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Topic: Tax Credit

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. 

New High-Road Cannabis Tax Credit (HRCTC) for California Retailers and Microbusinesses Worth up to $250k Annually

Executive summary

  • California now has a new tax credit called the High-Road Cannabis Tax Credit (HRCTC) available for eligible cannabis retailers and microbusinesses. 
  • The credit is available for tax years starting after January 1, 2023, through December 31, 2027, and can be applied against current year (and future) income taxes.  
  • To claim it, you must make a “tentative credit reservation.” 
  • Expenditures that qualify include wages for full-time employees; safety-related equipment, training, and services; and workforce development and safety. 

While the cannabis industry in California has been struggling on many levels, tax credit relief has come in the form of excise tax changes for distributors and has now arrived for retailers. The High-Road Cannabis Tax Credit is a new tax credit from the California Franchise Tax Board (FTB) available for cannabis retailers or microbusinesses for taxable years beginning January 1, 2023, through December 31, 2027. In order to capitalize on this opportunity, eligible calendar-year taxpayers must make a tentative credit reservation during the month of July to claim the credit on their 2023 CA income tax return. 

Who qualifies for the HRCTC 

To be eligible, you would need to meet three basic requirements.

Which expenditures qualify for the HRCTC 

There are several types of expenditures eligible for the credit with specific parameters that you would need to meet to qualify for them. Qualified expenditures are amounts that you have paid or incurred for any of the following expenses. 

Wages for full-time employees

Not every employee has to meet these requirements — but for those that do, their wages count as a qualified expenditure. First, full-time employees must be paid for no less than an average of 35 hours per week — or they must be a salaried employee paid compensation for full-time employment. 

In addition, full-time employees must be paid no less than 150% ($23.25) but no more than 350% ($54.25) of the state minimum wage. To meet the 150% minimum wage requirement, you may include the following employee benefits in qualified wages: group health insurance, childcare support, employer contributions to employer-provided retirement plans, or contributions to employer-provided pension benefits. But if you pay employees wages that surpass more than 350% of the state minimum wage, those wages are not considered a qualified expenditure.  

Safety-related equipment, training, and services 

Expenditures related to safety, training, and providing services can also qualify if they meet the following criteria: 

  • Equipment primarily used by the employees of the cannabis licensee to ensure personal and occupational safety, or the safety of the business’s customers. 
  • Training for nonmanagement employees on workplace hazards. (This includes safety audits, security guards, security cameras, and fire risk mitigation.) 

Workforce development and safety  

Qualified training for your employees includes: 

  • Joint labor management training programs 
  • Membership in a joint apprenticeship training committee registered by the Division of Apprentice Standards, and a state-recognized “high-road training partnership” (as defined in Section 14005 of the Unemployment Insurance Code).   

Available credit

The amount of available credit is equal to 25% of qualified expenditures. The aggregate credit that can be claimed by each taxpayer (as determined on a combined reporting basis) is a maximum of $250,000 per year. Any unused credit can be carried over to the following eight taxable years. Availability is limited as the total cumulative amount of HRCTC available to all taxpayers is $20 million. 

To claim the HRCTC on your California tax return, you must reduce any deduction or credit otherwise allowed for any qualified expenditure by the amount of the HRCTC allowed.

How do I make a tentative credit reservation — and when?  

You must make a tentative credit reservation (TCR) with the FTB to claim the credit. This reservation must be made online and once you’ve done so, you’ll receive an immediate confirmation. FTB currently reports that the system will be up and running by July 1, 2023, but you can start preparing now.  

How we can help

The HRCTC is a valuable tax credit opportunity for any commercial cannabis business operating in California. Determining if you qualify and calculating how much you can save could be complex. Our extensive experience in cannabis, cannabis tax, and state and local tax enables us to help you take advantage of this tax credit so you can stay focused on thriving in this ever-growing, culture-shaping industry. 

Reach out to MGO’s State and Local Tax team to find out whether you qualify for this tax credit opportunity and determine how much you could potentially save. 

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. 

R&E Capitalization is Still Here — What Should You Do if Change Isn’t Coming?  

Despite bipartisan support, there have been no revisions to the Internal Revenue Code (IRC) Section 174 rules requiring that research and experimentation (R&E) expenditures be capitalized and amortized. Although a policy change that would have postponed this requirement to the 2026 tax year was proposed in last year’s Build Back Better Act (BBBA), that change was never enacted due to the BBBA stalling in the Senate. Subsequent to the BBBA, no other bills – including the Consolidated Appropriations Act (CAA), the final large legislation of 2022 – has been successful in incorporating Section 174 changes into their final versions.  

What is the policy now? Well, the Tax Cuts and Jobs Act (TCJA) of 2017 changed the treatment of R&E costs so that taxpayers must capitalize all R&E costs incurred after December 31, 2021, and amortize them over either a five-year period (domestic costs) or a 15-year period (foreign costs). Previously, taxpayers could either (1) immediately deduct R&E expenditures, or (2) elect to amortize those costs over a period of five or more years, which gave the taxpayer the ability to choose the option that would be the most beneficial for them.  

While it is still possible for the legislative process to postpone or repeal mandatory capitalization of Section 174 costs (including retroactively applying any changes to the 2022 tax year), such legislation would need to have bipartisan support due to the currently divided Congress.  

In this article, we review what it would mean for your business if the much-anticipated revisions to Section 174 do not occur, and what kind of planning you should do to prepare on the front end. A number of these recommendations will be further refined once additional IRS guidance is provided. 

Background on 174 R&E expenditures  

R&E expenses for income tax purposes are defined under Section 174 and its regulations. In Treasury Regulation Section 1.174-2(a), R&E expenditures are described as expenditures incurred by the taxpayer in connection with the taxpayer’s trade or business in the experimental or laboratory sense. Section 174(c)(3) – added by the TCJA – also notes that any amount paid or incurred in connection with the development of any software shall also be an R&E expenditure subject to capitalization. Generally, when determining R&E expenses, not only are direct costs of R&E factored in, but also the indirect costs incident to the development or improvement of a product. 

Common expenses included in R&E costs under Section 174 are the following. Many of these expenses are considered for Section 174 specifically and are not qualified research expenses for purposes of the R&D credit. 

  • Attorneys’ fees in connection with filing and completing patent applications. 
  • Allowance for depreciation or depletion of property to the extent used in connection with R&E. 
  • Employee wages and employee benefits and costs in connection with R&E. 
  • Supplies, computer leasing, and contract research costs in connection with R&E. 
  • Pilot model expenditures. 
  • Facility expenditures in connection with R&E. 
  • Ordinary and extraordinary utilities in connection with R&E. 
  • Travel expenditures incident to R&E. 
  • Foreign research expenditures. 
  • Additional overhead expenditures incident to R&E.  

*In addition to the above, there are other criteria used for determining what expenses qualify for the R&D credit that do not apply towards determining Section 174 costs.  

In contrast, the following are common expenses that are excluded from the expansive definition of R&E costs under Section 174: 

  • the ordinary testing or inspection of materials or products for quality control;  
  • efficiency surveys;  
  • management studies;  
  • consumer surveys;  
  • advertising or promotions;  
  • acquisition of another’s patent, model, production or process;  
  • research in connection with literary, historical, or similar projects; and  
  • expenditures for the acquisition or improvement of land.  

The current R&E amortization rule explained

The ability to deduct R&E costs changed for all tax years beginning after December 31, 2021. As previously mentioned, these costs can no longer be deducted in full and must be capitalized and then amortized over five years for domestic costs and over 15 years for foreign costs. This amortization starts at the midpoint of the first year that the expenses were incurred, which results in only 10% of domestic costs (1/2 of 20%) being able to be deducted in their first year. 

Per IRS guidance, this mandatory change can be implemented as an automatic accounting method change through attaching a statement to a taxpayer’s first income tax return with a year beginning after 2021, in lieu of filing the much more intricate Form 3115. This change should not have an effect on prior tax years, since the automatic method change is implemented on a “cut-off basis.”

Macro effect of mandatory capitalization

As mentioned above, before the prior rule was changed, every R&E expense could be deducted in full in the year they were incurred. While it is expected that the Section 174 expensing rules will revert to this — to some extent — through pressure from persistent lobbyists, this change has not been incorporated into a bill yet.  

Some believe the mandatory R&E capitalization and amortization will adversely affect U.S. innovation, potentially resulting in a detrimental impact on our global competitiveness and jobs. For more than 60 years, businesses were able to immediately deduct their R&D expenses in the year those expenses were incurred (or choose to defer based on what worked for them). Now, the amortization of new R&E costs could cost businesses billions in cash taxes.  

Significant considerations

Estimated Tax Payments: For taxpayers making estimated tax payments utilizing current year taxable income, consideration should be given to R&E expenditures and how the capitalization of those expenditures may impact taxable income and timing of cash tax payments. A closer look at refining the various accounts in a taxpayer’s books may be needed for this. 

Tax Accounting / ASC 740: Taxpayers should be mindful of whether a new deferred tax asset is created, if any adjustment of existing deferred taxes may be necessary, or if a full or partial valuation allowance may be needed.  

Other Areas Affected: The amortization requirement also affects other areas of taxable income, including the following: 

  • increases the deductibility of business interest under Section 163(j), 
  • increases the deductibility of the QBI (Qualified Business Income) deduction, 
  • increases the amount of GILTI (global intangible low-taxed income) for controlled foreign corporations, 
  • potentially adjusts the amount of FDII (foreign derived intangible income) deduction that can be taken, 
  • changes the amount of R&E expenses allocable for purposes of the foreign tax credit, and 
  • impacts state taxable income for the few states that do not conform to the capitalization requirement (e.g., California). 

R&D credit considerations

The Section 174 capitalization requirements should not directly impact the amount of expenses that can be used for the R&D Tax Credit under Section 41, since the research credit is calculated using a much smaller subset of R&E expenditures than Section 174 and is not limited by the capitalization requirement. As Section 174 is much broader in scope, it applies to expenditures both eligible and ineligible for the research credit.  

Another consideration for tax planning is that the research credit will be even more important to assist with reducing the additional tax liability that will be generated by the R&E treatment change, since the credit can help offset some of the tax liability increase. Moreover, the analysis & processes used to determine the R&D credit can be leveraged to identify Section 174 R&E expenses, which helps create some efficiencies in quantifying the overall effect of the mandatory capitalization and amortization requirement.  

Extend impacted returns where possible

Tax return extensions are highly recommended for tax returns that have their due dates coming up. Not only is there the pending IRS guidance that may significantly change R&E expense calculations, but also the act of extending tax returns should allow more time for tax returns to be superseded (rather than amended) and should allow for R&D credit claims to be made on originally filed returns. 

This is echoed by a September 2021 Chief Counsel Memorandum issued by the IRS, which made the process for claiming a refund under the R&D credit far more stringent. The memorandum relayed that taxpayers must provide more information on business components, identify the research activities performed, and name the individuals who performed each research activity. Given the additional amount of detail needed, taxpayers making R&D credit claims on amended returns — especially small businesses — have a heavier burden than those who make the claim on an originally filed returns. 

How will it affect you?

If the mandatory R&E capitalization requirement is not changed, you should consider how the 174 capitalization rules will affect your business and how claiming the R&D credit will help offset the increase in tax liability. If you currently have an R&D credit analysis and/or an ASC 730 financial statement analysis, those studies can be used as starting points to determine the overall effect of Section 174 — keeping in mind that neither analysis includes all the costs included in Section 174.  

If the requirement is changed, there are several ways that the R&E expense landscape could turn out for taxpayers. Ideally, Congress will revert to the prior rule regarding R&D expenses. In that situation, you should be able to choose what is best for you — immediately deducting or deferring.  

Our perspective

As experienced advisors, MGO can help model the best R&E position for you, through the 2022 tax year and beyond — potentially saving you significant amounts of money. Our holistic tax advisor and business advisor-first philosophy factors not only the direct effects of the R&E capitalization requirement, but also the impact on other areas of your tax returns (e.g., international, transfer pricing, state, and local tax) and what potential savings you can obtain by claiming the R&D credit. Please feel free to reach out to any of our R&E costing professionals below to get the experienced insight that you deserve. 

About the author

Danielle Bradley is a senior manager in MGO’s National Tax Credits and Incentives practice. She focuses on helping businesses identify, substantiate, and defend federal and state tax credits and incentives. She has helped hundreds of companies monetize and defend over $100 million in various tax credits and incentives, such as the Research and Development (R&D) Tax Credit, Orphan Drug Credit, Employee Retention Credit, meals and entertainment deduction, and the current Research and Experimental (R&E) amortization calculations. Danielle has extensive experience in various industries, including software and technology, life sciences, manufacturing, aerospace and defense, and food, beverage and agriculture businesses.

Contact Danielle to further discuss the R&E amortization or other credits and incentives at Danielle Bradley or Michael Silvio (Tax Partner).

Guide to the “Green” Tax Credits and Incentives in the Inflation Reduction Act

Executive summary

  • President Biden has signed the Inflation Reduction Act of 2022 into law.
  • This large package contains many new tax credits to incentivize taxpayers to “go green” with energy from renewable resources while simultaneously receiving financial relief.
  • It also extends or adds to currently existing credits for additional tax-saving opportunities.

On August 16, President Joe Biden signed the Inflation Reduction Act (IRA) of 2022 into law. Within the large tax reform package are numerous “green” tax credits focused on providing financial relief to taxpayers while incentivizing them to make sustainable choices and combat climate change.

These new credits are aimed at motivating taxpayers to use energy from renewable sources, prioritizing options like wind and solar. The IRA also introduces new credits and strengthens or extends existing credits that provide tax relief for purchasing new and used clean-energy vehicles and installing energy efficient heating and cooling systems. Additionally, companies that cut their methane emissions can access certain credits, while those that do not could face penalties.

The rules and regulations around claiming these green credits can be complicated. In this article, our Tax Credits and Incentives team breaks down how individuals and organizations can capitalize on these tax saving opportunities.

Swap gas guzzlers for an electric vehicle

Taxpayers that purchase a new or used “clean car” can qualify for this consumer tax credit. Vehicles considered clean are those that use a battery partly or fully manufactured in North America and built with materials extracted or processed in one of the countries currently in a free-trade agreement with the U.S.

Your income is a factor in how much you can reap in tax credits. If a taxpayer makes less than $150,000 annually (or has a combined family income below $300,000), the taxpayer can get up to $7,500 for new electric vehicles that qualify. Note the money would be applied at the point of sale, so the taxpayer’s monthly payments would be lowered (as opposed to reducing the tax bill months down the line).

Previously, the federal tax credit for electric vehicles did not include cars from manufacturers that already sold at least 200,000 models (GM, Toyota, and Tesla were excluded). This bill unravels that; instead, there is now a price threshold per vehicle. To qualify for the credit, bigger vehicles like SUVs, pickup trucks, and vans would have to cost less than $80,000 to qualify for the credits. Smaller vehicles are capped at $55,000. So, if you have your eye on a super sporty electric vehicle, you may be out of luck.

Taxpayers can also get $4,000 off a used electric vehicle if it is sold by a dealer for $25,000 or less — but only if they individually make up to $75,000 annually or $150,000 jointly. The addition of credits for used electric vehicle purchases is a win for the industry, and advocates of the bill are hopeful that this incentive will encourage an increase in electric vehicle adoption.

Modifying your home to be more energy efficient

To incentivize taxpayers to make their homes more energy efficient, the bill’s $4.28 billion High-Efficiency Electric Home Rebate Program provides rebates for low- and moderate-income households when they replace fossil-fuel boilers, furnaces, water heaters, and stoves with more efficient electric devices powered by renewable energy.

Some taxpayers will need to upgrade their electrical panels before they are able to install the new appliances. They can take advantage of up to $4,000 to do so. Furthermore, if they are interested in making their home generally more energy efficient, they can capitalize on a rebate of up to $1,600 given to seal and insulate their house, as well as up to $2,500 to improve their home’s wiring.

In terms of appliances, taxpayers can get up to $8,000 to install heat pumps that both heat and cool their home, plus as much as $1,750 for a heat-pump water heater. To offset the cost of a heat-pump dryer or electric stove, taxpayers can claim up to $840. It is estimated by making these changes, they can save significantly on their future energy bills.

There are several parameters for these rebates. First, the program runs through September 30, 2031 — so you do have time to implement these changes to your home. The maximum amount taxpayers can collect is $14,000, and to qualify, their household income cannot exceed $150% of the median income in the area they live. For those who do not qualify, there is a tax credit of up to $2,000 available to install heat pumps, plus up to $1,200 annually to install new windows, doors, or an induction stove.

Save when installing solar panels

Lastly, taxpayers can collect a 30% tax credit for installing residential solar panels through December 31, 2034. The credit decreases to 26% if you wait until after December 31, 2032. Taxpayers can also install solar battery systems to qualify for the tax credit.

New “green” tax credits


There are other ways taxpayers can take advantage of going green. Here are some of the new tax credits to capitalize on.

Doubling of R&D Tax Credits for Small Business Startups — Would potentially allow recipients to double the amount they can claim on any R&D tax credits (from $250,000 to $500,000 per year against payroll taxes).

Zero Emission Nuclear Power Production Credit — Provides a new business credit for electricity produced by a taxpayer at a qualified nuclear power facility before the date of enactment.

Sustainable Aviation Fuel Credit – Creates a new business credit for each gallon of sustainable aviation fuel sold or used as part of a qualified fuel mixture. The credit equals the number of gallons of sustainable aviation fuel in the mixture multiplied by the base amount of $1.25. There are increases available if the taxpayer meets certain greenhouse gas emissions reductions, and it applies to fuel sold or used in 2023 and 2024.

Production of Clean Hydrogen Credit — Given to producers of clean hydrogen during the ten-year period beginning on the date a qualifying facility is originally placed in service. It applies to clean hydrogen produced after 2022.

Advanced Manufacturing Production Credit — Provides a new production credit for each eligible solar energy component, wind energy component, eligible inverter, qualifying battery component, and applicable critical mineral produced by a taxpayer in the U.S. (or in U.S. possession and sold to an unrelated person). It applies to components and minerals produced and sold after 2022.

Clean Electricity Production Credit — New business credit for clean electricity facilities placed in service after 2024 (where the greenhouse gas emissions rate is not greater than zero). The credit amount equals the kilowatt hours of electricity produced and sold multiplied by the base amount of 3 cents or 1.5 cents. The credit will phase out one year after the later of 2032 or the year when annual greenhouse gas emissions from U.S. production are equal to less than 25% of the 2022 emissions rate (whichever comes first).

Clean Electricity Investment Credit — New investment credit for clean electricity property investments in energy storage technology and qualified facilities placed in service after 2024 where the greenhouse gas emissions rate is not greater than zero. It phases out after the later of 2032 or when the annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of the 2022 emission rate (whichever comes first).

Clean Fuel Production Credit — Creates a business credit for the clean fuel a taxpayer produces at a qualifying facility and sells for qualifying purposes. The fuel must meet certain emissions standards.

Extension and modification of “green” tax credits


Several tax credits already in existence were extended and modified in the Inflation Reduction Act. They include:

Renewable Electricity Production Tax Credit (PTC) — Extends the beginning of construction deadline for certain renewable electricity production facilities through the end of 2024, as well as reduces the base amount of credit with the potential to qualify for five times that amount. It applies to facilities placed in service after 2021, and increases the credit amounts for domestic content, energy communities, and hydropower.

Energy Investment Tax (ITC) — Extends the beginning of construction deadline for some types of energy property, including qualified fuel cell property, for one year through the end of 2024. It extends the beginning of construction deadline for geothermal equipment through the end of 2034 and permits the credit for new types of energy property like energy storage technology, microgrid controller property, and qualified biogas.

Carbon Oxide Sequestration Credit — Extends and enhances carbon oxide sequestration credits for qualified industrial facilities and direct air capture facilities IF construction begins before 2033. It also lowers the minimum carbon capture requirement, and generally applies to those facilities and equipment placed in service post-2022.

Tax Credits for Biodiesel, Renewable Diesel, and Alternative Fuels — Extends these tax credits through 2024 and apply to fuel sold or used after 2021.

Second Generation Biofuel Credit — Extends tax credits to second generation biofuel through 2024 and applies to second generation biofuel production after 2021.

Nonbusiness Energy Property Credit — Extends this credit through 2023, as well as changes the credit rate to 30% for both qualified energy efficiency improvements and residential energy property expenditures. It replaces the $500 lifetime limit with a $1200 annual limit, modifies the limits for specific types of property, and modifies standards for qualified energy efficiency improvements on property placed in service after 2022.

Residential Energy Efficient Property Credit — Extends the residential energy-efficient property credit through 2034 and replaces the credit for biomass fuel property expenditures with a new credit for battery storage technology expenditures on those made after 2022.

New Energy Efficient Home Credit — Extends the business credit for contractors who manufacture or construct energy efficient homes through 2032. It applies to dwellings acquired by the contractor after 2022.

Alternative Fuel Vehicle Refueling Property Credit — Extends the tax credit through 2032 and increases the credit limit to $100,000 per item of depreciable refueling property and $1,000 per item of non-depreciable refueling property.

Advanced Energy Project Credit — Extends the competitively awarded investment tax credit for clean energy and energy efficiency manufacturing projects. It provides as much as $10 billion of new credit allocations effective in early 2023.

Increase in Energy Credit for Solar and Wind Facilities — In order to qualify, one must have a maximum net output of less than five megawatts and must be in a low-income community, on American Indian land, or part of a low-income residential building project (or low-income economic benefit project), effective in early 2023.

Reinstatement of Superfund Hazardous Substance Financing Rate — Reinstates a financing rate on crude oil and imported petroleum products at a rate of 16.4 cents per gallon through 2032.

Our perspective on the Inflation Reduction Act’s tax credits

Looking ahead, it is imperative that you are ready to capitalize on these tax credits. Getting into the weeds with some of the qualifications, however, could prove challenging, and working with a professional services firm could make all the difference in ensuring you take advantage of the credits you qualify for.

At MGO, our dedicated Tax Credits and Incentives team brings more than 30 years of experience in helping you structure your expenses in a way that will help you acquire appropriate documentation, assist in calculating and claiming credits, and maximize the amount you can receive. Our full-service firm, led by experienced CPAs and attorneys, provides a holistic approach to examining your organization and determining how you can best reach your goals.

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.

Getting Ahead of Tax Credit and Incentive IRS Issues

Recent events in the media have shone a spotlight on issues surrounding bad practices when it comes to tax credits and incentives. This increased attention is likely to result in an influx of audits by the Internal Revenue Service (IRS) as they crack down on the Research and Development (R&D) tax and the Employee Retention Tax Credit (ERTC) in the coming years.

We recently released an article detailing the red flags to look out when dealing with tax credits and incentives providers. If you think you could be at risk for future IRS issues, there is much you can do now to take a proactive approach and mitigate future negative impact. In the following, we break down steps you can take now to better understand and manage your exposure.

An overview of tax credits and incentives

Designed to encourage investment and development, job creation, growth, and certain business activities, tax credits and incentives provide an opportunity to reduce the amount of tax owed for performing certain activities. Credits and incentives are categorically different than tax deductions, which reduce the amount of taxable income.

These incentives often target desirable industries or activities like research and development, job creation for at-risk populations, and expanded growth in underdeveloped areas. When leveraged correctly, credits and incentives can be a powerful tool to funnel back resources into your organization to fuel activities you are already doing. Even more enticing, these credits can often apply retroactively if you determine you qualify for certain credits or incentives after the fact.

There are three basic types of tax credits: nonrefundable, refundable, and partially refundable. A few of the different types of tax credits pertaining to businesses in different classifications, industries, or activities performed include R&D tax credits, the employee retention tax credits, IRC Section 179D, and the work opportunity tax credit. To learn more about their eligibility rules, visit our previous article.

Understanding the risk of IRS tax audits

There is a three-year statute of limitations from the due date of the tax return or the filing date (whatever is later) for the IRS to assess your filings. That means if you think you may be exposed but escaped the IRS’ notice, you could still receive an audit notice for previous years’ returns. And if you do get audited, and the IRS determines you owe back taxes, you will get charged penalties and interest dating back to the infraction itself.

This is even more risky when considering the IRS’s extreme backlog. These IRS tax audits can sometimes take years to complete and if your credit and incentive calculations are the topic of interest, you’ll need to halt any future credit analysis until the situation is resolved. Meanwhile, you’ll be devoting crucial resources, time, and effort working with the IRS for something that yields no financial value and distracts from more conducive business activities.

Reasons to get a head-start and address issues now

Even though there is no guarantee you will get audited, you are still taking a risk if you do not address potential tax credit and incentive exposures in your organization. It may seem easy to “roll the dice” and hope the issue will remain uncovered, but it could come at a cost — especially if you are planning to make some big moves, like engaging in transaction of your business (M&A), going public, or embarking on another major transaction.

During the due diligence period of these transactions, it is almost certain any uncovered tax issues will emerge. You will likely not recover the value of these credits or remain on the hook for potential liability. Even worse, the exposure of these issues reflects negatively on your accounting and control system, potentially lowering the purchase value of your organization or undermining whatever deal you had in place prior to the due diligence. Often your transaction partners will start to question your organization’s trustworthiness, and reputation … due to something that may be no fault of your own.

So, you’ve been exposed … but haven’t received an IRS audit notice

Here is the deal: you know for certain you have been exposed, but you have not been notified by the IRS yet. You probably have a lot of questions — will you get an audit notice? Have you escaped unscathed? Do you need to address the issues preemptively, just in case? It may be overwhelming to decide how to proceed once you realize the exposure.

We suggest working with a qualified CPA firm to review your tax filings. A full-service accounting firm will review your organization holistically at a minimum rate, uncover any exposures, and deliver valuable peace of mind. If the firm does find issues, you have two options:

  • Update your credit and incentive filings moving forward.
    • While this will likely decrease the amount you can deduct, it exemplifies transparency.
  • Issue a Voluntary Disclosure (VA) if the exposure is significant and you do not have a lot of time to fix the issue.
    • Essentially, you are volunteering to correct your mistakes by recalculating the credits claimed and paying back the difference.
    • While this may sting a little, the IRS looks favorably upon organizations who are proactive to fix the issue by filing a VA and they are likely to waive any penalties or interest you would have had to pay.

You’ve received an IRS audit notice. Now what?

Well, it happened. You received an audit note from the IRS. Before you panic, here is what you need to do:

  • Start preparing your documentation right away. The sooner you have your ducks in a row, the sooner you are prepared to handle the audit.
  • Check the contract you signed with your original provider and verify if they provide controversy support services for situations like these.
    • If they do, reexamine the quality of their work. Do they have any of the red flags mentioned in this article? Could something they have done have caused the audit?
    • Consider engaging a qualified CPA firm as your new provider to handle the subsequent controversy support. Someone you trust can get you ready for any available credits and incentives moving forward, too.
  • If you used a provider that displays any red flags, you could have some leverage for a reasonable cause defense. Because the “professional” firm handled it for you and made a mistake, you could utilize a first-time penalty abatement, which means you can get relief from a penalty if you:
    • Did not previously have to file a return or if you do not have any penalties for the three years before the tax year you received a penalty;
    • Filed all currently required returns or an extension of time to file;
      and
    • Paid or have arranged to pay any tax due.
  • Verify your contract with the original provider to determine if you have any recourse to seek compensation from them. If the IRS does issue any penalties, you will want to ensure you do not have to pay.

Standalone firms vs. full-service accounting firms

Let’s say you haven’t received an IRS notice, and you do not think you are in danger of receiving one. How can you ensure you will not in the future? It comes down to choosing a firm to help you maximize the potential of these tax credits and incentives.

The bottom line: it is imperative you work with a certified public accounting (CPA) firm instead of a standalone firm. Because standalone firms often use lower-cost, less-experienced recent graduates who are not certified public accountants, there is a distinct lack of knowledge and background in the accounting fundamentals, causing you to be misled by those unequipped to help with complex tax matters. You also run the risk of being oversold benefits by aggressive firms that not only exaggerate the amount you are receiving from the tax credits and incentives, but also behave in a way that attracts IRS attention and jeopardizes your firm.

A full-service accounting firm, on the other hand, knows how to look at an organization holistically — and it has many more capabilities and professionals with experience. It looks at things through various lenses and can advise how certain positions will impact current and future tax positions. Full-service firms also likely have an in-house controversy team that has handled hundreds of audits successfully—so you will be in good hands.

Our perspective

Tax credits and incentives provide plenty of benefits you do not want to miss out on, and their often-complex application and qualification processes are reason enough to hire a professional accountant to help you maximize your returns. Unfortunately, we often see organizations placing their trust in the wrong providers and they end up suffering the consequences of an IRS audit. For many, it is simply easier and safer to cut off the relationship with the initial provider and start fresh with a professional firm you know you can trust.

At MGO, our dedicated Tax Credits and Incentives team brings more than 30 years of experience fixing these types of issues and working with the IRS to limit the damage. We provide cleanup in the event you are being audited by the IRS (or could be audited in the future), and help you identify areas where you can claim tax credits and incentives for next time. If you are concerned, our best advice is to get ahead of it with an opinion you can trust — before the IRS decides to investigate themselves.

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.

Keys to Avoiding IRS Red Flags with Tax Credits and Incentives 

Tax credits and incentives are an often underutilized, yet powerful tool to help you improve your bottom line and reinvest in your business – all while substantially reducing your tax exposure.

In recent years, a number of firms have emerged specializing in credits and incentives and building large businesses by over-promising and under-delivering these tax consulting services. While credits and incentives are enticing, they must be handled with extreme care, as the consequences of getting it wrong can be serious.

At MGO, we not only help you determine if you are eligible for these valuable tax credits and incentives, but we also perform damage control and clean-up following bad actors’ broken promises and sloppy work. We have seen firsthand the fallout from their poor performance and how it affects clients. In this article, we will help you understand what to look for in a tax credits and incentives provider and recognize and avoid IRS red flags so you can safely capitalize on these opportunities.

An overview of tax credits and incentives

Designed to encourage investment and development, job creation, growth, and certain business activities, tax credits and incentives provide an opportunity to reduce the amount of tax owed for performing certain activities. Credits and incentives are categorically different than tax deductions, which reduce the amount of taxable income.

These incentives often target desirable industries or activities like research and development, job creation for at-risk populations, and expanded growth in underdeveloped areas. When leveraged correctly, credits and incentives can be a powerful tool to funnel back resources into your organization to fuel activities you are already doing. Even more enticing, these credits can often apply retroactively if you determine you qualify for certain credits or incentives after the fact.

There are three basic types of tax credits: nonrefundable, refundable, and partially refundable. Here, we break down just a few of the different types of tax credits pertaining to businesses in different classifications, industries, or activities performed:

R&D Tax Credits

Designed to incentivize innovation, this dollar-for-dollar tax savings has both Federal and State-level implications and can save you up to 15% on qualifying activities. To claim an R&D tax credit, your company must pass a four-part test and be involved in the technical development of new or improved products or processes. This can apply to product enhancements, product development, software development, process improvements, and more.

Employee Retention Tax Credit

The ERTC was created to provide much-needed financial relief for businesses affected by the COVID-19 pandemic. With complex eligibility requirements, the refundable tax credit awards qualifying employers with a payroll tax credit of up to $26,000 per employee as an incentive to retain them on payroll through potential closures, quarantines, and other hardships. Since its rollout, the ERTC has been expanded to continue providing relief to an even larger group of employers, even retroactively (albeit with a smaller maximum amount per employee for 2021).

IRC Section 179D

This popular tax incentive gives designers, builders, and building owners the opportunity to obtain a tax deduction of up to $1.80 per square foot if they install eligible energy efficient buildings and systems that reduce the power and energy costs by 50% or more compared to the minimum standard requirements. Tenants are eligible if they make the construction changes, and the deduction can be claimed on both retrofits and new construction projects. Buildings that qualify include commercial buildings like parking garages and warehouses, government-owned buildings like universities and libraries, and apartment buildings with four stories or more.

Work Opportunity Tax Credit

A federal tax credit for employers looking to invest in American job seekers who face barriers to acquiring employment, the WOTC is claimable if the employer 1) meets their business needs, and 2) does so by hiring an employee from a WOTC targeted group (which include veterans, ex-felons, and qualified long-term unemployment recipients, among others). An employer interested in claiming this credit must verify the new hire is a member by applying and receiving a certification.

Risks associated with claiming tax credits and incentives

While there are many benefits to tax credits and incentives, there are a few risks attached to claiming them on your tax return.

One risk is exposing your organization to an IRS audit. An audit does not always mean trouble — at least, not if you are doing everything right — but having to go through the process of complying means you are devoting time and effort to something that yields no financial value, ultimately draining resources from more conducive business activities. Working with IRS representatives and organizing and submitting documentation is labor-intensive.

A significant issue to note is that if you overstate your credits, the IRS’s software may flag the subsequent higher score for the return, sparking an audit — so claim succinctly and accurately. Then, of course, there is the issue of an audit exposing issues unrelated to your tax credits, making you vulnerable to even bigger problems.

Another risk is payback. Tax credits do not have payback requirements, but some tax incentives do, and along with them come penalties for failing to pay in a timely manner. You may also then accrue interest, which can add up quickly. This negates the incentives in the first place, only causing a bigger headache.

Red flags to look for in tax credit and incentive providers

To maximize the potential of the credits, working with a certified public accounting (CPA) firm is absolutely essential. Non-CPA firms do not have to adhere to strict accounting guidelines. Additionally, they may not have the requisite experience or perspective to assess your situation holistically. A trained and licensed professional will examine your operations, uncover missed opportunities, and help you capitalize on a lower tax liability. But choosing unwisely can have major ramifications and increase your chances of being audited by the IRS.

Here are some of the most important red flags to look for when selecting a provider:

1. Standalone tax credits and incentives firm

Firms that do not utilize CPAs often use lower-cost, less-experienced recent graduates who act more in a sales-focused capacity than as an accountant. This lack of knowledge and background in accounting fundamentals can result in you being misled by someone who is not equipped to help with complex tax matters.

2. They only take contingency-based payments

Stay away from firms that take 25-35% of the savings recouped in fees. This is a sales approach that is commission-based by maximizing your credit, and you can assume they are being incentivized by these fees to over-promise — which means they will almost certainly underdeliver. Another negative? If an auditor sees your tax provider takes contingency-based payments, they will automatically assume they are acting in bad faith and then comb through your past credits to verify their accuracy. And they can look through your last three tax returns, making you even more vulnerable.

3. They market a team of “experts” with IRS or legislative backgrounds

Look out for firms that tout their employees as experts who have specialized backgrounds tailored to helping you get your tax credits. Whether or not they actually have IRS or legislative backgrounds, at the end of the day, a firm’s work should speak for itself. There is no need for flashy marketing collateral that boasts expertise without proof.

4. They bundle tax work with controversy and audit support

A combo deal is great when it is a burger, fries, and a Coke, but when it comes to your tax work, you should be looking for individualized support. Firms that package tax work with controversy and audit support are trying to catch your eye, saying, “Look at everything we can offer you!” If the tax assessment they provide is strong, these packages are not necessary and you’re paying for something you shouldn’t need in the first place.

5. There is a history (often public) of a toxic work culture

Do not be afraid to Google the firm you are considering. If several articles pop up detailing sordid work environments that include sexual harassment; lawsuits against former clients and employees; and obviously fake Glassdoor reviews, you can assume the firm itself is a red flag.

6. Targeting of less-sophisticated businesses as clients

Be aware of firms that go after mid-market and below businesses that are less “sophisticated” than other potential clients. They will usually peddle less-than-legitimate sales tactics, like promising a Porsche or other luxury vehicle, as an incentive to lure these businesses into hiring them. Red flag firms know less refined companies will not catch on to these “scummy” offers because they do not have the experience to know any better.

7. They employ a “cut-and-paste” approach

Many tax credits, like the R&D tax credit, require year-by-year claims, and in order to qualify, your tax return must depict work calculated and substantiated independent of years past. If a firm utilizes the “cut-and-paste” approach from the year before, this indicates sloppy work — and a red flag indicating you should choose a tax provider willing to perform the work necessary year after year without cutting corners and risking an IRS audit.

Keys to selecting a reliable tax credits and incentives provider

Now that you know what to avoid, here are some things a tax provider should have in order to best assist you with tax credits:

1. They are a full-service accounting firm.

A full-service accounting firm knows how to look at an organization holistically, providing the services necessary simply by peering beneath the hood. They will know how things work, and we are happy to tell you how to optimize — including how tax credits can be used or monetized within your business. Look for a firm that provides tax, audit, controversy, and more services, all under one roof.

2. They prioritize the security of your information.

A good tax provider knows your information is sacred and will treat it as such. While cybersecurity risks are never fully eliminated, stick with a firm with SOC or equivalent data protection. This way you are much less likely to have your sensitive financial information exposed in the event of a data breach.

3. They employ quality control

Look for a firm that utilizes multiple levels of internal review, so you know that the work you are getting has been vetted and approved by a strong system of quality control — all with your best interests in mind. When you are dealing with something like tax credits, you cannot take the easy way out or cut corners, so finding a provider that maintains control strength is crucial.

4. They never make a decision for you

While you want to trust your tax provider, at the end of the day, whatever decisions your organization makes regarding your tax credits affects you and only you. A reliable firm will not pressure you into questionable decisions. They will empower you through thorough education so you can feel confident making the right choice yourself.

5. They charge you a fixed rate based on hours worked

Unlike a red-flag firm, the firm you want to hire only charges a fixed rate based on the hours they work for you, rather than contingency-based charges taken from the recoup. This indicates they are focused on the outcome for you, not what that return means for them. A firm like MGO will perform an initial fact-find to determine eligibility and then make a conservative estimate, so you know exactly what to expect.

6. They follow a professional approach

Professional means qualified, and a good firm provides services from specialists with real certifications and strong backgrounds in the industry. Look for a tax provider that regularly publishes news, articles, and thought leadership detailing emerging opportunities and risks. The team you hire is embarking on a journey with you — and to create opportunities, gain competitive advantages, and see your hard work culminate in rewards, you want to work with someone you can trust: someone proactive and well-informed.

Our perspective on ethics in tax credits and incentives

Tax credits and incentives provide plenty of benefits you do not want to miss out on — and their often-complex application and qualification processes are reason enough to hire a tax provider to help you maximize your returns. However, it is important to be aware that not just any tax provider will do. Be aware of red flags and know what specifically to look for in a firm.

At MGO, our dedicated Tax Credits and Incentives team brings over 30 years of experience. We will take a holistic view of your operations and processes to identify areas where you may be able to claim tax credits and incentives.

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.

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 Taxpayers to Benefit from Expanded SALT-CAP Workaround, Corporate Breaks

On February 9, 2022, Governor Gavin Newsom signed SB 113, enacting several taxpayer-friendly updates for 2022. Specifically, the state estimates $6.1 billion in savings to taxpayers due to increases in the amount of potential Pass-through Entity Elective Tax (PEET) credits and who can claim those credits; the removal of the suspension on NOLs and R&D credits for taxpayers for the 2022 tax year; retroactive conformity to certain federal relief provisions for tax year 2020; and increased film industry tax credits.

Specifically, under SB 113:

  • Businesses will be able to fully utilize NOLs and R&D credits for the tax year 2022.
  • There will be expanded eligibility and application of California’s Pass-through Entity Elective Tax (PEET) through several new provisions:
    • Qualified net income now includes guaranteed payments.
    • MGO Insight: This will significantly increase the value of the PEET for owners/operators of pass-through service providers.
    • Individual taxpayers can apply the PEET state credit against tentative minimum tax.
      • MGO Insight: By removing the 7% tentative minimum tax threshold, more of the PEET credit can be used in a given year, resulting in less carryovers and less concerns about electing into the PEET in consecutive years.
    • Passthrough entities with owners that are partnerships are now eligible to make the PEET election.
    • SMLLCs that are pass-through entity owners can now claim the PEET credit.
    • MGO Insight: By removing the limitation on partnership owners and SMLLCs, more pass-through businesses will be able to benefit from the PEET including lower-tier partnerships.
    • New credit usage ordering rules increase the benefit for taxpayers that claim the Other State Tax (OST) Credit.
      • MGO Insight: OST credits are now specifically utilized before PEET credits, which should significantly reduce credit leakage for taxpayers with income in multiple states. (Prior to this, there was ambiguity on the ordering of credits and concerns that certain OST credits would not be able to be fully utilized.)
    • The law also includes some beneficial retroactive relief:
      • California will fully conform to the federal treatment of Restaurant Revitalization grants, retroactive to the 2020 tax year, and partially conform to the federal exclusion of Shuttered Venue Operator grants, retroactive to the 2020 tax year.
      • Producers of qualified motion pictures benefit from increased flexibility to use sales & use tax credits against income taxes and sales & use tax; the prohibition period for this benefit has been shortened to only the 2020 and 2021 tax years. In addition, certain producers will have the ability to obtain an immediate refund for the 2021 tax year on sales & use tax in excess of the $5 million cap.

In addition to the tax benefits signed into law by SB 113, Gov. Newsom also signed SB 114, which creates COVID leave rules for 2022 that should benefit California workers:

  • Employers with more than 25 employees will be required to provide up to 80 hours of COVID-19-related paid supplemental sick and family leave for the period January 1, 2022 (retroactive) through September 30, 2022. No additional tax benefits or credits have been provided in relation to this additional requirement.

With higher-than-anticipated tax revenues during the COVID pandemic, California improved the availability of various tax benefits, resulting in significant potential tax savings for California taxpayers in 2022 and later tax years that should help boost the state’s economic recovery.

Here come the child tax credit payments: What you need to know

The first advance payments under the temporarily expanded child tax credit (CTC) will begin to arrive for nearly 39 million households in mid-July 2021 — unless, that is, they opt out. Most eligible families won’t need to do anything to receive the payments, but you need to understand the implications and why advance payments might not make sense for your household even if you qualify for them.

Understanding the CTC, then and now

The CTC was established in 1997. Unlike a deduction, which reduces taxable income, a credit reduces the amount of taxes you owe on a dollar-for-dollar basis. While some credits are limited by the amount of your tax liability, others, like the CTC, are refundable, which means that even taxpayers with no federal tax liability can benefit. Historically, the CTC has been only partially refundable in that the refundable amount was limited to $1,400.

The American Rescue Plan Act (ARPA) significantly expands the credit, albeit only for 2021. Specifically, the ARPA boosts the CTC from $2,000 to $3,000 per child ages six through 17, with credits of $3,600 for each child under age six. Plus, the CTC is now fully refundable. It also affords taxpayers the opportunity to take advantage of half of the benefit in 2021, rather than waiting until tax time in 2022.

Note, however, that there are limits to eligibility. The $2,000 credit is subject to a phaseout when income exceeds $400,000 for joint filers and $200,000 for other filers, and this continues under the ARPA — for the first $2,000. A separate phaseout applies for the increased amount: $75,000 for single filers, $112,500 for heads of household and $150,000 for joint filers.

Receiving advance payments

The ARPA directed the U.S. Treasury Department to begin making monthly payments of half of the credit in July 2021, with the remaining half to be claimed in 2022 on 2021 tax returns. For example, a household that’s eligible for a $3,600 CTC will receive $1,800 ($300 in six monthly payments) in 2021 and would claim the balance of $1,800 on the 2021 return. The payments will be made on the 15th of each month through December 2021, except for August, when they’ll be paid on August 13.

To qualify for advance payments, you (and your spouse, if filing jointly) must have:

  • Filed a 2019 or 2020 tax return that claims the CTC or provided the IRS with information in 2020 to claim a stimulus payment,
  • A main home in the United States for more than half of the year or file a joint return with a spouse who has a U.S. home for more than half of the year,
  • A qualifying child who’s under age 18 at the end of 2021 and who has a valid Social Security number, and
  • Earned less than the applicable income limit.

If the IRS has your bank information, you’ll receive the payments as direct deposits.

Because the IRS will base the payments on your 2020 tax return (or, if not yet available, your 2019 return), it’s possible that you could receive excess payments over the amount you actually qualify for in 2021. In that case — unlike excess stimulus payments — you’ll be required to repay the excess. The IRS will either deduct the amount from your 2021 refund or add it to the amount you owe.

Opting out

The IRS will automatically enroll taxpayers for advance payments, but it’s also providing an online portal at irs.gov where taxpayers can opt out. You might consider opting out if, for example, you were near the income limits in 2019 or 2020, expect to earn more in 2021, and want to avoid excess payments. Be aware that couples filing jointly must both opt out, otherwise the spouse who doesn’t will receive half of the joint payment.

It’s not only a change in expected income that could lead to excess payments; it’s also a change in the number of dependents. For example, divorced couples who share joint custody may alternate the years in which they claim their children as dependents for CTC purposes. If 2021 is your former spouse’s year, consider opting out (your former spouse won’t receive the advance payments based on his or her 2020 tax return but, if eligible, can claim the credit on the 2021 return). Parents of children who will turn age 18 in 2021 also should consider opting out.
The deadline to opt out of the first payment was June 28, 2021, but you can still opt out for future payments.

Estimating, and reducing, 2021 income

When deciding whether to opt out, you can estimate your 2021 income using multiple methods. You could simply look at your modified adjusted gross income on your most recent tax return. You also could project your income for the year and reduce it by the standard deduction (for 2021, it’s $12,550 for individual taxpayers and $25,100 for married couples filing jointly).

If you estimate that your income will be near the eligibility threshold but want to receive the advance payments, you can take measures to reduce your income before year end. You might, for example, increase your 401(k) plan contributions (the contribution limit for 2021 is $19,500). Taxpayers with high deductible health plans and health savings accounts (HSAs) can similarly reduce their income with contributions. The HSA contribution limits for 2021 are $3,600 for individual health plans and $7,200 for family health plans.

Beyond 2021

The expanded CTC is available only for 2021 as of now. President Biden has indicated that he’d like to extend it through at least 2025, and some Democratic lawmakers hope to make it permanent. But it’ll be challenging to pass a bill to make either of these proposals happen. We’ll keep you informed about any developments that could affect your tax planning.