From Fraud to Pandemic: How Valuators Handle Subsequent Events

Fraud can paralyze a business, large or small. In some cases, a business that falls victim to employee theft can never fully recover. Fraud scams often take years to detect, so they may not have an immediate impact on stock price.

When valuing a business, professionals must put themselves in the shoes of hypothetical buyers and sellers and consider only what was “known or knowable” on the valuation date. In a recent U.S. District Court case, the estate filed a tax return based on the exchange price of bank stock before the company disclosed a devastating fraud scam. After the public disclosure of the incident, the stock became worthless. Here’s why the estate filed a refund claim — and the court denied its claim.

Background

For estate and gift tax purposes, fair market value is defined in IRS Revenue Ruling 59-60 as: “The amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

The fair market value of a decedent’s property may be calculated on either:

• The date of death, or
• An “alternative valuation date,” occurring six months from the decedent’s death.

In general, the most reliable evidence of fair market value of corporate stock is the price paid on an active exchange, such as the New York Stock Exchange. The price reflects what public investors knew on that specific date.

Refund Claim

In Carter, the estate chose the alternative valuation date (March 21, 2008) to value its interest in Colonial BancGroup. The estate argued that the stock was worthless on the valuation date due to a multimillion-dollar “sham mortgage” scheme perpetrated by one of its customers.

In 2013 and 2016, a representative for the estate filed an amended return and sought a refund of allegedly overpaid estate tax. The court denied her claim for various reasons.

Timeline of Events

The following three relevant dates in this case:

1. September 21, 2007, the date of death.
2. March 21, 2008, the six-month alternative valuation date.
3. August 3, 2009, the date that Colonial BancGroup publicly disclosed the fraud incident, causing the stock value to plummet.

The market for Colonial BancGroup didn’t collapse until more than a year after the six-month alternative valuation date. Until the fraud announcement affected the exchange price, the shareholders were unaware of the scam, and it exhibited no effect upon the stock’s fair market value.

Court Decision

When valuing a business, it’s important to differentiate between events that affect value and those that provide an indication of the company’s value.

A third-party buyout that happens a year after the valuation date is an example of an event that provides an indication of what the business is worth. These types of subsequent events might be used to provide evidence of fair market value, assuming that market conditions remain consistent with conditions on the valuation date and the transaction occurs at arm’s length.

However, in general, when a subsequent event affects the stock price, a valuation expert can factor it into his or her analysis only if it was “known or knowable” as of the valuation date. In Carter, the fraud scam adversely affected Colonial BancGroup’s stock price — but not until more than a year after the valuation date. The company’s shareholders were unaware of the fraud and, therefore, didn’t factor it into their investment decisions.

The U.S. District Court for the Northern District of Alabama reasoned that, if the estate had sold the stock on the valuation date, it would have received the market rate for the stock as of that date. Therefore, the stock’s value was correctly reported on the original estate tax return, and the estate wasn’t entitled to a refund. 

In Carter, the court concluded that “the fair market valuation method does not include an exception for fraudulent or criminal actions not known to the public, even if those actions lower or destroy the stock’s value.” The court also noted that, while it was “sympathetic” to the estate’s circumstances, it was unwilling invoke its equitable powers to provide relief.

We Can Help

It’s important to disclose to your business valuation expert any subsequent event that may affect value or provide an indication of value. They can determine whether it’s appropriate to factor the event into the valuation analysis. Contact your Yeo & Yeo business valuation advisor for more information.

Carter v. United States, No. 18-cv-01380-HNJ, N.D. Ala. Aug. 9, 2019

When you find yourself in the middle of a crisis, the last thing you are thinking about is your tax situation. However, if you have been impacted by a sudden, unexpected disaster, tax consequences should be on your radar. When you suffer damage or a total loss of your home or personal property from an event that is attributable to a federally declared disaster, you may be able to reduce your taxes in the year the event occurred.

The tax deduction due to a casualty loss, attributable to a federally declared disaster, is claimed as an itemized deduction on Schedule A of your tax return. The loss is calculated based on the lesser of your adjusted basis in the property or the decrease in the fair market value of the property as a result of the casualty. You must reduce the amount of the loss by any insurance or other reimbursement received for the loss. Once the total loss is calculated, there is a $100 reduction to the loss and a second reduction equal to 10 percent of your adjusted gross income in the year of the loss. Contact your Yeo & Yeo tax professional for help with tax planning and assessing if there is a potential for tax savings due to the loss.

If you believe you have incurred a substantial loss and plan to claim the loss on your tax return, you will need to support your claim with documentation. That information will be easier to gather as you assess damages and document the loss in the present-day rather than next year as you pull together all your tax documents. The documentation required to substantiate your loss is similar to the items needed to make an insurance claim. Some examples are photos with a time and date stamp, an itemized list of the items lost along with their purchase price and current value, and paid invoices from contractors or restoration companies.

Being aware of the tax impact and thinking proactively could save you tax dollars and reduce the amount of loss incurred. Planning now could prevent another disaster during tax time.

The USDA’s Coronavirus Food Assistance Program (CFAP) will provide $19 billion in direct relief for agricultural producers, using funding from the Coronavirus Aid, Relief, and Economic Security Act, the Families First Coronavirus Response Act, and other USDA authorities.

Local Farm Service Agency offices will begin accepting CFAP applications on May 26. Details about completing the application are available on the USDA website.

Eligible producers of specified agricultural commodities who have suffered a five percent-or-greater price decline as a result of the COVID-19 pandemic (from mid-January to mid-April), and who face substantial marketing costs for inventories, are eligible for CFAP payments. The marketing costs are associated with lower prices given significant declines in demand, surplus production, or disruptions to shipping patterns and the orderly marketing of commodities.

To be eligible for payments, a person or legal entity must have an average adjusted gross income of less than $900,000 for tax years 2016, 2017, and 2018. However, if 75 percent of their adjusted gross income comes from farming, ranching, or forestry, the AGI limit of $900,000 does not apply.

CFAP is not a loan program, and there is no cost to apply. The application deadline is August 28, 2020. Visit the USDA website for details about eligible commodities, payment calculations, how to apply, payment limits, resources and more. Also, refer to the CFAP Frequently Asked Questions.

Please contact Yeo & Yeo’s Agribusiness Services Group if you need assistance with answering questions on the application.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

As the novel coronavirus (COVID-19) spread throughout the country this March and April, many states restricted the movement of residents while allowing those in “essential” businesses to continue working. Generally, construction companies have been deemed essential for this purpose — leaving contractors to grapple with the logistics.

Although nothing is certain at this point, some standard COVID-19 operating procedures have been established by American General Contractors (AGC), one of the construction industry’s leading associations. Here’s an overview of what you can do to keep workers and others safe in the current hazardous environment.

General Policies and Practices

First and foremost, if someone on your job site or in your office — whether a manager, worker or visitor — shows COVID-19 symptoms, that person should be sent home immediately. But hopefully, you won’t have to deal with that situation.

To keep employees safe from infection, they should work at least six feet apart and meetings should be limited to a maximum of ten people. Limit or eliminate many face-to-face meetings by using electronic devices or phones and allow only necessary employees to enter trailers. Also, stagger breaks and lunches to avoid close contact among crew members. 

You might also want to consider dividing crews into two groups so that even if one team is required to quarantine, the other team can continue the work. These teams should work separately during the job’s duration. Be sure to use discretion when substituting workers or allowing workers to change teams.

If access to running water onsite is impracticable, provide your crews with alcohol-based hand sanitizers or disinfectant wipes. Workers should use these cleaning products on tools they share. Follow the tool manufacturers’ recommendations for proper cleaning techniques. Finally, encourage workers to wear facial masks. Because N95 respirators are in short supply, try to limit practices that produce heavy dust.

Field Specifics

Those are general outlines for construction work safety during the COVID-19 pandemic. Now let’s dig deeper into specific AGC-recommended practices.

Transportation. Discourage ridesharing to job sites, but if workers must share a vehicle, ensure adequate ventilation. And, if possible, assign crew members to drive the same truck or piece of equipment. Clean the interior thoroughly before switching operators.

Occupied buildings. Homes and other occupied structures present unique challenges. You should discuss and evaluate the risks with the building’s owner before starting the job. Have workers sanitize work areas upon arrival, throughout the day and immediately before they leave for the day. They should also wash or sanitize hands immediately before and after work.

Job site visitors. Allow visitors to the job site only when necessary. Before they enter a work area, ask a series of screening questions: 

• Have you tested positive for COVID-19?
• Are you currently experiencing any respiratory illness symptoms such as cough, shortness of breath or fever?
• Have you been in close contact with anyone who has tested positive for COVID-19?
• Have you recently traveled abroad?
• Have you been in close contact with anyone who has recently traveled abroad and is also exhibiting respiratory illness symptoms?

If a visitor answers “yes” to any of these questions, deny him or her access to your site.

Site deliveries. It’s OK to permit deliveries but arrange them so there’s minimal physical contact. For example, have delivery personnel remain in their vehicles while your workers unload the trucks.

Personal protective equipment. Besides providing workers with standard construction safety equipment such as hard hats and goggles, make sure they have personal protection equipment (PPE) to help guard against COVID-19. For example, even if the job doesn’t normally require gloves, distribute latex or other suitable gloves and require workers to wear them at all times on site.

N95 respirators. At this writing, the Centers for Disease Control and Prevention (CDC) hasn’t recommended that healthy people wear N95 respirators to prevent the spread of COVID-19. The CDC has said that employees should wear N95 respirators if a specific job requires it. But because N95 respirators are in high demand by health care workers and may not be easy to source, crews should: 

• Wear nonmedical grade masks while working,
• Reduce dust with engineering and work practice controls — specifically, water delivery and dust collection systems.
• Limit exposure time, if possible.
• Protect nonessential workers and bystanders by isolating workers in dusty operations with a containment structure.
• Institute a rigorous maintenance program to reduce general dust levels onsite.

Adaption Is Critical

As the situation evolves, construction firms must adapt, instituting safety measures that protect workers and visitors while sustaining operations. Take the long-term approach to this ongoing pandemic.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

Accounting Today’s annual ranking of the top CPA firms in the country recognized Yeo & Yeo CPAs & Business Consultants as a 2020 regional leader. Based on annual net revenue from 2019, Yeo & Yeo was ranked 16th in the Great Lakes region – which includes Illinois, Indiana, Michigan, Ohio and Wisconsin – and 108th nationally. The publication also recognized Yeo & Yeo among Firms to Watch beyond the top 100.

“We are honored to be continuously recognized as a top-performing firm by one of the industry’s most influential publications,” said Thomas E. Hollerback, President & CEO. “Being recognized by Accounting Today speaks to the commitment our teams make to perform to our highest abilities and provide the highest quality services to our clients.”

The firm has nine offices throughout Michigan and more than 200 employees. Yeo & Yeo’s companies include Yeo & Yeo Technology, Yeo & Yeo Medical Billing & Consulting, and Yeo & Yeo Wealth Management.

Many news outlets reported on Wimbledon’s pandemic insurance policy that is to pay out $141 million on an annual $2 million policy!

During these unfamiliar times, this serves as good reminder that nonprofit organizations should continually evaluate their insurance needs to protect against the unexpected.

A best practice is to review insurance policies and coverages annually with your insurance advisor and pay attention to the nuances of the policies and how they pay out in the event of a claim.

Common policies nonprofits should be evaluating annually include, but are not limited to:

• Cybersecurity – now even more important with increased work-from-home initiatives
• Directors and Officers coverage
• Workers’ compensation
• Employment practices liability
• Property and casualty
• Special event insurance
• Accident insurance for volunteers
• Auto insurance
• Umbrella policy

If you have questions or need assistance, contact your local Yeo & Yeo professional.

As we head into uncharted waters and hope for a semblance of normalcy and routine to come back to our lives, I thought it would be a good idea to revisit some accounting rules and situations you might be dealing with for the first time or in a long time. Some of these are just reminders of what you are currently doing, and others are things you might have placed on a back burner or just plain forgot about. When I think about this section, I think of that song from The Breakfast Club by Simple Minds, “Don’t You Forget About Me.”

Now that you are singing along, let’s get started.

• Extraordinary/Special items – These items are unusual in nature and infrequent, so they could be necessary in some cases where there is a direct impact on the organization.
• Fair Value – With the dramatic changes in the market, many organizations will have significant fluctuations in the market value of investments, retirement plans, Other Post-Employment Benefit Trusts and so on. Especially when the valuation period coincides with an upcoming fiscal year, there will be some impact. Those that are lucky enough to have a year-end that includes part of 2019 should have a little less impact, but it will still be significant.
• Going Concern – The financial health of your organization will need to be evaluated. It is better to do it before your auditors start asking you about it. Many of you have already done this in preparation for communications with your boards, employees, and communities. If your organization was struggling before the pandemic, it isn’t likely going to be better anytime soon. Your auditors will evaluate this in both the planning and completion stages of the audit.
• Expense/Expenditure Recognition – If part of your plan for cash flow is to delay payments or skip payments, remember there are rules in place for those payments on the full accrual method of accounting and the modified accrual basis of accounting.
• Uncollectable Accounts – Many of our citizens and customers will be facing cash flow challenges and, sadly, many businesses will not ever reopen. Also, Executive Orders have forced governmental entities to turn on water that was shut off for nonpayment, creating more concerns for local providers of water to the public.
• Violations of Debt/Payment Covenants – When these situations arise, make sure you review all your information to verify that you have everything you need before making this decision. Failing to make a payment will not impact your financial statements but will require additional disclosures and potential penalties from the lending institutions.
• Sale or Pledging Current or Future Receivables – Some may have done this for cash flow reasons, and I am thinking people are looking under every stone when they are struggling. If you are considering this, please make sure to research it in advance.
• Capital Asset Impairment – Vacant facilities, partial construction or renovation, and new closures will need to be evaluated for fair value and reviewed for impairment.
• Debt Restructuring – Interest rates are low and, if opportunities arise, this might be a time to review this and the rules related to scheduling out your payments. This is an area that could be challenging in the coming years.
• Subsequent Events – Almost every set of financial statements being issued right now will likely have some sort of subsequent event note for the pandemic. This will be more detailed as we fully understand the long-term impact this will have on our state and local governments as well as our school districts.
• Management’s Discussion and Analysis – Make sure that you are not just updating information and rolling this forward as there will likely be drastic changes in comparable information. This is your opportunity to speak on the issue through the financial statements as it relates to the current year and future budgets.

Certainly, other things can be considered, and every community has their own situations and challenges. Rest assured, we are here to help you any way we can. Please reach out to any of your Yeo & Yeo professionals – we would love to talk with you about anything, not just the items on this list. Thank you and we look forward to seeing you again soon!

Imagine this scenario: A company’s controller is hospitalized for the novel coronavirus (COVID-19), and she’s the only person inside the company who knows how its accounting and payroll software works. She also is the only person with check signing authority, besides the owner, who is in lockdown at his second home out of state. Meanwhile, payroll needs to be processed soon and unpaid bills are piling up.

Of course the health of the controller is what’s most important, but this situation also highlights the importance of cross-training your staff to handle critical tasks. Doing so offers numerous benefits that generally outweigh the investment in the time it takes to get employees up to speed.

Why cross-train?

Whether due to illness, resignation, vacation or family leave, accounting personnel may sometimes be unavailable to perform their job duties. The most obvious benefit to cross-training is having a knowledgeable, flexible staff who can rise to the occasion when a staff member is out.

Another benefit is that cross-training nurtures a team-oriented environment. If a staff member has a vested interest in the jobs of others, he or she likely will better understand the department’s overall business processes — and this, ultimately, both improves productivity and encourages collaboration.

Cross-training also facilitates internal promotions because employees will already know the challenges of, and skills needed for, an open position. In addition, cross-trained employees are generally better-rounded and feel more useful.

Additionally, the accounting department is at high risk for fraud, especially payment tampering and billing scams, according to the 2020 Report to the Nations by the Association of Certified Fraud Examiners (ACFE). If employees are familiar with each other’s duties and take over when a co-worker calls in sick or takes vacation, it creates a system of checks and balances that may help deter dishonest behaviors. Cross-training, plus mandatory vacation policies and regular job rotation, equals strong internal controls in the accounting department.

How to cross-train?

The best way to cross-train is usually to have employees take turns at each other’s jobs. The learning itself need not be overly in-depth. Just knowing the basic, everyday duties of a co-worker’s position can help tremendously in the event of a lengthy or unexpected absence.

Whether personnel switch duties for one day or one week, they’ll be better prepared to take over important responsibilities when the time arises. Also, encourage your CFO and controller to informally “reverse-train” within the department. This will prepare them to fill in or train others in the event of an unexpected employee loss or absence.

When to start?

Regardless of when your accounting team returns to the office, get started with cross-training now — much training can be done virtually if necessary. Then make it an ongoing process. We can help you cross-train your accounting personnel to minimize business interruptions and deter fraud, along with implementing other internal control procedures.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

© 2020

The United States-Mexico-Canada Agreement (USMCA) will take effect on July 1, 2020. President Trump has hailed the new North American trade treaty as a “colossal victory” for Americans. Whether the impact is worthy of superlatives will vary by industry sector and geography. Here’s what U.S. business owners should know.

Overview

When the Canadian parliament ratified the USMCA in mid-February, the clock began ticking for the parties to iron out the details. At the time, auto manufacturers — a sector that will be significantly affected by the USCMA — complained that they might not be able to comply by July 1.

The effects of the USMCA will be far-reaching. It updates the North American Free Trade Agreement (NAFTA), which has been in effect for 26 years.

Highlights from the new trade agreement can be divided into the following three categories:

1. Rules for Manufactured Goods

Automakers are especially concerned about complying with the USMCA provision that requires them to increase the proportion of auto parts in a vehicle made in the three countries covered by the treaty — from 62.5% under NAFTA to 75% by 2023. Vehicles that fail to meet the gradually increasing standard will incur a tariff when they’re sold across the borders of the United States, Mexico and Canada.

This provision aims to reduce the parts coming from China and other locations outside of North America. Will this rule increase demand for American-made parts? It depends on whether U.S. manufacturers can make auto parts formerly sourced outside of North America more competitively than parts makers in Mexico and Canada.

Another USMCA provision could help in that regard: It requires that 40% to 45% of auto content be made by workers earning an hourly wage of at least $16. That provision could lead to higher wages for workers in auto parts factories in Mexico — and it could also make U.S. auto parts more competitive in term of costs than under NAFTA.

U.S. auto industry executives, while optimistic about USMCA’s ultimate impact, anticipate higher costs for certain parts. A recent survey of those executives reveals that U.S. auto parts makers located closest to auto assembly plants are expected to benefit the most from the USMCA.

Beyond the auto sector, USMCA provisions intended to support labor unions in Mexico could ultimately push up costs for other goods made in Mexico. This could also help make American-made goods more competitive in terms of cost. According to a summary of the Agreement by the U.S. Trade Representative (USTR), “Mexico commits to specific legislative actions to provide for the legal recognition of the right to collective bargaining.” A related provision creates a “rapid response mechanism” that provides for “monitoring and expedited enforcement of labor rights to ensure effective implementation of Mexico’s landmark labor reform.”

The agreement also will facilitate agricultural trade in North America. For example, the United States, Mexico and Canada have agreed to provisions to enhance information exchange and cooperation on agricultural biotechnology trade-related matters.

In addition, the agreement will provide greater access to Canadian markets for U.S. farmers who produce such products as dairy, eggs, poultry, wheat and wine. In return, Canadian exporters of dairy and sugar will have greater access to U.S. markets. In total, American agricultural exports are expected to increase by $2.2 billion under the USMCA.

2. Rules for Intellectual Property (IP)

The USMCA strengthens IP protections by blocking the production of inexpensive knock-off products. The agreement, according to the USTR, will “provide strong patent protection for innovators, enshrining patentability standards and patent office best practices to ensure that U.S. innovators, including small- and medium-sized businesses, are able to protect their inventions with patents.” Along similar lines, it will “enhance provisions for protecting trademarks … to help companies that have invested effort and resources into establishing goodwill for their brand.”

The USMCA also provides new protections, such as customs duties and other measures, for products distributed digitally. These protections are expected to increase trade and investment in innovative digital products — such as videos, software, music, e-books and games — where U.S. manufacturers generally have a competitive advantage.

3. Small Business Provisions

Small business owners may be interested in a USMCA provision that adjusts the “de minimis shipping value level” for goods entering Canada. When a good’s value is below that minimum amount, they can move across the border with “minimal formal entry procedures.” Under the agreement, shipments worth up to $150 Canadian won’t be assessed duties otherwise eliminated under the treaty. The de minimis shipping value is $40 Canadian for basic taxation purposes.

“New traders just entering Mexico’s and Canada’s markets will also benefit from lower costs to reach consumers,” and U.S. express delivery carriers “stand to benefit through lower costs and improved efficiency,” according to the USTR. Specifically, a new and higher $2,500 value threshold is set for that purpose.

The USMCA includes a full chapter dedicated to smaller businesses. It’s designed to “promote cooperation … to increase trade and investment opportunities,” according to the Small Business Administration.

We Can Help

Contact your CPA to discuss how the new agreement could affect your supply chain. In some cases, changes may be warranted to comply with the USMCA and take advantage of new opportunities.

The coronavirus (COVID-19) pandemic has forced American businesses to adapt quickly to a radically new economic and operating landscape. If your company sells, manufactures, delivers, distributes or otherwise facilitates goods considered “essential” you may need to operate at full (or overtime) capacity. On the other hand, manufacturers whose goods aren’t deemed essential may be forced to idle their machines and close their doors indefinitely. (In many cases, state guidelines specify which businesses are essential and which ones aren’t.)

Both situations are challenging. But if you’re up and operating, here are four considerations to help you do so safely and productively:

1. Keep Workers Safe

The health and safety of workers has always been a priority for manufacturers. Now you must contend with the threat of COVID-19. If some of your employees can work from home, enable them to do so successfully by ensuring they have the technology and other resources they need. Even as states “open for business” again, consider keeping remote workers at home, if possible, until COVID-19 treatments or a vaccine are available.

For workers who must be on-site, consider scheduling skeleton crews in shifts and try to keep the same workers on individual crews to limit potential exposure. Also limit the number of managers working at any one time in production areas. Even if you normally operate nine to five, the transition to 24-hour operations may be easier than you think. Exercising flexibility helps lower the risk that the virus might spread. And if an employee does become sick, fewer coworkers will be required to self-quarantine.

Positive cases of COVID-19 exposure should be treated seriously. In addition to quarantining workers, you must thoroughly clean all production and office areas before allowing operations to resume.

2. Embrace Innovation

Doing things the way you always have may not be the best course right now. Instead, be ready to adapt and innovate whenever the situation calls for a different approach. For example, most manufacturing workers don’t work from home. But 3D printers may make it possible for some employees to produce goods while social distancing.

Or consider how your company might repurpose goods to meet new demands. As has been well-publicized, some companies are redeploying resources to produce ventilators and other needed medical equipment. In many cases, manufacturers may find it relatively easy to pivot to new production modes and goals. For instance, some distilleries are converting alcoholic beverages into disinfectants. Paper producers might ramp up production to meet increased demand for shipping boxes. And manufacturers already producing cardboard could redesign templates to make more “to-go” boxes for restaurants that have been forced to close dining areas.

Be sure you heed federal and state government mandates. Some companies may be asked to modify their operations so they can produce in-demand medical or cleaning products. Even if you aren’t required to change your operations, look for opportunities to address the current situation. Slight alterations could mean the difference between your products being deemed essential vs. non-essential. If you’re a link in an important supply chain, you may be able to make the case for continuing operations.

3. Plan for Financial Challenges

Your factory may be busy now, but there’s no guarantee that will be true in a few months. The financial ramifications of COVID-19 could be long-lived — and dire — for many businesses. Plan so that work slow-downs don’t sneak up on you.

Federal and state authorities have introduced various tax breaks, particularly for companies that keep workers on the payroll. The Families First Coronavirus Response Act made certain employers eligible for tax credits so long as they provide paid sick leave to COVID-19-positive employees or workers who have to stay home to care for sick family members.

The subsequent Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized several provisions, including:

• Delays for payroll tax obligations,
• An employee retention credit,
• Favorable tax provisions for businesses incurring losses, and
• Expanded unemployment benefits for workers.

The CARES Act also launched the massive Paycheck Protection Program (PPP) that offers qualified businesses forgivable loans and other forms of relief for keeping employees on the payroll. After the available money ran out, Congress approved a second round of funding for the PPP in late April.

State and local support levels vary depending on the municipality. For example, your state may have removed some restrictions for businesses producing essential products.

4. Get Professional Advice

Your manufacturing management team doesn’t have to tackle the many challenges of the COVID-19 crisis alone. We have up-to-date information on federal and state benefits available to manufacturers. And we can help you navigate the lending landscape. For example, we can help identify appropriate lenders and prepare the calculations and statements required to apply for PPP loans. Don’t hesitate to contact Yeo & Yeo’s manufacturing advisors.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

Many companies have questions about how to handle employee benefits, especially health care coverage while employees are on furlough due to the novel coronavirus (COVID-19) pandemic. Here’s an example of a common question some employers are asking.

Q. Our company is closing one of its divisions for one month and placing all employees in that division on temporary unpaid leave in a mandatory furlough in response to COVID-19. Do we have to offer COBRA to employees who lose coverage under our group health plan because they aren’t working that month?

A. Assuming your plan is subject to COBRA, all covered employees experiencing a reduction of hours and loss of coverage due to the furlough are entitled to a COBRA election (as are their covered spouses and dependent children). This is true even though they’ll presumably elect and continue COBRA coverage for only one month. Your company should timely provide COBRA election notices and follow its standard COBRA procedures.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods under certain circumstances. These include voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events. Qualified individuals may be required to pay the entire premium for coverage up to 102% of the cost to the plan.
— The U.S. Department of Labor

A reduction of hours in a covered employee’s employment is a COBRA triggering event that commonly occurs when an employee goes from full-time to part-time, is temporarily laid off, takes a leave of absence, or has hours reduced due to a strike or lockout. If eligibility for the plan depends on the number of hours worked, and the employee fails to work the required hours, then the employee has experienced a reduction of hours for COBRA purposes.

Keep in mind that if the reduction in hours doesn’t cause a loss of health plan coverage, no COBRA obligation arises. For instance, an employee on COVID-19-related paid sick or family leave who hasn’t experienced a loss of coverage wouldn’t trigger COBRA.

As a practical matter, given the time-frames involved with offering COBRA — including at least 60 days in which to elect COBRA and 45 days in which to make the first premium payment — qualified beneficiaries can adopt a wait-and-see approach and elect coverage only if medical care is required before the election is due. In your situation, they can wait to see if they incur any medical expenses during the one-month furlough period and then decide whether to elect COBRA.

For more information, contact your HR advisor or employment attorney.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

The $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act delivers good news to individuals and businesses, including valuable tax-relief measures. Some of that tax relief is retroactive. These provisions can affect 2018 and 2019 returns that have already been filed. One retroactive provision can, in some cases, go all the way back to 2013. Some taxpayers that file amended returns may receive a tax refund from prior years.

Here’s a summary of four retroactive CARES Act provisions that can potentially benefit you or your business entity after amended prior-year returns have been prepared and filed.     

1. Liberalized Rules for Deducting NOLs

Business activities that generate tax losses can cause you or your business entity to have a net operating loss (NOL) for the year. Many businesses are currently operating at a loss. But there’s a bright side: The CARES Act significantly liberalizes the NOL deduction rules and allows NOLs that arise from 2018 to 2020 to be carried back five years.

That means an NOL that arises this year can be carried back to 2015. In addition, an NOL that arose in 2018 can be carried back to 2013. Such NOL carry-backs allow you to claim refunds for taxes paid in the carry-back years. Because tax rates were higher in pre-2018 years, NOLs carried back to those years can be especially beneficial.

2. Better Depreciation Rules for Real Estate QIP

The CARES Act includes a retroactive correction to the 2017 Tax Cuts and Jobs Act (TCJA) that allows much faster depreciation for real estate qualified improvement property (QIP) that’s placed in service after 2017.

QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. However, QIP doesn’t include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

The retroactive correction allows you to claim 100% first-year bonus depreciation for QIP expenditures placed in service in 2018 through 2022. Alternatively, you can depreciate QIP placed in service in 2018 and beyond over 15 years using the straight-line method.

Amending a 2018 or 2019 return to claim 100% first-year bonus depreciation for QIP placed in service in those years may result in a lower bill for the tax year the QIP was placed in service. It may even generate an NOL that can be carried back to a prior tax year to recover taxes paid in that prior year. 

You could also amend a 2018 or 2019 return to claim 15-year straight-line depreciation for QIP placed in service in those years. That might not create an NOL for 2018 or 2019, but it would still lower your tax bill for those years. 

3. Suspended Excess Business Loss Disallowance Rule for Noncorporate Taxpayers

An unfavorable TCJA provision disallowed current deductions for so-called “excess business losses” incurred by individuals and other noncorporate taxpayers in tax years beginning in 2018 through 2025. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. The $250,000 and $500,000 limits are adjusted annually for inflation.

The CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018 through 2020. Amending a 2018 or 2019 return to reflect the suspension of the excess business loss disallowance rule could result in a 2018 or 2019 NOL that could then be carried back to a prior tax year to recover taxes paid in that prior year. Or it could just lower the 2018 or 2019 tax bill. Either way, you’ll come out ahead. 

4. Liberalized Limit on Business Interest Expense Deductions

Another unfavorable TCJA provision generally limited a taxpayer’s deduction for business interest expense to 30% of adjusted taxable income (ATI) for tax years beginning in 2018 and beyond. Business interest expense that’s disallowed under this limitation is carried over to the following tax year. 

In general, the CARES Act temporarily and retroactively increases the taxable income limitation from 30% of ATI to 50% of ATI for tax years beginning in 2019 and 2020. There’s no change for tax years beginning in 2018. Amending a 2019 return to reflect the liberalized taxable income limitation rule could result in a 2019 NOL that can be carried back to a prior tax year to recover taxes paid in that prior year. Or it could just lower the 2019 tax bill. Either way, you’ll come out ahead.  

Special complicated rules apply to partnerships and LLCs that are treated as partnerships for tax purposes. 

Important: Taxpayers with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the business interest expense deduction limitation. Certain real property businesses and farming businesses are also exempt if they choose to use slower depreciation methods for specified types of assets.

To Amend or Not to Amend?

The four retroactive tax-relief measures provided by the CARES Act can impact prior tax years for which returns have already been filed. Amended returns can allow you or your business to benefit from these changes and recover taxes paid in prior years. Contact your tax professional if you have questions, need more information or want to authorize us to start preparing amended returns for you or your business.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

Before awarding credit, lenders demand detailed budgets, including cash flow forecasts. They want realistic projections, not unfounded profit and revenue estimates. Cash flow projections are an important element for lenders because they show how you plan to repay the money.

Even if your company doesn’t need credit, a well thought-out budget, including cash flow projections, is important for the ongoing operation of your business. For some projections, surety companies look closely at budgets before issuing the bond needed. Additionally, by preparing an effective annual budget and comparing it to your actual financial performance, you can find certain situations that need to be addressed. 

For example, a business that expects $5 million in new projects in the first half of the year, but is awarded only half of that amount in contracts, need to review its bidding procedures. Perhaps the company needs to tighten up its bidding process, have someone review the work of the estimator before bids are submitted, and review other internal procedures to get more work.

Upon review of the actual performance, you may find expenses that are out of line and you want to look at instituting controls, safeguards — and perhaps even institute a bonus system for those responsible for controlling the job.

Effective budgeting requires knowledge of the technical aspects of the your industry — as well as experience with projections, job costing, and a host of related financial matters.

Contact us. We can help you develop a meaningful and reliable budget that will help your company now and in the future.

The recent Coronavirus Aid, Relief, and Economic Security” (CARES) Act provides relief to employers struggling to stay afloat during the novel coronavirus (COVID-19) pandemic. The not-for-profit sector is no exception. In fact, some provisions in the new law are specifically tied to charities. Following is a brief summary of seven key benefits for nonprofit employers and supporters.

1. Paycheck Protection Program (PPP) Loans

The PPP is the cornerstone of the COVID-19 federal stimulus package. Companies and nonprofits with 500 or fewer employees generally are eligible to apply for loans through authorized banks. After the initial $349 billion for PPP loans was exhausted within two weeks of the program’s introduction, Congress allocated an additional $325 billion on April 21.

PPP loans are forgivable if you use the proceeds to pay for certain expenses, including:

• Payroll costs,
• Mortgage interest incurred before February 15, 2020,
• Rent under lease agreements in effect before February 15, 2020, and
• Utilities for which services began before February 15, 2020

At least 75% of PPP loan proceeds must cover payroll costs, including staffers’ wages and benefits. However, loan funds can’t be used for compensating employees making $100,000 or more annually.

The amount of your loan eligible for forgiveness is reduced if you don’t keep employees on the payroll or if you reduce their wages by more than 25% compared with last year. If you’ve already laid off staffers, you can rehire them by June 30, 2020, and still qualify for loan forgiveness. Note that you’ll need to produce documentation (such as W-2s and quarterly payroll tax filings) to verify pay rates for current and prior years.

2. Disaster Grants

The CARES Act also sets aside $10 billion for Emergency Economic Injury Disaster Loan advances. Emergency grants are available to private nonprofit organizations, including 501(c) trade associations, advocacy organizations, unions and social clubs that aren’t eligible to participate in the PPP.  If your organization qualifies, nonprofits may receive a $10,000 emergency advance within three days of applying for it.

3. Employee Retention Credits

Also available is a payroll credit comparable to the existing credit for family and medical leave. The CARES Act credit applies to payroll taxes for wages paid to employees in 2020. It’s available if your operations are fully or partially suspended due to COVID-19 or if gross receipts have declined by more than 50% when compared to the same quarter last year.

This refundable credit is equal to 50% of the first $10,000 of qualified wages paid to each employee during the year (the maximum credit is $5,000 per employee). It applies to wages paid or incurred from March 13, 2020 through December 31, 2020. Note, however, that you can’t claim both the employee retention credit and the family and medical leave credit for the same wages.    

4. Economic Stabilization Fund

A new Economic Stabilization Fund offers loan guarantees and investments to organizations in industries affected by the COVID-19 pandemic. If your nonprofit can’t participate in the PPP — for instance, if it has more than 500 employees — it may qualify for this relief.

Loans can be direct loans or loan guarantees, but they can’t be forgiven like PPP loans. However, they must have an interest rate no higher than 2% and interest payments aren’t due in the first six months. If you qualify for this assistance, you’ll need to make certain certifications.

5. Unemployment Benefits

Organizations that elect to self-insure rather than pay state unemployment tax will be reimbursed for half the costs of benefits provided to laid-off employees. In addition, the CARES Act provides an extra $600 per week to employees on top of their state unemployment benefits for four months.

A new pandemic unemployment program aids unemployed and partially employed employees and individuals unable to work who don’t typically qualify for traditional benefits. This includes furloughed employees, contractors, gig economy and self-employed workers in the nonprofit sector.

6. Delayed Payroll Taxes

Businesses and nonprofits affected by the COVID-19 outbreak can defer payroll taxes that are due in 2020. This applies to the employer’s share of the 6.2% Social Security tax. Your organization may then arrange to pay 50% of the required amount by December 31, 2021, and the remaining 50% by December 31, 2022, without penalty.

7. Charitable Contributions

Finally, the new law offers various tax incentives intended to encourage charitable givers to continue making donations despite economic uncertainty. These incentives include:

• A deduction of up to $300 for donations, even if the taxpayer doesn’t itemize — but only for the 2020 tax year.
• Elimination of the deduction limit in 2020 for monetary contributions based on 60% of adjusted gross income (AGI).
• Enhanced deductions for donations by corporations. The new law raises the usual limit of 10% of AGI to 25% and increases the deduction limit for gifts of food from 15% of AGI to 25%.

For Specific Advice

This is just an overview of the main CARES Act benefits for nonprofits. Every organization is unique, so you should contact your tax and financial advisor for specific advice about how to obtain loans and take advantage of new tax breaks.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

The $2 trillion Coronavirus Aid, Relief and Economic Security Act that was signed into law on March 27 has several provisions you should know about with respect to personal finances.

• A one-time payment of $1,200 per individual, $2,400 per married couple, will be paid as a rebate from the IRS. The payments will go to individuals with adjusted gross income (AGI) of up to $75,000 and married couples with AGI up to $150,000 based on 2019 tax returns. There will be an additional payment of $500 per child.
• The 2019 deadline for Traditional and Roth IRAs contributions has been extended to July 15, the new tax filing deadline. Be sure to indicate the tax year on any contribution checks to make sure they are recorded properly by the custodian.
• Required minimum distributions (RMDs) have been suspended for 2020. The suspension covers RMDs from IRAs, SIMPLE IRAs, SEP IRAs, 401(k)s and inherited IRAs. The waiver also covers those taking their first RMD in 2019 which would have been due by April 1.
• Charitable contributions receive a new above-the-line deduction of up to $300. This provides a charitable tax deduction for those who do not itemize and take the standard deduction. Also, for those who do itemize, the 50% of adjusted gross income (AGI) limit for charitable contributions is suspended for 2020.
• Early withdrawal penalty is waived for distributions from retirement accounts that are needed for coronavirus-related purposes. The 10% penalty is waived, retroactive to January 1. These distributions will still be taxed, but the taxes are spread over three years. The taxpayer could also roll the money back in within three years without being taxed or counted toward that year’s contribution limit.
• The 401(k)-loan limit has been increased from $50,000 to $100,000.

Now that many nonprofit and nonpublic organizations are starting to put the implementation struggles of the new revenue recognition standards behind them, it seems that it is time to start shifting attention to the new lease standard (ASC Topic 842, Leases) … or is it?

A new proposal by FASB
FASB’s Proposed Accounting Standards Update for Revenue from Contracts with Customers and Leases is intended to provide relief to nonprofit and nonpublic organizations already dealing with other operational disruptions caused by COVID-19. Under this proposal, FASB has recommended deferring the lease standard implementation for yet another year (a one-year deferral was already approved in 2019). This would make the lease standard effective for fiscal years beginning after December 15, 2021, or in layman’s terms, for December 31, 2022, year-end financial reporting.

The COVID-19 pandemic has created a new wave of lease-related issues, such as short-term and long-term lease modifications, as well as other lease concessions, that could impact the accounting for lease assets and liabilities to be recorded under ASC Topic 842, Leases. So, a delay in implementation may be good news for some entities already at their capacity for change.

This proposed lease delay to date has yet to be accepted. However, in the event it is, use this additional time to continue getting your ducks in a row; don’t just put this off.

• Start a log of your organization’s current leases.
• Determine if you have any debt covenants that could be impacted by changes to the balance sheet.
• Consider changes to policies, procedures and internal controls related to the new standard.

If you have questions or need assistance with accounting for your organization’s leases, please contact your local Yeo & Yeo professional.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

Businesses that received Paycheck Protection Program (PPP) loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired, according to guidance issued on May 3, 2020, from the SBA, in consultation with the Treasury Department. The guidance was among three new questions the SBA added to its PPP Frequently Asked Questions (FAQ) file.

According to the guidance, SBA and Treasury plan to issue a new rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the loan forgiveness reduction calculation. The interim final rule will specify that a borrower may exclude an employee from loan forgiveness calculations if the borrower made a good-faith, written offer of rehire and documented the employee’s rejection of that offer. The guidance does not specify what form that documentation should take. Employees who reject good-faith offers of re-employment may find themselves ineligible for continued unemployment benefits.

The SBA’s FAQ #40 provides expressly:

FAQ – Question #40: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good-faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.