• 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.

• 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.

• Prepare for a cannabis tax audit by retaining 10 years of thorough financial records, using GAAP-compliant accounting methods, and staying current on all federal tax obligations.

• Work with experienced cannabis accountants to document tax positions, accurately track COGS, and respond quickly to any IRS audit notice.

• If faced with unfavorable audit results, consider appealing through the IRS Independent Office of Appeals or, if necessary, pursuing Tax Court.

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As a cannabis business owner, you operate in one of the most heavily scrutinized industries in America. With Section 280E hanging over all plant-touching activities and limiting business deductions, you’re already carrying a heavy tax burden. So adding a potential audit to the mix, it’s understandable why tax compliance might keep you up at night.

But here’s the good news: with proper preparation, you can significantly reduce both your audit risk and potential negative outcomes — and with professional support you may even be able to negotiate a reduction or amendment. Let’s walk through a comprehensive strategy to help you prepare for and survive during an IRS examination.

Your Four-Step Cannabis Audit Preparation Plan

Taking proactive steps now can save you significant headaches (and money) later. Here’s how to get your cannabis business audit-ready:

1. Retain Proper Documentation (For At Least 10 Years)

The foundation of audit defense is comprehensive documentation. In the event of an audit, you’ll need to provide evidence of every transaction under IRS review. These documents must be organized so they can be quickly retrieved and linked to general ledger entries.

Essential documents to preserve:

• Financial statements (trial balance, profit and loss, balance sheet, chart of accounts, etc.)
• Point of sale transaction data
• Invoices, receipts, and purchase orders
• Credit card statements
• Agreements (intercompany, licensing, management, etc.)
• Cash logs (especially important!)
• Payroll documentation and independent contractor agreements
• Rent payments, property tax bills, utilities bills, and other overhead documentation

Since the IRS can leverage an extended statute of limitations when income tax is “substantially understated”, you should save most documents for 10 years and critical formation documents indefinitely.

2. Establish Proper Accounting Methods

Your accounting and record-keeping should align with generally accepted accounting principles (GAAP) guidelines, particularly for inventory accounting — the key to managing 280E exposure.

Critical accounting practices:

• Accrual method of accounting: As a business that uses inventory accounting and reports cost of goods sold (COGS) expenses, you’re generally required to use accrual accounting. This means assigning values to inventory items based on acquisition and development costs.
• Understanding COGS: Your COGS must reflect actual costs of goods sold — not merely renamed ordinary expense deductions. Identify each expense and correctly categorize it as direct or indirect. When allocating selling, general and administrative (SG&A) expenses, they should specifically tie to production costs (not just be a generic percentage of overhead).
• Straight-line depreciation: Recent IRS cases and guidance establish that only straight-line depreciation methods (used for book purposes) are allowable for inclusion in COGS. Bonus depreciation and modified accelerated cost recovery system (MACRS) are not authorized.

3. Stay in Compliance with Federal Tax Law

This may seem obvious, but it bears repeating: the best way to stay off the IRS radar is to pay your taxes. Not paying is the reddest flag of all.

With limited access to banking services and capital, some cannabis operators are tempted to treat delinquent tax payments as a financing tool. While it may seem attractive for cash flow, it dramatically increases your audit risk.

This applies doubly for federal employment taxes (withholding, FICA, etc.), where penalties and interest are severe. The IRS imposes the Trust Fund Recovery Penalty against “responsible persons” in their individual capacity, at 100% of the underlying tax liability.

Remember, cannabis companies are not eligible for bankruptcy protection. If your business is structured as a pass-through entity (LLC or S-corporation), tax debts become your personal liability.

4. Proactively Document Accounting Policies and Tax Positions

If there’s any confusion about accounting practices or you lack back-office support, hire an experienced cannabis accountant to:

• Perform a 280E/COGS study to identify appropriate tax treatment
• Determine whether your “separate trade or business” truly qualifies as separate
• Address outstanding tax balances with an installment agreement or “offer in compromise”
• Review document creation/retention policies
• Ensure inventory accounting procedures align with GAAP/International Financial Reporting Standards (IFRS) rules

Receiving an IRS Audit Notice: Your Action Plan

If you receive an audit notice, don’t panic. Follow these steps:

1. Understand the Situation

The IRS conducts several types of audits — from relatively simple correspondence audits to intensive field audits where they visit your facility. Note that the IRS will first contact you via traditional mail (never by phone or email).

2. Act Immediately

Initial IRS contact letters typically require a response within 10-30 days. Don’t procrastinate. Reach out to a cannabis-specialized accountant immediately and execute a power of attorney so that your representative can contact the IRS auditor within the required timeframe.

3. Work With Qualified Professionals

An experienced representative will know cannabis accounting inside and out, have experience navigating audits, and may even have connections at the IRS. They’ll help minimize risk and potentially negotiate a reasonable outcome.

4. Set the Right Tone

From the outset, build rapport and credibility with the IRS auditor. Organize document production, establish a reasonable timeline, and follow through on commitments.

5. Be Transparent About Known Issues

The IRS examiner is trained to identify errors and problems. If you know there’s a glaring error in your tax return or a gap in record-keeping, consider presenting it upfront. Reluctance may be perceived as fraudulent intent, whereas transparency might earn goodwill from the auditor.

Challenging Unfavorable Audit Results: Your Options

If your audit doesn’t result in a manageable outcome, you have options:

1. Appeal

The IRS Independent Office of Appeals offers a path to resolving disputes without litigation. To successfully navigate this process, you’ll need to clearly present your case, provide all supporting documentation, and demonstrate where the IRS assessment went wrong.

2. Tax Court

As a last resort, you can take your case to U.S. Tax Court. While there have been some successes (Harborside reduced their tax bill from $29 million to $11 million), note that every attempt to overturn 280E has failed in Tax Court. Consider whether potential savings justify the resources invested in litigation.

Beyond the IRS: State and Local Tax Risks

Don’t forget that maintaining compliance with state and local tax laws is equally important. State and local regulators issue your licenses and are directly connected to tax enforcement. Even a minor tax infraction at the local level could lead to license revocation.

Types of audits to keep in mind:

• State income tax
• State sales and use tax
• State excise tax
• Local business tax

Take Control of Your Cannabis Tax Strategy Today

Being “audit-ready” not only helps you navigate an IRS examination but also implements financial best practices that benefit your business in numerous ways — from regulatory compliance to preparing for potential acquisition or initial public offering (IPO).

The cannabis industry presents tremendous opportunities for entrepreneurs ready to forge new paths. But significant risks await the unprepared. By following these guidelines, you’ll be positioned not just to survive an audit, but to thrive in this challenging regulatory environment.

How MGO Can Help

Our dedicated cannabis accounting, audit, tax, and consulting practice help organizations of all sizes — from multi-state operators to pre-revenue startups — establish optimal accounting processes, manage tax and regulatory compliance, perform audits to raise capital or engage in M&A, and everything else an operator needs to succeed.

We also offer tax advocacy and resolution services — including pre-audit readiness, audit representation, and guidance on obtaining penalty abatements and negotiating installment agreements.

Reach out to our Cannabis team today to find out how we can help support your business.

The post How to Prepare Your Cannabis Business for a Tax Audit appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Bankruptcy brings both complexity and opportunity, as Chapter 11 can be a powerful tool for business transformation — but it does bring with it intricate accounting challenges that require precision and specialized knowledge.

• From pre-bankruptcy valuations and compliance to ASC 852 reporting due to reorganization and fresh start accounting post-emergence, each phase has unique and technical financial reporting requirements.

• Your team may be overwhelmed or underprepared for bankruptcy-related accounting, so seeking the insight of knowledgeable financial advisors is key for compliance, clarity, and recovery.

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Filing for Chapter 11 bankruptcy can bring a new lease on life for a struggling company. During bankruptcy, business leaders may confront the reasons for reorganization in a way that empowers the company to surmount its challenges and uncover opportunities to reassess operations. It’s even possible to emerge from bankruptcy stronger than before. 

From the pre-bankruptcy planning to the post-bankruptcy reality, companies will encounter technical accounting and financial reporting complexities that further complicate their decision making. But business leaders also stand to take advantage of new options that arise. In this article, we will explore the dual nature of bankruptcy and offer insights into the roles that accounting professionals can play. 

The Accounting Hurdles of Bankruptcy

Bankruptcy can complicate critical accounting functions that already require meticulous attention to detail and compliance with a multitude of reporting requirements pursuant to the federal bankruptcy code, tax laws and regulations. Key accounting challenges for a company that is considering bankruptcy or has already filed for Chapter 11 include the following: 

Pre-Bankruptcy 

Before deciding to file for bankruptcy, companies often face internal and external challenges, such as inventory disruption, skyrocketing prices, and unfavorable contracts (e.g., revenue, supply, leasing). Management must tackle myriad complex accounting issues, even before filing for bankruptcy, including: 

• Valuation and accounting issues related to: 

• Accounts receivable and contract assets 

• Inventory 

• Long-lived assets 

• Intangible assets and goodwill 

• Contingent liabilities (not recorded on the books and records of the company), 

• Tax liabilities 

• Ownership interests pre-filing and potentially post-filing 

• Debt covenant compliance and debt modification  

• Contract modifications (revenue and supply contracts and lease agreements) 

• Restructuring considerations (exit and disposal activities, potential discontinued operations, change in ownership, net operating losses) 

• Operating segment results 

• Cash-flow and liquidity projections 

• Going concern

During Bankruptcy

Even after companies file for bankruptcy, they often continue to report financial results. Companies that file for a reorganization under Chapter 11 apply Accounting Standards Codification (ASC) 852 – Reorganizations for guidance on financial reporting. The guidance in ASC 852 applies to companies that have filed petitions with the Bankruptcy Court and expect to reorganize as going concerns under Chapter 11 of Title 11 of the United States Code. Companies that liquidate under Chapter 11, or adopt plans of liquidation and restructure outside of Chapter 11, are outside the scope of ASC 852 and would instead generally apply ASC 205-30, Presentation of Financial Statements — Liquidation Basis of Accounting. 

The provisions within ASC 852 generally are incremental to the requirements in other U.S. GAAP, rather than a replacement, and are intended to address the change in the needs of the financial statement users. It is important to note that ASC 852 applies only after the Chapter 11 filing. If a filing occurs after year end but before the issuance of a company’s financial statements (or before the financial statements are available to be issued), consideration must be given related to the requirements to evaluate, account for, and disclose subsequent events. 

Companies operating under Chapter 11 distinguish liabilities within their balance sheets as prepetition liabilities subject to compromise from those that are not subject to compromise and post-petition liabilities. Careful evaluation of the classification is required in each reporting period, and that classification must be revised to reflect the then current expectations and the decisions of the court as the bankruptcy proceeds.   

Accounting and presentation for debt while in bankruptcy requires careful consideration of the facts and circumstances for the appropriate presentation in accordance with ASC 852.  

While in Chapter 11, a company continues to present the results of its operations. However, revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of the business are reported separately as reorganization items. Similarly, reorganization items are presented separately within the operating, investing, and financing categories of the statement of cash flows. The determination as to whether an item qualifies as reorganization items requires careful evaluation and often judgment is required. Further complexities can arise when the reorganization plan involves discontinued operations, or when some but not all companies within a consolidated group are subject to the reorganization under a Chapter 11 bankruptcy. A company must also consider the presentation and disclosure requirements in ASC 852 to comply with reporting standards. 

The accounting considerations noted in the Pre-Bankruptcy section above (as well as all other U.S. GAAP) also generally apply during bankruptcy.  

After Bankruptcy 

ASC 852 provides further reporting principles for a company whose plans have been confirmed by the court and have thereby emerged from Chapter 11 when all material conditions precedent to the plan’s becoming binding are resolved. The company generally accounts for the plan’s effects in its financial statements as of the date the plan is confirmed.  

If the reorganization value of the assets of the emerging company immediately before the date of confirmation is less than the total of all post-petition liabilities and allowable claims, and if holders of existing voting shares immediately before confirmation receive less than 50 percent of the voting shares of the emerging company, it must adopt fresh-start reporting upon emergence from Chapter 11, assuming the loss of control is substantive and not temporary.  

Careful consideration must be given to the determination of the reorganization value of the assets and the determination of whether a loss of (collective) control has occurred. If either of the aforementioned conditions is not met, the company would not qualify for fresh-start accounting, and a new reporting entity would not be created for accounting purposes.  

Fresh-start accounting requires the company to present its assets and liabilities at fair value, with some exceptions, with the adjustments to such values from the pre-emergence carrying amounts being reflected within the predecessor statement of operations. This typically requires obtaining a third-party valuation. 

Charting a Course for the Future 

Before, during, and after bankruptcy, business leaders must work hard to confront and resolve their company’s financial difficulties.  

However, a company’s accounting team may be stretched to the limit or not well versed in bankruptcy laws or the accounting required under U.S. GAAP. This is where an outside accounting firm can supplement the accounting function as it shoulders new, and sometimes competing, priorities. Additionally, some of the accounting issues that arise before, during, and after emerging from bankruptcy can be complex. External accounting professionals can help. 

With a global network covering more than 160 counties and well-trained professionals, we are prepared to guide companies before, during and after bankruptcy.  

Written by Rob Trinchetto and Mike Whiting. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help

Filing for Chapter 11 can be a pivotal moment in your company’s journey, and it requires agility, foresight, and extensive knowledge. Our experienced team supports your company at every stage of the bankruptcy process, from pre-filing assessments and valuation guidance to ASC 852 compliance and fresh-start accounting.

Whether you need assistance navigating contract modifications, preparing financial statements under reorganization standards, or making sure you have a smooth emergence from bankruptcy, we provide you with clarity through complexity. Contact us to learn how MGO is ready to help you rebuild stronger, smarter, and with confidence in your future every step of the way.  

The post Navigating the Financial Storm: Accounting Challenges and Opportunities in Chapter 11 Bankruptcy appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Check your payroll and industry compliance tax rates regularly for updates to avoid penalties and interest from underpayment during quarterly filings.

• Properly classify employees versus contractors and align your business practices with your tax strategy to prevent costly adjustments and fines.

• Manage executive and owner compensation effectively, including proper documentation of draws and retirement contributions; meet requirements with compliance filings and diligence.

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As a professional services provider — whether you run a law firm, marketing agency, public relations company, architecture firm, or engineering consultancy — managing tax compliance can feel like a never-ending challenge. From industry-specific regulations to keeping up with rate changes to properly classifying employees and contractors, it’s crucial to stay proactive. Mistakes can cost you in penalties and interest, so let’s break down some key areas you should focus on.

Update Your Payroll and Industry Compliance Tax Rates Regularly

When the new year rolls around, published payroll tax rates, thresholds, and compliance items often change. These include federal, state, and local taxes, unemployment insurance rates, and compliance items like sales tax or permitting fees — which can vary significantly based on your business location and setup. While large payroll providers like Gusto and ADP often handle some of these updates automatically, smaller systems might leave this responsibility on your shoulders. Proper set up in point-of-sale (POS) or enterprise resource planning (ERP) systems can be daunting but is essential.

Risk:

If you fail to update your rates, any shortfall discovered during the quarterly filing will fall on you as the taxpayer. Payroll tax or sales deposits that fall short can trigger penalties and interest for underpayment, which are the responsibility of the company.

How to Manage the Risk:

• Schedule a compliance environment review with your accountant before quarterly payments are due.
• Confirm that all federal, state, and local rates are accurate and current.
• Audit your sales tax collection to verify POS and online sales platforms are correctly calculating and collecting taxes.
• Be sure about graduated receipts requirements and deadlines for permits and licenses, as these are not always “same as last year”.
• Double-check employee classifications to avoid misclassification penalties.

Align Your Business Spending with Your Tax Strategy

Year-end accounting may reveal gaps between your business practices and your tax strategy, especially around employee-versus-contractor classification. Misclassification carries significant financial risks — including penalties and the need for costly amended returns.

In recent years, states like California have tightened the definition of independent contractors. Considering the additional costs and obligations that come with employees, it is important to carefully weigh the costs and the benefits — as well as the risks — of using independent contractors.

If your workers have been treated as contractors rather than employees but meet the regulatory standards of employees, it’s not too late to make adjustments. Revisiting these arrangements with your contractors/employees and amending your payroll filings can help you avoid hefty penalties down the road. Many employers make such considerations at the preference of the contractors themselves, but it is important to keep in mind it is the business (not the contractor) who is opening themselves up to potential consequences.

Risk:

Improper classification of employees and contractors can expose your business to costly adjustments and fines. Additionally, handling bonuses outside of regular payroll can complicate reporting and create compliance issues.

How to Manage the Risk:

• Conduct a thorough review of employee and contractor classifications.
• File 1099s for all independent contractors — even if it’s late, it’s better than not filing.
• Carefully consider the additional costs of taking on employees (payroll taxes, increased workers’ compensation insurance) against the potential liabilities for non-compliance.
• Review year-end bonuses, especially if paid in cash, to confirm they were properly recorded in payroll filings.
• Correct errors promptly by amending filings as needed.

Manage Executive and Owner Compensation Effectively

Compensation planning for executives and business owners goes beyond standard wages. Compensation structures, distributions, and retirement contributions must align with your business and tax strategy.

Risk:

Failing to manage compensation properly can impact pass-through results, personal taxes, and compliance with financial covenants.

How to Manage the Risk:

• Regularly assess compensation structures to verify they align with current roles and business strategies.
• Document all draws and retirement contributions meticulously.
• Keep accurate filings and promptly address any discrepancies.

Be Prepared for IRS Shake-Ups

The IRS has undergone significant changes recently, with staffing shifts that have created uncertainty around audit frequency. While it might be tempting to assume that reduced IRS resources mean lower audit risk, this could be a dangerous assumption.

Despite the recent reorganization at the IRS, businesses should not let their guard down when it comes to business and regulatory tax compliance. The question isn’t whether you’ll face an audit, but whether your practices would stand up to one if it occurred. Implementing a strong, current tax strategy and strictly following it in practice is the best path to security.

Take Control of Your Regulatory and Compliance Strategy

Managing compliance requirements as a professional services provider can be daunting, but taking a proactive and strategic approach will help you stay ahead of potential risks. Consider meeting with your accounting professional to review your operational setup, align your compensation strategy, and catch any issues before they become costly problems.

How MGO Can Help

Our dedicated Professional Services team understands the unique needs of law firms, advertising agencies, architecture firms, marketing companies, PR firms, engineering firms, and more. We provide a full suite of tax, consulting, and assurance solutions to help you manage risks and seize new opportunities. Reach out to our team today to find out how we can help you streamline your strategy and maintain compliance.

The post 3 Smart Compliance Tax Strategies for Professional Services Firms appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Choosing the right investment structure is essential for successful U.S.-Canada cross-border transactions.

• Financing strategies can help improve cash flow and support tax efficiency.

• Managing tax compliance with strategies like proper transfer pricing and exact foreign reporting can help reduce risk and increase profitability.

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Expanding your business between the United States and Canada is a strategic move that can unlock new markets and revenue streams. However, the complexities of cross-border transactions can be daunting. From tax structures to financing strategies and compliance obligations, every move requires careful planning.

We recently hosted a webinar with Canada-based CPA Solutions designed to help businesses confidently expand into the U.S. from Canada or into Canada from the U.S. Here are some key takeaways from that discussion.

Making the Right Investment Structure Choices

Choosing the right investment structure is fundamental to successful cross-border transactions. The three primary structures to consider when entering Canada from the U.S. are:

1. Corporation: The most common structure, where a U.S. corporation sets up a Canadian corporation or acquires an existing business. These entities operate as separate legal entities, meaning that each pays taxes in its own jurisdiction. This structure helps minimize tax intermingling. However, when repatriating earnings, dividends are generally subject to withholding tax. You can also move money through management fees and interest expenses, but it’s important to understand the tax implications of each approach.

2. Branch: An alternative to forming a corporation, a branch allows a U.S. company to operate in Canada without creating a separate legal entity. This possibility can be efficient for businesses wanting to expand operations without setting up a new corporate structure. Retained earnings that are reinvested in Canada typically aren’t taxed. However, repatriating funds without reinvestment triggers withholding tax. This approach can be beneficial if your goal is to keep earnings within Canada for growth while avoiding unnecessary tax burdens.

3. Unlimited liability company (ULC): A hybrid entity that is treated as a corporation for Canadian tax purposes but disregarded for U.S. tax purposes. ULCs can present significant tax benefits, but they come with increased complexity due to hybrid mismatch rules. For example, some transactions may be deductible in Canada but not treated as income in the U.S., or vice versa. Navigating these nuances requires a thorough understanding of both tax codes and how they interact under the Canada-U.S. treaty.

Choosing the right structure requires balancing your business model, growth ambitions, and tax planning strategies. Consulting with knowledgeable professionals who understand both sides of the border is important to avoid costly pitfalls.

Financing Strategies to Fuel Your Expansion

Funding your cross-border investment efficiently is crucial to keeping profitability. There are three main approaches to financing:

1. Equity financing: Investing in shares to create paid-up capital, which can be returned tax-free. This approach is especially beneficial when your goal is long-term growth, as future capital gains from selling shares may also be favorable. You can also pay dividends back to the U.S. without withholding tax, provided you meet treaty requirements. However, equity financing may limit your ability to extract surplus quickly.

2. Debt financing: Loans offer tax-free principal repayments and allow interest charges to move surplus across borders. To deduct interest in Canada, the debt-to-equity ratio must not exceed 1.5:1. If the ratio is higher, excess interest is treated as a dividend and subject to withholding tax. Maintaining the right balance is necessary to preserve tax efficiency while using debt’s cash flow benefits.

3. Debt-equity mix: Combining both equity and debt to balance growth potential with tax efficiency. This approach provides flexibility while keeping favorable tax treatment if ratios are carefully managed. A common strategy is to set up a 1.5:1 ratio, allowing interest deductions while keeping equity growth potential.

Tax Compliance Implications for Inbound Canada/Outbound U.S.

When conducting cross-border transactions between Canada and the U.S., it’s important to navigate tax compliance from both perspectives to avoid unexpected liabilities. Here are key considerations for inbound Canada/outbound U.S. transactions:

• Permanent establishment (PE) status: Determining whether your business activities in Canada create a permanent establishment is critical. If no PE exists, profits may not be taxed in Canada. However, proper documentation is important to support a non-PE status, as failing to file can result in penalties.

• Withholding tax obligations: Repatriating earnings from Canada to the U.S. — whether as dividends, interest, or royalties — may trigger withholding tax. The standard rate is 25%, but treaty benefits can reduce this to 5% or even 0% for certain payments, like interest. Always file the necessary forms to claim reduced rates.

• Transfer pricing considerations: Make sure that intercompany pricing aligns with arm’s-length principles to avoid disputes. This includes loans, royalties, and service fees between U.S. and Canadian entities. Documenting the rationale behind your pricing strategy is important to meet compliance requirements and avoid penalties.

• Foreign reporting requirements: Canadian tax law mandates the disclosure of foreign ownership and payments to non-residents. This includes management fees, royalties, and interest payments, as well as transactions exceeding $1 million (CAD) annually. Failing to report accurately can result in fines and audits.

• Employee movement compliance: If employees cross the border to conduct business activities, understand the regulations that apply to payroll taxes, social security, and reporting obligations. Both countries may impose requirements on income earned while working abroad.

Proactively managing these compliance aspects can help you minimize tax exposure and keep smooth cross-border operations. Working with experienced advisors familiar with both tax systems is important to avoid costly mistakes.

Transfer Pricing Considerations

Transfer pricing is a critical tool for managing cash flow between U.S. and Canadian entities. Besides dividend payments, transfer pricing allows for efficient cash repatriation while minimizing tax liabilities. Implementing well-planned transfer pricing strategies can provide immediate cash flow or support long-term financial planning.

Key transfer pricing considerations to improve your cross-border transactions include:

• Interest payments: Charging interest on intercompany loans can be an effective way to move surplus funds from a Canadian entity to its U.S. parent. However, it’s crucial to analyze the credit risk associated with the borrower and perform a credit rating analysis at the time of loan initiation. Interest payments may qualify for reduced withholding tax rates under treaty benefits.

• Royalty collections: If intellectual property (IP) is held by the parent company and utilized by a Canadian subsidiary, charging royalties can be an efficient way to transfer cash back to the U.S. Prepayments on future royalty obligations can accelerate cash flow, but it’s important to calculate the present value of these prepayments based on projected revenue.

• Management service fees: If the U.S. parent company provides services — such as administrative or management support — to its Canadian subsidiary, charging management service fees can be an effective strategy. The U.S. tax code outlines detailed rules for what costs can be included, so be thorough in finding which expenses help the foreign entity.

• Other cross-border charges: Beyond interest, royalties, and management fees, other intercompany charges, such as cost-sharing arrangements or distribution charges, can help manage cash flow across borders. Adjusting intercompany pricing to reflect market conditions while keeping arm’s-length standards allows for flexibility in moving funds.

It’s important to keep comprehensive transfer pricing documentation to support your approach — including economic analyses and risk assessments. Proper documentation helps mitigate audit risks and shows compliance with both U.S. and Canadian regulations.

Your Path to Successful Cross-Border Transactions

Unlocking cross-border transactions requires a strategic and informed approach. With careful planning and the right guidance, you can use international opportunities while minimizing risks and staying compliant.

How MGO Can Help

At MGO, we understand the challenges and opportunities inherent in cross-border expansion and are here to help you navigate the complexities with confidence. Our International Tax team offers the guidance you need to manage tax and transfer pricing effectively and prevent or resolve any issues.

Have questions about your cross-border expansion? Reach out to our team today.

The post Strategic Tips for Your U.S.-Canada Business Expansion appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Managing finances in the cannabis industry is complex — with strict regulations, evolving tax laws, and banking challenges.

• Outsourcing your accounting function can help you navigate compliance, manage cash flow, and streamline operations.

• Benefits include cost savings, access to advanced knowledge, and improved financial reporting.

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As a professional in the cannabis or hemp industry, you’re navigating an evolving landscape filled with regulatory hurdles, cash flow challenges, and tax complexities. Whether you’re managing a cultivator, manufacturer, distributor, or dispensary, staying on top of compliance while scaling your business can be overwhelming.

Outsourcing your accounting offers a powerful solution — giving you access to extensive experience, strengthening internal controls, and allowing you to focus on strategic growth. But how do you know if it’s the right move for your business?

What Is Outsourced Accounting?

Outsourced accounting can have several meanings including: 

• Fractional or temporary controller 

• Special project accounting manager 

• Fractional CFO 

• Bookkeeper 

5 Reasons to Outsource Your Cannabis Accounting

Here are key signs that outsourced accounting could be the best next step for your cannabis company:

1. You’re Struggling with Tax Compliance and Complexities

Cannabis taxation is complicated, especially with IRS Code Section 280E limiting deductions. State and local tax requirements vary widely, and tracking inventory properly for cost accounting is crucial. If you’re spending more time deciphering tax laws than managing your business, it may be time to bring in consulting professionals who are knowledgeable in cannabis financial regulations.

2. Cash Flow Is a Constant Challenge

Managing cash flow, accounts payable, and payroll efficiently is critical to keeping operations running smoothly. An outsourced accounting team can implement financial controls, improve cash management, and help you meet payroll and tax obligations without stress.

3. Your Financial Records Need to Be Organized and Audit-Ready

Accurate financial reporting is essential for regulatory compliance, securing funding, and long-term success. If your accounting team is overwhelmed with day-to-day tasks and struggling to produce clear financial statements, an outsourced team can bring structure, accuracy, and transparency to your records — helping you stay compliant and prepared for audits or sophisticated investors.

4. You Have to Scale Quickly

As the cannabis industry grows, so do the demands on your financial operations. Whether you’re expanding into new markets, acquiring licenses, or preparing for investment opportunities, your accounting needs may fluctuate. Outsourced accounting provides the flexibility to scale up or down without the costs of hiring and training an in-house team.

5. You’re Concerned About Security and Fraud Risks

If your accounting team is small or handling the majority of the accounting duties, the risk of financial mismanagement or fraud increases. Outsourcing adds an extra layer of oversight — implementing stronger internal controls and reducing the risk of errors or financial misconduct.

How Outsourcing Can Benefit Your Cannabis Business

Here are some key benefits of outsourcing to help your cannabis business grow smoothly and stay compliant:

• Industry-specific experience: Work with professionals who understand the nuances of cannabis taxation, banking restrictions, and regulatory compliance.

• Stronger financial controls: Improve security, reduce fraud risk, and implement better cash management systems.

• Improved reporting and compliance: Maintain audit-ready financials and meet tax and reporting requirements with confidence.

• Scalability: Expand or contract your accounting support as your business evolves.

• Cost and time savings: Avoid the high costs of hiring full-time staff while gaining access to skilled and knowledgeable financial support.

How MGO Can Help

At MGO, we offer tailored outsourced accounting  and advisory solutions for the cannabis industry — providing the right-size support for your organization’s unique needs. Whether you’re looking to support your team with specialized knowledge or skills, manage day-to-day tasks, get assistance with regulatory compliance, or navigate complex transactions like M&A and capital raising, we’ve got you covered.

Reach out to our team today to learn how we can help streamline your accounting operations.

The post Is Outsourced Accounting Right for Your Cannabis Business? appeared first on MGO CPA | Tax, Audit, and Consulting Services.

MGO’s clients need a trusted partner to handle their 401(k) plan audits. We provide cost-effective, efficient service while offering insights into broader financial knowledge and regulatory complexities unique to each client’s business model. Our clients span industries ranging from manufacturing, technology, and apparel to food and beverage, professional services, and more. 

Challenge:  

When a company has 100 or more participants with balances in a 401(k) plan, it requires a 401(k) audit. A company needs an employee benefit plan audit provider that understands its unique business model and can help them navigate evolving regulatory requirements while maintaining transparency for employees and stakeholders. This calls for a nuanced understanding of employee classification, contribution eligibility, and plan participation rules.  

Additionally, with federal regulations governing employee benefit plans constantly evolving, a company needs an auditor with deep experience in ERISA, IRS, and DOL compliance standards for full regulatory adherence. 

Approach: 

When it comes to 401(k) audits, efficiency is key. By leveraging extensive industry knowledge and a thorough methodology, our team provides a seamless 401(k) audit experience that meets compliance and financial reporting requirements.  

Our risk-based approach addresses the complexities of a company’s diverse workforce and definitions of compensation — supporting proper classification and compliance with evolving ERISA, IRS, and DOL regulations. This approach allows us to provide cost-effective 401(k) audits to our clients. 

Value to Client:  

Our efficient approach provides a thorough and timely 401(k) audit, strengthening a company’s financial oversight and reinforcing trust among employees and stakeholders. By delivering a compliance-focused 401(k) audit, we help companies navigate complex regulatory compliance with confidence.  

Beyond the 401(k) audit, our insights into plan administration and financial controls highlight our deep understanding of employee benefit plan audits. Our strategic guidance positions us as a trusted advisor — often leading to invitations to bid on a company’s full-scale financial audit as well as other services. 

Need Help with Your 401(k) Audit? 

At MGO, we offer comprehensive audits covering all aspects of your 401(k) plan to help you achieve compliance and transparency. Reach out to our team today to learn about our Employee Benefit Plan Audits. 

The post Case Study: Simplifying 401(k) Compliance for Plan Sponsors appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• FASB’s ASU 2023-09 requires more detailed tax disclosures, including a breakdown by jurisdiction and a 5% threshold for key items. It applies to both public and private companies, with varying start dates.

• Some older disclosures are removed, while new rules require more detailed reporting on rate reconciliation and domestic versus foreign income (aligning with SEC rules).

• Companies should reassess tax controls to reduce the risk of restatements, material weaknesses, and SEC scrutiny.

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Correctly accounting for and disclosing income taxes under ASC 740 is complex. This is especially true this year given the effective date of Accounting Standards Update (ASU) No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which the Financial Accounting Standards Board (FASB) issued in late 2023.

With the potential complexity of the ASU’s new requirements, it’s important to consider whether your processes, systems, and internal controls should be modified to facilitate effective implementation. This article walks you through the most important aspects of the ASU, as well as what to consider in designing strong internal tax controls that can help reduce reporting errors.

FASB Issues Final ASU to Improve Income Tax Disclosures

In response to feedback from the investor community requesting the disclosure of additional information pertaining to income taxes, the FASB issued ASU 2023-09 in December 2023. One of the ASU’s overarching themes is the disaggregation of information that may previously have been aggregated or commingled — a change that’s expected to provide greater transparency and consistency. In particular, the disclosure requirements seek to increase visibility into various income tax components that affect rate reconciliation, as well as the qualitative and quantitative aspects of those components.

Main Provisions

The ASU requires public business entities (PBEs) to disclose additional information in specified categories with respect to the reconciliation of the effective rate to the statutory rate for federal, state, and foreign income taxes. It also requires greater detail about individual reconciling items in the rate reconciliation if the impact of those items exceeds a threshold.

Under the ASU, PBE information pertaining to taxes paid (net of refunds received) must be disaggregated for federal, state, and foreign taxes and further disaggregated for specific jurisdictions if the related amounts exceed a quantitative 5% threshold. That threshold is determined by multiplying 5% by the product of pretax income (or loss) from continuing operations and the applicable federal statutory rate, and it essentially emulates the requirement in SEC Regulation S-X.

The ASU also describes items that need to be disaggregated based on their nature, which is determined by reference to the item’s fundamental or essential characteristics.

Updated Annual Disclosure Requirements

Rate Reconciliation

ASU 2023-09 specifies categories for which disclosures associated with the rate reconciliation are required, and each category has varying degrees of qualitative and/or quantitative disclosure.

PBEs

The following categories must be included in annual disclosures in the rate reconciliation in tabular form both in amounts in the applicable reporting currency and in percentages:

• State and local income taxes in the country of domicile net of related federal income tax effects.
• Foreign tax effects, including state or local income taxes in foreign jurisdictions. 
  • Reflects income taxes imposed by foreign jurisdictions.  
  • Disaggregation is required when individual reconciling items equal or exceed the 5% threshold. This would include the statutory rate differential between the foreign jurisdiction and that of the county of domicile.  
  • If an individual foreign jurisdiction meets the 5% threshold, it must be separately disclosed as a reconciling item. Further disaggregation is required for that jurisdiction for cross-border tax laws, tax credits, and nontaxable or nondeductible items that meet the 5% threshold.  
• Effects of changes in tax laws or rates enacted in the current period.  
  • Applies to federal taxes of the country of domicile.  
  • Reflects the cumulative tax effects of a change in enacted tax laws or rates on current or deferred tax assets and liabilities at the date of enactment.  
• Effect of cross-border tax laws. 
  • Applies to incremental income taxes imposed by the jurisdiction of domicile on income earned in foreign jurisdictions. When the country of domicile taxes cross-border income but also provides a tax credit on the same income during the same reporting period, the tax effect of both the cross-border tax and its related tax credit may be presented on a net basis.  
  • Disaggregation required when individual reconciling items equal or exceed the 5% threshold and by nature of the item.  
• Tax credits. 
  • Applies to federal taxes of the country of domicile.  
  • Disaggregation required when individual reconciling items equal or exceed the 5% threshold and by nature of the item.  
  • This category does not include foreign tax credits.  
• Changes in valuation allowances. 
  • Applies to federal taxes of the country of domicile. For example, any change in valuation allowance in a foreign jurisdiction would be included in the foreign tax effects category and separately disclosed as a reconciling item if greater than the 5% threshold.  
• Nontaxable or nondeductible items.  
  • Applies to federal taxes of the country of domicile.  
  • Disaggregation required when individual reconciling items equal or exceed the 5% threshold and by nature of the item.  
• Changes in unrecognized tax benefits.  
  • Aggregate disclosure of changes in unrecognized tax benefits is allowed for all jurisdictions.  
  • This category reflects reconciling items resulting from changes in judgment related to tax positions taken in prior annual reporting periods.  
  • When an unrecognized tax benefit is recorded in the current annual reporting period for a tax position taken or expected to be taken in the same reporting period, the unrecognized tax benefit and its related tax position may be presented on a net basis in the category in which the tax position is presented.  

The FASB has determined all reconciling items should be presented on a gross basis. However, it will allow net presentation of the effects of specific cross-border tax laws and the associated effects of foreign tax credits, as well as the netting of current-year uncertain tax positions and current-year tax positions against the relevant category. If a foreign jurisdiction meets the 5% threshold, it must be disclosed as a reconciling item. Irrespective of whether any foreign jurisdiction satisfies the 5% threshold, any individual item meeting the 5% threshold must be disclosed by nature.

PBEs must disclose the state and local jurisdictions that contribute to the majority (greater than 50%) of the effect of the state and local tax category, beginning with the state or local jurisdiction having the largest effect and proceeding in descending order.

If the information is not otherwise evident, PBEs must explain any disclosed reconciling items in the categories above, including their nature, effect, and underlying causes, as well as the judgment used in categorizing them.

It is noteworthy that the FASB decided to align the disclosure requirements with those in SEC Regulation S-X Rule 4-08(h)(2). The federal rate for a foreign entity should normally be that of the entity’s jurisdiction of domicile. However, if that rate is other than the U.S. corporate rate, both the rate and the basis for its use must be disclosed.

Entities Other Than PBEs

For entities other than PBEs, a qualitative disclosure of the nature and effect of the categories of items discussed above is required along with the individual jurisdictions that result in a significant difference between the statutory and effective tax rates. A numerical reconciliation is not required.

Income Taxes Paid

The ASU requires that all entities annually disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign jurisdictions. It requires further disaggregation for any jurisdiction where the amount of income taxes paid is at least 5% of the total income taxes paid. In quantifying the 5% threshold for income taxes paid, the numerator of the fraction should be the absolute value of any net income taxes paid or income taxes received for each jurisdiction and the denominator should be the absolute value of total income taxes paid or refunds received for all jurisdictions in the aggregate.

Income Statement

The ASU makes some minor changes to the required income statement disclosures relating to income taxes, stipulating that income (loss) from continuing operations before income tax expense (benefit) be disclosed and disaggregated between domestic and foreign sources. It mandates the disclosure of income tax expense (benefit) from continuing operations disaggregated by federal, state, and foreign jurisdictions. Income tax expense and taxes paid relating to foreign earnings that are imposed by the entity’s country of domicile would be included in tax expense and taxes paid for the country of domicile.

Eliminated Disclosures  

ASU 2023-09 eliminates the historic requirement that entities disclose information concerning unrecognized tax benefits having a reasonable possibility of significantly increasing or decreasing in the 12 months following the reporting date. It also removes the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures. Entities should continue to disclose the types of temporary differences for which deferred tax liabilities have not been recognized under ASC 740-30-50-2(a), (c), and (d).  

Effective Dates and Transition  

All entities should apply the ASU prospectively with an option for retroactive application to each period in the financial statements. For PBEs, the guidance will be effective for fiscal years beginning after December 15, 2024, and for interim periods for fiscal years beginning after December 15, 2025. For entities other than PBEs, the guidance will be effective for fiscal years beginning after December 15, 2025, and for interim periods beginning with fiscal years beginning after December 15, 2026. Early adoption is allowed. 

When developing a plan to implement the new disclosure requirements, consider whether amounts meeting the 5% threshold are material to help guide an assessment of the jurisdictions and items that will be disaggregated in the disclosures. Specifically, it may be prudent to quantify those amounts in order to effectively assess the materiality of the amounts disaggregated. 

Given the potential complexity of, and the resources necessary to satisfy, the new requirements established by the ASU, consider whether adoption will be made prospectively or retrospectively. Also contemplate the modifications to processes, procedures, systems, and internal controls that will be necessary to facilitate an effective implementation process. Those considerations will be of particular importance for entities with foreign operations. 

Reducing Risk with Tax Internal Controls  

Two decades after the enactment of Section 404 of the Sarbanes-Oxley (SOX) Act, income-tax-related material weaknesses continue to plague companies — with a recent report showing that tax-related restatements account for approximately 12% of all restatements. 

Without proper internal controls, companies may be susceptible to reporting errors, which can lead to reputational risk and financial burdens stemming from remediation. Companies with strained or limited in-house resources must prioritize income tax accounting and reporting before it is too late.  

Correctly accounting for and disclosing income taxes under ASC 740 is increasingly important to mitigate a company’s risk of restatement, material weakness, and SEC comments. In-depth knowledge of tax and financial reporting, proper audit documentation, and clear and transparent disclosures can help reduce income reporting risk.  

While all public companies must be SOX compliant, many have not refreshed income tax controls since initial implementation, and new guidance has changed the standards required for compliance.  

Controls often fail because they are not adequately designed or operating as intended. For instance, it is unlikely that one overarching management review control can cover all the areas of an income tax provision or clearly identify the nature of the review procedures for each key provision component. Controls also might lack supporting evidence of performance and review. 

How MGO Can Help

Our dedicated team of tax professionals stays ahead of emerging guidance — such as FASB’s new ASU 2023-09 — to help your organization navigate complex requirements. We provide end-to-end support, from assessing current processes and strengthening internal controls to optimizing disclosure practices in line with the latest standards. By leveraging our practical experience and technical insights, we can help you mitigate risk, streamline reporting, and maintain robust compliance strategies to meet both immediate and long-term financial goals. Contact us today to stay ahead of these developments.  

The post FASB ASU 2023-09: Income Tax Disclosure Updates to ASC 740 appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Michigan’s new refundable R&D credit begins in 2025 with clear deadlines and potential proration based on total claims submitted.

• The credit is open to both corporations and flow-through entities with distinct eligibility and filing requirements. 

• Qualifying expenses follow federal R&D rules but must be incurred in Michigan and are calculated on a calendar-year basis. 

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On April 2, the Michigan Department of Treasury published guidance (Notice Regarding New Research and Development Credit) on the state’s new tax credit for eligible research and development (R&D) expenses and confirmed that it plans to issue a revenue administrative bulletin on the topic.  

The guidance follows the January enactment of two bills (House Bills 5100 (Public Act 186 of 2024) and 5101 (Public Act 187 of 2024)) that together created the R&D credit (see our related Alert for high-level provisions and some history on Michigan R&D credits). 

Application and Administration 

The refundable credit applies to R&D activities beginning January 1, 2025, regardless of the taxpayer’s year-end.  

• The guidance specifies that for R&D expenses incurred during the 2025 calendar year, all claimants with tax years beginning in 2025, including calendar- and fiscal-year corporate income tax (CIT) payers and flow-through entities, must submit their tentative claims no later than April 1, 2026. 

• A tentative claim must be timely filed to claim the R&D credit, and Treasury will not accept tentative claims after the statutory deadline. Because tentative claims will be used in any required proration calculation, they should be made using actual — not estimated — expenses. 

If the total amount of tentative claims exceeds the credit limit, Treasury must notify businesses of the adjustment. Neither HB 5100 nor HB 5101 specified when or how Treasury must provide that information. 

• The guidance states that Treasury will publish a general notice on its website notifying taxpayers whether adjustments to tentative claims are required for the calendar year and any amounts thereof. That notice will specify “whether proration is required for each type of claimant and will not contain taxpayer-specific information” [emphasis added]. According to the guidance, Treasury anticipates publishing the general notice before the annual return deadline for CIT filers (that is, April 30).  

Once Treasury has published the notice, taxpayers will be eligible to claim the credit, adjusted as necessary, on their annual returns filed after the end of their tax years.  

Qualifying R&D Expenses 

Qualifying R&D expenses are those expenses defined in Internal Revenue Code Section 41(b) but incurred in Michigan.  

• The guidance confirms that the new credit looks only to IRC Section 41, noting that in determining their state credits, taxpayers should not apply any IRC provisions, federal regulations, or federal concepts other than those that may be applicable under the Michigan Income Tax Act. 

Qualifying expenses are calculated per calendar year regardless of the taxpayer’s tax year-end. 

• The guidance clarifies that Treasury will develop an optional method for fiscal-year filers to convert their fiscal-year R&D expenses into calendar-year expenses for base-amount years before 2025. Additional information about that method will be published in future Treasury guidance.

Credit Amounts and Limits 

The bills generally define an authorized business as a specified taxpayer that has incurred qualifying R&D expenses over the base amount during the calendar year ending with or during the tax year for which a credit is being claimed. Only authorized businesses with R&D expenses exceeding the base amount during a calendar year will be eligible for a credit in that year. 

The base amount is defined as the average annual amount of qualifying R&D expenses incurred during the three calendar years immediately preceding the calendar year ending with or during the tax year for which a credit is being claimed. If an authorized business did not have previously qualifying R&D expenses, it has a base amount of zero. If an authorized business did not have qualifying R&D expenses in the three immediately preceding calendar years, the average annual amount is based on the number of calendar years during which the business incurred qualifying R&D expenses. 

Qualifying taxpayers with at least 250 employees are eligible for a credit of 3% on expenses up to the base amount and 10% on excess expenses, with a maximum credit of $2 million per year. Qualifying taxpayers with fewer than 250 employees are eligible for a credit of 3% on expenses up to the base amount and 15% on excess expenses, with a maximum credit of $250,000 per year.  

• The guidance indicates that Treasury plans to explain how to count the number of employees for the unadjusted credit calculation. It notes that MCL Section 206.605(3) defines an employee as “an employee as defined in [IRC] Section 3401(c)…. A person from whom an employer is required to withhold for federal income tax purposes is prima facie considered an employee.”  

The maximum amount of credit available across all authorized businesses per calendar year is $100 million. If total refund claims exceed that, the amount of credit allowed will be prorated across all taxpayers that applied for the credit using the applicable method provided in the bills.  

Provisions for Corporations and Flow-Throughs 

Corporate Entities 

For corporate purposes, a taxpayer is a corporation or unitary business group (see MCL Section 206.611(5)). 

• The guidance confirms a CIT payer that is a unitary business group would make all calculations (e.g., number of employees, total expenses, base amount, maximum credit amount, and any applicable proration) at the group level. 

Flow-Through Entities 

To be an eligible flow-through entity, the entity must be subject to Michigan income tax withholding on employees and, for the tax year, must not be a disregarded entity, taxed as a C corporation for federal income tax purposes, or subject to the Michigan Business Tax (MBT) Act. An eligible flow-through entity will take the credit on its annual withholding return for the tax year in which its tentative claim was filed. 

• The guidance provides some favorable relief for flow-through entities related to periodic withholding payments, allowing for a reduction once the tentative claim adjustment notice is published.  

To illustrate that point, the guidance provides an example using R&D expenses incurred in calendar year 2025. It says a flow-through entity filing a withholding tax return would claim the credit with its 2026 withholding tax return (due February 28, 2027) and could begin to reduce its 2026 periodic withholding payments as soon as Treasury issues its tentative claim adjustment notice for 2025 expenses. 

The credit is allowable only for flow-through entities and may not be passed on to owners. 

Insights 

• Unlike the federal credit (and credits in most states), the measure of qualifying R&D expenses is made on a calendar-year basis for all taxpayers, regardless of tax year-end. Thus, authorized businesses with fiscal year-ends will require some additional analysis. 

• The guidance says Treasury anticipates publishing any required proration, allowing taxpayers to claim the credit, by April 30. However, given the uncertainty, corporate taxpayers that have timely filed might want to extend their return due dates to avoid having to file amended returns to claim refunds. 

• The new credit includes unusual treatment of taxpayers that have little or no R&D expenses. If a taxpayer had no R&D expenses in the last three years, the legislation states that the base amount is zero. If, for example, a taxpayer had R&D expenses in only one year during the base period (e.g., $100,000 in 2024), then the legislation states that the expenses in the single year will be the taxpayer’s base amount (e.g., $100,000) instead of taking an average of the last three years (e.g., $0 + $0 + $100,000 / 3). That unusual approach seems to be a drafting error, with the drafter possibly imagining a situation in which a taxpayer was not in existence for the three years in the base period. If the taxpayer did not exist throughout the base period, then it would be appropriate to divide by the number of years of existence. If the taxpayer existed for the last three years, then it is counterintuitive that the taxpayer would not get to divide its R&D expenses for the last three years by three. 

• While the guidance confirms that taxpayer names and credit amounts will be included on a report to the legislature and governor, it also specifically mentions that the published adjusted credit notice will not contain taxpayer-specific information, providing some clarity on public release of details by taxpayer. 

• Because the credit is available only on a CIT return for corporations, and the statute for flow-through entities specifically excludes those filing under the MBT Act, no taxpayers filing the MBT because of a certificated credit election are eligible for the new R&D credit. 

• Even if a federal R&D credit has not previously been claimed, taxpayers should consider re-evaluating the potential benefit available related to their R&D activities in Michigan, especially given the credit’s refundable nature. 

• Additional Treasury guidance is expected in the form of a revenue administrative bulletin, as well as forms and instructions for administering the new credit. 

Written by Richard Spengler and Andrea Collins. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help 

MGO’s tax advisory and consulting teams can help businesses evaluate eligibility, quantify qualifying R&D expenses, and prepare for Michigan’s new refundable credit. Whether you’re a corporate taxpayer or a flow-through entity, we’ll guide you through tentative claim filings, employee headcount calculations, and ensure proper compliance with state-specific requirements. For companies new to R&D credits — or those with inconsistent prior-year activity — we provide strategic insights to help you optimize credit opportunities and avoid missteps. 

Let MGO help you capture this incentive while it’s fresh — and before April 2026 deadlines arrive. Contact us to learn more. 

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