Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 15

Pay the final installment of 2020 estimated tax.
Farmers and fishermen: Pay estimated tax for 2020.

February 1 (The usual deadline of January 31 is a Sunday)

File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
File 2020 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

March 1 (The usual deadline of February 28 is a Sunday)

File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans.

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As President-elect Joe Biden moves forward with the transition and prepares for the inauguration next month, you may be wondering how the federal estate tax may be affected.

During the campaign, Biden pledged to roll back many of President Trump’s tax policies. In response to the Tax Cuts and Jobs Act (TCJA), Biden has promised a progressive approach to taxation, focused primarily on increasing the burden on high-income individuals and businesses.

Bear in mind that his odds of translating his proposals into legislation in the next couple of years largely hinges on the outcomes of runoff elections for the two Georgia seats in the U.S. Senate. Biden’s party needs to win both seats to take a majority in the Senate. These elections are scheduled for January 5, 2021.

Proposals for gift and estate taxes

The TCJA temporarily doubled the federal gift and estate tax exemption to $10 million (adjusted annually for inflation), through 2025. The 2020 exemption is $11.58 million for individuals and $23.16 million for married couples; for 2021, it’s $11.7 million and $23.4 million, respectively. These TCJA amounts are scheduled to expire after 2025 to $5 million for individuals and $10 million for married couples, adjusted annually for inflation.

Biden has proposed reducing the exemption to $3.5 million for estate taxes and exempting $1 million for the gift tax. He also favors imposing a top estate tax rate of 45%, from the current rate of 40%.

In addition, Biden would like to end the “step-up” in basis that spares beneficiaries substantial tax liability for capital gains on inherited assets that have appreciated in value, such as stock or a house. If a beneficiary sells an inherited asset now, the capital gains generated is the difference between the asset’s fair market value at the time of sale less the stepped-up basis (the fair market value of the asset at the date of the deceased’s death), rather than the basis at the date of the original purchase. Without the step-up in basis, the capital gains generated on sale would be a larger amount.

Review your estate plan

As mentioned above, the ability of Biden to implement his proposals rests largely on the outcome of the Georgia runoff elections for Senate early next month. In the meantime, it would be worth your while to review your estate plan and make any necessary revisions. Potential tax law changes are a reason to trigger a review, as well as life changes, such as a marriage, the birth of a child or a divorce. Please turn to us for help reviewing your plan and making changes based on your specific circumstances.

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As the COVID-19 pandemic continues to disrupt work environments across the globe, business leaders should be aware of how they can motivate employees and improve morale. Increased stress, frustration and loneliness have lowered morale at many firms. Low employee morale can result in poorer work quality and employees who are more disengaged.

Business leaders and academics have studied what motivates people at work for years and different leaders have proposed different theories. In the Harvard Business Review, authors Lindsay McGregor and Neel Doshi identify six motivators – three positive and three negative – that influence work performance and motivation.

Play is when an employee is motivated by the work itself because they enjoy the activities of the work.
Purpose is when an employee values the work’s impact.
Potential is when the work enhances an employee’s future employment potential, i.e. promotion or advancement.
Emotional pressure such as fear, peer pressure, and shame.
Economic pressure is when an employee works to gain a reward or avoid a punishment.
Inertia is when an employee continues working because they worked yesterday and the day before, however they can’t explain why they are actually working.

The work of many researchers has found that the first three motives tend to increase performance, while the latter three hurt it. Companies with successful business cultures — from Southwest Airlines to Trader Joe’s — tend to maximize the good motives, while minimizing the bad ones.

As a result of the COVID pandemic, emotional pressure and economic pressure have increased for almost all employees as people worry about losing their jobs, paying their rent and protecting their health. Likewise, many employees are seeing their positive motivators threatened as they are finding it more difficult to connect with colleagues and clients. For example, employees may miss problem-solving with colleagues or face-to-face interaction with clients. The nature of communication and teamwork is changing in most work environments, whether employees are working remotely or not, and your employees may be questioning how much they enjoy these new changes.

So, what can you do to build and maintain a high-performing culture that continues to motivate your employees in this ever-changing world?

Effective Communication. It seems simple, but the more information you can share and the better you can communicate, the more your employees will feel valued. Remember that communication is a two-way street and in an evolving business climate, getting feedback from employees can help you determine what works and what does not. Soliciting ideas from employees reinforces your commitment to them.
Routine Meetings. With so much uncertainty in the world, developing a few routines can be reassuring. Holding a short reflection meeting with your team once a week, either in-person or through an online video platform, helps employees feel less isolated. It can also be an excellent way to encourage collaboration between employees and gives you an opportunity to recognize exceptional staff and their contributions.
Give Employees Freedom, Trust and Flexibility. Our world is in flux and many employees may need flexibility balancing their work lives with their personal lives. Be flexible and loosen some work restrictions where you can. That flexibility should also extend to employees’ roles. Think about where employees could be free to experiment and make that clear. Trust your employees to fulfill their potential and you will see your employees’ motivation renewed.

It is important for businesses to remember that a crisis, such as COVID, tests a company’s leadership and culture. Many new values can be formed under the strain, and it is a unique opportunity for employees to gain new perspectives on their organization and its leadership. The actions you take can help reinforce your employees’ trust in the organization and improve their performance at a difficult time. It can also help create a better culture that will carry on when the crisis is over.

How you react in the face of crisis and uncertainty can strengthen your business for years to come, so seize the opportunity.

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If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.

The QBI deduction:

Is available to owners of sole proprietorships, single-member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
Is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
Is taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
Is available regardless of whether you itemize deductions or take the standard deduction.

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2020, if taxable income exceeds $163,300 for single taxpayers, or $326,600 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. These include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in for 2020 applies to single filers with taxable income between $163,300 and $213,300 and joint filers with taxable income between $326,600 and $426,600.

For tax years beginning in 2021, the inflation-adjusted threshold amounts will be $164,900 for single taxpayers and $329,800 for married couples filing jointly.

Year-end planning tip

Some taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions at year-end so that they come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year end. The rules are quite complex, so contact us with questions and consult with us before taking steps.

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As your company plans for the coming year, management should assess your strengths, weaknesses, opportunities and threats. A SWOT analysis identifies what you’re doing right (and wrong) and what outside forces could impact performance in a positive (or negative) manner. A current assessment may be particularly insightful, because market conditions have changed significantly during the year — and some changes may be permanent.

Inventorying strengths and weaknesses

Start your analysis by identifying internal strengths and weaknesses keeping in mind the customer’s perspective. Strengths represent potential areas for boosting revenues and building value, including core competencies and competitive advantages. Examples might include a strong brand or an exceptional sales team.

It’s important to unearth the source of each strength. When strengths are largely tied to people, rather than the business itself, consider what might happen if a key person suddenly left the business. To offset key person risks, consider purchasing life insurance policies on key people, initiating noncompete agreements and implementing a formal succession plan.

Alternatively, weaknesses represent potential risks and should be minimized or eliminated. They might include low employee morale, weak internal controls, unreliable quality or a location with poor accessibility. Often weaknesses are evaluated relative to the company’s competitors.

Anticipating opportunities and threats

The next part of a SWOT analysis looks externally at what’s happening in the industry, economy and regulatory environment. Opportunities are favorable external conditions that could increase revenues and value if the company acts on them before its competitors do.

Threats are unfavorable conditions that might prevent your company from achieving its goals. They might come from the economy, technological changes, competition and government regulations, including COVID-19-related operating restrictions. The idea is to watch for and minimize existing and potential threats.

Think like an auditor

During a financial statement audit, your accountant conducts a risk assessment. That assessment can provide a meaningful starting point for your SWOT analysis. Contact us for more information.

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Many people have Series EE savings bonds that were purchased many years ago. Perhaps they were given to your children as gifts or maybe you bought them yourself and put them away in a file cabinet or safe deposit box. You may wonder: How is the interest you earn on EE bonds taxed? And if they reach final maturity, what action do you need to take to ensure there’s no loss of interest or unanticipated tax consequences?

Fixed or variable interest

Series EE Bonds dated May 2005, and after, earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE bonds were sold at half their face value. For example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its face value until it matures. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.

Interest generally accrues until redemption

Series EE bonds don’t pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.

The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn’t made so bond holders receive the benefits of tax deferral.

If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there’s a procedure under which the election can be canceled.

If the election isn’t made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond). The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported.

Note: Interest on EE bonds isn’t subject to state income tax. And using the money for higher education may keep you from paying federal income tax on your interest.

Reaching final maturity

One of the main reasons for buying EE bonds is the fact that interest can build up without having to currently report or pay tax on it. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. When the bonds reach final maturity, they stop earning interest.

Series EE bonds issued in January 1990 reached final maturity after 30 years, in January 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest is taxable in 2020.

If you own EE bonds (paper or electronic), check the issue dates on your bonds. If they’re no longer earning interest, you probably want to redeem them and put the money into something more profitable. Contact us if you have any questions about savings bond taxation, including Series HH and Series I bonds.

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Owners of closely held corporations are often interested in easily withdrawing money from their businesses at the lowest possible tax cost. The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient, since it’s taxable to you to the extent of your corporation’s “earnings and profits.” And it’s not deductible by the corporation.

Other strategies

Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five strategies to consider:

Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
Compensation. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). This same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In both cases, the compensation amount must be reasonable in terms of the services rendered or the value of the property provided. If it’s considered excessive, the excess will be a nondeductible corporate distribution.
Loans. You can withdraw cash tax free from the corporation by borrowing money from it. However, to prevent having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or note. It should also be made on terms that are comparable to those in which an unrelated third party would lend money to you, including a provision for interest and principal. Also, consider what the corporation’s receipt of interest income will mean.
Fringe benefits. You may want to obtain the equivalent of a cash withdrawal in fringe benefits, which aren’t taxable to you and are deductible by the corporation. Examples include life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other corporation employees. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50%-owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50%-owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those in which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

Minimize taxes

If you’re interested in discussing any of these ideas, contact us. We can help you get the most out of your corporation at the lowest tax cost.

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From natural disasters and government shutdowns to cyberattacks and fraud, risks abound in today’s volatile, uncertain marketplace. While some level of risk is inevitable when operating a business, proactive owners and executives apply an enterprise risk management (ERM) framework to manage it more effectively.

Evolving framework

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) was formed in July 1985 to combat fraudulent financial reporting. The panel is a joint initiative of the American Institute of Certified Public Accountants, Financial Executives International, Institute of Internal Auditors, American Accounting Association and Institute of Management Accountants.

COSO first published its Enterprise Risk Management — Integrated Framework in 2004. Companies aren’t generally required by law or regulations to apply an ERM framework. But they often choose to use COSO’s ERM framework to enhance their ability to manage uncertainty, consider how much risk to accept and improve understanding of opportunities as they strive to increase and preserve stakeholder value.

Through periodic updates, COSO aims to capture today’s best practices and help management attain better value from their ERM programs. The ERM framework was revamped in 2017 to address questions about how risk management should be incorporated with an organization’s management of its strategy. That update included five components: 1) governance and culture, 2) strategy and objective setting, 3) performance, 4) review and revision, and 5) information, communication and reporting.

The framework was modified again in 2018 to address sustainability issues. Specifically, COSO’s Guidance for Applying ERM to Environmental, Social and Governance (ESG)-related Risks highlights ESG risks, as well as opportunities to enhance resiliency as organizations confront new and developing risks, such as extreme weather events or product safety recalls.

In December 2019, COSO published Managing Cyber Risk in a Digital Age. This guidance addresses how companies can apply COSO’s framework to protect against cyberattacks. These attacks have been on the rise in 2020, in part, because people are increasingly reliant on the Internet for working, learning and interacting during the COVID-19 pandemic. And home networks tend to be more vulnerable to cyberattacks than in-office networks.

Broad scope

Many people are unclear what the term “ERM” means. ERM encompasses more than taking an inventory of risks — it’s an enterprise-wide process. Internal control is just one small part of ERM — it also may include, for example, strategy setting, governance, communicating with stakeholders and measuring performance. These principles apply at all business levels, across all functions and to organizations of any size.

The ERM framework is designed to help management anticipate risk so they can get ahead of it, with an understanding that change creates opportunities, not simply the potential for crises. In short, ERM helps increase positive outcomes and reduce negative surprises that come from risk-taking activities.

ERM in the new normal

Market conditions in 2020 have been unprecedented, and more uncertainty lies ahead. Our accounting professionals can help you identify and optimize risks. Contact us to discuss cost-effective ERM practices to make your business more resilient and responsive in the future.

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Many businesses and organizations are currently maintaining some hybrid model of remote/in-person work, with even more flexibility anticipated in the future. For most workforces, navigating processes, interactions and activities which are usually completed in-person, takes more than some new technology. Problems requiring unplanned, emergent coordination that could be addressed through impromptu interaction if everyone were in the same office, now require coordinated virtual communication.

The National Bureau of Economic Research utilized information from lockdowns in 16 metropolitan areas to compare the changes it caused to business communication patterns. Compared to pre- pandemic levels, they found increases in the number of meetings per person and the number of attendees per meeting, with decreases in the average length of meetings. They also found significant and durable increases in length of the average workday and email activity.

Employees are apprehensive about the challenges they are facing. Employers are too. Leaders of a remote workforce are facing a new organizational challenge. In addition to managing affairs, managers need to adopt new ways of leading their teams. The way you connect, enable and lead your remote team now, will set the trajectory for your next success.

Motivate and Inspire

Recognize that the dynamics of the office space must in some ways be recreated for a virtual workforce, but you can also re-envision and recreate your business for the better. A good virtual leader will start by clearly defining and then honing the virtual processes that will lead to success. Keep it simple. Move away from micro-management and delegate clear roles and benchmark goals with a heightened sense of trust. Prepare them and empower them.

Communication, Communication, Communication

Remote work-life integration and remote teamwork can be difficult and isolating. Communication is more critical than ever. Regular feedback and open communication boosts employees’ confidence in their work, improves mutual trust and ensures that managers are aware of issues as they arise. To create a culture of communication and enhance morale, give positive feedback generously and publicly when possible. This paves the way for effective feedback that is clearly understood and taken well by your employees. Remember, people won’t care how much you know until they know how much you care.

Tackle Problems Early

When businesses are operating in an environment of volatility, uncertainty, complexity and ambiguity, leaders must be sensitive to the barometer of the workforce where information is the freshest and most salient. Lead by example. Strengthen every available channel of virtual communication and be responsive and trustworthy. Conduct regular team meetings to check in, identify issues and tackle them together immediately.

Lead your virtual team with empathy and empower them to succeed.

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It’s been a year like no other. The sudden impact of the COVID-19 pandemic in March forced every business owner — ready or not — to execute his or her disaster response plan.

So, how did yours do? Although it may still be a little early to do a complete assessment of what went right and wrong during the crisis, you can take a quick look back right now while the experience is still fresh in your mind.

Get specific

When devising a disaster response plan, brainstorm as many scenarios as possible that could affect your company. What weather-related, environmental and socio-political threats do you face? Obviously, you can now add “pandemic” to the list.

The operative word, however, is “your.” Every company faces distinctive threats related to its industry, size, location(s), and products or services. Identify these as specifically as possible, based on what you’ve learned.

There are some constants for nearly every plan. Seek out alternative suppliers who could fill in for your current ones if necessary. Fortify your IT assets and functionality with enhanced recovery and security capabilities.

Communicate optimally

Another critical factor during and after a crisis is communication, both internal and external. Review whether and how your business was able to communicate in the initial months of the pandemic.

You and most of your management team probably needed to concentrate on maintaining or restoring operations. Who communicated with employees and other stakeholders to keep them abreast of your response and recovery progress? Typically, these parties include:

Staff members and their families,
Customers,
Suppliers,
Banks and other financial stakeholders, and
Local authorities, first responders and community leaders (as appropriate).

Look into the communication channels that were used — such as voicemail, text messaging, email, website postings and social media. Which were most and least effective? Would some type of new technology enable your business to communicate better?

Revisit and update

If the events of this past spring illustrate anything, it’s that companies can’t create a disaster response plan and toss it on a shelf. Revisit the plan at least annually, looking for adjustments and new risk factors.

You’ll also want to keep the plan clear in the minds of your employees. Be sure that everyone — including new hires — knows exactly what to do by spelling out the communication channels, contacts and procedures you’ll use in the event of a disaster. Everyone should sign a written confirmation that they’ve read the plan’s details, either when hired or when the plan is substantially updated.

In addition, go over disaster response measures during company meetings once or twice a year. You might even want to hold live drills to give staff members a chance to practice their roles and responsibilities.

Heed the lessons

For years, advisors urged business owners to prepare for disasters or else. This year we got the “or else.” Despite the hardships and continuing challenges, however, the lessons being learned are invaluable. Please contact us to discuss ways to manage costs and maintain profitability during these difficult times.

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A conflict of interest could impair your auditor’s objectivity and integrity and potentially compromise your company’s financial statements. That’s why it’s important to identify and manage potential conflicts of interest.

What is a conflict of interest?

According to the America Institute of Certified Public Accountants (AICPA), “A conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity.” Companies should be on the lookout for potential conflicts when:

Hiring an external auditor,
Upgrading the level of assurance from a compilation or review to an audit, and
Using the auditor for a non-audit purposes, such as investment advisory services and human resource consulting.

Determining whether a conflict of interest exists requires an analysis of facts. Some conflicts may be obvious, while others may require in-depth scrutiny.

For example, if an auditor recommends an accounting software to an audit client and receives a commission from the software provider, a conflict of interest likely exists. Why? While the software may suit the company’s needs, the payment of a commission calls into question the auditor’s motivation in making the recommendation. That’s why the AICPA prohibits an audit firm from accepting commissions from a third party when it involves a company the firm audits.

Now consider a situation in which a company approaches an audit firm to provide assistance in a legal dispute with another company that’s an existing audit client. Here, given the inside knowledge the audit firm possesses of the company it audits, a conflict of interest likely exists. The audit firm can’t serve both parties to the lawsuit and comply with the AICPA’s ethical and professional standards.

How can auditors prevent potential conflicts?

AICPA standards require audit firms to be vigilant about avoiding potential conflicts. If a potential conflict is unearthed, audit firms have the following options:

Seek guidance from legal counsel or a professional body on the best path forward,
Disclose the conflict and secure consent from all parties to proceed,
Segregate responsibilities within the firm to avoid the potential for conflict, and/or
Decline or withdraw from the engagement that’s the source of the conflict.

Ask your auditors about the mechanisms the firm has put in place to identify and manage potential conflicts of interest before and during an engagement. For example, partners and staff members are usually required to complete annual compliance-related questionnaires and participate in education programs that cover conflicts of interest. Firms should monitor conflicts regularly, because circumstances may change over time, for example, due to employee turnover or M&A activity.

For more information

Conflicts of interest are one of the gray areas in auditing. But it’s an issue our firm takes seriously and proactively safeguards against. If you suspect that a conflict exists, contact us to discuss the matter and determine the most appropriate way to handle it.

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Are you wondering if the passive activity loss rules affect business ventures you’re engaged in — or might engage in?

If the ventures are passive activities, the passive activity loss rules prevent you from deducting expenses that are generated by them in excess of their income. You can’t deduct the excess expenses (losses) against earned income or against other nonpassive income. Nonpassive income for this purpose includes interest, dividends, annuities, royalties, gains and losses from most property dispositions, and income from certain oil and gas property interests. So you can’t deduct passive losses against those income items either.

Any losses that you can’t use aren’t lost. Instead, they’re carried forward, indefinitely, to tax years in which your passive activities generate enough income to absorb the losses. To the extent your passive losses from an activity aren’t used up in this way, you’ll be allowed to use them in the tax year in which you dispose of your interest in the activity in a fully taxable transaction, or in the tax year you die.

Passive vs. material

Passive activities are trades, businesses or income-producing activities in which you don’t “materially participate.” The passive activity loss rules also apply to any items passed through to you by partnerships in which you’re a partner, or by S corporations in which you’re a shareholder. This means that any losses passed through to you by partnerships or S corporations will be treated as passive, unless the activities aren’t passive for you.

For example, let’s say that in addition to your regular professional job, you’re a limited partner in a partnership that cleans offices. Or perhaps you’re a shareholder in an S corp that operates a manufacturing business (but you don’t participate in the operations).

If you don’t materially participate in the partnership or S corporation, those activities are passive. On the other hand, if you “materially participate,” the activities aren’t passive (except for rental activities, discussed below), and the passive activity rules won’t apply to the losses. To materially participate, you must be involved in the operations on a regular, continuous and substantial basis.

The IRS uses several tests to establish material participation. Under the most frequently used test, you’re treated as materially participating in an activity if you participate in it for more than 500 hours in the tax year. While other tests require fewer hours, all the tests require you to establish how you participated and the amount of time spent. You can establish this by any reasonable means such as contemporaneous appointment books, calendars, time reports or logs.

Rental activities

Rental activities are automatically treated as passive, regardless of your participation. This means that, even if you materially participate in them, you can’t deduct the losses against your earned income, interest, dividends, etc. There are two important exceptions:

You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
If you qualify as a “real estate professional” (which requires performing substantial services in real property trades or businesses), your rental real estate activities aren’t automatically treated as passive. So losses from those activities can be deducted against earned income, interest, dividends, etc., if you materially participate.

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On September 17, the Financial Accounting Standards Board (FASB) issued an accounting rule that will provide more detailed information about noncash contributions charities and other not-for-profit organizations receive known as “gifts in kind.” Here are the details.

Need for change

Gifts in kind can play an important role in ensuring a charity functions effectively. They may include various goods, services and time. Examples of contributed nonfinancial assets include:

Fixed assets, such as land, buildings and equipment,
The use of fixed assets or utilities,
Materials and supplies, such as food, clothing or pharmaceuticals,
Intangible assets, and
Recognized contributed services.

Increased scrutiny by state charity officials and legislators over how charities use and report gifts in kind prompted the FASB to beef up the disclosure requirements. Specifically, some state legislators have been concerned about the potential for charities to overvalue gifts in kind and use the figures to prop up financial information to appear more efficient than they really are. Other worries include the potential for a nonprofit to hide wasteful use of its resources.

Enhanced transparency

Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, aims to give donors better information without causing nonprofits too much cost to provide the information.

The updated standard will provide more prominent presentation of gifts in kind by requiring nonprofits to show contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets. It also calls for enhanced disclosures about the valuation of those contributions and their use in programs and other activities.

Specifically, nonprofits will be required to split out the amount of contributed nonfinancial assets it receives by category and in footnotes to financial statements. For each category, the nonprofit will be required to disclose the following:

Qualitative information about whether contributed nonfinancial assets were either monetized or used during the reporting period and, if used, a description of the programs or other activities in which those assets were used,
The nonprofit’s policy (if any) for monetizing rather than using contributed nonfinancial assets,
A description of any associated donor restrictions,
A description of the valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition, and
The principal market (or most advantageous market) used to arrive at a fair value measurement if it is a market in which the recipient nonprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial asset.

The new rule won’t change the recognition and measurement requirements for those assets, however.

Coming soon

ASU 2020-07 takes effect for annual periods after June 15, 2021, and interim periods within fiscal years after June 15, 2022. Retrospective application is required, and early application is permitted. Contact us for more information.

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Remote audit procedures can help streamline the audit process and protect the parties from health risks during the COVID-19 crisis. However, seeing people can be essential when it comes to identifying and assessing fraud risks during a financial statement audit. Virtual face-to-face meetings can be the solution.

Asking questions

Auditing standards require auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks. Specific areas of inquiry under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit include:

Whether management has knowledge of any actual, suspected or alleged fraud,
Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
Any specific fraud risks that management has identified or that have been brought to its attention, and
The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist.

In addition, auditors will inquire about management’s communications, if any, to those charged with governance about the management team’s process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.

Seeing is believing

Traditionally, auditors require in-person meetings with managers and others to discuss fraud risks. That’s because a large part of uncovering fraud involves picking up on nonverbal cues of dishonesty. In a face-to-face interview, the auditor can, for example, observe signs of stress on the part of the interviewee in responding to the question.

However, during the COVID-19 pandemic, in-person meetings may give rise to safety concerns, especially if either party is an older adult or has underlying medical conditions that increase the risk for severe illness from COVID-19 (or lives with a person who’s at high risk). In-person meetings with face masks also aren’t ideal from an audit perspective, because they can muffle speech and limit the interviewer’s ability to observe facial expressions.

A videoconference can help address both of these issues. Though some people may prefer the simplicity of telephone or audioconferences, the use of up-to-date videoconferencing technology can help retain the visual benefits of in-person interviews. For example, high-definition videoconferencing equipment can allow auditors to detect slight physical changes, such as smirks, eyerolls, wrinkled brows and even beads of sweat. These nonverbal cues may be critical to assessing an interviewee’s honesty and reliability.

Risky business

Evaluating fraud risks is a critical part of your auditor’s responsibilities. You can facilitate this process by anticipating the types of questions your auditor will ask and ensuring your managers and accounting personnel are all familiar with how videoconferencing technology works. Contact us for more information.

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If you’re still around at this point of 2020, you’re probably expecting something crazy to happen. Will there be a release of a new and improved COVID-20? Will there be a civil war when half the country doesn’t like the election outcome? Are we in for a zombie apocalypse, perhaps?

While we do know that crazy stuff can happen, we can never predict it.

Financial media on the other hand, lives on predictors and prognosticators.

Every day, talking heads come onto CNBC and Bloomberg to gab about and predict the future of the economy, the stock markets and more. (In all honesty, they know nothing. But hey, something’s gotta fill their programming.)

We don’t like predictions because we know they don’t actually represent the truth. And even if they did, that information might not be as helpful as you’d think. Just imagine having a time machine where you could see future news, but not its financial outcome. All you’d need to do to know how the economy and stock market would look, is interpret the news.

So, it’s January of 2020, and you check into your magical machine. Alas, you see that a pandemic will be unleashed into the world, where air-travel would come to a halt, live sports would take a total sabbatical and the entire globe would be on an obligatory home confinement for months. You see that the virus will leave forty million Americans jobless, millions of people infected, and hundreds of thousands – dead.

Okay, now what would you do with your portfolio? Probably go to all-cash. Maybe you would buy some gold?

With the benefit of hindsight, cash was probably the worst asset class to be in. Gold did perform very well, but regarding the bulk of your decision, you would have been dead wrong. You would have never predicted that although thousands would die each day from the virus, the stock market would make a new all-time high just a couple of months afterwards.

Just think: If we can’t even predict the financial future knowing the news in advance, we definitely don’t stand a chance without that advantage.

Our take at Equinum is: stop predicting what the future holds. Instead, prepare and be ready for many diverse outcomes, including the crazy stuff.

If you watch financial media, your head should be spinning from all the current predictions coming from all the pundits sitting in their living rooms. (Although their bookshelves of borrowed books do make them look intelligent.)

Will we have hyper-inflation due to all the helicopter money being dropped in the form of stimulus and unemployment benefits, or deflation due to the millions of people out of work?

Will the market retest the March lows, or will the amazing ascent we are currently on, continue?

Will New York real estate have a Humpty Dumpty fall, or is this a once-in-a-life-time opportunity where the king’s horses and men come through?

Again, we don’t predict. But we do need to prepare.

And how do we do that?

Well first and foremost, we want to have an all-weather portfolio. That is, a properly diversified portfolio where you have a mix of asset classes and proper asset allocation.

At Equinum, we have made some changes to our clients’ accounts. We have swapped some of the government bonds in our portfolios to TIPS, which are inflation protected. So, if inflation gets out of control, clients won’t lose purchasing power.

We added some real assets to portfolios, like precious metals and real estate. These tend to do well in cases of inflation.

Income producing companies can also be a good hedge as well.

One more thing to the renters out there: It might be a prudent idea to consider purchasing a home. If we do have a pickup in real inflation, your rent can double over the next decade or so. But if you lock in a mortgage, your price is locked. To sweeten the deal, mortgage rates are the lowest ever recorded by Freddie Mac in a series that goes back to 1971.

If you have personal questions or concerns, please reach out to us at info@equinum.com to set up a call.

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In some cases, investors have significant related expenses, such as the cost of subscriptions to financial periodicals and clerical expenses. Are they tax deductible? Under the Tax Cut and Jobs Act, these expenses aren’t deductible through 2025 if they’re considered expenses for the production of income. But they are deductible if they’re considered trade or business expenses. (For tax years before 2018, production-of-income expenses were deductible, but were included in miscellaneous itemized deductions, which were subject to a 2%-of-adjusted-gross-income floor.)

In order to deduct investment-related expenses as business expenses, you must figure out if you’re an investor or a trader — and be aware that it’s more advantageous (and difficult) to qualify for trader status.

To qualify, you must be engaged in a trade or business. The U.S. Supreme Court held many years ago that an individual taxpayer isn’t engaged in a trade or business merely because the individual manages his or her own securities investments, regardless of the amount of the investments or the extent of the work required.

However, if you can show that your investment activities rise to the level of carrying on a trade or business, you may be considered a trader engaged in a trade or business, rather than an investor. As a trader, you’re entitled to deduct your investment-related expenses as business expenses. A trader is also entitled to deduct home-office expenses if the home office is used exclusively on a regular basis as the trader’s principal place of business. An investor, on the other hand, isn’t entitled to home-office deductions since the investment activities aren’t a trade or business.

Since the Supreme Court’s decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The U.S. Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this two-part test, a taxpayer’s investment activities are considered a trade or business only if both of the following are true:

The taxpayer’s trading is substantial (in other words, sporadic trading isn’t a trade or business), and
The taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments.

So, the fact that a taxpayer’s investment activities are regular, extensive and continuous isn’t in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, you must show that you buy and sell securities with reasonable frequency in an effort to profit on a short-term basis. In one case, even a taxpayer who made more than 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor because the holding periods for stocks sold averaged about one year.

Contact us if you have questions about whether your investment-related expenses are deductible. We can also help explain how to help keep capital gains taxes low when you sell investments.

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Today, many banks are working with struggling borrowers on loan modifications. Recent guidance from the Financial Accounting Standards Board (FASB) confirms that short-term modifications due to the COVID-19 pandemic won’t be subject to the complex accounting rules for troubled debt restructurings (TDRs). Here are the details.

Accounting for TDRs

Under Accounting Standards Codification (ASC) Topic 310-40, Receivables — Troubled Debt Restructurings by Creditors, a debt restructuring is considered a TDR if:

The borrower is troubled, and
The creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession it wouldn’t otherwise consider.

Banks generally must account for TDRs as impaired loans. Impairment is typically measured using the discounted cash flow method. Under this method, the bank calculates impairment as the decline in the present value of future cash flows resulting from the modification, discounted at the original loan’s contractual interest rate. This calculation may be further complicated if the contractual rate is variable.

Under U.S. Generally Accepted Accounting Principles (GAAP), examples of loan modifications that may be classified as a TDR include:

A reduction of the stated interest rate for the remaining original life of the debt,
An extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk,
A reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, and
A reduction of accrued interest.

The concession to a troubled borrower may include a restructuring of the loan terms to alleviate the burden of the borrower’s near-term cash requirements, such as a modification of terms to reduce or defer cash payments to help the borrower attempt to improve its financial condition.

Recent guidance

Earlier this year, the FASB confirmed that short-term modifications made in good faith to borrowers experiencing short-term operational or financial problems as a result of COVID-19 won’t automatically be considered TDRs if the borrower was current on making payments before the relief. Borrowers are considered current if they’re less than 30 days past due on their contractual payments at the time a modification program is implemented.

The relief applies to short-term modifications from:

Payment deferrals,
Extensions of repayment terms,
Fee waivers, and
Other payment delays that are insignificant compared to the amount due from the borrower or to the original maturity/duration of the debt.

In addition, loan modifications or deferral programs mandated by a federal or state government in response to COVID-19, such as financial institutions being required to suspend mortgage payments for a period of time, won’t be within the scope of ASC Topic 310-40.

For more information

The COVID-19 pandemic is an unprecedented situation that continues to present challenges to creditors and borrowers alike. Contact your CPA for help accounting for loan modifications and measuring impairment, if necessary.

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Financial audits conducted by outside experts are among the most effective tools for revealing risks in not-for-profits. They help assure donors and other stakeholders about your stability — so long as you respond to the results appropriately. In fact, failing to act on issues identified in an audit could threaten your organization’s long-term viability.

Working with the draft

Once outside auditors complete their work, they typically present a draft report to an organization’s audit committee, executive director and senior financial staffers. Those individuals should take the time to review the draft before it’s presented to the board of directors.

Your organization’s audit committee and management also should meet with the auditors prior to the board presentation. Often auditors will provide a management letter (also called “communication with those charged with governance”), highlighting operational areas and controls that need improvement. Your nonprofit’s team can respond to these comments, indicating ways they plan to improve the organization’s operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is properly comprehensive.

Executive director’s role

One important audit committee task is to obtain your executive director’s impression of the auditors and audit process. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? Consider this input when deciding whether to retain the same firm for the next audit.

The committee also might want to seek feedback from employees who worked most closely with auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit.

No material misrepresentation

The final audit report will state whether your organization’s financial statements present its financial position in accordance with U.S. accounting principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.

The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements. The auditors’ other suggestions, presented in the management letter, should include your organization’s responses.

If the auditors find your internal controls weak, promptly shore them up. You could, for example, implement new controls or new accounting practices.

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COVID-19 has changed our lives in many ways, and some of the changes have tax implications. Here is basic information about two common situations.

1. Working from home.

Many employees have been told not to come into their workplaces due to the pandemic. If you’re an employee who “telecommutes” — that is, you work at home, and communicate with your employer mainly by telephone, videoconferencing, email, etc. — you should know about the strict rules that govern whether you can deduct your home office expenses.

Unfortunately, employee home office expenses aren’t currently deductible, even if your employer requires you to work from home. Employee business expense deductions (including the expenses an employee incurs to maintain a home office) are miscellaneous itemized deductions and are disallowed from 2018 through 2025 under the Tax Cuts and Jobs Act.

However, if you’re self-employed and work out of an office in your home, you can be eligible to claim home office deductions for your related expenses if you satisfy the strict rules.

2. Collecting unemployment

Millions of Americans have lost their jobs due to COVID-19 and are collecting unemployment benefits. Some of these people don’t know that these benefits are taxable and must be reported on their federal income tax returns for the tax year they were received. Taxable benefits include the special unemployment compensation authorized under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

In order to avoid a surprise tax bill when filing a 2020 income tax return next year, unemployment recipients can have taxes withheld from their benefits now. Under federal law, recipients can opt to have 10% withheld from their benefits to cover part or all their tax liability. To do this, complete Form W4-V, Voluntary Withholding Request, and give it to the agency paying benefits. (Don’t send it to the IRS.)

We can help

We can assist you with advice about whether you qualify for home office deductions, and how much of these expenses you can deduct. We can also answer any questions you have about the taxation of unemployment benefits as well as any other tax issues that you encounter as a result of COVID-19.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Thursday, October 15

If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2019 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2019 to certain employer-sponsored retirement plans.

Monday, November 2

Report income tax withholding and FICA taxes for third quarter 2020 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Tuesday, November 10

Report income tax withholding and FICA taxes for third quarter 2020 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Tuesday, December 15

If a calendar-year C corporation, pay the fourth installment of 2020 estimated income taxes.

Thursday, December 31

Establish a retirement plan for 2020 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).

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Do you own a business with one or more individuals? Undoubtedly, your interest in the business represents a substantial part of your net worth and is likely your “pride and joy.” So it’s normal if your fondest wish is for the business to continue long after you’re gone or for you to keep it running if a co-owner or partner dies.

However, if adequate provisions aren’t made, the business may flounder if a leadership void isn’t filled. Or bitter family disputes may tear the organization apart. In the end, a “distress sale” may leave your heirs with substantially less than the company’s current value.

Fortunately, disastrous results may be avoided if you have a buy-sell agreement drafted during your lifetime. The agreement can dictate how the business is sold, to whom and for how much. Life insurance policies are often used to fund the transaction.

Buy-sell agreements in a nutshell

A buy-sell agreement may be used for virtually every type of business entity, including C corporations, S corporations, partnerships and limited liability companies. Typically, it applies to the shares of stock and any business real estate held by respective owners.

Although variations exist, the agreement essentially provides for the sale of a business interest to other owners or partners, the business entity itself, or a hybrid. Alternatively, the agreement may cover a sale to one or more long-time employees.

The agreement, which is typically signed by all affected parties, imposes restrictions on the future sale of the business or property. For instance, if you intend to leave a business interest to your children, you may provide for each child to sell or transfer his or her interest to another party or parties named in the agreement, such as grandchildren or other relatives.

Significantly, a buy-sell agreement often establishes a formula for determining the sale price of the business and its components. The formula may be based on financial statement figures, such as book value, adjusted book value, or the weighted average of historical earnings, or a combination of variables.

Understanding the benefits

Having a valid buy-sell agreement in writing removes much of the uncertainty that can happen when a business owner passes away. It provides a “ready, willing and able” buyer who’s arranged to purchase shares under the formula or at a fixed price. There’s no argument about what the business is worth among co-owners, partners or family members.

The buy-sell agreement addresses a host of problems about co-ownership of assets. For instance, if you have one partner who dies first, the partnership shares might pass to a family member who has a different vision for the future than you do.

Work with us to design a buy-sell agreement that helps preserve the value of your business for your family.

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You’d be hard-pressed to find a business that doesn’t value its customers, but tough times put many things into perspective. As companies have adjusted to operating during the COVID-19 pandemic and the resulting economic fallout, prioritizing customer service has become more important than ever.

Without a strong base of loyal buyers, and a concerted effort to win over more market share, your business could very well see diminished profit margins and an escalated risk of being surpassed by competitors. Here are some foundational ways to strengthen customer service during these difficult and uncertain times.

Get management involved

As is the case for many things in business, success starts at the top. Encourage your management team and fellow owners (if any) to regularly interact with customers. Doing so cements customer relationships and communicates to employees that cultivating these contacts is part of your company culture and a foundation of its profitability.

Moving down the organizational chart, cultivate customer-service heroes. Post articles about the latest customer service achievements on your internal website or distribute companywide emails celebrating successes. Champion these heroes in meetings. Public praise turns ordinary employees into stars and encourages future service excellence.

Just be sure to empower employees to make timely decisions. Don’t just talk about catering to customers unless your staff can really take the initiative to act accordingly.

Systemize your responsiveness

Like everyone in today’s data-driven world, customers want immediate information. So, strive to provide instant or at least timely feedback to customers with a highly visible, technologically advanced response system. This will let customers know that their input matters and you’ll reward them for speaking up.

The specifics of this system will depend on the size, shape and specialty of the business itself. It should encompass the right combination of instant, electronic responses to customer inquiries along with phone calls and, where appropriate, face-to-face (or direct virtual) interactions that reinforce how much you value their business.

Continue to adjust

By now, you’ve likely implemented a few adjustments to serving your customers during the COVID-19 pandemic. Many businesses have done so, with common measures including:

Explaining what you’re doing to cope with the crisis,
Being more flexible with payment plans and deadlines, and
Exercising greater patience and empathy.

As the months go on, don’t rest on your laurels. Continually reassess your approach to customer service and make adjustments that suit the changing circumstances of not only the pandemic, but also your industry and local economy. Seize opportunities to help customers and watch out for mistakes that could hurt your company’s reputation and revenue.

Don’t give up

This year has put everyone under unforeseen amounts of stress and, in turn, providing world-class customer services has become even more difficult. Keep at it — your extra efforts now could lay the groundwork for a much stronger customer base in the future. Our firm can help you assess your customer service and calculate its impact on revenue and profitability.

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Marketplace changes during the COVID-19 crisis have caused many companies to make major strategic shifts in their operations — and some changes are expected to be permanent. In certain cases, these pivot strategies may need to be reported under the complex discontinued operations rules under U.S. Generally Accepted Accounting Principles.

What are discontinued operations?

The scope of what’s reported as discontinued operations was narrowed by Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Since the updated guidance went into effect in 2015, the disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results.

A component comprises operations and cash flows that can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the company. It could be a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group.

Examples of a qualifying strategic shift include disposal of a major geographic area, a line of business or an equity method investment. When such a strategic shift occurs, a company must present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the balance sheet.

On the income statement, the results of discontinued operations are reported separately (net of income tax) from continuing operations in both the current and comparative periods. Allocating costs between discontinued and continuing operations is often challenging because only direct costs may be associated with a discontinued operation.

What disclosures are required?

Under GAAP, companies also must provide detailed disclosures when reporting discontinued operations. The goal is to show the financial effect of such a shift to the users of the entity’s financial statements — allowing them to better understand continuing operations.

The following disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:

The major classes of line items constituting the pretax profit or loss of the discontinued operation,
Either 1) the total operating and investing cash flows of the discontinued operation, or 2) the depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation, and
If the discontinued operation includes a noncontrolling interest, the pretax profit or loss attributable to the parent.

Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation or if a disposal doesn’t qualify for discontinued operations reporting.

Unfamiliar territory

Today’s conditions — including shifts to work-from-home arrangements, domestic supply chains and online distribution methods — have disrupted traditional business models in many sectors of the economy. These kinds of strategic changes don’t happen often, and in-house personnel may be unfamiliar with the latest guidance when preparing your company’s year-end financial statements. Contact us to help ensure you’re in compliance.

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Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless:

The taxpayer previously used the property and
The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:

Land improvements other than buildings, for example fencing and parking lots, and
“Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you’ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.

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The COVID-19 crisis is causing private companies to re-evaluate the type of financial statements they should generate for 2020. Some are considering downgrading to a lower level of assurance to reduce financial reporting costs — but a downgrade may compromise financial reporting quality and reliability. Others recognize the additional risks that work-from-home and COVID-19-related financial distress are causing, leading them to upgrade their assurance level to help prevent and detect potential fraud and financial misstatement schemes.

When deciding what’s appropriate for your company, it’s important to factor in the needs of creditors or investors, as well as the size, complexity and risk level of your organization. Some companies also worry that major changes to U.S. Generally Accepted Accounting Principles (GAAP) and federal tax laws in recent years may be overwhelming internal accounting personnel — and additional guidance from external accountants is a welcome resource for them to rely on while implementing the changes.

3 levels

In plain English, the term “assurance” refers to how confident (or assured) you are that your financial reports are reliable, timely and relevant. In order of increasing level of rigor, accountants generally offer three types of assurance services:

1. Compilations. These engagements provide no assurance that financial statements are free from material misstatement and conform with Generally Accepted Accounting Principles (GAAP). Instead, the CPA puts financial information that management generates in-house into a GAAP financial statement format. Footnote disclosures and cash flow information are optional and often omitted.

2. Reviews. Reviewed financial statements provide limited assurance that the statements are free from material misstatement and conform with GAAP. Here, the accountant applies analytical procedures to identify unusual items or trends in the financial statements. She or he inquires about these anomalies, as well as the company’s accounting policies and procedures.

Reviewed statements always include footnote disclosures and a statement of cash flows. But the accountant isn’t required to evaluate internal controls, verify information with third parties or physically inspect assets.

3. Audits. The most rigorous level of assurance is provided by an audit. It offers a reasonable level of assurance that your financial statements are free from material misstatement and conform with GAAP.

The Securities and Exchange Commission requires public companies to have an annual audit. Larger private companies also may opt for this service to satisfy outside lenders and investors. Audited financial statements are the only type of report to include an express opinion about whether the financial statements are fairly presented and conform with GAAP.

Beyond the analytical and inquiry steps taken in a review, auditors perform “search and verification” procedures. They also review internal control systems, tailor audit programs for potential risks of material misstatement and report on control weaknesses when they deliver the audit report.

Time for a change?

Not every business needs audited financial statements, and audits don’t guarantee against fraud or financial misstatement. But the higher the level of assurance you choose, the more confidence you’ll have that the financial statements fairly present your company’s performance.

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Increasing diversity is a key initiative at many companies in 2020. This movement goes beyond social responsibility — it can lead to better-informed decision-making, improved productivity and enhanced value. Congress has also jumped on the diversity-and-inclusion bandwagon: Legislation is in the works that would require public companies to expand their disclosures about diversity.

Good for business

Even though it’s not reported on the balance sheet, an assembled workforce is one of your most valuable business assets. From the boardroom to the production line, people are essential to converting hard assets into revenue. However, the tone of any organization starts at the top, where key decisions are made.

Academic research has found that boards with diverse members have better financial reporting quality and are more likely to hold management accountable for poor financial performance. This concept also extends to private companies: Management teams with people from diverse backgrounds and functional areas expand the business’s abilities to respond to growth opportunities and potential threats.

Bills to expand disclosures

The Securities and Exchange Commission (SEC) currently requires limited disclosures on boardroom diversity. Under current SEC rules, a public company must disclose whether and how it considers diversity in identifying board of director nominees. However, the rules don’t provide a definition of diversity.

In recent years, the SEC rules have been criticized for failing to provide useful information to investors. Critics want broader rules that provide more information about corporate board diversity.

In response, Congress is currently considering legislation to expand the SEC disclosure requirements. In November 2019, the House passed the Improving Corporate Governance Through Diversity Act. It would require public companies’ proxy materials to disclose additional diversity information on directors and board nominees.

The Senate introduced a similar bill in March 2020. In addition to expanding proxy statement disclosures, the Senate’s Diversity in Corporate Leadership Act would set up a diversity advisory group within the SEC to recommend ways to increase “gender, racial and ethnic diversity” on public company boards. The group would be tasked with studying strategies to improve diversity on boards of directors and would be required within nine months of its creation to report its findings and recommendations to the SEC, the Senate Banking Committee and the House Financial Services Committee.

In late July, a coalition of industry groups that included the American Bankers Association and U.S. Chamber of Commerce urged the Senate Banking Committee to pass the bill. “Our associations and members support efforts to increase gender, racial, and ethnic diversity on corporate boards of directors, as diversity has become increasingly important to institutional investors, pension funds, and other stakeholders,” the groups said.

Be a leader, not a follower

For now, Congressional legislation on diversity matters appears to have taken a backseat to more pressing matters related to the COVID-19 pandemic. In the meantime, many companies are planning to voluntarily expand their disclosures for 2020. We can help assess your level of boardroom or management team diversity — and provide cutting-edge disclosures that showcase your commitment to race, gender and ethnic diversity in the workplace.

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The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.

If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

The postponement means that you may be able to amend:

Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.

And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:

Capital loss deductions aren’t taken into account in computing the excess business loss and
The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

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If you’re getting close to retirement, you may wonder: Are my Social Security benefits going to be taxed? And if so, how much will you have to pay?

It depends on your other income. If you’re taxed, between 50% and 85% of your benefits could be taxed. (This doesn’t mean you pay 85% of your benefits back to the government in taxes. It merely that you’d include 85% of them in your income subject to your regular tax rates.)

Crunch the numbers

To determine how much of your benefits are taxed, first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file joint tax returns. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:

1. If your income plus half your benefits isn’t above $32,000 ($25,000 for single taxpayers), none of your benefits are taxed.

2. If your income plus half your benefits exceeds $32,000 but isn’t more than $44,000, you will be taxed on one half of the excess over $32,000, or one half of the benefits, whichever is lower.

Here’s an example

For example, let’s say you and your spouse have $20,000 in taxable dividends, $2,400 of tax-exempt interest and combined Social Security benefits of $21,000. So, your income plus half your benefits is $32,900 ($20,000 + $2,400 +1/2 of $21,000). You must include $450 of the benefits in gross income (1/2 ($32,900 − $32,000)). (If your combined Social Security benefits were $5,000, and your income plus half your benefits were $40,000, you would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals $4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure is used.)

Important: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You’ll have to pay tax on the additional income, you’ll have to pay tax on (or on more of ) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket.

For example, this situation might arise if you receive a large distribution from an IRA during the year or you have large capital gains. Careful planning might be able to avoid this negative tax result. You might be able to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock with gain that can be offset by a capital loss on other shares.

If you know your Social Security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments. Contact us for assistance or more information.

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Not-for-profits increasingly are adopting a corporate world tool: financial dashboards. A dashboard is a summary of an organization’s progress toward a specific goal over time — or a snapshot of its current situation. Dashboards are designed to help boards and other constituents visualize important metrics, or key performance indicators (KPIs). But to facilitate informed, timely decisions, it’s critical to select the right KPIs.

Choosing the right KPIs

A nonprofit’s financial KPIs will depend largely on factors such as its revenue streams, key expense factors, budget and strategic goals. To include the most useful metrics, identify your organization’s “business” drivers and solicit input from your audience.

Additionally, determine which factors affect the reliability of your revenue streams — and which influence expense levels. Then create KPIs that monitor those factors. Think, too, about the level at which you want to track your KPIs. You could monitor them by individual program or function, or at the organizational level.

Looking at an example

Say that a performing arts organization’s board is concerned about financial stability and liquidity. The nonprofit’s primary business drivers are proper pricing and maximum attendance. Its dashboard might include KPIs such as an increase or decrease in operating results, the level of liquid unrestricted net assets, current debt ratio (total liabilities / total assets), and progress toward a desired number of months’ cash on hand (cash on hand + current unrestricted investments / average monthly expenses). The organization also would want to monitor the number of tickets sold and average revenue per performance.

Over time, this nonprofit likely would need to adjust its KPIs as its strategies, priorities or programs change. As many organizations have learned recently, what was “key” last year isn’t necessarily key in today’s challenging environment.

Considering popular KPIs

Certain KPIs are popular among nonprofits. These include:

Current ratio. This reflects your organization’s ability to satisfy debts coming due within the year. Divide current assets by current liabilities. A ratio of “1” or more generally means you can meet those obligations.

Projected year-end cash. Based on the current cash position plus budgeted cash flows through the end of the fiscal year, this projects liquidity and ability to satisfy upcoming commitments.

Year-to-date revenue and expense. This KPI measures actual results against a budget and lets you know separately if revenues and expenses are in line with expectations or within a reasonable range.

Program efficiency ratio. The ratio assesses an organization’s mission efficiency by showing the amount of funding that goes to programs vs. administrative or other expenses. Calculate it by dividing a program’s expenses by its overall expenses.

Meaningful metrics

By providing a target such as budgeted amounts, chronological trends or external benchmarks, you’ll make the metrics more meaningful for your audiences. Contact us for help creating a dashboard with appropriate KPIs.

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On August 8, President Trump signed four executive actions, including a Presidential Memorandum to defer the employee’s portion of Social Security taxes for some people. These actions were taken in an effort to offer more relief due to the COVID-19 pandemic.

The action only defers the taxes, which means they’ll have to be paid in the future. However, the action directs the U.S. Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Legislative history

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act. A short time later, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act. Both laws contain economic relief provisions for employers and workers affected by the COVID-19 crisis.

The CARES Act allows employers to defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New bill talks fall apart

Discussions of another COVID-19 stimulus bill between Democratic leaders and White House officials broke down in early August. As a result, President Trump signed the memorandum that provides a payroll tax deferral for many — but not all — employees.

The memorandum directs the U.S. Treasury Secretary to defer withholding, deposit and payment of the tax on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020. This means that the employee’s share of Social Security tax will be deferred for that time period.

However, the memorandum contains the following two conditions:

The deferral is available with respect to any employee, the amount of whose wages or compensation, as applicable, payable during any biweekly pay period generally is less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods; and
Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax.

The Treasury Secretary was ordered to provide guidance to implement the memorandum.

Legal authority

The memorandum (and the other executive actions signed on August 8) note that they’ll be implemented consistent with applicable law. However, some are questioning President Trump’s legal ability to implement the employee Social Security tax deferral.

Employer questions

Employers have questions and concerns about the payroll tax deferral. For example, since this is only a deferral, will employers have to withhold more taxes from employees’ paychecks to pay the taxes back, beginning January 1, 2021? Without a law from Congress to actually forgive the taxes, will employers be liable for paying them back? What if employers can’t get their payroll software changed in time for the September 1 start of the deferral? Are employers and employees required to take part in the payroll tax deferral or is it optional?

Contact us if you have questions about how to proceed. And stay tuned for more details about this action and any legislation that may pass soon.

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While you probably don’t have any problems paying your tax bills, you may wonder: What happens in the event you (or someone you know) can’t pay taxes on time? Here’s a look at the options.

Most importantly, don’t let the inability to pay your tax liability in full keep you from filing a tax return properly and on time. In addition, taking certain steps can keep the IRS from instituting punitive collection processes.

Common penalties

The “failure to file” penalty accrues at 5% per month or part of a month (to a maximum of 25%) on the amount of tax your return shows you owe. The “failure to pay” penalty accrues at only 0.5% per month or part of a month (to 25% maximum) on the amount due on the return. (If both apply, the failure to file penalty drops to 4.5% per month (or part) so the combined penalty remains at 5%.) The maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months. The combined penalties can reach 47.5% over time in addition to any interest.

Undue hardship extensions

Keep in mind that an extension of time to file your return doesn’t mean an extension of time to pay your tax bill. A payment extension may be available, however, if you can show payment would cause “undue hardship.” You can avoid the failure to pay penalty if an extension is granted, but you’ll be charged interest. If you qualify, you’ll be given an extra six months to pay the tax due on your return. If the IRS determines a “deficiency,” the undue hardship extension can be up to 18 months and in exceptional cases another 12 months can be added.

Borrowing money

If you don’t think you can get an extension of time to pay your taxes, borrowing money to pay them should be considered. You may be able to get a loan from a relative, friend or commercial lender. You can also use credit or debit cards to pay a tax bill, but you’re likely to pay a relatively high interest rate and possibly a fee.

Installment agreement

Another way to defer tax payments is to request an installment payment agreement. This is done by filing a form and the IRS charges a fee for installment agreements. Even if a request is granted, you’ll be charged interest on any tax not paid by its due date. But the late payment penalty is half the usual rate (0.25% instead of 0.5%), if you file by the due date (including extensions).

The IRS may terminate an installment agreement if the information provided in applying is inaccurate or incomplete or the IRS believes the tax collection is in jeopardy. The IRS may also modify or terminate an installment agreement in certain cases, such as if you miss a payment or fail to pay another tax liability when it’s due.

Avoid serious consequences

Tax liabilities don’t go away if left unaddressed. It’s important to file a properly prepared return even if full payment can’t be made. Include as large a partial payment as you can with the return and work with the IRS as soon as possible. The alternative may include escalating penalties and having liens assessed against your assets and income. Down the road, the collection process may also include seizure and sale of your property. In many cases, these nightmares can be avoided by taking advantage of options offered by the IRS.

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If your business was fortunate enough to get a Paycheck Protection Program (PPP) loan taken out in connection with the COVID-19 crisis, you should be aware of the potential tax implications.

PPP basics

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020, is designed to provide financial assistance to Americans suffering during the COVID-19 pandemic. The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the PPP. In April, Congress authorized additional PPP funding and it’s possible more relief could be part of another stimulus law.

The PPP allows qualifying small businesses and other organizations to receive loans with an interest rate of 1%. PPP loan proceeds must be used by the business on certain eligible expenses. The PPP allows the interest and principal on the PPP loan to be entirely forgiven if the business spends the loan proceeds on these expense items within a designated period of time and uses a certain percentage of the PPP loan proceeds on payroll expenses.

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:

Payroll costs;
Interest (not principal) payments on covered mortgage obligations (for mortgages in place before February 15, 2020);
Payments for covered rent obligations (for leases that began before February 15, 2020); and
Certain utility payments.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage, make payments on a covered lease or make eligible utility payments.

Cancellation of debt income

In general, the reduction or cancellation of non-PPP indebtedness results in cancellation of debt (COD) income to the debtor, which may affect a debtor’s tax bill. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.

Expenses paid with loan proceeds

The IRS has stated that expenses paid with proceeds of PPP loans can’t be deducted, because the loans are forgiven without you having taxable COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit.

However, the IRS’s position on this issue has been criticized and some members of Congress have argued that the denial of the deduction for these expenses is inconsistent with legislative intent. Congress may pass new legislation directing IRS to allow deductions for expenses paid with PPP loan proceeds.

PPP Audits

Be aware that leaders at the U.S. Treasury and the Small Business Administration recently announced that recipients of Paycheck Protection Program (PPP) loans of $2 million or more should expect an audit if they apply for loan forgiveness. This safe harbor will protect smaller borrowers from PPP audits based on good faith certifications. However, government leaders have stated that there may be audits of smaller PPP loans if they see possible misuse of funds.

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During the COVID-19 crisis, you can’t afford to lose sight of other ongoing risk factors, such as cyberthreats, fraud, emerging competition and natural disasters. A so-called “stress test” can help reveal blind spots that threaten to disrupt your business. A comprehensive stress test requires the following three steps.

1. Identify the risks your business faces

Here are the main types of risks to consider:

Operational risks (based on the inner workings of the company),
Financial risks (involving how the company manages its finances, including the threat of fraud and the effectiveness of internal control procedures),
Compliance risks (related to issues that might attract the attention of government regulators, such as environmental agencies and the IRS), and
Strategic risks (regarding the company’s market focus and its ability to respond to changes in customer preferences).

If you’ve conducted a risk analysis in prior years, beware: Current risk factors may be different due to changes in market conditions, business operations and technology. For example, if your business pivoted to more online orders or remote working arrangements during the pandemic, it may now be more exposed to cyberattacks than it previously was.

2. Establish a risk management strategy

Meet with managers from all functional lines of business — including sales and marketing, human resources, operations, procurement, IT, and finance and accounting — to discuss the risks that have been identified. The goal is to improve your team’s understanding of business threats and to brainstorm ways to manage those risks.

For example, if your company operates in an area prone to natural disasters, such as earthquakes or wildfires, you should have a disaster recovery plan in place. Review copies of the disaster recovery plan and ask when it was last updated.

In addition to asking for feedback about identified risks, encourage managers to share any additional risk factors and projections regarding the potential financial impact. Their frontline experience can be eye-opening, especially during these unprecedented times.

3. Review and update your strategy

Managing risk is a continuous process. After creating your initial risk mitigation strategy, your management team should meet periodically to review whether it’s working. If it isn’t, brainstorm ways to fortify it.

For example, if your company’s disaster recovery plan has been activated recently, ask your management team to assess its effectiveness. Then consider making changes based on that assessment.

Need help?

While risk is part of operating a business, some organizations are more prepared to handle the unexpected than others. To ensure your company falls into the “more prepared” category, implement a stress test. We can help you assess current risks and develop a plan that’s right for you.

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On Tuesday, August 11^th, Roth&Co hosted a webinar titled, “State of The Industry: Nursing Homes & Assisted Living Facilities in a Post-COVID-19 World.” The roundtable featured Mr. Mark Parkinson, CEO and President of the American Health Care Association (AHCA) and former Governor of Kansas, and Steve Zicherman, Managing Partner at LTC Finance, a premier healthcare firm providing centralized back office and financial advisory services. The discussion was moderated by Roth&Co Partner Moshe Schupper. You can view a full video of the webinar here.

Please note that while we are sharing what we currently know, the details are still changing by the minute. We will continue to keep you updated as additional information becomes available. This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice.

Here are some key takeaways:

State of the Industry

This has been the toughest year in the history of our industry. Long-term care has endured over 50,000 deaths, taking an enormous emotional toll on our front-line heroes. From the business side, we have seen an average occupancy decrease of 10%, though that number varies by location and provider type, with facilities in the Northeast reporting census loss of up to 25%.

Today, we are doing better on both fronts: Clinically, the number of new cases and deaths has dropped significantly. From a business perspective, we received enormous resources from the Federal Government which provided much-needed relief. We are beginning to see the light at the end of the tunnel.

Through the CARES Act and other programs, we have been able to secure about $20 Billion for recovery for the sector, with providers receiving an average of $800,000. For about 80% of providers, this has allowed them to keep their heads above water, and hopefully, make it through to the end of the year. About 20% of the sector, mostly in the North East, will need a lot more assistance to stay afloat. We are optimistic that we will be able to get those buildings help as well.

HHS Distribution of an Additional $5 Billion

The U.S. Department of Health & Human Services has announced that they will distribute $5 billion to homes through four different programs:

$2.5 billion will be automatically distributed to every building in the country to be used for PPE, testing and staffing. Each home can decide how to allocate these funds. The amount that each home receives will be based on whether or not it has point of site antigen machines and how many beds there are in the facility. An average size facility (with about 104 beds) which has an antigen machine will receive $90,000. Homes without machines will receive $170,000, with the additional funding intended to cover the cost of testing. CMS is very likely to require buildings in a state with an infection rate of above 5% to test their staff weekly.
$2 billion will be spent on a value-based purchasing program that will incentivize keeping buildings COVID-19 free. Every month from September 2020 through December 2020, $500 million will be distributed to homes with an equal or better case count than their community average. It is expected to be about $70,000 a month per building. Each month will be considered individually, so a building may be eligible even if it was not previously. COVID-19-only wings and buildings will not be included in the total case count.
$250 million will be used to reimburse facilities with COVID-19-only wings or buildings. As of now, it only includes reimbursement of future expenses. We are advocating for reimbursement for past expenses as well.
$250 million will be designated to fund collaboration with outside groups to keep COVID-19 case count down. Currently, the details of this fund remains undefined.

Targeted Funds for New York & New Jersey Homes

We are actively advocating for COVID-19 hotspot payments in the next stimulus plan. While nothing specific has been proposed, the President’s comments have been supportive, so we are hopeful.

This is a lesson on the importance of relationships with local government. In some states, our ability to influence governors and legislatures is greater than in others. We need to do better politically in New York and New Jersey to receive the support we need, when we need it. This starts with being a united association.

Liability Protection

Majority Leader Mitch McConnell has included helpful language that protects skilled nursing and assisted living facilities by shielding them from any liability unless it is intentional or gross neglect. The legislation would limit the amount of recovery, ensuring that it does not exceed the amount in actual damages. It also moves litigation to federal court, which is very helpful since the most punitive damages have occurred in state courts. Normally, this would be difficult to get adopted, but Senator McConnell has declared it as his number one priority and will not let the bill pass without it.

Change of Ownership

New owners who have trouble accessing HHS funds that were distributed to former owners can sign up to receive the funds through a new portal, expected to open by Friday, August 14th.

If you are an AHCA member seeking assistance, you can email AHCA directly at CHOW@AHCA.org. In your email, please include building details as well the funds you would like to receive.

Deal-Making

While we saw a complete halt in all activity in April and May, the market bounced back as government support became clear. Activity right now is the same as it was before COVID-19 hit. There is interest in buying, equity is available, and banks consider the sector as a secure space to put their money. There is a little more diligence, but overall, players are ready to engage.

Returning to Pre-COVID-19 Levels:

Most facilities have seen a weekly occupancy decline of about 1%, beginning mid-March and continuing through June 1^st. Increasing our numbers relies on two factors:

Hospitals will need to start accepting patients for elective surgeries to create our post-acute business.
The public will need to regain the confidence needed to send family members back to our buildings.

Unfortunately, these two processes will take time. We expect the occupancy rates to remain stagnant through most of 2020.

The Long-Lasting Effects of COVID-19

We are expecting the release of a vaccine in January 2021, as well as proven therapeutic treatments for COVID-19. We are also hoping that by March 2021, the pandemic will be behind us, and that we will slowly grow both business and confidence levels.

The Election Ramifications

Polls currently predict that the upcoming election will deliver both the House and the Senate to Democratic control. This usually means greater access to funding, but with more oversight. Conversely, Republican control means less funding and less regulation. A bipartisan government is best for our sector as it moderates both funding and regulation.

Regardless of who wins this election, we expect a large amount of government oversight. There will be hearing after hearing on what went wrong and how it can be fixed. Our job is to ensure that the solutions that are helpful, get adopted. We are hoping for government support for proven infection control measures, like re-configuring our facilities to enable more private rooms and more collaborative survey systems that provide better data.

Last Words to Skilled Nursing & Assisted Living Facility Operators

These are the roughest five months of the sector. Congratulations on making it through and not giving up. You did a tremendous job. Our story is not over yet; we are expecting a rough 5 – 7 upcoming months. However, know that you are not alone. Every operator is experiencing the same thing. The AHCA is backing us up and the Government is behind us. We will get through this tougher.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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No company can afford to operate without the right accounting software. When considering whether to buy a new product or upgrade their current solutions, however, business owners often fall prey to some common mistakes. Here are five gaffes to avoid:

1. Relying on a generic solution. Some companies rush into buying an accounting system without stopping to consider all their options. Perhaps most important, they may be missing out on specific versions for their industries.

For instance, construction companies can choose from many applications with built-in features specific to how their businesses work. Nonprofit organizations also have industry-specific accounting software. If you haven’t already, check into whether a product addresses your company’s area of focus.

2. Spending too much or too little. When buying or upgrading something as important as an accounting system, it’s easy to overspend. Those bells and whistles can be enticing. Then again, frugal-minded business owners may underspend, picking up a low-end product and letting staff deal with the headaches.

The ideal approach generally lies somewhere in the middle. Perform a thorough review of your accounting needs, transaction volume and required reports, as well as your employees’ proficiency and the availability of tech support. Then calculate a reasonable budgeted amount to spend.

3. Getting stuck in a rut. Assuming you already have an accounting system, one of the keys to managing it is knowing precisely when to upgrade. You don’t want to spend money unnecessarily, but you also shouldn’t risk errors or outdated functionality by waiting too long.

There’s no one-size-fits-all answer. Your financial statements are a potentially helpful source of information. A general rule of thumb says that, when revenues hit certain benchmarks (perhaps $5 million, $10 million or $15 million), a business may want to start thinking “upgrade.” The right tipping point depends on various factors, however.

4. Neglecting the importance of integration and mobile access. Once upon a time, a company’s accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. You should be able to integrate your accounting system with all (or most) of your other software so that data can be shared seamlessly and securely.

Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that users can use on their smartphones or tablets.

5. Going it alone. Which accounting package you choose may seem an entirely internal decision. After all, you and your staff will be the ones using it, right? But you may be forgetting one rather obvious person who could help: your accountant.

We can help you assess and determine your accounting needs, set a feasible budget, choose the right solution (or upgrade) and implement it properly. Going forward, we can even periodically test your system to ensure it’s providing accurate data and generating the proper reports.

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There’s a bright side to today’s unprecedented market conditions: Agile people may discover opportunities to start new business ventures. Start-ups need a comprehensive business plan, including detailed financial forecasts, to drum up capital from investors and lenders. Entrepreneurs may also use forecasts as yardsticks for evaluating and improving performance over time.

However, forecasting can be challenging for a business with no track record, especially during today’s unprecedented conditions. Here’s an objective approach to developing forecasts based on realistic, market-based assumptions.

Starting point

Revenue is a critical line item in the forecast, because it drives many other accounts, such as direct costs, accounts receivable and inventory. To create a credible estimate of your start-up’s revenue-generating potential, consider the following questions:

What’s the size of the potential market?
How many competitors are vying for market share? What positioning strategies will the start-up use to compete?
How will the start-up price its products and services? Will its prices fall below, match or surpass those of competitors?
How will the start-up distribute products or services?
How many customers can the start-up support with its existing infrastructure? How will the start-up scale its operations to meet forecasted increases in demand?

It’s generally a good idea to develop multiple revenue scenarios — best, worst and most likely case. Then weight each scenario based on how likely it is to happen.

Costs and investments

Next, the costs directly attributable to producing revenue, such as materials, utilities and labor, need to be identified and quantified. These variable costs are typically stated as a percentage of forecasted revenue.

Some expenses — such as rent, insurance and administrative salaries — are fixed. That is, they remain constant over the short run, though they often have limited capacity. For example, you might need to add office space and headcount once a start-up grows beyond a certain level.

Besides expenses that are recorded on the income statement, start-ups may need working capital to ramp up operations. They may also need to invest in fixed assets, such as equipment, furniture and software. These expenditures are typically capitalized (reported) on the balance sheet and gradually depreciated their useful lives.

Finally, it’s time to focus on the missing puzzle piece: financing. You may need an initial round of capital to acquire (or produce) inventory, purchase essential assets and generate buzz about your new offering. Plus, start-ups often need ongoing access to capital — such as a revolving line of credit — to help fund the cash conversion cycle as the business grows.

Don’t let a competitor beat you to the punch!

Time is of the essence if you want to capitalize on emerging opportunities. So that you can focus on starting the business, we can help create an objective, defensible financial forecast for your start-up and benchmark your forecasted results against other successful businesses. This diligence will help impress prospective investors and lenders — and build value over the long run.

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Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

Filing requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you will need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

Reasons for the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

What’s considered “cash”

For Form 8300 reporting, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

E-filing and batch filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Setting up an account

To file Form 8300 electronically, a business must set up an account with FinCEN’s BSA E-Filing System. For more information, interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST) or email them at BSAEFilingHelp@fincen.gov. Contact us with any questions or for assistance.

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Does your employer provide you with group term life insurance? If so, and if the coverage is higher than $50,000, this employee benefit may create undesirable income tax consequences for you.

“Phantom income”

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s “phantom income.”

What’s worse, the cost of group term insurance must be determined under a table prepared by IRS even if the employer’s actual cost is less than the cost figured under the table. Under these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his or her compensation increases.

Check your W-2

What should you do if you think the tax cost of employer-provided group term life insurance is undesirably high? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group-term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return

Consider some options

If you decide that the tax cost is too high for the benefit you’re getting in return, you should find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are several different types of carve-out plans that employers can offer to their employees.

For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage, or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

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Although many businesses have had to reduce their workforces because of the COVID-19 pandemic, others are hiring or may start adding employees in the weeks or months ahead. A thoughtful onboarding program has become more important than ever in today’s anxious environment of safety concerns and compliance challenges.

Crucial opportunity

Onboarding refers to “[a formal] process of helping new hires adjust to social and performance aspects of their new jobs quickly and smoothly,” according to the Society for Human Resource Management.

Traditionally, a comprehensive onboarding program’s objective is to deliver multiple benefits to the company. These include stronger employee performance and productivity, higher job satisfaction and a deeper commitment to the business. New hires who are properly onboarded should also experience reduced stress and an enhanced sense of career direction.

What’s more, an onboarding program allows you to be crystal clear about compliance procedures, HR policies, compensation and benefits offerings. In other words, this is a crucial opportunity for you to explain to a new hire many issues, including all the measures you’re using to cope with the COVID-19 crisis.

3 parts to a program

What does a comprehensive onboarding program look like? Specifics will depend on the size, industry and nature of your company. Generally, however, an onboarding program can be segmented into three parts:

1. Preparing for the job. The onboarding process should begin before a new hire starts work. This involves steps such as discussing his or her specific acclimation needs, choosing and preparing a workspace (or introducing the platform and procedures for working remotely), and designating a coach or mentor.

2. Optimizing day one. As the saying goes, “You never get a second chance to make a good first impression.” An onboarding program might involve an itemized start-date schedule that lays out everything from who will greet the new employee at the door — or who will conduct a first-day video call — to what paperwork must be completed to a detailed itinerary of meetings (virtual or otherwise) throughout the day.

3. Following up regularly. Even a great first day can mean nothing if a new hire feels ignored thereafter. An onboarding program could establish continuing check-in meetings with the employee’s direct supervisor and coach/mentor for the first 30 or 60 days of employment. From then on, interactions with the coach/mentor could be arranged at longer intervals until the employee feels comfortable.

When the time is right

Onboarding in the year 2020 and beyond involves so much more than giving new employees their marching orders. It entails helping a new hire feel safe, supported and fully informed. We can help you calculate when the time is right to expand your workforce and accurately measure the productivity of workers added to your payroll.

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Starting in 2019, auditors’ reports for certain public companies must contain a new element: critical audit matters (CAMs). The requirement was in effect for audits of large accelerated filers (with market values of $700 million or more) in fiscal years ending on or after June 30, 2019. It goes into effect for smaller public companies in fiscal years ending on or after December 15, 2020.

Regardless of where you are in the implementation process, anticipating the CAMs that will appear in your auditor’s report may be especially challenging given the uncertainty caused by the COVID-19 crisis.

The basics

The auditor’s report offers an opinion as to whether the financial statements fairly present the company’s financial position, results of operations and cash flows in conformity with U.S. Generally Accepted Accounting Principles or another applicable financial reporting framework. In 2017, the Public Company Accounting Oversight Board (PCAOB) expanded the pass-fail format of the auditor’s report.

The PCAOB rule requires auditors to describe CAMs, which are matters that, from the auditor’s point of view, require especially challenging, subjective or complex judgment. CAMs aren’t necessarily meant to reflect negatively on the company or indicate that the auditor found a misstatement or internal control deficiencies. But they can raise a red flag to stakeholders.

Close-up on CAMs

When identifying CAMs, the auditor must:

Describe the principal considerations that led the auditor to determine that the matter is a CAM,
Describe how the CAM was addressed in the audit, and
Refer to the relevant financial statement accounts or disclosures that relate to the CAM.

In May, research firm Audit Analytics reported that the four most common CAMs in auditors’ reports issued for large accelerated filers through April 30, 2020, were: 1) goodwill and intangible assets, 2) revenue recognition, 3) structure events (valuation of acquiring assets), and 4) income taxes. Together, these topics accounted for more than half of all CAMs. These matters are expected to continue to present auditing challenges during the COVID-19 crisis.

Moving target

CAMs may change from year to year, based on audit complexity, changing risk environments and new accounting standards. Each year, auditors determine and communicate CAMs in connection with the audit of the company’s financial statements for the current period.

A significant event — such as a cybersecurity breach, a hurricane or the COVID-19 pandemic — may cause the auditor to report new CAMs. Though such an event itself may not be a CAM, it may be a principal consideration in the auditor’s determination of whether a CAM exists. And such events may affect how CAMs were addressed in the audit.

No surprises

Management and the audit committee should know what to expect when the financial statements are delivered. A dry run before year end can help you anticipate the CAMs that will appear on your auditor’s report for fiscal year 2020, so you can provide clear, consistent messaging to stakeholders. Contact us for more information.

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Timely, relevant financial data is critical to managing a business in today’s unprecedented conditions. Similar to the control panel in a vehicle or machine, dashboard reports provide a real-time snapshot of how your business is performing.

Why you need a dashboard report

Everything in a dashboard report can typically be found elsewhere in the company’s financial reporting systems, just in a less user-friendly format. Rather than report new information, a dashboard report captures the most critical data, based on the nature of the business. It can provide an early warning system for potential problems, allowing you to pivot as needed to minimize losses and jump on emerging opportunities in the marketplace.

To maximize the effectiveness of dashboard reports, make them accessible to managers across your organization via the company’s internal website or weekly email blasts. Widespread, easy access will allow your management team to quickly identify trends that require immediate attention. Additionally, businesses that are struggling during a reorganization or debt restructuring sometimes share these reports with their lenders as a condition of their continued support.

Metrics that matter

When deciding which information to target, look at your company’s loan covenants — lenders usually have a good sense of which metrics are worth monitoring. Then conduct your own risk assessment. What’s relevant varies depending on your industry, general economic conditions and the nature of your business operations.

In addition to tracking cash balances and receipts, most dashboard reports include the following ratios:

Gross margin [(revenue – cost of sales) / revenue],
Current ratio (current assets / current liabilities), and
Interest coverage ratio (earnings before interest and taxes / interest expense).

From here, consider adding a handful of company- or industry-specific performance metrics. For example, a warehouse might report daily shipments and inventory turnover. A hotel that’s struggling to reopen might provide a schedule of net operating income, average room rates and vacancy rates compared to the previous week or month. A law firm might report each partner’s realization rate.

A diagnostic test

Comprehensive financial statements are the best source of information about your company’s long-term stability and profitability — especially for external stakeholders. But dashboard reporting is critical for internal purposes, too. These reports can help assess a sudden change in market conditions, interim performance or potential downward trend in your financial performance. Contact us to help you compile a meaningful dashboard reporting process for your organization.

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When the COVID-19 crisis exploded in March, among the many concerns was the state of the nation’s supply chains. Business owners are no strangers to such worry. It’s long been known that, if too much of a company’s supply chain is concentrated (that is, dependent) on one thing, that business is in danger. The pandemic has only complicated matters.

To guard against this risk, you’ve got to maintain a constant awareness of the state of your supply chain and be prepared to adjust as necessary and feasible.

Products or services

The term “concentration” can be applied to both customers and suppliers. Generally, concentration risks become significant when a business relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region.

Concentration related to your specific products or services is something to keep a close eye on. If your company’s most profitable product or service line depends on a few key customers, you’re essentially at their mercy. If just one or two decide to make budget cuts or switch to a competitor, it could significantly lower your revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, your profit margin could narrow considerably. This is especially problematic if your number of alternative suppliers is limited.

To cope, do your research. Regularly look into what suppliers might best serve your business and whether new ones have emerged that might allow you to offset your dependence on one or two providers. Technology can be of great help in this effort — for example, monitor trusted news sources online, follow social media accounts of experts and use artificial intelligence to target the best deals.

Geography

A second type of concentration risk is geographic. When gauging it, assess whether many of your customers or suppliers are in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a substantial impact. As we’ve unfortunately encountered this year, the severity of COVID-19 in different regions of the country is affecting the operational ability and capacity of suppliers in those areas.

These same threats apply when dealing with global partners, with the added complexity of greater physical distances and longer shipping times. Geopolitical uncertainty and exchange rate volatility may also negatively affect overseas suppliers.

Challenges and opportunities

Business owners — particularly those who run smaller companies — have always faced daunting challenges in maintaining strong supply chains. The pandemic has added a new and difficult dimension. Our firm can help you assess your supply chain and identify opportunities for cost-effective improvements.

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If you’re a partner in a business, you may have come across a situation that gave you pause. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.

Why is this? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.)

Separate entity

While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.

A partnership must file an information return, which is IRS Form 1065. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.

Here’s an example

Two individuals each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his partnership interest from $50,000 to $10,000.

Other rules and limitations

The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions and other matters.

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You may think of trusts as estate planning tools — vehicles for reducing taxes after your death. While trusts can certainly fill that role, they’re also useful for protecting assets, both now and later. After all, the better protected your assets are, the more you’ll have to pass on to loved ones.

Creditors, former business partners, ex-spouses, “spendthrift” children and tax agencies can all pose risks. Here’s how trusts defend against asset protection challenges.

Tell creditors “hands off”

To protect assets, your trust must own them and be irrevocable. This means that you, as the grantor, generally can’t modify or terminate the trust after it has been established. (A “revocable trust,” on the other hand, allows the grantor to make modifications.) Once you transfer assets into an irrevocable trust, you’ve effectively removed your rights of ownership to the assets. Because the property is no longer yours, it’s unavailable to satisfy claims against you.

It’s important to note that placing assets in a trust won’t allow you to sidestep responsibility for debts or claims that are outstanding at the time you fund the trust. There may also be a substantial “look-back” period that could eliminate the protection your trust would otherwise provide, as well as other restrictions.

Build a fence

If you’re concerned about what will happen to your assets after they pass to the next generation, you may want to consider the defensive features of a “spendthrift” trust. Despite the name, a spendthrift trust does more than protect your heirs from themselves. It can protect your family’s assets against dishonest business partners and unscrupulous creditors. It also can protect loved ones in the event of relationship changes. For example, if your son divorces, his spouse generally won’t be able to claim a share of the trust property in the divorce settlement.

Several trust types can be designated a spendthrift trust — you just need to add a spendthrift clause to the trust document. Such a clause restricts a beneficiary’s ability to assign or transfer his or her interests in the trust, and it restricts the rights of creditors to reach the trust assets, as allowed by law.

Trustees play a role in keeping your trust safe. If a trustee is required to make distributions for a beneficiary’s support, a court may rule that a creditor can reach trust assets to satisfy support-related debts. So, for increased protection, consider giving your trustee full discretion over whether and when to make distributions. You’ll need to balance the potentially competing objectives of having the access you want and preventing creditors and others from having access.

Make asset protection a priority

If securing your assets is a priority — and it should be — talk to us about whether a trust can provide the protection you need. There may also be other ways to help shelter wealth — for example, maximizing your use of qualified retirement plans.

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If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

Fair market value rules

Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandfather bought ABC Corp. stock in 1935 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of your grandfather’s heirs — and all of that gain escapes federal income tax forever.

The fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, and those rules also apply to property inherited from foreign persons who aren’t subject to U.S. estate tax. It doesn’t matter if a federal estate tax return is filed. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

Step up, step down or carryover

It’s crucial for you to understand the fair market value basis rules so that you don’t pay more tax than you’re legally required to.

For example, in the above example, if your grandfather decides to make a gift of the stock during his lifetime (rather than passing it on when he dies), the “step-up” in basis (from $500 to $5 million) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it (just $500), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. Contact us for tax assistance when estate planning or after receiving an inheritance.

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Many business owners — particularly those who own smaller companies — spend so much time trying to eliminate weaknesses that they never fully capitalize on their strengths. One way to do so is to identify and explicate your unique selling proposition (USP).

Give it some thought

In a nutshell, a USP states why customers should buy your product or service rather than a similar one offered by a competitor. A USP might be rather obvious if you offer a type of state-of-the-art technology or specialize in a certain kind of service that’s not widely available. Many businesses, however, will need to dedicate some serious thought and discussion to identifying their USP — and they may need to do so every year or two to adapt to market changes.

Ask the right questions

Involve employees from every level of your company in brainstorming sessions to develop your USP. During these meetings, consider the answers to questions such as:

What makes our products or services distinctive?
What aspect of our business is most important to its growth?
Which elements of what we do are the most difficult for competitors to copy?
Why should customers buy from us instead of the competition?

As you might have noticed, knowledge of your competitors is critical to developing a strong USP. You can’t differentiate your business from theirs unless you’re familiar with what competitors are selling, how they sell their products or services, and how they support those sales in terms of customer service. To this end, you may need to undertake some “competitive intelligence” efforts to gather needed information.

Integrate it into the sales process

Your USP should be a powerful, concise statement that customers and prospects will immediately understand and recognize as fulfilling their wants or needs. Among the most commonly cited examples is package delivery giant FedEx’s “When it absolutely, positively has to be there overnight.” Although the company doesn’t use this slogan anymore, it remains a perfect example of a USP that’s clear and memorable.

Of course, your USP must be more than just words. Once established, it should serve as a sort of “mantra” for your sales team. That is, after identifying your customers’ needs during the sales process, they should use the USP (or an iteration of it) to explain to customers why your product or service is the right choice. Just be careful not to overuse your USP in sales and marketing materials, including on your website.

Now may be the time

Given the monumental changes that have occurred in the U.S. economy and in many industries because of the COVID-19 pandemic, now may be an imperative time to reconsider and relaunch your USP. We can help you evaluate your sales numbers, as well as return on investment in marketing efforts, to carefully craft the right approach.

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There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.

Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.

Why the new form?

Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.

What businesses will file?

Payers of nonemployee compensation will now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

Can a business get an extension?

Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.

Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:

The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.
A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.
The operation of the filer was affected by fire, casualty or natural disaster.
The filer was “in the first year of establishment.”
The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.

Need help?

If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

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The rise or downfall of a leader is often attributed to a crisis. If you have ever been involved in an organizational crisis, you know first-hand that its solutions require creative thinking. If you have ever been involved in managing one, you also know how a crisis constrains creative thinking just when you need it most.

The myth that creativity is heightened by the pressure of working ‘‘under the gun’’ was laid to rest by researchers almost ten years ago. Not only does deadline pressure stifle creativity, but its negative impact lasts even after deadlines expire. To achieve creative decisions, their recommendation was simple: avoid time pressure and situations requiring creativity under the gun.

Yet crisis management experts continue to assert that creativity enhances the thinking and planning necessary for responding to crises, even as they admit just how difficult the task is. So, what can you do to infuse your decision-making with creativity when it matters most to your organization?

Foster creative intentions: Create a culture that challenges the status quo and rewards efforts to look at old problems in new ways. To ignite sparks of creative thinking, encourage everyone in meetings to share allof their ideas- not just the great ones, but the ones they’re not so sure about- and explore them.
Develop enlightened trial and error: Familiarize team members with relevant threat scenarios and decision options by exploring cases and outcomes. Speculate about options and consequences, and get comfortable developing and questioning solutions vigorously. Practice makes it easier in a crisis to recognize and access known solutions and generate original alternatives together.
Don’t get comfortable with success: Look out for potential warning signals and act upon them quickly. Open-minded approaches like ferreting out bad news early and maintaining skepticism are necessary to support creative thinking and unconventional maneuvers.
Build trust: Lead a team that communicates openly, listens carefully and demonstrates mutual respect. When trust and confidence within a team grow, anxiety about managing unknown challenges tends to drop.

The 2007 global economic crisis is a prime example that underscores the importance of creative thinking in leadership. At congressional hearings, Alan Greenspan, the Chairman of the Federal Reserve at the time, was asked about failing to recognize numerous red flags that led to the global recession. Greenspan responded that he was shocked to find a flaw in his thinking. After all, he asserted, what he had been doing for more than 40 years, had worked exceptionally well.

Infusing organizational management with creativity is essential.

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Roth&Co is pleased to announce the acquisition of E.C. Ortiz & Co., LLP, an accounting and financial services firm based in Chicago, Illinois, with 45 accounting professionals and over 40 years of experience.

The deal expands Roth&Co’s regional reach to the Midwest, and broadens their service capabilities to include governmental entities among a variety of deep financial specialties. As of July 1st, 2020, E.C. Ortiz will operate under the Roth&Co brand.

The acquisition increases Roth&Co’s headcount to 14 partners and over 160 accounting professionals, with offices now in New York, New Jersey, Illinois and Israel. Roth&Co is the recipient of Inside Public Accounting’s Fastest Growing Firm award in 2019.

Both Roth&Co and E.C. Ortiz carry a respectable legacy of accounting and financial services, with Roth&Co founded in 1978, and Ortiz in 1974. Roth&Co was founded by Abraham Roth to service the accounting needs of local businesses and the nonprofit community. In the decades that followed, Roth&Co expanded to serve growing organizations across the Northeast and the U.S. at large, becoming a full-service solution with departments dedicated to taxation, assurance and advisory services.

The new addition to Roth&Co’s portfolio of businesses provides a strong foothold in the Midwest and adds a slate of real estate, healthcare and government entities to their already robust client base.

“E.C. Ortiz’s sterling reputation, local relationships and specialized services make them the perfect partner for our continuous expansion,” says Zacharia Waxler, co-managing partner of Roth&Co. “The acquisition allows us to continue to innovate and grow with our client community. It’s a win-win both for us, and for our clients,” he continued. “Roth&Co’s resources have just expanded exponentially, while client experience, relationship management and fee structures remain unchanged.”

Ortiz brings extensive experience in federal and state compliance, healthcare compliance and financial audits. “We couldn’t be more excited to join the Roth&Co family,” says Ortiz founder Ed Ortiz, who remains on board as one of the partners of the Illinois location. “We share the Roth&Co commitment to excellent, relationship-based financial services, and see the immediate value in combining resources for the benefit of our teams, clients and communities.”

Explore the site to see how your business can take advantage of our expanded suite of financial services.

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On Tuesday, June 23 ^rd , Roth&Co hosted a webinar on the topic of the new Paycheck Protection Program loan forgiveness applications. It was presented by Ahron Golding, our in-house tax controversy attorney, and moderated by Zacharia Waxler, Roth&Co’s Co-Managing Partner. There were opening remarks by Mr. Shlomo Werdiger, President & CEO of Outerstuff and Chairman of the Board of Agudath Israel of America. You can view a full video of the webinar here .

Please note that while we are sharing what we currently know about the applications, the details are still changing by the minute. We will continue to keep you updated as additional information becomes available. Keep in mind that the forgiveness process is brand new, so there is no experience to draw from. This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice.

Summary of Changes Under the Paycheck Protection Program Flexibility Act

Covered Periods:

The covered period in which the loan funds must be spent to qualify for forgiveness was changed from 8-weeks to 24-weeks.
If you received your loan before June 5^th, you have the option to choose between the 8-week and 24-week covered periods.

Payroll Costs:

The payroll cost requirement to qualify for maximum forgiveness was reduced from 75% of the total loan amount to 60%.
If payroll is less than 60%, forgiveness will be reduced, but will not be completely diminished.
You can spend more than 60% of your loan amount on payroll.

Headcount Requirements:

To qualify for maximum forgiveness, you are required to maintain the same employee headcount (FTE, or full time equivalent) as it was prior to the pandemic.

The following exceptions apply:

The amount of loan forgiveness will not be reduced due to loss of employees if the borrower can document the inability to hire or rehire new employees because of the business’s inability to return to its pre-February 15^th operating levels due to compliance of CDC, OSHA or HHS regulations. The SBA has clarified that if your local government ordered closures of businesses due to these guidelines, you would qualify for this exception. Keep documentation of any orders or guidelines that you are relying on for this safe harbor.
If you have reduced your headcount during the pandemic, you have the opportunity to restore your headcount without penalty by hiring back your workforce by December 31^st, 2020. This rehire safe harbor (called “safe harbor 2” on the regular forgiveness form) is only applicable if there was a reduction of FTE between February 15^th and April 26^th, 2020. If you did not reduce headcount between those dates, the “rehire/restore by December 31st” safe harbor will not apply.
The employer will not be penalized for reductions for positions in which the employer made a good-faith, written offer to rehire an employee and which was then rejected by the employee. Businesses have been finding this difficult to document, as employers are required to report rejected employment offers to the Department of Labor, possibly impacting the employee’s unemployment payments. Employees are therefore not inclined to respond in writing.

Other Changes:

Employers, even those who obtain forgiveness of a PPP loan, may defer their 2020 employer payroll taxes. 50% of the total due would need to be paid by the end of 2021, and the balance at the end of 2022.
You do not have to wait until December 31^st to apply for forgiveness. You can apply as soon as you have spent your loan proceeds on forgivable costs, even before your covered period is over.
Because of the extension to 24-weeks, those who are self-employed may now receive full forgiveness for up to $20,833 (rather than the 8-week limit of $15,385). The forgivable compensation limit is calculated as the 2.5-month equivalent of $100,000 per year ($20,833) or 2.5/12 (20.83%) of their 2019 Schedule C net income. This is per individual across all businesses.
For non-owner employees, the forgivable compensation limit is $46,154 for the 24-week covered period, and $15,385 for the 8-week covered period.
Note that you cannot apply for additional PPP funds due to the extension; it is just an extension of time in which you can spend it and receive forgiveness.

The New EZ Forgiveness Application

A simplified EZ Application is now available for sole proprietors and other borrowers who did not reduce their workforce or who were unable to maintain full employment due to safety guidelines. It is a 1-page form with a 1-page certification. However, there is extensive documentation required along with the application.

Qualifications for EZ Form:

self-employed with no employees; OR
did not reduce the salaries or wages of employees by more than 25% and did not reduce the number or hours of employees; OR
experienced reductions in business activity as a result of federal health directives related to COVID-19, and did not reduce the salaries or wages of employees by more than 25% of those of the first quarter of 2019.

How to Choose Between the 8-Week and 24-Week Covered Periods

You can apply for forgiveness at any time. An analysis is needed to know which covered period will yield maximum forgiveness.

Advantages of an 8-week covered period:

If you can spend the funds on forgivable costs sooner than later, you can get the PPP loan over with and get on with your business. You can apply for forgiveness as soon as you are ready.
You can take advantage of the safe harbor of reduction of business due to COVID-19 health guidance which will become harder to receive as cities move through their reopening phases.
Predictability. We never know what kind of regulations the SBA is going to come out with.
You can get the loan off your books. Borrowers who may need to maintain lines of credit or get subsequent loans will be impeded to the extent that lenders are concerned with the unclarity of how much forgiveness will be received. Until the forgiveness application has been approved by the bank and then by the SBA, the borrower cannot be sure that the loan will be forgiven.
You want to avoid tax complications. If you do not receive a forgiveness decision before you file your 2020 return, you may run into issues regarding business expenses, which cannot be deducted if those same expenses are later forgiven.

Advantages of a 24-week covered period:

You have more time to meet the required headcount and spending requirements. With 24 weeks, you have more payrolls, monthly rent and other expenses.

Bottom Line: If headcount and spending allow you to get full forgiveness after the 8-week period, then why risk waiting? Here at Roth&Co, we are doing the calculations for our clients now to determine the best choice. Unless you do the appropriate calculations, you will not have the data required to make a wise decision. Due to the current safe harbor, many businesses are able to apply for full forgiveness using a period significantly less than 24-weeks.

Frequently Asked Questions

Is there a deadline to apply for forgiveness?

At this point there is no clear deadline, but you will be required to start making payments to your bank 10 months after your covered period has ended.

When will I know if my loan is forgiven?

Your lender has 60 days to make a decision and inform the SBA, who then has 90 days to review, for a total of up to 150 days before a final decision is made. Keep all of your documentation on file for 6 years in case of an audit by the SBA.

Can you lay off your employees right after your covered period?

Yes.

Other Related Issues

The amount of EIDL Advance Grant (the portion that doesn’t have to be paid back) will be reduced from your PPP forgiveness.
If you received a PPP loan (whether or not it was forgiven), you are no longer eligible for the employee retention credit.

Back to industry updates

This week, the SBA reopened the EIDL loan and grant program for applicants and released an updated form for PPP forgiveness. Here is what it means for your business or organization:

EIDL LOAN & GRANT

On June 15 ^th , 2020, the SBA began accepting new Economic Injury Disaster Loan (EIDL) and EIDL Advance Grant applications from qualified small businesses. The EIDL provides low interest loans to small businesses and non-profits that have been severely impacted by COVID-19, as well as a grant of up to $10,000 that does not need to be repaid. Here is what you need to know:

EIDL Loans

Interest rates are 2.75% for nonprofits and 3.75% for businesses, with a maximum term of 30 years.
Loans over $200,000 must be guaranteed by an owner with at least 20% interest in the company. We expect this requirement to be waived for schools.
You can apply for this loan directly on SBA.gov. It is a simple form that can be completed in under 15 minutes.

EIDL Grants

Eligible businesses can request an advanced grant of up to $10,000, calculated at $1,000 per employee.
This grant does not need to be paid back, even if your organization is denied the EIDL loan.
You do not need to accept the loan to receive the grant.
If you get an EIDL grant, and later apply for a PPP loan, the EIDL grant will be subtracted from the amount that gets forgiven.

EIDL Eligibility

Small businesses with less than 500 employees, which have been in business as of January 31 ^st , 2020, are eligible. This includes:

independent contractors (for whom there is expanded eligibility criteria)
freelancers
sole proprietorships, with or without employees
gig workers
agricultural businesses

Although, the grants are available until December 16th, 2020, funds are expected to run out quickly, so apply as soon as possible.

The application could be found here .

UPDATED PPP FORGIVENESS APPLICATIONS

Today, the SBA, in consultation with the Department of the Treasury, posted a revised, borrower-friendly Paycheck Protection Program loan forgiveness application implementing the PPP Flexibility Act. In addition to revising the full forgiveness application, SBA also published a new EZ version of the forgiveness application which applies to borrowers who:

are self-employed and have no employees; OR
did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR
experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

The EZ application requires fewer calculations and less documentation for eligible borrowers. Details regarding the applicability of these provisions are available in the instructions to the new EZ application form.

Both applications give borrowers the option of using the original 8-week covered period (if their loan was made before June 5th, 2020) or an extended 24-week covered period. These changes will result in a more efficient process and make it easier for businesses to realize full forgiveness for their PPP loan.

Click here to view the EZ Forgiveness Application.

Click here to view the Full Forgiveness Application.

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On, June 5th, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (PPPFA) into law, which gives small businesses more flexibility in how they spend federal loans provided by the Paycheck Protection Program.

Under the act, the following changes were made:

The covered period to spend the loan proceeds was extended from 8 weeks to 24 weeks. Note: the loan amount will remain the same, borrowers just have more time to spend it and receive forgiveness. Businesses who received a loan prior to June 5, can still elect to use an 8 week period.
Only 60% of the loan amount must be allocated to payroll costs, instead of the previous 75%. The current language indicates that the 60% is now ‘all or nothing’. In other words, if 60% of payroll costs is not reached within the allowed 24 weeks, there will be zero forgiveness. There are legislators who have asked the SBA to not include this in the regulation.
The safe harbor to rehire employees in order to maintain FTE numbers was moved from June 30 to December 31. In addition, the amount of loan forgiveness will not be reduced due to loss of employees if the borrower can document the inability to hire or rehire new employees, due to the business’s inability to return to its pre-February 15 operating levels due to compliance of various regulations.
Employers who obtain forgiveness of a PPP loan may now defer all Employer Social Security tax deposits that would otherwise be required to be deposited before January 1, 2021.
The amount which is not forgiven can also be extended from a 2-year loan to up to 5 years.

There are many questions which remain unanswered with the passage of this new law. We are awaiting guidance from the SBA and will continue to keep you updated as information becomes available.

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Yesterday, June 3, 2020, the Senate passed the PPP Flexibility Act, which gives small businesses more flexibility in how they spend federal loans provided by the Paycheck Protection Program.

Under the bill, the terms for forgiveness would be relaxed, allowing businesses more time to rehire employees, expanding the covered period from 8 weeks to 24 weeks, and requiring only 60% of the loan amount to be allocated to payroll costs, instead of the previous 75%.

The amount which is not forgiven would also be extended from a 2-year loan to up to 5 years.

The bill has now been passed by the House and the Senate, and awaits President Trump’s signature to become law. Stay tuned for updates.

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In business, much as in life, there are things outside our control. Sudden social, political or economic

change can dramatically alter the landscape. When that happens- and inevitably it does- many leaders are presented with similar difficult circumstances, and where some succeed, others fail. Valuable lessons can be learned by observing those who get stuck as well as those who manage to keep moving forward.

Talk to any transformational leader and they will tell you that failure is something you need to get comfortable with if you want to be great. If it’s true that the greatest leaders once failed, then what exactly does it mean to fail, and, more importantly, how do we measure success?

Sports psychology explains what top athletes all have in common: they are always competing against themselves. They don’t play to beat the other players; they strive to outdo their own performance. If they lose, they respect the competition rather than gripe about unfair conditions. Every match is an opportunity to hone their skills. After every game, win or lose, they evaluate the strengths and weaknesses of their performance and adjust their efforts accordingly.

This model works in business as well. The best business leaders are competing against themselves. They understand that in business there is no absolute winner or loser, because the game is infinite. The infinite‐minded player understands that sometimes you have the better product, and sometimes “they” do. And it’s okay because this game isn’t over until you say so; it keeps going as long as you keep going.

When the going gets tough, the only way business will get better is when you do something better. The markets, the economy and the competition are not in your control. You can hope for one, or all of those things to change, or you can change what is in your control‐ your attitude, your process and your effort. Jeff Bezos often muses about how customer obsession is key to Amazon’s growth. Basketball superstar Kobe Bryant wrote about being fueled by his obsession to be the best, and Dropbox CEO Drew Houston talks about how critical it is to be obsessed with solving a problem that matters to you. What inspires these kind of “obsessions”?

“The most successful, hardest‐working people I know don’t work hard because they’re disciplined,” says Houston. “They work hard because they’re enjoying solving a problem they really care about…it’s not about pushing yourself — it’s about finding the thing that pulls you.”

If you are going to focus on a problem, find one you are enthusiastic about solving and then get excited about pursuing your goal. To be a success, you don’t have to be the best, you just have to be committed to doing something a little better all the time.

Back to industry updates

In business, much as in life, there are things outside our control. Sudden social, political or economic change can dramatically alter the landscape. When that happens- and inevitably it does- many leaders are presented with similar difficult circumstances, and where some succeed, others fail. Valuable lessons can be learned by observing those who get stuck as well as those who manage to keep moving forward.

Jeff Bezos often muses about how customer obsession is key to Amazon’s growth. Basketball superstar Kobe Bryant wrote about being fueled by his obsession to be the best, and Dropbox CEO Drew Houston talks about how critical it is to be obsessed with solving a problem that matters to you. What inspires these kind of “obsessions”?

Back to industry updates

Updated May 26^th, 2020

On Monday, May 11^th, Roth&Co hosted a webinar on the topic of maximizing Paycheck Protection Program loan forgiveness. It was presented by Ahron Golding, our in-house tax controversy attorney, and moderated by Zacharia Waxler, Roth&Co Co-Managing Partner. There were opening remarks by Rabbi Abba Cohen, Vice President for Government Affairs and Washington Director and Counsel of Agudath Israel of America. You can view a full video of the webinar here.

Due to lack of guidance from the SBA, there were some questions left unanswered during the webinar. The SBA has recently released their PPP Forgiveness Application, which includes instructions and clarifies some of these questions. For a copy of the forgiveness application from the SBA, see here. For your convenience, we have recapped the conversation below and responded to frequently asked questions, including the recent clarifications from the SBA. For a copy of the forgiveness application from the SBA, see here.

Please note that we are sharing what we currently know about PPP forgiveness, however we are still waiting on guidance regarding the many unknowns. This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice.

Secretary of Treasury Steven Mnuchin has indicated that loans over $2 million will be reviewed or audited for compliance. With this in mind, we recommend keeping detailed documentation as you make use of PPP funds to ensure you adhere to the guidelines and maximize forgiveness.

Determining & Documenting “Necessity”

The purpose of the PPP Program is to assist businesses and nonprofits facing financial difficulty with retaining workers, maintaining payroll or making mortgage interest, lease and utility payments. Each PPP applicant is required to sign a certification that specifies that: “the current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” The SBA guidance further clarifies that this takes into account current business activity and other sources of liquidity to support operations in a way that is not significantly determinantal to the organization. We therefore recommend documenting why the loan is necessary. This could be a memo or board meeting minutes where cashflow and forecasting are reviewed and makes clear that financial assistance to maintain operations is needed. The SBA has recently clarified that any loan under $2 million will be deemed to have been made in good faith.

If, upon further consideration, you determine that the PPP loan you received is not necessary under these guidelines, the funds can be returned under “safe harbor” amnesty until May 18th.

Note: PPP loan amounts may become public information as per the Freedom of Information Act, however this is not the case with tax information.

Maximizing Forgiveness – In General

The following guidelines were issued to ensure full or maximum forgiveness:

A minimum of 75% of received funds must be utilized for payroll.
The remaining 25% of the funds can be used to pay mortgage interest, rent, and utilities.
For full forgiveness, businesses must maintain employee headcount and salary levels.
Eligible expenses need to be incurred and paid over the eight-week period beginning from the day of the first PPP loan disbursement.

Payroll Costs: The Details

Payroll includes salary, vacation, leave, health and retirement benefits. There is a $100,000 annual salary maximum per employee (which translates to $15,385 maximum for the 8 weeks) allowed for forgiveness.
Shuttered businesses may pay employees that are not currently working. They are considered full-time employees (FTE) if you pay full wages.
Wages paid as parsonage is a payroll cost, and is considered cash compensation which is subject to the $100,000 annual salary cap.
The $100,000 annual salary cap is only a cap on cash compensation. Therefore employee benefits such as retirement contributions and health insurance are not limited by the $100,000 cap and are allowable as an additional payroll cost.
Businesses may use PPP funding to pay employees’ sick leave, unless they are already taking a credit for Family Medical Leave or Emergency Paid Sick Leave made available under the Family First Coronavirus Response Act.
Payments to 1099 contractors are notconsidered payroll costs.
Sole Proprietors (reported on Schedule C) can take a salary, which is also subject to the $100,000 annual cap (resulting in $15,385 maximum forgiveness for the 8 weeks). Retirement contributions, State and local taxes and health insurance for owners/partners/Sole proprietors are not forgivable payroll costs.
Cash distributions to active partners reported on a K-1 are allowable so long as it is allocated during the eight-week period (subject to same $100,000 annual cap).
There is a maximum of $15,385 of forgiveness (8 weeks of 100k annualized) per individual. If the same individual is an owner of 3 business, he can only receive forgiveness once
If a husband and wife are both owners, they are each most likely subject to their own $100,000 annual salary cap.

The Unknowns: What SBA Has Yet to Clarify

The following questions and considerations do not have clear guidance from the SBA.

Can we give raises or bonuses in order to reach the 75% payroll criteria for forgiveness? Yes
Is overtime pay allowed for employees? Is there a cap on the number of hours per employee based on other pay periods? Yes
Is an employer allowed to offer incentives to employees to entice them to return to work? Incentive pay has a good chance of being forgiven so long as it was paid during the eight-week period and documented correctly with concrete reasons as to why it was necessary? Yes, incentive or hazard pay is a forgivable payroll expense, as long as it was paid during the eight-week period
How is Qualified Tuition Reduction considered? This has not been clarified by the SBA. We have reason to believe that this falls under “other fringe benefits,” and would be included as an eligible payroll expense. QTR is not addressed on the newly released forgiveness form. We await further guidance from the SBA.

Expenses Paid & Incurred in the Covered Period

The statute states that, “costs incurred and payments made during the covered period” are eligible for forgiveness. How do we determine “incurred and paid” for the purpose of forgiveness?

The SBA has now clarified that Payroll expenses do not have to be both “paid and incurred” in the exact eight week period (56 days) that begins on the day that the first loan proceeds are received. The borrower is allowed to select the “Alternative Payroll Covered Period,” to coincide with their payroll schedule. The alternative pay period begins on the first day of the borrower’s first pay period following the date that they receive their first PPP funds and goes for the next 8 weeks.

For example, if you received your PPP funds on May 7, 2020, and the first day of your next pay period is May 15, 2020, you may elect to count the payroll costs for the 8-week period beginning May 15, 2020, rather than from May 1. In other words, you can start your 8 week period for payroll costs on your next regular scheduled payroll date after you receive the funds. This guidance ensures that companies will get 8 full weeks to use their loan for payroll costs, and get forgiveness for it.

This would answer questions like:

If I receive funds on May 15th, can I use those funds to make payroll which covers the preceding 2 weeks?

Yes. According to the forgiveness application, Payroll is considered paid on the day the paychecks are distributed or the employer originates the ACH transaction. Therefore, you could receive PPP money on May 15 and immediately pay – as part of your regular payroll process – wages that had been earned by the employees for the previous two weeks, and include the amounts in the forgiveness calculation because the amounts have been paid within your 8 weeks.

What if my 8 week period ends on June 23, but I don’t usually process payroll for that period until June 30? Should I accelerate my last payroll (which is already incurred) to ensure that it falls in the 8-week period?

You don’t have to accelerate, and it will still be forgiven. This is because payroll costs incurred for your last pay period of the 8-week period are eligible for forgiveness as long as they are paid no later than the next regular payroll date.

Can I pay ahead for benefits (such as medical) in order to maximize the forgiveness?

We await further guidance.

Can I pay the previous month’s rent if I haven’t paid it yet? Yes

Can I pay May’s rent if we received funds on May 7th?

Yes. Since the rent will have been paid during the 8 week period, it will qualify for forgiveness.

Note: The “covered period” for expenses other than payroll remains the 8 week period from when the funds were received by the borrower, regardless of whether they chose the Alternative period for payroll purposes. Therefore, if you elect the Alternative period, you will have two different 8 week periods to keep track of.

Other Expenses (up to 25%)

The remaining 25% of the funds can be used to pay mortgage interest (not including prepayment), rent, and utilities in force before February 15th, 2020.
For non-payroll costs such as mortgage interest, rent and utilities, to qualify for forgiveness, these expenses must either be: 1) paid during the 8-week covered period, or 2) incurred during the 8-week period, and paid by its next regular due date, even if that due date is outside the 8-week period.
Mortgage Interest: Amounts paid in interest on a mortgage obligation that the company incurred in the ordinary course of business before February 15th, 2020.
Rent: Rent paid pursuant to a lease agreement in force prior to February 15th, 2020.
Utility payments: Payment for services including the distribution of electricity, gas, water, transportation, telephone and internet access for which service began before February 15th, 2020. This also includes payments of a business’s car leases, gas, cellphones, Internet and landline bills.
Keep away from anything that looks like business expansion.

Forgiveness Reduction Issues

For full forgiveness, businesses must maintain prior employee headcount and 75% of salary levels.

How to calculate your prior headcount:

Step 1: Calculate your average full-time equivalent (FTE) headcount by adding:

A) Total amount of full-time employees (defined as those working 40+ hours a week), plus
B) Total amount of hours worked per week by part-time employees, divided by 40 (to add up the part timers)

Step 2: Choose the time period with the lower average FTE headcount:

A) February 15th – June 30th 2019
B) January 1st – February 29th 2020

You must have the same level now, from what you had prior (based on the above calculation).

If an employer rehires previously laid-off or furloughed employees by June 30th, the employer will not be penalized for the reduction. However, employers should keep in mind that they still need to ensure that 75% of their loan be paid towards payroll costs, to maximize forgiveness
Businesses may “replace” an employee to maintain headcount. The total number of employees needs to remain the same – not the employees themselves
Employers may not reduce the salaries of those earning less than $100,000 annually by more than 25%. However, they can cure that issue by raising the salaries back up before June 30th.
The employer will not be penalized for reductions in the following circumstances: (1) any positions for which the Borrower made a good-faith, written offer to rehire an employee during the 8 weeks which was rejected by the employee; and (2) any employees who (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested a reduction of their hours. Employer will, however, still need to meet the 75% payroll cost requirement. They just won’t be penalized for reduction of headcount or salary. In order to prevent being penalized for reduction of headcount or salary in such cases, the SBA is now requiring that the employer inform the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. If the employee voluntarily requested a schedule reduction, the employer should keep documentation of such request.

Adding It All Up: Financial & Tax Considerations

Here are some additional details on what can and cannot be included in your expense totals:

Employer-side payroll taxes are not forgivable.
The IRS has currently ruled that payroll and other expenses paid which eventually lead to forgiveness, will not be deductible as business expenses by the employer. Members of Congress are currently attempting to make a rule change to allow the expenses to be deductible. Stay tuned.
The CARES Act permits employers to defer the payment of the employer’s portion of payroll taxes. The employer will need to deposit half of these deferred payments by the end of 2021 and the other half by the end of 2022. If an employer receives forgiveness on a PPP loan, it is no longer eligible for this deferral. However, the deferral is still allowed until the date of forgiveness. At that point, employers will need to make regular payroll tax deposits.

Loan Forgiveness Timeline

The lender is required to issue the loan forgiveness decision within 60 days from the application of forgiveness.

We will continue to keep you updated as more information becomes available.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.

Back to industry updates

While the entire business community spent the past few weeks focused on getting SBA loans, we want to make sure the significant tax credits and deferrals made available by the CARES Act and other regulatory changes are not overlooked. Below, we have compiled a checklist of the provisions and their eligibility requirements that can translate into substantial savings.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon, for legal or tax advice.

EMPLOYEE RETENTION CREDIT

Effective as of March 12th, 2020, the Employee Retention Credit under the CARES Act was created to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in qualified wages per employee who is paid by employers whose business has been financially impacted by COVID-19.

Who is eligible to receive this credit?

Anyone who has received a PPP loan, whether or not it is forgiven, is ineligible for this credit.

All employers, including tax-exempt organizations, that meet one of the following conditions are eligible for the credit:

A. Operations were fully or partially suspended during any calendar quarter in 2020, due to government orders. This includes government-mandated shutdowns, curfews/limits on hours and workforce or a lack of supplies due to vendor closures. This does not include voluntarily closure of a business.

B. A significant decline in gross receipts experienced in a calendar quarter. A significant decline is defined as a 50% decrease of gross revenue from the same quarter in 2019. The duration of a significant decline includes all quarters that follow in 2020, until the quarter after gross revenue surpasses 80% of 2019 revenue.

How do I calculate the credit amount?

The credit is calculated as 50% of qualified wages (including health insurance) paid to eligible employees in a calendar quarter, up to a maximum wage of $10,000 annually. Qualified wages vary based on the size of an organization:

Organizations with less than 100 employees:

Qualified wages are wages paid to any employee during quarters that meet the eligibility conditions above.

Health insurance expenses are included as a qualified wage.

Organizations with more than 100 employees:

Qualified wages are wages paid only to an employee that is not providing services due to partial or full suspension of operations, or reduction of income. This amount cannot exceed that of wages paid 30 days prior to March 12th. This credit can also be used to cover wages for employees working reduced hours where the employer continues to pay their full-time wages. However, the credit is proportionate to the hours of no service.

If an employer pays for health insurance for employees that are not working (whether or not they have received other wages), the entire health insurance premium is eligible. If the employee is working reduced hours, health insurance is prorated in proportion.

The maximum credit is $5,000 per employee per year.

How do I claim this credit?

To claim this credit, reduce your payroll tax deposits by 50% of your qualified wage. If the credit is higher than the tax deposits, an accelerated credit can be requested through Form 7200 without having to wait for your 941 filing.

Please note: This credit does not get calculated as income, but rather as a reduction of wages, and will therefore decrease your wages for 199A calculation.

PAYROLL (SOCIAL SECURITY) TAX DEFERRAL

The CARES Act allows a deferral of the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date of the CARES Act’s enactment, through December 31st, 2020.

Who is eligible?

All organizations, including those that received PPP loans, are eligible.

When will the deferred taxes become due?

A payment of 50% of the deferred payroll taxes will be due on December 31st, 2021, and the remaining 50% by December 31st, 2022. If an employer receives forgiveness for a PPP loan, it is no longer eligible for this deferral. However, the deferral is still allowed until the date of forgiveness. At that point, employers will need to make regular payroll tax deposits.

How do I claim this deferral?

The way to apply this credit is as follows: reduce your payroll tax deposit by the employer portion of Social Security tax due. If you do not pay deposits, you can simply reduce the amount you pay when your 941 form is filed.

EMERGENCY PAID SICK & EXPANDED FAMILY MEDICAL LEAVE CREDITS

The Families First Coronavirus Response Act ensures that employees are eligible for two weeks of paid sick leave and use of 12 weeks of Family and Medical Leave Act leave for several circumstances related to COVID-19. Employers can claim a Social Security tax credit to offset the cost of providing expanded FMLA and emergency paid leave to their employees. The refundable credits would apply to all wages paid under these programs, effective from April 1st through December 31st, 2020.

Who is eligible?

Employers with fewer than 500 employees, with employees on leave due to:

COVID-19 illness
Quarantine
Caring for an individual in quarantine
Caring for a child whose school is closed, or whose childcare provider is no longer available due to COVID-19 illness

Please view this article for provision specifics.

How can I claim this credit?

Employers who pay paid sick and emergency family medical leave in accordance to FFCRA are entitled to a dollar-for-dollar tax credit. The credit is applied by reducing your payroll tax deposits by the amount paid to employees.

Employers can potentially take advantage of all three tax credits and deferrals. If the credit amount is higher than the tax deposits, an accelerated credit through Form 7200 can be requested without having to wait for your 941 filing.

We will continue to keep you updated as more information becomes available.

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Sustainability reports explain the impact of an organization’s activities on the economy, environment and society. During the novel coronavirus (COVID-19) pandemic, stakeholders continue to expect robust, transparent sustainability reports, with a stronger emphasis on the social and economic impacts of the company’s current operations than on environmental matters.

Investors, lenders and even the public at large may pressure companies to issue these supplemental reports. But the information they provide isn’t based on U.S. Generally Accepted Accounting Principles (GAAP). So, is it worth the time and effort? One way to make your company’s report more meaningful and reliable is to obtain an external audit of it.

What is a sustainability report?

In general, a sustainability report focuses on a company’s values and commitment to operating in a sustainable way. It provides a mechanism for communicating sustainability goals and how the company plans to meet them. The report also guides management when evaluating corporate actions and their impact on the economy, environment and society.

During the COVID-19 crisis, stakeholders want to know how your company is handling such issues as public health and safety, supply chain disruptions, strategic resilience and human resources. For example:

How is the company treating employees during the crisis?
Are workers being laid off or furloughed — or is management implementing executive pay cuts to retain its workforce?
What is the company doing to ensure its facilities are safe for workers and customers?
Is the company donating to charities and encouraging employees to participate in philanthropic activities during the crisis, such as volunteering at food pantries and donating blood?

Stakeholders want assurance that companies are engaged in responsible corporate governance in their COVID-19 responses. Sustainability reports can showcase good corporate citizenship during these challenging times.

Why do you need an external audit?

There aren’t currently any mandatory attestation requirements for sustainability reporting. That means companies can produce reports without engaging an external auditor to review the document for its accuracy and integrity. However, without independent, external oversight, stakeholders may view sustainability reports with a significant degree of skepticism. That’s where audits come into play.

Many organizations have developed standardized sustainability frameworks, including the:

Carbon Disclosure Project (CDP),
Dow Jones Sustainability Index (DJSI),
Global Initiative for Sustainability Ratings (GISR),
Global Reporting Initiative (GRI),
International Integrated Reporting Council (IIRC),
Sustainability Accounting Standards Board (SASB), and
United Nations’ Sustainable Development Goals (SDG).

External auditors can verify whether sustainability reports meet the appropriate standards, and, if not, adjust them accordingly. In addition, numerous attestation standards govern the audit of a sustainability report, including those from the American Institute of Certified Public Accountants, the International Standard on Assurance Engagements and the International Organization for Standardization.

Need help?

Many companies agree that a sustainability report is an important part of their communications with stakeholders. But there’s little consensus on the approach, topics or non-GAAP metrics that should appear in sustainability reports. We understand the standards that apply to these supplemental reports and can help you report sustainability matters in a reliable, transparent manner.

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With businesses across the country preparing for a reopening, Roth&Co’s HR director Chaya Salamon held a joint webinar session with employment attorneys Joel Greenwald and Jessica Shpall Rosen, of Greenwald Doherty LLP, about recommended practices to keep our employees safe and protect our businesses from liability. You can view a recording of the webinar here.

Below, you will find a recap of our discussion. Please keep in mind that this is informational only and not legal advice. In addition, the laws and guidance both governmental and health authorities are in flux.

With conditions changing every day, it is important to take the time to make considered decisions and consult your advisors, employment attorneys and accountants as necessary. This is a prime environment for plaintiffs’ attorneys on the lookout for potential lawsuits ‐ the last thing an employer needs at this time. Here are some considerations that our panelists discussed:

Track Time Carefully

Tracking time accurately may be difficult at this time, especially with non‐exempt employees working remotely without access to their usual timecards and oversight. However, it is essential to make sure they keep precise time records to ensure they are being paid for all time worked. In addition, there may be employees who are no longer exempt from overtime due to a decrease in wages below the minimum salary threshold, which means they will have to adjust to tracking their time.

Rehiring Furloughed & Laid‐Off Employees

While bringing back furloughed employees a relatively easy process, recalling laid‐off employees is, essentially, rehiring them. When rehiring employees, keep in mind:

New employee documentation should be completed and signed once again (for example, arbitration agreements, restrictive covenant agreements, immigration forms, and legal notices).
Depending on their policy and applicable law, employers may need (or want) to restore paid time off balances upon For example, some jurisdictions that require paid sick leave ‐ like New York City – have specific requirements when an employee is rehired.
Try to be as objective as possible in deciding who to bring back, to avoid an appearance of For example, base your choices on objective factors like length of service, high billings and sales numbers, and run these by counsel.

Health & Safety Recommendations

Employers should ensure the work environment is as safe as possible. This can be accomplished through measures such as:

Organizational Changes, for example:

Appointing a Chief Safety Officer or This could include the CEO, HR and other stakeholders who will take responsibility for health and safety.
Stay up to date on CDC, OSHA (Occupational Safety & Health Administration), EEOC (Equal Employment Opportunity Commission) and local and state guidance and standards of
Implement strong, clear, safety standards and policies (not just guidelines).

Personal Preventive Measures, for example:

Make sure that masks, gloves and hand sanitizer are available for your
Implement screening measures and return‐to‐work measures that are appropriate for your workforce (such as taking temperatures and testing), with guidance from counsel, as the laws and regulations in this particular area are changing
Monitor symptoms and send home employees exhibiting symptoms of COVID‐19.
Keep individual records tracking testing, symptoms or

Employment Infrastructure, for example:

Ensure social and physical
Stagger shifts so fewer employees are on site at one
Suspend large, in‐person meetings or extracurricular activities such as birthday
Allow employees to work remotely whenever feasible, particularly those who are high‐risk.
Establish common area

Physical Changes to the Workspace, for example:

Create more space around workstations to maintain social distancing
Erect walls and barriers among employees and clients
Update cleaning procedures to ensure regular disinfecting
Hang signage informing employees and visitors of new practices
Make stairways/hallways one‐way
Install hands‐free door‐opening

Responding to Illness, for example:

Report to health agency
Enact contact tracing
Disinfect office spaces

Business Changes, for example:

Establish rules regarding visitors, vendors and delivery
Cancel all non‐essential travel.

Potential Pitfalls

Requesting or requiring employees to disclose personal health information leaves you open to claims of privacy and HIPPA violations. On the other hand, if you don’t collect this information or take proper safety measures, you are at risk of an employee contracting COVID‐19, and potentially, facing a wrongful death suit. It is also unclear whether workers’ compensation insurance would cover employees who get sick with COVID‐19. Employers will need to weigh all these risks in consultation with counsel.

Be careful not to assume that employees are too feeble to work because of age, disability or illness. Doing so can leave you open to discrimination claims. Allow employees to approach you with their concerns, at which time you should engage in an interactive process to determine whether and how to reasonably accommodate their needs.

The foregoing is a summary of the laws discussed above for the purpose of providing a general overview of these laws. These materials are not meant, nor should they be construed, to provide information that

is specific to any law(s). You should be aware that these laws are changing rapidly. The above is not legal advice and you should consult with counsel concerning the applicability of any law to your particular situation.

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In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions. Here are two changes that affect businesses:

The limit on charitable deductions for corporations has increased. Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes). Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).

What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.

The deduction limit on food inventory has increased. At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities. In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy or infants.

“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.

Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.

What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

CARES Act questions

Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals. Contact us if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.

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Many small businesses continue to struggle in the wake of the coronavirus (COVID-19) pandemic. Some have already closed their doors and are liquidating assets. Others, however, may have a relatively less onerous option: bankruptcy.

Although bankruptcy obviously isn’t an optimal outcome for any small company, there may be a silver lining: A new bankruptcy law — coupled with an under-the-radar provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act — has made the process quicker and easier. It may even allow you to retain your business.

New law made better

The law in question is the Small Business Reorganization Act of 2019. That’s right, it was passed just last year and took effect on February 19, 2020, about a month before the pandemic hit the country full force.

The Small Business Reorganization Act added a new subchapter to the U.S. bankruptcy code: Subchapter V. Its purpose is to streamline the reorganization process for smaller companies and, in some cases, improve their odds of recovery.

When signed into law, Subchapter V applied only to companies or proprietors with less than about $2.7 million in debt. However, under the CARES Act, this amount has been temporarily increased to $7.5 million in debt. (Additional details apply; contact a bankruptcy attorney for a full explanation.)

Potential improvements

For small-business owners, Subchapter V could improve the bankruptcy process in several ways:

You may be able to keep your company. Under a Chapter 11 reorganization, business owners typically don’t receive an equity stake in the reorganized company until all debts are repaid. Subchapter V creates a pathway for owners to retain their equity if their disposable income is distributed to creditors over a certain period (generally three to five years) in a “fair and equitable” manner.

You may not need creditors’ approval to proceed. Small-business bankruptcies have long been stymied when one group of creditors object to the reorganization plan. Under Subchapter V, once a bankruptcy court approves the plan, the reorganization may proceed without creditors’ approval.

You may incur fewer costs and get it done more quickly. Subchapter V offers the opportunity to reduce the documentation and level of detail required under a traditional Chapter 11 proceeding. In turn, this can make the process less costly and more expeditious.

Prudent path

Given the extreme and sudden nature of this year’s economic downturn, bankruptcy has unfortunately become an option that many embattled small businesses will need to consider. Our firm can help you assess your company’s financial position and choose the most prudent path forward.Subchapter V: A silver lining for small businesses mulling bankruptcy

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The coronavirus (COVID-19) pandemic has affected many Americans’ finances. Here are some answers to questions you may have right now.

My employer closed the office and I’m working from home. Can I deduct any of the related expenses?

Unfortunately, no. If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expenses. For 2018–2025 employee home office expenses aren’t deductible. (Starting in 2026, an employee may deduct home office expenses, within limits, if the office is for the convenience of his or her employer and certain requirements are met.)

Be aware that these are the rules for employees. Business owners who work from home may qualify for home office deductions.

My son was laid off from his job and is receiving unemployment benefits. Are they taxable?

Yes. Unemployment compensation is taxable for federal tax purposes. This includes your son’s state unemployment benefits plus the temporary $600 per week from the federal government. (Depending on the state he lives in, his benefits may be taxed for state tax purposes as well.)

Your son can have tax withheld from unemployment benefits or make estimated tax payments to the IRS.

The value of my stock portfolio is currently down. If I sell a losing stock now, can I deduct the loss on my 2020 tax return?

It depends. Let’s say you sell a losing stock this year but earlier this year, you sold stock shares at a gain. You have both a capital loss and a capital gain. Your capital gains and losses for the year must be netted against one another in a specific order, based on whether they’re short-term (held one year or less) or long-term (held for more than one year).

If, after the netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit.

I know the tax filing deadline has been extended until July 15 this year. Does that mean I have more time to contribute to my IRA?

Yes. You have until July 15 to contribute to an IRA for 2019. If you’re eligible, you can contribute up to $6,000 to an IRA, plus an extra $1,000 “catch-up” amount if you were age 50 or older on December 31, 2019.

What about making estimated payments for 2020?

The 2020 estimated tax payment deadlines for the first quarter (due April 15) and the second quarter (due June 15) have been extended until July 15, 2020.

Need help?

These are only some of the tax-related questions you may have related to COVID-19. Contact us if you have other questions or need more information about the topics discussed above.

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Financial statements aren’t particularly meaningful without a relevant basis of comparison. There are two types of “benchmarks” that a company’s financials can be compared to — its own historical performance and the performance of other comparable businesses.

Before you conduct a benchmarking study, however, it’s important to make normalizing adjustments to avoid any misleading comparisons. This is especially important when looking at periods that include atypical financial results due to the novel coronavirus (COVID-19) pandemic. But there are a variety of factors that require normalizing adjustments.

Nonrecurring items

Some normalizing adjustments are needed to distinguish between historical results that represent potential ongoing earning power and those that don’t. A one-time revenue (or expense) or gain (or loss) will temporarily distort the company’s results. To more accurately reflect the company’s future earnings potential, you would add back expenses and losses (or subtract the revenues and gains) that aren’t expected to recur.

For example, if a retailer temporarily closed its brick-and-mortar stores during the COVID-19 pandemic, you’d add back the temporary losses to get a clearer picture of operating performance under normal conditions. Likewise, if a company won a $10 million lawsuit, you’d subtract the gain. Other nonrecurring items might include discontinued product lines or expenses incurred in an acquisition.

Accounting norms

Other normalizing adjustments compensate for the use of different accounting methods. Because companies’ accounting practices vary widely, comparing them without adjusting their financial statements is like comparing apples to oranges.

Even within the broad confines of Generally Accepted Accounting Principles (GAAP), it’s rare for two companies to follow exactly the same accounting practices. When comparing a company’s results to industry benchmarks, you need to understand how they report transactions.

A small firm, for example, might report earnings when cash is received (cash basis accounting), but its competitor might record a sale when it sends out the invoice (accrual basis accounting). Differences in inventory reporting, pension reserves, depreciation methods, tax accounting practices and cost capitalization vs. expensing policies also are common.

Related-party transactions

Another type of normalizing adjustment focuses on closely held businesses. They often pay owners based on the company’s cash flow or the owners’ personal needs, not on the market value of services the owners provide. Small businesses also may employ family members, conduct business with affiliates and extend loans to company insiders.

To get a clearer picture of the company’s performance, you’ll need to identify all related-party transactions and inquire whether they occur at “arm’s length.” Also consider reconciling for unusual perquisites provided to insiders, such as season tickets to sporting events, college tuition or company vehicles.

We can help

To complicate matters, normalizing adjustments can affect multiple accounts. While most normalizing adjustments are made to the income statement, some may flow through to the balance sheet. Our accounting professionals can help with these critical adjustments to a company’s financial statements, enabling you to make better-informed business decisions.

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On Friday, April 24th, President Trump signed a new bill providing a much-needed, additional $370 billion into the PPP and EIDL lending programs. Of the $370 billion, $60 billion is to replenish the Economic Injury Disaster Loan program, and $250 billion for the Paycheck Protection Program loans, with $60 billion set aside for community banks and community development financial institutions (CDFIs). While the initial round of funding under the CARES Act of $349 billion lasted for about a week before it dried up, this round is projected to last for just four to six days. Here’s what you need to know for a chance to receive these benefits:

PAYCHECK PROTECTION PROGRAM LOAN FORGIVENESS
We covered the Paycheck Protection Loan Program in detail in this article . Below is important additional information.
Hopefully, you have either made it through the mad-dash for the funds and had your loan approved or will get funded in this next round. With that in mind, here are our recommendations, based on currently known information, that gives you best the chance for maximum PPP loan forgiveness.

KEEP CLEAR RECORDS
We recommend using a separate bank account for the PPP funds to create an easy accounting trail. Maintain documents verifying the number of full-time equivalent employees on payroll as well as their salaries/wages for the period during which the loan was used to pay them. This could include payroll reports from a payroll provider, payroll tax filings, income/payroll/unemployment insurance filings from your state and paperwork that verifies retirement and health insurance contributions. In addition, have documents available that show payments of mortgage interest, rent and utilities.

MAKE NOTE OF THE TIMELINE
Funds must be spent within 8 weeks of receiving them. At the end of this 8-week period, you can apply for forgiveness through your bank.

ALLOCATE THE FUNDS CORRECTLY
At least 75% of the funds need to be used for payroll costs, with the maximum annual salary of $100k per employee. Forgiveness appears to be calculated on a cash-basis, which means accrued payroll due after the 8-week period will not qualify. This does not include the employer’s share of social security taxes. The IRS has agreed to defer the 6.2% employer share owed as of March 27, 2020, though the date on which the lender issues a decision on loan forgiveness.
The remaining 25% of the funds can be used for rent, mortgage interest (but not prepayments or payments towards the principal), utilities, continuation of healthcare benefits for those on leave, and interest payments on any debt obligation incurred before February 15th, 2020.

LOAN FORGIVENESS REDUCTION
To maintain 100% forgiveness, you will need to either keep your payroll as it was before February 15th, 2020 or during the same period in 2019, or hire back all laid-off employees, and undo wage reductions by the end of the PPP “covered period” on June 30th. The total amount forgiven will be reduced in proportion to the reduction in head-count, or wages decreased by more than 25%.

ECONOMIC INJURY DISASTER LOAN PROGRAM
The SBA will directly provide loans up to $2 million to small businesses and non-profits that have been severely impacted by COVID-19. An additional $60B has been made available in this last round. This is a good option for businesses with high non-payroll expenses. Here is how it works:

Interest rates are 2.75% for nonprofits and 3.75% for businesses, with a maximum term of 30 years.
Loans over $200,000 must be guaranteed by an owner with at least 20% interest in the company. We expect this requirement to be waived for schools.
Eligible businesses can request an advanced grant up to $10,000, calculated at $1,000 per employee. This grant does not need to be paid back, even if your organization is denied the EIDL loan. Note that if you get an EIDL advance, and later apply for a PPP loan, the EIDL will be subtracted from the amount that gets forgiven.
You can apply for this loan directly from SBA.gov

Note: At this moment the SBA is not accepting new applications and are only processing applications that were already submitted.

MAIN STREET LENDING PROGRAM
The Main Street Lending Program, an additional program created by the Federal Reserve, is a great alternative to the SBA programs which are running low in funds. This $600B program is designed to help banks give money more freely to businesses in need of a loan by purchasing a large portion of the loan from the bank, freeing the banks of most of the risk. The Federal Reserve will buy up to 95% of the loan from the bank, leaving just 5% with the bank that originated the loan. Here is how it works:

The program is available to all businesses with fewer than 10,000 employees or with revenues of less than $2.5 billion.
The term of these loans is four years, and loan amounts generally range between $1 million and $25 million. The loan amount is calculated as 4x earnings before interest, taxes, depreciation and amortization (EBITDA) less any debt. The minimum loan amount in $1 million.
Interest rates on these loans will be anywhere from 2.5% to 4%, with a repayment term of four years.
These loans cannot be used to pay off any other existing debt.
Once you have a loan, there are several requirements you must meet. First, all efforts must be made to maintain payroll and retain workers through the pandemic and economic crisis. Second, you must meet all compensation, stock repurchase and dividend restrictions that apply to direct loans under the CARES Act. Finally, there are several salary restrictions for employees or officers making more than $425,000.
This loan is available through your bank or local lender, and you are still eligible if you have made use of other SBA loans, such as the PPP.

We will continue to keep you informed as information becomes available. Please don’t hesitate to contact us with questions or concerns.

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The novel coronavirus (COVID-19) pandemic has adversely affected the global economy. Companies of all sizes in all industries are faced with closures of specific locations or complete shutdowns; employee layoffs, furloughs or restrictions on work; liquidity issues; and disruptions to their supply chains and customers. These negative impacts have brought the “going concern” issue to the forefront.

One-year look-forward period

Financial statements are generally prepared under the assumption that the entity will remain a going concern. That is, it’s expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business.

Under Accounting Standards Codification Topic 205, Presentation of Financial Statements — Going Concern, the continuation of an entity as a going concern is presumed as the basis for reporting unless liquidation becomes imminent. Even if liquidation isn’t imminent, conditions and events may exist that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern.

Management is responsible for evaluating the going concern assumption. Going concern issues arise when it’s probable that the entity won’t be able to meet its obligations as they become due within one year after the date the financial statements are issued — or available to be issued. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)

Making the call

The going concern assumption is evaluated when preparing annual and interim financial statements under U.S. Generally Accepted Accounting Principles (GAAP). The evaluation is based on qualitative and quantitative information about relevant conditions and events that are known (or reasonably knowable) at the time the evaluation is made.

Examples of warning signs that an entity’s long-term viability may be questionable include:

A reduction in sales due to store closures,
A shortage of products and supplies used in manufacturing operations,
A decline in value of assets held by the company,
Recurring operating losses or working capital deficiencies,
Loan defaults and debt restructuring,
Denial of credit from suppliers,
Disposals of substantial assets,
Work stoppages and other labor difficulties,
Legal proceedings or legislation that jeopardizes ongoing operations,
Loss of a key franchise, license or patent,
Loss of a principal customer or supplier, and
An uninsured or under-insured catastrophe.

If management concludes that there’s substantial doubt about the entity’s ability to continue as a going concern, it must consider whether mitigation plans can be effectively implemented within the one-year look-forward period to alleviate the going concern issues.

Reporting going concern issues

Few businesses will escape negative repercussions of the COVID-19 crisis. If your business is struggling, contact us to discuss the going concern assessment. Our auditors can help you understand how the evaluation will affect your balance sheet and disclosures.

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The law providing relief due to the coronavirus (COVID-19) pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This is referred to as qualified improvement property (QIP). You may recall that under the Tax Cuts and Jobs Act (TCJA), any QIP placed in service after December 31, 2017 wasn’t considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was due to an inadvertent drafting mistake made by Congress.

But the error is now fixed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It now allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What’s also helpful is that the correction is retroactive and it goes back to apply to any QIP placed in service after December 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP.

In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available.

And, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided to identify QIP expenditures.

For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return.

If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above. We will evaluate what your options are under Revenue Procedure 2020-25, which was just released by the IRS.

If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us.

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The term “pivot” has become a buzzword for a significant business change, ranging from mild to dramatic. Entrepreneurs don’t pivot for the fun of it. A pivot is intended to help a business recover when other factors make the original business model unsustainable. Oftentimes, entrepreneurs face a tough decision in a situation with mounting challenges; they may be facing insurmountable competition or trying to survive a tough period. If a business can’t survive the way it is, a pivot is sometimes the only logical option.

Pivots are common. According to venture capitalist Fred Wilson, “Of the 26 companies that I consider realized or effectively realized in my personal track record, 17 of them made complete transformations or partial transformations of their businesses between the time we invested and the time we sold.” Though the sample size is small, this suggests a two‐thirds probability that a business will require a pivot at some point to succeed.

While the world is currently experiencing a sudden and devastating situation, this challenge is certainly not unprecedented in the business world. Sudden upheavals in business have become of a hallmark of the age of technological advancement we are living in.

The advent of the Internet took some businesses down, yet left others stronger. When Starbucks popped up, many in the coffee business went down, but others revamped and found a loyal, larger clientele. Did Uber ride into town and take down the taxi industry or did the taxis’ inability to change their way of doing business play a large role?

According to Simon Sinek, business owners should avoid slipping into survival mode when what they need is reinvention mode. Instead of asking, “How will we do what we do?!” What you need to ask is, “How will we do what we’re doing in a new world?” A reinvention mindset asks, “How will we change to get through this? And what will our business look like in a new world?” It is optimistic. It sees opportunity in imaging what we can be and what we can contribute in a new way.

Examples are already cropping up: A fine-dining establishment that found a way to sell and ship high-end food products that are not usually available to individuals outside the food industry. Clothing designers who put their staff to work sewing masks and other PPE instead of their usual high‐end designer apparel. These employees are all doing different jobs, but they are all employed in the same business. At the helm of these companies are leaders with vision who inspired buy-in from employees willing and able to pivot from their usual job and adapt to the needs of the company.

If we have learned anything from iTunes vs. the music industry, Blockbuster vs. Netflix, Toys R Us vs. the Internet‐ it is that change is inevitable. Our only choice is to keep moving forward. Can you see the light at the end of the tunnel? That’s the future, and it is bright.

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Efforts to contain the spread of the novel coronavirus (COVID-19) have led to suspension of many economic activities, putting unprecedented strain on businesses. The Securities and Exchange Commission (SEC) recently issued guidance to help public companies provide investors and other stakeholders with useful, accurate financial statement disclosures in today’s uncertain marketplace.

New disclosure guidance

On March 25, the SEC issued interpretive guidance, Coronavirus (COVID-19), CF Disclosure Guidance: Topic No. 9. It highlights best practices in disclosing the risks and effects of the COVID-19 pandemic.

The guidance recommends using a principles-based disclosure system rooted on the concept of materiality. This means companies should disclose information that a reasonable person would find important in the total mix of information considered when making a decision to sell or buy a company’s stock.

10 questions

The SEC guidance offers the following 10 questions for companies to consider when making COVID-19-related disclosures:

How has COVID-19 impacted your company’s financial condition and results of operations — and how might it impact future operations?
How has COVID-19 impacted your company’s liquidity position and its capital and financial resources? Do you expect to incur any material COVID-19-related contingencies?
How will COVID-19 affect assets on your company’s balance sheet and its ability to account for those assets in a timely manner?
Have there been (or do you anticipate) any material impairments (for example, related to goodwill, intangible assets, long-lived assets, right of use assets and investment securities), increases in allowances for credit losses, restructuring charges, other expenses or changes in accounting judgments?
Have remote working arrangements and other COVID-19-related circumstances adversely affected your company’s ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures? If so, what changes in controls have occurred during the current period?
Have you experienced challenges or resource constraints in implementing your company’s business continuity plans, or do you foresee requiring material expenditures to do so?
Do you expect COVID-19 to affect demand for your company’s products or services?
Will COVID-19 have a material adverse impact on your company’s supply chain or the methods used to distribute products or services?
Will your company’s operations be materially impacted by any constraints or other impacts on its human capital resources and productivity?
Are travel restrictions and border closures expected to have a material impact on your company’s ability to operate and achieve its strategic goals?

This list of open-ended questions isn’t intended to be exhaustive. Each company will need to customize COVID-19-related disclosures using forward-looking information that’s based on assumptions about what may or may not happen in the future. In many situations, the impact will depend on factors beyond management’s control and knowledge.

We can help

The SEC has separately provided 45-day relief for certain reports that need to be filed by public companies. This will give management extra breathing room to assess the evolving situation and estimate the probable effects of the pandemic. Contact us for assistance crafting COVID-19 disclosures in these unprecedented conditions.

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As we all try to keep ourselves, our loved ones, and our communities safe from the coronavirus (COVID-19) pandemic, you may be wondering about some of the recent tax changes that were part of a tax law passed on March 27.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains a variety of relief, notably the “economic impact payments” that will be made to people under a certain income threshold. But the law also makes some changes to retirement plan rules and provides a new tax break for some people who contribute to charity.

Waiver of 10% early distribution penalty

IRAs and employer sponsored retirement plans are established to be long-term retirement planning accounts. As such, the IRS imposes a penalty tax of an additional 10% if funds are distributed before reaching age 59½. (However, there are some exceptions to this rule.)

Under the CARES Act, the additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with COVID-19 or is economically harmed by it. Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread-out.

Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.

Waiver of required distribution rules

Depending on when you were born, you generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts — including traditional IRAs, SEP accounts and 401(k)s — when you reach age 70½ or 72. These distributions also are subject to federal and state income taxes. (However, you don’t need to take RMDs from Roth IRAs.)

Under the CARES Act, RMDs that otherwise would have to be made in 2020 from defined contribution plans and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70½ in 2019.

New charitable deduction tax breaks

The CARES Act makes significant liberalizations to the rules governing charitable deductions including:

Individuals can claim a $300 “above-the-line” deduction for cash contributions made, generally, to public charities in 2020. This rule means that taxpayers claiming the standard deduction and not itemizing deductions can claim a limited charitable deduction.
The limit on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020. Instead, an individual’s eligible contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 is required.

Far beyond

The CARES Act goes far beyond what is described here. The new law contains many different types of tax and financial relief meant to help individuals and businesses cope with the fallout.

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The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27. Among other economic relief measures, the new law allows large public banks to temporarily postpone the controversial current expected credit loss (CECL) standard. Here are the details.

Updated accounting rules

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in response to the financial crisis of 2007–2008. The updated CECL standard relies on estimates of probable future losses. By contrast, existing guidance relies on an incurred-loss model to recognize losses.

In general, the updated standard will require entities to recognize losses on bad loans earlier than under current U.S. Generally Accepted Accounting Principles (GAAP). It’s scheduled to go into effect for most public companies in 2020. In October 2019, the deadline for smaller reporting companies was extended from 2021 to 2023, and, for private entities and nonprofits, it was extended from 2022 to 2023.

Option to delay

Under the CARES Act, large public insured depository institutions (including credit unions), bank holding companies, and their affiliates have the option of postponing implementation of the CECL standard until the earlier of:

The end of the national emergency declaration related to the COVID-19 crisis, or
December 31, 2020.

Many public banks have made significant investments in systems and processes to comply with the CECL standard, and they’ve communicated with investors about the changes. So, some may decide to stay the course. But many large banks are expected to take advantage of the option to delay implementation.

Congress decided to provide a temporary reprieve from implementing the changes for a variety of reasons. Notably, the COVID-19 pandemic has created a volatile, uncertain lending environment that may result in significant credit losses for some banks.

To measure those losses, banks must forecast into the foreseeable future to predict losses over the life of a loan and immediately book those losses. But making estimates could prove challenging in today’s unprecedented market conditions. And, once a credit loss has been recognized, it generally can’t be recouped on the financial statements. Plus, there’s some concern that the CECL model would cause banks to needlessly hold more capital and curb lending when borrowers need it most.

Stay tuned

So far, the FASB hasn’t delayed the CECL standard. But the COVID-19 crisis has front-loaded concerns about the CECL standard, prompting critics in both the House and Senate to step up their efforts to block the standard. Contact us for the latest developments on this issue.

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As the emotional, physical and financial chaos of the past few weeks continues, so does the stress affecting your employees. Thanks to a little-known tax provision, you can now relieve some of that anxiety by providing cash gifts to your team that are tax-free to them, and fully deductible to you.

In general, an employer cannot give a “gift” to an employee. Regardless of intent, any payment from employer to employee is taxed to the employee as compensation. However, Section 139 — added to the Code after September 11th— says that during a federally declared disaster, an employer can reimburse or pay an employee for “reasonable and necessary personal, family, living, or funeral expenses.” These payments are tax-free to the employees, but fully deductible to the employer.

Beginning immediately, employers can assist employees in managing the COVID-19 crisis in the following ways:

Qualified Disaster Relief Payments

An employee’s medical expenses that are not compensated for by insurance, for example, the employee’s deductible and out-of-pocket expenses
The cost of over-the-counter medications and hand sanitizer
Funeral costs of an employee or a member of an employee’s family
The cost of enabling an employee to work from home throughout the pandemic, for example, the cost of a computer, cell phone, printer, supplies and increased utility costs of the employee
The cost of an employee’s child care or tutoring for family members that cannot attend school during the pandemic

Please note: Payments that are otherwise compensated for by insurance or that are intended to replace lost income do not qualify.

Interestingly, Section 139 does not require that employees complete a certain period of service to be eligible to receive these tax-free payments, nor is the employer required to maintain any formal plan or documentation. Nevertheless, it would be wise for employers to document their intention to make payments covered by Section 139, as well as the following:

Important Payment Information to be Documented by Employer

The amounts paid, and to whom
The start and end dates of any Section 139 “payment program”
A general list of the expenses that will be paid or reimbursed on behalf of the employees
Any maximum amount per-employee or in the aggregate that the employer will pay

You put your heart and soul into your business, and your employees have become your family. We understand how important it is for you to be a backbone for them and help in whatever way you can. We encourage you to take this opportunity to support your employees in a very practical way and be there when they need you most.

Wishing everyone happy and healthy YomTov.

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Last Thursday we partnered with Agudath Israel of America to present an important webinar titled Navigating Regulatory Changes, covering the latest “CARES” stimulus act as well as other relief initiatives and how they affect your business or organization. To the 1000+ people who joined us – thank you! For those who missed it, a full recording of the webinar is available here.

Below, we have prepared a summary of the presentation as well as responses to some of the many questions we received. This is a very brief outline of several complex bills. We recommend speaking with your accountant or attorney to determine the best course of action for your specific circumstances.

CARES ACT

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed by President Trump this Friday. The $2 trillion stimulus bill intends to provide significant relief for small businesses and expanded unemployment benefits for individuals. Here are the highlights:

For Individuals and Families

The CARES Act will provide direct payments to individuals depending on income.

How much can we expect?

· $1,200 per single individual who earns up to $75,000 in adjusted gross income

· $2,400 for married couples who earn up to $150,000

· An additional payment of $500 per child under the age of 17.

The payment would scale down by income (a $5 deduction for every additional $100 earned above the maximum), phasing out entirely at $99,000 for singles and $198,000 for couples without children. Qualifying income levels will be based on 2019 federal tax returns if already filed, or on 2018 returns if not. Payments should be received within three weeks.

If you haven’t filed a 2018 or 2019 tax return, you should speak to a tax professional and consider filing; so that you can be eligible to receive the stimulus payment.

What other relief is available to me?

Make the most of your 401k:

· You are no longer required to take the annual minimum distribution from retirement accounts. This is to give investments a chance to recover and avoid taking a loss.

· You can now withdraw up to $100,000 this year without the usual 10 percent penalty, so long as you are doing so in response to the COVID-19 outbreak.

· For 180 days after the bill passes, with certification that you’ve been affected by the pandemic, you will be able to take out a loan of up to $100,000.

Take advantage of relaxed charitable giving rules:

Normally, you may donate up to 60% of your income for a full tax deduction. You can now donate up to 100% of your income without any tax deduction limitations.

Expanded Unemployment Benefits

Who is covered?

The CARES Act has substantially expanded benefits to include part-time workers, gig workers and the self-employed, who in the past have not been eligible. Covered individuals include those who are unemployed, partially unemployed or unable to work as a direct result of COVID-19. This includes illness, quarantine, loss of childcare, or loss of unemployment as a result of the virus.

What are the benefits?

Exact employment benefits are determined by the state’s unemployment insurance program. The CARES act entitles covered individuals to an additional $600 per week in addition to state benefits. The extra $600 payment will last for up to four months, covering weeks of unemployment through December 31, 2020.

How soon can I get it?

States have been incentivized to waive the one-week waiting period, but processing claims may take some time given the current climate.

How long will it last?

The CARES Act would provide all eligible individuals with an additional 13 weeks of payment following the end of state benefit programs; for the maximum of 39 weeks of benefits.

Some important notes:

· Parsonage is not currently covered by unemployment.

· Organizations who opted to self-insure will be required to reimburse 50% of each unemployment claim.

For Employers

Tax Credit to Support Workforce Retention

This provision will reimburse up to 50% of qualified wages, including health insurance, as a refundable tax credit against the employer’s share of payroll taxes for applicable employment taxes, up to $10,000 per employee per quarter.

What organizations are eligible?

· Businesses and nonprofits that were partially or fully suspended due to a mandatory government shut-down related to COVID-19.

· If a business remained opened during any quarter in 2020 but gross receipts for that quarter were less than 50% of what they were for the same quarter in 2019, the business will then be entitled to a credit for each quarter. This will continue until the business has a quarter where gross receipts exceed 80% of what they were for the same quarter of the previous year.

· Employers with over 100 employees are eligible to receive the credit if they continue to pay employees that are not providing services.

· Employers with fewer than 100 employees will receive the credit if they continue to pay employees whether they are or are not providing services

What wages are ineligible?

· Qualified wages do not include those paid under the Families First Coronavirus Response Act for sick leave or family medical leave, which are already subject to certain tax credits.

· If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as amended by this Act, no employee retention credit will be available.

Deferral of Payroll Tax:

The CARES Act allows a 50% deferral of the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date of the CARES Act’s enactment through December 31, 2020.

When will the deferred taxes become due?

A payment of 50% of the deferred payroll taxes will be due on December 31, 2021, and the remaining 50% by December 31, 2022.

Paycheck Protection Loan Program

The United States Small Business Administration will administer the SBA 7a loan program to eligible businesses to help pay operational costs such as payroll, rent, health benefits, insurance premiums and utilities. Subject to certain conditions, loan amounts are forgivable if employers retain employees.

What businesses are eligible?

· Small businesses, nonprofits, religious institutions and houses of worship, with up to 500 employees.

· Independent contractors, 1099 workers, self-employed individuals and sole proprietorships.

· Restaurants and hotels, are eligible as long as they employ 500 workers or less per location.

· Businesses that have more than 500 employees but are within the SBA size limits.

How much can I borrow?

Loan amounts can be up to 2.5 times average monthly payroll (between January 1, 2020 and February 29, 2020), mortgage payments and lease payments. The maximum loan amount is $10 million.

An advance grant of up to $10k can be requested 3 days after applying for the loan. Even if the business is denied the loan, the advance will not have to be paid back provided it is used for operational expenses such as payroll and rent payments.

What are the terms of the loan?

· Maximum interest rates of 4% with 10-year term.

· No personal guaranty or collateral is required.

How does loan forgiveness work?

· There is an additional application for loan forgiveness.

· Upon application, your company’s expenses for the eight-week period after the origination of the loan will be analyzed.

· Every dollar spent on payroll, utilities, rent, or interest on mortgage debt will be forgiven, up to the total amount borrowed.

Loan amount forgiven will be reduced if:

· Businesses lay off employees during the first eight weeks following the loan.

· Companies reduce wages of employees who make less than $100,000 per year by 25% or more.

· Businesses that have already let employees go before accepting the loan will not be subject to such penalties. If those businesses rehire employees after accepting the loan, they’ll receive additional credit to cover their wages.

Please note: As of Friday, March 27th, parsonage was not explicitly noted as a part of payroll. There is a possibility that it will be included in the future.

Economic Injury Disaster Loan Program

The SBA will directly provide loans up to $2 million to small businesses and non-profits that have been severely impacted by COVID-19, with interest rates of 2.75% for nonprofits and 3.75% for businesses.

HR 6201: FAMILIES FIRST CORONAVIRUS RESPONSE ACT

HR 6201 was signed by President Trump on March 18, 2020, ensuring that employees are eligible for two weeks of Paid Sick Leave and use of 12 weeks of Family and Medical Leave Act leave for several circumstances related to COVID-19. It will be in effect from April 1, 2020 until December 31, 2020.

How does it work?

Under HR 6201, employers can claim a Social Security tax credit to offset the cost of providing expanded FMLA and emergency paid leave to their employees. If the credit exceeds the employer’s accumulated Social Security tax for the calendar quarter, the excess will be issued in the form of a refund from the IRS.

Who is eligible?

· Employers with under 500 employees

· Employees who cannot work due to COVID-19 related illness, and/or quarantine, or due to an ill family member or a child without childcare.

What do these provisions provide?

· 10 days covered by Emergency Paid Sick leave for illness or quarantine, with a total of $5,110, or 2/3 of pay to care for ill family or because of loss of childcare, capped at $200/day and $10,000 total.

· 10 weeks covered by Family Medical Leave pays 2/3 of the employee’s regular rate of pay for the number of hours they would normally be scheduled to work, capped at $200/day and $10,000 total.

Please note: As of now there is no mechanism for business owners to collect PSL or FML.

For full details on EPSL and FMLA expansion please visit our website: https://rothandco.com/trend/current-tax-paid-leave-regulation-changes/

We will continue to keep you informed as more information becomes available. As always, we are here to help implement these changes. Please don’t hesitate to contact us with questions or concerns.

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Every company has faced unprecedented challenges in adjusting to life following the widespread outbreak of the coronavirus (COVID-19). Small businesses face particular difficulties in that, by definition, their resources — human, capital and otherwise — are limited. If this describes your company, one place you can look to for some assistance is the Small Business Administration (SBA).

New loan, relaxed criteria

The agency has announced that it’s offering Economic Injury Disaster Loans under the Coronavirus Preparedness and Response Supplemental Appropriations Act, which was recently signed into law.

Here’s how it works: The governor of a state or territory must first submit a request for Economic Injury Disaster Loan assistance to the SBA. The agency’s Office of Disaster Assistance then works with the governor to approve the request. Upon completion of this process, affected small businesses within the state gain access to information on how to apply for loan assistance.

To speed the process, the SBA has relaxed its usual disaster-loan criteria. A state or territory now needs to certify that at least five small businesses have suffered substantial economic injury anywhere in the state. Previously, at least one of the companies had to be in each of the disaster-declared counties or parishes.

Along similar lines, once the submission process is completed, Economic Injury Disaster Loans will be available across the state. Under previous criteria, only businesses in counties identified as disaster areas could obtain financial assistance. Given the expected widespread and economically drastic effect of the coronavirus, most states will have likely garnered approval by the time you read this.

Amount, interest and terms

Economic Injury Disaster Loans offer up to $2 million in financial assistance to help small businesses mitigate their revenue losses. You could use the money to pay overhead costs such as utilities and rent, keep up with accounts payable and cover payroll.

For qualifying small businesses, the interest rate is 3.75%. Some nonprofits may also be eligible for this assistance. For them, the interest rate is 2.75%. The specific loan terms will vary according to each borrower’s ability to pay. The agency does say that it “offers loans with long-term repayments in order to keep payments affordable.”

Mitigate and manage

Bear in mind that these loans are just one form of assistance offered by the SBA. Your small business may qualify for other loans, and there might be training programs that benefit your company. Our firm can help you assess your financial situation in light of the coronavirus crisis and formulate a strategy for mitigating and managing your risks going forward.

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As we continue to face the global health crisis of COVID-19, Roth&Co is committed to supporting your organization in navigating these confusing times. Here is what you need to know regarding the recent tax and regulatory changes.

TAX FILING DEADLINE EXTENSION

On Friday, March 20th the IRS has announced that the deadline for filing tax returns is being moved from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.

HR 6201: FAMILIES FIRST CORONAVIRUS RESPONSE ACT

HR 6201 was signed by President Trump on March 18, 2020, ensuring employees are eligible for two weeks of Paid Sick Leave and use of 12 weeks of Family and Medical Leave Act leave for several circumstances related to COVID-19. It will be in effect until December 31, 2020.

Key Details:

1. Payroll Tax Credit for Employers

2. Emergency Paid Sick Leave for Employees

Covered Employers: Employers with fewer than 500 employees.
Covered Employees: All employees, except some exclusions for health care providers or emergency responders.

Covered Leave: When an employee is quarantined or isolated as ordered by a governmental agency, health care provider, or is experiencing symptoms of COVID-19. 2/3 pay is required for employees on leave for the purpose of caring for an individual in quarantine, or a child whose school is closed or child-care provider is no longer available due to COVID-19.

Duration of Leave: Full-time employees are entitled to 80 hours of paid sick leave. Part-time employees are entitled to sick leave equal to the hours worked on average over a typical two-week period.

Pay caps:
Illness or quarantine: Pay is capped at $511/day and $5,110 total
Providing family care: Pay is capped at $200/day and $2,000 total

Note: Employers cannot require employees to use other leave first.

Additional Tax Credits: An employer can claim additional refundable tax credits for the employer portion of Medicare taxes and nontaxable health insurance premiums as related to COVID-19.

3. Emergency FMLA Expansion for Employees

Covered Employers: Employers with fewer than 500 employees
Covered Employees: Any employee who has been employed for at least 30 calendar days (excluding health care providers or emergency responders)
Covered Leave Purposes: To care for a child under 18 if the child’s school or the childcare provider is unavailable due to the Coronavirus.

Duration: Up to 12 weeks of job-protected leave.

Compensation: After 10 days covered by Emergency Paid Sick leave, employers must pay two-thirds of the employee’s regular rate of pay for the number of hours they would normally be scheduled to work, capped at $200/day and $10,000 total.

4. Reinstatement to Position after Leave

The same reinstatement provisions apply under the traditional FMLA. However, restoration to position does not apply to employers with fewer than 25 employees if the job no longer exists because of the economic downturn caused by a public health emergency. The employer is required to make reasonable efforts to return the employee to an equivalent position, and contact a displaced employee if a similar position becomes available within a year of when they would have returned to work.

5. Exemptions for Businesses with Fewer than 50 Employees

Businesses with under 50 employees are subject to exemptions from Emergency FMLA and Emergency PSL if the requirements “would jeopardize the viability of the business.”

We will continue to keep you informed as more information becomes available. As always, we are here to help implement these changes. Please don’t hesitate to contact us with questions or concerns.

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While global health and governmental agencies grapple with how best to fight the new coronavirus (COVID-19), nonprofit organizations worldwide are scrambling to figure out what steps they should take and how they can be helpful in this time of uncertainty.

The U.S. Centers for Disease Control and Prevention (CDC) is taking aggressive public health measures to help protect the health of Americans and assist international partners. Leaders at nonprofit organizations can also play a pivotal role at this critical time.

COVID-19 is very dangerous, and we must take comprehensive and coordinated action to address it. Today, we must be diligent in our response as the outbreak continues to spread worldwide, including in the United States, and the economic consequences that follow.

What can nonprofit leaders do in this time of uncertainty and concern? We’d like to offer five steps or initiatives that leaders of all nonprofits and philanthropies can take or consider.

1. Seek out the right information. The best source of up-to-date information on everything related to COVID-19 is the CDC website. It is a trusted source with information provided by CDC scientists. Beyond CDC, look to your state and local public health departments.State and local health departments offer accurate and timely infectious disease information.

2. Dispel myths. We are living in an anxious time, and as leaders we must ensure not to create a panic. This is even more difficult in an era where anyone with a smart phone can share an opinion or create a storyline. Myths about the coronavirus, including all the remedies, protections, etc. will continue to proliferate. Social media, while it can be a powerful tool to provide timely updates and information, can also make the problem worse. As leaders, we can dispel many of the myths about the disease and use our platforms to get out the facts.

3. Put into action good public health practices. As employers, community partners and influencers, the nonprofit sector enjoys a tremendous amount of trust and respect. Ensure your employees, volunteers and ambassadors know what they can do to protect themselves, their communities and the people they serve. Putting into practice actions from staying home when sick to cleaning and disinfecting work areas and communal areas where services are provided can make a big difference.

4. Make a financial grant. If your organization is in the position to do so, make a financial grant to strengthen public health and the response efforts. While increased funding is becoming available for public health agencies, governments cannot do it alone, particularly as the response moves from containment to mitigation. A collective response is needed to meet the rapidly evolving needs of COVID-19 — from communications campaigns to strengthening state and local health labs to providing equipment and supplies as well as supporting those in quarantine or those who are at high-risk from the dangers of COVID-19. In any crisis situation, it takes an effort on the part of all sectors to mitigate the crisis and meet the needs of our communities and vulnerable populations.

5. Collaborate with peer organizations. Nonprofit organizations and philanthropies have greater positive impact and can accomplish more collectively than individually. By aligning diverse interests and resources and leveraging the strengths of your organization with another, we can work together to fight this outbreak and support those affected. If your organization is in a position to partner with another nonprofit, consider it. The nonprofit sector has been crucial in past emergency responses such as the Ebola and Zika outbreaks, and we can’t do it alone this time, either.

From the outset of the COVID-19 outbreak, there has been confusion, concern and anxiety about the infectious disease with good reason. We should treat it as we would other past outbreaks — recognize that it has not respected borders or politics and requires a collective effort of government, individual and organizations.

The resilience of our front line public health responders is amazing. The nonprofit community has the opportunity to support them and others affected by the COVID-19 outbreak by providing accurate information and working with the public health community to find innovative ways to offer support.

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The coronavirus (COVID-19) outbreak — officially a pandemic as of March 11 — has prompted global health concerns. But you also may be worried about how it will affect your business and its financial statements for 2019 and beyond.

Close up on financial reporting

The duration and full effects of the COVID-19 outbreak are yet unknown, but the financial impacts are already widespread. When preparing financial statements, consider whether this outbreak will have a material effect on your company’s:

Supply chain, including potential effects on inventory and inventory valuation,
Revenue recognition, in particular if your contracts include variable consideration,
Fair value measurements in a time of high market volatility,
Financial assets, potential impairments and hedging strategies,
Measurement of goodwill and other intangible assets (including those held by subsidiaries) in areas affected severely by COVID-19,
Measurement and funded status of pension and other postretirement plans,
Tax strategies and consideration of valuation allowances on deferred tax assets, and
Liquidity and cash flow risks.

Also monitor your customers’ credit standing. A decline may affect a customer’s ability to pay its outstanding balance, and, in turn, require you to reevaluate the adequacy of your allowance for bad debts.

Additionally, risks related to the COVID-19 may be reported as critical audit matters (CAMs) in the auditor’s report. If your company has an audit committee, this is an excellent time to engage in a dialog with them.

Disclosure requirements and best practices

How should your company report the effects of the COVID-19 outbreak on its financial statements? Under U.S. Generally Accepted Accounting Principles (GAAP), companies must differentiate between two types of subsequent events:

1. Recognized subsequent events. These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.

2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet. Rather, they arose after that date but before the financial statements are issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).

The World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until January 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the COVID-19 risk was present in China on December 31, 2019. Accordingly, calendar-year entities may need to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020.

Need help?

There are many unknowns about the spread and severity of the COVID-19 outbreak. We can help navigate this potential crisis and evaluate its effects on your financial statements. Contact us for the latest developments.

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If you’re the owner of an incorporated business, you probably know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason is simple. A corporation can deduct the salaries and bonuses that it pays executives, but not its dividend payments. Therefore, if funds are withdrawn as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is taxed only once, to the employee who receives it.

However, there’s a limit on how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. The IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder or a member of a shareholder’s family.

How much compensation is reasonable?

There’s no simple formula. The IRS tries to determine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include:

The duties of the employee and the amount of time it takes to perform those duties;
The employee’s skills and achievements;
The complexities of the business;
The gross and net income of the business;
The employee’s compensation history; and
The corporation’s salary policy for all its employees.

There are some concrete steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:

Use the minutes of the corporation’s board of directors to contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.)
Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
If the business is profitable, be sure to pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

Planning ahead can help avoid problems. Contact us if you’d like to discuss this further.

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In business, a failure to evolve may lead to failure. One way to keep your company rolling is to regularly adjust how you market products or services to customers and prospects.

A marketing strategy shouldn’t be a knee-jerk reaction to some enticing rumor or hot trend. Rather, it needs to be a carefully calculated effort that assesses profitability (not just revenue) and identifies a feasible price point for the products or services in question.

Evaluating targets

Consider each prospect, existing customer or targeted group as an investment. Estimate your net profit after subtracting production, sales and customer service costs.

More desirable customers will purchase a sizable volume with enough frequency to provide a steady income stream over time rather than serve as just a one-time or infrequent buyer. They also will be potential targets for cross-selling other products or services to generate incremental revenue.

Bear in mind that you must have the operational capacity to fulfill a given prospect’s demand. If not, you’ll have to expand your operations to take on that customer, costing you more in resources and capital.

Also, be wary of becoming too dependent on a few large customers. They can use this status as leverage to lowball you. Or, if they decide to pull the plug, it could be financially devastating.

Naming your price

Another key factor to consider in adjusting your marketing strategy is how much you’ll charge. It’s a tricky balance: Setting your price low may help to attract customers, but it can also minimize or even eliminate your profit margin.

In addition, think about what kind of payment terms you’re prepared to offer. Sitting on large accounts receivable can strain your cash flow. Establishing a timely payment schedule with customers is critical to sustaining your operations and supporting the bottom line.

If you must make a major cash outlay for setting up a new customer, such as for new equipment, consider offering initial pricing that includes a surcharge for a specified period. For example, if the normal product price is $1.00 each, you might want to arrange for the customer to pay $1.10 each until you have recovered the cost of the equipment, plus carrying charges.

Taking the risk

If your company has been around for a while, you know that marketing is risky business. An unsuccessful campaign can not only waste dollars in the short term, but also hurt morale and even trigger bad PR if it’s particularly misguided. The costs of doing nothing, however, may be even greater. We can assist you in evaluating the potential profitability of your marketing initiatives, as well as calculating viable price points for your products or services.

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The rules for reporting leasing transactions are changing. Though these changes have been delayed until 2021 for private companies (and nonprofits), it’s important to know the possible effects on your financial statements as you renew leases or enter into new lease contracts. In some cases, you might decide to modify lease terms to avoid having to report leasing liabilities on your balance sheet. Or you might opt to buy (rather than lease) property to sidestep being subject to the complex disclosure requirements.

Updated standard

In 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases. The effective date for calendar year-end public companies was January 1, 2019. Last fall, the FASB deferred the effective date for private companies and not-for-profit organizations from 2020 to 2021.

The updated guidance requires companies to report long-term leased assets and leased liabilities on their balance sheets, as well as to provide expanded footnote disclosures. Increases in debt could, in turn, cause some companies to trip their loan covenants.

Updated lease terms

The updated standard applies only to leases of more than 12 months. To avoid having to apply the new guidance, some companies are switching over to short-term leases.

Others are incorporating evergreen clauses into their leases, where either party can cancel at any time after 30 days. An evergreen lease wouldn’t technically be considered a lease under the accounting rules — even if the lessee renewed on a monthly basis for 20 years. This might not be the best approach from a financial perspective, however, because the lessor would likely charge a higher price for the transaction. There’s also a risk that short-term and evergreen leases won’t be renewed at some point.

Lease vs. buy

The updated standard is also causing organizations to reevaluate their decisions about whether to lease or buy equipment and real estate. Under the previous accounting rules, a major upside to leasing was how the transactions were reported under Generally Accepted Accounting Principles (GAAP). Essentially, operating leases were reported as a business expense that was omitted from the balance sheet. This was a major upside for organizations with substantial debt. Under the updated guidance, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans. Reporting leases also will require expanded footnote disclosures.

The changes in the lease accounting rules might persuade you to buy property instead of lease it. Before switching over, consider the other benefits leasing has to offer. Notably, leases don’t require a large down payment or excess borrowing capacity. In addition, leases provide significant flexibility in case there’s an economic downturn or technological advances render an asset obsolete.

Decision time

When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, with no universal “right” choice. Contact us to discuss the pros and cons of leasing in light of the updated accounting guidance. We can help you take the approach that best suits your

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Grantor and non-grantor trusts are taxed differently.

Non-grantor trusts are treated as separate entities (like a C-Corporation). But grantors of grantor trusts maintain significant rights to the trust’s assets and income. Because of that, they’re treated as if they are direct owners of the trust assets (like a sole proprietorship).

A grantor trust is any trust in which the grantor is treated as owner of any portion of the trust. This is determined by a list of powers. Some of the most common powers are:

Power to revoke
Power to substitute assets or borrow from trust without adequate security
Power to distribute income from trust to Grantor or Grantor’s spouse
Power to add beneficiaries

There are many other powers that can cause a trust to be a grantor trust; a grantor only needs one of these powers for the trust to be a grantor trust.

How Grantor Trust income is taxed

When Trust has only 1 Grantor: 3 options

The payer issues a 1099 (or K-1) to the trust with the trust TIN. The trust files form 1041 with no income reported. The trust issues a grantor letter to the grantor reporting all the income the trust earned. The grantor reports this income on his 1040

Example: Reuven transferred $10M to The Reuven Family Trust; TIN 45-6789100; a Grantor Trust. The funds are invested in a Charles Schwab Brokerage account. The account is held in the name and TIN of the Trust. At year end, a 1099B is issued in the name and TIN of the trust. The trust files a 1041. No income is reported on the 1041 and a statement is attached stating that the income is taxable to the Grantor. A Grantor letter specifying the income earned by the trust is filed with the 1041 and issued to the a Grantor. The Grantor uses this to report the income on his 1040.

The payer issues a 1099 (or K-1) to the trust but uses the Grantors SSN. The income is reported directly on the grantors 1040 and no 1041 is filed.

Example: Reuven transferred $10M to The Reuven Family Trust; TIN 45-6789100; a Grantor Trust. The funds are invested in a Charles Schwab Brokerage account. The account is held in the name of the trust but with the SSN of the grantor Reuven.. At year end, a 1099B is issued to The Reuven Family Trust with Reuven’s SSN. Reuven uses this 1099B to report the income on his 1040.

Payer issues 1099(or K-1) to the trust using the trust TIN. The trust issues a 1099 to the grantor. The Grantor reports this income on his 1040. No 1041 Filed. (not typically done)

Example: Reuven transferred $10M to The Reuven Family Trust; TIN 45-6789100; a Grantor Trust. The funds are invested in a Charles Schwab Brokerage account. The account is held in the name and TIN of the Trust. At year end, a 1099B is issued in the name and TIN of the trust. The trust then issues a 1099 to Reuven specifying all the income earned by the trust to Reuven. The trust does not file a 1041. Reuven uses the 1099 he received from the trust to report the income on his 1040.

When Trust has more than 1 Grantor: 2 Options

The payer issues a 1099 (or K-1) to the trust with the trust TIN. The trust files form 1041 with no income reported. The trust issues a grantor letter to the grantor reporting all the income the trust earned. The grantor reports this income on his 1040
Payer issues 1099(or K-1) to the trust using the trust TIN. The trust issues a 1099 to the grantor. The Grantor reports this income on his 1040. No 1041 Filed. (not usually done)

A non-grantor trust is any trust that is not a grantor trust.

How Non-Grantor trust income is taxed

As a separate tax entity, a non-grantor trust is required to have its own TIN and must file a 1041 and issue K-1s to the Beneficiaries
There are 2 basic types of non-grantor trusts. Complex and simple trusts.
Non-grantor trusts must pay taxes on income received, which is typically at much higher rates than for individuals.
Distributions to beneficiaries are deducted from the taxable income of the trust and K-1s are issued to the beneficiaries for the amount of the distribution. The beneficiaries report this income on their 1040.
The major difference between a complex trust and a simple trust is that a simple trust must distribute all its income to the Beneficiaries while a complex trust does not need to. So a simple trust would have no taxable income, pays no taxes, issues K-1s to the beneficiaries and the Beneficiaries report all the trust income on their 1040. A complex trust pays taxes on the portion of income it did not distribute and issues K-1s to its beneficiaries for the distributions.

Example: Reuven transferred $10M to The Reuven Family Trust; TIN 45-6789100; a Non-Grantor Complex Trust. The funds are invested in a Charles Schwab Brokerage account. The account is held in the name and TIN of the Trust. The trust distributed $100,000 to Levi ( a beneficiary) in the current tax year. At year end, a 1099B is issued in the name and TIN of the trust. The trust files a 1041. Income and deductions are reported and taxed on the return. The trust deducts $100,000 from its taxable income for the distribution to Levi. A K-1 is issued to Levi with $100,000 of taxable income. Levi uses this to report the income on his 1040.

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If you own a home, the interest you pay on your home mortgage may provide a tax break. However, many people believe that any interest paid on their home mortgage loans and home equity loans is deductible. Unfortunately, that’s not true.

First, keep in mind that you must itemize deductions in order to take advantage of the mortgage interest deduction.

Deduction and limits for “acquisition debt”

A personal interest deduction generally isn’t allowed, but one kind of interest that is deductible is interest on mortgage “acquisition debt.” This means debt that’s: 1) secured by your principal home and/or a second home, and 2) incurred in acquiring, constructing or substantially improving the home. You can deduct interest on acquisition debt on up to two qualified residences: your primary home and one vacation home or similar property.

The deduction for acquisition debt comes with a stipulation. From 2018 through 2025, you can’t deduct the interest for acquisition debt greater than $750,000 ($375,000 for married filing separately taxpayers). So if you buy a $2 million house with a $1.5 million mortgage, only the interest you pay on the first $750,000 in debt is deductible. The rest is nondeductible personal interest.

Higher limit before 2018 and after 2025

Beginning in 2026, you’ll be able to deduct the interest for acquisition debt up to $1 million ($500,000 for married filing separately). This was the limit that applied before 2018.

The higher $1 million limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from the refinancing of pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing doesn’t exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt, and that refinanced debt amount won’t be subject to the $750,000 limitation.

The limit on home mortgage debt for which interest is deductible includes both your primary residence and your second home, combined. Some taxpayers believe they can deduct the interest on $750,000 for each mortgage. But if you have a $700,000 mortgage on your primary home and a $500,000 mortgage on your vacation place, the interest on $450,000 of the total debt will be nondeductible personal interest.

“Home equity loan” interest

“Home equity debt,” as specially defined for purposes of the mortgage interest deduction, means debt that: is secured by the taxpayer’s home, and isn’t “acquisition indebtedness” (meaning it wasn’t incurred to acquire, construct or substantially improve the home). From 2018 through 2025, there’s no deduction for home equity debt interest. Note that interest may be deductible on a “home equity loan,” or a “home equity line of credit,” if that loan fits the tax law’s definition of “acquisition debt” because the proceeds are used to substantially improve or construct the home.

Home equity interest after 2025

Beginning with 2026, home equity debt up to certain limits will be deductible (as it was before 2018). The interest on a home equity loan will generally be deductible regardless of how you use the loan proceeds.

Thus, taxpayers considering taking out a home equity loan— one that’s not incurred to acquire, construct or substantially improve the home — should be aware that interest on the loan won’t be deductible. Further, taxpayers with outstanding home equity debt (again, meaning debt that’s not incurred to acquire, construct or substantially improve the home) will currently lose the interest deduction for interest on that debt.

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At Roth&Co, we strive for excellence. We are dedicated to making sure our clients get top-of-the-line service and results. While we spend the bulk of our time buried in tax filings and spreadsheets, we never forget the people at the heart of our work and believe that it takes a positive, friendly, family-like environment to bring out our best.

Firmwide, we work to ensure that our commitment to warmth is more than just some paint on a pillar. Each birthday is celebrated with music, party hats and our fancy prize wheel. New staff members make their rounds with a snack cart as a fun way to meet their new coworkers. We celebrate RothDay with an out-of-office trip to relax and have a good time together. Chanukah donuts, chulent and kugel on Fridays during busy seasons, Superbowl parties and small gestures around the office are the norm and contribute to our warm and upbeat atmosphere.

Personally, I make every effort to demonstrate that my door, literally and figuratively, is always open. It starts with a friendly smile and an authentic “Hello, how are you?” If I know someone is ill or otherwise struggling, I check in and offer help, a listening ear or a walk around the block. Genuine connection is simple – it could be done through a good joke, shared news, or a nice compliment – but it makes all the difference. As Maya Angelou once said: “I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

With over 28 years at Roth&Co, I’ve watched us grow from a team of 18 to over 120 – without losing our close-knit atmosphere. I’m so proud of our Roth&Co family and couldn’t be more pleased to be representing our core value of Warmth. Thank you for the little things you do every day to make our firm a great place to work.

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If you’re a parent, or if you’re planning on having children, you know that it’s expensive to pay for their food, clothes, activities and education. Fortunately, there’s a tax credit available for taxpayers with children under the age of 17, as well as a dependent credit for older children.

Recent tax law changes

Changes made by the Tax Cuts and Jobs Act (TCJA) make the child tax credit more valuable and allow more taxpayers to be able to benefit from it. These changes apply through 2025.

Prior law: Before the TCJA kicked in for the 2018 tax year, the child tax credit was $1,000 per qualifying child. But it was reduced for married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000 ($75,000 for unmarried taxpayers). To the extent the $1,000-per-child credit exceeded a taxpayer’s tax liability, it resulted in a refund up to 15% of earned income (wages or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer’s Social Security taxes for the year over the taxpayer’s earned income credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.

Current law. Starting with the 2018 tax year, the TCJA doubled the child tax credit to $2,000 per qualifying child under 17. It also allows a $500 credit (per dependent) for any of your dependents who aren’t qualifying children under 17. There’s no age limit for the $500 credit, but tax tests for dependency must be met. Under the TCJA, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned threshold is decreased to $2,500 (from $3,000 under prior law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

More parents are eligible

The TCJA also substantially increased the “phase-out” thresholds for the credit. Starting with the 2018 tax year, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000 (up from the prior threshold of $110,000). The threshold is $200,000 for other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

In order to claim the credit for a qualifying child, you must include the child’s Social Security number (SSN) on your tax return. Under prior law, you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN). If a qualifying child doesn’t have an SSN, you won’t be able to claim the $1,400 credit, but you can claim the $500 credit for that child using an ITIN or an ATIN. The SSN requirement doesn’t apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you’re claiming a $500 credit.

The changes made by the TCJA generally make these credits more valuable and more widely available to many parents.

If you have children and would like to determine if these tax credits can benefit you, please contact us or ask about them when we prepare your tax return.

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For a corporate taxpayer, the combination of a reduced corporate rate, a special deduction, and access to indirect FTCs largely mitigates the impact of GILTI and section 965 –Individuals and pass-through entities have no such benefits.

Consider an individual who owns, directly or through a pass-through entity, 100 percent of a German services company which pays a 30 percent rate of local income tax. If the German company generates $1,000 U.S. dollars of income, that income is first subject to $300 U.S. dollars of German taxes, then potentially the entire $700 remainder could be currently taxed as GILTI and subject to an additional 37 percent U.S. individual tax rate in the year incurred (note that GILTI inclusions are not eligible for the new section 199A business income deduction). The outcome: a current effective tax rate of over 55 percent, regardless of whether the individual owner draws a dividend or reinvests the business’ earnings.

Enter section 962 which allows an individual (or trust or estate) U.S. shareholder of a CFC to elect to be subject to corporate income tax rates (under Sections 11 and 55) on amounts that are included in his or her gross income.

The keys to the effectiveness of the election to minimize U.S. tax on anti-deferral income are:

1. The use of the 21% corporate tax rate to determine the baseline U.S. tax liability.
2. Access to the 50% Section 250 deduction against GILTI (although such offset is not available against income included under the historic anti-deferral rules).
3. The availability of the foreign tax credit mechanism to offset the calculated U.S. tax with foreign taxes on the included income (subject to the GILTI haircut of foreign taxes).
4. A special rule that prevents the spillover of personal or business deductions that could otherwise impair the use of foreign tax credits or subject the 50% deduction to a taxable income limitation.

Returning to the facts of the prior example, if the individual makes a section 962 election for the year, the German earnings are now subject to GILTI tax at the deemed-corporate level instead of the individual level. Applying GILTI’s rules for corporate indirect foreign tax credits and section 250 deductions, the $1,000 of pre-tax income is eligible for a 50 percent deduction ($500 U.S. dollars) and the net income of $500 U.S. dollars is subject to a 21 percent U.S. corporate rate. A FTC is available of up to 80 percent of the German taxes, or $240 U.S. dollars. The FTC offsets the full $105 U.S. dollars of corporate-level tax and, assuming the German earnings are not distributed to the shareholder, there is zero residual U.S. tax in the current year.

The §962 election is made on a year-by-year basis with the tax return filed for that year. As a result, US individual shareholders facing a significant tax on GILTI may wish to consider making this election to lower the taxes due. However, an individual making this election will also be subject to US tax when it receives a dividend from the CFC. Dividends from a foreign corporation are generally taxed at regular tax rates unless the dividend is from a “qualified foreign corporation” which is taxed at the long term capital gains tax rate of 20%. A qualified dividend is a dividend from a foreign corporation that is eligible for benefits under an income tax treaty between the US and their home country. The US has income tax treaties with many nations (e.g., England, France, Germany), but not with all nations.

Section 962 election may be a valuable tool in softening or deferring the double-tax blow of being a U.S. shareholder in a foreign business – but careful consideration should be used before making the election. Depending on the specific circumstances, using section 962 could result in an individual paying a greater effective rate of tax on their foreign earnings once they have been repatriated (distributed).

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Roughly half of CFOs believe an economic recession will hit by the end of 2020, and about three-quarters expect a recession by mid-2021, according to the 2019 year-end Duke University/CFO Global Business Outlook survey. In light of these bearish predictions, many businesses are currently planning for the next recession. Are you? Here are four steps to help your company strengthen its balance sheet against a possible downturn.

1. Identify what’s most important

The balance sheet shows your company’s financial condition — its assets vs. liabilities — at a specific point in time. Some line items are more critical to your success than others. For example, inventory is a top priority for retailers, and accounts receivable is important to professional service firms.

A “common-sized” balance sheet can help you determine what’s most relevant. This type of statement presents each account as a percentage of total assets. Items that represent the highest percentages are generally the ones that warrant the most attention.

2. Analyze ratios

Ratios compare line items on your company’s financial statements. They may be grouped into four categories: 1) profitability, 2) solvency, 3) asset management, and 4) leverage. While profitability ratios focus on the income statement, the others assess items on the balance sheet.

For example, the current ratio (current assets ÷ current liabilities) is a solvency measure that helps assess whether your company has enough current assets to meet current obligations over the short run. Conversely, the days-in-receivables ratio (accounts receivable ÷ annual sales × 365 days) is an asset management ratio that gauges how efficiently you’re collecting receivables. And the debt-to-equity ratio (interest-bearing debt ÷ equity) focuses on your company’s use of debt vs. equity to finance growth.

3. Set goals

The common-sized balance sheet and ratios can be used to create “goals” for each key line item. What’s right depends on the nature of your business and industry benchmarks.

For example, you may strive to meet the following goals over the next year:

Increase cash as a percentage of total assets from 5% to 15%,
Improve the current ratio from 1.1 to 1.2,
Decrease the days-in-receivable ratio from 40 to 35 days, and
Lower the debt-to-equity ratios from 5.6 to 4.

4. Forecast the impact

Once you’ve set goals, devise a plan to achieve them. For example, you might cut fixed costs or forgo buying equipment to build up your cash reserves. In turn, stockpiling cash — along with improving collections — might help boost your current ratio.

Part of your plan should be forecasting how the changes will filter through the financial statements. This exercise can help you determine whether your goals are realistic. For example, if you decide to build up cash reserves, it might be difficult to simultaneously pay down debt. You can generate only a limited amount of incremental cash in a year. Forecasting can help pinpoint the shortcomings of your plans.

We can help

Markets are cyclical. So, it’s only a matter of time before another downturn happens. We can help you take steps to position your organization to weather the next storm — whenever it arrives.

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Have you applied for a business loan lately? Or had some repairs done on your facilities? Maybe you’ve signed a contract with a certain technologically inclined customer or vendor. In any of these instances, you (or one of your employees) probably had to electronically sign a digital document.

So, the next question is: Why isn’t your company using this technology? If the answer is, “We are,” kudos to you (assuming it’s working out). But if your reply is, “We’ve always used paper and don’t want to deal with the expense and hassle of converting to digital documentation,” you may want to reconsider — because it’s not going away.

Why go digital?

For businesses, there are generally three reasons to use digital documents with e-signatures:

1. Speed. When you can review and sign a business document electronically, it can be transmitted instantly and approved much more quickly. And this works both ways: your customers can sign contracts or submit orders for your products or services, and you can sign similar documents with vendors, partners or consultants. What used to take days or even weeks, as paper envelopes crisscrossed in the mail, now can occur in a matter of hours.

2. Security. Paper has a way of getting lost, damaged and destroyed. That’s not to say digital documents are impervious to thievery, corruption and deletion, but a trusted provider should be able to outfit you with software that not only allows you to use digital docs with e-signatures, but also keep the resulting files encrypted and safe from anyone or anything who would do them harm.

3. Service. This may be the most important reason to incorporate digital docs and e-sigs into your business. Younger generations have come of age, if not grown up, with digitized business services. They expect this functionality and may prefer a company that offers it to one that still requires them to put pen to paper.

What about the law?

Many business owners hesitate to dive into digital docs and e-sigs because of legal concerns. This is a reasonable concern. However, e-signatures are now widely used and generally considered lawful under two statutes:

The Electronic Signatures in Global and National Commerce Act of 2000, a federal law, and
The Uniform Electronic Transactions Act, which governs each state unless a comparable law is in place.
What’s more, every state has some sort of legislation in place legalizing e-signatures. There may be some limited exceptions in certain cases, so check with your attorney for specifics.

Is now the time?

To be clear, investing in digital documents with e-signatures, and training your employees to use them, is a major strategic initiative. You need to ensure the return on investment will be worth the effort. We can assist you in evaluating whether now’s the time to “go digital” and, if so, in setting a budget for the software purchase and implementation.

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Auditors use various procedures to verify the amounts reported on your financial statements. In addition to reviewing original source documents and comparing trends from prior years, they may reach out to third parties — such as customers and lenders — to confirm that outstanding balances and estimates agree with their records. Here are answers to questions you may have about audit confirmations.

When are they used?

External confirmations received directly by the auditor from third parties are generally considered to be more reliable than audit evidence generated internally by your company. Auditors may, for example, send paper or electronic confirmations to customers to verify accounts receivable and to financial institutions to confirm notes payable. They also may choose to substantiate cash, inventory, consigned merchandise, long-term contracts, accounts payable, contingent liabilities, and related-party and unusual transactions.

Before wrapping up audit procedures, a letter also will be sent to your attorney, asking whether the information provided about any pending litigation is accurate and complete. Your attorney’s response can help determine whether a legal situation has a material impact on the company’s financial statements.

What are the options?

The types of confirmations used vary depending on the situation and the nature of your company’s operations. Three forms of confirmations include:

1. Positive. This type asks recipients to reply directly to the auditor and make a positive statement about whether they agree or disagree with the information included.

2. Negative. This type asks recipients to reply directly to the auditor only if they disagree with the information presented on the confirmation.

3. Blank. This type doesn’t state the amount (or other information) on the request. Instead, recipients are asked to complete the confirmation form and return it to the auditor.

Some banks no longer respond to confirmation letters mailed through the U.S. Postal Service. Instead, they respond only to electronic requests. These may be in the form of an email submitted directly to the respondent by the auditor or a request submitted through a designated third-party provider.

How can you help?

You can facilitate the confirmation process by approving your auditor’s requests in a timely manner. However, there may be situations when you object to the use of confirmation procedures. When this happens, discuss the matter with your auditor and provide corroborating evidence to support your reasoning. If the reason for the refusal is considered valid, your auditor will apply alternative procedures and possibly ask for a special representation in the management representation letter regarding the reasons for not confirming.

Auditors also might ask your staff about confirmation recipients who aren’t responding to requests or exceptions found during the confirmation process. This may include discrepancies over the information provided in the request, as well as responses received indirectly, oral responses and restrictive language contained in a response. Your staff can help the audit team determine whether a misstatement has occurred — and adjust the financial statements accordingly.

Simple but effective

Audit confirmations can be a powerful tool, enhancing audit quality and efficiency. Let’s work together to ensure the confirmation process goes smoothly.

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Numbers can be misleading. While data can give the impression of clarity and transparency, figures can mean different things depending on how they are presented.

For example: The Federal Reserve Chairman Jay Powell held a press conference and commented that US consumers in aggregate are propping up the economy. This phrase subtly highlights the very different situations experienced by the wide range of US consumers that are thrown together and summarized in one number. In short, the consumers that added $1.3 trillion to their savings last year are not the same ones who owe $1 trillion on their credit cards. Is this good news or bad news?

Charles Munger, one of the greatest business minds of our time and vice chairman of Berkshire Hathaway, calls out another example of misinformation by numbers, citing the proliferation of EBITDA as a fake profit metric. In business, there’s more than meets the eye in any given set of numbers. Take Uber for example. Its shares jumped last week after it announced it was moving up its EBITDA profitability target to the fourth quarter of this year.

Good investment? “It’s ridiculous,” Munger said, EBITDA — which is short for earnings before interest, taxes, depreciation and amortization — does not accurately reflect how much money a company makes, unlike traditional earnings. “Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a flake.”

Today, with nearly all activities measured or recorded, it is more challenging than ever to discern what to keep track of and whether the numbers you’re seeing are telling the whole story. The right metrics enable your organization to examine concrete criteria and to meet its business goals. The wrong metrics lead you down a risky road.

Don’t risk it…Roth and Co.

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A financial power of attorney can be a valuable planning tool. The most common type is the durable power of attorney, which allows someone (the agent) to act on the behalf of another person (the principal) even if the person becomes mentally incompetent or otherwise incapacitated. It authorizes the agent to manage the principal’s investments, pay bills, file tax returns and handle other financial matters if the principal is unable to do so as a result of illness, injury, advancing age or other circumstances.

However, a disadvantage of a power of attorney is that it may be susceptible to abuse by scam artists, dishonest caretakers or greedy relatives.

Watch out for your loved ones

A broadly written power of attorney gives an agent unfettered access to the principal’s bank and brokerage accounts, real estate, and other assets. In the right hands, this can be a huge help in managing a person’s financial affairs when the person isn’t able to do so him- or herself. But in the wrong hands, it provides an ample opportunity for financial harm.

Many people believe that, once an agent has been given a power of attorney, there’s little that can be done to stop the agent from misappropriating money or property. Fortunately, that’s not the case.

If you suspect that an elderly family member is a victim of financial abuse by the holder of a power of attorney, contact an attorney as soon as possible. An agent has a fiduciary duty to the principal, requiring him or her to act with the utmost good faith and loyalty when acting on the principal’s behalf. So your relative may be able to sue the agent for breach of fiduciary duty and obtain injunctive relief, damages (including punitive damages) and attorneys’ fees.

Take steps to prevent abuse

If you or a family member plans to execute a power of attorney, there are steps you can take to minimize the risk of abuse:

Make sure the agent is someone you know and trust.
Consider using a “springing” power of attorney, which doesn’t take effect until certain conditions are met, such as a physician’s certification that the principal has become incapacitated.
Use a “special” or “limited” power of attorney that details the agent’s specific powers. (The drawback of this approach is that it limits the agent’s ability to deal with unanticipated circumstances.)
Appoint a “monitor” or other third party to review transactions executed by the agent and require the monitor’s approval of transactions over a certain dollar amount.
Provide that the appointment of a guardian automatically revokes the power of attorney.
Some state laws contain special requirements, such as a separate rider, to authorize an agent to make large gifts or conduct other major transactions.

Act now

If you’re pursuing legal remedies against an agent, the sooner you proceed, the greater your chances of recovery. And if you wish to execute or revoke a power of attorney for yourself, you need to do so while you’re mentally competent. Contact us with questions.

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Teamwork: What does it mean to you?

Let’s start with a short clip to get you thinking about what good teams can accomplish: Click here.

If you search for definitions of teamwork, you’ll find a variety of them, all similar, but not quite the same.

Here are a few examples I found:

• “Teamwork is the process of working collaboratively with a group of people in order to achieve a goal. Teamwork means that people will try to cooperate, using their individual skills and providing constructive feedback, despite any personal conflict between individuals.”
~ Business Dictionary
• “Work done by several associates with each doing a part but all subordinating personal prominence to the efficiency of the whole.” ~ Merriam-Webster
• “The combined actions of a group of people working together effectively to achieve a goal.”
~ Cambridge Dictionary

They’re okay; but they don’t really convey what a team, or teamwork, really is. To me, good teamwork means so much more.

It means working with others in a way that takes advantage of each team member’s unique strengths to achieve results that exceed the cumulative results they each could have individually accomplished. When team members complement each other, their potential is greater than the sum of the parts. Think 1+1+1 = 5!

It means working towards a common goal by setting aside egos and personal goals for the good of the team.

It means working in a way that lifts your teammates and enables them to perform better, filling roles that are aligned and in tune with each other so that everyone pulls in the exact same direction.

It means working with teammates who are passionate about working together and easy to get along with because they care about each other.

It means collaboration and open communication in both directions, up and down, coordinated by a leader who motivates and initiates connections rather than dictates, but who also knows how and when to make the tough decisions for the good of the team. It means keeping team members in the loop and involved in the decision-making process.

And when a team works this way, the results are AMAZING! (As you may have noticed, I’m very passionate about teamwork.)

So tell me… what does teamwork mean to YOU?

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Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

Tax basics

If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

What’s considered a sale

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares.

Determining the basis of shares

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis.

First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2015.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.
As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you.

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Finding the right person to head up your company’s finance and accounting department can be challenging in today’s tight labor market. While it may be tempting to simply promote an existing employee, external candidates may offer fresh ideas and skills that take your financial reporting to the next level. Here are four traits to put on your wish list.

1. Leadership and strategy experience

The finance and accounting department provides critical feedback on how your company is performing and is expected to perform in the future. That information helps the rest of the management team make critical business decisions.

The CFO must provide timely, relevant financial data to other departments — including information technology, operations, sales and supply chain logistics — to help improve how the business operates. He or she also must be able to drum up cross-departmental support for major initiatives. If you operate overseas or plan to expand there soon, experience operating and reporting in a global context would be a bonus.

2. Command of the basics

Your CFO must have a working knowledge of finance and accounting fundamentals, such as:

U.S. Generally Accepted Accounting Principles (GAAP) and, if applicable, international accounting standards, Federal and state tax law, Budgeting and forecasting, and Financial planning and benchmarking. Accounting rules and tax law have undergone major changes in recent years. Candidates should understand the business provisions of the Tax Cuts and Jobs Act, as well as the impact of updated accounting standards on reporting revenue, leases and credit losses. It’s also helpful to have experience with managerial accounting and cost-cutting initiatives.

3. Previous employment in public accounting

Many CFOs start off their careers in public accounting for good reason: They learn about a broad range of accounting, tax and consulting projects in many different industries.

This experience positions candidates for leadership roles in the private sector. Former CPAs know how the auditing process works and can implement procedures to support that process within your organization. They’ve also seen the best (and worst) business practices in the real world. This insight can help your company seize opportunities — and avoid potential pitfalls.

4. Forensic and technology skills

CFOs sometimes need to examine the business from a forensic perspective. That could include overseeing a fraud investigation, evaluating compliance with new or updated government regulations, or remediating a data breach.

In turn, the prevalence of cyberattacks has made technology skills increasingly important for CFOs. Candidates should know how to protect against loss of sensitive data, including customer credit card numbers and company financial data and intangible assets. Candidates also must have a working knowledge of accounting systems and how they operate in the cloud.

Help wanted

As your business evolves, so too must the role of the CFO. We can help you evaluate candidates to find the right mix of skills and experience for your finance and accounting department.

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To guard against natural disasters and other calamities, many companies buy business interruption insurance. These policies provide cash flow to cover revenues lost and expenses incurred while normal operations are limited or suspended.

But buying coverage is one thing — making a claim and receiving the funds is quite another. Depending on the scope of your loss, the insurer may enlist its own specialists to audit and reduce your claim. Fortunately, you can enlist a CPA to help you prepare a claim, quantify business interruption losses and anticipate your insurer’s challenges.

Major roles

There are two major roles your accountant can play in managing the claims process:

1. Point person. He or she can be the primary contact with the insurer, dealing with the typical onslaught of document requests. This leaves you free to run your business and bring it back up to speed.

Your CPA can also keep the claims process on track by informing the insurer about your actions and dealing with requests to inspect the damaged property. It’s possible that your accountant may already have an established relationship with the insurer and knows how its claims department works.

2. Damage estimator. Most policies define losses based on the earnings a company would have made if the interruption hadn’t occurred. To project lost profits, a CPA can analyze, identify and segregate revenues and expenses. The insurer will cover only losses that are directly attributable to the damage, as opposed to macroeconomic or other external causes, such as an economic downturn.

Detailed documentation

Most insurers require you to provide detailed documentation on the steps you took to mitigate losses during the business interruption period, which is the time it took your company to resume normal operations. The steps may involve shutting down all or part of the business or moving to a temporary location. The interruption period is critical and one of the determining factors the insurer will use when examining the total amount of your company’s claim.

Your CPA can review your documentation and, in particular, calculate or double-check any financial information provided to ensure accuracy. It’s also a good idea to work with an attorney who can aid in the legal interpretation of your policy.

A well-crafted claim

Filing a well-crafted business interruption claim can speed processing time and ease the resolution of any disputes that may arise with your insurance company. As a result, you’ll be more likely to receive much-needed cash-flow relief while getting your business back up and running after a disaster. We’d be happy to provide the services mentioned here as well as any other support necessary to pursuing a claim.

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Are you an employer who owns a business where tipping is customary for providing food and beverages? You may qualify for a tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.

How the credit works

The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.

You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15 per hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

How it works

Example: A waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.

The waiter’s $2 an hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.

While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Get the credit you’re due

If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.

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The word “concentration” is usually associated with a strong ability to pay attention. Business owners are urged to concentrate when attempting to resolve the many challenges facing them. But the word has an alternate meaning in a business context as well — and a distinctly negative one at that.

Common problem

A common problem among many companies is customer concentration. This is when a business relies on only a few customers to generate most of its revenue.

The dilemma is more prevalent in some industries than others. For example, a retail business will likely market itself to a broad range of buyers and generally not face too much risk of concentration. A commercial construction company, however, may serve only a limited number of clients that build, renovate or maintain offices or facilities.

How do you know whether you’re at risk? One rule of thumb says that if your biggest five customers make up 25% or more of your revenue, your customer concentration is high. Another simple measure says that, if any one customer represents 10% or more of revenue, you’re at risk of elevated customer concentration.

In an increasingly specialized world, many types of businesses focus only on certain market segments. If yours is one of them, you may not be able to do much about customer concentration. In fact, the very strength of your company could be its knowledge and attentiveness to a limited number of buyers.

Nonetheless, know your risk and explore strategic planning concepts that might enable you to lower it. And if diversifying your customer base just isn’t an option, be sure to maintain the highest levels of customer service.

Other forms

There are other forms of concentration. For instance, vendor concentration is when a company relies on only a handful of suppliers. If any one of them goes out of business or substantially raises its prices, the company relying on it could find itself unable to operate or, at the very least, face a severe rise in expenses.

You may also encounter geographic concentration. This can take a couple forms. First, if your customer base is concentrated in one area, a dip in the regional economy or a disruptive competitor could severely affect profitability. Small local businesses are, by definition, dependent on geographic concentration. But they can still monitor the risk and look for ways to mitigate it (such as online sales).

Second, there’s geographic concentration in the global sense. Say your company relies on a foreign supplier for iron, steel or another essential component. Tariffs can have an enormous impact on cost and availability. Geopolitical and environmental factors might also come into play.

Major risk

Yes, concentration is a good thing when it comes to mental acuity. But the other kind of concentration is a risk factor to learn about and address as the year rolls along. We can assist you in measuring your susceptibility and developing strategies for moderating it.

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An array of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2020. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2020 at $137,700 (up from $132,900 for 2019).

Deductions

Section 179 expensing:
Limit: $1.04 million (up from $1.02 million for 2019)
Phaseout: $2.59 million (up from $2.55 million)
Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
Married filing jointly: $326,600 (up from $321,400)
Married filing separately: $163,300 (up from $160,725)
Other filers: $163,300 (up from $160,700)

Retirement plans
Employee contributions to 401(k) plans: $19,500 (up from $19,000)
Catch-up contributions to 401(k) plans: $6,500 (up from $6,000)
Employee contributions to SIMPLEs: $13,500 (up from $13,000)
Catch-up contributions to SIMPLEs: $3,000 (no change)
Combined employer/employee contributions to defined contribution plans (not including catch-ups): $57,000 (up from $56,000)
Maximum compensation used to determine contributions: $285,000 (up from $280,000)
Annual benefit for defined benefit plans: $230,000 (up from $225,000)
Compensation defining a highly compensated employee: $130,000 (up from $125,000)
Compensation defining a “key” employee: $185,000 (up from $180,000)

Other employee benefits
Qualified transportation fringe-benefits employee income exclusion: $270 per month (up from $265)
Health Savings Account contributions:
Individual coverage: $3,550 (up from $3,500)
Family coverage: $7,100 (up from $7,000)
Catch-up contribution: $1,000 (no change)
Flexible Spending Account contributions:
Health care: $2,750 (no change)
Dependent care: $5,000 (no change)
These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.

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Many taxpayers make charitable gifts — because they’re generous and they want to save money on their federal tax bills. But with the tax law changes that went into effect a couple years ago and the many rules that apply to charitable deductions, you may no longer get a tax break for your generosity.

Are you going to itemize?

The Tax Cuts and Jobs Act (TCJA), signed into law in 2017, didn’t put new limits on or suspend the charitable deduction, like it did with many other itemized deductions. Nevertheless, it reduces or eliminates the tax benefits of charitable giving for many taxpayers.

Itemizing saves tax only if itemized deductions exceed the standard deduction. Through 2025, the TCJA significantly increases the standard deduction. For 2020, it is $24,800 for married couples filing jointly (up from $24,400 for 2019), $18,650 for heads of households (up from $18,350 for 2019), and $12,400 for singles and married couples filing separately (up from $12,200 for 2019).

Back in 2017, these amounts were $12,700, $9,350, $6,350 respectively. The much higher standard deduction combined with limits or suspensions on some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your charitable donations won’t save you tax.

To find out if you get a tax break for your generosity, add up potential itemized deductions for the year. If the total is less than your standard deduction, your charitable donations won’t provide a tax benefit.

You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.

What is the donation deadline?

To be deductible on your 2019 return, a charitable gift must have been made by December 31, 2019. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. For example, for a check, the delivery date is the date you mailed it. For a credit card donation, it’s the date you make the charge.

Are there other requirements?

If you do meet the rules for itemizing, there are still other requirements. To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

And there are substantiation rules to prove you made a charitable gift. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the organization you donated to that shows its name, plus the date and amount of the contribution. If you make a charitable contribution by text message, a bill from your cell provider containing the required information is an acceptable substantiation. Any other type of written record, such as a log of contributions, isn’t sufficient.

Do you have questions?

We can answer any questions you may have about the deductibility of charitable gifts or changes to the standard deduction and itemized deductions.

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The IRS announced it is opening the 2019 individual income tax return filing season on January 27. Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing as soon as you can this year. The reason: You can potentially protect yourself from tax identity theft — and you may obtain other benefits, too.

Tax identity theft explained

In a tax identity theft scam, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

The legitimate taxpayer discovers the fraud when he or she files a return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the valid one, tax identity theft can cause major headaches to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected, rather than yours.

Note: You can get your individual tax return prepared by us before January 27 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

Your W-2s and 1099s

To file your tax return, you must have received all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2019 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2019 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

Other advantages of filing early

Besides protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost or stolen or returned to the IRS as undeliverable. And by using direct deposit, you can split your refund into up to three financial accounts, including a bank account or IRA. Part of the refund can also be used to buy up to $5,000 in U.S. Series I Savings Bonds.

What if you owe tax? Filing early may still be beneficial. You won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly.

Be an early-bird filer

If you have questions about tax identity theft or would like help filing your 2019 return early, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

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You’ve no doubt read articles or heard stories about how artificial intelligence (AI) is bringing sweeping change to a wide variety of industries. But it’s one thing to learn about how this remarkable technology is changing someone else’s company and quite another to apply it to your own. Here’s a primer on what AI might be able to do for your business.

3 technology types

AI generally refers to using computers to perform complex tasks usually thought to require human intelligence — such as image perception, voice recognition, decision making and problem solving. Three primary types of technologies fall under the AI umbrella:

1. Machine learning. This involves an iterative process whereby machines improve their performance in a specific task over time with little or no programming or human intervention. It can, for example, improve your forecasting models for determining which products or services will be in high demand with customers.

2. Natural language processing (NLP). This uses algorithms to analyze unstructured human language in documents, emails, texts, conversation or otherwise. Language translation apps are among the most common and dramatic examples of NLP. Communicating with business partners, customers and prospects in other countries — or simply people whose first languages are other than English — has become much easier as this type of software has improved.

3. Robotic process automation (RPA). Using rules and structured inputs, RPA automates time-consuming repetitive manual tasks that don’t require decision making. For instance, an RPA system can collect data from vendor invoices, enter it into a company’s accounting system, and generate an email confirming receipt and requesting additional information if needed. This functionality can help you better time vendor payments to optimize cash flow.

Chat boxes, data sensors

A couple of the most common on-ramps into AI for businesses are chatbots and data sensors. Chatbots are those AI-based instant messaging or voice-based systems that allow users to ask relatively simple questions and get instant answers.

Today’s customers expect to find information quickly and chatbots can provide this speed. However, it’s important to implement a system that enables users to speedily connect to a human customer service rep if their questions or issues are complex or urgent.

Data sensors generally don’t have anything to do with customers, but they can be quite valuable when it comes to your offices or facilities. AI-enhanced building systems allow for real-time monitoring and adjustment of temperature, lighting and other controls. This data can drive predictive analytics that improve decisions about the maintenance and replacement of systems, lowering energy and repair costs.

Upgrade prudently

Precisely how AI might help you run your business more efficiently and profitably depends on the size of your company and the nature of its work. You don’t want to throw dollars at an AI solution just to keep up with the competition. Then again, this technology may offer enticing ways to sharpen your competitive edge. We can help you perform a cost-benefit analysis of any technological upgrade you’re considering.

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Personal data encompasses a lot of our identifiable information, like social security numbers, addresses, banking information and credit card details. Yet, what is often overlooked are the breadcrumbs we leave online. Innocuous information which we freely share through our social media and internet searches are regularly monetized in ways that our credit card number is not.

Personal data today can be compared to yesterday’s oil—it powers today’s most profitable corporations. Every day, hundreds of companies gather facts about us, some more private than others.
American companies are estimated to have spent over $19 billion in 2018 acquiring and analyzing consumer data, according to the Interactive Advertising Bureau. The information that brokers collect is incredibly valuable to corporations, marketers, investors, and individuals – as well as abusers. In addition to the companies trying to sell us stuff, the information may be passed on to data analysts, hackers, and many others.

When President Lyndon Johnson’s administration proposed merging hundreds of federal databases into a centralized National Data Bank, Congress quashed the project. Concerned about possible surveillance, if congress organized a Special Subcommittee on the Invasion of Privacy. The New York Times reported that lawmakers worried that the data bank could violate the privacy of millions of Americans. Instead, Congress passed a series of personal data use laws, including the Fair Credit Reporting Act in 1970 and the Privacy Act in 1974, mandating increased transparency on how and when federal agencies use our personal data.

Fast forward to today. Even after being faced with numerous high‐profile data security breaches and despite knowing little about how much of their information is collected and who gets to look at it, people world‐wide surrender all sorts of their data in the name of convenience. But their expectation that their medical histories, for example, will stay private remains deeply embedded in their assumptions. “Health information,” The Wall Street Journal recently wrote, “is the last sacrosanct piece of personal information.” So eyebrows were raised, recently, at the news that Google and Ascension entered into a business venture giving Google access to millions of American’s private medical records. Everyone, it seems, expected that HIPAA laws would protect them.

The HIPAA law, though, was enacted in 1996 ‐ before Google, Amazon and Apple became titans of technology. The technology boom left us with gaping holes in our regulatory framework that Congress is only now working to address. And while transparency is still a most important tool in protecting consumers, as competitors, these industry giants all value the shroud of secrecy they operate behind. Aggregating, sharing, selling and transferring data remains perfectly legal. For now. Tech companies have been forced to acknowledge the need for additional regulation as lawmakers slowly sift through the dense and challenging nature of the laws governing them. Even in a divided Congress, they are likely to unite around protecting American’s privacy. crutinizing “Big Tech” has become an important issue for people who are on either side of the aisle.

In the meantime, business owners all agree that loose lips sink ships, but Roth and Co. keeps your confidence.

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