With all of the curveballs 2020 has thrown at the nation, the economy, and businesses, there’s never been a better time to get an early jump on year-end planning for your business. While all the usual year-end tasks are still on the docket, you’ll want to consider implications related to the Paycheck Protection Program (PPP), any disaster loan assistance you received, and changes made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
We’ve put together a checklist of what you need to do now to prepare for a great year-end that includes annual tasks as well as 2020-specific tasks. Keep reading for assistance getting your financials organized, reviewing your tax strategy, and preparing for next year.
1. Bring order to your books – Now is the time to collect, organize, and file all of your receipts for the year if you haven’t been staying on top of it. Get with your CPA to ensure everything is clean and in order before the end of the year to help avoid surprises come tax time.
2. Examine your finances – This includes having your balance sheet, income statement, and cash-flow statements prepared and up to date. Reviewing this information allows you to see where your money went for the year so you can properly prepare for next year.
3. Work with your CPA on your PPP loan forgiveness application – We are currently awaiting further guidance on the PPP’s impact to taxes, but it’s important to work with your CPA on your PPP loan forgiveness application. Knowing where your PPP loan lies can help determine how to spread out your cash flow for the remainder of the year.
4. Organize all disaster loan assistance documentation – This includes your Economic Injury Disaster Loan (EIDL) documentation if you received an advance grant. EIDL advances must be added to your taxable income (unless different guidance is released), but you’ll be able to deduct any expenses paid with this grant.
Review your tax strategy
5. Review your taxes with your CPA – Do not put off your tax planning meeting with your CPA. Especially after the year you’ve had and any potential federal state aid your business received, your tax plan needs a review. Getting a jump on this early, well before the new year, can help you plan for what’s to come on Tax Day. It’s even more imperative to plan early for any tax obligations you may have at tax time as it’s likely the COVID-19 pandemic will continue to create a volatile environment for many industries’ revenue projections.
6. Execute on year-end tax strategy adjustments such as:
- Accelerating AMT refunds – The CARES Act has accelerated the alternative minimum tax following changes made by the Tax Cuts & Jobs Act. Corporations can claim all remaining credits in 2018 or 2019 thus allowing for filing of quick refunds.
- Using current losses for quick refunds – The CARES Act allows businesses to claim immediate refunds by using current losses against past income, for example.
- Submitting a retroactive refund for bonus depreciation – Businesses can now deduct qualified improvements dating back to Jan. 1, 2018, thanks to a fix made by the CARES Act. This could offer a quick refund.
- Claiming quick disaster loss refunds – Nearly every U.S. business is eligible for disaster-related refunds from losses in 2020 on an amended 2019 return for a quicker refund.
- Timing out your payroll tax deduction – While the CARES Act allows employers to defer paying their share of Social Security taxes, you should review the best strategy with your accountant. In some cases, it’s better to pay on time to take a loss. In others, it provides a liquidity benefit.
- Cash in on generous Section 179 deduction rules – For qualifying property placed in service in tax years beginning in 2020, the maximum Section 179 deduction is $1.04 million. The Section 179 deduction phase-out threshold amount is $2.59 million.
7. Prepare your tax documents – Once you’ve met with your CPA, it’s time to line up all the info you need to prepare your final tax documents or have your CPA take care of it. Be sure not to put this off to the last minute as it will be a complicated year for everyone.
8. Automate your tax function – Instead of spending valuable time and energy on manual tasks and repetitive processes this year, consider investing in data analytics and automation tools to optimize and streamline your in-house accounting and tax functions. There’s never been a better time to invest in technology that will help you become more efficient and accurate.
Plan for the future
9. Evaluate your goals – There’s no doubt that 2020 likely threw a wrench in many of your goals for the year. However, you should still review the goals you set last year and see if you’ve met or made progress on any of them. This will help with 2021 business planning.
10. Set goals for the new year – No one knows how 2021 will play out, and it’s unlikely the market or business will return to normal in the first part of the year. Take into consideration the challenges you’ve faced so far in the pandemic as you plan for 2021. Work with your trusted advisor to determine several back-up plans for what if scenarios in case of any state or national lockdowns.
In a year like no other, it’s crucial to prepare like no other so you’re not met with any surprises or devastating fees. Contact us today to set up your tax and business planning appointment.
With the M&A market in flux after all the unexpected challenges of 2020, buyers and sellers are likely wondering how their Paycheck Protection Program (PPP) loan comes into play in an M&A transaction. On Oct. 2, we got some answers when the Small Business Administration (SBA) released guidance on what to do if you are buying or selling a business with a PPP loan. The Procedural Notice was addressed to SBA employees and PPP lenders and clarifies how a change of ownership is defined, the steps that need to be taken with a PPP loan, and the obligations of borrowers regardless of change of ownership. Here’s what you need to know:
What defines a change of ownership?
The guidance states that a change of ownership requires at least one of the following conditions to be true for a PPP borrower:
- A sale or transfer of at least 20% of common stock or other ownership interests has occurred. This can be done in one or more transactions and can be to an affiliate or an existing owner of the entity.
- A sale or transfer of at least 50% of the PPP borrower’s assets measured by the fair market value in one or more transactions.
- A PPP borrower merges with or into another entity.
Aggregation of sales and transfers since the date of the approval of the PPP loan is required. Sales or other transfers for publicly traded borrowers must be aggregated when they result in one person or entity holding or owning at least 20% of the common stock or other ownership interest.
What must I do before the ownership change?
1. Notify your lender if you are contemplating a transaction that will change ownership – this must be done in writing and include relevant documentation.
2. If your lender is accepting PPP loan forgiveness applications, submit your application with all required documentation (we can help with this).
3. Set up an interest-bearing escrow account with your PPP lender which will be required in most cases by the SBA.
4. Determine if SBA approval of the change of ownership is required for your transaction.
How do I determine if SBA approval is required for my transaction?
SBA approval is not required for:
- Equity sales where the transaction is of 50% or less of the borrower’s equity.
- Equity or asset sales where the PPP borrower submits a forgiveness application that shows usage of all PPP loan proceeds and that an interest-bearing escrow account has been established with the PPP lender with funds equal to the balance of the outstanding PPP loan. After forgiveness has been processed, the escrow funds are to be used to pay any remaining loan balance plus interest.
SBA approval is required for sales that cannot meet the above criteria. The SBA will have 60 calendar days to review and approve or not approve. The PPP lender is responsible for notifying the SBA within five business days from the completion of the transaction and must submit to the SBA:
- Reasoning for why the above requirements cannot be met and details of the requested transaction
- A copy of the executed PPP note
- A letter of intent and the purchase or sale agreement that includes the PPP borrower, seller (if different than borrower), and buyer’s responsibilities
- Disclosure of buyer’s existing PPP loan, if any, including SBA loan number and an ownership list of 20% or more of purchasing entity
- Monthly 1502 reports until the PPP loan is satisfied
What if I don’t set up an escrow account?
Borrowers attempting to make an asset sale with 50% of assets and no escrow account will require a condition of the purchasing entity to assume all of the PPP borrower’s obligations under the PPP loan. The purchaser will then be responsible for compliance with PPP loan terms, and the assumption must be part of the purchase and sale agreement.
What do I do if I end up with two PPP loans?
Transactions resulting in an owner holding two PPP loans will require the owner to segregate and delineate the PPP funds and expenses with documentation demonstrating PPP requirement compliance for both loans. Being thorough and accurate with your documentation is key.
Anything else I should know?
Loans that are repaid in full or are fully forgiven by the SBA have no restrictions for change in ownership. Note that all PPP borrowers are responsible for the performance of PPP loan obligations, certifications related to the PPP loan application including economic necessity, compliance with all PPP requirements, and supporting PPP documentation and forms. Borrowers will be responsible for providing any and all of this documentation to a PPP lender/servicer or the SBA upon request.
For questions and assistance with an M&A transaction and your PPP loan, reach out to us.
Employers can now defer payroll tax withholding on employee compensation for the last four months of 2020 and then withhold the deferred amounts in the first four months of 2021, confirms a recent update from the IRS. President Trump’s memorandum on Aug. 8 gave employers the ability to defer payroll taxes for employees affected by the COVID-19 pandemic in an effort to provide financial relief.
The guidance directs that employers can defer the withholding, deposit, and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3102(a) and Railroad Retirement Act Tier 1 under Sec. 3201 from employee wages from Sept. 1 to Dec. 31, 2020.
Employers must then withhold and pay the deferred taxes from wages and compensation during the period from Jan. 1, 2021, and April 30, 2021, with interest, penalties, and additions to tax to begin accruing starting May 1, 2021. Included in the notice is a line that indicates, if necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee,” such as if an employee leaves the company before the end of April 2021, but does not provide details on what that entails.
Employees with pretax wages or compensation during any biweekly pay period totally less than $4,000 qualify for the deferral. Amounts normally excluded from wages or compensation under Secs. 3121(a) or 3231(e) are not included in calculating the applicable wages. The determination of applicable wages should be made on a period-by-period basis.
Companies may choose whether or not to enact the payroll tax deferral. We are closely monitoring updates related this and other presidential executive orders and will communicate if more information becomes available. For questions or assistance with this payroll tax deferral, contact us.
On Aug. 24, the Small Business Administration (SBA) and Treasury issued the latest interim final rule update to the Paycheck Protection Program (PPP) that seeks to clarify guidance related to owner-employee compensation and non-payroll costs. This guidance has been long-awaited and clears up several questions borrowers have had about forgiveness. Here are the main points:
1. Owner-employees of C or S corporations are exempt from the PPP owner-employee compensation rule for loan forgiveness if they have a less than 5% stake in the business. The intent is to provide forgiveness for compensation of owner-employees who do not have a considerable or meaningful ability to influence decisions over loan allocations. This clarifies earlier guidance that capped the owner-employee compensation regardless of what stake they have in the business.
2. Loan forgiveness for non-payroll costs may not include amounts attributable to the business operation of a tenant or subtenant of the PPP borrower. The SBA provides a few examples of what this means:
- Borrowers renting an office building and subletting a portion to another business can only claim the difference between their rental cost and the sublet income.
- Borrowers with a mortgage on the building in which it operates who lease a portion of the building to another business can only claim a portion of the mortgage interest limited to the percent share of fair market value of the space not leased.
- Borrowers sharing rented space with another business must prorate rent and utility payments like they would for 2019 tax filings or, if new, expected 2020 tax filings.
- Borrowers working from home may only claim the share of covered expenses deductible on the 2019 tax filings or, if new, expected 2020 tax filings.
3. To achieve loan forgiveness on rent or lease payments to a related third–party, borrowers must ensure that (1) the amount of loan forgiveness requested does not exceed the amount of mortgage interest owed on the property attributable to the business’s rented space during the covered period, and (2) the lease and mortgage meet the Feb. 15, 2020, requirement for establishment. Earlier guidance had not addressed related third-party leases.
It’s important to note that mortgage interest payments to a related party are not eligible for forgiveness as PPP loans are not intended to cover payments to a business’s owner because of how the business is structured – they are intended to help businesses cover non-payroll costs owed to third parties.
For questions on any of these rules or assistance with your PPP loan forgiveness application, contact us today.
CFOs are playing more pivotal roles in modern corporations than ever before, and the impact of the COVID-19 pandemic is shedding light on how CFOs can impact short and long-term financial stability. While growth is frequently considered the ultimate goal for a business, economic downturns like the one created by the pandemic show us that CFOs with eyes on long-term financial stability, and not just on growth, will be able to better help their organizations weather the storms of an economic crisis.
A CFO’s strategy for long-term success should incorporate thorough cost management protocols, a comprehensive and holistic approach to increasing value, and stewardship and championship of the bigger picture. Here’s what that means.
How CFOs impact direct costs
As the financial head of the organization, the CFO naturally serves as the rightful guardian of a business’s expenses. It’s through these direct costs that CFOs can implement stronger internal controls and recover lost revenue for long-term benefit. A CFO can improve long-term viability by analyzing:
Cost of Goods Sold (COGS) – COGS are a key area for reduction as they represent the largest operating expense for the business. Depending on the industry, these costs can be complex, and the biggest expense can come in the form of purchased components and materials. CFOs can optimize this area with help from sourcing programs that consolidate costs by choosing more goal-aligned suppliers.
Indirect Taxes – Indirect taxes are an often-overlooked area of opportunity for many businesses. These taxes can be found in areas like R&D, procurement, labor, utilities, and manufacturing and can represent 25% of personnel expenses. Making indirect taxes a regular component of your tax strategy allows you to reduce costs in this area by 10-20% with quick realization rates. Bonus: “Look-back” provisions can help you save even more.
Real Estate – With real estate, take a holistic inventory of your business and consolidate where possible. The COVID-19 pandemic showed us how much can be done at home or in fewer locations. Consider whether you need all your locations, your facility management costs, and negotiating your contracts. Also, plan for a future workforce that may expect a more flexible work-from-home situation. Just because you‘re growing doesn’t mean you will actually need all that extra space.
Product Optimization – If you haven’t invested and implemented benchmarking and KPIs for your products, you need to now. Data and analytics are key to understanding how you can improve margins and grow profit. With product rationalization, you can drill down into what is really profitable and make decisions on what to cut and what to expand. Look at customer buying habits and your company overhead and determine what’s really worth keeping on the shelves.
Labor – The key to optimizing labor costs lies within efficiency. Do you have the right people in the right seats? Can current employees be retrained to fill open needs? Consider where you can use automation and outsourcing to save on salaries/benefits and overhead.
Working Capital – Assessing your working capital for cost efficiency involves taking a look at:
- Cash flow – Know that cash in the bank doesn’t equal good cash flow. Understanding cash flow is key to making short and long-term projections through times of prosperity and crisis.
- Supplier/vendor relationships – Reconsider and negotiate vendor/supplier terms where necessary while preserving valuable relationships.
- Accounts receivable – Your AR should have set policies for payment plans/terms, follow up procedures, and multiple available payment methods.
- Accounts payable – Assess your AP for opportunities to free up cash flow such as automating electronic payments and diligently checking for discrepancies.
How CFOs impact value
CFOs not only help to optimize costs, but they are also integral in increasing company value because of their instinct and insight into the finances, the business, and how everything relates. Value is the ultimate determinate for long-term success in a business as it is the final measurement taken into consideration at the time of succession or buy-out. And, as any good business valuation professional will tell you, the business is not worth what you think it’s worth. The consensus among international accounting organizations is that value is defined by your customers/stakeholders and created and sustained through the responsible management of your organization’s tangible and intangible assets, resources, and relationships.:
One can clearly see how the areas of impact for CFOs listed in the costs section above directly relates to value creation in a business and the management of financial resources. The CFO is the gatekeeper for value creation and thus long-term viability.
How CFOs champion the big picture
Because the CFO is intimately connected to the financial health of the organization, they are also the eyes of the market. They see the trends and shifts directly in the numbers and can advocate for the right kinds of measurements to make long-term decisions. CFOs should take an active role in their organization’s strategic planning process and use their knowledge to translate the ebbs and flows of the business into scalable growth.
Now more than ever, CFOs are at the forefront of business viability and growth. Their knowledge is invaluable in times of crisis and prosperity, and their voice and action are essential for long-term financial stability.
Our outsourced CFO services can help you establish and maintain a long-term financial strategy for your business. Contact us for more information.
The Small Business Administration (SBA) and Treasury released an updated Paycheck Protection Program (PPP) FAQ on Aug. 4 in an effort to address PPP loan forgiveness issues that have arisen as borrowers begin to complete their applications. The 23 FAQs address various aspects of PPP forgiveness including general loan forgiveness, payroll costs, non-payroll costs, and loan forgiveness reductions. Here is a brief overview of some of the most notable clarified guidance.
General loan forgiveness
- Sole proprietors, independent contractors, and self-employed individuals with no employees and no employee salaries included in average monthly payroll at the time of PPP loan application should use PPP Loan Forgiveness Application Form 3508EZ.
- Borrowers who submit their loan forgiveness application within 10 months of the completion of the covered period do not need to make payments until the forgiveness amount is remitted to the lender by the SBA.
- Borrowers who must repay a portion of the loan should know interest is accrued from the time of disbursement and the SBA remittance of the forgiveness amount. Borrowers whose full loan is forgiven do not need to pay the accrued interest.
Payroll costs forgiveness
- Owner-employee is defined as someone who is both an owner and an employee of a C corporation. This was not previously defined.
- Compensation limitation for owners is cumulative across all businesses if there are multiple.
- S corporation considerations
- Health insurance costs do not qualify as compensation for S corporation employees that own at least 2% of the business nor for family members of such employees.
- S corporation owner-employees with less than 2% ownership can count health insurance costs.
- Unemployment and state income taxes are eligible for forgiveness.
- Employer retirement contributions are eligible capped at 20.833% of 2019 contributions.
- C corporation considerations
- Forgiveness is allowed for employee shareholder compensation including state unemployment and income taxes and corporate contributions to employee health insurance.
- Employer retirement contributions are eligible capped at 20.833% of 2019 contributions.
- Employer contributions for retirement and group health benefits that were accelerated from periods outside of the covered period or alternative covered period are not eligible for forgiveness.
Non-payroll costs forgiveness
- Payments of transportation utility fees assessed by state and local governments are eligible for forgiveness.
- The alternative payroll covered period does not apply to non-payroll costs.
- Leases that existed prior to Feb. 15, 2020, but expired or renewed during the covered period are eligible for forgiveness.
- Interest payments on mortgage loans for real or personal property that existed prior to Feb. 15, 2020, but were refinanced during the covered period are eligible for forgiveness.
- Benefits are not to be included in the determination for a 25% reduction in employees’ hourly or salary wages.
- It is still unclear whether tips for restaurant employees are included, so restaurant owners may want to make up for lost tips to avoid the reduction.
- Borrowers should include employees who made more than $100,000 in 2019 when calculating FTE reduction exceptions.
The FAQ document also includes several examples for making calculations related to the above questions. Contact us for questions and assistance with your PPP loan forgiveness application.
Economic downturns are an almost inevitable reality for nearly every business owner. Decisions made far away from your community, catastrophic and unpredictable weather events, and even global pandemics as we’ve seen this year can disrupt the health and viability of a business. During these challenging times, business owners have to make difficult decisions about the future of their business that not only affect them but also their employees, vendors, clients, and communities. It’s an enormous responsibility to bear, but you don’t have to go it alone.
Your CPA advisor is your best resource for tackling the challenges of an economic downturn. As an outside party, they can help you make smart business decisions that protect your vision and mission while remaining financially responsible. Your CPA can help you:
Optimize your books
Never underestimate the power of good bookkeeping. By keeping your books in order, your CPA can help you plan and project for the future at each stage of an economic downturn. This includes planning for temporary closures and tiered re-openings (and potentially a back-and-forth of both depending on the state of the country and market). When your books are clean and up to date, you can better project how events and decisions will impact your finances on a weekly, monthly, and quarterly basis. Your CPA can help you flex the numbers on fixed and variable expenses to account for increases in costs, decreases in income, and potential changes to payroll. Knowing your numbers intimately can help you make better-informed decisions.
Minimize your tax burden
During times of economic crisis, staying abreast of new and changing tax legislation will be essential to projecting tax burden and uncovering tax savings opportunities. Your CPA is the best person to handle this because they know your business and your industry inside and out and can help you uncover tax savings opportunities that are unique to your circumstances. They do all the research, and you reap the rewards. With a CPA’s assistance, you achieve deductions and credits you may not have realized were available and develop a plan to defer costs where allowed depending on your business, industry, and location. Taxes are not an area you should or need to face alone during an economic downturn. Your CPA has done the homework, so you don’t have to.
Rationalize your decision making
When markets are in flux and your business is facing unprecedented challenges, the decisions you make can make or break your business. But you don’t have to go it alone. Your accountant can help you make data-informed decisions whether that be how to pay vendors, when and how to apply lines of credit, and the best ways to use your capital. Negotiating contracts with vendors that meet your needs and theirs during a downturn will not only achieve cost savings but also preserve relationships – your CPA can help develop a plan that makes sense. Knowing when to engage lines of credit can help you make better moves that you can either afford to pay back later, or maybe prevent you from taking on credit you can’t handle – your CPA can guide you in this process. Knowing where to allocate capital will be key to maintaining operations, and you may need guidance on what expenses to cut and what to keep such as marketing and payroll – your CPA can help you project the ramifications. With your CPA by your side, you don’t have to operate in a silo of decision-making.
Maximize your sense of relief
Most of all, your CPA can provide perspective, alleviate business back-end burden, and help advise you on financially feasible and sound decisions when much of the world feels like it’s in chaos. You have a lot to focus on during a downturn including how to handle your customers and employees in a changing marketplace. Having someone who can help you stay fiscally viable as you work through tough times, and develop a plan for future success, provides a welcome peace of mind.
You don’t have to go through any economic downturn alone. Your CPA can help you shoulder the challenges and weather the storms so you can continue doing what you do best – running your business.
Your cash flow is the financial story of your business. It tells the story of your high points and low points, where the money comes in and goes out, and is the lifeline of your business in times of crisis. Proper cash flow management can mean the difference between survival and going under for small businesses especially in periods of market and economic downturn, such as the period of challenge faced currently by the ramifications of COVID-19.
Here are seven steps to managing your cash flow during a crisis.
1. Update your financial statements – The key to managing your cash flow is operating from current financial statements. As a first step, ask your CPA to provide you with an up-to-date look at your business’s financial picture and discuss the statement together. Your CPA can help you identify areas of opportunity and challenge to ensure you’re proactively optimizing your business’s financial situation no matter the circumstances of the marketplace.
2. Understand your fixed and variable expenses – Hand-in-hand with updated financial statements comes an understanding of your fixed and variable expenses. Sorting your expenses into these two buckets will help you to see where you have expenses you can cut temporarily or permanently to save cash, or where you can negotiate to improve your cash flow in times of need.
3. Know your credit options – Next, contact your banking professional to understand your credit options. In times of crisis, the likelihood of needing to dip into lines of credit increases, and you need to know what’s available to you, the terms, and have a plan for repaying it when the dust settles. This will help you project your cash flow as you begin to model scenarios through a period of challenge
4. Project your cash flow – Your first cash flow projection should be conducted using your current levels of income, expenses, and lines of credit so you can get a clear look at where you stand without change. Additionally, you will want to look back at least five years to see how your financial picture has fluctuated in the context of times of growth and downturn. Then, as you project outward into the future, break down your cash flow at micro increments, weekly or biweekly, to see where and when your cash reserves and credit lines may begin to run out. This can help you predict where you will need to make changes internally and when.
5. Increase income – Once you’ve projected your cash flow out, look at ways you can increase your income.
- Accounts receivable – You don’t have to be facing a period of crisis to start to clean up your accounts receivable (AR). Improving your AR timeline is essential to improving cash flow. Work with your customers to set up payment plans that make sense and adjust your AR policies where needed. Are you offering more time than necessary to pay-in-full? Are you following up with late payments? Are you offering multiple methods of payment? Now may be the time to start considering credit cards if you aren’t currently accepting them.
- Pivot your products/services – The COVID-19 pandemic is forcing many small businesses to pivot their offerings. Restaurants are offering delivery and takeaway, and grocery stores are offering personal shoppers as a couple of examples. As you look around, you’ll see small businesses across the country changing up the way they offer products and services to meet the needs of their customers. How can you pivot while staying true to your strengths?
- Offer gift cards/certificates – If you’re not already offering gift cards/certificates, this may be a good option to start if your services warrant it. Make it as easy as possible for customers to purchase these over the phone or online so you can start to realize some cash now.
6. Decrease expenses – Decreasing expenses is a natural place to start to try improving cash flow during a crisis, but it must be done carefully to maintain relationships with customers, vendors, and employees. Consider your fixed and variable expenses and what can be reduced or cut. Adjusting your utilities at the office if you’re working from home, implementing hiring freezes if you’re unsure about the future, and redistributing contract work to employees are just a few ways to decrease expenses. Additionally, consider:
- Negotiating contracts – Work with your suppliers to understand your options for delaying payments, keeping in mind that they have expenses to meet as well. Approach negotiating contracts carefully as you do not want to damage important relationships.
- Cutting payroll as a last resort – Before you implement lay-offs or furloughs, consider moving employees around the company to meet other needs, or offer work-from-home when possible. If you must make lay-offs or furloughs, ensure they meet the department of labor guidelines.
7. Rerun your cash flow model with different scenarios – Considering your options for increases in income and expenses, model your cash flow using various rates of change in those areas. Use realistic numbers to see how much of an improvement you can expect by making these adjustments over time.
Times of crisis can force small businesses to take a long hard look at their financial picture and address cash flow issues that may have been lingering long before the major event. By monitoring up-to-date financial statements and performing cash flow projections, you can become a better steward of your business’s finances in times of crisis and times of opportunity.
The Internal Revenue Service (IRS), Department of the
Treasury (DOT), Employee Benefits Security Administration (ESA), and Department
of Health and Human Services (DHS) recently issued a final ruling on the use of
employer-funded health accounts. Effective January 1, 2020, employers of all
sizes that do not offer a group coverage plan may use HRAs as a vehicle
to help employees pay for health insurance premiums. This ruling extends beyond
the current scope of health reimbursement arrangements (HRAs), which allows
businesses to offer employer-funded accounts for employees to apply to out-of-pocket
medical expenses and now allows employees to pay for insurance premiums.
The new ruling is expected to affect more than 800,000
employers and 11 million employees, making it a far-reaching update to the
current system. Under the guidance, employers may offer two new types of HRAs:
- Individual coverage HRAs (ICHRAs) – Employees
can use these funds to buy individual-market insurance as well as insurance on
the public exchanges formed under the Affordable Care Act (ACA), pay insurance
premiums and in some cases reimbursements. These can be offered when no group health
coverage is provided by the employer.
- Excepted-benefit HRAs (EBHRAs) – Employees
can use these funds to pay premiums for vision and dental coverage or similar
benefits. This is only permitted if you offer employees group health coverage.
- Small employers can now more effectively compete
with larger businesses when it comes to benefits offerings.
- The change allows businesses, small businesses,
in particular, flexibility in providing their workers with tax-preferred funds
to pay all or a portion of their cost of health coverage.
- Employers can segment their employees and offer
customized health benefits to individual groups. For instance, you could have one
group qualify for traditional group coverage while another group qualifies for
ICHRA but you may not offer them a choice between the two. For a full list of
employee classifications, visit https://www.irs.gov/pub/irs-utl/health_reimbursement_arrangements_faqs.pdf
- Employers must offer the HRA on the same terms
to all employees within a segment, but ICHRA benefit levels can be customized
- Employers can provide more substantial benefits
to older workers and workers with more dependents. ICHRAs can be used to
reimburse premiums for Medicare and Medigap when certain conditions are met.
- ICHRAs can also be compatible with HSAs when
- Employers should note that they are only allowed
to fund ICHRAs if they do not offer a group health plan. Conversely, EBHRAs may
only be offered if employers sponsor coverage under a group health plan.
- Participation in an ICHRA may make employees
ineligible for certain tax credits or subsidies when purchasing a policy from
the ACA exchange, even if they opt-out of the ICHRA.
- Employers are required to give employees at
least 90-days-notice before the beginning of the plan year and include
disclosure provision to help employees thoroughly understand their options.
- Although the new ruling offers more flexibility,
it does not permit employers to provide employees with a choice between ICHRAs
or a traditional group plan. However, when it comes to new employees, employers
can maintain their existing benefits for enrollees while offering new hires
only an ICHRA.
- The new rule does not cap contributions to
ICHRAs. Excepted-benefit HRAs are capped at $1,800 per year.
To assist employers, the DOL issued this Individual Coverage HRA Model Notice: https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB87/individual-coverage-model-notice.pdf .
This notice is not exhaustive. If you would like more
information on how your business might benefit from an ICHRA, give the
professionals in our office a call. We can go over your options and determine
if you satisfy the ACA’s affordability and minimum value requirements.
The Taxpayer First Act (the Act) of 2019 was signed into law on July 1, 2019. The bill, having gone through a few changes on its way to the president’s desk, passed with bipartisan support – a rare thing in Washington these days. The law aims to reform the Internal Revenue Service (IRS) by making it more taxpayer-friendly and has been praised by the American Institute of Certified Public Accountants (AICPA). The summary of the bill, its titles and subtitles signal a much-needed pivot to the way the IRS fits into the 21st-century economic narrative. Among the areas of impact, the main themes include customer service, enforcement procedures, cybersecurity and identity protection, management of information technology, and use of electronic systems. While the following table is not exhaustive, it does highlight the key points of reform.
IRS will adopt best practices of private sector customer service providers,
starting with a comprehensive training plan. They will officially benchmark
and track their endeavors and be responsible for measuring their success.
The IRS is required to
work behind the scenes and take their position front and center to assure
greater identity protection. By 2024, any taxpayer will be able to request a personal
identification number (PIN) to use when filing their tax return. The IRS is
also legally bound to notify taxpayers of suspected fraud and point them in
the right direction for next steps. Finally,
if a taxpayer’s return is adversely affected by identity theft, the IRS must provide
a single point of contact to track the case and resolve the issue.
taxpayers can skip the third-party service when paying their bill. The new
law allows the IRS to accept direct payment as long as the taxpayer agrees to
pay the processing fees. The IRS is also tasked with securing contracts with
The Act locks down
taxpayer information as it relates to contractors, such as outside attorneys,
when it is obtained by summons. Furthermore, by 2023, disclosures of tax
information for third party income verification must be fully automated and accomplished
disputes will get a second look under the Act. Taxpayers with a legitimate
claim now have legal access to an independent appeals process. The IRS is
also required to provide written notice of denial to the taxpayer and
Congress and turn over its case files to qualified individual and business taxpayers.
The IRS loves the word
“reasonable.” When it comes to audit inquiries, the ambiguity of the term has
now come to an end. The Act demands a 45-day notice requirement before
contact with a third party can be made.
| Internet Filing||
IRS has been tasked with creating a secure online user interface that allows
taxpayers to prepare and file Forms 1099 electronically. The platform, which
must be established by 2023, will also keep a historical record of submitted
Small business owners that
structure their bank deposits can rest a little easier. Legal deposits that
fall below the $10,000 threshold are no longer subject to the threat of IRS
Act prohibits consent-based disclosures from being used for purposes other
than their original intent.
The Taxpayer First Act is a welcome change. The Act helps protect business owners from IRS seizures and allows them to avoid the expenses and time-consuming process of having to go through the courts to reclaim their assets. Perhaps the most critical component of the new law is the attention to cybersecurity and customer service. Small business owners will still need to interact with the IRS, but if the law accomplishes its goal, the process will be easier and safer.
How will this law impact
my payroll compliance?
It is important to note that several of the Taxpayer First
Act provisions will directly influence your company’s payroll operations.
- The IRS has been tasked with creating a secure
online server for e-filing because the new law reduces the threshold for
mandatory e-filing. Currently, businesses only need to file online if they
employ 250 or more. The new law lowers the threshold to 100 in calendar-year
2021, and only 10 in calendar-year 2022 and on.
- The new law requires the IRS to verify
individuals as they open accounts to use the new e-Service features. Because of
the new information and identity protection measures outlined above, e-Services
are expected to take a little bit longer than they have in the past. Accounting
services personnel should factor this potential delay into their timelines.
- Although the IRS internet filing platform may
not be up and running until January 1, 2023, the interface will be familiar, similar
to the SSA’s Business Services Online.
- One of the law’s most significant changes
directly impacts nonprofits. Under the Act, all tax-exempt organizations
must e-file Form 990 and Form 8872. This provision, unlike many of the others,
goes into for tax years beginning after July 1, 2019. Organizations whose tax
year began July 1 will receive transition relief.
- Finally, it is worth mentioning that the law
institutes a new position within the IRS, Chief of Appeals. This person
will oversee the Independent Office of Appeals and report to the IRS
Commissioner. The Chief and their office will embody independent review by seeking
to resolve tax disputes outside the courtroom.
If you have questions about the law in its entirety or want
to know how this legislation will impact your company’s payroll operation
compliance, give the professionals in our office a call today.