond interest, incurs $4,000 in nondeductible meals and entertainment expenses, and pays Jessica $35,000 in distributions.

Here’s where each ledger lands:

  • Retained Earnings: The $84,000 income increases it. The $500 tax-exempt interest increases it. The $4,000 nondeductible expenses and $35,000 distributions decrease it. Total: $45,500.
  • AAA: The $84,000 income increases it. The $4,000 expenses and $35,000 distributions decrease it. But the $500 tax-exempt income doesn’t touch AAA. It goes to the Other Adjustments Account (OAA) instead. The $1,000 capital contribution also bypasses AAA. Total: $45,000.
  • Stock Basis: Everything affects basis, including the $1,000 contribution, the $84,000 income, the $500 tax-exempt income, minus the $4,000 expenses and $35,000 distributions. Total: $46,500.

Three different numbers from perfectly ordinary transactions. As Jeremy emphasizes, “there is nothing locking these three ledgers together.”

The specific items that cause divergence aren’t unusual:

  • Capital contributions increase only stock basis. Jeremy sees preparers incorrectly running these through AAA or retained earnings, but they should go directly to the balance sheet as capital stock or additional paid-in capital.
  • Tax-exempt income increases retained earnings and basis but not AAA. If you worked with businesses during the COVID-19 pandemic, you’ve seen this with PPP loan forgiveness and the pre-EIDL grants. Both created tax-exempt income that went to OAA, not AAA.
  • Distributions affect all three ledgers differently. They reduce retained earnings without limit, reduce AAA but not below zero, and reduce basis with tax consequences if exceeded.

The Costly Errors That Follow

Understanding the theory is one thing. Recognizing the practical mistakes is where Jeremy’s guidance becomes invaluable for practitioners.

The “Loans to Shareholder” Trap

Jeremy sees this error often. When distributions exceed a shareholder’s basis, IRC Section 1368 requires treating the excess as capital gain. Instead, preparers record the excess on the balance sheet as “loans to shareholder” without any promissory note, repayment schedule, or reported interest income.

This is a misclassification. As Jeremy notes, both the IRS and courts consistently reject these arrangements when no bona fide debtor-creditor relationship exists. If you’re reviewing a return with loans to shareholders that never decrease or only increase, start asking for documentation. Without it, you’re likely looking at misclassified distributions that should have triggered capital gain.

Missing Capital Contributions

There’s a trap for 1040 preparers who don’t also prepare the 1120-S. Nothing on the K-1 explicitly reports capital contributions. Unless the corporate preparer adds a note, that contribution is invisible. Jeremy recommends asking every S corporation shareholder client every year, “Did you make any contributions to this S corporation?” Skip the question, and you’ll understate the basis.

Suspended Losses at Termination

This one catches clients by surprise. IRC Section 1366(d)(3)(A) permanently disallows suspended losses due to insufficient basis when the S election terminates. They don’t release like passive activity losses. During the post-termination transition period, shareholders can contribute capital to create basis and claim those losses. After that window closes, they’re gone forever.

The Order-of-Operations Election

Jeremy highlights an often-overlooked election under Regulation 1.1367-1(g). Normally, nondeductible expenses reduce basis before deductible losses. If those expenses use up remaining basis, the deductible losses suspend while the nondeductible amounts simply disappear.

Shareholders can elect to flip this order, preserving deductible loss carryovers at the expense of nondeductible items. The election is permanent, so revoking it requires IRS permission. Jeremy specifically mentions this could benefit cannabis businesses operating under IRC Section 280E, which face substantial nondeductible expenses.

Practical Takeaways for Your Practice

Jeremy emphasizes that S corporation shareholders need to know their basis and should perform mid-year tax projections. Basis is calculated at year-end or upon stock disposal, but projecting it mid-year helps avoid surprises like taxable distributions or suspended losses.

The three ledgers framework provides clarity in a complex area. Retained earnings shows what happened over the corporation’s life. AAA shows what kind of transactions occurred. Stock basis shows how much in limitations apply to each shareholder. Keep these distinctions clear, and you’ll avoid the errors that trip up even experienced practitioners.

Listen to the full episode for Jeremy’ complete discussion, including additional nuances about basis calculations and real-world applications that go beyond what’s covered here. The next episode of Tax in Action builds directly on these basis concepts, explaining what happens when shareholders actually sell their S corporation stock.

What Losing Your Best Bookkeeper Reveals About How You Price Yourself

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Alicia Katz Pollock, founder of Royalwise, published author, and host of The Unofficial QuickBooks Accountants Podcast, spent two years training a bookkeeper named Brenda. It started as a coaching relationship, but ended up with Brenda earning $10,000 a month and giving notice because she’d outgrown Alicia’s “tiny little clients.”

That’s absolutely a success story. But when Alicia shared this story with Questian Telka and Nancy McClelland on a special crossover episode between The Unofficial QuickBooks Accountants Podcast and She Counts, they heard something Alicia hadn’t noticed.

“Oh my God, I’m undervaluing myself,” Alicia admitted. “But it wasn’t part of my narrative, and I wasn’t thinking about it that way at all.”

That moment of recognition became the foundation for a brutally honest conversation. Three experienced professionals with decades of combined expertise discovered they all struggle with the same thing: chronically underpricing themselves. As a result, Alicia decided to build a paid bookkeeper incubator that turns her expertise into a scalable training model.

The episode dug into the invisible forces that cap the growth of technically brilliant professionals who can untangle any set of books but can’t bring themselves to charge what that skill is worth. As Alicia put it, “The ability to expand really happens when you step into your own worth.”

 

When Your Best Employee Outgrows You

Brenda’s journey from a coaching client to a $10,000-a-month earner unfolded gradually over two years. She asked insightful questions during Alicia’s coaching sessions. Then she began handling Alicia’s smaller bookkeeping clients. She bought a few personal finance accounts from Alicia’s book of business. She landed her own clients. Finally, a church hired her for $4,000 a month.

“Hey, Alicia, I need to give you notice,” Brenda said. “I can’t do your tiny little clients anymore.”

Alicia’s first reaction was panic. “What am I going to do now? Am I going to take these back and do them myself? Am I going to sell off my book of business?”

Nancy, who’s run a Chicago CPA firm for 25 years, had her own parallel story. Her first employee left without warning to start a competing firm after Nancy trained her from scratch. “I taught her everything she knew,” Nancy said. “And she didn’t tell me that’s what she was doing.”

When Nancy shared her frustration with Hector Garcia, he offered another perspective: “Yeah, but what if you don’t teach them everything they need to know and they stay?”

Questian, founder of a fractional CFO firm focused on nonprofits, cut through the emotion. “When that takes place, it forces us to realize the value of what we’ve built.”

That’s the mirror moment. When someone you’ve trained walks away making more than you charged for the same work, it stops being a staffing problem. It becomes a pricing problem.

Rather than shrinking after Brenda’s departure, Alicia asked herself, “If it worked for Brenda, can I repeat the success? If it works for one person, can I scale it?”

Why We Undervalue Ourselves

When Questian asked why technically excellent bookkeepers undervalue themselves, Alicia’s answer was immediate: “Human beings are wired for insecurity.”

Nancy wanted that line as a promotional clip. But the conversation identified three specific patterns that keep even accomplished accounting professionals from charging what they should.

Poverty consciousness hits hard

When Alicia calculated her incubator program’s value at roughly $19,000 a year, her first thought was “Who the heck is going to pay $19,000 to be part of this?” The discomfort was physical. “Everybody wants to spend a minimum amount of money,” she said. She worried about being seen as greedy.

She’s not alone. Nancy’s husband jokes she’ll eventually come home with a live chicken from bartering with clients who can’t pay. Then one client actually started raising backyard chickens and gave them eggs. Alicia’s husband trades Apple training for eggs, too. Someone recently told Questian she “runs her business like a nonprofit.” 

“It’s not entirely untrue,” she admits.

Helper mentality runs deep

When your identity centers on serving others, asking for significant money feels wrong. Alicia genuinely worried that some clients would only do bookkeeping if she kept prices at rock-bottom levels. Nancy confessed she hasn’t embraced value pricing “at all.” The instinct to help can override business sense.

The expertise blind spot might be worst

Nancy explained it perfectly. “Oh yeah, I know how to do that. It only takes me ten minutes.” When years of expertise compress complex tasks into quick execution, experts discount the outcome’s value because the effort felt minimal. But clients aren’t paying for your ten minutes. They’re paying for the decade that made ten minutes possible.

Reading Blair Enns’s book The Four Conversations at Hector Garcia’s Reframe conference, Alicia encountered the expert’s mantra: “I am the expert. I am the prize. I am on a mission to help. I can only do that if you let me lead. I accept that not all will follow.”

“My value is not me being able to untangle complicated books,” Alicia realized. “That’s what I do. And it has value, but that’s not my value.” Her real value includes a master’s in teaching, two decades of QuickBooks expertise, practice management knowledge, and industry relationships so deep she can text Intuit product managers directly.

Nancy connected this to value pricing. “When everything depends on you and your hands and your knowledge, your time fills up, and there’s a cap. But when you multiply your expertise through others, your impact expands.”

Building the Incubator

Alicia did something most business owners wouldn’t dare. She asked her community whether her idea was any good.

At a Royalwise OWLS membership meeting, with Brenda present to tell her own story, Alicia asked, “Is this a good idea or a stupid idea?” The response was immediate. Members wanted hands-on experience with real clients because “every single one is different.”

The training model follows a deliberate progression. In month one, Alicia does the bookkeeping while interns watch. In month two and beyond, interns do the bookkeeping while Alicia talks them through it. By month five or six, they work independently, with Alicia only reviewing.

But the incubator goes beyond bookkeeping mechanics. She’s enrolling interns in Mariette Martinez’s accounting lifecycle course. She set up a roundtable with business coach Richard Roppa-Roberts without Alicia present so interns have a safe space for support or, as Alicia put it, “a grievance panel if it’s needed.” Everyone takes her hands-on QuickBooks training course built from her published textbook.

The financial structure makes it work for everyone. Interns earn 60% of client fees as salaried employees. Her lawyer insisted on employee classification, which meant Alicia unexpectedly doubled her company’s size and had to navigate employment registrations across multiple states. “Some of them were like twice as much,” she said about certain states’ requirements. “But for me, that’s exciting because I’m learning something new.”

She secured sponsorship from Double and converted it entirely into scholarships. She offered payment tiers and prorated fees for existing members.

The pricing felt right when she considered Brenda’s trajectory. If working with Alicia can lead to $10,000 in monthly income, then $19,000 annually is a clear investment.

Behind the incubator sits strategy. With 10 to 15 years until retirement, Alicia wants something she can sell. “Right now, Royalwise is based on Jamie and me. We are the product. But that’s not something you can sell.”

She’s also thinking about the profession. With outsourcing and AI reducing opportunities for US-based bookkeepers, the incubator invests in domestic talent. “We need to have talented people here.”

This is explicitly a pilot program. “We are building this together,” she told her cohort. Her exit strategy is still up in the air. It might continue with new cohorts, become permanent staff, or scale differently.

Questian, navigating her own business transformation, offered the episode’s emotional core. “I’m on the right track because I am absolutely terrified.”

Nancy pushed back against advice to “not be afraid.” Fear is human. Your brain is protecting you. The answer is to act anyway. “Be afraid,” Nancy said. “And do it anyway.”

You Get What You Have the Courage to Ask For

Three successful women in accounting discovered (again) that even people others admire struggle with insecurities. Alicia didn’t realize she was undervaluing herself until Questian and Nancy reflected her story back to her. Nancy still catches herself working for free. Questian is navigating changes she’s not ready to name publicly.

None have figured it out. All are moving forward anyway.

Here’s what their conversation teaches us:

  • Your best employee leaving is data, not a disaster. When someone you’ve trained outgrows your practice, it reveals what you’ve built and whether you’re pricing accordingly.
  • Technical mastery isn’t business authority. Knowing QuickBooks doesn’t mean you know how to price services or lead others. Those require separate skills, community, and practice.
  • Undervaluation has specific causes. Poverty consciousness, helper mentality, and the expertise blind spot are patterns, not flaws. You can interrupt patterns once you see them.
  • Scaling expertise multiplies impact. Training others creates value for clients, team members, the profession, and yourself.
  • Fear is a compass, not a stop sign. If the next step terrifies you, you’re probably headed in the right direction.

The accounting profession faces change. Outsourcing and AI are reshaping US-based bookkeeping. Professionals investing in domestic talent, including Alicia’s incubator, are investing in the industry’s future.

But these breakthroughs didn’t happen alone. Every pivot came from honesty about fears, mistakes, or unknowns. Community and vulnerability are business strategies.

The episode closed with Oprah Winfrey’s quote, “You get in life what you have the courage to ask for.”

So ask. Ask for fees reflecting your expertise. Ask your community about your ideas. Ask for help building what you can’t build alone.

Listen to the full episode and share your own undervaluation story in the Unofficial QuickBooks Accountants Podcast LinkedIn group. When you undervalued yourself, what helped you move past it?

If you’re thinking “who would pay me for what I know,” you’re in good company. Three experts had the same thought, caught themselves, and chose to charge anyway.

Alicia Katz Pollock’s Royalwise OWLS (On-Demand Web-based Learning Solutions) is the industry’s premier portal for top-notch QuickBooks Online training with CPE for accounting firms, bookkeepers, and small business owners. Visit Royalwise OWLS, where learning QBO is a HOOT!