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New Federal Tax Relief related to COVID

Rachel Owens0 Comment

The latest information related to COVID relief is in the form of two new Federal bills that provide extended financial relief.

The Bipartisan COVID-19 Emergency Relief Act of 2020:

This bill has several payroll provisions that include a second PPP loan through the SBA (Small Business Administration) based on limited eligibility.  The qualifications of this loan are small businesses with less than 301 employees and with lost revenue of 30% or more during any 3-month period of 2020.  The expenses covered in this bill extend safety operations and cover supplier costs, facility “modifications.”  PPP loans of $150,000 or less are eligible for a much more streamlined forgiveness process.

Unemployment is included in this Act as well.  It extends all unemployment insurance programs by 16 weeks, beginning January 1, 2021.  Any Federal supplement to unemployment received is also extended expanded for the same period, by $300 per week.

The Bipartisan State and Local Support and Small Business Protection Act of 2020:

This bill provides $160 billion in governmental relief designated for State, municipal and tribes.  Additionally, it pushes back the deadline to spend the CARES Act Coronavirus Relief Funding to December 31, 2021.

There is guidance included in this bill to provide “liability protection” for businesses.  Those businesses trying to follow current health standards, would not be responsible under federal unemployment law due to COVID-19 exposure and working environment changes.

Key Highlights of the CARES Act and the FFCRA Relief Provisions

Rachel Owens1 Comment

We have compiled the following useful and concise information for your reference as you consider the various planning opportunities available to address the impact of the COVID-19 situation on nonprofit organizations.  After studying the recently enacted law and interacting with other professionals, by parsing through the voluminous CARES Act, Families First Coronavirus Response Act (“FFCRA”) and relevant peripheral materials, the following includes the highlights of the relevant relief available to you via the government stimulus packages:

FINANCING & GRANTS

  • Loans available under the CARES Act provide the largest measure of assistance available via what is termed the “PPP”.  The borrowing amount is capped at a formula calculating the average monthly “Total payroll” incurred in a trailing 12-month period.  “Total payroll” includes employee compensation (not to exceed $100,000 annually per capita) + health insurance (employer share only) + PTO.  PPP loans will be obtained through traditional lending relationships (local / national banks) and NOT the SBA; best bet is to work with lenders with whom a borrowing relationship already exists as it may help expedite the process.   Our understanding is that local lenders will have finalized the application process and be in a position to initiate the approval process beginning April 3.  We recommend contacting lenders with whom the organization already enjoys a relationship as many banks are refusing to process the PPP applications for new customers without any other current bank connections.
  • Forgiveness of any “PPP” loans received under the CARES Act will be available if proceeds are used for payroll, rent, utilities AND employee labor force or employee compensation after April 1 remains consistent with a pre-April 1 “measurement period”.
  • An alternative loan program will be created in the future [“Midsize Business Loan Program”] will be established for organizations with > 500 employees whom plan to retain workforce.  No details have yet been released on this program.
  • Independently, “Disaster Relief Loans” (referred to as “EIDL”) are available under the more traditional borrowing program offered by the SBA.  The on-line loan application is available at https://covid19relief.sba.gov/#/.
  • What is interesting and somewhat confusing, the EIDL program administered by the SBA also includes a grant opportunity for up to $10,000 for businesses that have been severely effected by COVID-19.  The grant does not require repayment, nor does it obligate the recipient to execute an EIDL loan; furthermore, it does not preclude the business from also applying for the PPP.  Most prospective borrowers will apply for the grant through the SBA (which should be received on an expedited basis according to the Federal government’s stimulus objectives) while simultaneously applying for the PPP through their local lender.
  • NC-based businesses may also apply for loans of < $50,000 under the “NC COVID-19 Rapid Recovery Loan” program administered by a consortium of local lenders and stakeholders, and funded by the “Golden Leaf Foundation”.  The loans will have favorable repayment terms and the application process is available on-line.

 

EMPLOYMENT

  • Payroll tax deferment is available for employer FICA and Medicare due 4/1/20 – 12/31/20.  Any tax amounts deferred must be repaid in no less than 50% < 12/31/21 and the remaining 50% < 12/31/22.
  • Payroll tax credit is available on up 50% of up to $10,000 of wages per employee (or $5,000 of credit per quarter) by meeting certain workforce retention criteria [50% of wages paid to retained labor force during period when business gross revenues decline > 50% or experienced at least a partial shutdown].  Any employer whom receive a PPP loan and loan forgiveness will be precluded from qualifying for an equivalent amount of payroll tax credit.
  • EFMLA [“Family leave”] and EPSL [“Sick leave”] benefits paid out to qualifying employees will generate a payroll tax credit (rather than the normal deduction).  These “leave” and “sick pay” provisions provide a benefit to employees who file claims with compensation (at least in part) for up to 12 weeks in aggregate.  The mandatory leave provisions may not be applicable to anyone in the healthcare industry, however if a business already has family leave policies in place as part of their employee benefits, the policies should be be adhered to with regard to relevant claims made by employees whom are incapable of working due to COVID-19 issues.
  • Employees whom are separated from service via layoff can qualify for Unemployment Insurance.  Filings are now made via on-line platform by the terminated employee directly.  Under NC Law, even employees whom were not fully terminated but experienced severe decrease in work hours may qualify to receive partial benefits.  Anyone properly terminated would be ineligible for EFMLA or EPSL; in addition, employees severed from service whom were participants in the group health plan will need to offered COBRA coverage.  [Note for exit- counseling purposes and temporary layoff planning, a terminated employee is typically not required to self-pay the monthly premium amount until after a 59-day grace period; therefore, if a business anticipates rehiring the terminated employee < 59 days following the expectation of a return to business activity suspended due to COVID-19, there may not be any additional premium cost to the employee nor significant interruption in health care coverage.  [However, each business should consult with its health plan advisor or representative to verify no other “breaks in service” nor “on-board delays” in coverage would apply under the terms of the group plan in place.]

 

CHARITABLE CONTRIBUTION MODIFICATIONS

  • Individual taxpayers beginning in 2020 tax year may make a $300 tax-deductible contribution to public charities, and without any of the standard itemized deduction limitations.
  • Normal Itemized Deduction AGI limitations [60% for 2019] are lifted in 2020
  • Corporate Contribution Limitation [10% of net income for 2019] is increased to 25% for cash and food donations

 

CARES Act Relief Pertaining to Retirement Accounts

  • The Act allows for “coronavirus-related” distributions from defined contribution retirement plans, such as 401(k), IRAs, and 403(b) plans, of up to $100,000, with the early 10% withdrawal penalty suspended. Income associated with these distributions would be subject to tax over a three-year period rather than in the current year. Taxpayers would be able to choose to repay their retirement plans after receiving these distributions if they wish.
  • Coronavirus-related distributions include those made to individuals who have been diagnosed with COVID-19, a spouse or dependent of such individual, or those who experience adverse financial consequences as a result of the pandemic.
  • The amount that an individual may borrow from a qualified plan is temporarily increased from $50,000 to $100,000.
  • The Act suspends required minimum distributions (RMDs) in the year 2020 for various retirement plans, including IRAs, 403(a) and 403(b) plans, and 457(b) plans. Therefore, the 50% penalty associated with not taking an RMD is suspended in 2020.
  • The RMD suspension covers first RMDs from 2019, which individuals may have deferred until April 1 of this year. Similarly, RMDs are waived for plan participants who turned 70 ½ in 2019 (prior to the enactment of the SECURE Act) and are required to take an RMD prior to April 1 of this year. Though we are waiting on official guidance from the IRS, we expect that if an RMD has already been taken in 2020, the plan participant has up to 60 days to deposit it back into a qualified retirement account. We expect further guidance on a number of questions raised by the Act, including the treatment of 2019 RMDs taken in 2020.

 

Details continue to be released and we will keep you posted as to any new developments, and of course feel free to contact us should you need further information.

 

 

SBA loans may be more difficult than we thought

Rachel Owens0 Comment

Small businesses looking to get some relief from the Payroll Protection Program may run into a snag or two.  Because this stimulus package was passed so quickly, the banks are not necessarily prepared to handle the loans like the media initially described.  This article from Fortune provides some additional insight.

If you are a small business looking to apply for one of these loans, here is a link to help you find a lender along with a sample application.

We understand how difficult this time is for you.  If we can be of any assistance, we will be happy to help!  Please contact our office if you have questions or would like to know more about other COVID-19 relief options.

Financial statements tell your business’s story, inside and out

Rachel Owens2 Comments

Ask many entrepreneurs and small business owners to show you their financial statements and they’ll likely open a laptop and show you their bookkeeping software. Although tracking financial transactions is critical, spreadsheets aren’t financial statements.

In short, financial statements are detailed and carefully organized reports about the financial activities and overall position of a business. As any company evolves, it will likely encounter an increasing need to properly generate these reports to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions.

These are the typical components of financial statements:

Income statement. Also known as a profit and loss statement, the income statement shows revenues and expenses for a specified period. To help show which parts of the business are profitable (or not), it should carefully match revenues and expenses.

Balance sheet. This provides a snapshot of a company’s assets and liabilities. Assets are items of value, such as cash, accounts receivable, equipment and intellectual property. Liabilities are debts, such as accounts payable, payroll and lines of credit. The balance sheet also states the company’s net worth, which is calculated by subtracting total liabilities from total assets.

Cash flow statement. This shows how much cash a company generates for a particular period, which is a good indicator of how easily it can pay its bills. The statement details the net increase or decrease in cash as a result of operations, investment activities (such as property or equipment sales or purchases) and financing activities (such as taking out or repaying a loan).

Retained earnings/equity statement. Not always included, this statement shows how much a company’s net worth grew during a specified period. If the business is a corporation, the statement details what percentage of profits for that period the company distributed as dividends to its shareholders and what percentage it retained internally.

Notes to financial statements. Many if not most financial statements contain a supplementary report to provide additional details about the other sections. Some of these notes may take the form of disclosures that are required under Generally Accepted Accounting Principles — the most widely used set of accounting rules and standards. Others might include supporting calculations or written clarifications.

Financial statements tell the ongoing narrative of your company’s finances and profitability. Without them, you really can’t tell anyone — including yourself — precisely how well you’re doing. We can help you generate these reports to the highest standards and then use them to your best advantage.

© 2019

Partner Announcement

Pam Williams0 Comment

meagan partner picLangdon & Company LLP is pleased to announce that Meagan L. Bulloch, CPA has been admitted as partner in our audit practice.  Meagan joined Langdon & Company LLP in 2008 and has over ten years of public accounting experience including work for Ernst and Young LLP in their Raleigh, NC office.  She is a graduate of North Carolina State University with a Bachelor of Science and Masters of Science in Accounting.

Meagan’s focus is to provide audit and attest services to clients primarily in the nonprofit, healthcare and small business industries.  She is also experienced in the preparation of Medicare and Medicaid cost reports.  Meagan was also recently published in the Common Ground newsletter, a publication of the N.C. Center for Nonprofits.  She is an active member of the American Institute of Certified Public Accountants and the North Carolina Association of Certified Public Accountants.

Meagan lives in Angier, North Carolina with her husband and two children.

Small Business in North Carolina

Pam Williams0 Comment

by Russell Barker18th

Did you know there are approximately 833k small businesses in North Carolina?  That’s a pretty big number.  Why we are talking about this now? It is tax season and companies and individuals are gathering their information in order to either prepare or have their accountants their tax returns. You may or may not understand the process to get your tax returns accurately prepared and timely filed. I wanted to give you some guidelines to help.

Some people might think that gathering all their personal information and getting some of the business information is all you have to do.  The reality is that your first objective is to have your business’ books completed accurately.  You should ensure that all the bank accounts (including credit cards and loans) are updated and reconciled.  Be certain to capture any supplies or equipment  purchased near year-end in your books.  This will ensure that you obtain the proper expense and depreciation deductions you are entitled to.

The reason to get your company books in order first is because most small business (sole proprietor, Sub-S, Partnership, LLP, LLC) income will flow into your personal return.  It is important that you or  your tax preparer has all the proper information to complete both. Delays in the business returns will cause delays in having your personal returns processed.

This is just a quick reminder for you to think about so you can prepare all supporting documentation and have it ready for your tax preparer.

Remember 2015 taxes are due April 18th! Contact Langdon & Company LLP for help in getting 2015 tax return prepared or extended.

Russell ([email protected]) is part of Langdon & Company’s Accounting Services department. He works primarily with doctor’s practices.

Update on Increase of Deduction for Purchase of Tangible Property

Pam Williams0 Comment

by Eric Murphy

For several years, the IRS has deemed that tangible assets used in business such as equipment and computers with a purchase price of more than $500 must be capitalized and depreciated based on the Assets’ useful life.  Any money spent below $500 on an asset that would have traditionally be capitalized, could be expensed in the year of purchase instead.  The IRS made this rule under the Tangible Property Regulations, specifically Reg. 1.263(a)-1(f)(1)(ii)(D).  This deduction was allowed for businesses that didn’t have annual financial statements subjected to annual audits.

Under IRS Notice 2015-82,  the lower tier safe harbor amount was increased from $500 to $2,500 of costs per tangible item and can now be expensed instead of being capitalized for small businesses that don’t have audited annual financial statements.  This ruling will take effect for the tax year beginning January 1, 2016 all future years unless a modification is made at a future date.  The IRS will also not challenge amounts between $500 and $2500 that were expensed in prior years between December 31, 2011 and December 31, 2015 that should have been capitalized.book stack

If you’re a business owner who wants to make sure their purchases are properly recorded and reported in their financial statements and tax returns, contact Langdon & Company LLP.  Our team of highly skilled tax and bookkeeping professionals will assist you in making sure your company’s financial activity is reported properly and in conformity with all legally mandated requirements.  We will also analyze your statements and make suggestions on ways you can become more profitable and efficient to the best of our ability.

Eric ([email protected]) is a Senior in the Langdon & Company LLP tax practice. He works with a variety of clients in preparation of tax returns and other projects.

 

The Importance of Separation of Duties

Pam Williams0 Comment

by Katie Anthony

It is important to have levels of separation of duties in your business. You may say that you are a very small business and cannot afford to have many employees. That may be true, in which case you can add approval and double sign-offs on items of significance as well as review of certain processes. You may be in a situation where you do not even have enough employees to do this. In such a case, it might benefit your company to set up a monthly or quarterly review by an outside accounting firm.

You may be asking why separation of duties is so important. A big reason is that although a greater number of frauds are perpetrated by employees low on the ladder, greater amounts are stolen by employees at the management level. The ACFE Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Study reports that employees committed 42% of occupational frauds but caused a median loss of $75,000, while executives committed 19% of occupational frauds with a median loss of $500,000. These high level employees are trusted and intelligent, so they are able to get away with the fraudulent activities for a longer period of time, enabling them to steal larger amounts of money.fraud triangle

There are three elements to occupational fraud, which are opportunity, rationalization, and pressure, as credited to Donald Cressey. He believed that these three elements must all be present for an ordinary person to commit fraud (Fraud Examiners Manual: 2014 US Edition).

Let’s start with rationalization. You may not think you are able to influence someone else’s rationalization. However, some people rationalize fraudulent actions by saying that they are owed what they are stealing from the organization because they feel underappreciated. You need to take steps to make sure that you pay your employees appropriately for their roles and that you do things occasionally to show your employees that you appreciate them. Employees sometimes even rationalize their behavior based on what they see employees higher than themselves doing. That means you! Keep in mind that your employees are watching you to set the tone of the business.

While you cannot remove pressures employees feel from those outside of your organization, you can make sure that you don’t put too much pressure on them from within. This means doing evaluations that are not only one-sided, but rather structured so that your employees can give feedback about their workloads and stress levels. If you overwork your employees they may feel pressure to take shortcuts that eventually lead to fraudulent actions.

Last but not least, is opportunity. Separation of duties and reviews can really help with this element. If employees feel that no one looks at their work, they may take that opportunity to begin stealing, especially if the other two elements of the fraud triangle are present. By adding separation of duties and reviews, you are filling a gap that will help keep your business healthy. If, despite all your precautions, one of your employees IS stealing, separation of duties and reviews will help catch them. The ACFE Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Study goes on to show that review is second only to a tip in discovering frauds in small businesses.

While no plan to prevent and detect fraud is perfect, each step you take will help. Langdon and Company LLP knows that you want to keep your business healthy and thriving. L&C can help you define the duties in your processes that need separation as well as provide review services for your organization. Contact our office today with any questions or concerns you have.

Katie ([email protected]) is an Audit Staff at L&C and works with a variety of clients.

The Why, Who, What and How of an effective audit committee for nonprofit organizations

Pam Williams0 Comment

by Meagan Bullochhands

The establishing and maintaining an audit committee is considered a best practice for nonprofit organizations.  An audit committee can greatly help the governing board perform their fiduciary and oversight roles over financial reporting, reducing risk and maintaining donor confidence.  Some organizations may utilize their finance committee as an audit committee.  What is important is not the form of the committee but the substance.

Q: Why should a nonprofit consider forming an audit committee?

A: In addition to Sarbanes Oxley and state requirements imposed for organization’s soliciting funds within certain states, the Form 990 asks if an organization has an audit committee.  Although, such a committee is not a requirement, the establishment of one is considered a best practice by the IRS.  As the Form 990 is a public document, answering “no” to this question may lead to funders questioning why the organization is not following a suggested best practice.  The American Institute of Certified Public Accountants’ (AICPA) Audit Committee Toolkit: Not-for-Profit Organizations, 2nd Edition (available at AICPA Store) lists numerous reasons as to why a nonprofit organization should consider forming an audit committee, including providing better: financial results, decision-making in terms of accuracy and quality of financial reporting; ability to build stronger relationships with stakeholders; as well as facilitating transitions in leadership.

Q:  Who makes the best audit committee members?

A:  Audit committee’s typically consist of 3-6 members with diverse backgrounds and experience all of which are considered “financially literate.”  To be financially literate, members should be able to read and understand fundamental financial statements and recognize when the numbers along with associated disclosures to not make business sense.  Additionally, the best audit committee members are fully involved and engaged with the organization and ensure that two-way constructive dialogue occurs at all times between all parties involved.  Members should also be independent in both fact and appearance.  To be truly effective, the committee must be able to resist any attempt by management to compromise financial reporting.  The following relationships are considered to impair independence:

  1.  An audit committee member who is or has been an officer or employee of the organization during the past 3 years
  2. A member who is an immediate family member of an officer or someone in management
  3. A member who has a direct business relationship with the organization in the past three years; such as a consultant

Q:  Who can serve as a financial expert on the audit committee?

A:  The inclusion of at least one financial expert is a highly recommended best practice.  The following attributed are deemed essential components of a financial expert:

  1.  An understanding of generally accepted accounting principles (GAAP) and nonprofit financial statements
  2.   The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves
  3. Experience preparing, auditing, analyzing or evaluating financial statements that are comparable to those of the organization
  4. An understanding of internal controls and procedures for financial reporting
  5. An understanding of the audit committee function
  6. A general understanding of nonprofit financial issues and specific knowledge of the nonprofit industry in which the organization operates

It is worth noting that an audit committee financial expert has no greater obligations or liability than any other members of the audit committee and board of directors who are not designated as financial experts.

Q:  What should be the mission of an effective audit committee?

A:  Simply put, the mission should be oversight.  Specifically, the following areas should be their main focus:

  1.  Financial reporting
  2. Risk Management

Audit function – oversight of and communication with independent auditors, both internal and external

Langdon & Company LLP will be happy to assist with your audit needs.  Please contact our office!

Meagan Bulloch ([email protected]) is an audit manager at Langdon & Company LLP focused primarily on non-profit clients.

The Fine Line: Debt vs. Equity

Pam Williams0 Comment

by Bennett Strickland

Distinguishing between debt and equity has long been debated in the accounting world and is one of the most complex issues in practice today.  Take an instrument like mandatorily redeemable preferred stock for example.  Is it classified as a liability or as equity?  This clearly affects reported amounts of liabilities and equity, and also things such as the debt-to-equity ratio and the asset-to-equity ratio.

debt equityThe line between liabilities and equity is also critical in measuring income.  So companies began to take advantage of manipulating their debt and equity and therefore manipulating their net income.  Neither changes in the values of a company’s outstanding equity instruments or transactions between a company and its owners, affect reported income.  Whereas, interest payments and at least some changes in the values of liabilities actually do affect reported income.

A lot of companies will try and classify their equity as debt and some may get away with it.  However, the consequences can be substantial if the IRS deems that the company needs to reclassify.  In Laidlow Transportation Inc. v. commissioner (TC Memo 1998-332), the taxpayer’s tax liability was increased by more than $55 million after the IRS made the company reclassify their debt as equity.  So when companies are walking the fine line of debt versus equity they must ask themselves, is it worth it?

The staff at Langdon & Company LLP are all too familiar with such an issue and would be happy to help your company decide which classification is proper.  Please contact our office for more information.

Bennett ([email protected]) is an auditor at Langdon & Company LLP.  He primarily focuses on healthcare and nonprofit organizations.