The acceleration of artificial intelligence (AI) adoption across industries has become one of the most transformative business stories of the decade. Companies are not merely deploying AI to augment human productivity, they are redesigning workflows, reducing headcount, and reallocating capital toward AI systems and data infrastructure. This has operational and ethical implications in addition to tax consequences that few organizations have fully explored.

The recent One Big Beautiful Bill Act (OBBBA), which permanently reinstated 100% bonus depreciation for qualified capital investments and immediate expensing for research and development (R&D) expenditures, adds new urgency to this analysis. The bill effectively removes tax friction that once discouraged large-scale investment in technology and automation.

The OBBBA codifies a new economic reality: U.S. tax policy now actively subsidizes the move from human labor to AI, rewarding companies that reinvest workforce dollars into automation.

A Tax Code That Encourages Automation

For decades, labor dominated the cost structure of most enterprises. Today, the OBBBA has fundamentally changed the economics of workforce planning. U.S. tax policy now favors automation over labor, creating strong incentives for companies to redirect spending from payroll to capital investments. As businesses replace portions of their workforce with AI systems, labor expenses decline while capital expenditures rise.

Under these provisions, AI-related costs can be:

• Fully expensed for internally developed software and systems
• Depreciated at 100% for hardware and infrastructure
• Eligible for R&D credits and state incentives tied to innovation

These rules deliver immediate advantages: lower effective tax rates, improved cash flow from accelerated deductions, and short-term valuation boosts. However, timing matters. As payroll shrinks and capital spending stabilizes, recurring deductible expenses decline, increasing taxable income in later years. In essence, automation delivers a front-loaded deduction surge followed by a steady-state flattening, requiring careful timing and multi-year modeling.

Takeaway: Tax rules reward automation, but businesses must weigh short-term gains against long-term impacts to optimize cash flow and maintain compliance.

Planning Considerations for Business Leaders

Understanding these tax dynamics is only the first step. As automation directs cost structures, tax can no longer be an afterthought. It must be included in strategic decision-making. The financial and operational impact of AI adoption puts added pressure on leaders to integrate tax strategy into every stage of automation planning.

Forward-thinking companies should:

1. Determine AI cost treatment and whether AI development expenses qualify for immediate deduction or must be capitalized.
2. Map incentives by identifying federal, state, and global programs that encourage automation, R&D, and workforce reskilling.
3. Leverage workforce transition credits that offset retraining displaced workers.
4. Plan for lifecycle of tax deductions by modeling how accelerated deductions affect long-term cash flow, effective tax rates, and profitability.
5. Think globally and account for cross-border tax rules triggered by AI investments.
6. Collaborate across finance, human resources, and technology teams to balance cost efficiency with workforce ethics and brand reputation.

In the automation era, tax becomes a catalyst for innovation, guiding decisions that drive efficiency, growth, and competitiveness.

Takeaway: Companies that integrate tax considerations early into automation planning are better positioned to capture incentives, optimize cash flow, and maintain compliance.

Automation’s Hidden Valuation Multiplier

When payroll is replaced with AI investment, enterprise value experiences a temporary boost as businesses look more profitable and cash-rich on paper:

• Profitability looks stronger as reduced labor costs lift EBITDA significantly higher
• Assets grow because unlike labor, capitalized AI investments show up on the balance sheet, increasing total assets
• Taxes drop (temporarily) as immediate deductions enhance near-term cash flow

These gains are often timing-based, not permanent. Once deductions normalize, valuation effects fade, requiring proactive and ongoing financial planning.

Takeaway: Treat automation’s valuation uplift as short-term. Model deferred tax impacts and clearly communicate what’s driving results to stakeholders.

State and Local Tax Impact of Automation

As your company adopts AI and automation, state and local taxes (SALT) can shift in ways that affect your bottom line. Here’s what matters most:

1. How Automation Changes Tax Exposure

Automation redesigns your tax footprint in several ways:

• Fewer employees reduce payroll taxes, while AI infrastructure increases property tax exposure.
• Sales still remain the biggest factor in most states’ tax formulas.

Expect less exposure in high-payroll states and more where data centers or automation hubs are located.

2. State Rules on Expensing Investments

Federal law allows full, immediate write-offs for R&D and equipment, but states vary:

• Conforming states (e.g., FL, IL, TX) = faster tax relief
• Non-conforming states (e.g., CA, MA, NJ) = slower deductions

Track which states align with federal rules before making major automation investments.

3. Opportunities You Can Leverage

While automation reduces headcount, it opens doors to new savings:

• Retraining and reskilling initiatives
• Data center and energy-efficiency programs
• Property tax breaks for AI hardware
• Innovation and R&D credits

Combine state incentives with federal expensing for maximum benefit.

4. Nexus: Where You Owe Taxes

Automation redefines tax presence:

• Fewer employees reduce payroll-based taxes
• Servers and AI systems can trigger property or use taxes even without on-site staff
• Some states now tax based on digital activity alone
• AI systems could shift the sourcing of service revenue, under a cost-of-performance method

Update your tax strategy to reflect technology-driven nexus and map where your digital presence creates tax obligations.

5. Strategic Steps for Leaders

Here’s how to prepare for automation-driven changes:

1. Conduct a SALT footprint review before and after automation rollouts.
2. Model how changes in payroll and property affect state tax rates.
3. Revisit incentive strategies tied to capital investment and retraining.
4. Keep documentation to support your positions across states.

These steps help your organization adapt effectively, reduce risk, and capture every available tax advantage.

Site Selection in the Automation Economy

The move from labor to capital investment is redefining where companies locate operations as property replaces payroll in apportionment formulas. Historically, enterprises chose locations based on access to skilled labor and payroll-tax efficiency. In the automation era, those decisions increasingly hinge on where capital is taxed rather than where people are paid.

Key factors in site selection:

• Property-weighted apportionment states (e.g., FL, OK, VA) become less attractive because AI hardware increases apportionable income
• Single-sales-factor states (e.g., GA, SC, TX) grow more attractive, since property no longer drives apportionment
• Personal-property-tax jurisdictions may impose recurring levies on AI equipment, favoring states that exempt or abate such assets
• State conformity to federal expensing rules, local property tax regimes, and infrastructure or energy incentives influence competitiveness

States taxing capital lightly will attract AI data centers, robotics facilities, and digital infrastructure. Expect a new era of state competition as jurisdictions:

• Offering AI and automation investment credits instead of labor-based ones
• Modifying property-tax regimes to attract digital infrastructure
• Adjusting apportionment formulas to remain competitive in a capital-heavy economy

Takeaway: Consider state tax, property cost, and incentive policy when determining where to locate AI and automation investments.

We Can Help

Understanding how tax policy aligns with automation leads to smarter business decisions. Tax leaders have an opportunity to influence workforce design, capital allocation, and long-term competitiveness.

If your organization is exploring AI adoption, consider how federal and state tax rules, credits, and planning strategies fit into your roadmap. Engaging tax advisors early can help you capture benefits and position your business for sustainable growth.

Contact us today to start the conversation.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

In private equity, audit readiness is often framed around portfolio companies and their ability to deliver timely, accurate financials. But what happens when the lens shifts to the fund itself?

Fund-level audits, particularly for Small Business Investment Companies (SBICs), introduce a distinct set of challenges and compliance requirements that deserve equal attention. While delays at the portfolio level can erode investor trust and complicate reporting cycles, inefficiencies at the fund level may disrupt capital calls, delay distributions, and invite regulatory scrutiny.

Fund managers must understand the distinct audit rules tied to fund classification. For funds operating under the SBIC program, the stakes are even higher as noncompliance can jeopardize access to Small Business Administration (SBA) leverage and hinder future fundraising efforts.

This guide explores the nuances of fund-level audit preparedness, outlines key differences between SBIC and non-SBIC audits, and offers practical strategies for managing both effectively.

Common Pitfalls in Fund-Level Audit Preparation

Based on our experience with portfolio company audits, many of the same challenges show up at the fund level, often with added complexity, regulatory pressure, and tighter timelines. Below are several frequent issues that can be avoided with thoughtful planning and the right resources:

• Insufficient documentation for valuation adjustments and portfolio company financials, which can slow down the audit process and raise red flags.
• Uncertainty around SBA-specific reporting requirements, especially for funds operating under the SBIC program, where compliance expectations are more rigid.
• Misalignment between fund accounting and compliance teams, particularly when managing both GAAP and SBA standards. This disconnect can lead to inconsistent reporting, missed deadlines, and audit delays.
• Limited internal experience with SBA Form 468, including its structure, submission timeline, audit implications, and how it differs from standard fund reporting.

6 Audit Preparedness Steps for SBIC and Non-SBIC Funds

Fund-level audits require a clear understanding of how accounting standards differ across fund types. These six steps can help improve your audit preparation and reduce compliance risk:

1. Understand How Unrealized Gains and Losses Are Treated

• Non-SBIC Funds (U.S. GAAP): Changes in unrealized gains/losses are recognized as part of net income or loss on the statement of operations.
• SBIC Funds: Unrealized appreciation or depreciation is recorded directly to equity, not through the statement of operations. This shields net income from fair value fluctuations, aligning with the SBA’s conservative approach.

2. Apply the Correct Valuation Methodology

• Non-SBIC Funds (U.S. GAAP): Investments are marked to fair value at each valuation date (typically year-end).
• SBIC Funds: Valuation follows SBA guidelines:
  
  • Cost is presumed fair value unless justified otherwise.
  • Unrealized appreciation is limited to investments with sustained economic justification for an increase in value.
  • Unrealized depreciation is recorded when portfolio companies show sustained poor performance.
  • Permanent declines trigger write-offs as realized losses.

3. Prepare Investment Detail with Fair Value Adjustments

Be ready to provide a breakdown of all investments, including any adjustments made to fair value and the rationale behind them.

4. Gather Portfolio Company Financial Statements

Auditors will require financials from underlying portfolio companies to validate fund-level reporting.

5. Document Valuation Models and Justifications

Maintain clear documentation of valuation methodologies and support for any changes in investment value.

6. Track and Meet Reporting Deadlines

• SBIC Funds: Must file SBA Form 468 within three months of fiscal year-end (e.g., March 31 for a December 31 year-end).
• Non-SBIC Funds: Follow deadlines outlined in partnership agreements, typically 90–120 days post year-end.

We Can Help

At Elliott Davis, we specialize in guiding private equity firms through both portfolio and fund-level audits. Whether you're working through GAAP, SBA standards, or both, our team offers tailored support to streamline your audit process and build investor confidence.

Reach out today to learn how we can help make your next audit cycle smoother.

Looking for guidance on portfolio company audit readiness? Check out our related article.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

Physician and clinical services like infusion, behavioral health, dental, and specialty care account for nearly 20% of U.S. healthcare spending. The sector is expansive, essential, and growing fast. Yet for most-mid-sized practices, that growth is shadowed by rising costs, staffing shortages, and operational challenges.

With multiple locations and service lines, understanding your true profitability is the key to stability, smarter resource allocation, and sustainable growth. Margin analysis in healthcare reveals hidden inefficiencies and enables data-driven decisions that create measurable value.

Why Margin Analysis Drives More Strategic Healthcare Decisions

Operating margins are the backbone of performance. They show whether a healthcare practice can cover its costs and still reinvest in people, technology, and future growth.

Despite their importance, many practices only review margins annually, if at all. With reimbursements tightening and expenses surging, an annual approach is no longer enough. Leaders need real-time visibility into performance across locations, services, and payers to make informed decisions.

Margin analysis empowers healthcare organizations to:

• Identify true profitability across service lines, specialties, and locations
• Manage expenses by pinpointing inefficiencies in labor, supplies, and contracts
• Refine prices to reflect value while remaining competitive and accessible
• Allocate resources to the most productive areas
• Plan for expansion based on real financial strength
• Drive accountability and transparency to leadership to make sound operational decisions
• Support valuation and private equity strategy through improving EBITDA

Without this insight, companies risk making decisions based on assumptions, investing in underperforming services, and missing opportunities to scale.

For information on strategic market positioning and how benchmarking fuels smarter business decisions, read our related insight.

Real-World Example: Turning Data into Deal-Ready Decisions

A growing multi-specialty healthcare practice with over a dozen physicians and multiple locations was preparing for a sale but lacked financial clarity around profitability by doctor, location, or specialty. When the leadership team engaged an investment bank, they were told the business couldn’t be taken to market until the financials were in order, an exercise that delayed their plans. In short, they weren’t deal-ready.

By segmenting financial data by provider and service line, the practice uncovered data that showed infusion services (previously lumped into general revenue) were driving a disproportionately high margin. This insight helped them identify ways to optimize operations and position infusion services as a key selling point for private equity buyers.

With a clear understanding of profitability, the practice was able to restructure its reporting and move forward with a successful sale.

Click here for the full case study.

Real-Time Visibility Beats Rear-View Reporting

Healthcare organizations often continue to rely on archaic systems to track important data. Many have not optimized their reporting, leading to delays in delivering financial statements and key performance indicators (KPIs). This lack of urgency can lead to compounding issues that don’t get addressed until it’s too late—when expenses have exceeded budgets, overtime has been paid, and other variable costs have disrupted cash flow and profitability.

Real-time dashboards can change the game.

When operational leaders have access to integrated, up-to-date financial and clinical data, they can act accordingly in real-time by:

• Adjusting staffing levels before burnout or budget overruns occur.
• Renegotiating supply contracts based on current usage trends.
• Monitoring department-level performance and correcting course quickly to protect margins.

For more information on how a management reporting system transforms decision-making for healthcare entrepreneurs, read our related insight.

What Is a "Good" Margin in Healthcare?

There is no single benchmark for a “good” margin across healthcare in general. A mature urgent care clinic might operate efficiently at 15%, while a well-established dental group might aim for 30–40%. What matters most is whether your margin can sustain your business model, support future growth, and absorb risk. That answer depends on your stage of growth, payer mix, and operational efficiency.

Benchmarking can provide helpful context, but only if applied carefully.

Too often, practices compare themselves against industry averages without accounting for key variables. Consider:

• Are you calculating margins the same way as your benchmark source?
• Are you factoring in one-time costs or ongoing capital investments?
• Are you in growth mode or a steady-state phase?

For example, an oral surgery group in expansion mode may show thinner margins than the average for general dental offices, but those higher fixed costs and startup investments may lead to outsized returns over time.

We Can Help

At Elliott Davis, we help organizations understand their true profitability. Our team works with customers to build margin dashboards, define KPIs, capitalize on cost-saving opportunities, and develop pricing models rooted in real performance data.

We also help align teams to break down silos and enable cross-functional discipline across budgeting, planning, and execution.

When margins are under pressure, the smartest investment is visibility. Let us help turn your data into decisions. Contact us today to get started.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.