• A financial statement audit evaluates whether a company’s financials are fairly presented in accordance with applicable accounting standards. An integrated audit also includes an assessment of internal controls over financial reporting.

• Common audit mistakes include late or missing provided-by-client (“PBC”) requested submissions, insufficient or unreliable documentation that hinders effective risk assessment, weak internal and IT controls, and errors in applying accounting standards.

• Preparing early, understanding the internal control environment, and training staff can help your company provide relevant and reliable information, which is critical for assessing audit risk and demonstrating compliance with applicable laws and regulations.

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Financial statement audits are a critical checkpoint for companies, stakeholders, and investors. While the process has its limitations, the goal of an audit is to provide reasonable assurance that the company’s financial statements are free of material misstatement (whether due to error or fraud).

However, the audit process is only as effective as the broader environment supporting it — including timely and reliable financial information, a well-resourced accounting function, effective oversight by the board or audit committee, and a clear understanding of the entity’s operations and the regulatory landscape of its industry.

Many organizations approach audit season underprepared or unaware of the common pitfalls and complex or nontraditional transactions that can delay the process, increase costs, or raise compliance concerns.

In this article, we explain the financial statement audit process, common mistakes we see companies make during external audits, and best practices that lay the foundation for a smoother audit experience.

Understanding Financial Audits

During a financial statement audit, an independent registered public accounting firm follows generally accepted auditing standards (GAAS) and assesses your company’s financial records, transactions, and reporting processes. Independent auditors gather and evaluate relevant and reliable evidence to determine whether the financial statements are presented fairly — following generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), or another applicable financial reporting framework.

The process typically follows these phases:

1. Audit planning and risk assessment: External auditors work closely with company management to understand the operations of the business, identify significant risk areas, and develop an audit strategy that is unique to the organization.

2. Internal control evaluation: The auditor assesses the design and operating effectiveness of internal controls over financial reporting, often through walkthroughs and targeted testing of key controls. The results of this evaluation directly inform the auditor’s risk assessment and the nature, timing, and extent of substantive audit procedures. In an integrated audit, this process also includes gathering information to develop an opinion on the effectiveness of internal controls. Auditors pay particular attention to information technology general controls (ITGCs), which are foundational to the reliability of automated processes and system-generated reports. If the auditors identify material weaknesses, they may need to disclose them in the financial statement footnotes or the auditor’s report (depending on the severity and context).

3. Substantive testing: The auditor gathers evidence by examining transactions, account balances, and disclosures through sampling, confirmations, and recalculations. Strong internal controls impact the audit team’s risk assessment and may allow the team to reduce the amount of substantive testing required.

4. Conclusion and reporting: The auditor drafts the opinion letter, communicating findings to management and those charged with governance.

10 Common Types of Mistakes Made in Public Audits

Despite best intentions, many organizations encounter issues during the annual audit that delay timelines, increase costs, or raise red flags. Here’s a look at some common mistakes and why they matter:

1. Inadequate Documentation of Internal Controls

Many companies fail to maintain sufficient documentation around their internal control procedures. This lack of documentation makes it difficult for auditors to understand and — if necessary — test the design, implementation, and effectiveness of key controls. As a result, auditors may need to perform additional walkthroughs or expand their substantive testing — potentially increasing audit costs and timelines.

For publicly traded companies, this issue can have additional implications under Section 404 of the Sarbanes-Oxley Act (SOX). Section 404(a) requires management to assess and report on the effectiveness of internal control over financial reporting (ICFR). Section 404(b) requires the independent auditor to attest to and report on management’s assessment for accelerated filers.

If the auditors deem internal controls ineffective, management must disclose material weaknesses in its annual filing with the SEC. This can affect investor confidence, internal resource allocation, and external perceptions of the company’s governance. These findings may also place added pressure on the accounting team to remediate deficiencies under tight deadlines while still managing the financial close and reporting cycle.

2. Late or Incomplete Audit PBC Requests

Prior to audit fieldwork, the audit team sends a “provided by client” (PBC) list to management outlining the documents and financial data auditors need. Submitting incomplete or delayed items stalls fieldwork and may increase audit fees.

3. Improper Revenue Recognition

Misapplying Accounting Standards Codification (“ASC”) 606 or lacking support for revenue transactions — including cutoff periods around year-end — is a recurring audit issue. Companies often struggle to identify and document performance obligations in their contracts with customers and allocate the transaction price appropriately among those obligations.

These issues are especially common in arrangements involving bundled products or services, where the timing and pattern of revenue recognition may differ by deliverable. Inadequate documentation or inconsistent application of these principles can lead to audit adjustments or the need for expanded testing.

4. Weak IT General Controls

Deficiencies in ITGCs — such as user access management, change management, physical security of IT systems, intrusion detection, and system backup and recovery processes — can compromise the integrity of financial reporting systems and result in control deficiencies or audit findings. Increasingly, cybersecurity risk is also a critical area of concern, particularly as companies face heightened exposure to data breaches and unauthorized access.

In cases where companies outsource key processes or use cloud-based platforms that affect financial reporting, it’s important to obtain and evaluate SOC 1 Type 2 reports from service providers. These reports help assess whether the third party’s control environment supports reliable financial reporting. Failing to obtain or properly review these reports can result in audit scope limitations or the need for additional procedures.

5. Errors in Lease Accounting

ASC Topic 842  introduced significant changes to lease accounting — increasing complexity in how companies identify, measure, and disclose lease arrangements. Common mistakes include misclassifying leases, failing to identify embedded leases in service or supply agreements, and incorrectly applying accounting treatment for lease modifications and remeasurement events.

Errors can also arise in calculating the right-of-use asset and lease liability, selecting the appropriate discount rate, and preparing the required footnote disclosures. These issues can lead to material misstatements and require substantial audit follow-up — especially when a company maintains a large or decentralized lease portfolio.

6. Inaccurate or Unsupported Estimates

Many key areas in financial reporting rely on management’s judgment, especially when it comes to technical estimates such as goodwill impairment, valuation of long-lived assets, fair value of debt or equity instruments, and contingent liabilities. These estimates require a disciplined process of identifying the appropriate valuation method, documenting key assumptions, and evaluating both supporting and contradictory information.

Errors often arise when companies fail to update assumptions based on current market conditions, skip critical steps in the impairment testing process, or use inconsistent inputs across related estimates. A lack of documentation or transparency around the basis of these estimates raises audit concerns and can result in restatements or material weaknesses in internal controls over financial reporting.

7. Failure to Perform Timely Reconciliations

Account reconciliations help ensure accuracy and reliability in financial statements by comparing information in your financial records with third-party support — such as bank statements or loan documents. Delayed or inconsistent reconciliations of bank accounts, intercompany balances, and key general ledger accounts can indicate larger issues with the financial close process.

8. Insufficient Segregation of Duties

In smaller or rapidly growing companies, it’s common for individuals to handle multiple steps within a transaction cycle — such as initiating, approving, and recording transactions. This increases the risk of errors and intentional misstatements.

A lack of proper segregation of duties introduces risk at the process level and signals broader weaknesses in the company’s control environment (a key component of internal control frameworks). When auditors identify these gaps, they may reduce their reliance on controls and expand the scope of substantive testing — increasing the time and resources required for the audit and potentially causing delays.

Strengthening segregation of duties supports the integrity of financial reporting and reinforces a culture of accountability.

9. Poor Communication Between Financial Reporting and Operational Teams

A disconnect between accounting and other departments — including operations, legal, and procurement — can result in incomplete or misclassified transactions and missed disclosures. This issue is especially common in areas like inventory management, project accounting, and deferred revenue recognition.

It can also impact the identification and disclosure of related party transactions, legal contingencies, and other matters that require input from departments outside of finance. For example, if legal teams do not communicate the existence of pending or threatened litigation, the accounting team may fail to properly record or disclose a loss contingency — resulting in audit findings or misstatements. Clear, documented communication channels between departments are critical for complete and accurate financial reporting.

10. Lack of Readiness for New Accounting Standards

Companies often underestimate the effort required to adopt new standards — such as those related to segment disclosures (ASU 2023-07), income tax disclosures (ASU 2023-09), and business combinations (ASU 2023-05). Late-stage implementation leads to rushed adjustments and audit stress.

Fortunately, many of these issues are avoidable through proper preparation, communication, documentation, and adherence to regulations.

How to Prepare for a Smoother Audit Season

Here are a few best practices to reduce audit risks and improve efficiency in the financial statement reporting process:

• Start early: Preparing for the year-end audit should begin months in advance. Develop and assign internal timelines for PBC deliverables, reconciliations, and close procedures.

• Assess and document internal controls: Clearly document your control procedures. Perform regular controls testing throughout the year and update them to reflect changes in processes or personnel at year-end.

• Invest in training: Your accounting and finance teams should stay current on new standards and audit requirements to reduce the risk of misapplication.

• Leverage technology thoughtfully: Use financial close and compliance tools to streamline workflows, manage documentation, and maintain audit trails.

• Conduct a pre-audit walkthrough: Reviewing key areas of risk, estimates, and controls ahead of time enables your company to address issues before auditors arrive.

• Foster collaboration: Create open channels of communication between auditors, internal accounting functions, IT, operational departments, and the audit committee to minimize misalignment. Collaboration between external auditors and the internal audit team can also be beneficial. However, under the Public Company Accounting Oversight Board’s new QC 1000 standards, internal auditors are considered “other participants” in the audit, which may affect how their work is evaluated and used. Companies should understand the implications of this designation and ensure internal audit activities are properly documented and aligned with audit objectives.

Be Proactive to Prevent Audit Mistakes Before They Happen

A successful audit is more than a compliance milestone. It’s a sign of sound corporate governance. By recognizing common mistakes and addressing them proactively, you can support more accurate and timely financial statements, reduce audit fatigue in your team, and build trust with stakeholders and regulators.

How MGO Can Help

Our Audit and Assurance team supports public companies through every stage of the audit lifecycle — from preparing internal controls documentation to navigating complex accounting standards and responding to auditor inquiries. Our professionals bring deep industry experience to help clients identify risks and streamline financial reporting processes. If you’re approaching audit season or facing challenges with audit readiness, reach out for guidance tailored to your specific needs.

The post 10 Common Public Audit Mistakes That Could Delay Your Timeline appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Ethical training and leadership can help reduce fraud risk in your casino operations.

• Fraud prevention begins with employee awareness, transparency, and well-communicated policies.

• Internal audit and risk management efforts are strengthened by a culture that prioritizes accountability.

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In any casino or Tribal gaming operation, the risk of fraud is an ongoing concern. With high-volume transactions, cash-intensive environments, and multiple operational layers, even well-structured controls can fall short — especially when the organizational culture does not support them.

That’s why your most effective line of defense isn’t just a system or checklist; it’s your people. How they understand expectations, perceive risk, and feel empowered to raise concerns directly influences your organization’s vulnerability to fraud.

The Human Side of Risk

When employees know what’s expected and see ethical behavior valued in practice, they’re more likely to do the right thing — and speak up when something doesn’t seem right.

Organizations that emphasize ethics and transparency often experience earlier issue detection and fewer instances of internal fraud. But that kind of culture isn’t built overnight. It requires leadership, communication, and a consistent message that ethics are part of how the business runs.

In regulated environments like gaming, where reputational and compliance risks are high, building an ethical foundation can offer both protection and a strategic advantage.

It Starts with Awareness

Employees don’t always recognize how certain actions — like offering excessive comps, skipping documentation, or bypassing approval workflows — can trigger risk. Regular, practical training helps close that gap.

Effective ethics training should be more than a once-a-year checkbox. It should reflect real-world scenarios and encourage open dialogue. Share anonymized examples of past issues, explore how breakdowns happen, and help staff understand their role in upholding financial integrity.

How leadership responds when someone raises a concern often sends the clearest message about what your organization values.

Leadership Shapes Culture

Ethics must be proven — not just stated. When senior leaders model accountability, ethical behavior becomes the standard across the organization.

This includes how issues are addressed, how support is shown for audit and compliance teams, and how ethics are reflected in performance discussions. When integrity is embedded in daily decisions, it helps foster consistency across departments.

Aligning Controls with Culture

While internal controls are essential — segregation of duties, dual approvals, surprise audits — they’re most effective when backed by a culture that supports their purpose.

For instance, employees are more likely to follow promotion approval processes when they understand why the rules exist. Controls are embraced, not resisted, when they’re reinforced by open communication and consistent expectations.

A culture that values transparency doesn’t cut fraud risk, but it creates an environment where controls are more likely to succeed.

A Real-World Perspective

One gaming organization created quarterly “Fraud Awareness Spotlights” using anonymized case studies to highlight areas where controls had been bypassed. These discussions opened space for employees to ask questions, learn from past missteps, and better understand their role in prevention.

Over time, the organization saw an increase in early reporting of process issues — helping management act before small problems escalated.

This wasn’t about policing behavior; it was about creating shared ownership over risk.

Sustaining the Effort

Building a culture of ethics is not a one-time initiative. It requires ongoing reinforcement through regular training, consistent communication, and support from leadership at all levels.

At MGO, we help casinos and Tribal gaming organizations develop fraud prevention strategies that reflect your unique culture and operational structure. Whether you’re refining reporting channels, enhancing staff education, or aligning audit procedures with your values, our team can help you build a stronger, more resilient organization.

The post Build a Culture of Ethics to Prevent Casino Fraud appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Expanding through contract manufacturing opens opportunities for your cannabis or hemp brand — but also brings complex financial and regulatory challenges.

• Stay ahead of tax risks by aligning your operations with both federal and state compliance rules.

• Strengthen your contracts and tracking systems to keep royalty payments accurate and transparent.

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Contract manufacturing arrangements can accelerate brand growth for cannabis and hemp companies, but they present complex tax, accounting, and compliance challenges. To protect financial integrity and valuation, companies must:

• Recognize and present revenue in a manner consistent with accounting standards and investor expectations. 

• Structure operations to preserve favorable tax status — especially for cannabis intellectual property (IP) entities avoiding Internal Revenue Code (IRC) §280E. 

• Monitor multi-jurisdictional tax nexus triggered by licensing activity. 

• Implement clear, enforceable, and regularly reconciled royalty calculation methods.

1. Revenue Recognition and Financial Presentation

Accounting Considerations

In contract manufacturing models, brand owners typically license IP to local manufacturers, who produce and distribute products under the brand name in exchange for royalty payments. Under U.S. generally accepted accounting principles (GAAP), this licensing arrangement should be accounted for as royalty income — distinct from product sales revenue recorded by manufacturers.

• Licensed operators: Recognize product sales with corresponding inventory and cost of goods sold (COGS).

• IP companies: Recognize only royalty income, without inventory or COGS.

For both cannabis and hemp operators, proper classification ensures financial statements reflect contractual entitlements — not hypothetical retail values — which can withstand both audit and investor due diligence.

Investor and Valuation Impact

Royalty-based models often report lower top-line revenue than direct sales, potentially influencing valuation multiples in capital raises. Your company can mitigate this perception by:

• Presenting retail market performance data as supplemental (non-GAAP) information.

• Demonstrating brand market share, pricing strength, and geographic expansion.

• Maintaining accounting integrity by ensuring GAAP statements reconcile with contractual royalty terms.

Sophisticated investors prioritize accuracy and contractual consistency over inflated revenue optics.

2. Tax Positioning and Regulatory Compliance

Cannabis: Preserving Non-280E Status

Cannabis IP holding companies that do not sell THC products directly and operate as an independent trade or business are generally not subject to IRC §280E and enjoy a significantly lower federal tax burden than state-licensed cannabis operators. However, maintaining this advantage depends on operational alignment between a company’s tax position and accounting presentation.

• Revenue must be recorded as royalty income, not product sales.

• General ledger (GL) accounts and financial statement categories must reflect licensing activity, not manufacturing operations.

Misalignment — such as recording product sales revenue while claiming 280E exemption — can trigger IRS scrutiny.

Hemp: Avoiding Misclassification

While hemp companies are generally outside §280E due to the 2018 Farm Bill, misclassification of revenue streams can still lead to incorrect tax filings, higher tax liabilities, or state compliance issues.

Proactive Compliance Measures

• Regular review of GL account descriptions and revenue categories.

• Documentation that ties reported revenue directly to licensing contracts.

• Periodic confirmation that financial presentation supports intended tax treatment.

For cannabis brands, this is critical to preserving 280E protection; for hemp, it safeguards proper business classification and tax outcomes.

3. State Tax Nexus and Multi-Jurisdictional Compliance

Income Tax Nexus

Licensing IP can create state income tax nexus without physical presence. States differ in sourcing rules — some focus on where products are consumed, others on where IP is exploited. Cannabis companies must navigate cannabis-specific rules layered over general sourcing provisions, while hemp companies contend with varied CBD/hemp regulations.

Sales Tax Considerations

Licensing arrangements may create sales tax obligations or require exemption certificate documentation. Hemp brands selling directly to consumers are typically subject to standard sales tax rules in each state.

Risk Mitigation

• Conduct nexus analysis regularly across all jurisdictions where products are sold.

• File returns in nexus states even if no tax is due.

• Document exemptions and monitor legislative changes.

Factor in marketing, contractor activity, and promotional events in nexus determinations.

4. Royalty Calculation and Documentation

Common Dispute Areas

Royalty disagreements often arise over:

• Gross versus net sales bases.

• Treatment of COGS, taxes, and regulatory fees.

• Allocation of shared costs (utilities, equipment, marketing).

• Returns, discounts, and promotional allowances.

Industry-Specific Nuances

• Cannabis: Must incorporate jurisdiction-specific excise taxes and licensing fees into formulas.

• Hemp: May face cost allocation issues related to compliance testing and certification.

Best Practices

• Include pro forma royalty calculations in contracts, tested with realistic production and pricing scenarios.

• Obtain written acknowledgment of the agreed methodology.

• Specify all potential chargebacks, shared costs, and allocation rules.

• Maintain separate royalty tracking systems.

• Perform periodic reconciliations between contractual formulas and actual payments to identify discrepancies early — an emerging industry best practice.

• Consider independent accounting reviews to validate partner-reported figures.

• If the manufacturer and the IP company are related parties, contracts should be reviewed in relation to tax transfer pricing rules that require arm’s length and market rate terms.

Position Your Brand for Contract Manufacturing Success

Contract manufacturing can offer compelling growth opportunities for your cannabis or hemp brand. The key to sustainable success lies in disciplined revenue presentation, strong tax positioning, proactive compliance, and robust royalty oversight.

By aligning accounting standards with tax objectives, maintaining transparent investor communications, and reconciling royalties regularly, your company can position itself to expand with confidence while minimizing regulatory and financial risk.

How MGO Can Help

We help cannabis companies across the U.S. to navigate complex accounting and tax challenges — including contract manufacturing arrangements. Whether you’re structuring royalty agreements, managing state tax compliance, or preparing for a potential audit, our dedicated Cannabis practice can help you grow smarter. Reach out to our team today to learn how we can support your goals.

The post 4 Critical Tax and Accounting Considerations for Cannabis and Hemp Contract Manufacturing Arrangements 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.

• OBBBA has expanded excise taxes on compensation and endowment income for tax-exempt entities. 

• Charitable contribution rules now include new deduction floors and reinstated nonitemizer deductions. 

• Clean energy credit limits and “direct pay” changes could impact your project funding timelines. 

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President Donald Trump signed into law a sweeping reconciliation tax bill, commonly known as the “One Big Beautiful Bill Act” (OBBBA) at a July 4 signing ceremony, capping a furious sprint to finish the legislation before a self-imposed Independence Day holiday deadline. The Senate had 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 then voted 218- 214 on July 3 to send the bill to the president’s desk. 

With the legislation now final, tax-exempt organizations should focus on assessing its impact and identifying planning opportunities and challenges. The OBBBA introduces both tax cuts and tax 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). 

Several areas of the final bill have tax implications for tax-exempt organizations, summarized below. 

Section 4960 Excise Tax on “Excess” Compensation 

The OBBBA expanded the group of individuals covered by the Section 4960 excise tax on compensation over $1 million paid by certain tax-exempt organizations. Under the act, all employees and former employees of the organization are now subject to Section 4960, not just the top five highly compensated employees in the current year or prior years. The final bill kept the language in Section 4960 that limits the group of individuals covered to those who were employees of the organization during taxable years beginning after December 31, 2016. The amendment to Section 4960 will apply to tax years beginning after December 31, 2025.  

Takeaway 

• This provision will have a significant impact on tax-exempt organizations that pay more than $1 million in remuneration to more than five individuals or provide certain severance payments to an employee (even one earning significantly less than $1 million). 

• Tax-exempt organizations should begin to look at future planning opportunities in structuring compensation, severance, and retirement agreements to mitigate the impact of the expansion of the scope of individuals covered under Section 4960. 

• The exceptions for licensed medical professionals providing medical services and non-highly compensated employees as defined under Section 414 remain available.   

Section 4968 Excise Tax “Endowment Tax” 

The OBBBA will have a significant impact on the excise tax imposed on net investment income of applicable education institutions under Section 4968. Under prior law, the excise tax rate was calculated using a flat 1.4% rate. The OBBBA increases the rate, utilizing a new tiered structure. For applicable institutions with student adjusted endowments: 

• Over $500,000 but not exceeding $750,000, the rate remains at 1.4% 

• Over $750,000 but not exceeding $2,000,000, the rate is increased to 4% 

• Over $2,000,000, the rate is increased to 8% 
   

For purposes of Section 4968, “student adjusted endowment” is the aggregate fair market value of the institution’s assets (as determined at the end of the preceding taxable year), other than assets that are used directly in carrying out the institution’s exempt purpose, divided by the number of students at the institution. The original House bill included a provision that would have excluded foreign students from the total number of students, but that provision was removed from the final version of the act. 

The OBBBA also updated the definition of applicable educational institution to exempt institutions with fewer than 3,000 tuition-paying students in the preceding tax year. This amount was increased from 500 tuition-paying students prior to the act.   

The OBBBA also requires institutions to include student loan interest from a loan made by the institution (and any related organization) and federally subsidized royalty income as gross investment income. This amendment overrides the existing regulations under Section 4968. 

The amendment to Section 4968 will apply to tax years beginning after December 31, 2025.  

The OBBBA will have a significant impact on institutions with the largest per-student endowments; however, the rates are lower than those in President Trump’s original proposal — 35% — and the original House bill, which included tiered rates of 1.4%, 7%, 14%, and 21%. 

Takeaway 

The increase in the tuition-paying student threshold from 500 to 3,000 is a positive change that will decrease the number of institutions subject to the tax, specifically those with a relatively small number of tuition-paying students. 

Educational institutions will need to closely monitor their enrollment and assets, as small fluctuations in the student-adjusted endowment may have a significant impact on the institution’s tax rate in the new tiered rate structure.  

Institutions that will face a significantly higher tax rate beginning in 2026 may want to consider reverse planning strategies to recognize income before the change takes effect.  

For purposes of this section, the assets and investment income of any related organization are treated as assets and net investment income of the educational institution; therefore, it is important to closely monitor and coordinate any activities of related organizations to anticipate and reduce potential tax exposure. 

The OBBBA also directs the Secretary of the Treasury to issue regulations and other guidance necessary to prevent avoidance of tax under this section. 

Direct Pay and Energy Credits 

The OBBBA retained the “direct pay” mechanism under Section 6417 for tax-exempt organizations and state, local, and tribal governmental entities. The direct pay (or elective pay) process allows the entities described above to receive a cash payment for clean energy tax credits they qualify for but are unable to use due to the entities having no tax liability.  However, the act curtailed and eliminated many of the clean energy credits.  

Here is a brief summary of some of the key clean energy credits impacted by the OBBBA: 

• The alternative fuel vehicle refueling property credit (Section 30C), which includes EV chargers, is not available for property placed in service after June 30, 2026. 

• The qualified commercial clean vehicle credit (Section 45W), for which no credit is available with respect to vehicles acquired after September 30, 2025.  

• The technology-neutral clean electricity investment credit (Section 48E) for certain wind and solar facilities is terminated for property that does not begin construction within one year of enactment (by July 4, 2026) or is not placed in service by December 31, 2027. For other facilities, and for energy storage (battery) technology, the current credit phaseouts that begin in 2032 generally apply (although the potential for a later phaseout was eliminated).  

• Revisions to the Section 48E clean electricity investment credit include higher phased-in domestic content requirements and new material assistance restrictions for projects sourcing from certain Chinese supplies and other foreign entities of concern (for projects beginning construction after 2025). However, the revisions contain no provision accelerating the phaseout of the investment tax credit available for geothermal energy property under Section 48, as the House bill proposed.  

• The transferable deduction for installation of certain energy-efficient property in buildings owned by certain government or tax-exempt entities (Section 179D) is no longer available for property beginning construction after June 30, 2026. 

Takeaway 

Tax-exempt organizations with planned clean energy projects should quickly assess their eligibility under the new restrictions and timelines. The ability to receive direct refundable credits has made energy projects more economically compelling for many tax-exempt organizations, and it may be prudent to accelerate some activity to avoid new restrictions or phaseouts. 

Employee Retention Tax Credit      

The bill 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, perhaps 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. 

Corporate and Individual Charitable Contributions 

Corporations 

1.0% Floor on Charitable Contributions Deduction 

The OBBBA amends Section 170(b)(2)(A) to permit corporations to claim a charitable contribution deduction only to the extent it exceeds 1% of taxable income (up to the current 10% cap).   Excess contributions as well as contributions disallowed by the 1% floor can be carried forward for up to five years. However, if the aggregate corporate charitable contributions do not exceed 10% of taxable income, there will be no carryforward of charitable contributions disallowed due to the 1% floor.  

Individuals 

0.5% Floor on Charitable Contributions Deduction 

The OBBBA amends Section 170(b)(1) to allow individuals to claim a charitable contribution deduction only if all of the contributions exceed 0.5% of the individuals’ adjusted gross income (AGI). The act did not change current percentage limitations (related to type of contribution or organization that receives the contribution), but it does create a new limit on the value of itemized deductions that will affect charitable contributions. The value of itemized deductions is essentially capped so that the maximum benefit achievable is equivalent to offsetting income taxed at a top rate of 35%, rather than at the higher individual marginal rate of 37%. For individuals in the top bracket, this in effect creates a 2% tax on charitable deductions that would otherwise offset income at the 37% rate. 

Any excess charitable contributions, along with the contributions disallowed by the 0.5% floor, can be carried forward for five years. If an individual’s total contributions do not result in a carryover amount, there is no carryover of contributions disallowed due to the 0.5% floor.   

60% Limitation on Individual Charitable Contribution Deductions 

The OBBBA makes the current 60% deduction limitation of AGI permanent for charitable contributions of cash made by individuals to public charities (as well as certain private foundations as defined in Section 170(b)(1) (F)). This limitation was originally enacted as part of the Tax Cuts and Jobs Act (TCJA) and would have expired at the end of 2025. The act also amends the application of the 60% limit. This amendment appears to potentially allow individuals to deduct up to 60% of AGI even if they make total cash contributions to public charities that are less than 60% of AGI and also make charitable contributions of noncash property to eligible donees that are not public charities.  

Reinstatement of Partial Charitable Contribution Deduction for Nonitemizer Individuals 

The OBBBA amends and permanently reinstates the partial deduction for charitable contributions for individuals who do not itemize deductions on their individual tax returns. The maximum amount is increased to $2,000 for married filing jointly taxpayers and $1,000 for all other taxpayers. The deduction is available only for cash contributions made to certain charitable organizations. It does not include noncash contributions, contributions made to donor-advised funds, supporting organizations, and to most types of private foundations.  

All changes for both corporations and individuals are effective for tax years beginning after December 31, 2025.  

Takeaway 

The OBBBA includes both favorable and unfavorable provisions impacting charitable contributions.  The provisions may have funding implications for tax-exempt organizations that rely on contributions. 

Corporate contributions were previously capped at 10% of taxable income but the OBBBA includes a 1% floor that limits the deductibility of corporation contributions. This floor could result in a reduction in corporate contributions received.   

Individual contributors will be limited to amounts exceeding a .5% floor, which may result in an overall reduction in contributions from individual donors, with the potential to impact funding for tax-exempt organizations that rely on contributions.   

The reinstatement of the partial deduction for individuals that do not itemize and increases the maximum contribution amounts may result in increased charitable contributions from individuals that do not meet the threshold to itemize on their personal returns. 

Tax-exempt organizations should consider how these changes will impact their donor base and ultimately the total funding received from corporate and individual contributors. The available tax deduction for nonitemizers may entice taxpayers to make charitable contributions that they had not previously made, potentially providing additional funding to tax-exempt organizations. 

Tax Credit for Contributions to Scholarship-Granting Organizations 

The OBBBA allows a credit for contributions by individuals to a scholarship-granting organization. A scholarship-granting organization is a Section 501(c)(3) organization, excluding private foundations, that provides scholarships to 10 or more students, spends at least 90% of its income on scholarships for eligible students, and limits scholarships to qualified elementary or secondary education expenses. Scholarship-granting organizations must be identified to the Secretary of the Treasury by a participating state in an annual listing (issued by January 1). Eligible students include a member of a household with income that is not greater than 300% of area median gross income and is eligible to enroll in a public elementary or secondary school. The maximum credit for any tax year shall not exceed $1,700 (with a carryover period limited to five years) and must be reduced for any state tax credit received. To avoid a double benefit, no charitable contribution deduction is allowed for amounts claimed as a credit under this provision. 

Scholarships for qualified elementary or secondary education expenses will not be included in the scholarship recipient’s gross income. 

This provision is effective for tax years beginning after December 31, 2026.  

Takeaway 

The potential benefits of this provision may be limited depending on whether states voluntarily elect to participate in this program. This election must be made by the governor of the state or by an individual, agency, or entity designated under state law to make such elections on behalf of the state with respect to federal benefits. The burden is on the states to determine that scholarship-granting organizations meet the requirements described in this section. Each participating state must release a list of qualified organizations no later than January 1 of each year. 

Increase in State and Local Tax (SALT) Cap for Individuals 

The OBBBA provides a temporary increase in the cap on deducting SALT as itemized deductions.  The act temporarily increases the SALT cap to $40,000 (for married filing jointly taxpayers) beginning in 2025, with subsequent annual increases of 1% for tax years 2026 through 2029.  The SALT cap is reduced by 50% for filers other than married filing jointly. Beginning in 2030, this SALT cap will revert to $10,000.  For tax year 2025, the increased SALT cap begins to phase out when modified AGI exceeds $500,000 for married filing jointly taxpayers, with a 50% reduction for other filers. This phaseout amount increases 1% annually after 2025. The allowable SALT deduction amount will not result in a limitation amount of less than $10,000. 

Takeaway 

This provision will benefit individuals residing in states with high state taxes and will result in an increase in the overall number of taxpayers eligible to itemize on their personal tax returns. This may indirectly benefit tax-exempt organizations by enticing taxpayers to make charitable contributions, which would be more likely to result in a tax benefit.  

Next Steps 

The Act includes a limited number of provisions that will directly impact tax-exempt organizations and many others that will indirectly impact these organizations. Additionally, the Medicaid provisions included in the OBBBA may present challenges to tax-exempt organizations in the healthcare sector.   

While many of the OBBBA’s provisions will negatively impact tax-exempt organizations, it is important to recognize that many of the proposals included in the original House bill but struck from the final package would have had a more negative impact on the nonprofit sector. These include the potential revocation of tax-exempt status based on an organization’s support for terrorist organizations, increased excise tax rates for private foundations, the treatment of qualified transportation fringe benefits as unrelated business income, stricter rules for exemption of research income from unrelated business income, and the inclusion of name and logo royalties in unrelated business income.   

Tax-exempt entities should assess the impact of the changes that did survive and consider mitigation strategies.  

Written by Jake Cook, Sandra Feinsmith and Todd Teresco. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Helping Tax-Exempt Organizations Navigate New Tax Complexities 

At MGO, we help nonprofits, foundations, and educational institutions proactively respond to regulatory changes like those in the OBBBA. From expanded excise taxes to revised charitable contribution rules and curtailed energy credits, these updates present both risks and opportunities for exempt organizations. Our team offers tailored support in compensation structuring, donor impact analysis, tax credit optimization, and compliance strategy — so you can focus on your mission while we handle the shifting tax landscape. Contact us to learn more.  

The post New Tax Law Will Have Significant Impact on Tax-Exempt Organizations  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Know which regulations apply to your business, such as ITAR or ER, and identify high-risk jurisdictions.  

• Follow key elements of an export control and sanctions compliance program, including senior management commitment, risk assessment, internal controls, and training. 

• Vigilantly assess potential red flags and risk factors on a per-transaction basis, using resources like BIS “Red Flags” and Know Your Customer guidance.  

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Considering the rapidly changing export controls and sanctions landscape, companies need to ensure their compliance programs respond to the latest-breaking risks and demands from regulators.  While the scope and volatility of trade sanctions may seem daunting, companies can protect themselves from costly violations by proactively bolstering compliance programs.  

Export controls and sanctions risk can exist in any cross-border transaction involving foreign jurisdictions, people, or products.  A responsive sanctions compliance program needs to 1) Respond to specific risks based on your organization’s operations; and 2) Demonstrate to regulators that you have prioritized compliance and leveraged the tools available to you.   

The encouraging part is that you can strengthen an export controls and sanctions compliance program without incurring significant costs by implementing a few practical measures. 

If you are concerned about your sanctions risk, but aren’t sure where to start, ask yourself the following questions: 

1. Do you understand which regulations apply to your business? 

It is imperative to know which regulations and laws may apply to your business. Understand which government regulators (OFAC, BIS, DDTC, EU, OFSI) exercise jurisdiction over your business, products, information and services. For example, are exported items subject to the International Traffic in Arms Regulations (ITAR) (defense articles and defense services) or Export Administration Regulations (EAR) (dual-use and general commercial goods) and has the company classified those items accordingly under the Munitions List and Commerce Control List, respectively? The penalties for non-compliance differ depending on whether exported items are subject to the ITAR or EAR.  

Be familiar with your geography and high-risk jurisdictions/transshipment countries of concern. For example, BIS and FinCen published a joint alert listing transshipment countries of concern including, but not limited to, Armenia, Brazil, China, Georgia, India, Israel, Kazakhstan, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, Turkey, United Arab Emirates, and Uzbekistan. 

2. Do your compliance policies provide a digestible and practical roadmap for your compliance program? 

We recommend that businesses involved in cross-border transactions should follow the key elements of an effective export control and sanctions compliance program. OFAC, DDTC, and BIS all provide separate guidance for an effective compliance program but contain overlapping themes:  

• Senior management commitment – policy statement 

• Risk assessment 

• Internal controls 

• Handling violations and taking corrective action 

• Monitoring, testing, auditing 

• Training 

Additionally, compliance policies and manuals should act as a roadmap for your company’s sanctions compliance program.  These policies should: 

• Reflect requirements of regulatory guidance 

• Encompass all business cycles with sanctions compliance risk (e.g., sales, procurement, supply chain, etc.) 

• Clearly identify and explain compliance risks 

• Detail mitigating controls 

• Designate compliance roles and systems 

• Provide real-life examples to help employee comprehension 

• Identify records to retain and related storage systems 

• Be disseminated/readily available to employees 

• Be periodically updated based on regulatory, system, and business changes 

Regulators expect a risk-based compliance program that is tailored to the business and is routinely updated. Organizations should continually assess their export controls and sanctions compliance risks in a rapidly changing environment. For instance, consider changes in operations, locations, products, services, business relationships, etc. Companies should also monitor regulatory guidance and enforcement actions as a good sanctions compliance program is one that can respond nimbly to regulatory changes and guidance.  

3. Is your company exercising due diligence best practices on a transaction- and system-wide basis? 

Organizations should be vigilant about different warning signs and risk factors on a per-transaction basis. BIS “Red Flags” and Know Your Customer guidance found in Supplement No. 3 to EAR Part 732 is a great resource for ascertaining potential red flags. For example, any transactions with Russia and Belarus are high risk due to the significant OFAC and EAR restrictions involved.  

Companies should utilize enhanced due diligence for higher-risk jurisdictions, customer types, and significant relationships. Business partner due diligence should include several components, including: 

• Documents and electronic records provided by the business team members  

• Independent research of publicly available information and media 

• In-person visits, inspections and verification 

• KYC’s Customer – End Users 

• End Use verification 

• Screening and re-screening parties 

4. Are you enhancing the use of your company’s data and IT systems? 

Every organization has data, and regulators expect that organizations will utilize available data in their compliance programs.  Companies should ask themselves if they understand the extent of their organization’s data, and whether they are able to leverage that data to control sanctions compliance risks. For example, most companies closely track customers and sales, but do they also retain information on their distributors and agents, freight forwarders, shipping routes, and the origin of all the components in any branded products built by third-party manufacturers?   

Retaining all available data and entering it into IT systems in a standard format allows companies to automate transaction analysis for sanctions risk, screen third parties against restricted entity lists, and respond to demands of regulators. Failure to take such measures can lead to enhanced penalties in the event of a violation, whether intentional or not.   

Key essential measures to implement for data and IT systems include: 

• Integrate IT systems and automate restricted party screening when possible 

• Standardize data format across IT systems to allow for full-business cycle analysis 

• Require supporting documentation, including for customer onboarding, travel, shipment, and vendor payment request. This allows for automated matching, e.g., bill of lading to invoices to verify delivery location 

• Generate dashboards to alert for potential risks 

• Perform keyword searches on systems and emails for “code words” pointing to potentially prohibited transactions 

• Periodically test and enhance IT controls 

5. Are your employees equipped with the necessary training, resources, and skills to effectively execute your compliance program? 

Your people are the front line against potential export controls and sanctions violations.  Personnel in key roles perform due diligence on customers, authorize contracts and transactions, and can perform audits and inspections of your compliance activities and those of third parties.  It is critical that these personnel remain well-versed in evolving compliance risks and your company’s risk response.   

Compliance trainings should include: 

• Sanctions and export controls (including EAR and ITAR, as applicable) compliance awareness training for all employees/contractors – front line of defense 

• External trainings for key relationships 

• Job-specific training that is risk-based and tailored to employee roles 

• Multiple formats – online, in-person with Q&A, etc. 

• Knowledge checks and exams 

• Periodic evaluation of training content – is it keeping up with changes in regulations and the sanctions environment? Has it been updated for changes in business? 

• Continuous reinforcement – periodic training reinforced with sanctions compliance communications 

Additionally, organizations should perform quality assurance, audits, and inspections of both their own company and key compliance functions as well as those of their business team members.  Audits should be conducted by personnel that are qualified and independent.  Some key elements of such activities include: 

• Perform focused internal or external audits of your sanctions and export controls compliance program 

• Examine your key internal controls, ensure they are operating as designed 

• Test system/IT controls – e.g., automated screening, transaction holds 

• Conduct random records spot checks to ensure appropriate record retention 

• Audit/Inspect/Visit your business partners (e.g., freight forwarders, distributors, contract manufacturers, warehousing providers) 

• Establish a process to implement corrective actions – tracked milestones, deadlines and accountability 

• Create a feedback loop – communicate results, observations, recommendations and enhancements to key stakeholders 

• Establish a reporting hotline – mechanisms/channels for employees and business partners to report suspected violations for follow up 

In today’s dynamic global trade environment, companies should prioritize the development and enhancement of their export controls and sanctions compliance programs to effectively manage risks and adhere to regulatory demands.  

While the complexity and unpredictability of trade sanctions can be overwhelming, organizations can safeguard themselves against costly violations by taking proactive measures. This involves tailoring compliance programs to address specific risks associated with their operations and demonstrating a strong commitment to compliance to regulators. Importantly, enhancing these programs doesn’t have to be financially burdensome; practical steps can be taken to strengthen compliance efforts.  

For companies uncertain about their sanctions risk, a good starting point is to critically assess their current compliance posture by asking targeted questions about their operations and risk management strategies. 

Written by Richard Weinert and Nate Giarnese (BDO USA) and Luis Arandia and Nicholas Galbraith (Barnes & Thornburg). Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help 

MGO can help you understand and navigate complex export control and sanctions regulations. Our team of International Tax professionals offers tailored risk assessments, help develop comprehensive compliance programs and provide ongoing support to make sure you remain compliant with the latest regulatory changes. We can also conduct due diligence and training to keep your employees informed and prepared for potential risks. Contact us to help you confidently manage sanctions risk and protect your business from costly violations.  

The post From Uncertainty to Clarity: Key Questions to Help You Get Started with Addressing Sanctions Risk  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The SLFRF program’s reporting deadlines have passed, but compliance reviews and documentation requests from the Treasury are now underway.

• A detailed checklist can help your government stay organized and responsive during this oversight phase.

• Proactively reviewing records and internal controls helps confirm your use of funds aligns with what was reported to the Treasury.

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The State and Local Fiscal Recovery Funds (SLFRF) program, established under the American Rescue Plan Act, delivered $350 billion in federal aid to help state, local, territorial, and Tribal governments address the public health and economic impacts of the COVID-19 pandemic. While the program provided critical flexibility, it also came with deadlines and oversight requirements.

The key deadline to obligate SLFRF funds was December 31, 2024. Final reports were due earlier this year, and the U.S. Department of the Treasury has shifted its focus to compliance reviews, documentation requests, and potential fund recovery actions. That means your role isn’t over.

Even though the obligation and reporting windows have closed, there’s still time to strengthen your compliance posture. Whether you’re preparing for Treasury inquiries, reviewing internal documentation, or confirming your use of funds aligns with what you reported, this checklist is designed to help you stay proactive and prepared.

SLFRF Compliance Checklist for State and Local Government

Use this checklist to make sure you’re covered for SLFRF compliance and oversight:

1. Adequate Documentation

• Maintain detailed records of all obligations and expenditures.

• Ensure documentation substantiates obligations were made by December 31, 2024.

• Retain contracts, invoices, and procurement records.

• Keep records for at least 5 years after the end of the period of performance.

2. Reporting Requirements

• Submit final obligation reports:

• Quarterly reporters: by January 31, 2025

• Annual reporters: by April 30, 2025

• Review submitted reports for accuracy and completeness.

• Confirm that all obligated funds are eligible uses under SLFRF guidelines.

3. Treasury Communications

• Monitor for Information Document Requests from U.S. Treasury.

• Respond to Information Document Requests promptly and thoroughly.

• Watch for financial instructions to return unobligated funds if applicable.

4. Repayment (if applicable)

• Follow instructions for repayment options via pay.gov.

• Take note of deadlines and potential interest and penalties.

• Consult legal or financial advisors if repayment is disputed or unclear.

5. Internal Controls and Oversight

• Conduct an internal review of and track all SLFRF obligations.

• Implement or update internal controls to prevent misuse of funds.

• Ensure spending of SLFRF funds is in line with obligations made.

6. Stakeholder Communication

• Inform elected officials and stakeholders of compliance status.

• Prepare a public summary of SLFRF use and impact, if appropriate.

Stay Ahead of Compliance Risks

With the Treasury increasing oversight and requesting documentation from recipients, staying prepared is essential. This is your opportunity to review your internal records, verify alignment with what was reported, and make adjustments to avoid compliance issues. Proactive steps today can help you minimize the risk of repayment and preserve your funding impact.

For SLFRF reporting guidance and other resources, visit the U.S. Treasury website.

How MGO Can Help

Our dedicated State and Local Government team is ready to support you through the next phase of SLFRF compliance. From reviewing documentation to advising on Treasury communications or repayment concerns, we’re here to help you stay prepared.

Reach out to our team today to learn how we can support you.

The post Compliance Checklist: Is Your Government Prepared for SLFRF Oversight? appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Notice 2025-27 introduces new CAMT AFSI thresholds and adjustments, easing compliance for large corporations during the transition period. 

• The IRS extended penalty relief for underpayments of estimated CAMT through tax year 2025, reducing risk for affected taxpayers. 

• Corporations must still test CAMT applicability under full AFSI rules if they exceed interim thresholds under the simplified method. 

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On June 2, 2025, the Department of the Treasury and the IRS released additional interim guidance regarding the corporate alternative minimum tax (CAMT) imposed under Internal Revenue Code Section 55. Notice 2025-27 provides taxpayers an interim optional simplified method for determining whether a corporation is an applicable corporation and, therefore, subject to the CAMT. The notice also extends previous guidance that temporarily waives penalties for underpayments of estimated CAMT.  

Background 

The Inflation Reduction Act of 2022 amended Code Section 55 to create a CAMT for tax years ending after December 31, 2022. The CAMT applies only to “applicable corporations” and generally exacts a tax equal to 15% of an applicable corporation’s adjusted financial statement income (AFSI). In general, a corporation’s AFSI is the net income shown on its applicable financial statement (AFS), after taking into account various adjustments set out in Section 56A.  

A corporation (other than an S corporation, a REIT, or a RIC) is an applicable corporation for a taxable year if it meets an average annual AFSI test during one or more taxable years that are prior to that year and end after December 31, 2021.  

• If the corporation is not a member of a foreign-parented multinational group (FPMG), the corporation meets the average annual AFSI test for a taxable year if the average annual AFSI for the three-taxable-year period ending with that taxable year exceeds $1 billion (the general AFSI test).  

• A U.S. corporation that is a member of an FPMG satisfies the average annual AFSI test for a taxable year if (i) the FPMG meets the $1 billion average annual AFSI test, and (ii) the average annual U.S. AFSI for the three-taxable-year period ending with such taxable year is $100 million or more. 

Proposed regulations published on September 13, 2024, provided an optional simplified safe harbor for determining applicable corporation status, which generally substituted $500 million for $1 billion in the general AFSI test and $50 million for $100 million in the FPMG AFSI test, and simplified the calculation of AFSI for purposes of applying the safe harbor thresholds. To rely on this safe harbor, a taxpayer and each member of its test group must consistently apply certain portions of the proposed regulations. 

Notice 2025-27 

Interim Simplified Method 

In response to public comments received on the proposed regulations, Notice 2025-27 provides an interim optional simplified method for determining applicable corporation status. Under the interim simplified method, “$800 million” is substituted for “$1 billion” when applying the general AFSI test, and “$80 million” is substituted for “$100 million” when applying the second prong of the AFSI test for FPMGs. 

As with the safe harbor in the proposed regulations, Notice 2025-27 modifies the calculation of AFSI for purposes of the interim simplified method, requiring AFSI to include: 

• Adjustments for financial statement consolidation entries (Section 56A(c)(2)(A)) 

• Adjustments to disregard certain federal and foreign taxes (Section 56A(c)(5)) 

• Adjustments related to effectively connected income (Section 56A(c)(4)). 

For purposes of applying the interim simplified method, Notice 2025-27 requires additional adjustments that were not authorized under prior iterations of the simplified safe harbor method. In particular, the notice requires adjustments under Section 59A(c)(9) (related to certain credits treated as payment against the corporation’s federal income tax) and Section 59A(c)(12) (related to unrelated business taxable income of tax-exempt entities), as well as specific adjustments related to amounts associated with certain credits to the extent not otherwise captured by the adjustment under Section 59A(c)(9). These adjustments were included in response to public comments and are generally expected to reduce a corporation’s AFSI.  

Similar to prior simplified methods, if a corporation’s AFS covers a period that differs from its taxable year, average annual AFSI under the interim simplified method of Notice 2025-27 is calculated using the three-AFS-year period ending during the taxable year. 

The notice also clarifies that if a corporation uses the interim simplified method of Notice 2025-27 and exceeds the applicable threshold, the corporation will be an applicable corporation only if it is determined to be an applicable corporation under the statute or, if it chooses to follow them, the proposed regulations.  

Effective Date and Reliance 

Corporations may use the interim simplified method in Notice 2025-27 for any taxable year ending on or before the date a Treasury Decision adopting a simplified method pursuant to Section 59(k)(3)(A) is published in the Federal Register and for which the original federal income tax return has not been filed as of the date Notice 2025-27 is published in the Internal Revenue Bulletin. Importantly, taxpayers may use the Notice 2025-27 simplified method without becoming subject to, or violating, the reliance rules (including the consistency requirements) provided in the proposed regulations. 

Insight 

Comments received on the simplified safe harbor contained in the 2024 CAMT proposed regulations suggested increasing the safe harbor’s AFSI thresholds as well as favorably expanding the modifications to AFSI to reduce compliance burdens and costs for corporations that might exceed the safe-harbor thresholds but that are not expected to be applicable corporations under the regular AFSI test. The IRS issued Notice 2025-27 to prescribe the new interim simplified method, which incorporates some taxpayer suggestions. The notice states that Treasury and the IRS intend to issue revised proposed regulations that include a method similar to the interim simplified method of Notice 2025-27 prior to finalizing the CAMT regulations. 

Taxpayers should be aware that even though they may take advantage of the interim simplified method of Notice 2025-27 when determining whether a corporation is an applicable corporation, those that exceed the simplified method’s AFSI threshold will still be required to determine if they are an applicable corporation under the regular AFSI test, the rules and calculations for which are onerous and complex. 

Extended Waiver of Section 6655 Addition to Tax 

Notice 2025-27 extends previous interim guidance that temporarily waives penalties for underpayments of CAMT. The notice provides that the IRS will waive any addition to tax imposed under Section 6655 attributable to a corporation’s CAMT liability for any taxable year that begins after December 31, 2024, and before January 1, 2026. (Previous notices (Notice 2023-42, Notice 2024-33, Notice 2024-66) provide similar relief for tax years beginning before January 1, 2025.) For these taxable years, corporations are not required to make installment payments of CAMT to avoid Section 6655 additions to tax. To benefit from the waiver, corporations must file Form 2220 and complete it as directed in the notice. 

As with previous waivers, this waiver only covers taxes imposed under Section 6655 additions to tax for failure to make sufficient and timely estimated income tax payments—and does not waive additional taxes for underpayments under other sections, such as Section 6651, which imposes penalties for payments not made by the due date of the corporation’s return (without extension). Therefore, any CAMT liability due for the 2025 calendar year must be paid by April 15, 2026, to avoid penalty. 

Additional Interim Guidance and Regulations 

Notice 2025-27 states that the Department of the Treasury and the IRS anticipate issuing additional interim guidance regarding the CAMT to respond to other comments submitted in response to the CAMT proposed regulations, including among others: 

• How unrealized gains and losses on certain investment assets reported for financial statement purposes are taken into account for purposes of determining AFSI 

• Alternative rules for determining a partner’s distributive share of partnership AFSI 

• AFSI adjustments resulting from certain transactions between a partner and a partnership 

• AFSI adjustments resulting from certain corporate transactions 

• The interaction of the CAMT and the tonnage tax regime 

• Alternative rules for early reliance on the CAMT proposed regulations. 

Written by Kevin Ainsworth, Jacob Davis and Seth Gee, Senior Manager. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Helps You Navigate CAMT Complexity 

MGO’s tax professionals guide corporations through the evolving CAMT landscape — from determining applicable corporation status to navigating AFSI adjustments and compliance requirements. We help simplify complex calculations, assist with proper application of IRS guidance, and reduce your risk of penalties. Our team monitors CAMT regulatory changes in real-time and provides practical, audit-ready strategies for large corporations facing these new tax burdens. Whether you need help modeling liability, documenting AFSI adjustments, or filing Form 2220, MGO can help you stay compliant and strategic. Contact us to learn more.  

The post IRS Issues Additional CAMT Interim Guidance  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Fidelity bonds are not interchangeable with fiduciary or D&O insurance. Each policy type serves a distinct risk category and compliance role. 

• Coverage is required regardless of plan size or audit exemption. Even small plans or those not subject to audit may be noncompliant without proper bonding. 

• Cybersecurity coverage is not automatically included. ERISA bonds must be reviewed to confirm whether cyber-related risks are addressed. 

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Fidelity bonds are known as the fundamental component of safeguarding your employee retirement plans. Required by the Employee Retirement Income Security Act (ERISA), these bonds protect plan assets from any losses due to misappropriation or misuse by the individuals who handle plan funds. Yet, despite the importance of this safeguard, there still exists widespread confusion among plan sponsors and their administrators.  

Read on for further clarification on the key compliance requirements — by correcting five frequently encountered myths about these ERISA fidelity bonds, you can better align with the regulatory expectations and reinforce internal controls.  

Understanding ERISA Fidelity Bond Requirements 

Mandatory Coverage 
ERISA generally mandates that most retirement plans maintain fidelity bond coverage equal to at least 10% of plan assets, with minimum and maximum thresholds. Exceptions apply to certain unfunded, governmental, or church plans. Form 5500, filed annually under penalty of perjury, asks directly about this coverage — so accurate compliance is essential. 

Bond Sourcing and Structure 
The bond must be obtained from an insurer listed on the Department of the Treasury’s approved surety list. It can be issued as a standalone bond or included within a broader insurance policy, but it has to meet ERISA’s first-dollar coverage rule, which prohibits deductibles. 

Covered Individuals 
Anyone with access to plan funds — including fiduciaries and relevant third-party administrators — must be included in the bond’s scope. The coverage has to apply to all plan assets, regardless of asset type or custody arrangements. 

Five Myths That Can Risk Your Compliance 

1. “Our fiduciary insurance covers the ERISA bond requirement.” 
You’ve probably heard this common misunderstanding. That’s because fiduciary liability insurance covers breaches of fiduciary duty, while fidelity bonds cover acts such as theft or embezzlement by those handling funds. Both are important, but not interchangeable. 

2. “Retroactive fidelity bond coverage can fix past gaps.” 
Insurers generally can’t issue retroactive bonds due to legal constraints. Sponsors discovered without coverage during a plan audit must work with the Department of Labor (DOL) to document their remediation efforts and make sure they’re compliant. 

3. “We’re exempt because our plan doesn’t require an audit.” 
The thing is, audit exemptions don’t apply to fidelity bonds. ERISA requires fidelity coverage regardless of the number of plan participants or the size of the plan assets. 

4. “Our D&O insurance includes fidelity coverage.” 
D&O insurance may reference fidelity coverage, but this doesn’t guarantee your compliance with ERISA bonding requirements. For example, many policies include deductibles, which disqualify them under ERISA. You should review each policy carefully. 

5. “The bond protects against cyber theft by default.” 
Some fidelity bonds include provisions related to cybersecurity...but not all do. The DOL encourages plan sponsors to be proactive and assess and supplement your cyber protections. Combination policies can be explored but must still meet ERISA requirements. 

Supporting Plan Integrity Through Review 

Protecting retirement plan assets is both a regulatory obligation and a fiduciary priority. MGO’s Employee Benefit Plan Audit professionals can assist with evaluating your current fidelity bond coverage, identifying potential gaps, and supporting alignment with DOL and ERISA guidelines. Our team brings a detail-oriented, audit-first perspective to strengthen the security and compliance posture of your plan. Contact us to learn more.  

The post ERISA Fidelity Bonds: Dispelling Five Common Misunderstandings  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Indiana now uses market-based sourcing for services and intangibles, retroactive to 2019—and companies should review apportionment for prior years.  

• Financial institutions must file combined FIT returns that include only entities transacting business in Indiana, and unitary group filings should be reassessed.  

• Amended Indiana returns are required within 180 days of any federal changes, and missing this deadline may leave your returns open to audit risk.  

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If you do business in Indiana — or with customers in Indiana — there’s a big tax update you should know about. The state has officially moved to market-based sourcing for service and intangible income. That means instead of focusing on where you perform the service, Indiana now cares about where your customers receive the benefit. And here’s the kicker: it applies retroactively all the way back to tax years starting January 1, 2019. 

This change, now locked in under 45 IAC 3.1-1-55.5, lays out a tiered framework that walks through where to source revenue — starting with the benefit location, then moving to the customer’s billing address, and if needed, using a reasonable approximation.  

The rule casts a wide net, covering everything from service revenue and intangible licenses to digital goods and even tax credit assignments. But it does carve out a few exceptions—like insurance premiums, GILTI (Section 951A), and repatriated dividends (Section 965). Read more here and here. 

While Indiana leans heavily on the Multistate Tax Commission’s model, there are state-specific twists, especially in areas like construction, publishing, and transportation. So, if you’re operating across state lines, you’ll want to make sure your compliance strategy accounts for those differences. 

Financial Institutions Tax: Clarity on Combined Reporting and NOL Treatment 

In tandem with sourcing updates, the Indiana Department of Revenue has revised Information Bulletin #200 to clarify how the Financial Institutions Tax (FIT) should be applied. These updates strive to reduce confusion around combined reporting and net operating losses (NOLs). 

If your entity is a part of a unitary group, it must file a combined FIT return, but only for members actively transacting business in Indiana. For more information, you can consult the bulletin, as it also outlines how adjustments can be made if the standard calculation doesn’t fairly reflect Indiana-source income. 

It’s important for you to note that for NOLs, Indiana has reaffirmed conformity with federal treatment: no Indiana NOL exists without a federal NOL, even if one could arise from Indiana-only modifications. Your NOLs may be carried forward for 15 years, with no carryback allowed. The bulletin also addresses scenarios involving the discharge of indebtedness. 

Another important update: your amended Indiana returns are required within 180 days of a federal return change (audit, amended return, etc). If you fail to comply, you leave your return open to state audit indefinitely. 

What This Means for You, the Taxpayer 

Indiana’s adoption of market-based sourcing, especially with retroactive effect, could significantly impact your multistate businesses with service or intangible income. If your company previously applied cost-of-performance methods, you should evaluate whether prior filings require adjustments. 

Financial institutions should confirm that only Indiana-transacting entities are included in FIT combined returns and revisit how NOLs are calculated and carried forward under the revised guidance. 

With the new 180-day amended return rule, you’ll want your tax department to review its federal change reporting processes to avoid inadvertently triggering an open audit window. 

Your Next Steps 

These changes go back to 2019, so they could affect both your compliance obligations and potential refund opportunities. You should evaluate your business’s prior filings, update sourcing methodologies, and consider participating in Indiana’s newly approved tax amnesty program (HB 1001), which may offer you limited relief for pre-2023 exposures. Program details are forthcoming. 

For companies generating service revenue, licensing IP, or filing under Indiana’s FIT rules, these changes are not just procedural for you; they could have real strategic implications. Taking initial action can help you mitigate risk and position your company for better compliance moving forward.  

Practical Support for Navigating Indiana’s Tax Rule Changes 

Maneuvering Indiana’s new market-based sourcing rules and the revised Financial Institutions Tax framework requires more than just a surface-level understanding. It calls for strategic insight — and tailored execution. MGO’s State and Local Tax (SALT) professionals are here to help you assess the impact these changes can have on your business, identify potential refund opportunities, and realign your compliance strategy.

These regulatory shifts may affect businesses across a range of industries, including manufacturing, technology, cannabis, life sciences, entertainment, and wineries. MGO collaborates with companies in these sectors to evaluate tax positions, assess risks or potential overpayments, and refine state tax strategies that reflect current rules and industry practices. Contact us to learn more about moving forward with clarity, confidence, and compliance.  

The post Indiana Amends Income Sourcing and Financial Institutions Tax Rules  appeared first on MGO CPA | Tax, Audit, and Consulting Services.