MGO CPA | Tax, Audit, and Consulting Services

Topic: COVID-19

Are Your Employee Retention Credit (ERC) Claims at Risk? What You Need to Know

Key Takeaways:

  • Employers should promptly respond to IRS notices regarding ERC claims to avoid disallowance and potential legal action.
  • Accurate documentation is essential, particularly regarding qualifying government orders and the eligibility period for ERC claims.
  • Understanding IRS-identified risks, such as overstating claims and calculation errors, is crucial to avoid costly compliance issues.

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UPDATE (AUGUST 2024):

The IRS is advancing its processing of Employee Retention Credit (ERC) claims while extending the moratorium on new claims to January 31, 2024. The IRS will now start processing claims filed between September 14, 2023, and January 31, 2024. This shift allows the IRS to expedite payments for legitimate claims and crack down on improper filings. What this means is that taxpayers who filed ERC claims after the prior moratorium date of September 14, 2023, and have been waiting for them to be processed, should now see progress on these claims in the coming months. This is a very positive development for taxpayers who have submitted pending claims.

Recently, 28,000 disallowance letters were sent, potentially saving $5 billion in erroneous payouts. The agency’s actions reflect a careful balance between protecting taxpayers and ensuring eligible businesses receive due funds. The IRS also recently reported that it has identified 50,000 valid ERC claims and is quickly processing them and sending refunds in the weeks ahead.

For those taxpayers who have received denial letters or believe their claims were wrongly rejected, there are several paths to address these issues. Consulting with a tax controversy advisor is advisable to determine the best course of action, including the possibility of appealing the decision. In some cases, taxpayers may consider pursuing legal action through tax court, U.S. District Court, or the Court of Federal Claims, either as an alternative to an appeal or following an unsuccessful one. Engaging an attorney early in the process is recommended to explore all available options.

To combat a wave of frivolous Employee Retention Credit (ERC) claims, the IRS has sharply increased compliance action through audits and criminal investigations, with more activity planned in the future. In this heightened enforcement-focused environment, employers are advised to act swiftly when responding to IRS notices regarding ERC claims.

Immediate Action Required for Employers Receiving IRS Audit Notifications

Employers must be aware that failing to respond to IRS notices within the time frame specified can lead the IRS to disallow the entire ERC claim and issue a notice of disallowance. Once the IRS formally disallows a refund claim, the taxpayer may be permitted to first file a protest with the IRS Office of Appeals or, in some cases, the taxpayer may decide to file a lawsuit in federal court to litigate the issue. Both scenarios subject employers to the necessary defense of an often burdensome and costly refund claim controversy, further delaying the much-needed ERC relief promised by Congress.

The successful defense of any ERC examination will depend greatly on an understanding of the risks and eligibility criteria to avoid the costly repercussions of noncompliance, including the potential for general examination. In Notice IR-2024-39, the IRS highlighted warnings signs that ERC claims may be incorrect, urging businesses to revisit their eligibility.

Key Examination Risks Identified by the IRS

  1. Claiming Too Many Quarters: It is unusual for employers to qualify for the ERC in all available quarters. A meticulous review of eligibility for each quarter is advised to avoid overstating claims.
  1. Non-Qualifying Government Orders: The IRS has clarified that not all government orders related to COVID-19 qualify for the ERC. Orders must have directly affected the employer’s operations, and mere guidance or recommendations do not suffice. Businesses must be able to document and substantiate the impact of qualifying government orders.
  1. Employee Counts and Calculation Errors: Thanks to changes in the law throughout 2020 and 2021, employers must now be vigilant in their calculations, adhering to the dollar limits and credit amounts for qualified wages.
  1. Supply Chain Disruptions: Qualifying for the ERC based solely on supply chain issues is rare. Employers must demonstrate that their supplier was affected by a qualifying government order.
  1. Overstating the Eligibility Period: Claiming the ERC for an entire calendar quarter is possible only if the business was impacted for the full duration of the quarter. Employers are entitled to claim ERC only for wages paid during the actual suspension period and must maintain accurate payroll records.

Navigating Refund Claim Controversies Amid Increased IRS Action

Employers should seek guidance from trusted tax professionals to maintain compliance and effectively manage the challenges of the IRS’s ongoing enforcement actions.

How MGO Can Help

MGO can assist you in navigating IRS audits and ERC claims — helping you meet compliance standards, provide accurate documentation, and address tax controversies. For detailed assistance, visit our Tax Advocacy and Resolution services.

IRS Takes Drastic Measures to Combat Fraudulent Employee Retention Tax Credit Claims 

Executive Summary 

  • The Internal Revenue Service (IRS) instituted a moratorium on the processing of new Employee Retention Tax Credit (ERTC) claims due to an influx of fraudulent and exaggerated claims — primarily stemming from unscrupulous ERTC mills. 
  • As of July 31, 2023, the IRS Criminal Investigation division had initiated 252 investigations involving more than $2.8 billion in potentially fraudulent ERTC claims. Fifteen investigations have resulted in federal charges, with six of those resulting in convictions with an average sentence of 21 months. 
  • Taxpayers who are not certain of their eligibility should consult with a trusted tax professional for a second review and may want to avail themselves of the IRS’s new settlement and/or withdrawal programs.

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The IRS recently took a drastic step to impede a wave of ineligible ERTC claims by halting the processing of new refund requests through at least December 31, 2023.  

Ineligible ERTC claims have plagued the IRS since Congress enacted the credit in 2020. In fact, the IRS opened its 2023 “Dirty Dozen” list with warnings about common ERTC scams that taxpayers should be wary of. This prominently placed notice — as well as subsequent announcements from the IRS — alerted taxpayers to unscrupulous actors who have been advising employers to claim credits in excess of what they could legitimately qualify for while charging those employers hefty upfront fees or fees contingent on ERTC refunds.  

In the wake of a flurry of IRS investigations that identified more than $2.8 billion potentially fraudulent claims, the halt on processing ERTC claims will allow the IRS to further focus their efforts on investigating and ultimately prosecuting fraudulent claims. In the following we’ll detail the impact of the IRS moratorium and provide guidance if you suspect you’ve been exposed to inaccurate or fraudulent ERTC claims.  

Background on the ERTC

First established in 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the employee retention tax credit was critical — along with Paycheck Protection Program (PPP) — in giving businesses that struggled to navigate the pandemic’s challenges much needed resources to pay employees while the businesses were shut down or facing declining sales.  

For most taxpayers, the ERTC was claimed on quarterly payroll tax returns encompassing the period March 13, 2020, through September 30, 2021 (i.e., first quarter of 2020 through the third quarter of 2021). For a small subset of businesses classified as “recovery startup businesses” (as defined below), the ERTC could also be claimed for the fourth quarter of 2021.  

Despite the halt in processing by the IRS, eligible taxpayers are still able to claim the credit by filing amended quarterly payroll tax returns. Amended payroll tax returns for 2020 quarters are able to be processed by the IRS as long as they are filed on or before April 15, 2024, while amended payroll tax returns for 2021 quarters are able to be processed as long as they are filed on or before April 15, 2025. 

The credit is calculated based on the “qualified wages” of employees. The maximum amount of payroll tax credit that an employer can claim per employee is $26,000. 

Qualification Tests 

To be eligible for the ERTC, businesses must generally satisfy one of the following criteria for each of the quarters for which they are claiming the credit: 

  • Government Mandate Test — They experienced a full or partial suspension of operations that resulted from government orders that limited commerce, travel, or meetings. 
  • Decline in Gross Receipts Test — They experienced a significant decline in gross receipts resulting in more than a 50% decline during each claimed 2020 quarter or more than a 20% decline during each claimed 2021 quarter. 
  • Recovery Startup Business — They qualified as a “recovery startup business” — a business that began operations after February 15, 2020, and whose average annual gross receipts were $1 million or less. (Note that this last qualification only applies for the third and fourth quarters of 2021.) 

The IRS Processing Moratorium 

On September 14, 2023, the IRS announced that it would halt the processing of new ERTC claims through at least December 31, 2023. The IRS also stated that it plans to subject its queue of more than 600,000 existing ERTC claims to stricter compliance reviews, increasing the standard processing goal for those claims from 90 days to 180 days — with a potential for a much longer processing time for claims that require further review or audit. 

This processing moratorium comes on the heels of a significant influx of claims – many of which the IRS believes are ineligible. The IRS stated that it has received more than 3.6 million ERTC claims over the life of the ERTC program, with about 15% of those claims being received in the 90-day period preceding the processing freeze. This amounts to roughly 50,000 claims still being received a week. To put this in perspective: the IRS has paid out about triple the amount that Congress had originally estimated for the program. 

Additionally, as of July 31, 2023, the IRS Criminal Investigation division had initiated 252 investigations involving more than $2.8 billion in potentially fraudulent ERTC claims. Fifteen of the 252 investigations had resulted in federal charges, with six of those resulting in convictions. Four of the six convictions had reached the sentencing phase with an average sentence being 21 months. 

The IRS intends on utilizing the moratorium to add more safeguards to the processing of ERTC claims, to protect businesses by decreasing the momentum of the pop-up ERTC mill industry, and to provide several solutions for taxpayers who submitted invalid claims. Those solutions include: 

  • A claim withdrawal program will be rolled out in Fall 2023 allowing businesses to withdraw ERTC claims that have not been processed or paid, even if those claims are under audit or awaiting audit. 
  • A claim settlement program rolling out in Fall 2023 that will allow businesses to repay ERTC claims, while also avoiding penalties and future compliance actions. (Note that fraudulent claims may still be subject to criminal referral.) 

How to Respond to IRS Scrutiny of ERTC Claims 

Given the expected extra scrutiny that businesses can expect to face on their claims, businesses should review ERTC claims that they have made and/or intend to make where there are any doubts regarding the eligibility of those claims: 

  • If you have already submitted the ERTC claim and received a refund: If you have any doubts regarding your eligibility, we recommend reaching out to a trusted tax professional to obtain a fresh, objective assessment of your qualifications for the credit. If you determine that you were ineligible, you can participate in the IRS’s settlement program so that you can repay the claim, avoiding both penalties and audit-related fees. 
  • If you have already submitted the ERTC claim, but the claim has not been processed or paid: The claim will take longer to process than during the summer — increasing from a three-month turnaround time to a likely six-month turnaround time. If you have any doubts regarding the claim during this period, we recommend reaching out to a trusted tax professional to have a second review of the claim. If you determine that you were ineligible, you can withdraw the claim under the IRS’s withdrawal program without penalties, even if an audit has commenced. 
  • If you have not yet submitted the ERTC claim: Any claim submitted between September 14 and the date that the IRS lifts the moratorium – currently after December 31, 2023 – will not be processed. This should provide an opportunity for you to re-evaluate whether the claim has merits and to bolster the claim if needed. We recommend working with a trusted tax professional to have the best possible substantiation for your claim so that it is more likely that the claim will be sustained if challenged by the IRS. 

How MGO Can Help 

MGO’s ERTC Second Look program is geared towards the types of objective, trustworthy reviews that would benefit you during this time of heightened ERTC claim scrutiny. Our experienced Credits & Incentives team can identify audit red flags, areas that need more substantiation, miscalculations, and incomplete filings. In addition, our Tax Controversy team — in tandem with our Credits & Incentives team — can defend you if any of your ERTC claims are challenged by the IRS, with the ability to represent you during audit, appeals, and tax court. Contact us to learn more. 

Four Considerations to Maximize Post-COVID Tour Profits

Executive summary

  • Contract negotiations during the planning phase are essential to securing appropriate financial outcomes
  • Think carefully about production expenses, which can cut into potential profits
  • Plan your travel route efficiently to cut down on transportation overhead
  • Maximize the various opportunities to monetize content and merchandise

Our clients who are musical artists are excited to get back on the road now that COVID-19 event restrictions are largely lifted. Their passion for music, their connection with the fans, the irreplaceable energy of commanding a big stage in a packed arena are driving forces, but on the practical side, so is the revenue.

While music venues are open for business, the impact of COVID-19 can still be felt in conditions and requirements around events that can have a financial impact. In many instances, artists may be willing to jump at contract offers that could limit the financial benefits they could have otherwise realized.

As the Entertainment, Sports and Media Industry Leader, I have been on your side of the desk. I am not only a CPA, but for 15 years I was manager of a certified Diamond and 11-times Platinum, six-time Grammy Award winning hip-hop group. I have managed several other culture-defining artists, as well as partnered with artists, and their agents, managers, tour managers, lawyers, labels, crews, and families to help them secure favorable contracts for innumerable tours.

These are four things I most often advise our clients to keep in mind to maximize their profits when planning a tour.

#1 Be smart with your contract

Decide your rate per show ONLY after thinking through as many factors as you can. Without guidance, artists can get caught up in the excitement of tour planning, and get offered a certain amount per show that may not cover all of the overhead. We partner with artists and management, and layout typical hard costs and considerations, so you know what it will take to make the tour happen, and still get the kind of monetary return you are looking for. Factors such as set design, shipping and transportation, set construction, crew transportation, insurance, personnel, all of these elements need to be taken into account.

Knowledge is power in negotiations. Our process is to arm our clients with first-hand knowledge of the touring process and insights we have gained through the countless negotiations we’ve done on behalf of other artists.

#2 Think through your production expenses

The scope of the show and the set design has a direct impact on the profitability of your tour. The creative vision needs to be balanced with actual hard costs. The size of the set and the scale of the show will directly affect the equipment needed for set transport, the number of people needed to set up the stage, the number of dancers, tour managers, a band, audio engineers, lighting engineers, the required production staffing, security teams, the number of trucks, busses, etc. Additionally, for multi-city tours, budgets to transport and house the sets along the route also need to be allocated.

We work with our clients to provide an informed understanding of upfront planning so that you see all the factors and can identify areas to streamline. One of our best practice solutions is to hire multi-discipline specialists who can fulfill several jobs. This saves money on flights, hotels, per diems, and salaries.

Taxes and payroll are a factor to keep in mind, as are passports for all staff members if you are planning to include an international leg of your tour. There may additional fees that are crucial to budgeting, related to visas/passport fees and taxes and tariffs for each city, state, and country. We can provide Tour Accountant Services to manage the ins and outs of these details so you and your Tour Management Team can focus on what you do best.

#3 Map out your transportation

Managing tour transportation is critical for success and maximizing your profits. There are a lot of moving parts that require consideration. Before announcing tour dates and locations, focus on your tour route. For example, consider where you are located. If you’re on the east coast, it might make more sense to start there, work your way down, take a break, and then fly directly to the west coast, where it’ll be the most profitable. What about where your set is being built? If it is in Los Angeles, for instance, it will be far easier and cheaper to start there so you won’t have to pay to fly it all out initially. The size of your set and show will impact the number of trucks and busses, and/or air transportation elements that will need to be factored in.

Ultimately, you will need to determine the most cost-effective route for you. Start by locking in gig dates that you know are inflexible, like large music festivals, and work around them. Choosing an efficient route will not only ensure you’re seeing as many of your fans as you can, but you’ll also be doing so in a way that your tour will yield the best most profitable returns.

Transportation can have huge cost implications. Planned flights are much more efficient than last minute travel. Commercial flights are more affordable than private jets. Tour busses can be rented short term or leased long term and wrapped for marketing impact for a cohesive branding look. The more you plan ahead, the better you can manage your costs and the more profits you can retain from your tour.

#4 Your tour can have multiple lives

Every step of your tour: the struggles, the victories, the comic moments, the behind-the-scenes (BTS) life, your hopes, your thoughts on what it will mean to be back with your fans, and of course every on-stage performance … all of it is content with monetary value.

The life you will be living on tour is one your fans only dream of and you can bring them into that space. From potential specials that can be sold to streaming services like Netflix, to exclusive BTS content that can be on your website or packaged as part of marketing partnerships with companies who could potentially offer footage as video-on-demand, mobile content, and social media content.

Simultaneous streaming of concerts either in select cities on a certain date, in movie theaters, in the metaverse (i.e., Decentraland) or via Pay Per View, are areas that can be leveraged for profit.

All of the footage can also be used in long and short form to build out your own band’s social media presence as well.

Onsite and online Merchandise sales are another revenue channel to recognize for potential profits. At $60-70 per sweatshirt, $30 a tee shirt and $20 a water bottle sold onsite or online, profits from these items can quickly add up.

With guidance from our team, you gain access to our broad eco-system of partners to help you realize these additional revenue streams while you get to focus on performing.

How we can help plan and manage a profitable tour

You’re sharing your passion on a global stage — going on tour should be exciting. Not to mention, touring is now one of the best ways you can bring in significant income, given you know how to properly plan ahead. Our Entertainment, Sports and Media team has extensive experience planning large-scale tours, managing expenses, optimizing revenue, and delivering the financial results you expect. Before going on the road again, reach out to our team for a consultation to avoid common issues that can undermine profitability.  

About the author 

Tony Smalls is the leader of our Entertainment, Sports, and Media (ESM) practice and helps culture-defining entertainers, athletes, and other high-net-worth individuals build and protect their wealth while maximizing growth opportunities in today’s fast-evolving media marketplace. He specializes in accounting, finance, tax strategy, financial planning, and analysis, financial reporting, and contract/deal negotiations, workin

How to Account for the Employee Retention Credit

Executive summary

  • There is still uncertainty about how to account for the refundable Employee Retention Credit in your books, because you can’t account for it the same way you can account for the Paycheck Protection Program loan.
  • The standards you can choose from are FASB ASC 958-605, International Accounting Standard (IAS) 20, FASB ASC 450-30, and FASB ASC 832.
  • Depending on the standard you choose, you might have to consider the timing of recognition, the presentation of a grant income line, and financial ratios.

The Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC) were powerful economic stimulus programs instituted during the COVID-19 pandemic to provide financial relief to struggling businesses. Both programs were the first initiatives of their kind, and as a result, there remains some uncertainty about what standards apply when accounting for them in your financial statements and records. 

If you’re wondering how to distinguish the two, as well as determine the standard you should be utilizing, Angel Naval, a leader in our Client Accounting Solutions practice, breaks it down.  

The PPP versus the ERC

Created to aid businesses facing financial challenges through the pandemic, there are several key differences between the PPP and the ERC.  

The PPP is a loan and was created for small businesses with less than 500 employees in mind, giving them the funds needed to cover payroll and other eligible expenses. This includes hiring back employees who were laid off and covering applicable overhead. The loans are forgiven if the proper criteria are met (I.e., maintaining payroll and keeping consistent employee numbers).  

A subset of the PPP loan, the ERC is a refundable tax credit that allows businesses to reduce their tax liability based on the qualified wages they’ve paid to their employees during the pandemic. It was created for businesses of all sizes to capitalize on in order to avoid layoffs. They can claim up to $5,000 per employee in 2020 and $7,000 per employee per quarter in 2021.  

Determining the appropriate accounting standard for ERCs 

If you took advantage of the ERC, currently, there is no straightforward way of accounting for it. Put simply, the ERC is a gray area because it’s so new, and there isn’t a straightforward way of accounting for it. Plus, ERCs are payroll credits, not income tax credits — and while FASB has extensive guidance for accounting for income taxes in ASC 740, it doesn’t for payroll taxes. Even the American Institute of Certified Public Accountants (AICPA) has suggested different standards, so it’s up to you to apply your best judgement based on the facts and circumstances of your business. Some things to consider:  

  • The timing of recognition, 
  • The financial ratios important to you, and 
  • Whether you want to present a grant income line. 

For income statement presentation, according to AICPA’s December 2022 report, more public entities are crediting the associated expense rather than recognizing the amounts on a separate line item.  

For example, you may think you can account for the ERC the same way you can for the PPP, but you can’t. As we differentiated above, the PPP is a loan and the ERC is a payroll credit, therefore the PPP is subject to debt and liability standards and the ERC is not. While the PPP did come first, those companies that have paid payroll taxes but still qualified for the ERC are still able to retroactively claim the credit.  

For prospective applications, for-profit entities can adhere to guidance in one of the following. 

FASB ASC 958-605 

If you’re applying the revenue recognition model under ASC 958-605, ERCs are treated as conditional contributions. In this case, companies must have met the program’s eligibility conditions to record revenue (and no amounts can be recorded until all criteria are evaluated and “substantially” met according to regulations). Given the conditions are met, a refund receivable and income should be recognized in the period the entity determines the conditions have been substantially met. This standard requires that gross revenue be recorded, and it doesn’t permit any netting of revenue against related expenses.  

Some barriers to meeting ASC 958-605’s requirements include the eligibility requirements, like meeting the rules for a decline in gross receipts as well as incurring qualifying expenses (i.e., payroll costs). To file for the ERC, you’ll need to decide whether preparing the related ERC form and filing it with the government presents a barrier you’ll need to overcome. Note administrative and other small stipulations do not represent a barrier. 

IAS 20 

If you’re applying IAS 20, you can’t recognize the ERC until the “reasonable assurance” threshold is met in correlation with ERC’s conditions and receiving the credit. In this case, “reasonable assurance” translates to “probable” under GAAP standards and is easier to satisfy than “substantially met” in Subtopic 958-605. Once you’ve provided reasonable assurance that conditions will be met, the earnings impact of the government grants is recorded over the periods in which you recognize as expenses the related costs that the grants are intended to cover. So, you’ll need to estimate the amount of the credit you expect to keep. 

IAS 20 allows you to record and present either the gross amount as other income or net the credit against other related payroll expenses. For every quarter that a company meets the recognition criteria, it records a receivable and either other income or net expense.  

FASB ASC 450-30 

If you’re interested in applying FASB ASC 450-30, please note amounts related to the ERC wouldn’t be recognized under this model until all uncertainties regarding the disposition of the credit are resolved — and there’s less detail on the disclosure, measurement, and recognition requirements as compared to the other standard models. For this reason, the AICPA doesn’t believe this model to be a preferred accounting policy for the ERC. 

FASB ASC 832 

If you’re applying this model, you must disclose several specifics about transactions with a government within its scope. These entail the nature of the transactions, which includes a description of the transactions as well as the form in which it has been received, whether it’s cash or other assets. You must also detail the accounting policies you used to account for the transactions. Any line items on the balance sheet and income statement that are affected by the transactions must be accounted for too — plus, the amounts applicable to each financial statement line item in the current reporting period.  

How MGO can help 

While there are clear accounting standards for the PPP, there is still some uncertainty surrounding the ERC. Depending on the standard you choose, you may have to consider the timing of recognition, financial ratios, and whether to present a grant income line. Therefore, businesses need to apply their best judgment based on the facts and circumstances of their business when accounting for ERCs. Our Client Accounting Solutions team has extensive experience helping clients navigate complex tax regulations post-pandemic. Contact us to learn more about which standard you should be using for federal relief programs. 

About the author 

Angel Naval oversees our West Coast Financial Advisory Services practice and provides value-added guidance for your corporate finance, financial planning, and business process needs. 

Five Signs You’re Ready for Outsourced Accounting Support

Executive summary

  • A growing organization is a positive, but along with it usually comes increasingly complex financial accounting.
  • Outsourcing provides businesses of all sizes with an opportunity to manage an array of issues — from staffing shortages or a lack of specific expertise to disorganized or unsecure financial records.
  • Benefits of outsourcing include significant cost savings, direct access to specific accounting knowledge, the minimization of turnover, the ability to scale, access to tools and processes, and flexibility.

Many CEOs and business leaders are experiencing challenges in the aftermath of the COVID-19 pandemic, including changing customer trends, aggressive competition, emerging digital technologies, and the new normal of employee expectations for workplace flexibility.

These uncertain economic forces and cultural shifts are putting increased pressure on staffing for organizations of all sizes – especially fast-growing ones. While these difficulties are difficult to overcome, they are also an opportunity to change the “status quo” and level-up back-office performance.

For leaders navigating the uncertain tailwinds of the pandemic and planning to enter a new era of growth, outsourcing represents a powerful opportunity to address any staffing issues or business challenges. It empowers you to access specialized insight on a temporary basis, create value ahead of a major transaction, manage overhead costs, and modernize and revitalize business processes.

A recent study showed that 59% of all businesses utilize outsourced resources and that accounting is the most commonly outsourced function. So, how do you know if outsourcing your accounting function is right for your organization?

In this article we’ll look at five indicators that this strategy might be right for you and detail the key benefits to outsourcing or augmenting your accounting function.

Five signs your business may benefit from outsourced accounting


Here are some questions you should ask yourself to determine if your organization would benefit from outsourced accounting services:

  1. Is your business growing rapidly?

If you’re experiencing a significant influx of revenue, first off, great work! Your business model is proving out and you’re on the fast-track to success. But what is happening to your expenses, profitability and working capital? Depending on your answer it could mean that your accounting needs are evolving, the risks of a breakdown are higher, and overall, there is simply more at stake. It may be time to confirm that your current in-house team is qualified and staffed appropriately to handle these new responsibilities.

  1. Are you struggling to keep up with your accounts receivable or payroll?

One way to get a firm answer to whether your team is understaffed is if you’re missing key deadlines or struggling to get timely collection of cash from your accounts receivable. The inability to collect and follow-up on AR is essential to funding current and future growth and is directly connected to meeting your payroll commitments – one of the largest expenses of any business. If anything falls behind, you can find yourself in a difficult position if you do not have the ability to access cash or financing.

  1. Are your financial records organized and producing usable data?

Your accounting function does more than compliance, it should help guide your organization’s financial hygiene. Organized financials tell a clear story of earnings, spending, and investment, so you can make informed decisions. An over-worked or inexperienced accounting team will be working furiously to keep up with compliance and may not have the capacity, or necessary experience, to provide guidance on your financial scorecard to accrete value to the organization.

  1. Do your accounting needs fluctuate significantly throughout the year?

If your business experiences big shifts in labor productivity based on the calendar year and your taxes filings are late with significant overages from the tax preparers, or your audits have a significant number of adjustments, that may mean your accounting team lacks capability. Striking the right balance between hiring quality talent and the speed of bringing new hires up to date with company procedures can be a challenge. Outsourcing your team can deliver the resources you need, when you need them, and limit costs during the slower periods.

  1. Are you concerned about financial security and checks and balances?

If your internal accounting team is one or two individuals, you may be open to hidden risks. An independent team can provide the checks-and-balances that help mitigate the risk of fraud and asset misappropriation.

If you answered yes to any of these questions, you should consider outsourcing part or all of your accounting function. With an outsourced accounting team, you gain immediate access to trained, knowledgeable staff with the knowledge you need in technical accounting. The right outsourced resources can help your business grow faster and run more smoothly — often at a lower price than building an internal accounting department.

Benefits of outsourced accounting services


1.Cost and time savings

Maintaining full-time employees can be costly — and for most organizations, labor costs are some of the highest expenses. By relying on an outsourced team, you can devote your time to growing your business and spend less time managing accounting.

  1. Direct access to specific accounting expertise

Every company is different, which means every company’s needs are different. By outsourcing, you have access to the service you need when you need it. An outsourced team will bring familiarity with an array of accounting and reporting standards, including GAAP, IFRS, GASB, etc. Plus, they can provide specific experience with M&A transactions, raising capital, scaling, or downsizing operations.

  1. Minimize turnover disruption

In a smaller organization, each employee is vital to the business’s success. When you lose one, the disruption left in their wake can provide additional challenges. An outsourced accounting team will never leave you in the lurch, so you can focus on what is most important: generating revenue.

  1. The ability to scale

If your organization has grown quickly, you may experience growing pains when your fortunes suddenly shift. In boom times, you may need to hire more staff to meet demand. But that also means you may find yourself laying off employees in a downturn. Outsourcing allows you to handle more work without hiring additional employees or scale back if your capacity shrinks.

  1. Tools and processes

No matter what your organization’s size, you should always try to keep your overhead costs minimal. By outsourcing, you can save money on specific tools or processes you might otherwise need to function. The right outsourced team will provide the know-how and equipment you need to succeed.

  1. Flexibility

By outsourcing certain jobs, you can plan — and pivot, as needed — depending on your organization’s needs. This is especially relevant in the case of needing specialized guidance. If you’re planning a major transaction or other market move, an outsourced CFO can provide tactical expertise when and where you need it.

MGO can help

As your organization grows, your financial accounting needs become increasingly complex. Because your in-house accountants may be limited to handle the basics, outsourcing to professional teams with specialized knowledge and experience can provide precisely the kind of service you require — and give you the time you need to focus on the organization’s other needs.

MGO has a robust outsourced accounting team staffed by CPAs with diverse industry background and technical specialties. We’ll provide the right-size solution to your organization’s needs. Areas we support include day-to-day accounting tasks, complex financial systems projects, regulatory compliance demands, and support for M&A deals, raising capital, and other major transactions.

Whether you’re interested in simply augmenting your team with additional financial knowledge, or undertaking a complete accounting transformation, we can help you with the people, processes, and technology you need to move your business forward.

To explore your options and start along the path to organizational change, contact us.

Businesses must navigate year-end tax planning with new tax laws potentially on the horizon

The end of the tax year is fast approaching for many businesses, but their ability to engage in traditional year-end planning may be hampered by the specter of looming tax legislation. The budget reconciliation bill, dubbed the Build Back Better Act (BBBA), is likely to include provisions affecting the taxation of businesses — although its passage is uncertain at this time.

While it appears that several of the more disadvantageous provisions targeting businesses won’t make it into the final bill, others may. In addition, some temporary provisions are coming to an end, requiring businesses to take action before year end to capitalize on them. As Congress continues to negotiate the final bill, here are some areas where you could act now to reduce your business’s 2021 tax bill.

Research and experimentation

Section 174 research and experimental (R&E) expenditures generally refer to research and development costs in the experimental or laboratory sense. They include costs related to activities intended to uncover information that would eliminate uncertainty about the development or improvement of a product.
Currently, businesses can deduct R&E expenditures in the year they’re incurred or paid. Alternatively, they can capitalize and amortize the costs over at least five years. Software development costs also can be immediately expensed, amortized over five years from the date of completion or amortized over three years from the date the software is placed in service.

However, under the Tax Cuts and Jobs Act (TCJA), that tax treatment is scheduled to expire after 2021. Beginning next year, you can’t deduct R&E costs in the year incurred. Instead, you must amortize such expenses incurred in the United States over five years and expenses incurred outside the country over 15 years. In addition, the TCJA requires that software development costs be treated as Sec. 174 expenses.

The BBBA may include a provision that delays the capitalization and amortization requirements to 2026, but it’s far from a sure thing. You might consider accelerating research expenses into 2021 to maximize your deductions and reduce the amount you may need to begin to capitalize starting next year.

Income and expense timing

Accelerating expenses into the current tax year and deferring income until the next year is a tried-and-true tax reduction strategy for businesses that use cash-basis accounting. These businesses might, for example, delay billing until later in December than they usually do, stock up on supplies and expedite bonus payments.

But the strategy is advised only for businesses that expect to be in the same or a lower tax bracket the following year — and you may expect greater profits in 2022, as the pandemic hopefully winds down. If that’s the case, your deductions could be worth more next year, so you’d want to delay expenses, while accelerating your collection of income. Moreover, under some proposed provisions in the BBBA, certain businesses may find themselves facing higher tax rates in 2022.

For example, the BBBA may expand the net investment income tax (NIIT) to include active business income from pass-through businesses. The owners of pass-through businesses — who report their business income on their individual income tax returns — also could be subject to a new 5% “surtax” on modified adjusted gross income (MAGI) that exceeds $10 million, with an additional 3% on income of more than $25 million.

Capital assets

The traditional approach of making capital purchases before year-end remains effective for reducing taxes in 2021, bearing in mind the timing issues discussed above. Businesses can deduct 100% of the cost of new and used (subject to certain conditions) qualified property in the year the property is placed in service.
You can take advantage of this bonus depreciation by purchasing computer systems, software, vehicles, machinery, equipment and office furniture, among other items. Bonus depreciation also is available for qualified improvement property (generally, interior improvements to nonresidential real property) placed in service this year. Special rules apply to property with a longer production period.

Of course, if you face higher tax rates going forward, depreciation deductions would be worth more in the future. The good news is that you can purchase qualifying property before year-end but wait until your tax filing deadline, including extensions, to determine the optimal approach.

You can also cut your taxes in 2021 with Sec. 179 expensing (deducting the entire cost). It’s available for several types of improvements to nonresidential real property, including roofs, HVAC, fire protection systems, alarm systems and security systems.

The maximum deduction for 2021 is $1.05 million (the maximum deduction also is limited to the amount of income from business activity). The deduction begins phasing out on a dollar-for-dollar basis when qualifying property placed in service this year exceeds $2.62 million. Again, you needn’t decide whether to take the immediate deduction until filing time.

Business meals

Not every tax-cutting tactic has to be dry and dull. One temporary tax provision gives you an incentive to enjoy a little fun.

For 2021 and 2022, businesses can generally deduct 100% (compared with the normal 50%) of qualifying business meals. In addition to meals incurred at and provided by restaurants, qualifying expenses include those for company events, such as holiday parties. As many employees and customers return to the workplace for the first time after extended pandemic-related absences, a company celebration could reap you both a tax break and a valuable chance to reconnect and re-engage.

Stay tuned

The TCJA was signed into law with little more than a week left in 2017. It’s possible the BBBA similarly could come down to the wire, so be prepared to take quick action in the waning days of 2021. Turn to us for the latest information.

Cannabis Companies May Have Access to Tax Relief with the Employee Retention Tax Credit

While cannabis companies were unable to participate in most government-provided economic recovery packages in the wake of the COVID-19 pandemic, due to limitations under Section 280E, there may be good news. The Employee Retention Tax Credit (ERTC) does not explicitly exclude cannabis companies from eligibility for the ERTC.

Since Section 280E does not apply to employment payroll taxes because the provision is found in the income tax section of the code, qualifying cannabis companies may be able to capitalize on the credit that rewards employers for keeping their employees on payroll through the pandemic.

What is the ERTC?

Issued as a refund of an employer’s Form 941, the ERTC provides an incentive for those employers who suffered from pandemic-related disruptions and decreased revenues. If a cannabis company continued to pay employees through these challenges, they may be eligible to qualify for ERTC refunds retroactively. The refundable credit can be claimed on qualified wages, including certain health costs paid to employees.

Why was cannabis excluded?

Cannabis companies were unable to qualify for a Paycheck Protection Program (PPP) loan under IRS Section 280E, which prohibits them from deducting ordinary business expenses from gross income for the purpose of income tax. This is because while many states are now proposing and passing legislation to legalize cannabis, the substance is still federally classified as illegal under the Controlled Substances Act (and thus subject to IRS Section 280E).

How do cannabis businesses claim relief?

MGO’s approach to 280E mitigation is based on the idea that the rule only applies to income tax — not payroll tax. And because the ERTC is a payroll tax credit and issued as a refund, cannabis companies previously thought to be ineligible for relief can now claim it if they meet the qualifications:

(1) prove they had a decrease in percentage of gross receipts in calendar quarters during the COVID-19 pandemic when compared to prior quarters, or

(2) that they underwent a full or partial government suspension due to COVID-19 restrictions, like forced closure or quarantine.

The IRS has not yet weighed in on the cannabis issue, so for now, we consider it safe for cannabis companies to act on the opportunity. To determine qualification, a cannabis company will need to provide information like quarterly revenues, payroll tax returns, employee wages, and lines of business on Form 941, the Employer’s Quarterly Federal Tax Return.

Rely on cannabis tax and accounting specialists

All things cannabis tax and finance are complicated and make a major impact on an operator’s bottom line. On top of that, the IRS’ penchant for focusing additional attention on the cannabis industry is well-documented. As a result, cannabis operators should always utilize a cannabis-focused accounting provider that is well-versed in the ins-and-outs of cannabis tax compliance and planning.

MGO is uniquely positioned as a national leader in both tax credit advisory and cannabis accounting and financial best practices. We can help you identify tax credits, file claims, prepare documentation, and ultimately successfully defend your claim.

About the author

Michael Silvio is a partner at MGO. He has more than 25 years of experience in public accounting and tax and has served a variety of public and private businesses in the manufacturing, distribution, pharmaceutical, and biotechnology sectors.

California Small Business COVID-19 Relief Grant Deadline Extended

The State of California Small Business COVID-19 Relief Grant Program, which offers grants of $5,000 to $25,000 to eligible small businesses and nonprofits adversely affected by the pandemic, has extended the deadline for the first round of applications to January 13th, 2020.

Start a grant application here: https://careliefgrant.com/partners/county/

Basics of the COVID-19 relief grant program

The program, which allocates $500 million in financial relief to small businesses and nonprofits that have been impacted by the COVID-19 pandemic, was first announced by Gov. Newsom and the California state legislature on November 30th, 2020.

All California-based small businesses (including sole proprietors, home-based businesses, and independent contractors) and not-for-profits with a yearly gross revenue of $2.5 million or less, and have been in operation since at least June 1, 2019, may be eligible for the grant. It is worth noting that applicants with multiple business entities/franchises/locations, etc. are not eligible for multiple grants and are only allowed to apply once using their eligible small business with the highest revenue.

Grant awards by entity revenue

The grant award ranges from $5,000 to $25,000 based on your operation’s annual gross revenue as reported in the most recent federal tax return.

Gross Annual Revenue – Grant Award
$1,000 to $100,000 – $5,000
Greater than $100,000 up to $1,000,000 – $15,000
Greater than $1,000,000 up to $2,500,000 – $25,000

The award is a true grant, not a loan that has to be forgiven. The funds are intended to be used as working capital for your business’s operating expenses – payroll, rent, loan payments, COVID-protective measures, etc.

Award selection process

The grants are not issued on a “first-come, first-served” basis; rather all applications will be assessed following the close of each application round. The program prioritizes distribution based on key factors, including:

  • Geographic distribution based on COVID-19 health and safety restrictions;
  • County status and regional stay-at-home orders;
  • Industry sectors most impacted by the pandemic;
  • Underserved small business groups:
    • e.g., majority-owned and run by women, persons of color, or veterans, or located in low-to-moderate income and rural communities.

The Small Business COVID-19 Relief Grant Program will be offered in two “Rounds” – with the first Round running from December 30, 2020 to January 13, 2021 at 11:59pm. Everyone who applies during a Round will be given equal consideration. Awards will be announced after each Round closes. The timing of the second and final Round is to be determined.

If you apply in the Round 1 and are not successful, your application will be carried over for consideration in Round 2 without the need to reapply. Businesses can only receive one grant even though there will be two Rounds.

For more information, visit careliefgrant.com

Guide to CARES Act Support for State and Local Governments

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law by President Donald Trump and is the largest economic stimulus package in U.S. history.

The bill is the third phase of Congress’ COVID-19 response and provides substantial federal government support aimed to address the economic fallout associated with the COVID-19 pandemic in the United States.

For state and local governments the Act provides substantial appropriations to assist with the financial impacts of COVID-19. There are various funding provisions that state and local governments will be able to participate in, each of which has differing eligibility and reporting requirements.

MGO understands the complexities of this historic Act and in an effort to provide support and clarity to our state and local government clients we have summarized some of the significant funding sources by type, total monies allotted, general purpose, and eligible parties.

Download Guide

As state and local governments, you will be facing significant fiscal and personnel restraints not only due to new costs incurred directly related to the COVID-19 pandemic, but also due to decreased revenue resulting from the reduction in overall economic activity. As leaders in serving state and local governments for more than 30 years, we are here to help you navigate through this time.

For more information, please contact your MGO advisor directly, or email our team at [email protected].

Forging A Path Forward: CARES Act Loan and Tax Benefit Guidance

As the coronavirus (COVID-19) pandemic continues to have widespread economic impacts, small businesses, nonprofits, and similar organizations have been hit hard.

To help combat the economic fallout from the pandemic, the federal government has introduced sweeping legislation to provide emergency relief via loan and grant programs and tax breaks, credits and other incentives.

Sources of relief include:

Millions of dollars of emergency relief is now available to qualifying organizations, some of which is eligible for 100% forgiveness. Unfortunately application processes are complex and time-sensitive, strict usage rules determine what can be forgiven, and changes to tax code are complex.

MGO has created the attached one-page summary to provide basic details on what your organization may be eligible for, and the levels of relief available.

Download PDF

If you need assistance applying for loans, or applying tax incentives, please do not hesitate to reach out to our team.