The old adage “the only thing constant is change” has never been more applicable. For many, this last year has felt like a race to put out one fire after another. When it comes to accounting for your construction company, getting back into a proactive mindset can help set you up for success down the line. There are upcoming changes to the way companies will need to account for leases, which will have an impact on those in the construction industry. While it isn’t at our doorstep yet, early awareness and adoption can lead to less headache in the future.
In February 2016, the Financial Accounting Standards Board (FASB) issued a new standard for accounting for leases (ASC 842), which must be adopted by all non-public companies for the calendar year ending in 2022. One of the biggest changes coming with the new leasing standard requires the recognition of right of use assets (ROU assets) and the corresponding lease liabilities on the balance sheet for many of the leases previously classified as an operating lease. Furthermore, much like how companies are required to recognize revenue based on performance obligations within their long-term contracts with clients under the new revenue recognition standards, companies will now be required to identify individual lease components (i.e. ROU assets) within a single lease contract.
Admittedly, this is an oversimplification of the new leasing standard and adopting ASC 842 will take time and analysis with your accountant. For now, we’ve highlighted two ways your construction company may be impacted by ASC 842.
Bonding and Debt Covenants
The FASB estimates that approximately $3 trillion dollars of ROU assets and lease payment liabilities are going to be added to US company balance sheets as a result of adopting ASC 842. As you begin this exercise in your own company, it is going to be imperative that you review your bonding and debt covenants and determine whether the increased reported leverage will negatively affect any key metrics or potentially cause covenant violations.
While operating lease liabilities will be presented outside of traditional debt, if you believe that violations to your bonding or debt covenants are likely to occur as a result of adopting ASC 842, we recommend that you begin having these discussions with lenders and bonding agencies now.
Income Tax Considerations
While the FASB can issue new standards for financial statements, they have no authority over the IRS or the tax code. For many, this means there are going to be additional reconciliation items between a company’s financial statements and its tax returns. These reconciliation items are referred to as deferred tax assets and deferred tax liabilities.
Once a company implements ASC 842, it will need to establish a process to account for these deferred tax assets and deferred tax liabilities. As you begin reevaluating your leases under the new leasing standard, we recommend taking the opportunity to also reassess your current tax treatment of leases as well as your data collection and process.
The Time is Now
For some, this new standard might actually be favorable and provide an opportunity to lower tax obligations. This may require a change in the method that you account for leases on your tax returns. However, the IRS considers a taxpayer’s treatment of leases to be a method of accounting, and any changes to existing methods may require IRS consent. Beginning these conversations with your accountant, lenders, and bonding agencies now can alleviate future year end surprises.
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August 22, 2023The U.S. Department of Labor (DOL) has issued its long-awaited Final Rule to revise the Davis Bacon Act (DBA) regulations. The Final Rule will be effective 60 days after the date of publication in the Federal Register, which currently is scheduled for August 23rd.
While we are still analyzing all the regulatory changes in the 812 pages Final Rule, it is clear (like the DOL’s Notice of Proposed Rulemaking (NPRM) issued March 18, 2022) that the Final Rule contains only a few changes that will be beneficial to contractors, while most of the changes heavily favor workers and unions and enhance the DOL’s enforcement tools.
Examples of key changes in the latter category include:
Changing the way wage and fringe rates are developed in wage determinations to favor adoption of union rates which will result in higher wage and benefits
Broadening the definition of “site of the work” to include locations where “significant portions” of a project (such as prefabricated materials manufacturing facilities) are produced
Expanding DBA coverage of truck drivers and material suppliers
Making DBA contract clauses and applicable wage determinations effective by “operation of law” even where a contracting agency fails in include them in a contract or funding agreement
Requiring DOL approval of vacation and holiday plans for fringe credit
Requiring contractors to consent to cross withholding for back wages owed on contracts held by different but related legal entities (those controlled by the same controlling shareholder or entities that are joint venturers or partners on a federal contract)
Expanding record-keeping obligations
These changes in the DBA regulation will impact not only Davis Bacon Act contracts, but also the DBA requirements in over 70 statutes (DBA Related Acts). As a result, federal agencies provide funding assistance for construction projects primarily through direct funding, grants, loans, loan guarantees, or insurance.
Also impacted, at least in part, will be the prevailing wages requirements of the Inflation Reduction Act, which provides enhanced tax credits for certain clean energy projects in exchange for compliance with prevailing wage and apprenticeship requirements.
We anticipate multiple legal challenges to the Final Rule by construction trade associations and other interested parties, and that these court filings will be accompanied by requests for temporary injunctions of the Final Rule.
Construction contractors and other impacted parties should start gearing up now for compliance with the Final Rule.
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May 18, 2023by Drew Mansell, CPA
Introduction
The Inflation Reduction Act (IRA) increased the potential benefit of several energy efficiency tax incentives. These include the Section 179D energy efficient commercial buildings deduction and the Section 45L new energy efficient home credit. A more detailed description of these incentives is below. These changes warrant a renewed look at these incentives by companies looking to build or remodel real property.
The Inflation Reduction Act’s stated goals include reducing carbon emissions and encouraging domestic energy production and manufacturing. The law introduces and expands existing tax incentives available for those investing in clean energy projects. It also increased the time horizon for these incentives, in many cases by up to 10 years.
Importance of Extension
Many tax credits and incentives available have limited time horizons, often requiring annual renewal by congress. This has caused uncertainty about their benefits, especially in industries where projects typically take multiple years to complete. With the extension of these incentives for the next ten years, that uncertainty is eliminated and developers can build these incentives into project costs for the foreseeable future.
Tax Incentives to Watch
New Energy Efficient Home Credit (IRC Sec. 45L)A $2,000 credit per single family residential housing unit. Available to multifamily developers, investors, and construction companies that build energy efficient properties sold or leased through Dec. 31, 2022. Increased to $2,500 per unit under Energy Star and $5,000 per unit under the Zero Energy Ready Homes program from Jan. 1, 2023, through Dec. 31, 2032.Energy Efficient Commercial Buildings Deduction (IRC Sec. 179D)Deduction available to building owners for installing qualifying energy systems. The deduction can be up to $1.88 per sq. ft. through Dec. 31, 2022 and increases up to $5.00 per sq. ft. beginning in 2023 if the project meets prevailing wage, and apprenticeship requirements. See below.
The Feasibility Study
Real estate and construction companies should discuss these incentives with their tax advisors who can connect them with experts to determine project feasibility. These professionals, usually engineers, evaluate a company’s projects and consider incentives that are likely applicable. The study can be used to make businesses decisions about next steps.
A feasibility analysis can follow five simple steps:
Consider the project’s goals. Look into intended investments your company plans to make for its building project.
Split investments up into distinct groups. Section off relevant investments into qualifying and nonqualifying categories.
Match investments to potential IRA incentives. Compare the list of planned investments with the list of available tax incentives and determine overlap.
Conduct a cost-benefit analysis of implementing a tax incentive. Calculate the degree of investment required to achieve eligibility and the return on investment the tax incentives would offer.
Identify requirements to substantiate claims to incentives. Pull together the documentation required to prove existing or intended adherence to tax incentive requirements.
Prevailing Wage & Apprenticeship Requirements
A key hurdle to qualify for these incentives are the prevailing wage and apprenticeship requirements. Companies must pay workers wages and benefits that meets standards for their geographical area set by the government. A certain portion of the labor on each project must also be performed by certified apprentices. It is important to understand these requirements before beginning a project. A feasibility study could include an analysis of these requirements and whether adjustments would be required to meet them.
Conclusion
These incentives have often been overlooked by taxpayers and practitioners alike due to their relatively minor potential benefits and complex rules to navigate. However, after the “remodel” of these incentives in the IRA, they deserve another look. We recommend reaching out to Harris or your preferred advisor if you think a project in your pipeline could qualify for one of these incentives.
Full Magazine Issue here: https://www.idahoagc.org/blog/spring-2023-buildingidaho
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December 9, 2022by Kevin Hatrick
Small business owners are always looking for ways to protect against catastrophic risks while improving cash flows. One tool that can help you do both is using a captive insurance company.
A captive insurance company is a small insurance company created by a business to help hedge against specific risks – generally risks that a company cannot protect against using available insurance, such as supply-chain interruption or key employee loss. It is an increasingly popular tool for risk management, currently being used by over 90% of Fortune 1000 companies. By creating and using a captive insurance company, a business essentially pays insurance premiums to a company they own. The insurance company then keeps that money available – usually in low risk investment vehicles – to be used to protect against the specified risks if and when they occur.There are three main advantages of captive insurance:
Increased protection – Captive insurance companies allow businesses to be ready for business disruptions that would previously have gone uninsured. Also, because captive insurance inherently offers financial rewards for effectively controlling losses, safety and loss control get a higher level of attention.
Improved profitability – There are a number of ways in which captive insurance companies help businesses increase profitability.a. They provide the opportunity to capture investment income from the reserves.b. They reduce the expense factors associated with commercial insurance.c. They minimize the impact of specific losses and risks.
Tax savings – Captive insurance companies can elect to be taxed only on its investment income and not on the insurance premiums it receives. This allows for potential short-term and long-term tax savings opportunities.
If you want to minimize risks while simultaneously improving cash flows, protect your business against disruptions, increase profitability, and increase your company’s tax savings; using a captive insurance company can be extremely beneficial. If you think this may be an option for your company, consult with your tax professional for more guidance.
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November 11, 2022As we approach the new year, it is time for individuals to review their 2022 and 2023 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2022 Year-End Tax Planning for Individuals:
Highlights from this guide:
Individual Tax Planning Highlights with tax brackets
Timing of Income and Deductions
Long-Term Capital Gains with rate brackets
Retirement Plan Contributions
Foreign Earned Income Exclusion
Kiddie Tax
Alternative Minimum Tax
Limitations on Deduction of State and Local Taxes ( Salt Limitations)
Charitable Contributions
Net Operating Losses and Excess Busoness Loss Limitation
Estate and Gift Taxes [...]
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September 23, 2022by Drew Mansell, CPA – Harris CPAs
The Tax Cuts and Jobs Act (TCJA), passed in 2017, was the most significant amendment to the Internal Revenue Code since the 1980s. The majority of the changes have already gone in to effect, and taxpayers and practitioners alike are familiar with most of them, as we’re four tax years in to the law’s implementation. However, a set of amendments seldom discussed until now are the amendments to Internal Revenue Code Section 174. These changes go in to effect for tax years beginning after 12/31/21 and may impact some construction and engineering firms with R&D.
Section 174 defines which expenditures are qualifying research and development expenditures associated with claiming an R&D Tax Credit under Section 41 on form 6765. These costs include costs incurred related to the development or improvement of a product, including costs associated with improving the production process, and costs incurred for internally developed software.
Starting in 2022, these costs can no longer be expensed in the year incurred. The amendments to Section 174 require these costs to be amortized over 5 years for costs incurred domestically, and 15 years for costs incurred outside the US. These costs must be capitalized as of the midpoint of the tax year when the expenses were incurred. This means the 60 or 180 month amortization period will begin July 1st for most taxpayers. A key point about the changes to Section 174 is that even if a taxpayer is not eligible to take the R&D tax credit under Section 41, the requirement to capitalize Section 174 costs still applies.
A requirement to file an Accounting Method Change (Form 3115) may exist for taxpayers who have historically expensed Section 174 costs in the year incurred. Companies impacted by the above changes should contact Harris prior to the end of 2022 to ensure these costs are being accurately captured, as well as to discuss any potential 3115 filing requirement and materiality of book to tax differences.
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July 20, 2022by Alison Suko
Do you own an interest in an S Corporation, Partnership, or Limited Liability Company taxed as a Partnership? If it operates in Idaho, it may qualify as an Affected Business Entity (ABE). Many businesses taxed as S Corporations or Partnerships, currently pay distributions to their owners in order to pay the taxes on the business taxable income. Because distributions are not deductible from taxable income, the taxes are paid by the source, but there is no tax benefit.
On April 15, 2021, Governor Little signed House Bill 317, now Idaho Code Section 63-3026B “Affected Business Entities – State and Local Taxation Treatment.” This new law allows certain pass through entities like those mentioned above to pay Idaho state income taxes on the owner’s share of the business income at a flat 6.5% rate. This tax is deductible on the pass through owner’s federal tax return. It is not deductible on the owner’s Idaho tax return, but instead is treated as a credit toward the taxes due by the owner.
An annual election must be made on the pass through entity’s original, timely-filed Idaho tax return. Once the election is made, it is irrevocable for that tax year. The election must be signed by all members of the electing entity or by an officer, manager, or member with authorization to make these decision on behalf of all other owners.
Payments can be made using the Idaho State Tax Commission’s QuickPay, a business’ existing TAP account, or by mailing in a check with Idaho Form 41ES. The entity’s tax must be paid prior to the filing of the owner’s tax return in order to be applied to a return filed for the same year. ABE payments are deductible in the year they are paid, so a payment made before December 31, 2022 will be deducted on the owners 2022 tax return. If the amount paid is more than the owner’s Idaho tax liability, the excess is refunded.
If you own an interest in a pass through entity and are looking for ways to lower your federal income tax bill, you may want to consider whether an ABE election would work for you. Contact your tax professional to see if this is an option for you and how much tax could be saved.
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June 27, 2022by Margaret Flowers
Are you holding onto an investment property and looking at the property values climbing? Have you considered if this is the time to sell the property? Do the taxes on the gain from the schedule have you sweating buckets? Have you considered the possibility of doing a 1031 exchange to cash in the gains and avoid the taxes on the gains, but realized that you would have to buy a new property?
If you have looked at possibly selling your existing investment property, you may have considered doing a tax-free exchange under section 1031 to avoid the tax on the large capital gains on the property (and the potential recapture of the depreciation you have claimed over the years). In researching the rules for the 1031 exchange, you may have come across the requirement to identify the replacement property within 45 days of the close date of the sale. In this real estate market, properties are selling quickly upon listing so to identify the replacement property and actually close on that property are getting extremely difficult. You can identify multiple properties to help protect your 1031 transaction, but once you identify more than three properties, there are rules about the market value of the identified properties exceeding the value of the property you want to sell. This can create a stressful environment or can be downright prohibitive from successfully executing a 1031 exchange.
Another issue to consider is if you are considering selling an investment property because you no longer want to be involved in the management of said property, you are looking to retire or reduce the amount of time spent on the property. In order to have a successful 1031 exchange you need a replacement investment property which will create the need to manage the property, thereby undermining your goals in selling your original property.
Enter the Delaware Statutory Trust (DST). Since 2004, the IRS has allowed investors to do a 1031 exchange from an investment property into a DST and continue to defer the gain. The Delaware Statutory Trust is a fractional ownership in an packaged investment of real estate properties. The Companies that offer these have several options depending on your desired investment term and investment goals. The properties generally are managed by the companies offering the investment so you can step back into a more passive role while maintaining the integrity of the 1031 transaction and maintaining cash flow from the properties. Because the packages are generally established, the identification requirement of the replacement property is able to be done quickly so that you can meet the rules required under section 1031.
If you have been debating doing a 1031 exchange but thought that the market forces currently at play were prohibiting you from successfully completing a 1031 transaction, you may want to consider looking into the Delaware Statutory Trust. You will want to consult your tax professional to see what the implications of doing so are and how much the tax savings would be to see if this is something you should consider.
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June 15, 2022The Internal Revenue Service on June, 9th announced an increase in the optional standard mileage rate for the final 6 months of 2022. Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes.
For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022.
While fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.
Midyear increases in the optional mileage rates are rare, the last time the IRS made such an increase was in 2011.
Mileage Rate Changes
PurposeRates 1/1 through 6/30/22Rates 7/1 through 12/31/22Business58.562.5Medical/Moving1822Charitable1414
Link to the full article on the IRS website: https://www.irs.gov/newsroom/irs-increases-mileage-rate-for-remainder-of-2022
Link to Optional Standard Mileage Rates IRS Announcement: https://www.irs.gov/pub/irs-drop/a-22-13.pdf
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June 6, 2022by David Hegstrom
Unless you have been living under a rock for the last year, you have noticed costs in the Treasure Valley are rising rapidly. Everything from gas, materials, and equipment prices in the construction industry, to your bill at the grocery store are being affected. And now, for a variety of reasons, the prices for your accounting fees and services are following suit. But what are the major factors contributing to this escalation and what can you do to help reduce costs?
RISING COST FACTORS
Inflation: You have probably already seen the impact of inflation affecting multiple aspects of your business. According to the U.S. Bureau of Labor Statistics, the annual inflation rate for the United States for the 12 months ending December 2021 was seven percent. This is the largest inflation rate for a singlecalendar year in nearly 40 years.
The Great Resignation: Employees are leaving their jobs at an unprecedented rate across all industries, or leaving their local jobs to work remotely for companies in states with higher wages. The effect of this trend is compounded by the fact that the accounting profession has one of the most aged workforces in the nation. The American Institute of CPAs (AICPA) estimates that over 75 percent of current CPAs will retire in the next 10 to 15 years.
Changes to the Tax Code: Every year there are amendments to the tax code. Typically these are small changes and the additional time required to prepare a tax return would be modest at best. Then in late 2017, the Trump administration passed the Tax Cuts and Jobs Act (TCJA), which was effective for the calendar year 2018. It was a massive overhaul to the US Tax Code. Enter the 2019 tax season; by most estimates, the TCJA increased tax preparation time by 30 percent. And since that time CPA firms havebeen in hyperdrive due to the CARES Act, Employee Retention Tax Credit, PPP Loans, and all the amended tax returns that come with an ever-changing regulatory landscape. IRS Backlog: If you have received a letter from the IRS, you are not alone. The IRS has been understaffed and underfunded for decades. Right now the IRS is sitting on literal trailer-loads of notification responses and other correspondence. On February 10, 2022, the IRS determined that they would stop sending automated notifications for most tax related issues until their current backlog has been “sufficiently” resolved. It is important to note, however, the IRS has not suspended assessing fees and penalties; they are simply not communicating the fees and penalties they are assessing and effectively creating more backlog for later.
Other Regulatory Updates: The GAAP framework, the standardized rules required when presenting financial information for audits, review, and compilations, has adopted some major updates over the lastfew years with more changes on the way (i.e. financial reporting leasing standards which must be adopted for 2022). And as we already talked about, more changes equals more time required for your CPA. To sum it all up, costs are on the rise because of higher operating costs, more work, increasing complexity in tax codes, and less staff to do it all.
SO WHAT CAN BE DONE?
Now that we have identified why fees are on the rise, lets discuss what can be done to reduce costs.
Interim Work: If you are required to obtain an audit, review, or compilation ask your CPA if there is work that can be done outside of the typical CPA “busy season”. This may allow you to complete a portion of the engagement at a time of the year when there is additional staff availability and flexibility. This is evenmore important if you are required to adopt a new ASU (Accounting Standards Update). Make a plan, identify a timeline, and then execute.
Regular Communication: The old process of only speaking to your CPA once a year during tax season doesn’t work anymore. Aside from the increasing regulatory hurdles for businesses, you may also be missing out on time-sensitive tax planning opportunities. So instead of waiting until the end of the year to bring in that old file full of receipts, begin consulting with your CPA in real time as financial situations change and events occur that financially impact your organization.
Systems Upgrade: When was the last time you took a hard look at your accounting procedures to findefficiencies? There are many new tools that can increase a company’s accounting capability while also reducing the time and administrative burden of maintaining accurate financial records. Having your CPA clean up your books at the end of the year only increases your costs. Have an open conversation with them about what you can improve year-round to reduce the year-end burden. Keep in mind your CPA most likely also works with many other construction companies and is a great resource when looking fornew software to improve efficiencies, or for other accounting best practices. With all the changes we have seen the last few years, one thing can be sure it’s unlikely we will ever operate our businesses like we did pre-2019. And that’s okay. Your CPA isn’t the same professional that they were three years ago either, and have had to adapt to a vastly changing industry. It’s time to find a better way of managing our businesses,of being more intentional, and of shaping the environment we all find ourselves in.
This article can be found on The Idaho AGC Building Idaho Magazine
Link to full magazine: https://www.idahoagc.org/sites/default/files/u-23/SP2022%20buildingIdaho.pdf
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May 18, 2022WHICH METHOD OF ACCOUNTING IS RIGHT FOR YOUR CONSTRUCTION COMPANY?
by Megan McDonald
For construction companies and contractors, there are more options available for accounting methods than other business entities due to the nature of construction activities and the timing of profit at different points during a construction contract. Methods include cash and accrual, and more specifically, accrual methods include percentage of completion and completed contract method. But which method is right for your company? The answer to that will mostly depend on your size in revenue, but in this article, we will highlight some of the important aspects of each.
Cash Method
Under the cash method, revenue is recognized upon receipt and expenses are recognized when paid. The cash method can be used by a small contractor for both short-term and long-term contracts as long as the average gross receipts do not exceed $5 million and sales revenue from merchandise does not exceed 10 to 15 percent of the gross income. Many small construction companies opt to use the cash method for their short-term contracts and an accrual method for their long term contracts. There is a rule in cash basis that is often overlooked- if a business receives a check at the end of the year but does not deposit it until the next year, the business must report the income in the first year, when the money changes hands.
Accrual Method
Under the accrual method, income is recognized when earned and expenses when incurred. If a contractor is unable to use the cash method based on gross receipts, they must choose between the percentage of completion method or the completed contract method of accrual accounting.
Percentage of Completion Method
If a contractor’s average annual gross receipts exceed $10 million then the Internal Revenue Service will consider that a large contractor. Large contractors must use the percentage of completion method, which is a type of accrual accounting. The percentage of completion method involves estimating the finish date of the contract and recognizing income based on the work completed. The contractor will need to have an idea of when the contract will be completed to determine a percentage of how much was completed at year end when it comes to tax time. Using this method, the contractor reports income earned as well as expenses related to those jobs rather than deferring those. The main tax advantage to the percentage of completion method is that it allows you to report your expenses each year against the income rather than all at once as the completed contract method. According to the IRS, this method is preferred by most banks and bonding companies.
Completed Contract Method
Completed contract method allows taxpayers to defer the taxes in the year in which the contract is completed. However, the expenses directly related to the jobs are also deferred until the end when the contract is completed. Completed contract is an available option to smaller contractors (under $10 million in average gross receipts over the last 3 years) or if the project has at least 80 percent of costs arising from construction of residential homes and buildings with no more than four dwelling units. The downside of the completed contract method is a contractor could end up completing several jobs in one year which could result in an unexpected jump in the contractor’s tax bracket.
As a taxpayer in the construction industry, there are various accounting methods to choose from that will have an impact on tax-related cash flow over the life of your business. It is important for contractors to be aware of the methods and together with their tax advisors, determine which method best suits their business need and growth goals.
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February 7, 2022This year we sift through the noise of headlines to understand what is actually happening in the economy. Steve Scranton, CFA from Washington Trust Bank dives into the economic outlook for the Treasure Valley and also insight into Supply Chain issues around the world. We concluded with a tax update by our very own Robert Shappee, CPA, CCIFP reviewing recent legislation, and what strategies you might be able to take advantage of in 2022. Below is a video of our full presentation. [...]
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December 3, 2021As the U.S. entered 2021, many assumed that newly elected President Joe Biden along with Democratic majorities in the House and Senate would swiftly enact tax increases on both corporations and individuals to pay for the cost of proposed new infrastructure and social spending plans, potentially using the budget reconciliation process to do so. Since then, various versions of tax and spending measures have been negotiated and debated by members of Congress and the White House. As 2021 heads to a close, tax increases are still expected, but the timing and content of final changes are still not certain.
On November 5, 2021, the U.S. House of Representatives delayed voting on its version of the Build Back Better Act (H.R. 5376), a package of social spending measures funded by tax increases. The delay allows members more time to review the budget impact of the provisions in the bill. Some of the legislation’s major tax proposals, which mainly target large profitable corporations and high-income individuals, include:
A 15% corporate alternative minimum tax on companies that report financial statement profits of over $1 billion.
A 1% surtax on corporate stock buybacks.
A 15% country-by-country minimum tax on foreign profits of U.S. corporations.
A 5% surtax on individual incomes over $10 million, an additional 3% surtax on incomes over $25 million and expansion of the 3.8% Net Investment Income Tax.
At the time of writing, the House had not yet voted on the Build Back Better Act. Once the House votes, the legislation will be taken up by the Senate. If enacted in its current form, the legislation would generally be effective for taxable years beginning after December 31, 2021; however, many of the corporate and international proposals affecting businesses would apply for taxable years beginning after December 31, 2022 – i.e., they would be deferred for one year.
The information contained in this article is based on tax proposals as of November 4, 2021 and is subject to change based on final legislation. Businesses should continue to track the latest tax proposals to understand the impacts of possible new legislation, particularly when engaging in tax planning. Despite the delays and uncertainty around exactly what tax changes final legislation will contain, there are actions that businesses can consider taking to minimize their tax liabilities.
Consider tax accounting method changes and strategic tax elections
The 2017 Tax Cuts and Jobs Act (TCJA) lowered the regular corporate tax rate to 21% and eliminated the corporate alternative minimum tax beginning in 2018. The current version of the proposed Build Back Better Act would leave the 21% regular corporate tax rate unchanged but, beginning in 2023, would create a new 15% corporate alternative minimum tax on the adjusted financial statement income of corporations with such income over $1 billion. Companies with adjusted financial statement income over $1 billion, therefore, should take into account the proposed 15% corporate alternative minimum tax when considering 2021 tax planning actions that could affect future years.
Companies that want to reduce their 2021 tax liability should consider traditional tax accounting method changes, tax elections and other actions for 2021 to defer recognizing income to a later taxable year and accelerate tax deductions to an earlier taxable year, including the following:
Changing from recognizing certain advance payments (e.g., upfront payments for goods, services, gift cards, use of intellectual property, sale or license of software) in the year of receipt to recognizing a portion in the following taxable year.
Changing from the overall accrual to the overall cash method of accounting.
Changing from capitalizing certain prepaid expenses (e.g., insurance premiums, warranty service contracts, taxes, government permits and licenses, software maintenance) to deducting when paid using the “12-month rule.”
Deducting eligible accrued compensation liabilities (such as bonuses and severance payments) that are paid within 2.5 months of year end.
Accelerating deductions of liabilities such as warranty costs, rebates, allowances and product returns under the “recurring item exception.”
Purchasing qualifying property and equipment before the end of 2021 to take advantage of the 100% bonus depreciation provisions and the Section 179 expensing rules.
Deducting “catch-up” depreciation (including bonus depreciation, if applicable) by changing to shorter recovery periods or changing from non-depreciable to depreciable.
Optimizing the amount of uniform capitalization costs capitalized to ending inventory, including changing to simplified methods available under Section 263A.
Electing to fully deduct (rather than capitalize and amortize) qualifying research and experimental (R&E) expenses attributable to new R&E programs or projects that began in 2021. Similar planning may apply to the deductibility of software development costs attributable to new software projects that began in 2021. (Note that capitalization and amortization of R&E expenditures is required beginning in 2022, although the proposed Build Back Better Act would delay the effective date until after 2025).
Electing to write-off 70% of success-based fees paid or incurred in 2021 in connection with certain acquisitive transactions under Rev. Proc. 2011-29.
Electing the de minimis safe harbor to deduct small-dollar expenses for the acquisition or production of property that would otherwise be capitalizable under general rules.
Is “reverse” planning better for your situation?
Depending on their facts and circumstances, some businesses may instead want to accelerate taxable income into 2021 if, for example, they believe tax rates will increase in the near future or they want to optimize usage of NOLs. These businesses may want to consider “reverse” planning strategies, such as:
Implementing a variety of “reverse” tax accounting method changes.
Selling and leasing back appreciated property before the end of 2021, creating gain that is taxed currently offset by future deductions of lease expense, being careful that the transaction is not recharacterized as a financing transaction.
Accelerating taxable capital gain into 2021.
Electing out of the installment sale method for installment sales closing in 2021.
Delaying payments of liabilities whose deduction is based on when the amount is paid, so that the payment is deductible in 2022 (e.g., paying year-end bonuses after the 2.5-month rule).
Write-off bad debts and worthless stock
Given the economic challenges brought on by the COVID-19 pandemic, businesses should evaluate whether losses may be claimed on their 2021 returns related to worthless assets such as receivables, property, 80% owned subsidiaries or other investments.
Bad debts can be wholly or partially written off for tax purposes. A partial write-off requires a conforming reduction of the debt on the books of the taxpayer; a complete write-off requires demonstration that the debt is wholly uncollectible as of the end of the year.
Losses related to worthless, damaged or abandoned property can generate ordinary losses for specific assets.
Businesses should consider claiming losses for investments in insolvent subsidiaries that are at least 80% owned and for certain investments in insolvent entities taxed as partnerships (also see Partnerships and S corporations, below).
Certain losses attributable to COVID-19 may be eligible for an election under Section 165(i) to be claimed on the preceding taxable year’s return, possibly reducing income and tax in the earlier year or creating an NOL that may be carried back to a year with a higher tax rate.
Maximize interest expense deductions
The TCJA significantly expanded Section 163(j) to impose a limitation on business interest expense of many taxpayers, with exceptions for small businesses (those with three-year average annual gross receipts not exceeding $26 million ($27 million for 2022), electing real property trades or businesses, electing farming businesses and certain utilities.
The deduction limit is based on 30% of adjusted taxable income. The amount of interest expense that exceeds the limitation is carried over indefinitely.
Beginning with 2022 taxable years, taxpayers will no longer be permitted to add back deductions for depreciation, amortization and depletion in arriving at adjusted taxable income (the principal component of the limitation).
The Build Back Better Act proposes to modify the rules with respect to business interest expense paid or incurred by partnerships and S corporations (see Partnerships and S corporations, below).
Maximize tax benefits of NOLs
Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers. Businesses should make sure they maximize the tax benefits of their NOLs.
Make sure the business has filed carryback claims for all permitted NOL carrybacks. The CARES Act allows taxpayers with losses to carry those losses back up to five years when the tax rates were higher. Taxpayers can still file for “tentative” refunds of NOLs originating in 2020 within 12 months from the end of the taxable year (by December 31, 2021 for calendar year filers) and can file refund claims for 2018 or 2019 NOL carrybacks on timely filed amended returns.
Corporations should monitor their equity movements to avoid a Section 382 ownership change that could limit annual NOL deductions.
Losses of pass-throughs entities must meet certain requirements to be deductible at the partner or S corporation owner level (see Partnerships and S corporations, below).
Defer tax on capital gains
Tax planning for capital gains should consider not only current and future tax rates, but also the potential deferral period, short and long-term cash needs, possible alternative uses of funds and other factors.
Noncorporate shareholders are eligible for exclusion of gain on dispositions of Qualified Small Business Stock (QSBS). The Build Back Better Act would limit the gain exclusion to 50% for sales or exchanges of QSBS occurring after September 13, 2021 for high-income individuals, subject to a binding contract exception. For other sales, businesses should consider potential long-term deferral strategies, including:
Reinvesting capital gains in Qualified Opportunity Zones.
Reinvesting proceeds from sales of real property in other “like-kind” real property.
Selling shares of a privately held company to an Employee Stock Ownership Plan.
Businesses engaging in reverse planning strategies (see Is “reverse” planning better for your situation? above) may instead want to move capital gain income into 2021 by accelerating transactions (if feasible) or, for installment sales, electing out of the installment method.
Claim available tax credits
The U.S. offers a variety of tax credits and other incentives to encourage employment and investment, often in targeted industries or areas such as innovation and technology, renewable energy and low-income or distressed communities. Many states and localities also offer tax incentives. Businesses should make sure they are claiming all available tax credits for 2021 and begin exploring new tax credit opportunities for 2022.
The Employee Retention Credit (ERC) is a refundable payroll tax credit for qualifying employers that have been significantly impacted by COVID-19. Employers that received a Paycheck Protection Program (PPP) loan can claim the ERC but the same wages cannot be used for both programs. The Infrastructure Investment and Jobs Act signed by President Biden on November 15, 2021, retroactively ends the ERC on September 30, 2021, for most employers.
Businesses that incur expenses related to qualified research and development (R&D) activities are eligible for the federal R&D credit.
Taxpayers that reinvest capital gains in Qualified Opportunity Zones may be able to defer the federal tax due on the capital gains. An additional 10% gain exclusion also may apply if the investment is made by December 31, 2021. The investment must be made within a certain period after the disposition giving rise to the gain.
The New Markets Tax Credit Program provides federally funded tax credits for approved investments in low-income communities that are made through certified “Community Development Entities.”
Other incentives for employers include the Work Opportunity Tax Credit, the Federal Empowerment Zone Credit, the Indian Employment Credit and credits for paid family and medical leave (FMLA).
There are several federal tax benefits available for investments to promote energy efficiency and sustainability initiatives. In addition, the Build Back Better Act proposes to extend and enhance certain green energy credits as well as introduce a variety of new incentives. The proposals also would introduce the ability for taxpayers to elect cash payments in lieu of certain credits and impose prevailing wage and apprenticeship requirements in the determination of certain credit amounts.
Partnerships and S corporations
The Build Back Better Act contains various tax proposals that would affect partnerships, S corporations and their owners. Planning opportunities and other considerations for these taxpayers include the following:
Taxpayers with unused passive activity losses attributable to partnership or S corporation interests may want to consider disposing of the interest to utilize the loss in 2021.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (within certain limitations based on the taxpayer’s taxable income, whether the taxpayer is engaged in a service-type trade or business, the amount of W-2 wages paid by the business and the unadjusted basis of certain property held by the business). Planning opportunities may be available to maximize this deduction.
Certain requirements must be met for losses of pass-through entities to be deductible by a partner or S corporation shareholder. In addition, an individual’s excess business losses are subject to overall limitations. There may be steps that pass-through owners can take before the end of 2021 to maximize their loss deductions. The Build Back Better Act would make the excess business loss limitation permanent (the limitation is currently scheduled to expire for taxable years beginning on or after January 1, 2026) and change the manner in which the carryover of excess business losses may be used in subsequent years.
Under current rules, the abandonment or worthlessness of a partnership interest may generate an ordinary deduction (instead of a capital loss) in cases where no partnership liabilities are allocated to the interest. Under the Build Back Better Act, the abandonment or worthlessness of a partnership interest would generate a capital loss regardless of partnership liability allocations, effective for taxable years beginning after December 31, 2021. Taxpayers should consider an abandonment of a partnership interest in 2021 to be able to claim an ordinary deduction.
Following enactment of the TCJA, deductibility of expenses incurred by investment funds are treated as “investment expenses”—and therefore are limited at the individual investor level— if the fund does not operate an active trade or business (i.e., if the fund’s only activities are investment activities). To avoid the investment expense limitation, consideration should be given as to whether a particular fund’s activities are so closely connected to the operations of its portfolio companies that the fund itself should be viewed as operating an active trade or business.
Under current rules, gains allocated to carried interests in investment funds are treated as long-term capital gains only if the investment property has been held for more than three years. Investment funds should consider holding the property for more than three years prior to sale to qualify for reduced long-term capital gains rates. Although the Build Back Better Act currently does not propose changes to the carried interest rules, an earlier draft of the bill would have extended the current three-year property holding period to five years. Additionally, there are multiple bills in the Senate that, if enacted, would seek to tax all carry allocations at ordinary income rates.
Under the Build Back Better Act, essentially all pass-through income of high-income owners that is not subject to self-employment tax would be subject to the 3.8% Net Investment Income Tax (NIIT). This means that pass-through income and gains on sales of assets allocable to partnership and S corporation owners would incur NIIT, even if the owner actively participates in the business. Additionally, taxpayers that currently utilize a state law limited partnership to avoid self-employment taxes on the distributive shares of active “limited partners” would instead be subject to the 3.8% NIIT. If enacted, this proposal would be effective for taxable years beginning after December 31, 2021. Taxpayers should consider accelerating income and planned dispositions of business assets into 2021 to avoid the possible additional tax.
The Build Back Better Act proposes to modify the rules with respect to business interest expense incurred by partnerships and S corporations effective for taxable years beginning after December 31, 2022. Under the proposed bill, the Section 163(j) limitation with respect to business interest expense would be applied at the partner and S corporation shareholder level. Currently, the business interest expense limitation is applied at the entity level (also see Maximize interest expense deductions, above).
Various states have enacted PTE tax elections that seek a workaround to the federal personal income tax limitation on the deduction of state taxes for individual owners of pass-through entities. See State pass-through entity tax elections, below.
Planning for international operations
The Build Back Better Act proposes substantial changes to the existing U.S. international taxation of non-U.S. income beginning as early as 2022. These changes include, but are not limited to, the following:
Imposing additional interest expense limitations on international financial reporting groups.
Modifying the rules for global intangible low-taxed income (GILTI), including calculating GILTI and the corresponding foreign tax credits (FTCs) on a country-by-country basis, allowing country specific NOL carryforwards for one taxable year and reducing the QBAI reduction to 5%.
Modifying the existing FTC rules for all remaining categories to be calculated on a country-by-country basis.
Modifying the rules for Subpart F, foreign derived intangible income (FDII) and the base erosion anti-abuse tax (BEAT).
Imposing new limits on the applicability of the Section 245A dividends received deduction (DRD) by removing the application of the DRD rules to non-controlled foreign corporations (CFCs).
Modifying the rules under Section 250 to remove the taxable income limitation as well as reduce the GILTI and FDII deductions to 28.5% and 24.8%, respectively.
Businesses with international operations should gain an understanding of the impacts of these proposals on their tax profile by modeling the potential changes and considering opportunities to utilize the favorable aspects of the existing cross-border rules to mitigate the detrimental impacts, including:
Considering mechanisms/methods to accelerate foreign source income (e.g., prepaying royalties) and associated foreign income taxes to maximize use of the existing FTC regime and increase current FDII benefits.
Optimizing offshore repatriation and associated offshore treasury aspects while minimizing repatriation costs (e.g., previously taxed earnings and profits and basis amounts, withholding taxes, local reserve restrictions, Sections 965 and 245A, etc.).
Accelerating dividends from non-CFC 10% owned foreign corporations to maximize use of the 100% DRD currently available.
Utilizing asset step-up planning in low-taxed CFCs to utilize existing current year excess FTCs in the GILTI category for other CFCs in different jurisdictions.
Considering legal entity restructuring to maximize the use of foreign taxes paid in jurisdictions with less than a 16% current tax rate to maximize the GILTI FTC profile of the company.
If currently in NOLs, considering methods to defer income or accelerate deductions to minimize detrimental impacts of existing Section 250 deduction taxable income limitations in favor of the proposed changes that will allow a full Section 250 deduction without a taxable income limitation.
In combination with the OECD Pillar One/Two advancements coupled with U.S. tax legislation, reviewing the transfer pricing and value chain structure of the organization to consider ways to adapt to such changes and minimize the future effective tax rate of the organization.
Review transfer pricing compliance
Businesses with international operations should review their cross-border transactions among affiliates for compliance with relevant country transfer pricing rules and documentation requirements. They should also ensure that actual intercompany transactions and prices are consistent with internal transfer pricing policies and intercompany agreements, as well as make sure the transactions are properly reflected in each party’s books and records and year-end tax calculations. Businesses should be able to demonstrate to tax authorities that transactions are priced on an arm’s-length basis and that the pricing is properly supported and documented. Penalties may be imposed for non-compliance. Areas to consider include:
Have changes in business models, supply chains or profitability (including changes due to the effects of COVID-19) affected arm’s length transfer pricing outcomes and support? These changes and their effects should be supported before year end and documented contemporaneously.
Have all cross-border transactions been identified, priced and properly documented, including transactions resulting from merger and acquisition activities (as well as internal reorganizations)?
Do you know which entity owns intellectual property (IP), where it is located and who is benefitting from it? Businesses must evaluate their IP assets — both self-developed and acquired through transactions — to ensure compliance with local country transfer pricing rules and to optimize IP management strategies.
If transfer pricing adjustments need to be made, they should be done before year end, and for any intercompany transactions involving the sale of tangible goods, coordinated with customs valuations.
Multinational businesses should begin to monitor and model the potential effects of the recent agreement among OECD countries on a two pillar framework that addresses distribution of profits among countries and imposes a 15% global minimum tax.
Considerations for employers
Employers should consider the following issues as they close out 2021 and head into 2022:
Employers have until the extended due date of their 2021 federal income tax return to retroactively establish a qualified retirement plan and fund the plan for 2021.
Contributions made to a qualified retirement plan by the extended due date of the 2021 federal income tax return may be deductible for 2021; contributions made after this date are deductible for 2022.
The amount of any PPP loan forgiveness is excluded from the federal gross income of the business, and qualifying expenses for which the loan proceeds were received are deductible.
The CARES Act permitted employers to defer payment of the employer portion of Social Security (6.2%) payroll tax liabilities that would have been due from March 27 through December 31, 2020. Employers are reminded that half of the deferred amount must be paid by December 31, 2021 (the other half must be paid by December 31, 2022). Notice CP256-V is not required to make the required payment.
Employers should ensure that common fringe benefits are properly included in employees’ and, if applicable, 2% S corporation shareholders’ taxable wages. Partners should not be issued W-2s.
Publicly traded corporations may not deduct compensation of “covered employees” — CEO, CFO and generally the three next highest compensated executive officers — that exceeds $1 million per year. Effective for taxable years beginning after December 31, 2026, the American Rescue Plan Act of 2021 expands covered employees to include five highest paid employees. Unlike the current rules, these five additional employees are not required to be officers.
Generally, for calendar year accrual basis taxpayers, accrued bonuses must be fixed and determinable by year end and paid within 2.5 months of year end (by March 15, 2022) for the bonus to be deductible in 2021. However, the bonus compensation must be paid before the end of 2021 if it is paid by a Personal Service Corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.
Businesses should assess the tax impacts of their mobile workforce. Potential impacts include the establishment of a corporate tax presence in the state or foreign country where the employee works; dual tax residency for the employee; and payroll tax, benefits, and transfer pricing issues.
State and local taxes
Businesses should monitor the tax rules in the states in which they operate or make sales. Taxpayers that cross state borders—even virtually—should review state nexus and other policies to understand their compliance obligations, identify ways to minimize their state tax liabilities and eliminate any state tax exposure. The following are some of the state-specific areas taxpayers should consider when planning for their tax liabilities in 2021 and 2022:
Does the state conform to federal tax rules (including recent federal legislation) or decouple from them? Not all states follow federal tax rules. (Note that states do not necessarily follow the federal treatment of PPP loans. See Considerations for employers, above.)
Has the business claimed all state NOL and state tax credit carrybacks and carryforwards? Most states apply their own NOL/credit computation and carryback/forward provisions. Has the business considered how these differ from federal and the effect on its state taxable income and deductions?
Has the business amended any federal returns? Businesses should make sure state amended returns are filed on a timely basis to report the federal changes. If a federal amended return is filed, amended state returns may still be required even there is no change to state taxable income or deductions.
Has a state adopted economic nexus for income tax purposes, enacted NOL deduction suspensions or limitations, increased rates or suspended or eliminated some tax credit and incentive programs to deal with lack of revenues due to COVID-19 economic issues?
The majority of states now impose single-sales factor apportionment formulas and require market-based sourcing for sales of services and licenses/sales of intangibles using disparate sourcing methodologies. Has the business recently examined whether its multistate apportionment of income is consistent with or the effect of this trend?
Consider the state and local tax treatment of merger, acquisition and disposition transactions, and do not forget that internal reorganizations of existing structures also have state tax impacts. There are many state-specific considerations when analyzing the tax effects of transactions.
Is the business claiming all available state and local tax credits, e.g., for research activities, employment or investment?
For businesses selling remotely and that have been protected by P.L. 86-272 from state income taxes in the past, how is the business responding to changing state interpretations of those protections with respect to businesses engaged in internet-based activities?
Has the business considered the state tax impacts of its mobile workforce? Most states that provided temporary nexus and/or withholding relief relating to teleworking employees lifted those orders during 2021 (also see Considerations for employers, above).
Has the state introduced (or is it considering introducing) a tax on digital services? The definition of digital services can potentially be very broad and fact specific. Taxpayers should understand the various state proposals and plan for potential impacts.
Remote retailers, marketplace sellers and marketplace facilitators (i.e., marketplace providers) should be sure they are in compliance with state sales and use tax laws and marketplace facilitator rules.
Assessed property tax values typically lag behind market values. Consider challenging your property tax assessment.
State pass-through entity elections
The TCJA introduced a $10,000 limit for individuals with respect to federal itemized deductions for state and local taxes paid during the year ($5,000 for married individuals filing separately). At least 20 states have enacted potential workarounds to this deduction limitation for owners of pass-through entities, by allowing a pass-through entity to make an election (PTE tax election) to be taxed at the entity level. PTE tax elections present state and federal tax issues for partners and shareholders. Before making an election, care needs to be exercised to avoid state tax traps, especially for nonresident owners, that could exceed any federal tax savings. (Note that the Build Back Better Act proposes to increase the state and local tax deduction limitation for individuals to $80,000 ($40,000 for married individuals filing separately) retroactive to taxable years beginning after December 31, 2020. In addition, the Senate has begun working on a proposal that would completely lift the deduction cap subject to income limitations.)
Accounting for income taxes – ASC 740 considerations
The financial year-end close can present unique and challenging issues for tax departments. Further complicating matters is pending U.S. tax legislation that, if enacted by the end of the calendar year, will need to be accounted for in 2021. To avoid surprises, tax professionals can begin now to prepare for the year-end close:
Evaluate the effectiveness of year-end tax accounting close processes and consider modifications to processes that are not ideal. Update work programs and train personnel, making sure all team members understand roles, responsibilities, deliverables and expected timing. Communication is especially critical in a virtual close.
Know where there is pending tax legislation and be prepared to account for the tax effects of legislation that is “enacted” before year end. Whether legislation is considered enacted for purposes of ASC 740 depends on the legislative process in the particular jurisdiction.
Document whether and to what extent a valuation allowance should be recorded against deferred tax assets in accordance with ASC 740. Depending on the company’s situation, this process can be complex and time consuming and may require scheduling deferred tax assets and liabilities, preparing estimates of future taxable income and evaluating available tax planning strategies.
Determine and document the tax accounting effects of business combinations, dispositions and other unique transactions.
Review the intra-period tax allocation rules to ensure that income tax expense/(benefit) is correctly recorded in the financial statements. Depending on a company’s activities, income tax expense/(benefit) could be recorded in continuing operations as well as other areas of the financial statements.
Evaluate existing and new uncertain tax positions and update supporting documentation.
Make sure tax account reconciliations are current and provide sufficient detail to prove the year-over-year change in tax account balances.
Understand required tax footnote disclosures and build the preparation of relevant documentation and schedules into the year-end close process.
Begin Planning for the Future
Future tax planning will depend on final passage of the proposed Build Back Better Act and precisely what tax changes the final legislation contains. Regardless of legislation, businesses should consider actions that will put them on the best path forward for 2022 and beyond. Business can begin now to:
Reevaluate choice of entity decisions while considering alternative legal entity structures to minimize total tax liability and enterprise risk.
Evaluate global value chain and cross-border transactions to optimize transfer pricing and minimize global tax liabilities.
Review available tax credits and incentives for relevancy to leverage within applicable business lines.
Consider the benefits of an ESOP as an exit or liquidity strategy, which can provide tax benefits for both owners and the company.
Perform a cost segregation study with respect to investments in buildings or renovation of real property to accelerate taxable deductions, and identify other discretionary incentives to reduce or defer various taxes.
Perform a state-by-state analysis to ensure the business is properly charging sales taxes on taxable items, but not exempt or non-taxable items, and to determine whether the business needs to self-remit use taxes on any taxable purchases (including digital products or services).
Evaluate possible co-sourcing or outsourcing arrangements to assist with priority projects as part of an overall tax function transformation. [...]
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December 3, 2021As we approach year end, now is the time for individuals, business owners, and family offices to review their 2021 and 2022 tax situations and identify opportunities for reducing, deferring, or accelerating tax obligations. Areas potentially impacted by proposed tax legislation still in play should be reviewed, as well as applicable opportunities and relief granted under legislation enacted during the past year.
The information contained within this article is based on tax proposals as presented in the November 3, 2021, version of the Build Back Better Act. Our guidance is subject to change when final legislation is passed. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.
Individual Tax Planning Highlights
2021 Federal Income Tax Rate Brackets
2022 Federal Income Tax Rate Brackets
Proposed Surcharge on High-Income Individuals, Estates and Trusts
The draft Build Back Better Act released on November 3, 2021 would impose a 5% surcharge on modified adjusted gross income that exceeds $5 million for married individuals filing separately, $200,000 for estates and trusts and $10 million for all other individuals. An additional 3% surcharge would be imposed on modified adjusted gross income in excess of $12.5 million for married individuals filing separately, $500,000 for estates and trusts and $25 million for all other individuals. The proposal would be effective for taxable years beginning after December 31, 2021 (i.e., beginning in 2022).
While keeping the proposed surcharges in mind, taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2021 and 2022. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2021 to 2022 will produce a one-year tax deferral and accelerating deductions from 2022 to 2021 will lower the 2021 income tax liability.
Actions to consider that may result in a reduction or deferral of taxes include:
Delaying closing capital gain transactions until after year end or structuring 2021 transactions as installment sales so that gain is deferred past 2021 (also see Long Term Capital Gains, below).
Considering whether to trigger capital losses before the end of 2021 to offset 2021 capital gains.
Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
Deferring commission income by closing sales in early 2022 instead of late 2021.
Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2021 (subject to AGI limitations).
Evaluating whether non-business bad debts are worthless by the end of 2021 and should be recognized as a short-term capital loss.
Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years.
On the other hand, taxpayers that will be in a higher tax bracket in 2022 or that would be subject to the proposed 2022 surcharges may want to consider potential ways to move taxable income from 2022 into 2021, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2022 taxes include:
Accelerating capital gains into 2021 or deferring capital losses until 2022.
Electing out of the installment sale method for 2021 installment sales.
Deferring deductions such as large charitable contributions to 2022.
Long-Term Capital Gains
The long-term capital gains rates for 2021 and 2022 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax.
2021 Long-Term Capital Gains Rate Brackets
2022 Long-Term Capital Gains Rate Brackets
Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains:
Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate.
Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones.
Investing in, and holding, “qualified small business stock” for at least five years. (Note that the November 3 draft of the Build Back Better Act would limit the 100% and 75% exclusion available for the sale of qualified small business stock for dispositions after September 13, 2021.)
Donating appreciated property to a qualified charity to avoid long term capital gains tax (also see Charitable Contributions, below).
Net Investment Income Tax
An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. For 2021, net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.
The November 3 version of the Build Back Better Act would broaden the application of the NIIT. Under the proposed legislation, the NIIT would apply to all income earned by high income taxpayers unless such income is otherwise subject to self-employment or payroll tax. For example, high income pass-through entity owners would be subject to the NIIT on their distributive share income and gain that is not subject to self-employment tax. In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider the following tax planning to minimize their NIIT liabilities:
Deferring net investment income for the year.
Accelerating into 2021 income from pass-through entities that would be subject to the expanded definition of net investment income under the proposed tax legislation.
Social Security Tax
The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $142,800 for 2021 and $147,000 for 2022. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.
Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax.
Long-Term Care Insurance and Services
Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum deduction amount is determined by an individual’s age. The following table sets forth the deductible limits for 2021 and 2022 (the limitations are per person, not per return):
Retirement Plan Contributions
Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer’s age.
The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions). For 2022, these limits are $20,500 and $27,000, respectively.
The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72.
Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA.
The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2021 is $58,000. The maximum SEP contribution for 2022 is $61,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).
2021 could be the final opportunity to convert non-Roth after-tax savings in qualified plans and IRAs to Roth accounts if legislation passes in its current form. Proposed legislation would prohibit all taxpayers from funding Roth IRAs or designated Roth accounts with after-tax contributions starting in 2022, and high-income taxpayers from converting retirement accounts attributable to pre-tax or deductible contributions to Roths starting in 2032.
Proposed legislation would require wealthy savers of all ages to substantially draw down retirement balances that exceed $10 million after December 31, 2028, with potential income tax payments on the distributions. As account balances approach the mandatory distribution level, extra consideration should be given before making an annual contribution.
Foreign Earned Income Exclusion
The foreign earned income exclusion is $108,700 in 2021, to be increased to $112,000 in 2022.
Alternative Minimum Tax
A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2021 are $73,600 for unmarried individuals and individuals claiming head of household status, $114,600 for married individuals filing jointly and surviving spouses, $57,300 for married individuals filing separately and $25,700 for estates and trusts. For 2022, those amounts are $75,900 for unmarried individuals and individuals claiming the head of household status, $118,100 for married individuals filing jointly and surviving spouses, $59,050 for married individuals filing separately and $26,500 for estates and trusts.
Kiddie Tax
The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate.
Limitation on Deductions of State and Local Taxes (SALT Limitation)
For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017 and before January 1, 2026. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases.
The November 3 draft of the Build Back Better Act would extend the TCJA SALT deduction limitation through 2031 and increase the deduction limitation amount to $72,500 ($32,250 for estates, trusts and married individuals filing separately). An amendment currently on the table proposes increasing the deduction limitation amount to $80,000 ($40,000 for estates, trusts and married individuals filing separately). The proposal would be effective for taxable years beginning after December 31, 2020, therefore applying to the 2021 calendar year.
Charitable Contributions
The Taxpayer Certainty and Disaster Relief Act of 2020 extended the temporary suspension of the AGI limitation on certain qualifying cash contributions to publicly supported charities under the CARES Act. As a result, individual taxpayers are permitted to take a charitable contribution deduction for qualifying cash contributions made in 2021 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for non-operating private foundations and 60% of AGI for donor advised funds. The temporary suspension of the AGI limitation on qualifying cash contributions will no longer apply to contributions made in 2022. Contributions made in 2022 will be subject to a 60% AGI limitation. Tax planning around charitable contributions may include:
Maximizing 2021 cash charitable contributions to qualified charities to take advantage of the 100% AGI limitation.
Deferring large charitable contributions to 2022 if the taxpayer would be subject to the proposed individual surcharge tax.
Creating and funding a private foundation, donor advised fund or charitable remainder trust.
Donating appreciated property to a qualified charity to avoid long term capital gains tax.
Estate and Gift Taxes
The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:
Making annual exclusion gifts.
Making larger gifts to the next generation, either outright or in trust.
Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).
Net Operating Losses
The CARES Act permitted individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The unused portion of such losses was eligible to be carried forward indefinitely and without limitation. Net operating losses generated beginning in 2021 are subject to the TCJA rules that limit carryforwards to 80% of taxable income and do not permit losses to be carried back.
Excess Business Loss Limitation
A non-corporate taxpayer may deduct net business losses of up to $262,000 ($524,000 for joint filers) in 2021. The limitation is $270,000 ($540,000 for joint filers) for 2022. The November 3 draft of the Build Back Better Act would make permanent the excess business loss provisions originally set to expire December 31, 2025. The proposed legislation would limit excess business losses to $500,000 for joint fliers ($250,000 for all other taxpayers) and treat any excess as a deduction attributable to a taxpayer’s trades or businesses when computing excess business loss in the subsequent year. [...]
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November 12, 2021Harris CPAs has announced a merger with Deagle Ames, LLC and Ataraxis Accounting and Advisory, Chtd of Twin Falls, Idaho effective October 16, 2021. The mergers add a total of 22 professionals to the Harris CPAs team, and a new office location in Twin Falls.
Deagle Ames, LLC offers tax planning and preparation, advisory and accounting services and has worked side by side with their business owners to help them stay competitive and profitable for nearly 65 years from two office in Twin Falls and Buhl. “This merger provided a unique opportunity for us to expand our service offerings to our clients. Their core values strongly mirror our own and we are excited to be a part of their continuous growth,” said Pam McClain, managing partner of Deagle Ames. Pam and her team of 12 other professionals remain in their current office locations in Twin Falls on 5th Ave S and in Buhl on Main St.
Ataraxis Accounting and Advisory Services, Chtd is located in Twin Falls and provides tax planning and preparation, advisory and accounting services. They have an established reputation for quality service and deep client relationships in the area. “We are enthusiastic to continue the high level of service we have provided our clients for nearly 50 years,” said Lisa Donnelley, Managing Partner at Ataraxis. “Joining the team at Harris CPAs will allow us to take advantage of their advanced technology in service delivery and provide our clients additional technical resources.” Lisa and her team of 7 other professionals have relocated to the new Harris location at 161 5th Ave S, Suite 200 in the historic downtown Twin Falls.
Harris CPAs has been a leading provider of assurance, tax, accounting, and advisory services in Idaho since 1996 with additional offices in Meridian, Boise and Coeur d’Alene. They serve clients throughout the United States and in all stages of the business cycle. The merger also provides Harris CPAs with a new competitive advantage in the agriculture industry.
A ribbon cutting with the Twin Falls Chamber of Commerce will take place on December 2, 2021 at 161 5th Ave S, Suite 200, Twin Falls, ID 83301, followed by a welcoming reception.
For more information, please contact Tara Davis, Marketing Manager for Harris CPAs at (208) 333-8965 or taradavis@harriscpas.com. [...]
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October 11, 2021The construction industry took a brutal hit when the COVID-19 pandemic drove millions of construction sites to a screeching halt. For some, projects resumed quickly — however, skyrocketing material costs and worldwide supply chain disruptions continue to affect virtually every employer across the industry. Luckily, the IRS issued welcomed relief for employers that kept employees on their payroll despite the hardships of the pandemic. In a labor-heavy field, the Employee Retention Credit (ERC) could offer significant benefits for many employers across the construction industry.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) was created by the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020. Between sweeping lockdowns and strict government mandates, the ERC was designed as an incentive for businesses to keep employees on their payroll during the pandemic. As COVID-19 continued to wreak havoc well into 2021, the IRS extended the ERC through the end of 2021 as part of the American Rescue Plan Act.
Who Qualifies?
As an industry widely impacted by COVID-19, most construction businesses have a pretty good chance of reaping the benefits of the ERC. However, determining the extent of that benefit can get a little complicated due to varying rules based on the year in which you qualify as an eligible employer.
On the most basic level, an eligible employer must have experienced at least one of the following two scenarios:
The business shut down operations (either entirely or partially) due to government mandates or reduced business.
The business experienced a significant quarterly revenue decrease compared to the same quarter in 2019. For 2020, that is 50% compared to the same quarter in 2019, and for 2021 it is 20% compared to the same quarter in 2019.
It’s worth noting that the ERC did not initially allow for employers to obtain both a Payroll Protection Program (PPP) Loan in addition to claiming the ERC. While modifications to the original CARES Act now allow all eligible employers to claim the ERC regardless of receiving a PPP Loan, the same wages cannot be used for both PPP loan forgiveness and the ERC.
What’s the Benefit?
This part of the equation depends on the calendar year of eligibility and the average number of full-time employees in 2019. Keep in mind that the IRS considers a full-time employee to be one that worked at least 120 hours in a month or averaged 30 hours per week each month.
2020 Credits:
Businesses that averaged 100 or fewer full-time employees may claim up to 50% of all wages and health insurance benefits paid to employees up to $10,000 ($5,000) per employee for 2020.
Businesses that averaged more than 100 average full-time employees can only claim the wages and health insurance benefits paid to an employee not providing service due to pandemic-related circumstances.
2021 Credits: To reach more businesses, the employee threshold was increased from 100 to 500 average full-time employees beginning in the 2021 calendar.
Businesses that averaged 500 or fewer full-time employees in 2021 may receive up to 70% of the first $10,000 of qualified wages paid per full-time employee per quarter. This could add up to a whopping $28,000 per employee.
The Bottom Line
Despite the lingering effects of COVID-19 in the construction world, the ERC offers a shimmer of hope to many businesses in need of a financial boost. With few restrictions, you could use this extra cash for anything from equipment updates to promotions and marketing campaigns. Talk to your accountant about how you can take advantage of this credit for your construction company.
By David Hegstrom – Harris CPAs
Construction & Engineering Page [...]
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September 22, 2021Some businesses may not be aware of the tax credits offered by the Internal Revenue Service. For construction clients, there are a broad range of construction activities which qualify for the credits, from research and development to building green and energy efficiency. For all industries, there are credits for employers as well, including the work opportunity tax credit and the employee retention credit. This article identifies several of those tax credits and gives a brief overview of each. To learn more about these credits and others including proposed credits for the future, please contact us. – Ann Stratton, Harris CPAs
Tax credit programs provide opportunities to reduce tax expense, increase after-tax income and improve cash flow. The federal government offers a variety of tax credits and other incentives to encourage employment and investment, often in targeted industries or areas such as innovation and technology, renewable energy, low-income communities and others. Many states and localities offer their own tax incentive programs.
Taxpayers that are looking for ways to reduce their tax bill and boost their bottom line may still be able to take advantage of federal tax credits or incentive programs in 2021. In some cases, taxpayers also may still be able to claim benefits for prior years.
Federal tax credits and incentives to consider include:
Employee Retention Credit
R&D credit
Incentives for investment in low-income communities
Energy efficiency and sustainability incentives
Other credits for employers
American Jobs Plan
Employee retention creditThe employee retention credit (ERC) is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a “significant” reduction in gross receipts as compared to 2019. Businesses may use ERCs to reduce federal payroll tax deposits, including deposits of employee FICA and income tax withholding.
Eligible employers may claim a credit of up to $7,000 per employee in each quarter of 2021 (eligible start-upbusinesses can claim up to $35,000 per employee per quarter).
For 2020, the annual per-employee credit is limited to $10,000.
Businesses that have obtained a loan under the Payroll Protection Program (PPP) may also claim the ERC, provided that ERC wages are not also used for determining the amount of their PPP loan forgiveness.
Employers should take steps now to make sure they are claiming all of the ERCs to which they are entitled. Businesses that were eligible for but did not claim the ERC in 2020 may be able to file amended payroll tax returns to claim 2020 benefits. Importantly, planning may be needed prior to filing PPP loan forgiveness applications to ensure maximum benefits of both the ERC and PPP programs. BDO’s ERC resource hub contains more information on how to qualify for, calculate and claim ERC benefits. Also, be sure to review the update of guidance issued in April 2021 by the IRS—see BDO’s article IRS Issues Guidance for Claiming Employee Retention Credit in 2021.
R&D creditBusinesses in any industry are eligible for the federal R&D credit provided they incur expenses related to qualified R&D activities. Both in-house and contract research expenditures can qualify. Special rules apply for start-ups and qualified small businesses, which may be able to claim a credit of up to $250,000 against the employer portion of federal payroll taxes. Many states also offer their own R&D credits. R&D credits can reduce taxes by as much as 9% of qualified spending for federal taxes and as much as 40% in some states.
Incentives for investment in low-income communities qualified opportunity zonesQualified opportunity zones (QOZs) present an opportunity for investors to defer (and potentially reduce) the federal tax due on certain capital gains. To qualify, a taxpayer must invest the capital gain in property or businesses located inside a QOZ, or in a “qualified opportunity fund” (QOF), shortly following the completed transaction that gave rise to the gain. (QOFs are investment vehicles that invest at least 90% of their capital in QOZ properties and businesses.) There are substantial tax benefits for investors:
Tax deferral on capital gains until the earlier of the disposition of the investment in the QOZ/QOF (or other inclusion event), or December 31, 2026;
Ten percent reduction of the deferred tax on the original gain when the investment in the QOZ/QOF is made by December 31, 2021 and is held for at least five years; and
Exemption from tax on post-acquisition appreciation of the QOZ/QOF investment provided the investment is held for at least 10 years and is sold by December 31, 2047.
New markets tax creditThe new markets tax credit program provides federally funded tax credits for approved investments in low-income communities that are made through certified “Community Development Entities.” The credit generally equals 39% of the investment and is paid out over seven years.
Energy efficiency and sustainability incentivesThere are a number of federal tax benefits available for investments to promote energy efficiency and sustainability initiatives, including:
A deduction of up to $1.80 per square foot for investments in qualifying energy efficient systems (lighting, HVAC, etc.) installed in commercial, certain multi-family and government-owned buildings;
A credit of $2,000 per home for the construction of energy efficient new homes;
A credit of up to 26% of qualifying investments in solar, wind or other renewable energy equipment (the credit reduces further in 2023). Larger credit amounts may be available based on when the projects commenced construction and the application of the IRS regulations around this area;
Cash grants for the development of products and technology that assist with energy efficiency and certain othersustainability goals; and
Alternate fuel tax incentives.
Other credits for employersEmployers may be able to take advantage of the following credits:
The work opportunity tax credit (WOTC) program grants tax credits (of up to $9,600 per new hire) to employers that hire and retain individuals from any of 10 targeted employment groups—including veterans, ex-felons, long term family assistance or unemployment recipients, summer youth workers and others.
Businesses operating within a federal empowerment zone may claim a 20% credit on up to the first $15,000 of wages paid to certain employees.
The Indian employment credit may entitle an employer to a 20% tax credit on a portion of the qualified wages and employee health insurance costs paid to an enrolled member of an Indian tribe. (BDO’s article Three Tax Credit Opportunities Extended: WOTC, Federal Empowerment Zone and Indian Employment Credits contains more information on these three credits.)
The family and medical leave (FMLA) tax credit provides employers a credit of up to 25% of paid family and medical leave taken as a result of the birth of a child, adoption or foster care, or to care for a spouse or child that has a serious health condition.
The “FICA tip credit” gives tax relief to employers via a federal income tax credit that is based on the amount of FICA and Medicare taxes they have paid on reported tips.
Credits may be available for providing access for disabled individuals or for providing employer provided childcare facilities and services.
American Jobs PlanThe American Jobs Plan, introduced by President Biden on March 31, 2021, includes proposals that would create a number of new tax credits for businesses, such as credits for green energy initiatives, affordable housing, construction of childcare facilities and others. For more information on the American Jobs Plan, see BDO’s article Biden Administration Unveils Tax Blueprint as Part of American Jobs Plan.
By Dan Fuller, Managing Partner, National Business Incentives & Tax Credits Practice Leader
(This article was originally published https://www.bdo.com/insights/tax/. Harris CPAs is an independent member of the BDO Alliance USA.) [...]
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September 13, 2021One of the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was to introduce the Paycheck Protection Program. This allowed small business to obtain crucial funding and keep their staff employed through the pandemic. Now that the dust has settled on the three rounds of PPP loan funding, it important to consider the tax implications of these loans and the forgiveness thereof.
First off, if the loan was not forgiven (the business for whatever reason did not qualify for forgiveness), the loan is treated the same as any other debt. The principle will be required to be paid back and the interest will be deductible as a business expense.
If the business does qualify for forgiveness, the amount forgiven will be treated as tax-exempt income. This created some initial confusion as expenses incurred to generate tax-exempt income are generally not deductible (thus making the forgiveness essentially taxable in a roundabout way). As this was not the intent of congress, the CARES Act was amended by the Tax Relief Act of 2020 to allow for these expenses to be fully deductible. This was a win-win for taxpayers as it allowed for the exclusion from income of the forgiveness while still being able to deduct the payroll, rent, utilities, and other qualifying expenses used to obtain the forgiveness.
If you or your business has taken advantage of the tax-favorable provision and have questions or need assistance applying for forgiveness, please reach out to one of our advisors. We are always happy to help!
By: Matt Goodfellow, CPA- Harris CPAs [...]
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May 18, 2021The old adage “the only thing constant is change” has never been more applicable. For many, this last year has felt like a race to put out one fire after another. When it comes to accounting for your construction company, getting back into a proactive mindset can help set you up for success down the line. There are upcoming changes to the way companies will need to account for leases, which will have an impact on those in the construction industry. While it isn’t at our doorstep yet, early awareness and adoption can lead to less headache in the future.
In February 2016, the Financial Accounting Standards Board (FASB) issued a new standard for accounting for leases (ASC 842), which must be adopted by all non-public companies for the calendar year ending in 2022. One of the biggest changes coming with the new leasing standard requires the recognition of right of use assets (ROU assets) and the corresponding lease liabilities on the balance sheet for many of the leases previously classified as an operating lease. Furthermore, much like how companies are required to recognize revenue based on performance obligations within their long-term contracts with clients under the new revenue recognition standards, companies will now be required to identify individual lease components (i.e. ROU assets) within a single lease contract.
Admittedly, this is an oversimplification of the new leasing standard and adopting ASC 842 will take time and analysis with your accountant. For now, we’ve highlighted two ways your construction company may be impacted by ASC 842.
Bonding and Debt Covenants
The FASB estimates that approximately $3 trillion dollars of ROU assets and lease payment liabilities are going to be added to US company balance sheets as a result of adopting ASC 842. As you begin this exercise in your own company, it is going to be imperative that you review your bonding and debt covenants and determine whether the increased reported leverage will negatively affect any key metrics or potentially cause covenant violations.
While operating lease liabilities will be presented outside of traditional debt, if you believe that violations to your bonding or debt covenants are likely to occur as a result of adopting ASC 842, we recommend that you begin having these discussions with lenders and bonding agencies now.
Income Tax Considerations
While the FASB can issue new standards for financial statements, they have no authority over the IRS or the tax code. For many, this means there are going to be additional reconciliation items between a company’s financial statements and its tax returns. These reconciliation items are referred to as deferred tax assets and deferred tax liabilities.
Once a company implements ASC 842, it will need to establish a process to account for these deferred tax assets and deferred tax liabilities. As you begin reevaluating your leases under the new leasing standard, we recommend taking the opportunity to also reassess your current tax treatment of leases as well as your data collection and process.
The Time is Now
For some, this new standard might actually be favorable and provide an opportunity to lower tax obligations. This may require a change in the method that you account for leases on your tax returns. However, the IRS considers a taxpayer’s treatment of leases to be a method of accounting, and any changes to existing methods may require IRS consent. Beginning these conversations with your accountant, lenders, and bonding agencies now can alleviate future year end surprises.
Construction & Engineering Page [...]
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May 18, 2021Through our membership with CICPAC (Construction Industry CPAs and Consultants) we are excited to offer our clients a sampling of the most comprehensive salary data available in the construction industry, compiled by PAS, Inc. This can prove very valuable when considering compensation for your construction employees.
The custom report for CICPAC members includes the following position salary data:
Senior Project Manager
Senior Estimator
Controller
In order to receive your free copy of this report, please fill out the information below.
CICPAC Survey Request
Name
*
First
Last
*
Last
Email
*
Company Name
*
Company Revenue
*
[Please select]Less than $1M$1M – $5M$5M – $10M$10M+
Submit
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March 18, 2021The American Rescue Plan Act of 2021 (ARPA), signed into law by President Biden on March 11, 2021, provides additional major relief to individuals and businesses that continue to be impacted by the COVID-19 pandemic. The ARPA includes the following provisions related to individual taxpayers:
Additional recovery rebate credit
Unemployment compensation received in 2020 partially excluded from gross income
Child tax credit expanded for 2021
Child and dependent care credit enhanced and refundable
Student loan discharges excluded from gross income
Additional Recovery/Rebate Credit
Two rounds of economic impact payments have already been sent to individual taxpayers. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020 granted eligible individuals a recovery rebate credit of $1,200 for single filers and $2,400 for joint filers (plus $500 per qualifying child). The rebate amount was advanced based on 2018 or 2019 income, but the credit is determined based on 2020 income. The Covid-Related Tax Relief Act of 2020 (CRTRA), enacted as part of the Consolidated Appropriations Act on December 27, 2020, granted eligible individuals a second refundable tax credit against their 2020 taxable income equal to $600 for single filers and $1,200 for joint filers (plus $600 per qualifying child). The CRTRA rebate amount is determined based on 2020 income, but the credit was advanced to taxpayers based on their 2019 income tax return.
The ARPA grants eligible individuals a third refundable tax credit equal to $1,400 for single filers and $2,800 for joint filers, plus $1,400 for each dependent of the taxpayer. The credit is for the 2021 tax year; however, the rebate amount is advanced based on 2019 income, or 2020 income if the 2020 tax return has been filed. Similar to the CARES Act and CRTRA, the ARPA credit begins to phase out when the single filer’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit completely phases out when a single filer’s AGI exceeds $80,000 ($160,000 for joint filers and $120,000 for head of household filers).
Individuals eligible for the third economic impact payment do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates or trusts. Children who are or can be claimed as dependents by their parents are not eligible individuals, even if the parent chooses not to claim the child as a dependent.
A dependent of the taxpayer includes a qualifying child and a qualifying relative. A qualifying child includes a child, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, or a descendent of any of them (i) who is under age 19 or a student under age 24 at the end of the year, (ii) who has not provided more than half of their own support, (iii) who has lived with the taxpayer for more than half of the year and (iv) who has not filed a joint return (other than only for a refund claim) with the individual’s spouse. For a qualifying child who is permanently and totally disabled at any time during the tax year, all of the foregoing requirements apply except for age—age is irrelevant. A qualifying relative includes a child, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, father or mother, grandparent, stepfather or stepmother, or an individual with the same place of abode as taxpayer (i) whose gross income is less than $4,300 (excluding social security benefits), (ii) who has not provided more than half of their own support, and (iii) who is not a qualifying child. For a qualifying relative who is permanently and totally disabled at any time during the tax year, gross income does not include income for services performed at a school that provides special instruction or training designed to alleviate the disability of the individual and that is operated as a non-profit organization. The availability of medical care at the school must be the principal reason for the individual’s presence there, and the income must arise solely from activities at the school that are incidental to the medical care.
The ARPA provides that no advance refund amount will be made if the taxpayer was deceased before January 1, 2021, nor will any amount be determined for a qualifying dependent of a taxpayer if the taxpayer (both taxpayers on a joint return) was deceased before January 1, 2021. Further, in the case of a joint return where only one spouse has a valid Social Security number (SSN), that spouse is eligible to receive the $1,400 rebate if he or she meets all other requirements of joint filers (i.e., AGI limitations). However, for military service members, both spouses are eligible for the economic income payment if at least one spouse was a member of the U.S. armed forces at any time during the tax year and at least one spouse’s SSN in included on the joint return. If a dependent is considered when calculating the credit, the dependent must have a valid SSN.
Individuals who did not file a tax return in 2019 or 2020 may still receive an automatic advance based on the individual’s status as a beneficiary of social security, railroad retirement benefits or VA (Veteran’s Administration) benefits. Individuals who otherwise are not required to file and are not receiving social security benefits are still eligible for the rebate but will be required to file a tax return to claim the benefit.
Unemployment Income
For tax year 2020, if a taxpayer’s adjusted gross income is less than $150,000, the taxpayer may exclude up to $10,200 of unemployment compensation from gross income. There is no phaseout, and the $150,000 limit applies to single filers, joint filers and head of household filers. In the case of joint filers, the $10,200 exclusion amount applies separately to each filer. If the taxpayer has filed his or her 2020 tax return, the he or she will need to file an amended return to receive the tax benefit. The act also extends the federal unemployment compensation benefits in the amount of $300 per week through September 6, 2021.
Child Tax Credit
The ARPA expands the child tax credit amounts and eligibility requirements for tax year 2021. The credit is increased from $2,000 to $3,000 per qualifying child ($3,600 for children under age 6). The definition of a qualifying child is expanded to include a child who has not turned 18 by the end of 2021. The credit is fully refundable for a taxpayer with a principal place of abode in the U.S. for more than one-half the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year.
The additional $1,000 credit amount per qualifying child ($1,600 per qualifying child under age 6) begins to phase out at a rate of $50 for each $1,000 when a single filer’s modified adjusted gross income (MAGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). A single filer with one qualifying child over age 6 will phase out of the increased credit amount if the taxpayer’s MAGI exceeds $95,000. Similarly situated joint filers will phase out of the increased credit amount if their MAGI exceeds $170,000.
After application of the phase-out rules for the temporarily increased credit amount, the remaining $2,000 of credit is subject to the phaseout rules under existing law ($400,000 for joint filers and $200,000 for all other filers). A single filer with one qualifying child will phase out of the remaining credit if his or her MAGI exceeds $240,000, while joint filers with one qualifying child will phase out of the remaining credit if their MAGI exceeds $440,000.
The ARPA directs the IRS to establish a program in which monthly advance payments equal to 1/12th of the estimated 2021 Child Tax Credit amount will be paid to the taxpayer during the period July 2021 through December 2021. The remaining 50% of the annual estimated amount will be claimed on the 2021 tax return. Initially, the advanced amount will be determined based on a taxpayer’s 2019 or 2020 tax filing. However, upon receipt of a more recent tax filing or other taxpayer-provided eligibility information, the IRS may modify the advance amount.
The IRS announced on March 12, 2021 that it is reviewing implementation plans for the ARPA and that it will be issuing guidance on relevant provisions.
Child and Dependent Care Credit
The child and dependent care credit also is expanded for tax year 2021. The limitation for employment-related expenses considered in determining the credit is increased from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals. Further, the applicable percentage of employment-related expenses that are allowed as a credit against tax is increased from 35% to 50%. As a result, for taxpayers with one qualifying individual, the maximum credit is increased from $1,050 to $4,000. For taxpayers with two or more qualifying individuals, the maximum credit is increased from $2,100 to $8,000.
The credit begins to phase out when the taxpayer’s AGI exceeds $125,000. The applicable percentage is reduced by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s AGI exceeds $125,000. However, the applicable percentage is not reduced below 20% except for taxpayers with AGI in excess of $400,000. Consequently, the applicable percentage is 50% for taxpayers with AGI of $125,000 or less, 20% for taxpayers with AGI greater than $185,000 but not greater than $400,000, and phases out completely for taxpayers with AGI greater than $440,000.
The credit is refundable for taxpayers that have a principal place of abode in the U.S. for more than one-half of the tax year.
Student Loan Discharges
For tax years 2021 through 2025, partial or full discharge of an eligible student loan may be excluded from gross income. The types of eligible student loans include (1) loans for post-secondary educational if made, insured or guaranteed by a federal, state or local government; (2) certain private education loans; and (3) original or refinanced loans made by an educational institution, charitable contributions to which would be limited to 50% of an individual taxpayer’s AGI if the loan is made with federal, state or local government or with certain private education lenders pursuant to a program designed to encourage students to serve in occupations, or areas, with unmet needs under the supervision of a tax-exempt governmental unit or organization described in Internal Revenue Code section 501(c)(3).
If the discharge of a loan made by an educational organization or a private education lender is in exchange for services performed for that organization or private lender, these rules do not exclude the discharge of the loan from gross income. [...]
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March 5, 2021
The Consolidated Appropriations Act of 2021 (Act), signed into law on December 27, 2020, contains significant enhancements and improvements to the Employee Retention Credit (ERC). The ERC, which was created by the CARES Act on March 27, 2020, is designed to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the coronavirus pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.
Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits.
ERC for 2020
The Act makes the following retroactive changes to the ERC, which apply during the period March 13, 2020 through December 31, 2020:
Employers that received PPP loans may qualify for the ERC with respect to wages that are not paid with proceeds from a forgiven PPP loan.
The Act clarifies how tax-exempt organizations determine “gross receipts.”
Group health care expenses are considered “qualified wages” even when no other wages are paid to the employee.
INSIGHTS:
Employers that received a PPP loan and that were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020.
With respect to the retroactive measures in the Act, employers that paid qualified wages in Q1 through Q3 2020 may elect to treat the qualified wages as being paid in Q4 2020. This should allow employers to claim the ERC in connection with such qualified wages via a timely filed IRS Form 7200 or Form 941, as opposed to requiring an amended return (IRS Form 941-X) for the prior quarter(s) in 2020.
ERC for 2021 (January 1 – June 30, 2021)
In addition to the retroactive changes listed above, the following changes to the ERC apply from January 1 to June 30, 2021:
Increased Credit Amount
The ERC rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
Broadened Eligibility Requirements
The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019.
A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
The credit is available to certain government instrumentalities, including colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.
Determination of Qualified Wages
The 100-full time employee threshold for determining “qualified wages” based on all wages paid to employees is increased to 500 or fewer full-time employees.
The Act strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).
Advance Payments
Under rules to be drafted by Treasury, employers with less than 500 full-time employees will be allowed advance payments of the ERC during a calendar quarter in which qualifying wages are paid. Special rules for advance payments are included for seasonal employers and employers that were not in existence in 2019.
INSIGHTS:
Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries.
Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. Previously this rule was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer.
The Act may provide significant opportunities for your company. However, the interplay between the Act, the CARES Act and various Internal Revenue Code sections is nuanced and complicated so professional advice may be needed. [...]
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January 4, 2021A video introduction of our new office at 1120 S Rackham Way, Meridian
While 2020 has dealt its fair share of curve balls, one thing that has not wavered is our commitment to helping our clients and their businesses succeed and make it through these unforeseen circumstances. We are grateful to each and every one of our clients for the relationships we have created over the years. Our success would not be possible without you. We have been excited to see our team grow significantly over the last few years, and the time has come where we have finally outgrown our current space.
We are excited to announce that we have moved and are now open at our new location! It was important to us to remain in Meridian, which has become a central location for the entire Treasure Valley, and to continue to provide easy access to our office for our clients. Our new office location is just down the road from our former location, and is in the new Eagle View Landing Business Complex in Meridian.
We look forward to celebrating this move with you and inviting you to our new space when it is safe to do so. We truly value our relationship with each and every one of our clients and look forward to working with you in the new year!
NEW ADDRESS:1120 S Rackham Way, Suite 100 | Meridian, ID 83642(Map Source: https://bvadev.com/properties)
Take a Look Inside:
(Swipe to advance slideshow) [...]
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December 29, 2020On December 27, 2020, the president signed into law the Consolidated Appropriations Act, 2021 (bill), a massive tax, funding, and spending bill that contains a nearly $900 billion coronavirus aid package. The over 5,500-page emergency coronavirus relief package aims to bolster the economy, provide relief to small businesses and the unemployed, deliver checks to individuals and provide funding for COVID-19 testing and the administration of vaccines.
The coronavirus relief package contains another round of financial relief for individuals in the form of cash payments and enhanced federal unemployment benefits. Individuals who earn $75,000 or less annually generally will receive a direct payment of $600. Qualifying families will receive an additional $600 for each child. According to Treasury Secretary Mnuchin, these checks could be distributed before the end of 2020. To provide emergency financial assistance to the unemployed, federal unemployment insurance benefits that expire at the end of 2020 will be extended for 11 weeks through mid-March 2021, and unemployed individuals will receive a $300 weekly enhancement in unemployment benefits from the end of December 2020 through mid-March. The CARES Act measure that provided $600 in enhanced weekly unemployment benefits expired on July 31, 2020.
The bill earmarks an additional $284 billion for a new round of forgivable small-business loans under the Paycheck Protection Program (PPP) and contains a number of important changes to the PPP. It expands eligibility for loans, allows certain particularly hard-hit businesses to request a second loan, and provides that PPP borrowers may deduct PPP expenses attributable to forgiven PPP loans in computing their federal income tax liability and that such borrowers need not include loan forgiveness in income.
The bill allocates $15 billion in dedicated funding to shuttered live venues, independent movie theaters and cultural institutions, with $12 billion allocated to help business in low-income and minority communities.
The bill also extends and expands the employee retention credit (ERC) and extends a number of tax deductions, credits and incentives that are set to expire on December 31, 2020.
This alert highlights the main tax provisions included in the bill.
Paycheck Protection Program
The PPP, one of the stimulus measures created by the CARES Act, provides for the granting of federally guaranteed loans to small businesses, nonprofit organizations, veterans organizations and tribal businesses in an effort to keep businesses operating and retain staff during the COVID-19 pandemic. (PPP loans are administered by the Small Business Administration (SBA)).
A recipient of a PPP loan under the CARES Act (the first round) could use the funds to meet payroll costs, certain employee healthcare costs, interest on mortgage obligations, rent and utilities. At least 60% of the loan funds were required to be spent on payroll costs for the loan to be forgiven.
Eligible businesses
Business are eligible for the second round of PPP loans regardless of whether a loan was received in the first round. The bill changes the definition of a “small business.” Small businesses are defined as businesses with no more than 300 employees and whose revenues dropped by 25% during one of the first three quarters of 2020 (or the fourth quarter if the business is applying after January 1, 2021). The decrease is determined by comparing gross receipts in a quarter to the same in the prior year. Businesses with more than 300 employees must meet the SBA’s usual criteria to qualify as a small business.
Borrowers may receive a loan amount of up to 2.5 (3.5 for accommodation and food services sector businesses) times their average monthly payroll costs in 2019 or the 12 months before the loan application, capped at $2 million per borrower, reduced from a limit of $10 million in the first round of PPP loans. The bill also expands the types of organizations that may request a PPP loan. Eligibility for a PPP loan is extended to:
Tax-exempt organizations described in Internal Revenue Code (IRC) Section 501(c)(6) that have no more than 300 employees and whose lobbying activities do not comprise more than 15% of the organization’s total activities (but the loan proceeds may not be used for lobbying activities)
“Destination marketing organizations” that do not have more than 300 employees
Housing cooperatives that do not have more than 300 employees
Stations, newspapers and public broadcasting organizations that do not have more than 500 employees
The following businesses, inter alia, are not eligible for a PPP loan:
Publicly-traded businesses and entities created or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong that hold directly or indirectly at least 20% of the economic interest of the business or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership, or that retain as a member of the entity’s board of directors a China-resident person
Persons required to submit a registration statement under the Foreign Agents Registration Act
Persons that receive a grant under the Economic Aid to Hard Hit Small Businesses, Nonprofits and Venues Act
Uses of loan proceeds
The bill adds four types of non-payroll expenses that can be paid from and submitted for forgiveness, for both round 1 and round 2 PPP loans, but it is unclear whether borrowers that have already been approved for partial forgiveness can resubmit an application to add these new expenses:
Covered operational expenditures, i.e., payments for software or cloud computing services that facilitate business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses
Covered property damage, i.e., costs related to property damage and vandalism or looting due to public disturbances that took place in 2020, which were not covered by insurance or other compensation
Covered supplier costs, i.e., expenses incurred by a borrower under a contract or order in effect before the date the PPP loan proceeds were disbursed for the supply of goods that are essential to the borrower’s business operations
Covered worker protection equipment, i.e., costs of personal protective equipment incurred by a borrower to comply with rules or guidance issued by the Department of Health & Human Services, the Occupational Safety and Health Administration or the Centers for Disease Control, or a state or local government
To qualify for full forgiveness of a PPP loan, the borrower must use at least 60% of the funds for payroll-related expenses over the relevant covered period (eight or 24 weeks).
Increase in loan amount
The bill contains a provision that allows an eligible recipient of a PPP loan to request an increased amount, even if the initial loan proceeds were returned in part or in full, and even if the lender of the original loan has submitted a Form 1502 to the SBA (the form sets out the identity of the borrower and the loan amount).
Expense deductions
The bill confirms that business expenses (that normally would be deductible for federal income tax purposes) paid out of PPP loans may be deducted for federal income tax purposes and that the borrower’s tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This has been an area of uncertainty because, while the CARES Act provides that any amount of PPP loan forgiveness that normally would be includible in gross income will be excluded from gross income, it is silent on whether eligible business expenses attributable to PPP loan forgiveness are deductible for tax purposes. The IRS took the position in guidance that, because the proceeds of a forgiven PPP loan are not considered taxable income, expenses paid with forgiven PPP loan proceeds may not be deducted. The bill clarifies that such expenses are fully deductible—welcome news for struggling businesses. Importantly, the effective date of this provision applies to taxable years ending after the date of the enactment of the CARES Act. Thus, taxpayers that filed tax returns without deducting PPP-eligible deductions should consider amending such returns to claim the expenses.
Loan forgiveness covered period
The bill clarifies the rules relating to the selection of a PPP loan forgiveness covered period. Under the current rules, only borrowers that received PPP proceeds before June 5, 2020 could elect an eight-week covered period. The bill provides that the covered period begins on the loan origination date but allows all loan recipients to choose the ending date that is eight or 24 weeks later.
Loan forgiveness
PPP loan recipients generally are eligible for loan forgiveness if they apply at least 60% of the loan proceeds to payroll costs (subject to the newly added eligible expenditures, as described above), with partial forgiveness available where this threshold is not met. Loans that are not forgiven must be repaid.
Currently, PPP loan recipients apply for loan forgiveness on either SBA Form 3508, Form 3508 EZ or Form 3508S, all of which required documentation that demonstrates that the claimed amounts were paid during the applicable covered period, subject to reduction for not maintaining the workforce or wages at pre-COVID levels.
The bill provides a new simplified forgiveness procedure for loans of $150,000 or less. Instead of the documentation summarized above, these borrowers cannot be required to submit to the lender any documents other than a one-page signed certification that sets out the number of employees the borrower was able to retain because of the PPP loan, an estimate of the amounts spent on payroll-related costs, the total loan value and that the borrower has accurately provided all information required and retains all relevant documents. The SBA will be required to develop the simplified loan forgiveness application form within 24 days of the enactment of the bill and generally may not require additional documentation. Lenders will need to modify their systems used for applications to make an electronic version of the new forgiveness application available to eligible borrowers.
Employment Retention Credit and Families First Coronavirus Response Credit
The bill extends and expands the ERC and the paid leave credit under the Families First Coronavirus Response Act (FFCRA).
ERC
The ERC, introduced under the CARES Act, is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50% of its gross receipts for the same quarter in 2019.
The bill makes the following changes to the ERC, which will apply from January 1 to June 30, 2021:
The credit rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility and the ERC is available to employers that were not in existence during any quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
The credit is available to certain government instrumentalities.
The bill clarifies the determination of gross receipts for certain tax-exempt organizations and that group health plan expenses can be considered qualified wages even when no wages are paid to the employee.
New, expansive provisions regarding advance payments of the ERC to small employers are included, such as special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan. Further, the bill strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).
The bill makes three retroactive changes that are effective as if they were included the CARES Act. Employers that received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. The bill also clarifies how tax-exempt organizations determine “gross receipts” and that group health care expenses can be considered “qualified wages” even when no other wages are paid to the employee.
FFCRA
The FFCRA paid emergency sick and child-care leave and related tax credits are extended through March 31, 2021 on a voluntary basis. In other words, FFCRA leave is no longer mandatory, but employers that provide FFCRA leave from January 1 to March 31, 2021 may take a federal tax credit for providing such leave. Some clarifications have been made for self-employed individuals as if they were included in the FFCRA.
Other Tax Provisions in the CAA
The bill includes changes to some provisions in the IRC:
Charitable donation deduction: For taxable years beginning in 2021, taxpayers who do not itemize deductions may take a deduction for cash donations of up to $300 made to qualifying organizations. The CARES Act revised the charitable donation deduction rules to encourage donations following a decline after the enactment of the Tax Cuts and Jobs Act in 2017.
Medical expense deduction: The income threshold for unreimbursed medical expense deductions is permanently reduced from 10% to 7.5% so that more expenses may be deducted.
Business meal deduction: Businesses may deduct 100% of business-related restaurant meals during 2021 and 2022 (the deduction currently is available only for 50% of those expenses).
Extenders: The bill provides for a five-year extension of the following tax provisions that are scheduled to sunset on December 31, 2020:
The look-through rule for certain payments from related controlled foreign corporations in IRC Section 954(c)(6), which was extended to apply to taxable years of foreign corporations beginning before January 1, 2026 and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end
New Markets Tax Credit
Work Opportunity Tax Credit
Health Coverage Tax Credit
Carbon Oxide Sequestration Credit
Employer credit for paid family and medical leave
Empowerment zone tax incentives
Exclusion from gross income of discharge of qualified principal residence indebtedness
Seven-year recovery period for motorsports entertainment complexes
Expensing rules for certain productions
Oil spill liability trust fund rate
Incentive for certain employer payments of student loans (notably, the bill does not include other student loan relief so that borrowers will need to resume payments on such loans and interest will begin to accrue).
Permanent changes: The bill makes several tax provisions permanent that were scheduled to expire in the future, in addition to the medical expense deduction threshold mentioned above:
The deduction of the costs of energy-efficient commercial building property (now subject to inflation adjustments)
The gross income deduction provided to volunteer firefighters and emergency medical responders for state and local tax benefits and certain qualified payments
The transition from a deduction for qualified tuition and related expenses to an increased income limitation on the lifetime learning credit
The railroad track maintenance credit
Certain provisions, refunds and reduced rates related to beer, wine and distilled spirits, as well as minimum processing requirements for certain craft beverages produced outside the U.S. [...]
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November 17, 2020The year is well into its fourth quarter and already, the past few months have many businesses reeling with the financial impacts of COVID-19, and no company has been immune to disruptions. If revenues are the measuring point for the impact of COVID-19, the construction industry has been spared the drastic financial impacts that other industries, such as the hospitality industry, have faced. Yet construction businesses have still had to face disruptions on jobs, safety risks, scheduling and the inability to hire essential employees. These changes have caused construction companies to take a second look at their internal processes. Dealing with the realities of the last 7 months has provided the data and the necessary time to offer construction companies the opportunity to adapt quickly. They are now able to prepare for not only the remainder of 2020, but for the changes that will be necessary in 2021. Construction business relies on the financial viability of other industries in order to perform its own services, so the impact of COVID-19 as it continues to move through the economy will further impact the construction industry itself.
INDUSTRY ASSESSMENT
As we look to 2021, financial leaders will be even more essential in ensuring that contractors are prepared to sustain or even capitalize on these changes to the industry. CFOs and Controllers can help prepare their businesses by taking a proactive approach and assessing the impacts of COVID-19 to date by asking some important questions:
How has it affected our company?
How has it affected our customers and their industry?
How has it affected our vendors or suppliers? And lastly,
How has it affected our workforce as a whole?
With this important information, the construction industry can then quickly transition to understanding how these main areas could be impacted in 2021. Each area of the industry won’t move in the exact same direction or even at the exact same time, so it is vital for your company to address each area with an independent and personalized approach. There will need to be careful predictions and planning for many alternative scenarios. Given the unpredictability of COVID-19, firmly planning out and projecting the unknown is next to impossible. Having multiple financial scenarios and a larger game plan will help ensure that thoughtful and proactive decisions are being made. The overall goal is to avoid the more dangerous reactive measures.
STEPS FOR PROACTIVE PREDICTIONS & PLANNING
As you look to develop a smart financial plan for your company in 2021, one thing is certain in the air of uncertainty, and that is cash. The old moniker, “Cash is King” is even more true during recessions and uncertain times. The push in the Winter of 2020, for most contractors, should be to prepare your company by monitoring and, if necessary, stock piling cash. This will allow your company to be put in a position of strength as it enters 2021; to not only weather unforeseen storms or swings in business, but to allow for the execution of plans that can capitalize on the market of other companies who may not be acting as proactively.
Construction companies should ask themselves if they are actively monitoring suppliers, vendors and clients, paying close attention to contracts and addressing the risk of increased pricing is necessary. The trend has been to focus more on cost plus types of arrangements, to protect against possible price increases in 2021. It is important to also review the financial capacity of your subcontractors and to ensure that they will have the financial wherewithal to complete the contract. Evaluating clients not only ensures collectability of receivables, but also monitors for potential delays or disruptions to the job. Reviewing contract schedules and staying on top of A/R is extremely important. Even with the increase in unemployment, government intervention and other opposing trends have continued to present challenges if your company is looking to add or replace employees. Consider a second look at current employees to be sure they are being effectively utilized to avoid unnecessary outside hiring. Before replacing A with B, take a look at the schedule to determine if delays or disruptions could be handled with the placement of employees where the work needs to be done. Having people on the sidelines is the primary objective that companies should look to avoid. Even with the best scheduling, those contractors that find themselves in growth will still need to get creative in attracting top talent and this again, will require cash and a position of strength going into 2021.
FINANCIAL SOLUTIONS
Without addressing the PPP loan program, it is still important to focus on all other debt. Refinancing debt, loan covenant waivers or restructuring and other debt modifications should be started now if they are anticipated to be an issue in 2021. The financial environment and access to capital can change quickly. Waiting to plan and address this issue until the first quarter of 2021 could cause disruptions to your company and will also give you less bargaining power. Part of managing cash is closely monitoring debt.
Especially important is planning out debt, cash and taxes at the end of 2020. If, over the last several years, year-end equipment purchases (whether through debt or cash) have been used to minimize taxes, you are sitting on a tax liability. It must be taken into account when deciding to keep debt to a minimum and to hold on to cash. There will be an offset to this, which will be a tax bill coming in 2021 as these deferrals from the prior years reverse. Depending on a company’s views of the current tax rates, 2020 could or could not be the right time to catch up on this deferred tax liability. In any case, proper planning at year end will be required.
As the construction industry puts together financial plans for 2021 and strategically tackles the uncertainty of the 4th quarter of 2020, try to embrace these challenges as opportunities. There are lessons learned and good processes that have come forth as a result of the challenges of COVID-19. Unfortunate as these challenges have been, they have allowed companies, employees and the industry as a whole to reevaluate their current finances and to make improvements for the future. With the right mindset and some planning, you can forge through this pandemic and come out stronger and more successful in the end.
By Josh Tyree, Partner at Harris CPAs
(This article was also featured in the Idaho AGC Building Idaho Magazine – Fall/Winter edition) [...]
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October 19, 2020Businesses that would typically provide a Form 1099-MISC to independent contractors (and certain others) and the IRS need to be aware of new IRS Form 1099-NEC. For non-employee compensation paid during 2020, payers must provide Form 1099-NEC (instead of Form 1099-MISC) to the recipients and to the IRS no later than January 31, 2021. In addition, the IRS has redesigned Form 1099-MISC, so businesses should expect that reporting may be somewhat different from past years.
Which payments are reported on Form 1099-NEC?
Businesses must provide a Form 1099-NEC if all of the following apply to payments made in 2020:
The payment is made to someone performing services as a non-employee
The payment is for services performed in the course of the entities’ trade or business
The payment is for $600 or more for the year
Some examples of common payments that must be reported on Form 1099-NEC include:
Fees paid to members of the business’s board of directors who are not employees
Fees paid to independent contractors
Commissions paid to nonemployee salespeople that were not repaid during the year
Professional service fees paid to attorneys (including payments made to corporations)
Fees paid by one professional to another (such as “fee-splitting” arrangements)
Payments for services, including payments for parts or materials used to perform the services, if they were incidental to the service
Businesses must also file Form 1099-NEC for anyone from whom they withheld federal income tax under back up withholding rules, for any amount (even if under $600).
Insights:
Use Form 1099-NEC only when payments are made in the course of a trade or business. Personal payments (like paying a household employee) are not reportable on Form 1099-NEC.
Generally, a trade or business is operated for gain or profit. Nonprofit organizations are considered to be engaged in a trade or business and should use Form 1099-NEC. Federal, state, or local government agencies should also use Form 1099-NEC.
Form 1099-NEC is not actually “new,” since the IRS used it until 1982. The IRS revived it starting in 2020 to keep better track of non-employee compensation. This change was driven by the gig economy and employers’ increased use of independent contractors. From 1982 to 2019, non-employee compensation was included in Form 1099-MISC.
Redesigned 2020 Form 1099-MISC
Businesses should also be aware that the IRS redesigned the 2020 Form 1099-MISC due to the creation of Form 1099-NEC. Specifically, the IRS rearranged several box numbers on the 2020 Form 1099-MISC, so payers should use:
Box 7 (check box) for payer made direct sales of $5,000 or more
Box 9 for crop insurance proceeds
Box 10 for certain payments to an attorney (that are not reported on Form 1099-NEC)
Box 12 for IRC Section 409A deferrals (this would only apply in rare situations that are not reportable on Form 1099-NEC)
Box 14 for nonqualified deferred compensation income (this is optional and would only apply in rare situations that are not reportable on Form 1099-NEC)
Boxes 15, 16 and 17 for state taxes withheld, state identification number and amount of income earned in the state, respectively
Next steps
Businesses may need some time to update their payroll processing or reporting systems to generate new IRS Form 1099-NEC and to accommodate the changes to the 2020 Form 1099-MISC. They should expect that 2020 reporting will not be simply the same as last year.
Businesses cannot download usable copies of Form 1099-NEC from the IRS website, so they may need some time to obtain copies of the new forms. Businesses can order paper copies of Form 1099-NEC from the IRS.
Insight:
Due to COVID-19 delays, it is unclear how long it would take the IRS to mail paper copies of the forms, so ordering early would be a good idea. [...]
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July 20, 2020COVID-19 has impacted many organizations financially and structurally. It has also brought uncertainties to an organization’s ability to operate remotely and determine estimates for financial reporting. Organizations should consider taking the following approach to navigate through the control environment changes impacted by COVID-19. The article below identifies the impacted key control environment factors and solutions to evaluate and improve them. -Madeline Liu, Harris CPAs
As the world continues to battle the novel coronavirus (COVID-19) outbreak and we all do our part to help flatten the curve, individuals and companies alike are taking steps to navigate this public health crisis.
At the same time, every one of us is asking the same question: What’s next? What’s next for our families and our communities? What’s next for small businesses and the people who run them? For large organizations and the millions who rely on them?
What’s next for our people, our customers? And what will it take to once again thrive?
To move forward, we will come together—as we always do—to define and create the best of what’s next.
Organizational Impact
Like many organizations, the top priority is the safety and well-being of people, clients, customers, families, and the communities in which we live and work. Seeing how people have taken care of each other in this difficult time gives hope that organizations will emerge from this stronger. To respond—and recover—from a crisis, companies and their boards must work quickly to minimize business interruption, maximize operational efficiencies, and assess cash flow and liquidity concerns. These assessments can lead to hard and life-changing decisions for their employees that are not taken lightly yet have a lasting impact.
Internal Controls Over Financial Reporting (ICFR) Impact
Current uncertainty continues to evolve, making it difficult for organizations to evaluate the impact on their control environments. As companies move to remote operations, or need to modify their workforce, an assessment over the control environment is required to determine if it is operating as it had been prior to the rapid changes. These changes can impact the overall control environment including the design and operation of controls. The question organizations should be asking themselves is How has your control environmentbeen impacted?
PHASE 1: PERSEVERE Review and Adapt
In order to persevere, adapting quickly in today’s environment is key. As an organization, it is the ability to assess and adapt to the ‘new’ normal that will allow it to survive. Consideration of change should include:Assess common core areas where change is likely to take place; PEOPLE, PROCESSES, TECHNOLOGY. Consider the following:
Performance and Knowledge
Has the individual who initiates the transaction / analysis / procedures changed? Is there an adequate backup?
Does the individual who has assumed a new role have the appropriate knowledge and training to perform the task / analysis?
Are the policies and procedures in place up to date?
Data & Systems
Has the information captured changed (process to record in the system, post, and retain)?
Do employees all have access to internet connectivity?
Is there appropriate backup and recovery of systems if network connection is lost?
Are access rights / logical access still appropriate and relevant for all financial systems?
Is there adequate cyber security and infrastructure to protect against attacks due to increased remote working?
Is the company following its change management/ SDLC methodology?
Segregation of Duties (SOD) – Has the delegation of authority (DOA) for dollar thresholds and authorized individuals for approving transactions changed, management review and evidence?
Third Parties – Has the vendor control environment been impacted?
Fraud – What checks and balances are missing with the workforce working remotely?
Entity-Level Controls – Has there been a change in the organization at the C-Suite level or tone at the top?
Missing Controls – Are controls missing from a framework that were not previously required, do they require enhancement, update in frequency?
Impairment assessment control, going concern, valuation, subsequent events assessment, debt covenants, compliance with federal loan / grant documentation (CARES) and reporting, etc.
Collaborate – Have other areas (Board of Directors, Audit Committee, Executive team, external audit, business process owners, Internal Audit) provided feedback on how their area has been impacted and what needs to change.
PHASE 2: MAINTAIN Modify and Maintain
For gaps / risks identified in review, the following could be considered and performed:
Validate the gaps and create mitigating actions to address them.
Perform a risk assessment to evaluate if there has been a change to the frameworks in scope due to materiality (increase or decrease in revenue or assets), level of risk, or if there are process frameworks that need to be added or removed from scope.
Perform a controls rationalization/optimization to determine if the gap or risk identified is a key control in current environment.
Develop procedures or new controls to mitigate the gap / risk
Can processes be automated? Can technology be leveraged?
Is a new control required to mitigate the gap / risk?
Does a risk of fraud exist due to the loss of an employee? Is another individual required for the process to fully satisfy review / segregation of duties / add another review in case of fraud?
Is the gap or risk covered in another control?
Consider the magnitude of the gap:
Number of Controls Impacted – Single / Few Controls Affected or a Majority
Type of Gap – Does the gap create a step that is missing in the overall process or a control deficiency? Does the gap add a risk or elevate an existing risk ranking due to a missing procedure below?
Authentication not performed?
Review not evidenced?
Data validation not performed?
Segregation of duties not performed?
Assess what procedures are required to mitigate the gaps / risks and whether there are material changes to ICFR which require disclosure to the Board and or financial statements.
PHASE 3: RECOVER Develop and Advance
Develop and advance, where necessary, the control environment process design, operation, and documentation.
Develop a timeline of all the activities that are required to mitigate / remediate gaps identified. Milestones include:
Create new procedures/controls, add resources, or system parameters that would close the gap(s) noted in the design of control(s).
Update testing strategy for the new scope of locations and controls.
Document / update relevant policies, procedures, Risk and Control Matrix (RCM), narratives, process flow diagrams and test plans.
Develop training for those who are assuming new roles or may not have sufficient knowledge of the task they are performing, or new controls designed.
Implement these procedures in the control environment to remediate the design gaps / risks identified.
Test the remediation efforts to conclude if the controls are effective. If the gap or risk is not fully remediated, returning to phase 1 would be required.
The milestones should be completed on an aggressive timeline as to provide enough time for remediation testing and validation.
PHASE 4: THRIVE Update and Flourish
On-going monitoring and evaluation allow a company to update the control environment fluidly in an ever-changing world. When the implementation and remediation is complete, the process to evaluate controls on an on-going basis can be performed by management/co-source/outsource provider. This monitoring will consider if the changes made are adaptable to a changing environment or require further refinements. The on-going monitoring should evaluate the following areas and adapt and evolve the control environment to be fluid to events in the world:
Timing – Start testing early to allow for a longer time frame due to new processes and controls and to possibly minimize the business disruptions.
Restrictions – Implement remote testing, if possible, or be prepared to use limited on-site resources if the organization has implemented disallowance of travel and social distancing guidelines.
Priorities – Focus on new process and controls as theses will need full process walkthroughs and documentation.
Points of Focus – Enhance, review and/or incorporate Subject Matter Professionals (SMPs) to assist the organization in reviewing and understanding new regulations or complex accounting issues.
Risk Assessment – Analyze and update the risk assessment when the economy and impacts of COVID-19 soften to determine if the scope (reduced or increased), as identified previously, requires adjustment.
ICFR Program – Evaluate the overall program including:
Timeline – Is there enough time to complete all testing required?
Reporting Requirements and Disclosure
Have there been any changes to reporting requirements (i.e. extensions, exemptions, etc.)?
Are there any required disclosures to the Board of Directors, Audit Committee, or in the Financial Statements (SOX Section 302 Certifications), in regard to the change of ICFR?
High Risk Areas – Are there new high-risk areas identified that may require the use of SMPs?
Key Control Classification – Is the classification still correct, are there ‘new’ key controls which must be documented and tested?
Summary and Concluding Thoughts
The action steps outlined will help your organization to:
Assess your control environment to identify any gaps or risks that are not addressed due to changes from COVID-19 by performing the following:
Control design assessments
Update risk assessment and scoping
Evaluate the changes to the control environment and implement remediation procedures to mitigate gaps identified by performing the following:
Gap / risk mitigation plans
Collaborate with other departments / individuals across the organization
Update policy, procedures, and RCMs for the new normal
Improve your ICFR program to be adaptable to impactful global or economic events
Develop on-going monitoring and evaluation procedures to assess the ICFR program and continuously adapt to the changing environment
(This article was originally published on bdo.com)
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June 8, 2020“In another win for small businesses, the President has signed into effect some new changes to the Paycheck Protection Program, most notably tripling the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans. In the article below, the Journal of Accountancy does a great job of outlining all the changes you can now expect to see if you are the recipient of a PPP loan.”-Robert Shappee, Partner at Harris CPAs
The U.S. Senate passed the House version of Paycheck Protection Program (PPP) legislation Wednesday night, tripling the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.
The bill passed in a unanimous voice vote hours after Wisconsin Sen. Ron Johnson initially blocked it. Among the key provisions is a change in the threshold for the amount of PPP funds required to be spent on payroll costs to qualify for forgiveness to 60% of the loan amount.
The Senate approval sent the House bill, called the Paycheck Protection Flexibility Act, to President Donald Trump, who signed it Friday.
The vote had to be unanimous because the Senate is not officially in session. That meant that any senator could force the matter to be delayed until the Senate returned to Washington with enough members for a quorum and a vote.
Leaders from both parties in the Senate pushed to pass the legislation on Wednesday as the clock on the initial eight-week window recently expired for the first recipients of PPP loans. Johnson dropped his objections after Senate leader Mitch McConnell agreed to add a letter to the Congressional Record clarifying that June 30 remains the deadline for applying to receive a PPP loan.
Following is a summary of the legislation’s main points compiled by the AICPA:
Current PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. New PPP borrowers will have a 24-week covered period, but the covered period can’t extend beyond Dec. 31, 2020. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
Under the language in the House bill, the payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met. Rep. Chip Roy (Texas), who co-sponsored the bill in the House, said in a House speech that the bill intended the sliding scale to remain in effect at 60%. Senators Marco Rubio and Susan Collins indicated that technical tweaks could be made to the bill to restore the sliding scale.
Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
New borrowers now have five years to repay the loan instead of two. Existing PPP loans can be extended up to 5 years if the lender and borrower agree. The interest rate remains at 1%.
The bill allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.
In a statement issued Friday, the AICPA thanked Congress for the flexibility legislation and encouraged small businesses to apply for PPP loans.
“CPA firms have worked tirelessly to help their small business clients understand, as best possible, the PPP’s policies and apply for financial relief,” Mark Koziel, CPA, AICPA executive vice president–Firm Services, said in the statement. “Some small businesses may have hesitated to apply for PPP funds because of challenges with the old forgiveness rules. We encourage CPA firms to share how the PPP Flexibility Act greatly improved these rules, which may help more small businesses apply for relief.”
Erik Asgeirsson, CEO and president of CPA.com, said the improved U.S. unemployment figures for May demonstrated that the PPP is having a significant impact on the retention and rehiring of workers.
“Over the past two months, the 44,000 CPA firms tied to the AICPA have played a critical role in delivering this needed business relief to their clients,” Asgeirsson said in the statement. “We are going to continue to work with the AICPA-led coalition to help answer new questions related to these recent changes.”
The PPP in brief
The PPP launched in early April with $349 billion in funding that was exhausted in less than two weeks. Congress provided an additional $310 billion in funding in an April 21 vote, but demand for the program soon waned due to controversies over publicly traded companies and other large enterprises being awarded loans. Concerns about the attainability of loan forgiveness under the program’s rules also contributed to small businesses and other eligible entities casting a wary eye to the program.
Congress established the PPP to provide relief to small businesses during the coronavirus pandemic as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The legislation authorized Treasury to use the SBA’s 7(a) small business lending program to fund loans of up to $10 million per borrower that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities.
PPP funds are available to small businesses that were in operation on Feb. 15 with 500 or fewer employees, including tax-exempt not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. Businesses with more than 500 employees also can apply for loans in certain situations.
By Jeff Drew, Journal of Accountancy, Senior Editor
(The article below was originally posted on https://www.journalofaccountancy.com/news/2020/jun/ppp-loan-forgiveness-changes-coming.html)
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May 19, 2020As I sit in my home office here in the beginning of April I am humbled by the resolve we are all showing in the face of uncertain times. I know you are probably feeling anxious about the future, but together, we can achieve great things and I have no doubt this crisis will bring us all closer together, not farther apart – well not more than 6 feet closer for now. Our hope is that companies will be back operating at full strength and better than ever in the near future. As you are well aware, the government has stepped in and provided a few resources to make sure this is the case. While it is impossible to cover every resource available, there are a few I would like to point out that have been the most beneficial for our construction clients, and can help make a positive impact on your company moving forward.
FAMILIES FIRST CORONAVIRUS RESPONSE ACT (H.R. 6201)
The Families First Act expanded FMLA requirements to include employees affected by Covid-19. Businesses with fewer than 500 employees are required to provide up to 80 hours of Emergency Paid Sick Leave for employees that are subject to a quarantine order, have been diagnosed with Covid-19, or are caring for someone under the same conditions. Depending on the reason, employers would pay the employees regular rate of pay, up to $511 per day, if it is for their own illness, or $200 per day if caring for another individual. To assist employers the act provides refundable credits to be used against payroll taxes at the capped amounts.
IRS AND IDAHO STATE TAX COMMISSION EXTEND TAX DEADLINES
On March 20th, the IRS released expanded guidance providing relief to taxpayers by extending the due date of tax returns and payments due on April 15, 2020 to July 15, 2020. The Idaho State Tax Commission followed up shortly thereafter extending the due date of returns and payments due on April 15, 2020 to June 15, 2020. You may also still file an automatic filing extension to October 15, 2020.
CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT (CARES Act)
Delay of Employer Payroll Taxes
The CARES ACT defers the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security. The payments may be deferred one-half to December 31, 2021 and the other one-half to December 31, 2022. However, this deferral is not available for businesses that take advantage of the SBA Paycheck Protection Program, whose loans are forgiven.
Employee Retention Credit
There is now an available credit to be used against your payroll taxes. The credit is limited to 50% of the first $10,000 in wages per employee. Businesses must be fully or partially shut down due to a government order, or have had at least a 50% reduction in gross receipts. There are additional limitations for employers with over 100 employees.
SBA Paycheck Protection Loan Program
The SBA now provides a forgivable loan program, in which businesses can secure credit through local banks and credit unions to cover costs including payroll, continuation of health care benefits, mortgage interest obligations, rent or lease payments, utilities, and interest on debt incurred prior to obtaining the loan. The loan amount available is 2.5 times the business average payroll and benefit costs for the prior twelve months. To qualify, businesses must have fewer than 500 employees and be within the SBA’s Small business size threshold. The applicant must certify the loan is due to uncertainty of current economic conditions and is necessary to support the ongoing operations of the business. The applicant must spend the funds on eligible expenses in the immediate 8 week period after getting the loan and then may submit an application for forgiveness.
SBA Economic Injury Disaster Loans
The SBA also has available loans to eligible small businesses up to $2M to provide a stop gap funding at a reduced interest rate and attractive terms. The loan provides an approval grant of $10,000 per applicant. The loan can be used to cover expenses that cannot be paid due to the pandemic. Payments can be deferred for up to 12 months, however interest will still accrue. These loans require collateral if over $25,000 and typically require personal guarantees, however, there is no fee to apply.
Deferral of Net Business Losses
Prior law limited the amount of other income that an individual could offset by losses from passthrough business. Business losses were limited to $500,000 for married couples and any excess would be converted to Net Operating Losses (See below), which could then be only carried forward. This was effective for years beginning after 2017 and before 2026. The CARES Act defers the effective date of this rule for three years. Therefore losses sustained in 2018, 2019 or 2020 will be fully available to offset other income and not limited to $500,000.
Net Operating Losses
Prior law abolished the carryback for Net Operating Losses (NOLs) generated in years beginning after 2017. NOLs were only allowed to be carried forward and were limited to 80% of a taxpayers income in any given year they were carried to. The CARES Act provides that NOLs generated in 2018, 2019 or 2020 will be carried back 5 years. Taxpayers can elect to forego the carryback, however the election is irrevocable once made. For those companies with losses in any of those years, look to carry back the loss and generate current year refunds by offsetting taxable income in the prior five years. The CARES Act also delayed the 80% rule and allows the NOL to offset 100% of your income in those prior years.
Qualified Improvement Property
Prior law required that Qualified Improvement Property (QIP) be depreciated over 39 years. Qualified Improvement Property is an improvement to the interior of nonresidential real property that is not structural in nature. This also includes Qualified Leasehold Improvements made by the lessee, any sublessee, or the lessor under a lease or a commitment to enter into a lease. To qualify, it must not be between related parties and the improvement must be placed in service more than 3 years after the date the building was first placed in service. The effect of this rule resulted in QIP not being eligible for 100% bonus depreciation. This was an error in the drafting of the prior law and caught many of us off guard in 2018. The CARES Act retroactively changes QIP to 15 year property, thereby allowing 100% depreciation in years 2018 and forward. This can provide a real benefit to those companies that had QIP in 2018. You may now go back and amend your tax returns and take the additional deduction, which could generate immediate refunds. Going forward, this will allow greater flexibility to deduct the cost of these improvements.
Alternative Minimum Tax Credit Refunds
Prior law required that Alternative Minimum Tax Credits be refunded over a period of years with the balance due in 2021. The CARES Act allows these tax credits to be fully refundable in 2018 on an amended tax return or on your 2019 tax return.
Charitable Contributions by Corporations
The CARES Act expands the deduction for charitable contributions by corporations from 10% to 25% of taxable income. It also increases the limitation on deduction for contributions of food inventory from 15% to 25%.
YOU ARE NOT IN THIS ALONE
Navigating these resources can be tricky, and time is of the essence. As a CPA, it is our job to stay up to date on the changing regulations, and to help our clients take advantage of opportunities as they present themselves. This summary is meant to be a brief overview, but many stipulations can apply. Consult your tax advisor regarding your specific situation to learn which of these resources may be applicable to your business and can help you weather the storm and come out stronger and more prepared in the end.
About the author: Robert Shappee has over 18 years of experience in public accounting. During the last 13 years at Harris CPAs, Robert has focused his practice primarily on the construction industry, advising companies on process improvement, financial strategies, succession planning and tax strategies. He partners with businesses and owners in understanding the value in well planned and executed financial initiatives and how they can have a positive impact to the bottom line of their companies. He can be reached at robertshappee@harriscpas.com.
(Published in the Build Idaho Magazine – The official publication of the Idaho Associated General Contracters. Spring/Summer 2020 issue.) [...]
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May 4, 2020The novel coronavirus (COVID-19) has upended the global economy in a way that has never before been seen in the modern world. The virus has implications well beyond health: Within a matter of weeks, millions of Americans filed for unemployment, sending the unemployment rate to levels not seen since the Great Depression, and economic projections are grim. Some estimates place job losses near 50 million and GDP contraction in the second quarter at up to 25%, even as state and federal governments enact emergency measures and businesses across industries comply with mandatory closures.
Beyond the immense impact the outbreak is having on public health, the pandemic poses unique challenges to businesses across industries. While the hospitality industry initially took the full force of the virus’ initial effects, all sectors of the real estate and construction industries will be affected, to varying degrees, by the COVID-19 outbreak.
Ascertaining lost revenue and income stemming from these extraordinary circumstances is key to minimizing the financial consequences of this pandemic. As we all hope these extraordinary measures will flatten the curve, all real estate and construction companies need to prepare as if the spread will continue. To do that, industry leaders must take inventory of their exposure, discuss potential scenarios and develop a plan centered on communication and compassion.
Here are some key questions real estate and construction leaders need to ask to evaluate their risk profile and the corresponding action items to navigate the ongoing outbreak:
1. How prepared are we? What does “prepared” look like?
Conduct a daily business continuity risk assessment to evaluate the most current facts from reliable sources and identify potential internal operational, financial and market risks; determine direct and indirect impacts; and generate an action plan. Don’t forget third-party vulnerabilities such as customers and tenants—they should be assessed and incorporated into action plans as well.
Identify a response team to lead ongoing crisis management efforts that coordinate with appropriate federal, state and local authorities. These efforts should be clearly communicated, with regular updates making sure that affected parties fully understand the direction and intent of your initiatives, as well as what is required of them.
Clear and consistent communications—with internal and external stakeholders as well as their surrounding communities—about key protective measures they, your employees and clients, can take. Leveraging information from the World Health Organization’s (WHO) or the Centers for Disease Control and Prevention’s (CDC) dedicated public advice pages are good places to start.
2. Have we clearly communicated to our workforce what steps they should take and how they should respond to different scenarios identified?
Evaluate work-from-home arrangements and options for remote meetings and videoconferencing. Employees working remotely, meanwhile, will need secure remote access to necessary files and services, likely using a VPN, as well as collaboration tools including instant-messaging apps, project management platforms and shared documents.
Review remote working policies and guidelines. Remote workers should only use their work computers and not their personal computers, and managers should be trained on how to be virtual leaders by setting clear expectations and emphasizing regular communication.
Review policies for paid time off, sick leave and short-term disability. Employees should be reassured that they will not be penalized for taking sick leave. Policies for payment if the workplace is temporarily closed or employees are furloughed will also need to be reviewed and clarified.
3. What are our organization’s capabilities, strengths and weaknesses, including across the supply chain? Which third-party risks do we have, and where are they concentrated?
Build scenario models to determine ways to mitigate any risks to your supply chain. Originating in China, the pandemic immediately disrupted the global supply chain, including building and raw materials imports to the U.S. However, as countries successfully contain the disease’s contagion, supply chain disruptions appear to be decreasing. Map the parts of your supply chain that are going offline and coming back online, keeping in close communication with your vendors as events unfold.
Insulate your supply chain from disruption and create a backup plan. Identify ways to diversify your supply chain, if possible. Suppliers in countries affected by the pandemic could be supplemented, temporarily substituted or replaced by domestic sources.
4. What is our organization’s coverage, and do we have funds to support this crisis?
Evaluate your leases and contracts. Identify the impact from any service or supply chain interruptions, lease abatements, loss mitigation and higher costs related to workforce disruption, debt covenants and others. Determine the extent to which your contractual language will mitigate the financial impacts of the outbreak.
Determine a strategy for enforcing legal rights. While it may well be within your purview to enforce your rights as laid out within your contracts, consider, as an expedient to what may be an overtaxed judicial system, whether leveraging any federal, state or local government assistance available may immediately mitigate the impact of COVID-19 on your business.
Establish milestones for recovery. Resources are likely going to be stretched thin for the foreseeable future. It is important to create realistic, incremental goals and hold all members accountable for steering the course to achieve them.
5. With developments unfolding as quickly as they are, how can this threat continue to evolve, and what scenarios do we need to consider for our company?
Regularly monitor announcements from federal, state and local governments, the WHO and the CDC to determine other potential impacts and regulatory changes that could be coming down the pike for your organization.
Establish various versions of your enterprise risk plan that can be adapted to help mitigate risk should other waves of the outbreak take place, taking into consideration their intersection with your places of business.
Consider accounting implications and total tax liability changes. Your total tax liability will be affected depending on your individual company circumstances and the actions taken by local and national governments.
Evaluate and take advantage of potential benefits from the CARES Act, including payroll credits and SBA forgivable loans.
Following this checklist can better enable you to make informed operational and strategic decisions while balancing the risks inherent to an infectious disease pandemic. Beyond that, you can use the intel gained from your self-evaluation to build your capabilities over time and support the business case for future investments in resiliency.
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March 9, 2020For the past few years, we have kept a close eye on the future impact and implementation of ASC 606, the new revenue recognition standard. ASC 606 changes how most construction companies are required to recognize revenue under US generally accepted accounting principles (GAAP)—specifically contracts with customers and is. All companies are now required to adopt these new standards for 2019. This industry-standard revenue recognition model was designed to help streamline company and industry financial statements for comparability, with the overall goal to decrease the complexity of revenue recognition. But in some cases, it has created more questions and different interpretations. As member of the CICPAC (Construction Industry CPAs & Consultants) Association, we have been provided with the following three whitepapers that are available for download.
1. Revenue Recognition (ASC 606) Terminology & Concepts Part of learning the standard is understanding the terminology and concepts. CICPAC has compiled this Revenue Recognition Terminology & Concepts document to summarize the new terms as they relate to the old terms or to define what the new terms are referencing.
2. Using the Modified Retrospective Transition MethodThe modified retrospective method approach differs from the full retrospective method in that prior year financial statements are not restated. Instead, disclosure is required of differences in each line of the financial statements causing revenue recognized in 2019 under Topic 606 to differ from revenue that would have been reported using former accounting guidance if comparative financial statements are presented. This helpful resource will walk you through the steps needed to take this approach.
3. Retention Receivable GuidanceThe question many experts have regarding retainage under ASC 606 is whether retention receivable is to be presented as an account receivable or a component of contract asset. The final determination of classification will be based upon a careful review of several factors. This guide will help you properly classify your contracts’ retention receivables.
To download these free resources, please submit the form below:
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