The COVID-19 pandemic is not yet over, and contractors will continue to feel its impact for subsequent years. As far as accounting and financial statements are concerned, preparations should be made for possible changes, including adjustments to Generally Accepted Accounting Principles (GAAP) requirements and disclosures.
GAAP Changes
Some significant possible changes to GAAP requirements and disclosures affect the following topics:
- Contract modifications
- Debt modifications
- Loan covenants
- Going concern
- Inventory
- Property, Plant, and Equipment (PPE)
- Risks and uncertainties
- Securities
- Subsequent events
These changes will vary from contractor to contractor due to each running their own unique business.
Effects of an Economic Downturn
With the economy slowing and, in some places, shutting down during this pandemic, it is evident it can lead to long term changes to the economy. Contractors need to take into consideration the following possible effects.
Contracts, debt modifications, loan covenants, and going concern are all directly impacted by this. Contractors will have to analyze their current contracts and possibly renegotiate to proceed on. The same goes for amending existing debt agreements regarding liquidity. The impact on going concern evaluations will require the disclosure of the results from COVID-19 and possible reassessments. This would include things such as key financial ratios, financial projections, and their ability to meet debt covenants.
Inventory and PPE are both similarly affected. ASC Topic 330 states when production is lower than typical, it is required to expense, as an alternative to capitalizing, an allocation of fixed overhead costs. Due to the decrease in the workforce, an adjustment to the carrying value of inventory may be necessary and then disclosed. As for PPE, the carrying amount of an asset may no longer be recoverable, which is required to be disclosed as well.
Risk and Uncertainties
After any pandemic, it is expected there could be a significant increase in risks and uncertainties reported on the financial statements. It is required that contractors disclose the impact of COVID-19 and the effect on their current and future operations for their business. Some areas which are expected to be impacted are volume discounts, variable considerations, rebates in revenue contracts, and asset impairment evaluations. Along with risks and uncertainties come securities. It is no secret that COVID-19 had a major impact on the decline of the economy, therefore capital markets were negatively affected. Therefore, it is required for an individual disclosure to be made of equity securities, debt securities, and equity method investments.
Disclosure
Regarding COVID-19 and subsequent events, contractors must review and disclose the events that occurred because of the pandemic. With the disclosure of a non-recognized subsequent event, the financial impact should be stated as well. Significant disclosures contractors should consider are:
- Government-mandated restrictions
- Staff reductions
- Investment losses
As this pandemic continues, it leaves many contractors wondering what lies ahead. Even though the future is unforeseeable, if contractors act now and take advantage of the resources they are given, they will be prepared. The time to begin planning is now, as it’s important for businesses to know any tax changes and filing requirements. If you have any questions, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
The Tax Cuts and Jobs Act of 2017 (TCJA) created legislation limiting the deductibility of business interest expense on businesses with average annual gross receipts of $25 million or more (amount is indexed annually for inflation) in the previous three years and businesses considered tax shelters as defined under the Internal Revenue Code. The limitation generally reduces the deductibility of business interest expense to 30% of the taxpayer’s adjusted taxable income. The recent passing of the CARES Act generally increased the deductibility of business interest expenses from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020.
State-By-State Variations
As each state has their own respective tax structure, there are varying degrees of conformity to the federal business interest expense limitations discussed above. Accordingly, businesses may have the added complexity of tracking business interest expense limitations at the state level, which only gets compounded for those businesses operating in multiple jurisdictions. There are currently 35 states that conform to some version of the 163(j) business interest expense limitation, and of these, 22 states conform to the recently increased limitation provided in the CARES Act of 50%, whereas 13 of these states conform to 163(j) as it was originally adopted in the Tax Cuts and Jobs Act of 2017.
More Information
If you are a business who is subject to the limitation on business interest expense, and seek guidance in this area, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
If you sustain a casualty loss due to a federally declared disaster under Section 165(i), you may elect to deduct a casualty loss in the tax year before the casualty actually occurred. Taxpayers have the option of claiming a deduction for the casualty loss either in the year the loss occurred or the prior year. To claim the deduction in the prior year, an election may be made to accelerate this loss. In 2019, the IRS finalized a proposed regulation it had issued in 2016 that states this election must be made 6 months after the original due date of the current year return. Under the prior rules, the election had to be made by the unextended due date of the current return.
Who Can Benefit?
Any taxpayer that has suffered a disaster-related loss as defined in Sec. 165 (h)(5) can benefit from this election. This is specifically beneficial for taxpayers who have income to take the loss against on prior year returns and are expecting to have a loss in the current year.
Additional Considerations
The election can be revoked for up to 90 days after the due date of the election. This may be a beneficial election particularly during the 2020 tax year where many businesses may be experiencing losses due to the pandemic.
If you have any questions regarding the tax implications of electing to accelerate disaster losses, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
With nearly 700,000 businesses having applied for the Paycheck Protection Program (PPP), many are unaware that the forgiven portion of the loan for Federal purposes may actually be taxable as gross income in some states.
Will Federally Forgiven PPP Debt be Taxable by States?
The answer to the questions is possibly. Under normal circumstances, cancellation of debt would be includable in your gross income. An example would be if you and your credit card company discussed your balance, and the credit card company forgave a portion of your balance due. The balance of the forgiven portion would then be included as income. Businesses that meet the qualifications for their PPP loans to be fully or partially forgiven at the Federal level will need to determine if the states they have nexus in will follow the Federal guidelines.
Will Expenses Paid with PPP Funds Be Deductible?
In the normal course of business, ordinary and necessary expenses are deductible. However, if you received a loan to pay your expenses, and then the debt was forgiven and not taxed, did you pay those expenses? The IRS believes that expenses paid with forgiven funds should not be deductible from a company’s gross income. The exclusion of forgiven expenses in calculating taxable income will increase the company’s tax liability and the amount due to the IRS. Ruling for this topic is not final, although some states have issued guidance.
Disagreement Among States
Each state has the power to regulate the laws within their respective state borders. There are twenty-one rolling conformity states, which means they conform with the Internal Revenue Code (IRC) whenever there are changes. Nineteen states are static conformity. This means their tax laws are based on the IRC as of a specific date. As new federal tax laws are enacted, their legislative body must vote to either adopt any federal changes or change their state’s IRC conformity date. These static conformity states may operate under the pre-TCJA code (Tax Cuts & Jobs Act) due to their outdated conformity of the IRC. The other states either do not have an income tax or have selective conformity between individual and corporate taxation. Significant tax issues may arise for businesses that operate or have nexus in multiple state jurisdictions.
If you have any questions regarding federal PPP loan forgiveness and how it could affect your business, please reach out to us via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information regarding COVID-19 assistance programs, please visit our COVID-19 Resources page.
Real estate investment trusts are an investment vehicle that owns, operates or finances income producing real estate. A real estate investment trust, or REIT, can be a corporation, trust, or association that is managed by trustee(s) or director(s) to provide its investors a share of income produced through a real estate investment. While REITs are able to avoid the double taxation issue, they are required to distribute their taxable income as dividends to their shareholders in order to retain the status of a REIT.
Benefits of REITs
REITs provide their investors some favorable investment features. Collectively, REITs of all types own more than $3 trillion in gross assets in the United States. Public REIT funds that were raised in 2019 hit $107.3 billion, nearly twice of that in 2018 and 7% higher than the last peak in 2017. Therefore, it shows how REITs are able to raise ample amounts of capital in real estate investments. Additionally, REITs provide investors high dividends that increase accordingly with inflation rates. REITs offer its investors a reduction in the overall risk level according to a study by Ibbotson Associates, where they showed a correlation between REIT stock returns and other common stocks. It showed that REITs display a less volatile investment and may be a way to diversify an investor’s portfolio.
REIT Requirements
In order to meet the qualifications for REIT status, the entity must meet several requirements. The entity must:
- Be managed by one or more trustees or directors.
- Be a corporation, trust or association taxed as a domestic corporation.
- Be at least 100 shareholders and its shares must be freely transferable.
- Have no more than 50% of the stock owned directly or indirectly by five or fewer individuals during the last half of the taxable year.
As stated in §856, a REIT must also meet a 75% gross income and a 95% gross income test. In regards to the taxation of REITs, the dividends are taxable to the shareholder; however, if a REIT pays out more than its taxable income, the excess is a nontaxable return of capital that reduces the shareholder’s basis. In order to take advantage of a REIT, certain steps can be taken to minimize the REIT’s tax impact. As all items with tax implications, it is recommended to speak with an informed tax professional in order to fully understand the complexities of a REIT and minimize its tax impact.
If you have any questions about REITs, and their tax implications for you, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
COVID-19 has enhanced both the work from home and schooling from home models. More and more people are looking at redesigning their current home and/or buying a new home due to lifestyle changes, and with employers encouraging the work from home concept, people are looking to migrate to the suburbs from city centers.
Let’s say you have been offered an attractive price for your current home. Over the years, you’ve probably put a ton of money into your home—that new roof in 2013, the deck you added in 2014, and the nightmare that was a kitchen remodel in 2017. While those costly improvements didn’t net you any tax benefits back when they were done, we hope you kept those receipts and records! We’ll get back to that in a bit.
Let’s say you purchased your home when the market was low, around 2012. Now you’re ready to sell and recoup your investment. Will there be a big tax bite on the gain? Probably not, if you’ve lived in the home as your primary residence for two of the last five years. If you meet this time requirement, your first $250,000 of gain (if single) or $500,000 of gain (if married—the rules are a little more complicated if there’s been a divorce) are not subject to federal income tax under current law. Also, this exclusion is available to take more than once, but not more often than every two years.
Back to our example, if you are single and managed to get a fantastic deal on your house (perhaps a foreclosure) in 2012 for $125,000 and were lucky enough to see your investment appreciate over the years and now you have been offered $399,000. That is a gain of $274,000 and doesn’t that put you over the exclusion? Not necessarily. This is where having your receipts and records from all those improvements comes in handy. Your basis (investment on which the gain is calculated) in the home includes your purchase price plus any improvements. Also, the costs associated with the sale (such as real estate commissions) are deducted from the sales price. Once you re-do the math with these additional figures, your gain could very well be below the $250,000 threshold and therefore, is tax-free as illustrated below:
Keep in mind that not all the money you put into your home “counts” as an increase to your basis. Normal repairs and maintenance (such as painting, fixing plumbing leaks, repairing broken steps) should not be considered. Nor should improvements that are no longer part of the home, such as wall-to-wall carpeting that you installed but later replaced with hardwood flooring. In that case, the hardwood flooring, but not the carpet, would be added to the basis. A common misconception is that you can include the value of your time for do-it-yourself projects, but this is specifically not allowed according to the tax laws (sorry, DIY-ers!). Items that can be included typically increase the home’s value, such as appliances that are left with the home upon sale, decks, flooring, additions, doors and windows, fences, siding, heating and air conditioning systems, driveways, security systems, and kitchen and bath modernizations.
If you meet the requirements for living in the home for two of the past 5 years, but your gain is above the $250,000/$500,000 limit, only the excess is subject to tax at preferential capital gains rates.
This represents a basic overview of the tax law as it applies to the sale of a primary residence. There are many situations that call for additional analysis in the year the home is sold, such as:
- The home was previously a rental property or used for business
- The home was received through a divorce settlement, gift or inheritance
- The homeowner meets an exception to the two-year rule
- The homeowner qualifies for a reduced exclusion
- The home was acquired through a like-kind exchange
- The homeowner had received any tax credits or subsidies that may be subject to recapture
Since a home is often the largest asset and most significant portion of a taxpayer’s net worth, this exclusion offers a meaningful tax break and acts as an incentive to homeownership. Keep in mind, however, that tax laws can and do change. For this reason, we recommend keeping excellent records of all improvements to justify your basis in the property even if you don’t think your gain will approach anywhere near the threshold amount.
If you have any questions regarding the tax implications for selling your home, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
Throughout the COVID-19 pandemic, we are seeing more telemedicine appointments than ever before. Telemedicine enables remote healthcare, which makes it possible for physicians and medical professionals to treat patients via computer, tablet or smartphone, virtually anywhere at any time. It has been around for the past 40 years, but within the last five years there has been major growth in the field.
It is important to follow these best practices when offering telemedicine at your practice:
- Do realize that telemedicine will create efficient time saving opportunities for you and you patients.
- Check with your state’s licensing board to ensure you follow all standards that are applicable.
- Talk with insurance companies on whether certain services/codes that are billed for can be reimbursed if they are provided by telemedicine.
- Download Medicare Current Procedural Technology (CPT) codes that are specific to telemedicine.
- Ensure your malpractice insurance will cover your telemedicine services.
- Market that you are a provider of telemedicine and make patients aware of your services.
- Communicate what the patient can expect with telemedicine. Let the patient know things like the types of situations that can be addressed with telemedicine, let them know how long the visits tend to be, inform them of how much they will need to pay out of pocket, and let them know how emergency situations should be handled.
- Do inform patients about confidentiality and privacy with virtual medical professional visits.
- Do obtain Informed Consent from patients. These Consents provide important protection for the medical provider and gives the patient information on the services they will receive, how their records will be stored, and ensures the patient understands the medium through which care is being delivered and the limitations of providing care in this manner.
- Do manage your technology risk as discussed below.
Education is key. The patient should understand the benefits of telemedicine and be provided with step-by-step instructions to help them through the initial visit. At the time the appointment is made, someone should communicate all of the initial steps and ultimately follow-up with an email or video to ensure the patient understands and is comfortable with all of the process and procedures.
Managing Technology Risk is Key
Managing technology risk is critical to the telemedicine service delivery method. Patients need to be confident that telemedicine is safe and secure. Some technology-related risks include:
- Technology failures
- Identity and access management issues
- Physical security risks
- Information Technology (IT) infrastructure risks
Identity and access management can be combated through multi factor authentication. Physical security risks can be mitigated by having cameras and all secure platforms when communicating with patients. Technology risks can be mitigated by having the most up to date technology and having an IT professional available. If you do not have a designated technology expert on staff to assess and mitigate against the risks of offering telemedicine, there are many technology outsourcing companies available that can assist you.
Technology is the future, and with some assistance, all medical professionals can either begin to offer telemedicine or improve upon the telemedicine service delivery method. Successful treatment of more patients via telemedicine will lead to a larger more lucrative practice. If COVID-19 has taught us anything, it’s that we need to adapt quickly to the ever-changing circumstances around us.
If you have any questions regarding telemedicine best practices for your health practice, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information on COVID-19 resources, please visit our COVID-19 Resources page.
As every student with loans probably knows, the Coronavirus Aid, Relief, and Economic Security (CARES) Act that President Trump signed into law on March 27, 2020, provides some assistance for borrowers of federal student loans (private loans may or may not have special treatment depending on the lender). The Act suspends all payments from March 13, 2020 through September 30, 2020. During this period, interest will not accrue and collections and garnishments will not be pursued. Additionally, the missed months of payments will still count toward the 120 payments required for those borrowers working toward public service loan forgiveness. This is great news for about 9 million student loan borrowers.
On August 9, 2020, the President signed an Executive Order to extend student loan relief through the end of the year. More specific information on the changes, if any, will be forthcoming.
But what happens when 2021 rolls around, especially if you’re out of work due to the widespread impact of the coronavirus, lack of work or any other circumstances? There are still options to continue deferring or reducing the payments on your student loans. Ideally, the time to look into these options is now, and not when the relief has expired.
Student Loan Options
For reducing or deferring your student loan payments, here are a few options:
- Refinance at a lower interest rate.
- Consolidate several loans into one loan with a fixed interest rate that is based on the average interest rate of all loans being consolidated.
- Sign up for income-driven repayment.
- Apply for loan forgiveness programs; there are several, including ones available to teachers, nurses, military personnel, and those in public service. You may also qualify for income-driven repayment forgiveness, which allows you to base your payments on your monthly income. After 20 or 25 years (the plans have different time frames), your balance may be forgiven.
If you’re interested in learning more about these options, an excellent resource is the Federal Student Aid website, studentaid.gov. You will also be able to find updates on new legislation related to student loans due to COVID-19, as the administrators update the website frequently.
Finances During COVID-19
We would be remiss if we didn’t also touch upon what to do with the funds you would have used for student loan debt had there been no forbearance. Assuming you have income, whether from working or unemployment, and you have cash remaining after covering your necessities (housing, utilities, food, etc.), here are some financial tips we would recommend:
- Establish, or add to, your emergency fund. As the pandemic has so clearly illustrated, bad things can happen. Aim for at least three months of living expenses; six to twelve months (or even more) is ideal.
- Once you are comfortable with the level of your emergency funds, concentrate on paying down debt, beginning with the highest interest rate balances.
- Add to retirement savings.
- After you’ve taken these steps, you can look at other goals, such as a home improvement or vacation fund, or saving for your children’s education.
No one expected a global pandemic this year and all that has followed, but if it has shown that we need to be ready for the unexpected. We can take the lessons learned from this pandemic to prepare for the next bump in the road.
If you have any questions regarding federal student loans and the relief provided by the CARES Act, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information regarding COVID-19 assistance programs, please visit our COVID-19 Resources page.
Do you, as an employer, have parking available at your office or place of work? If the answer is yes, there are some things you will need to consider. The Tax Cuts and Jobs Act (TCJA) generally disallows the employer deduction for expenses regarding the cost of qualified transportation fringes for employees. When TCJA was first enacted, there was not much guidance in this section, that is until Notice 2018-99 was issued.
Notice 2018-99
This notice provided the guidance people had been asking for for over a year. All in all, parking that is taxable to the employee of the business can be deducted by the employer, only if it is on an after-tax basis. Different factors come into play whether an employer pays a third party for parking, or if the employer owns/leases their own parking facility. The notice guides the employer in determining what is and is not deductible through both instances.
Third-Party Parking
For employers who pay a third party, the deduction to be taken is fairly simple. Everything is disallowed except for the amount paid in excess of the monthly limitation. A reminder that any parking expense paid for employees in excess of the IRS prescribed monthly qualified parking exclusion can be included in the employee’s W2 income, and therefore would be deductible by the employer as part of the parking expense.
Owned or Leased Parking
As for those employers who own or lease their parking lot, the following is a brief explanation of how the calculation for disallowed expenses would work. This is a four-step calculation where the cost would include maintenance, repairs, snow removal, landscaping, insurance, taxes, security, and parking attendants. The notice specifically states that depreciation and expenses paid for items not located in or on the parking facility, for example lighting, are not included in the cost. Once that cost is figured, one can begin the process of calculating.
Step one of this equation would be to figure out the “reserved employee spots”. All of the costs in relation to their spots will not be deductible. These spots include any areas with specified signage or other ways to designate spots to anyone but the general public. Businesses were granted until March 31, 2019 to remove any signage to eliminate or decrease the amount of reserved parking spots within their lots. The employer should then allocate the percentage of total cost to these spots and deduct them 100% from the allowable expense.
The next step in the process is to determine the principal use of the remaining spots. These are spots not set aside specifically for employees. If 50% or more of the remaining spots are or can be used by the general public, then all of those spots are entirely deductible, and your calculation is complete. There is a guideline on what constitutes these spots as “provided to the general public,” which also needs to be taken into consideration within this calculation.
If the second step above is not the end of the road, then you must next calculate the reserved non-employee parking spots. These spots could be reserved for visitors, partners or 2-percent shareholders and are fully deductible. Again, this step requires you to calculate the percentage of spots reserved for non-employees and then you may deduct that amount in full.
Finally, step four is to determine the remaining allocation of the expenses. This is the part where anything that may not fall specifically into the above three steps would sit. The employer would then need to reasonably determine the use of these spots on a normal business day. This could be based on actual or estimated figures.
More Information
It should be noted that final guidance has not been provided for this issue. The IRS states that these guidelines are to be used in the determination of deductible qualified transportation fringes until the publication of proposed and final regulations. As you can see, the calculation for this deduction is in no way simply done. If you feel this change in law could pertain to you, or have any questions, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
A “Just In Case” For Those Struggling Financially Due to COVID-19
It would be difficult to find a business or individual in the world that hasn’t been impacted by COVID-19 in some way. Millions of people are either unemployed, struggling to keep their businesses open, or are just trying to maintain the minimum cash flow necessary to provide the essentials needed to live. While unemployment assistance is available and stimulus payments continue to go out, much of the assistance has been slow, or has yet to arrive. Many people are exhausting their savings, if they haven’t already, and are looking for any possible way to survive financially. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It included qualified retirement plan distribution relief that may be an option to help you get through this global pandemic.
Background
Prior to COVID-19, the IRS did allow taxpayers to take retirement distributions early, however doing so would result in a 10% additional tax if you were under age 59 1/2. Considering the economic hardship that most Americans are currently facing, the IRS has provided some much-needed relief to individuals that are adversely affected by this pandemic.
Relief Breakdown
As part of the CARES Act, the 10% early withdrawal penalty is being waived. This applies to coronavirus-related retirement distributions up to an aggregate total of $100,000 from all eligible plans and IRAs to a “qualified individual”. This waiver will apply to all retirement distributions that qualify under the CARES Act between January 1, 2020 and December 31, 2020, even if you are under 59 ½. This waiver applies to eligible retirement plans such as:
- Traditional individual retirement accounts (IRAs)
- 401(k) plans
- Profit-sharing plans
- Stock bonus plans
- Qualified 403(a) annuity plans
- 403(a) annuity contracts
- Custodial accounts
- Governmental section 457 deferred compensation plans
In addition to the 10% waiver, taxpayers can pay the tax associated with the distribution over a three-year period beginning with tax year 2020. Depending on the plan, taxpayers may also recontribute the funds they withdrew in one or more payments over a three-year period.
Eligibility
To be considered a “qualified individual” for this relief, you must have experienced at least one of the following;
- Either you, your spouse, or one of your dependents was diagnosed with COVID-19
- You have experienced financial hardship because you have been quarantined, furloughed, laid off, or had hours reduced due to the pandemic
- You are unable to work due to child care responsibilities
- You own or operate a business and had to close or reduce hours due to the pandemic
- You have experienced an adverse financial consequence due to other factors as provided in guidance issued by the IRS
Withdrawing funds from a qualified retirement plan early should never be a first choice, but under certain circumstances it may be necessary. It’s nice to have the option available without having to take the 10% early withdrawal penalty, while also having the option to pay income taxes on the distribution over a three-year period.
Further Information
If you have any questions regarding the qualified retirement plan distribution relief available though the CARES Act, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information regarding COVID-19 assistance programs, please visit our COVID-19 Resources page.