• Procurement in state and local governments has evolved into a strategic function that safeguards compliance, mitigates risk, and enhances public trust.

• Best practices include modernizing systems, expanding vendor diversity, prioritizing value over cost, and strengthening workforce development.

• CFOs and procurement officers must embrace strategy, innovation, and transparency to deliver sustainable, long-term value to taxpayers.

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In today’s complex fiscal environment, procurement in state and local governments must serve not only as a mechanism for acquiring goods and services but also as a strategic function that safeguards compliance, mitigates risk, promotes access, and delivers value to taxpayers. This article discusses what CFOs and procurement officers need to consider related to best practices, risk, and the evolving role of technology in state and local government procurement. For years, the procurement officer was seen as the organization’s gatekeeper, but their role is much more important than that — they are an organization’s risk manager, compliance protector, and strategic enabler.

Best Practices in Procurement for State and Local Governments

Procurement today is expected to balance regulatory compliance, fiscal discipline, access, and innovation. The following best practices reflect the most current standards across jurisdictions: 

• Strengthen Strategic Procurement Planning
• Modernize and Digitize Procurement Processes
• Uphold Regulatory and Grant Compliance
• Expand Vendor Diversity and Local Economic Development
• Focus on Value, Not Just Lowest Price
• Strengthen Risk Management and Contractor Oversight
• Prioritize Sustainability and Resiliency
• Enhance Transparency and Public Trust
• Invest in Workforce Development
• Adapt to Emergency and Cooperative Purchasing Needs

The following sections provide insight into how state and local governments can effectively implement these best practices.

Strengthen Strategic Procurement Planning

By strengthening strategic procurement planning, governments can align activities with broader organizational goals. This consists of:

• Centralizing or standardizing procurement policies across departments, where possible.
• Developing multi-year procurement plans aligned with budget forecasts, strategic initiatives, and grant cycles.
• Using category management (grouping similar goods/services) to leverage buying power and manage vendor performance across agencies.

Example: A city establishes a centralized IT procurement team to reduce redundant purchases across departments and better negotiate volume discounts.

Modernize and Digitize Procurement Processes

Modernizing and digitizing procurement processes streamlines operations and enhances efficiency. This consists of:

• Adopting eProcurement platforms for solicitation, bidding, contracting, and vendor communication.
• Using contract management systems to automate renewals, monitor performance, and enforce compliance.
• Verifying systems can handle hybrid work environments and providing real-time reporting on procurement activity.

Example: A county implements an eProcurement platform to manage RFPs, vendor scoring, and award transparency.

Uphold Regulatory and Grant Compliance

Upholding regulatory and grant compliance safeguards against legal pitfalls and improves  funding opportunities. This consists of:

• Training procurement staff regularly on Uniform Guidance (2 CFR 200) and other federal and state-specific requirements.
• Documenting full and open competition processes meticulously, especially when using federal grant funding.
• Preparing procurement files to withstand audits or public information requests (e.g., bids, scoring, award justifications).

Note: Federal programs often have strict procurement and documentation standards that are actively audited (e.g., EPA’s Greenhouse Gas Reduction Fund, FEMA Disaster Recovery Funds).

Expand Vendor Diversity and Local Economic Development

Expanding vendor diversity fosters local economic development and promotes access. This consists of:

• Implementing or strengthening small, minority-owned, and women-owned business engagement programs.
• Increasing the pool of potential vendors to allow broader participation.
• Using targeted outreach, training, and pre-bid meetings for underrepresented businesses.

Example: A city revises its scoring criteria for evaluating RFPs to award points based on vendor diversity criteria.

Focus on Value, Not Just Lowest Price

When appropriate, focusing on value rather than just the lowest price provides quality and long-term benefits. This consists of:

• Using best value procurement (BVP) approaches rather than defaulting to lowest bidder, which means prioritizing the overall value of a product or service and considering factors beyond just price. It involves evaluating different options based on criteria like quality, knowledge and experience, performance, and total cost of ownership, rather than solely on the lowest bid. This approach aims to increase the benefits and decrease risks associated with a procurement decision, establishing a long-term, sustainable outcome. 
• Evaluating proposals based on total cost of ownership, vendor qualifications, risk, and long-term value.
• Implementing weighted evaluation criteria with clear documentation.

Example: A school district awards an IT managed services contract after evaluating a host of factors, including service quality, scalability, and risk mitigation plans – not just cost. 

Key Principles of Best Value Procurement (BVP)

BVP is a procurement method that focuses on achieving the best overall value for a project or purchase, rather than simply selecting the lowest bid. The approach emphasizes quality, performance, and cost-effectiveness, taking into account factors such as:

1. Quality and Performance – evaluating the quality and performance of goods or services offered by vendors to make sure they meet the required standards and specifications.
2. Cost-Effectiveness – considering the total cost of ownership, including initial costs, maintenance, operation, and disposal costs, rather than just the upfront price.
3. Vendor Experience and Capability – assessing the experience, knowledge, and capability of vendors, including their history and reliability to deliver the project successfully. 
4. Risk Management – identifying and mitigating potential risks associated with the procurement process and the vendor’s ability to manage those risks effectively.
5. Innovation and Value-Added Services – encouraging vendors to offer innovative solutions and additional services that can enhance the value of the procurement.

BVP aims to make sure the procurement process results in the best possible outcome for the organization, balancing cost with quality and performance.

Strengthen Risk Management and Contractor Oversight

Strengthening risk management and contractor oversight can mitigate potential issues and enhance project success. This consists of:

• Conducting pre-award risk assessments on vendors (especially new or small firms).
• Building performance milestones and liquidated damages clauses into contracts, where appropriate.
• Increasing vendor monitoring for large projects (e.g., construction, IT systems).

Note: Many governments are now tying payment schedules to verified deliverables instead of time periods.

Prioritize Sustainability and Resiliency

Prioritizing sustainability and resiliency address environmental concerns and prepares for future challenges. This consists of:

• Including sustainability criteria in procurements, where practical.
• Sourcing vendors with green certifications (e.g., Energy Star, LEED).
• Considering supply chain resiliency and utilizing vendors with varied sourcing and continuity plans.

Example: A city requires fleet vehicle purchases that meet minimum hybrid or EV standards.

Enhance Transparency and Public Trust

Enhancing transparency builds public trust and accountability. This consists of:

• Publicly posting online the procurement opportunities, bid tabulations, and award decisions.
• Establish clear conflict-of-interest disclosures for procurement officials and evaluators.
• Respond proactively to public records requests.

Example: A state posts all RFP responses and scoring matrices within 10 days of contract awards.

Invest in Workforce Development

Investing in workforce development equips staff with the skills needed for evolving procurement demands. This consists of:

• Requiring continuing education and certifications (e.g., Certified Public Procurement Officer (CPPO), National Institute of Government Purchasing – Certified Purchasing Professional (NIGP-CPP)).
• Creating succession plans for procurement leadership and technical staff.
• Training on new risks like cybersecurity clauses, AI tools, and federal compliance changes.

Note: Workforce shortages are a significant risk and developing internal capacity is critical.

Adapt to Emergency and Cooperative Purchasing Needs

Adapting to emergency and cooperative purchasing needs allows for responsiveness and collaboration in times of crisis. This consists of:

• Creating pre-approved emergency procurement policies for disasters (e.g., waiving competitive bids temporarily with documentation).
• Leveraging cooperative purchasing agreements (e.g., Sourcewell, NASPO ValuePoint) to expedite access to competitively bid contracts.

Example: After a disaster, a county uses pre-existing cooperative contracts to quickly procure generators and emergency equipment.

Key Challenges Driving These Best Practices

1. Federal grant funding expansion with strict compliance.
2. Public pressure for transparency following high-profile procurement fraud or mismanagement cases.
3. Cybersecurity and data privacy risks in vendor selection, inflation, and supply chain instability complicating procurement timelines and budgets.
4. Sustainability goals expand the strategic role of procurement.

Modern procurement is no longer a back-office function—it is a critical component of risk management, public accountability, and strategic execution. CFOs and procurement officers must actively engage in policy design, system upgrades, and workforce development to make sure procurement delivers both value and integrity.

How MGO Can Help

At MGO, we understand the growing complexities facing state and local government procurement leaders. Our SLG team provides tailored services that help your organization modernize its procurement processes, strengthen compliance, expand vendor diversity, and mitigate risk. From strategic planning and technology implementation to workforce training and audit readiness, we work with governments to align procurement practices with broader organizational goals. With MGO’s guidance, procurement can become not just a purchasing function, but a driver of trust, accountability, and long-term value for the communities you serve. Contact us to learn more.

Written by Lee Klumpp. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post Enhancing Procurement Practices: Strategic Considerations and Best Practices for State and Local Governments appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• A structured procurement cycle, from needs assessment to strategy updates, makes sure you’re compliant, fiscally responsible, and aligned with your community goals. 

• Strategic considerations such as risk management, transparency, sustainability, and technology help governments to build resilient procurement processes. 

• You should adhere to regular policy reviews and robust risk management practices to strengthen your accountability and maintain public trust. 

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In today’s intricate fiscal landscape, procurement for state and local governments has evolved beyond simple acquisition. It now serves as a strategic function that balances regulatory compliance, fiscal discipline, access, and innovation. This article provides a detailed exploration of procurement processes, key considerations for management, best practices, and risk management, offering valuable insights for CFOs, controllers, business managers, and procurement officers.

What Does the Procurement Cycle Look Like?

The procurement cycle to purchase or obtain goods and services for state and local governments is a multifaceted journey that requires careful planning and execution at every stage. From initial planning and needs assessment to the final closeout and lessons learned, each phase is critical in making sure procurement activities align with strategic goals and deliver value to the community.

This section outlines the key considerations at each stage of the procurement process, providing a comprehensive framework for effective management. By focusing on activities like confirming funding sources, drafting solicitations, evaluating proposals, awarding contracts, and monitoring performance, government entities can navigate the complexities of procurement with confidence. These considerations are designed to maintain fairness, transparency, and compliance while prioritizing best value and sustainability. Through diligent attention to these aspects, procurement professionals can enhance their strategies and contribute to the successful achievement of organizational objectives.

Procurement Process for State and Local Governments

The diagram above depicts the entire procurement cycle for an individual transaction from the initial award through the procurement closeout and lessons learned. However, this relates to an individual procurement – the process is much more complicated and there are some additional steps that are just as important including monitor contract performance, conduct post-contract review, and update procurement strategies. A structured procurement process is essential for achieving strategic alignment and fiscal responsibility. 

Step 1: Identify Needs

The procurement journey begins with identifying the specific needs of the government entity. This involves a thorough assessment of requirements to make sure that procurement aligns with the organization’s strategic objectives. Engaging stakeholders early in the process can help clarify needs and set the stage for successful procurement.

Step 2: Develop Procurement Plan

Once needs are identified, the next step is to develop a procurement plan. This plan should align with the strategic objectives and budget so that procurement activities support broader organizational goals. A well-crafted procurement plan serves as a roadmap, guiding the entire process and helping to manage resources effectively.

Step 3: Conduct Market Research

Conducting market research is crucial to understanding the vendor landscape. This step involves identifying potential vendors, including diverse suppliers and cooperatives, to establish a competitive and inclusive procurement process. Market research helps uncover opportunities for cost savings and innovation.

Step 4: Draft and Issue Solicitation

With market insights in hand, the next step is to draft and issue a solicitation. Whether it’s a Request for Proposal (RFP), Invitation for Bid (IFB), or Request for Quotation (RFQ), the solicitation must include a clear scope and evaluation criteria. This allows vendors to understand the requirements and can provide accurate and competitive responses.

Step 5: Evaluate Responses

Evaluating responses is a critical phase where the best value approach is applied. Using a scoring matrix helps objectively assess each proposal, bid or quote against predefined criteria. This provides transparency and fairness in the selection process, leading to the best possible outcome for the government entity.

Step 6: Negotiate and Award Contract

After evaluating responses, negotiations with the selected vendor begin. This step involves finalizing terms and confirming proper documentation and notice of the award. Effective negotiation can lead to better contract terms and conditions, benefiting both the government and the vendor.

Step 7: Monitor Contract Performance

Monitoring contract performance is essential to making sure deliverables are met and payments are made according to the contract terms. Tracking risk indicators and maintaining open communication with vendors helps mitigate issues for project success.

Step 8: Conduct Post-Contract Review

Once the contract is completed, conducting a post-contract review provides valuable insights. This step involves evaluating vendor performance and identifying lessons learned. Such reviews are crucial for continuous improvement and enhancing future procurement activities.

Step 9: Update Procurement Strategies

The final step is to update procurement strategies based on data and insights gained from the post-contract review. This continuous improvement approach helps procurement processes remain effective and responsive to changing needs and market conditions. By following these nine steps, state and local government CFOs and procurement officers can streamline procurement processes, achieve strategic alignment, and meet fiscal responsibility. Embracing these best practices will lead to more efficient and effective use of public funds, ultimately benefiting the communities they serve.

Key Considerations in the Procurement Process

The following demonstrates the stages of the procurement process, the related activities, and key considerations for management: 

Other Key Strategic Considerations Throughout Procurement

Strategic considerations extend beyond the immediate transactional aspects. These considerations encompass a broader spectrum of questions that make sure the procurement process not only meets immediate needs, but also aligns with overarching goals and values. Addressing these critical questions is essential for fostering a procurement environment that is compliant, equitable, transparent, and resilient. By focusing on regulatory compliance, risk management access, transparency and public trust, best value, sustainability and resilience, and technology enablement, governments can enhance their procurement strategies to deliver long-term value and maintain public trust.

This section explores these key strategic considerations, providing a framework for thoughtful and effective procurement practices.

How Often Should Procurement Policies and Procedures be Reviewed?

Procurement policies should be formally reviewed at minimum every two to three years. Interim updates may occur more frequently, especially when regulations change, audit findings arise, or new technologies are implemented. Proactive management oversight makes sure policies remain current, enforceable, and aligned with strategic goals.

Procurement Risk Management Checklist

Effective procurement requires a robust risk management strategy. The following checklist outlines key risk categories, areas of concern, and best practice risk mitigations:

1. Compliance Risk

• Key Risk Areas: Inadequate competitive bidding; missing federal documentation
• Best Practice Mitigation: Train staff on requirements under the Uniform Guidance (2 CFR 200) and state laws; use standardized checklists; conduct pre-issuance legal reviews

2. Financial Risk

• Key Risk Areas: Vendor overcharges; contract overruns
• Best Practice Mitigation: Include cost control clauses; milestone payments; regular audits

3. Operational Risk

• Key Risk Areas: Vendor non-performance; supply delays
• Best Practice Mitigation: Prequalify vendors; build performance benchmarks and termination clauses

4. Reputational Risk

• Key Risk Areas: Conflicts of interest (COI); favoritism; transparency concerns
• Best Practice Mitigation: Publish solicitations, bids, and awards publicly; require COI disclosure

5. Strategic Risk

• Key Risk Areas: Misalignment with goals (e.g., sustainability)
• Best Practice Mitigation: Include evaluation criteria for strategic priorities; monitor key performance indicators (KPIs) after award

6. Cybersecurity Risk

• Key Risk Areas: Vendor access to sensitive systems/data
• Best Practice Mitigation: Require minimum cybersecurity standards; conduct IT security reviews pre-award

By embracing these best practices and considerations, state and local governments can streamline procurement processes, mitigate risks, and enhance public trust, ultimately benefiting the communities they serve.

How MGO Can Help

At MGO, we understand the complexities of public sector procurement and the importance of balancing compliance, efficiency, and strategic alignment. Our State and Local Government team provides tailored consulting, audit, and risk management services to help state and local governments strengthen procurement processes, safeguard public funds, and enhance community outcomes.

Whether you need support with policy reviews, compliance oversight, or implementing technology-driven solutions, MGO is here to help your organization achieve greater accountability and impact. Contact us to learn more.

Written by Lee Klumpp. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post Understanding Procurement Risk Management appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The One Big Beautiful Bill Act accelerates clean energy tax credit deadlines and tightens eligibility for state and local governments and Tribal nations.

• Key credits for EV fleets, charging stations, and clean power generation now require faster project timelines to qualify.

• Acting now could help your government or Tribal nation preserve access to millions in federal clean energy funding before it disappears.

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In recent years, federal incentives have made it easier for state and local government and Tribal nations to fund sustainability projects such as electric vehicle (EV) fleets, charging stations, and renewable energy power infrastructure. But many of these benefits are now expiring sooner than expected.

The One Big Beautiful Bill Act (OBBBA) accelerates the deadlines and narrows the eligibility criteria for several cornerstone energy tax credits. These changes are already affecting planning decisions for fiscal year 2025 and beyond. If you don’t take action soon, your government or Tribal nation could lose access to millions of dollars in direct federal support for clean energy projects.

From the IRA to OBBBA: How We Got Here

When Congress passed the Inflation Reduction Act (IRA) of 2022, it dramatically expanded clean energy incentives across the country. Most notably, it introduced elective pay (also called direct pay) starting with tax years beginning after December 31, 2022 — giving state and local governments and Tribal nations the ability to receive the full value of qualifying clean energy tax credits as a cash payment from the IRS even if they have no federal tax liability.

The elective pay option helped governments, Tribes, and nonprofits (tax-exempt) launch projects that previously lacked financial viability. However, with the passage of the OBBA on July 4, 2025, new restrictions are coming into play. Understanding these changes is essential if you want to stay on track — and fully capture the credits you’re eligible for.

What’s Changing — and What It Means for Your Government or Tribal Nation

Several key clean energy tax credits have been modified under the OBBBA. Here’s what’s changing and how it could affect your clean energy initiatives:

Commercial Clean Vehicle Credit (§45W)

If your government or Tribal nation is planning to transition to electric buses, trucks, or light-duty fleet vehicles, this credit likely plays a critical role in your funding model.

Previous Rule:

Credit available through December 31, 2032

OBBA Update:

Accelerated expiration — vehicles must be placed in service by September 30, 2025

Credit Value:

• Up to $7,500 per vehicle under 14,000 pounds
• Up to $40,000 per vehicle over 14,000 pounds

What This Means for You:

Fleet upgrades must be finalized soon. Procurement and delivery timelines are critical — if vehicles aren’t placed in service by the deadline, you may miss out entirely.

Alternative Fuel Infrastructure Credit (§30C)

If you’re installing EV charging stations or alternative fuel infrastructure (like hydrogen), this credit directly offsets installation costs.

Previous Rule:

Available through December 31, 2032

OBBA Update:

Accelerated expiration — equipment must be placed in service by June 30, 2026

Credit Value:

• 6% base credit, up to $100,000 per unit/port
• 30% credit when prevailing wage and apprenticeship requirements are met

What This Means for You:

If you have eligible projects in the pipeline, now is the time to accelerate timelines — ideally placing ports in service by the end of the current calendar year. This strategy could help you preserve credit eligibility.

Clean Electricity Investment and Production Credits (§48 and §48E)

These credits apply to large-scale clean energy generation projects — including solar, wind, and other qualifying technologies.

OBBA Update:

• Construction on wind and solar projects that begins by June 2026 (12 months from the passage of the OBBBA) is not subject to the accelerated placed-in-service date. These projects can be placed in service within four calendar years after the year construction begins.
• Accelerated timeline applies to wind and solar projects starting construction after June 2026. These projects must be placed in service by December 31, 2027.
• Prohibited foreign entity restrictions and material assistance applies for projects starting construction in 2026 or later, disqualifying projects with certain supply chain components.

Credit Value:

• 6% to 70% for investment credit
• Production credit varies depending on source and place-in-service date. Credit is between 0.3 cents to 2.8 cents/kWh.

What This Means for You:

Project lead times are long, especially for solar and wind. Now is the time to meet with relevant departments to identify project timelines and prioritize needs to begin construction by mid-2026. You should also assess any foreign involvement in current or planned energy projects as materials or partnerships linked to prohibited foreign entities could affect eligibility starting in 2026, and why starting construction by December 31, 2025, may be necessary for eligibility.

What You Should Do Now

These accelerated timelines mean waiting is no longer an option. To protect your ability to access elective pay and federal clean energy credits, you should:

• Engage tax and legal advisors immediately to review your current project portfolio and identify which initiatives can realistically meet the new requirements. Consider safe harbor strategies that might preserve current credit rates for projects already in development.
• Accelerate project timelines for any clean energy projects in your pipeline. Review permitting, financing, and construction schedules to ensure they align with new deadlines.
• Secure allocations and submit documentation now rather than waiting for more convenient timing. The administrative processes for these credits can be complex and time-consuming.
• Coordinate across departments to ensure your legal, tax, engineering, and procurement teams are aligned on the urgency of these changes and new timeline requirements.
• Explore transitional provisions or grandfathering opportunities that might apply to projects already in your planning pipeline.
• Stay agile with your project planning given ongoing legislative uncertainty around continued support for renewables under current terms.

Why These Changes Matter to Your Government or Tribal Nation

These credits represent not just funding — but flexibility. They make it possible to stretch your budget, pursue larger projects, and deliver visible environmental and economic benefits to your community. With federal support shifting, your ability to act decisively today will shape your portfolio for years to come. Delays now could mean leaving millions in funding on the table.

How MGO Can Help

Our team of experienced Tax Credits and Incentives professionals helps state and local governments and Tribal nations navigate the evolving clean energy tax landscape with confidence. We work closely with you to assess project eligibility, interpret the latest credit rules, and prepare the documentation required to claim elective pay. Don’t miss out on this critical funding for your government or Tribal nation — reach out to our team today.

The post New Clean Energy Credit Deadlines Are Here — Is Your Government or Tribal Nation Ready? appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• DOJ has narrowed FCPA focus to cartel-linked bribery, shell firms, and TCOs tied to national security threats. 

• Corporate FCPA enforcement shifted to target individuals, reducing business disruption. 

• DOJ guidance now highlights the risk of material support to FTOs and urges stronger compliance controls. 

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On June 9, 2025, the United States Department of Justice’s (DOJ) Deputy Attorney General, Todd Blanche, released new guidance regarding FCPA investigations and enforcement by the department’s Criminal Division. 

The guidance reflects a consistent “America-First” approach, continuing the Trump administration’s pause on FCPA enforcement by introducing additional guidelines designed to “limit undue burdens on American companies operating abroad” and focusing enforcement on conduct that undermines U.S. national interests. In addition, the memo provides more detailed information on how enforcement efforts will be prioritized moving forward. 

Key Takeaways from the Guidelines: 

1. Continued Focus on Cartels and Transnational Criminal Organizations (TCOs): 

The DOJ will maintain its emphasis on the “total elimination” of cartels and TCOs. In addition to investigating bribery that facilitates these organizations, the DOJ will also prioritize “dismantling the financial mechanisms and shell companies used by criminal networks.” This raises the expectations for transaction monitoring by financial institutions and Money Service Businesses (MSBs). Specifically, the memo instructs DOJ prosecutors to determine whether the alleged conduct in cases they pursue: 

• Is associated with the criminal operations of a cartel or TCO; 

• Utilizes shell companies or money launderers known to support such organizations; or 

• Is linked to foreign officials or employees of state-owned entities who have received bribes from cartels or TCOs. 

2. Safeguarding Fair Opportunities for U.S. Corporations: 

The DOJ aims to protect U.S. companies from corrupt foreign competitors by identifying cases where alleged misconduct: 

• Deprived specific and identifiable entities of fair access to compete; or 

• Resulted in economic injury to American companies or individuals. 

3. Advancing U.S. National Security: 

There will be a particular focus on bribery of corrupt foreign officials that may threaten key minerals, deep-water ports, critical infrastructure assets, and the defense industry as a whole. 

4. Prioritizing Serious Misconduct: 

The DOJ will prioritize “serious misconduct” and will not penalize Americans for routine or facilitation payments in jurisdictions where such payments are permitted. 

Furthermore, the prosecution of FCPA cases will now focus on individuals rather than corporate entities, making the process less disruptive for companies. All currently active FCPA cases are centered on individuals responsible for the violations. Additionally, each new case must be escalated to senior DOJ officials for approval and consideration. The DOJ aims to ensure that FCPA enforcement is both expeditious and minimally disruptive to U.S. companies. 

Lastly, the new guidance makes notable reference to the Foreign Extortion Prevention Act (FEPA), indicating that prosecutors will consider whether U.S. companies have been harmed by foreign officials demanding bribes to secure contracts. 

What Does This Mean for Your Company? 

Given the current administration’s focus on Foreign Terrorist Organizations (FTOs) and Transnational Criminal Organizations (TCOs), companies now face increased legal risk of inadvertently providing “material support” to these groups. The definition of material support is broad, encompassing “any property, tangible or intangible, or service,” including currency or monetary instruments, financial services, lodging, training, expert advice or assistance, communications equipment, facilities, personnel, or transportation. Importantly, companies do not need to be directly complicit in making payments to such organizations; liability can arise simply from having knowledge that payments are being made to entities designated as FTOs. This places additional strain on existing compliance programs and controls, requiring companies to ensure they can appropriately capture this knowledge and prevent such transactions from occurring. 

The guidance confirms that, beyond the FCPA pause of February 2025, enforcement will not disappear but will become more targeted in support of U.S. companies and national interests. With a focus on national resources, security, and TCOs, certain industries will be more heavily impacted and should consider the following actions: 

Actions to Consider 

Reassess Your Company’s Risk Profile: 

• Identify whether your organization operates in regions known for cartel or TCO activity, and reassess your risk exposure accordingly. 

Conduct a Risk Assessment: 

• Evaluate risks based on your company’s geographic footprint and operational activities. 

Review International Procurement and Bidding Processes: 

• Examine your escalation procedures when red flags arise, especially if requests for intermediaries or consultants are made in high-risk territories. 

Engage with Security Teams: 

• Collaborate with your company’s security teams, who are often most knowledgeable about physical security in your areas of operation and transport corridors. Including them in the risk assessment process is essential for employee safety and for determining when heightened security measures are necessary. 

Evaluate Treasury and Payment Processing Controls: 

• Assess controls related to payments that could inadvertently involve unknown TCOs or cartels. 

Strengthen Third-Party Onboarding and KYC Processes: 

• Ensure your onboarding process includes robust Know Your Customer (KYC) procedures. Cartels and TCOs often operate through seemingly legitimate businesses and may require you to use their services if you operate in their territories. Understanding beneficial ownership is critical. 

Test and Update Whistleblower Mechanisms: 

• Ensure your whistleblower system addresses both safety and compliance concerns associated with operating in cartel or TCO territories. Update training for employees in high-risk areas and review internal escalation protocols to ensure prompt notification and response. 

Written by Didier Lavion. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Helps You Stay Compliant in a Changing Global Enforcement Climate 

As FCPA enforcement pivots toward national security and individual liability, MGO’s team can help your company reassess its compliance risk, especially in regions with cartel or TCO activity. We support cross-functional teams with actionable risk assessments, KYC enhancements, and controls that align with DOJ expectations. Whether updating your whistleblower protocols or safeguarding procurement in high-risk territories, MGO assists your legal and finance teams to strengthen your compliance infrastructure without disrupting core operations. Contact us to learn more.  

The post New Guidelines on FCPA Investigations by the DOJ: What Companies Need to Know  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The new law preserves SALT workarounds and Section 199A, but limits itemized deductions and expands QSB stock eligibility. 

• Asset managers must reassess their investment structures, energy projects, and carried interest planning. 

• Portfolio companies gain bonus depreciation and interest deduction flexibility but face new limits in 2026. 

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The enactment of the One Big Beautiful Bill Act (OBBB) on July 4 will have a significant impact on tax planning for the investment and asset management industry. 

The act has mostly favorable provisions for asset management, with varying implications for asset managers, portfolio company investments, and investors. With the legislation now final, investors and funds should focus on assessing its impact and identifying planning opportunities and challenges. 

Several key provisions offer different options for implementation. The effective dates will be important, and there may be time-sensitive planning considerations. The act could immediately affect decisions on how to structure new investments in tax efficient ways. 

This Alert highlights key provisions of the OBBB affecting the asset management industry. For a broader discussion of the act, see BDO’s Tax Alert: “Republicans Complete Sweeping Reconciliation Bill.” Also available are a table of major provisions, a recording of a July 10 webcast on the act, and discussions of the financial accounting implications, international tax provisions, and real estate implications.  

Key Implications for Asset Managers 

Preservation of SALT Cap Workarounds and Section 199A 

The act makes permanent the Section 199A deduction for pass-through business income. The deduction will still generally not be available for financial services, brokerage services, investing or investment management, trading, or dealing in securities. It will remain available for real estate investment trusts (REITs), banking, and some portfolio company operating businesses structured as pass-throughs. 

The OBBB makes the state and local tax (SALT) cap permanent while raising the threshold for five years and then reverting it to $10,000 in 2030. The cap is set at $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029. More importantly, lawmakers struck a provision that would have shut down SALT cap workarounds offered by states with pass-through entity tax (PTET) regimes.  

Takeaway 

Most states have now enacted PTET regimes that allow pass-through businesses to elect to be taxed at the entity level, where a deduction is allowed without regard to the individual SALT cap. The regimes can offer a valuable benefit to both managers and investors, particularly in years when a transaction will create significant state taxes. The elections can also have complex ramifications and should be modeled first.  

IRA Energy Credits Phaseout and Repeal 

The OBBB raises approximately $500 billion by repealing, restricting, and phasing out many of the energy credits enacted under the Biden administration as part of the Inflation Reduction Act (IRA). The effective dates for the phaseouts and new restrictions are staggered depending on the specific credit. The act does not affect the transferability or refundability of the credits. 

Takeaway 

Funds involved in energy investments or projects should carefully assess the impact of the rules. It may be prudent to accelerate some near-term projects while reassessing the economic viability of projects that are less shovel ready. The credit transfer market and tax equity financing market should remain robust for the next several years.   

Changing the Regulatory Mandate for Disguised Sales or Payments for Services 

The act changes a reference to regulations under Section 707(a)(2) that could affect fund managers. It essentially clarifies that the rules are effective even in the absence of regulations. 

Section 707(a)(2) allows the IRS to recharacterize certain transactions involving partners and partnerships. For example, Section 707(a)(2) can be used to treat the exchange of partnership interests for waived management fees or carried interests as a disguised payment for services. If applicable, this can result in fund managers or carry partners recognizing ordinary income rather than capital gains. Additionally, certain contributions of cash to a partnership followed by a distribution to the partners may be recharacterized as a purchase of partnership interests from the selling partners. This recharacterization could result in the recognition of additional taxable gain by the “selling” partner.  

The statute was previously drafted to provide that Section 707(a)(2) operates “under regulations prescribed by the Secretary.” To date, no regulations have been finalized addressing disguised sales of partnership interests. Further, only proposed regulations have been issued addressing disguised payment for services. The act modifies the statute to provide that Section 707(a)(2) operates “except as provided by the Secretary.” This appears to clarify that the statute operates even in the absence of regulations. Further, the amendment delegates significant authority to the IRS to provide operational rules. 

Takeaway 

The IRS has long argued that the prior statute is still operative even in the absence of regulations, and the legislation provides that it should not be “construed to create any inference with respect to the proper treatment under Section 707(a)” before the date of enactment. But there may be some question as to whether taxpayers can argue that the rules do not apply to prior transactions because of the lack of regulations. The provision is effective for services performed and property transferred after July 4, 2025. 

Pro-Rata Rules Under GILTI and Subpart F  

The act changes the pro-rata share rules to require a U.S. shareholder of a controlled foreign corporation (CFC) to include its pro-rata share of Subpart F or Net CFC Tested Income (formerly GILTI) if it owned stock in the CFC at any time during the foreign corporation’s tax year in which it was a CFC. It removes the requirement that the U.S. shareholder own the CFC’s stock on the last day the foreign corporation was a CFC. Treasury is given the authority to issue regulations allowing taxpayers to make a closing of the tax year election if there is a disposition of a CFC. 

Takeaway 

Managers will need to analyze current investments to understand the impact of this change. Managers will need to closely monitor the investor makeup of offshore funds, especially in the initial launch/fundraising phase. 

Active Business Losses Under Section 461(l) 

The OBBB makes the active loss limit under Section 461(l) permanent, while reducing the threshold at which it applies beginning in 2026. Lawmakers struck from the act a provision that would have changed how disallowed losses under Section 461(l) are treated. 

Takeaway 

A disallowed loss under Section 461(l) will still be converted to a net operating loss (NOL) in subsequent years. This allows investors to use an NOL created by Section 461(l) against other sources of income in future years. 

Repeal of Itemized Deductions 

The act makes permanent the repeal of most itemized deductions, including those for investment expenses (apart from investment interest) incurred for the production of income under Section 212. 

Takeaway 

Consistent with the treatment since 2018 under the Tax Cuts and Jobs Act, investment expenses will generally only be deductible to the extent they are considered ordinary and necessary expenses of an activity that rises to the level of a trade or business under Section 162. This will continue to impact investors in private equity, venture capital, and other investment funds where items such as management fees generally are not deductible at the individual level. 

Limit on Value of Itemized Deductions 

The OBBB creates a new limit on itemized deductions, including investment interest. The provision would essentially cap the value of itemized deductions so that the maximum benefit achievable is equivalent to offsetting income taxed at a top rate of 35% rather than offsetting income taxed at the higher individual marginal rate of 37%. 

Takeaway 

This limit applies after the deduction is capped based on the amount of net investment income. For individuals taxed at the 37% rate, this is essentially equivalent to imposing a 2% tax on the total amount of otherwise deductible investment interest (and any other itemized deductions).    

Creation of Trump Accounts 

The OBBB establishes new tax-preferred investment accounts for individuals under the age of 18. Contributions are set to begin one year after enactment and are allowable up to $5,000 per year until the calendar year before an individual turns 18. A pilot program will provide a $1,000 tax credit for contributing to an account for every child born from 2025 through 2028. Eligible investments are limited to mutual funds or exchange traded funds that track a qualified index, do not use leverage, and have expenses of less than 0.1%. Qualified indexes include the S&P 500 and other indexes for equity investments primarily in U.S. companies. Industry-specific indexes are prohibited but indexes based on market capitalization are allowed.  

Takeaway 

The automatic $1,000 contribution for children born from 2025-2028 will create millions of potential accounts for the asset management industry to administer.  

Key Implications for Portfolio Company Investments 

Expansion of Qualified Small Business Stock Eligibility 

The act enhances the exclusion of gain for qualified small business (QSB) stock under Section 1202 issued after July 4, 2025: 

• In addition to the existing 100% exclusion for qualified stock held for five years, taxpayers can qualify for a 50% exclusion after three years and a 75% exclusion after four years. 

• The current limit on the exclusion (the greater of $10 million or 10 times basis) is increased to the greater of $15 million or 10 times basis, indexed to inflation beginning in 2027.  

• The limit on gross assets at the time stock is issued is increased from $50 million to $75 million, indexed to inflation beginning in 2027. 

Takeaway 

QSB stock is a powerful tax planning structure that has become increasingly popular with private equity in recent years. The changes make the structure more accessible and increase the size of potential investments. State conformity to both the existing rules and new changes will be important for determining whether the structure is appropriate. Key states such as California do not conform to the federal QSB stock exclusion.  

Section 163(j) Limit on the Interest Deduction 

The OBBB permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of adjusted taxable income (ATI) for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024. 

The act makes two unfavorable changes for tax years beginning after 2025. Income from Subpart F and Net CFC Tested Income (formerly GILTI) will be excluded from ATI along with Section 78 gross-up amounts for indirect foreign tax credits. More importantly, the limit will apply to any interest capitalized to other assets, except interest capitalized to straddles under Section 263(g) or to specified production property under Section 263A(f). 

Takeaway 

The changes may allow highly leveraged portfolio companies to deduct suspended interest carryforwards beginning in 2025. Although the act essentially shuts down interest capitalization planning for years beginning in 2026 or later, those strategies remain viable for the 2024 and 2025 tax years. The legislation will not claw back any interest capitalized to other assets in tax years beginning before 2026, even if the capitalized interest has not been fully recovered with the asset. Interest capitalization planning in 2024 and 2025 could help some portfolio companies deduct additional interest more quickly and could be particularly beneficial for companies that may still face the limit even after the favorable change to ATI.  

Bonus Depreciation and Small Business Expensing 

The act permanently restores 100% bonus depreciation for property placed in service after January 19, 2025. The change could affect the Section 743(b) basis adjustment for funds purchasing interests in a partnership. The act also increases the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million for property placed in service after 2024, with both thresholds indexed to inflation in future years. 

Restoration of Limitation on Downward Attribution of Stock Ownership  

The act reinstates Section 958(b)(4), which, prior to the Tax Cuts and Jobs Act (TCJA), prohibited the downward attribution of stock ownership from a foreign person to a U.S. person for purposes of determining CFC and U.S. shareholder status. The repeal of Section 958(b)(4) under the TCJA resulted in many foreign corporations becoming CFCs and created filing obligations for constructive U.S. shareholders. These rules are effective for tax years beginning after December 31, 2025. 

Takeaway 

The restoration of Section 958(b)(4) could simplify reporting obligations for certain taxpayers. Taxpayers that were affected by the repeal of Section 958(b)(4) in the past should carefully review these rules to see if they are impacted by the reinstatement of the section. 

Section 174A Research Expensing 

The act permanently restores the expensing of domestic research costs for tax years beginning after December 31, 2024. The permanent expensing rules are created under new Section 174A, while Section 174 is retained and amended to provide for the continued 15-year amortization of foreign research costs. Taxpayers retain the option of electing to capitalize domestic Section 174A costs and amortize such amounts over 10 years or the useful life of the research (with a 60-month minimum).  

The act will generally require taxpayers to implement the new treatment with an automatic accounting method change on a cut-off basis, but it offers two alternative transition rules. Taxpayers can elect to claim any unamortized amounts incurred in calendar years 2022, 2023, and 2024 in either the first tax year beginning after 2024 or ratably over the first two tax years beginning after 2024. Separate transition rules are available for eligible small business taxpayers meeting the gross receipts test under Section 448 ($31 million in 2025) for the first tax year beginning after 2024, allowing those taxpayers to file amended returns to claim expensing for tax years before 2025. 

Takeaway 

There are important interactions between Section 174 and other tax attributes, especially for portfolio companies that will continue to face a limit on interest deductions even after the OBBB change. Companies should consider modeling out the implementation options and capitalization elections to determine the most favorable treatment. 

Real Estate Investment Trusts   

The OBBB raises the percentage of allowable assets a REIT may have in a taxable REIT subsidiary from 20% to 25% effective for tax years beginning after 2025. The change provides additional structuring flexibility for managers with REITs in their structure.  

Deductions for Overtime Pay and Tip Income 

The act creates a deduction of up to $12,500 (single) and $25,000 (joint) on qualified overtime compensation, as well as a deduction of up to $25,000 on qualified tips reported on Forms W-2, 1099-K, 1099-NEC, or 4317. These deductions are allowed from 2025 through 2028 without regard to whether a taxpayer itemizes deductions.  

Takeaway 

These new deductions will carry certain reporting requirements and compliance complexities, impacting portfolio companies with eligible employees. Hospitality companies, in particular, will need to make several determinations at the entity level that could affect whether employees qualify. All companies should consider communicating with employees that receive tips or overtime wages on the withholding considerations.    

Key Implications for Investors 

Endowment Tax Increase  

The OBBB will increase the 1.4% tax on net investment income of private colleges and universities, but it will limit the application of the tax to universities with at least 3,000 tuition-paying students (up from 500). The OBBB imposes a new rate structure with excise taxes up to 8%.  For institutions with a student adjusted endowment over $500,000 and not exceeding $750,000, the rate remains 1.4%.  For institutions with a student adjusted endowment over $750,000 and not exceeding $ 2 million, the rate is 4%. For institutions with a student adjusted endowment over $2 million, the top rate is 8%. The changes are effective for tax years beginning after 2025. 

Takeaway 

Affected universities have some runway before the change takes effect, particularly those with fiscal years ending on June 30. There may be planning opportunities to accelerate income or trigger gains at lower rates.  

Written by Shawn McKenna, Joe Pacello and Dustin Stamper. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Provide Strategic Tax Guidance for Asset Managers Facing OBBB Changes 

MGO works with asset managers, private equity funds, and investors to turn policy shifts into opportunity. The OBBB introduces a wide array of changes, from enhanced QSB stock benefits and bonus depreciation to stricter rules around disguised sales and interest deductibility. Our tax team help you model scenarios, optimize fund structures, and align tax strategies with evolving rules. Whether you’re rethinking offshore structures, planning around energy credit phaseouts, or managing carried interest treatment, we provide you with the insight and execution you need to keep your investments tax efficient and future ready. Contact us to learn more.  

The post OBBB Is Final: What’s Next for Asset Managers?  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Proactive compliance risk assessments help state and local governments avoid funding clawbacks, penalties, and reputational damage.

• Strong internal controls, continuous monitoring, and staff training are essential for preventing improper payments and managing regulatory complexity.

• Integrating compliance into broader risk management frameworks builds financial resilience and reinforces public trust.

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Part III: Ensuring Compliance and Financial Integrity – Preventing Improper Payments and Managing Regulatory Risk

This is the final installment in our series, Navigating Fiscal Uncertainty. Having explored budgetary and revenue risks, we now turn to compliance — a cornerstone of public sector accountability.

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Introduction

In an environment of heightened fiscal scrutiny and increasing regulatory complexity, compliance is not just a legal requirement – it is a cornerstone of public trust and financial integrity. For state and local governments, the prevention of improper payments and adherence to regulatory mandates are essential for maintaining both fiscal discipline and the public’s confidence. In Part III of our series, we explore how to conduct compliance risk assessments, prevent improper payments, and establish robust internal controls to manage regulatory risk.

Understanding Compliance Risk

Compliance risk encompasses the challenges associated with making sure all financial operations meet statutory, regulatory, and internal standards. For state and local governments, noncompliance can result in:

• Funding Clawbacks: The return of funds due to noncompliance.
• Penalties and Legal Challenges: Potential fines, litigation, or sanctions under laws such as the False Claims Act.
• Reputational Damage: Eroding the public’s trust in the management of government funds.

Example:

A local government might face a situation where insufficient documentation for vendor payments triggers an audit, resulting in the recovery of funds and significant negative media coverage. Such incidents underscore the importance of rigorous compliance measures.

Approaching a Compliance Risk Assessment

1. Inventory Regulatory Requirements

Mapping the Regulatory Landscape: Begin by identifying all applicable regulations – from federal requirements (such as 2 CFR Part 200 and OMB circulars) to state-specific mandates and internal policies.

Items to Consider:

• What specific federal, state, or local regulations govern your operations?
• Are there any recent regulatory changes that impact your current processes?
• How are these requirements documented and communicated across the organization?

Develop a Compliance Matrix: Create a detailed compliance matrix that links each regulatory requirement to specific internal controls and reporting deadlines. This matrix acts as a roadmap to make sure no requirement is overlooked.

Example:

A county government may develop a matrix that clearly outlines deadlines for submitting grant expenditure reports, documenting employee time for federally funded projects, and procedures for vendor verification. This matrix is reviewed regularly to make sure it reflects current regulations.

2. Evaluate Internal Policies and Controls

Review and Gap Analysis: Conduct a thorough review of existing internal policies, procedures, and controls. Compare these against the compliance matrix to identify any gaps or areas that need improvement.

Items to Consider:

• Are current policies up to date with the latest regulatory requirements?
• What internal controls are in place to prevent improper payments?
• How is documentation managed, and are records readily accessible in the event of an audit?

Documentation Practices: Establish rigorous documentation standards for all financial transactions, approvals, and compliance-related communications. Effective documentation is the first line of defense in audits and regulatory reviews.

Example:

A state department might notice through internal audits that certain expense claims are not supported by adequate documentation. By revising internal guidelines and conducting training sessions, the department improves its record-keeping practices, thereby reducing the risk of noncompliance.

3. Implement Continuous Monitoring and Training

Internal Audits and Real-Time Monitoring: Schedule regular internal audits focusing on high-risk areas like payroll, vendor payments, and subrecipient oversight. In parallel, use compliance management software to monitor key indicators in real time.

Items to Consider:

• What frequency is appropriate for internal audits of high-risk areas?
• Which automated tools can provide early warnings of compliance issues?
• How are audit findings communicated and remedied?

Employee Training and Culture: Invest in ongoing training programs for finance and administrative staff to make sure everyone understands regulatory requirements and proper procedures. Cultivating a culture of compliance helps prevent errors and fraud before they occur.

Example:

A municipal finance department might institute quarterly compliance training sessions and utilize an online learning platform to keep staff updated on new regulatory changes. This proactive approach not only minimizes errors but also reinforces the importance of ethical financial management.

4. Preventing Improper Payments

Segregation of Duties and Pre-Payment Reviews: Implement robust internal controls that separate the responsibilities for authorizing, processing, and reconciling payments. Pre-payment reviews are crucial to make sure each disbursement is supported by the necessary documentation.

Items to Consider:

• Are there clear, defined roles in the payment process to prevent conflicts of interest?
• What checks are in place to verify that payments align with approved budgets and vendor contracts?
• How are duplicate or erroneous payments detected and prevented?

Automated Detection Tools: Leverage technology like AI-driven analytics and duplicate payment detection systems to flag anomalies. These tools can analyze large volumes of transactions to identify irregular patterns that might indicate improper payments.

Example:

A local government might adopt a financial software system that automatically compares vendor invoices with contract terms. When discrepancies are detected – like a duplicate invoice or an invoice that exceeds the agreed-upon amount, the system alerts the finance team for further review.

Key Considerations and Concerns

• Evolving Regulations: The regulatory environment is continually changing. CFOs must stay informed about legislative updates and adjust internal controls accordingly.
• Subrecipient and Vendor Oversight: For organizations that distribute funds to subrecipients or rely on multiple vendors, making sure all partners comply with guidelines is essential. Lapses in oversight can have cascading effects on overall compliance.
• Integration with Overall Risk Management: Compliance should be integrated with broader risk management processes. This established that financial, operational, and regulatory risks are not viewed in isolation but are addressed holistically.

Strategic Recommendations for Compliance

• Build a Comprehensive Compliance Framework: Integrate compliance risk assessments into your overall risk management strategy. Use a combination of internal audits, automated monitoring tools, and periodic external reviews to establish ongoing compliance.
• Regularly Update Training Programs: Keep all employees informed about the latest regulatory changes and internal policy updates. Regular training and clear communication channels help reinforce a culture of accountability.
• Engage External Expertise: Consider partnering with third-party auditors or consultants to provide an objective assessment of your compliance framework. This external perspective can highlight blind spots and offer recommendations for improvement.
• Establish Clear Reporting Channels: Implement secure, anonymous channels for staff to report potential compliance issues or irregularities. An effective whistleblower program not only detects problems early but also reinforces organizational commitment to integrity.

Establishing compliance and preventing improper payments is a critical component of financial management for state and local governments. Through comprehensive compliance risk assessments, robust internal controls, continuous monitoring, and ongoing staff training, CFOs and directors of finance can safeguard public funds and maintain the trust of their communities. By proactively addressing compliance challenges, organizations can minimize legal risks, avoid funding clawbacks, and build a resilient financial infrastructure capable of withstanding future uncertainties.

Series Conclusion: A Proactive Roadmap to Fiscal Resilience

This three-part series has explored the essential elements of managing fiscal uncertainty in state and local government finance. We began with budgetary risk management – emphasizing realistic forecasting, monitoring, and contingency planning. We then examined revenue risk assessments – focusing on diversification, accurate forecasting, and cash flow strategies. Finally, we addressed the critical area of compliance – outlining how to prevent improper payments and manage regulatory risks effectively.

For CFOs and directors of finance, the challenges are significant, but so too are the opportunities. By integrating these risk assessments into strategic planning, leveraging technology, and fostering a culture of transparency and accountability, financial leaders can transform uncertainty into a catalyst for innovation and long-term stability. In doing so, they not only protect public funds but also reinforce the trust that the community places in its government institutions.

As you work to build a resilient financial framework, consider the insights and strategies outlined in this series as a roadmap to navigating today’s complex fiscal environment. Whether you are refining your budgetary forecasts, diversifying revenue streams, or enhancing compliance protocols, proactive risk management will empower your organization to thrive in even the most uncertain times.

How MGO Can Help

At MGO, we understand the unique compliance challenges facing state and local governments. Our experienced team works with public sector leaders to conduct detailed compliance risk assessments, strengthen internal control environments, and implement real-time monitoring systems that reduce your risk of improper payments. We also keep your teams informed and aligned with the latest regulatory changes.

Whether you’re building a compliance matrix, managing subrecipient oversight, or integrating compliance into your broader risk strategy, MGO delivers the experience and the tools to help you stay compliant, protect public funds, and uphold the trust of your community. Contact us to learn how we can support you in creating a stronger, more resilient financial future.

Written by Lee Klumpp. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post Navigating Fiscal Uncertainty: Risk Management Strategies for State and Local Governments  — Part Three appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Clear, consistent classification of direct and indirect costs is critical for maximizing grant utilization and making sure you’re compliant.
• Choosing the right indirect cost recovery strategy (NICRA or de minimis) directly impacts a grant recipient’s ability to recover operational expenses.
• Misclassification or inconsistent treatment of costs can jeopardize your financial reporting accuracy and the long-term health of grant-funded programs.

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Bottom Line Up Front

Grant recipients navigate multiple complexities when managing federal financial assistance, including defining costs as indirect or direct and selecting the most appropriate indirect cost recovery strategy to maximize utilization of grant funds and cost recovery. Further, a lack of clarity and understanding of the associated cost accounting practices and consistency of treatment of certain costs as direct or indirect can cause serious compliance challenges for grant recipients. 

In an environment where acceptable indirect cost rates is a topic of discussion and scrutiny from several federal grant-making agencies, it is critical for grant recipients to understand their current indirect cost methodologies and be prepared to revisit or adjust their strategies going forward to protect or enhance financial health.

What Are Direct and Indirect Costs?

Direct costs are costs grant recipients can attribute specifically to program operations, which are reimbursed at the full level of the cost allocated to the grant. Indirect costs refer to costs a grant recipient cannot easily assign directly to a particular cost objective that help manage the administrative functions of their operations (e.g., overhead costs). Indirect costs are charged to an award as a percentage of the direct costs, allowing grant recipients to recover the costs of these operational activities that cannot be directly attributed.

Since grant recipients incur both direct and indirect expenses, they must consider their cost methodologies in a way to fairly represent their operational expenses so they can accurately charge program expenses against grant funds. Reporting an ineffective or inaccurate indirect cost allocation methodology or making poor strategic decisions for direct and indirect cost treatment can risk the underutilization of grant funds that may jeopardize the financial health of the grant-funded program.

Some grant recipients find it challenging to appropriately identify expenses as direct or indirect as certain types of costs may fall into either category or overlap depending on the organization’s structure and/or cost accounting practices. Therefore, its critical for grant recipients to establish clear and consistent methodologies for how such costs are treated.

Examples of Direct and Indirect Costs

Note: If a grant recipient is choosing to identify cost types detailed above as a direct cost to a specific program or activity, it must also similarly attribute such expenses as direct costs to all other specific programs or activities it operates, regardless of funding source, and can only consider remaining items that truly support all operations in their indirect pool.

Applying Costs Against Awarded Grant Funds

Effective allocation of costs is critical to ensure expenses are appropriately charged to each program or activity and that the grant recipient can accurately track and report the charges to a grant program on its financial reporting. This includes the detail of costs included on a grant recipient’s invoices or reimbursement requests and its Federal Financial Reports (SF-425), a reconciliation the grant recipient is required to submit periodically that illustrates the financial health of the grant-funded program or activity.

There are different methodologies to calculate the amount of indirect costs charged to the grant. Grant recipients may elect to establish a Negotiated Indirect Cost Rate Agreement (NICRA), which is calculated based on the specific indirect costs incurred by each organization and reviewed and negotiated with the organization’s cognizant or oversight agency (the agency that represents the largest proportion of funds received by the organization). Establishing a NICRA allows a grant recipient to reflect the full cost to run its business and elect the most effective or appropriate distribution basis against which its indirect rate will be applied. Once in place, a NICRA must be accepted by any federal funding agency.

Recipients who choose not to (or may not be eligible to) pursue a NICRA can use the de minimis rate established in 2 CFR 200.414(f). This allows organizations without a current NICRA to use an indirect cost rate up to 15% (increased from 10% as of Oct. 1, 2024) of Modified Total Direct Costs (MTDC) charged to the grant. MTDC are direct costs, excluding equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward in excess of $50,000 (increased from $25,000 as of Oct. 1, 2024).

Examples of Direct and Indirect Costs

How MGO Can Help

Navigating federal grant compliance requirements can be complex, but you don’t have to do it alone. MGO’s State and Local Government team works closely with grant recipients to review cost allocation methodologies, assist with indirect cost rate development, and identify opportunities for better financial management and recovery. Whether you’re unsure how to classify certain costs or you need guidance on improving your reporting accuracy, our team can help you develop practical, defensible strategies that stand up to audit scrutiny and safeguard your funding. Contact us to learn more.

Written by David Clark and Dan Grossman. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post Cost Category Considerations for Grant Recipients appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Sweeping tax changes enacted through the reconciliation bill include permanent TCJA cuts and major reforms to business, individual, and international tax rules. 

• Taxpayers should begin modeling changes now, especially for bonus depreciation, research expensing, Section 163(j), and Opportunity Zones, to identify planning windows. 

• A wide range of industries including manufacturing, real estate, energy, and financial services will be affected, with varying opportunities and risks across sectors 

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The president signed into law a sweeping reconciliation tax bill in a July 4 signing ceremony, capping a furious sprint to finish the legislation before the self-imposed holiday deadline. The Senate approved the bill in a 51-50 vote on July 1 after making a number of last-minute changes following intense bicameral negotiations. The House voted 218-214 on July 3 to send the bill to the president’s desk. 

Notable late changes to the version of the tax title released by the Senate Finance Committee on June 16 include: 

• Cutting Section 899 from the bill after reaching an agreement on Pillar Two with G-7 countries; 

• Significantly amending the provisions on global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT); 

• Modifying the energy credits provisions; 

• Removing the shutdown of state pass-through entity workarounds to the cap on deducting state and local tax (SALT); 

• Removing an unfavorable expansion of the loss limit under Section 461(l); 

• Reducing the new tax on remittances; 

• Changing the opportunity zone provisions; 

• Expanding to all residential construction an exception to the long-term contract rules; and  

• Removing a new excise tax on litigation financing. 

Also, President Donald Trump reportedly promised House conservatives that he would strictly enforce the beginning of construction rules for wind and solar projects and potentially make the permitting process more difficult. 

With the legislation now final, taxpayers should focus on assessing its impact and identifying planning opportunities and challenges. The bill offers both tax cuts and increases that would affect nearly all businesses and investors. The Joint Committee on Taxation (JCT) scored the bill as a net tax cut of $4.5 trillion over 10 years using traditional scoring. Under the current policy baseline the Senate used for purposes of the reconciliation rules, that cost drops to just $715 billion. The Senate scored the provisions against a baseline that assumes temporary provisions have already been extended, essentially wiping out the cost of extending the tax cuts in the Tax Cuts and Jobs Act (TCJA). 

The bill not only makes the TCJA tax cuts permanent but amends them in important ways. The legislation also offers a mix of favorable and unfavorable new provisions. Key aspects of the bill include: 

• Making 100% bonus depreciation permanent while temporarily adding production facilities;  

• Permanently restoring domestic research expensing with optional transition rules; 

• Permanently restoring amortization and depreciation to the calculation of adjusted taxable income (ATI) under Section 163(j) while shutting down interest capitalization planning; 

• Increasing the FDII effective rate while changing the deduction allocations and other rules;  

• Increasing the GILTI effective rate while changing the foreign tax credit (FTC) haircut and expense allocation rules;  

• Increasing the effective rate on BEAT; 

• Phasing out many Inflation Reduction Act energy credits early and imposing new sourcing restrictions;  

• Creating new deductions for overtime, tips, seniors, and auto loan interest; 

• Imposing a 1% excise tax on remittances;  

• Increasing filing thresholds for Forms 1099-K, 1099-NEC, and 1099-MISC; 

• Extending opportunity zones with modifications; 

• Increasing transfer tax exemption thresholds; and 

• Increasing the endowment tax to a top rate of 8%. 

Takeaway

Now that the legislation is final, taxpayers should assess its impact carefully and consider planning opportunities. Several key provisions offer different options for implementation. The effective dates will be important, and there may be time-sensitive planning considerations.  

The following offers a more detailed discussion of the provisions. For a comparison of the tax provisions to current law and the campaign platform see BDO’s table. Join BDO July 10 for a webcast discussing the bill and its impact. 

Business Provisions 

Bonus Depreciation 

The bill permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025.  

The legislation also creates a new elective 100% depreciation allowance under Section 168(n) for any portion of nonresidential real property that is considered “qualified production property.” The election is available if construction on the property begins after January 19, 2025, and before January 1, 2029, and the property is placed in service by the end of 2030. 

A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities.  

There is an exception from the original use requirement if acquired property was not used in a qualified production activity between January 1, 2021, and May 12, 2025. Special recapture rules apply if the property is disposed of within 10 years after it is placed in service.  

The bill also increases the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million for property placed in service after 2024, with both thresholds indexed to inflation in future years. 

Takeaway 

Allowing producers, refiners, and manufacturers to fully expense buildings rather than depreciate them over 39 or 15 years offers a significant benefit. The definition of “production” will be important, and generally requires “a substantial transformation of the property comprising the product.” Taxpayers with buildings that house both qualified production activities and other administrative, office, or research functions will also likely need to perform an analysis to allocate costs between functions. 

Section 174 Research Expensing 

The bill permanently restores the expensing of domestic research costs for tax years beginning after December 31, 2024. The permanent expensing rules are created under new Section 174A, while Section 174 is retained and amended to provide for the continued 15-year amortization of foreign research costs. Software development is statutorily included in the definition of research for purposes of Section 174A. Taxpayers retain the option of electing to capitalize domestic research costs and amortize such amounts over either 10 years or the useful life of the research (with a 60-month minimum).  

The bill will generally require taxpayers to implement the new treatment with an automatic accounting method change on a cut-off basis, but it offers two alternative transition rules. Taxpayers can elect to claim any unamortized amounts incurred in calendar years 2022, 2023, and 2024 in either the first tax year beginning after 2024 or ratably over the first two tax years beginning after 2024. Separate transition rules are available for eligible small business taxpayers meeting the gross receipts test under Section 448 ($31 million in 2025) for the first tax year beginning after 2024, allowing those taxpayers to file amended returns to claim expensing for tax years before 2025. Retroactivity is not available to small business taxpayers that are tax shelters, such as pass-throughs that allocate more than 35% of their losses to limited partners or limited entrepreneurs. 

The bill also amends Section 280C to again require taxpayers to reduce their deduction for research costs under Section 174A by the amount of any research credit (or reduce their credit by an equivalent amount), effective for tax years beginning after 2024. Under changes made by the TCJA, taxpayers were generally required to reduce their Section 174 capital account only to the extent the research credit exceeded their current-year amortization deduction. For most taxpayers, that meant that the amortization deductions and research credits were both allowed in full.  

Takeaway 

The restoration of domestic research expensing is somewhat retroactive, and taxpayers will have several options for recognizing unused research amortization and for recovering future research costs. Businesses should consider modeling their options to identify beneficial strategies because the timing of deductions can affect other calculations, including those for Section 163(j), net operating losses, FDII, and GILTI. 

Section 163(j) Interest Deduction Limit  

The bill permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of ATI for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024. 

The bill also makes two unfavorable changes effective for tax years beginning after 2025:  

• Excluding income from Subpart F and GILTI inclusions and excluding Section 78 gross-up from ATI; and 

• Including interest capitalized to other assets in the limit under Section 163(j), except interest capitalized to straddles under Section 263(g) or to specified production property under Section 263A(f).  

The business interest allowed as a deduction up to the Section 163(j) limit will come first from any capitalized interest. Any disallowed capitalized interest exceeding the cap will be incorporated into the Section 163(j) carryforward and will not be treated as capitalized in future years.   

Takeaway

The ability to again exclude amortization and depreciation from ATI will provide welcome relief for many taxpayers, but others will be negatively affected by the changes. The JCT score indicates that the revenue raised from shutting down capitalization planning and excluding new categories of income will save more than one-third of the $60 billion cost of reinstating the exclusion of depreciation and amortization. Taxpayers should model the impact and consider tax attribute and accounting method planning. Although the bill essentially shuts down interest capitalization planning for years beginning in 2026 or later, those strategies remain viable for the 2024 and 2025 tax years. The legislation does not claw back any interest capitalized to other assets in tax years beginning before 2026, even if the capitalized interest has not been fully recovered with the asset.  

Section 199A 

The bill makes permanent the deduction for pass-through income under Section 199A and favorably adjusts the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a “specified trade or business.” The legislation also creates a minimum deduction of $400 for taxpayers with at least $1,000 of qualifying income.  

Opportunity Zones 

The bill makes permanent the qualified opportunity zone (QOZ) program and updates the rules for investments made after 2026. As in the current program, taxpayers can defer capital gain by investing in a qualified opportunity fund. For investments made after 2026, taxpayers will be required to recognize the deferred gain five years after the date of the investment but will get a 10% increase in basis. Taxpayers can still receive a full basis step up to fair market value (FMV) for property held 10 years, but the bill adds a rule freezing the basis step up at the FMV 30 years after the date of the investment.  

Current QOZ designations will expire early at the end of 2026. New zones will be designated in rolling 10-year designation periods under new criteria that are expected to shrink the number of qualifying zones. A new category of rural opportunity zones is created. The 10% basis increase is tripled to 30% for investments in rural opportunity zones and the threshold for establishing the substantial improvement of qualifying property would be lowered to 50%. 

Both qualified opportunity funds (QOFs) and qualified opportunity zone businesses (QOZBs) will be required to comply with substantial new reporting requirements. 

Takeaway

The bill does not extend the mandatory recognition date of December 31, 2026, for investment made before 2027, as many taxpayers had hoped. But the program’s extension preserves one of the most powerful tax incentives ever offered by lawmakers. The timing of capital gains transactions may be particularly important. Delaying a capital gain transaction could allow taxpayers to make a deferral election in 2027 and defer recognizing the gain until well after the current 2026 recognition date. On the other hand, QOZ designations are likely to change in 2027. Taxpayers planning investments in geographic areas that are unlikely to be redesignated may need to make the investments before the end of 2026. Existing QOFs and QOZBs should consider their long-term capital needs because it is not clear whether any “grandfathering” relief will allow additional qualified investments into funds operating in QOZs that are not redesignated. The new reporting rules will apply to both new and existing QOZs and QOZBs for tax years beginning after the date of enactment, and those entities will need to collect and report substantial new information that has never before been required. 

Qualified Small Business Stock 

The bill enhances the exclusion of gain for qualified small business (QSB) stock under Section 1202 issued after the date of enactment in the following ways: 

• In addition to the existing 100% exclusion for qualified stock held for five years, taxpayers can qualify for a 50% exclusion after three years and a 75% exclusion after four years;  

• The current limit on the exclusion (the greater of $10 million or 10 times basis) is increased to $15 million, indexed to inflation beginning in 2027; and 

• The limit on gross assets at the time stock is issued is increased from $50 million to $75 million, indexed to inflation beginning in 2027. 

Takeaway

QSB stock is a powerful tax planning tool that can essentially erase gain of up to 10 times the initial basis. The changes make the structure more accessible and increase the size of potential investments. The bill does not change the expansive qualification requirements under Section 1202, and taxpayers should understand the rules clearly and document compliance throughout the holding period. 

Section 162(m) 

The bill amends the aggregation rules for applying the $1 million limit on deducting the compensation of a public company’s covered employees under Section 162(m). The current rules identify covered employees separately for each public entity but calculate compensation subject to the limitation on a controlled group basis. The number of covered employees is set to expand by five for tax years beginning in 2027 or later, and there has been some question whether such employees can come from the entire controlled group or only the public entity. 

The bill creates a new aggregation rule for tax years beginning after 2025 for identifying who is a covered employee and the amount of compensation subject to the limit. The aggregation rules are based on a controlled group as defined under the qualified plan rules in Section 414. The proposal also provides rules for allocating the $1 million deduction among members of a controlled group.   

Takeaway

The provision will have unfavorable consequences for many companies, including requiring the full amount of compensation from a related partnership in the calculation (rather than a pro-rata amount based on ownership percentage). It is estimated to raise almost $16 billion.  

Form 1099 Reporting 

The bill amends Section 6050W to reinstate the 200 transaction and $20,000 threshold for reporting third-party payment network transactions on Form 1099-K. The American Rescue Plan Act of 2021 repealed that threshold and required reporting when aggregate payments exceeded $600, regardless of the number of transactions. The IRS offered transition relief delaying the implementation of the change for two years and then provided a $5,000 threshold for payments made in 2024 and a $2,500 threshold for payments made in 2025. The bill restores the old threshold retroactively so that reporting is required only if aggregate transactions exceeded 200 and aggregate payments exceeded $20,000.  

The bill also increases the threshold for reporting payments under Sections 6041 and 6041A on the respective Forms 1099-MISC and 1099-NEC from $600 to $2,000 in 2026, indexing that figure to inflation in future years. 

Remittance Tax 

The bill imposes a new 1% excise tax on remittances of cash, money orders, cashier’s checks, or other similar physical instruments, with an exception for transfers from most financial institution accounts or debit cards. 

Takeaway

The tax in the final version affects a much narrower set of payments than the original 5% tax proposed in the House and the 3.5% tax in earlier House and Senate drafts.  

Exception for Percentage of Completion Method 

The bill expands exceptions to the percentage of completion method under the long-term contract rules under Section 460. The exception for home builders is expanded to include all residential construction. Further, the exception from the uniform capitalization rules for home builders meeting the gross receipts threshold under Section 448(c) ($31 million in 2025) is expanded to include all residential construction, and the allowable construction period is extended from two years to three. 

Employee Retention Credit 

The legislation makes several changes to the employee retention credit (ERC), including: 

• Barring ERC refunds after the date of enactment for claims filed after January 31, 2024; 

• Extending the statute of limitations on ERC claims to six years; and 

• Increasing preparer and promoter penalties on ERC claims.  

Takeaway

The provision presumably will affect only refund claims that have not been paid by the IRS. The legislative language provides that no credit or refund “shall be allowed or made after the date of enactment” unless the claim was filed on or before January 31, 2024. The IRS had been slow to process claims – potentially in anticipation of this provision, which had been included in a failed 2024 tax extenders bill. The provision is now estimated to raise only $1.6 billion, much less than the $77 billion estimated under the 2024 version. The difference may be the result of refunds that have already been paid, although it remains unclear how fast the IRS is processing claims filed after January 31, 2024. 

International Provisions 

Foreign-Derived Intangible Income 

The bill makes significant reforms to FDII, including raising the effective rate while making the calculation of income more generous. 

The bill permanently lowers the Section 250 deduction from 37.5% to 33.34%, still well above the 21.875% deduction rate that would take effect without legislation. The change will increase the FDII effective rate from 13.125% to 14% (compared to 16.4% absent legislation).  

The bill also repeals the reduction in FDII for the deemed return on qualified business asset investment (QBAI) and provides that interest and research and experimental (R&E) costs are not allocated eligible income. The final version modifies a change from an earlier draft that would have narrowed the allocation of deductions only to those “directly related” to such income. The final bill provides that the calculation includes “properly allocable” deductions. 

The changes are effective for tax years beginning after 2025, aside from a new exclusion from FDII-eligible income that would take effect after June 16, 2025. The bill would exclude income or gain from the Section 367(d) disposition of intangible property or property subject to depreciation, amortization, or depletion. The final bill omits a provision from an earlier draft that would have also excluded specified passive income subject to the high-tax kickout. 

Takeaway

The changes could expand the value of the deduction for many taxpayers despite the effective rate increase, particularly for industries with significant fixed assets and R&E costs. Taxpayers should assess the changes for potential planning and arbitrage opportunities, given the change in rates and rules. There may be accounting methods opportunities that could increase the benefit in current and future years. 

Global Intangible Low-Taxed Income 

The bill increases the GILTI effective rate while making both favorable and unfavorable changes to the underlying calculation effective for tax years beginning after 2025.   

The Section 250 deduction for GILTI decreases from 50% to 40%, still higher than the 37.5% deduction rate that would take effect without legislation. The effective rate before the FTC haircut will increase from 10.5% to 12.6% (compared to 13.125% absent legislation). The bill will also reduce the FTC haircut under GILTI from 20% to 10%, resulting in an equivalent top effective rate of 14% (up from the current 13.125% rate and the 16.4% rate that would take effect without legislation). It also provides that 10% of taxes (compared to 20% absent legislation) previously associated with Section 951A taxed earning and profits are not treated as deemed paid for purposes of Section 78. 

The deemed return for QBAI is repealed, increasing the amount of income subject to the tax. The provision also changes the allocation of expenses to GILTI for FTC purposes so that it includes only the Section 250 deduction, taxes, and deductions “directly allocable” to tested income. It also specifically excludes interest and R&E costs.  

Takeaway

The changes are significant and could affect GILTI calculations in both favorable and unfavorable ways. The legislation does not provide a definition of “directly allocable,” and guidance may be important in this area. Taxpayers should assess the impact and consider FTC and other planning strategies.  

Base Erosion and Anti-Abuse Tax 

The bill increases the BEAT rate from 10% to 10.5% for tax years beginning after 2025, lower than both the 14% rate in the previous Senate draft and the 12.5% rate that would take effect without legislation. The legislation also repeals an unfavorable change to the BEAT scheduled to take effect in 2026 that would effectively require taxpayers to increase their liability by the sum of all income tax credits. The final bill omits several provisions from an earlier draft that would have changed the base erosion percentage, created a high-tax exclusion, and shut down interest capitalization planning.  

Takeaway 

The final version removed several favorable changes from an earlier draft but potentially still allows for planning that capitalizes interest to other assets. 

Reciprocal Tax for ‘Unfair Foreign Taxes’ 

The final bill omits proposed Section 899, which would have imposed retaliatory taxes on residents of that impose “unfair foreign taxes.” The provision was removed from the legislation after the Trump administration announced an agreement with the G-7 countries to “exempt” the U.S. from Pillar Two taxes. The G-7 released a statement saying that the countries are committed to working toward an agreement that would create a side-by-side system to fully exclude U.S.-parented groups from the undertaxed profits rule and income inclusion rule while ensuring that risks related to base erosion and a level playing field are addressed. The group also agreed to work toward compliance simplification and consider treating nonrefundable tax credits similarly to refundable tax credits. 

Takeaway

The ability of G-7 countries to drive broader agreements — and the details emerging from any such agreements — will be critical for U.S. multinationals. The current announcements are largely just statements of intent on a common goal. No countries outside the G-7 were party to the commitments, and there may be resistance from some OECD and EU countries.  

Other International Provisions 

The bill includes several other international provisions effective for tax years beginning after December 31, 2025, including: 

• Making permanent the controlled foreign corporation (CFC) look-through under Section 954(c)(6); 

• Restoring the exception from downward attribution rules under Section 958(b)(4) that was repealed under the TCJA while adding a narrower rule under Section 951B that is more closely aligned with the TCJA’s intent; 

• Amending the FTC rules to treat inventory produced in the U.S. and sold through foreign branches as foreign-source income, capped at 50%, likely only for branch category purposes; and 

• Amending the pro-rata rules under GILTI and Subpart F. 

Takeaway

The changes are generally favorable. The permanent extension of the CFC look-through rule under Section 954(c)(6) preserves an important exception for Subpart F income that is scheduled to sunset at the end of 2025. The restoration of Section 958(b)(4) could simplify reporting obligations for some taxpayers. However, Section 951B gives Treasury the authority to provide guidance on reporting for foreign-controlled U.S. shareholders. The inventory sourcing rule could result in additional foreign-source income for FTC purposes when compared to the current rule, which sources based on production activities. Finally, the pro-rata share rules will require a U.S. shareholder of a CFC to include its pro-rata share of Subpart F or GILTI income if it owned stock in the CFC at any time during the foreign corporation’s tax year in which it was a CFC. That provision removes the requirement that the U.S. shareholder own the CFC’s stock on the last day the foreign corporation was a CFC. The proposal provides Treasury with the authority to issue regulations allowing taxpayers to make a closing of the tax year election if there is a disposition of a CFC.  

Energy Provisions 

Consumer and Vehicle Credits 

The bill repeals the following credits with varying effective dates: 

• Previously owned clean vehicle credit under Section 25E repealed for vehicles acquired after September 30, 2025; 

• Clean vehicle credit under Section 30D repealed for vehicles acquired after September 30, 2025; 

• Commercial clean vehicle credit under Section 45W repealed for vehicles acquired after September 30, 2025; 

• Alternative fuel refueling property credit under Section 30C repealed for property placed in service after June 30, 2026; 

• Energy-efficient home improvement credit under Section 25C repealed for property placed in service after December 31, 2025; 

• Residential clean energy credit under Section 25D repealed for expenditures made after December 31, 2025; and 

• New energy-efficient home credit under Section 45L repealed for property acquired after June 30, 2026. 

Depreciation 

The bill repeals the five-year depreciable life of qualified energy property. The Section 179D deduction is repealed for construction beginning after June 30, 2026.  

Sections 48E and 45Y 

The bill will generally begin to phase out the production tax credit under Section 45Y and the investment tax credit under Section 48E for projects beginning construction after 2033 except for solar and wind projects. Wind and solar projects beginning more than 12 months after the date of enactment must be placed in service by the end of 2027. 

The bill also creates restrictions related to prohibited foreign entities, most significantly adding limits on receiving material assistance from a prohibited entity for facilities that begin construction after December 31, 2025. Material assistance is based on a cost ratio for sourcing eligible components. The bill also tightens domestic sourcing requirements under Section 48E.   

Takeaway 

The final language was softened with a last-minute amendment that allows some continued runway for wind and solar projects. The change angered some House conservatives, who blocked a final vote in the House for hours before reportedly extracting a promise from the administration that it would vigorously enforce the beginning of construction rules. Treasury may have limited ability to change the guidance in this area because the statute itself provides that the beginning of construction for some credit purposes shall be determined under rules similar to existing IRS notices. 

Section 45X 

The advanced manufacturing credit under Section 45X is repealed for wind energy components sold after 2027 but will otherwise be extended to allow a 75% credit for components sold in 2031, 50% for 2032, 25% for 2033, and fully repealed for 2034 or later. The credit is expanded to cover metallurgical coal. Material assistance rules for prohibited foreign entities apply. 

Section 45Z 

The bill extends the Section 45Z clean fuel production credit through 2031 while reinstating a stackable small agri-biodiesel credit under Section 40A. A new restriction under Section 45Z disallows a credit unless the feedstock is produced or grown in the U.S., Mexico, or Canada. The calculation of greenhouse gas emissions is amended to exclude indirect land use changes and new prohibited foreign entity rules are imposed. 

Other Energy Provisions  

The bill makes several other changes, including: 

• Repealing the clean hydrogen production credit under Section 45V for construction beginning after 2027, two years later than earlier versions of the bill would have provided; 

• Increasing the rates for carbon capture under Section 45Q for carbon sequestered as a tertiary injectant or for productive use to provide parity with the rates for permanent geologic storage (also adding foreign entity of concern restrictions); 

• Expanding the publicly traded partnership rules to allow income from carbon capture facilities nuclear energy, hydropower, geothermal energy, and the transportation or storage of sustainable aviation fuel or hydrogen; and 

• Adding new restrictions for foreign entities of concern for the nuclear production credit under Section 45U. 

Tax-Exempt Entities 

The bill replaces the 1.4% endowment tax rate with graduated brackets based on the size of the endowment per student up to a top rate of 8%. The tax applies only to universities with at least 3,000 students, up from 500.   

The bill also expands the excise tax on executive compensation exceeding $1 million to include all current employees, as well as former employees employed in tax years beginning after 2016. 

Takeaway 

The final version of the bill removed provisions that would have increased the excise tax on private foundations and resurrected the “parking tax,” which included the value of transportation in fringe benefits in unrelated business taxable income.  

Individual Provisions 

Deduction for Tip Income 

The bill creates an annual deduction of up to $25,000 for qualified tips reported on Forms W-2, 1099-K, 1099-NEC, or 4317 for tax years 2025 through 2028. The deduction is available without regard to whether a taxpayer itemized deductions but begins to phase out once modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. 

For tips to be deductible, they must be paid voluntarily in an occupation that “traditionally and customarily” received tips before 2025, as provided by the Secretary. The business in which the tips are earned cannot be a specified trade or business under Section 199A, and self-employed taxpayers, independent contractors, and business owners face additional limitations.  

Employers will be required to report qualifying tips to employees on Form W-2. The provision applies only to income taxes and generally does not affect the employer’s FICA tip credit except to extend it to specified beauty services businesses.   

The bill gives Treasury several explicit grants of authority to provide regulations on specific issues. The IRS is required to adjust withholding tables and provide guidance within 90 days to define which occupations “traditionally and customarily” received tips in the past. The IRS will also need to provide rules for determining when a tip is voluntary.   

Takeaway 

The provision will affect employers in important ways. Hospitality companies will face new reporting requirements that depend on how the business and worker occupations are characterized. Further, an employee’s ability to deduct tips could also depend on employer policies, such as mandatory tips, service charges, or other amounts that are not determined solely by customers.  

Deduction for Overtime Pay 

The bill creates a permanent deduction of up to $12,500 (single) and $25,000 (joint) of qualified overtime compensation for tax years 2025 through 2028. The deduction is available without regard to whether a taxpayer itemized deductions but begins to phase out once modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. 

Qualified overtime compensation is defined as compensation paid to an individual required under Section 7 of the Fair Labor Standards Act (FLSA). Employers must perform new information reporting to separately report overtime pay. 

Takeaway 

Determining whether compensation is qualified overtime pay will not be made using tax rules but will instead depend on the employer’s characterization of the pay under the FLSA. 

Auto Loan Interest Deduction 

The bill will create a permanent deduction of up to $10,000 of interest on a qualified passenger vehicle loan for tax years 2025 through 2028. The deduction begins to phase out once modified adjusted gross income exceeds $100,000 for single filers and $200,000 for joint filers.  

The vehicle must be manufactured primarily for use on public streets, roads, and highways, and its final assembly must occur in the U.S. The deduction does not apply to lease financing and the loan cannot be to finance fleet sales, purchase a commercial vehicle, purchase a salvage title, purchase a vehicle for scrap or parts, or be a personal cash loan secured by a vehicle previously purchased by the taxpayer. 

Takeaway

Auto loan financing companies will face additional reporting requirements and be required to furnish a return with specific information on loans. 

Personal Exemption for Seniors 

The bill provides a new $6,000 personal exemption for individuals aged 65 and above for tax years 2025 through 2028. The deduction phases out for taxpayers with modified adjusted gross income exceeding $150,000 for joint filers and $75,000 for all other taxpayers.  

Takeaway

The personal exemption is meant to fulfill Trump’s pledge to remove tax on Social Security payments, which is not allowable under reconciliation rules. The legislation does not affect payroll taxes on Social Security payments. 

Individual TCJA Extensions 

The bill largely makes the individual TCJA provisions permanent, although with some important modifications. The individual rate cuts and bracket adjustments are made permanent while providing an extra year of inflation adjustment for the lower brackets. The bill also makes permanent: 

• The repeal of general personal exemptions;  

• The limits on the deductions for mortgage interest (while adding mortgage insurance premiums as qualified interest), personal casualty losses, and moving expenses; 

• The repeal of miscellaneous itemized deduction (with an exception for some educator expenses); and 

• The exclusion for bicycle commuting reimbursements. 

The bill restores an itemized deduction for up to 90% wagering losses, capped at the amount of wagering income.  

The bill makes permanent the increased alternative minimum tax exemption and phaseout thresholds but would claw back inflation adjustments to the phaseout thresholds by resetting them to 2018 levels. The actual phaseout of the exemptions based on the amount of income exceeding the thresholds is slowed by half.  

The bill permanently repeals the Pease limitation on itemized deductions that the TCJA suspended through 2025, but it would create a new limit. The new provision would essentially cap the value of itemized deductions so that the maximum benefit achievable for the deductions is equivalent to offsetting income taxed at a top rate of 35% rather than offsetting income taxed at the higher individual marginal rate of 37%.  

The bill creates a 0.5% haircut on individual itemized charitable deductions but also adds a permanent charitable deduction for non-itemizers of up to $2,000 for joint filers and $1,000 for other taxpayers. 

SALT Cap 

The bill makes the SALT cap permanent while raising the threshold for five years and then reverting it to $10,000 in 2030. The cap is set at $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029.  

Takeaway

Earlier drafts of the bill would have shut down taxpayers’ ability to use pass-through entity tax regimes to circumvent the SALT cap; the final version eliminated those provisions.  

Transfer Taxes 

The bill permanently sets the lifetime exemptions for the gift, estate, and generation-skipping transfer taxes at $15 million for 2026 and indexes them for inflation thereafter. The change represents a modest increase from the exemptions under the TCJA, which were initially set at $10 million but reached $13.99 million in 2025 with inflation adjustments. 

Active Business Losses 

The legislation makes the active loss limit under Section 461(l) permanent but reverses recent inflation adjustments in the $250,000 threshold.  

Takeaway

The final bill struck an unfavorable provision in earlier drafts that would have required disallowed losses to remain in the Section 461(l) calculation in future years. Under the final bill, disallowed losses still become net operating losses in subsequent years and can offset other source of income.  

Other Provisions 

The bill contains a number of other meaningful tax changes, including: 

• Creating a 1% floor for charitable deductions for corporations by providing that a deduction is allowed only to the extent it exceeds 1% of taxable income (up to the current 10% cap) for tax years beginning after 2025; 

• Changing the explicit regulatory mandate for disguised sale rules under Section 707(a)(2) to clarify that the rules are self-executing without regulations, effective after the date of enactment; 

• Raising the percentage of allowable assets a real estate investment trust (REIT) may have in a qualified REIT subsidiary from 20% to 25% effective for tax years beginning after 2025; 

• Making permanent the increases to the low-income housing tax credit;  

• Increasing the Section 48D credit for semiconductor manufacturing facilities from 25% to 35% for property placed in service after 2025; 

• Making permanent the new markets tax credit; 

• Treating spaceports like airports for the private activity bond rules, effective for obligations issued after the date of enactment; 

• Increasing the limit on the “cover over” to Puerto Rico and the U.S. Virgin Islands for excise taxes on distilled spirits effective for imports after 2025; 

• Allowing the liability from gain on the sale of qualified farmland property to be paid in 10-year installments for sales after the date of enactment; and 

• Creating tax-preferred accounts for children, with a pilot program offering a $1,000 contributory credit for qualifying children for tax years beginning after 2025. 

Takeaway

The inclusion of the new markets tax credit and the CFC look-through rule, which are both scheduled to expire at the end of 2025, indicates that Republicans do not have much hope for another tax bill this year. House Ways and Means Committee Chair Jason Smith, R-Mo., originally left those provisions off the House bill, saying he hoped to address them in a bipartisan extenders bill. Republicans have also discussed moving a second reconciliation bill, although that may have been a negotiating ploy to appease members whose priorities are not addressed in this bill. 

Next Steps 

Taxpayers should assess the potential impact of major provisions when considering the tax efficiency of transactions and investments. There may be planning opportunities that should be considered now, such as accelerating or abandoning energy credit projects or investments and modeling the impact of changes to the limit on the interest deduction under Section 163(j), bonus depreciation, and research expensing under Section 174. Changes to opportunity zone rules could affect the timing for triggering capital gains and making investments. International changes may present arbitrage opportunities to capitalize on favorable changes or mitigate the impact of unfavorable changes. 

Written by Dustin Stamper. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Navigating What’s Next: Industry-Specific Tax Strategies 

This reconciliation bill marks one of the most consequential shifts in tax policy in recent years —impacting businesses across nearly every sector. At MGO, we’re helping clients in manufacturing, real estate, financial services, energy, and emerging technology interpret the changes and respond with purpose.

From bonus depreciation and research expensing under Section 174 to the evolving rules around Section 163(j), Opportunity Zones, and global tax alignment, our professionals bring deep technical insight and practical industry knowledge to every engagement. Whether you’re modeling tax scenarios, rethinking compliance, or reevaluating deal timing, MGO’s team is ready to help. Contact us to learn more.  

The post Republicans Complete Sweeping Reconciliation Bill  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• OBBBA tax changes signed July 2025 affect Q2 ASC 740 tax provision and valuation allowance disclosures for calendar-year companies. 

• GILTI and FDII rule changes may increase tax rates and impact deferred tax assets and international tax strategies in 2025. 

• New bonus depreciation rules and state nonconformity create challenges in 2025 tax modeling and ASC 740 reporting. 

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President Donald Trump signed the reconciliation tax bill, commonly known as the “One Big Beautiful Bill Act” (OBBBA) into law July 4, 2025, which is considered the enactment date under U.S. Generally Accepted Accounting Principles (GAAP). The legislative changes will affect income tax accounting in accordance with Accounting Standards Codification (ASC) 740, Income Taxes. Notable corporate provisions include the restoration of 100% bonus depreciation; the creation of Section 174A, which reinstates expensing for domestic research and experimental (R&E) expenditures; modifications to Section 163(j) interest limitations; updates to the rules for global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII); amendments to the rules for energy credits; and the expansion of Section 162(m) aggregation requirements. Refer to BDO’s tax legislative alert for additional analysis. 

Those provisions could have important implications for the calculation of current and deferred taxes, including the assessment of valuation allowances. However, because the bill was signed after the June 30 period-end and its provisions have varying effective dates, only some changes – such as those affecting valuation allowance assessments – might affect the current year’s financial statements. For calendar-year filers, there are specific disclosure considerations for their Q2 10-Q filings, as discussed below. 

Changes in Tax Laws 

Under ASC 740, the impact of tax law changes on taxes payable or receivable for the current year is reflected in the estimated annual effective tax rate (AETR) in the period that includes the enactment date. Adjustments to prior years’ income taxes resulting from new legislation are recognized as discrete items in income tax expense from continuing operations in the period of enactment. 

For deferred taxes, the effects of tax law changes on temporary differences and related deferred taxes existing as of the enactment date are recognized as discrete items in the period of enactment as a component of income tax expense from continuing operations. Companies must make a reasonable effort to estimate temporary differences and related deferred tax amounts, including related valuation allowances, as of the enactment date. For temporary differences arising after the enactment date within the current year, the impact of the tax law change is incorporated into the AETR beginning in the first period that includes the enactment date.  

Insights: Accounting for Tax Law Changes in an Interim Period 

We are aware of an alternative policy that allows companies to use beginning-of-year temporary differences and related deferred tax balances when evaluating the impact of tax law changes during an interim period. Companies should discuss the approach with their auditors and tax advisors. 

For companies that have elected to recognize deferred taxes on GILTI, any changes in the tax law that affect GILTI deferred tax accounting must be reflected in the interim period that includes the enactment date, as discussed below. Also, companies may need to assess the impact of the expanded Section 162(m) aggregation rules on the recognition of deferred tax assets (DTAs) related to share-based compensation for covered employees. 

Insights: Accounting for Retroactive Changes in Tax Laws 

If a tax law change is retroactive, the accounting treatment depends on whether the impact relates to prior periods or the current year. For prior-period deferred taxes and taxes payable or receivable, the effect is recognized discretely in the period of enactment. However, if the retroactive change affects current-year taxes payable or receivable – when the effective date is before the enactment date but still within the current year – the impact is recognized through an adjustment to the AETR. The updated AETR is then applied to year-to-date ordinary income, resulting in a catch-up adjustment for taxes payable or receivable in earlier interim periods.  

Companies should consider that rule when assessing the financial reporting implications of some provisions enacted in July 2025 that are retroactive to the beginning of 2025. That includes provisions such as R&E expensing, Section 163(j) limitation on interest deductions, and 100% bonus depreciation (for property acquired and placed in service after January 19, 2025). 

Valuation Allowance Considerations 

Adjustments to valuation allowances for DTAs existing as of the enactment date are recorded as discrete items and allocated to income tax expense from continuing operations. Conversely, the expected adjustment to the valuation allowance at year-end for deductible temporary differences originating after the enactment date and related to current-year ordinary income must be incorporated into the estimated AETR.  

The corporate provisions – such as the permanent restoration of 100% bonus depreciation, R&E expensing, changes to the GILTI and FDII rules, and the more favorable calculation of the interest limit under Section 163(j) – could have important effects on the determination of valuation allowances for many companies. Specifically, the updates could affect projections of future taxable income, including adjusted taxable income under Section 163(j), potentially triggering a change in judgment about the realizability of DTAs. 

If tax law changes are enacted after the period ends but before financial statements are issued, changes to the valuation allowance are not recognized until the period that includes the enactment date. However, disclosure may be required, as discussed below. 

Insights: Reassess the Realizability of Deferred Tax Assets 

Before, companies might have recorded a full valuation allowance on their Section 163(j) DTA as a result of the interest deduction limitation being based on 30% of adjusted taxable income, which included amortization, depreciation, and depletion (that is, the earnings before income and taxes limitation). The reinstatement of the earnings before income, taxes, depreciation, and amortization limitation under Section 163(j) for tax years beginning after December 31, 2024, might require a reassessment of the realizability of the current-year disallowed interest deduction and Section 163(j) carryforward DTAs from prior years that were previously subject to a full valuation allowance. 

International Provisions 

The OBBBA includes several major changes to international tax provisions. Further, it renames the FDII and GILTI provisions to “foreign-derived deduction-eligible income” (FDDEI) and net controlled foreign corporation tested income (NCTI), respectively. In this Alert, we use the terms “FDII” and “GILTI.”  

The OBBBA introduces major changes to the FDII regime by increasing the effective tax rate from 13.125% to 14% through a permanent reduction of the Section 250 deduction from 37.5% to 33.34% – a rate still higher than what would have applied without the legislation. It also makes the FDII calculation more favorable by eliminating the reduction for qualified business asset investment (QBAI) and specifying that interest and R&E costs are not allocated to eligible income. Most FDII changes in the OBBBA are effective for tax years beginning after 2025. 

The act raises the effective tax rate on GILTI by reducing the Section 250 deduction from 50% to 40%, resulting in a pre-foreign tax credit (FTC) effective rate increase from 10.5% to 12.6%. That is still lower than the rate that would apply without the act. The FTC haircut under GILTI is reduced from 20% to 10%. The OBBBA also repeals the QBAI deemed return, increasing the amount of income subject to GILTI, and narrows expense allocations for FTC purposes. Those changes are effective for tax years beginning after 2025. 

The OBBBA raises the base erosion and anti-abuse tax (BEAT) rate from 10% to 10.5% for tax years beginning after 2025, which is lower than the 12.5% rate that would have applied absent the legislation. It also repeals a scheduled 2026 change that would have increased BEAT liability by the sum of all income tax credits. 

For tax accounting purposes, FDII and BEAT are treated as period costs, and most companies also account for GILTI as a period cost. Because most of the OBBBA international provisions do not take effect until tax years beginning after December 31, 2025, companies will likely see an immediate accounting impact at enactment only if the law change affects their valuation allowance assessments – for example, if the changes affect future income projections used in the valuation allowance analysis.  

However, companies that recognize deferred taxes for GILTI-related basis differences must remeasure those deferred tax balances at enactment if they are expected to reverse after the new law becomes effective. Further, if a company factors BEAT into its assessment of deferred tax asset realizability, it must evaluate how changes to the BEAT calculation affect its valuation allowance and recognize any impacts in the period of enactment. 

Energy Credit Provisions 

The OBBBA significantly curtails and modifies a broad range of Inflation Reduction Act (IRA) energy tax incentives, imposes new domestic content and foreign entity restrictions, and phases out or repeals many credits in the coming years. The changes effective in 2025 could affect financial statements if companies had anticipated the impact of IRA credits in their 2025 AETR calculations for interim periods.  

Accounting Considerations for Uncertainty in Income Taxes 

Companies must assess the act’s impact, particularly in areas where the interpretation of new rules is uncertain. If a tax position expected to be taken on a tax return is not more likely than not to be sustained upon examination based on its technical merits, it must be evaluated under the recognition and measurement requirements of ASC 740 to determine the appropriate amount of tax benefit to recognize. 

State Income Tax Considerations 

Companies must assess the state and local tax effects of the OBBBA; the impact will depend on whether and how states conform to the federal tax code. State tax implications may be significant for bonus depreciation, R&E expensing, FDII, GILTI, and interest deductibility. Companies must review state conformity rules to determine the appropriate state tax effect and related tax accounting and may need to adjust state current and deferred tax balances in addition to federal balances. 

Financial Statement Disclosures 

Companies need to consider disclosing the expected effects of new tax laws in the notes to the financial statements, management’s discussion and analysis, and risk factors. 

If a law is enacted after the interim balance sheet date but before financial statements are issued, the tax law change would be considered a Type II nonrecognized subsequent event under ASC 855, Subsequent Events. In that case, companies must disclose the nature of the event and either estimate its effect (if material) or state that an estimate cannot be made. If a law is enacted during an interim period, major variations in the relationship between income tax expense and pretax income must be explained.  

For annual financial statement reporting, ASC 740-10-50-9(g) requires companies to disclose the tax effects of adjustments to deferred tax liabilities or assets resulting from enacted changes in tax laws or rates in their annual financial statements. Public business entities in the U.S. need to separately disclose the effect of tax law changes in the annual effective tax rate reconciliation.  

Next Steps 

Companies must assess the impact of the tax legislation on their income tax provision calculations, including current and deferred tax balances, the AETR, valuation allowances, and related financial statement disclosures. The analysis will likely require extensive modeling and planning because the provisions are highly interconnected. While this Alert highlights selected areas of income tax accounting that might be affected by the OBBBA, it is important to consider how the changes apply to specific facts and circumstances.  

Written by Daniel Newton and Bella Verdiyan. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Helps You Navigate the New Tax Landscape 

The OBBBA brings a wave of corporate tax changes that present both risk and opportunity, especially around deferred tax assets, valuation allowances, and interim reporting under ASC 740. MGO’s Tax team works with tax and finance leaders to adapt provision models to reflect the latest federal and international updates. We support companies in life sciences, manufacturing, and technology by turning legislative changes into practical, forward-looking strategies. From addressing Q2 financial statement impacts to modeling future effects of GILTI, interest limits, and bonus depreciation, we serve as a resource for navigating complex tax reporting with accuracy and speed. Contact us to learn more.  

The post One Big Beautiful Bill Act: Implications for Accounting for Income Taxes  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• State and local governments should actively assess the reliability and timing of revenue streams to avoid disruptions caused by overreliance on volatile sources.

• Scenario-based forecasting, which is informed by historical trends and external factors, helps finance leaders plan for best, base, and worst-case outcomes.

• Maintaining liquidity reserves and exploring diverse funding sources, such as service fees or public-private partnerships, can protect against shortfalls and enhance your fiscal resilience.

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Part II: Revenue Risk Assessments — Diversification, Forecasting, and Cash Flow Strategies

This article is Part II of our series on Navigating Fiscal Uncertainty. Building on our discussion of budgetary risk, we now turn to revenue risk — the unpredictability of income that can undermine even the most well-crafted financial plan.

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Introduction

Revenue stability is the lifeblood of any public sector organization. For state and local governments, the challenge is not only to predict revenue flows accurately but also to diversify sources and manage cash flow effectively amid uncertainty. In Part II of our series, we delve into revenue risk assessments, exploring how to evaluate revenue streams, forecast future revenues, and mitigate risks associated with revenue volatility.

Understanding Revenue Risk

Revenue risk encompasses uncertainties related to the reliability, predictability, and timing of revenue. This includes:

• Revenue concentration: High dependency on a sole source, like federal funding or property taxes.
• Timing mismatches: Differences between when revenue is expected versus when it is actually received.
• External factors: Economic shifts, policy changes, and demographic trends that can influence revenue generation.

Example:

Imagine a city that relies heavily on sales taxes. During an economic downturn, consumer spending might decrease, leading to lower-than-expected sales tax revenue. Without alternative revenue sources or sufficient reserves, this shortfall could force difficult budget cuts or service reductions.

Approaching a Revenue Risk Assessment

1. Identify and Categorize Revenue Streams

Mapping sources: Start by categorizing revenue into distinct streams:

• Federal and state funding (i.e., grants): Often one of the largest sources but subject to political and economic variability.
• Local taxes and fees: Property, sales, or service taxes that provide a more stable base.
• Contract revenues and service fees: Income from contracts or fee-for-service programs.

Items to Consider:

• What percentage of total revenue comes from each source?
• Which revenue sources are most volatile or subject to external pressures?
• Are there opportunities to broaden the revenue base?

Example:

A local government might discover that 60% of its revenue is derived from property taxes, while federal funding only account for 20%. Recognizing this distribution helps in understanding which areas might be more susceptible to shortfalls and where diversification efforts should be focused.

2. Forecast Revenue with Precision

Historical trend analysis: Review historical revenue data to establish trends and identify seasonal or cyclical patterns. Historical analysis can reveal underlying patterns that help refine forecasts.

Items to Consider:

• What are the historical growth rates for each revenue stream?
• Are there seasonal variations that affect revenue collection?
• How have previous economic downturns affected revenue?

Scenario forecasting: Develop different revenue scenarios to account for uncertainty:

• Optimistic scenario: Based on favorable economic conditions and full appropriation of funds.
• Base scenario: Reflects moderate growth consistent with historical trends.
• Pessimistic scenario: Incorporates potential cuts or delays in revenue.

Example:

A county government might use historical data to project a 3% annual increase in local tax revenue under normal conditions. However, by modeling a pessimistic scenario where an economic downturn leads to a 2% decline, the finance team can better prepare for cash flow challenges.

3. Monitor Revenue Realization and Manage Cash Flow

Regular reporting and reconciliation: Implement robust reporting processes that regularly compare forecasted revenue against actual collections. This involves setting up monthly or quarterly review cycles.

Items to Consider:

• Are revenue collection processes integrated with financial reporting systems?
• How frequently is revenue data reconciled against bank deposits and collection records?
• What mechanisms are in place to alert management when significant discrepancies occur?

Cash flow management: Revenue timing is critical. Even if overall revenue targets are met, delays in cash inflows can create operational challenges.

• Liquidity reserves: Maintain sufficient cash reserves to bridge gaps between revenue receipts and expenditure obligations.
• Timing strategies: Consider measures such as accelerating collections or negotiating payment terms to better align revenue timing with expense schedules.

Example:

A municipal finance department may notice that although annual revenue targets are met, monthly cash flow reports reveal recurring shortfalls during the first quarter of the fiscal year. By establishing a reserve fund and adjusting collection strategies (such as offering advance payment incentives), the department can mitigate cash flow issues.

4. Diversify Revenue Streams

Mitigate concentration risk: Diversification reduces the risk associated with dependence on a single revenue source. Explore new revenue opportunities or expand existing streams.

Items to Consider:

• Are there underutilized local assets that could generate additional income?
• Can fee-based services be expanded or enhanced to create steady revenue?
• What partnerships or innovative financing arrangements can be pursued?

Example:

A state government that relies primarily on federal funding to fund infrastructure projects may consider developing public-private partnerships for infrastructure projects. These arrangements can generate additional revenue streams while sharing risk with private sector partners.

Effective revenue risk assessments require a comprehensive understanding of your revenue sources, accurate forecasting, and proactive cash flow management. By categorizing revenue streams, forecasting with scenario-based approaches, monitoring real-time performance, and diversifying revenue sources, state and local governments can build a more resilient financial foundation. The key is to remain vigilant and adaptable — ready to adjust strategies as external conditions change, to make sure revenue uncertainties do not compromise public services or fiscal stability.

How MGO Can Help

At MGO, we understand that revenue uncertainty can undermine even your strongest budgets. That’s why we work with state and local governments to assess revenue risks with precision and insight. Our State and Local Government team helps you map and analyze revenue sources, build robust scenario-based forecasts, and design effective cash flow strategies tailored to your unique operational needs.

From improving reconciliation processes to identifying new revenue opportunities, we can support you in building a diversified and resilient financial foundation … so your community can thrive even amid the murkiest uncertainty. Contact us to learn more.

Written by Lee Klumpp. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post Navigating Fiscal Uncertainty: Risk Management Strategies for State and Local Governments — Part Two appeared first on MGO CPA | Tax, Audit, and Consulting Services.