FAQs on New Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides financial relief to businesses and families that have been adversely affected by the coronavirus (COVID-19) pandemic. The centerpiece of the new economic stimulus plan for the business sector is the massive Paycheck Protection Program (PPP). This program — which kicked off on April 3 — provides a wide range of benefits for businesses on the front lines of the COVID-19 pandemic.

However, the PPP has experienced some glitches and confusion over how it will operate and what it covers. Here are answers to eight FAQs about this Small Business Administration (SBA) program.

1. What are the main benefits?

The CARES Act provides the framework for approving up to $349 billion in loans to qualified businesses so they can continue to pay their employees during the COVID-19 crisis. The loans are forgivable under the program if certain requirements are met.

Specifically, loan proceeds must be used to cover the following expenses by employers affected by COVID-19:

• Payroll costs or employee benefits,
• Mortgage interest incurred before February 15, 2020,
• Rent and utilities under lease agreements in effect before February 15, 2020, and
• Utilities where services began before February 15, 2020.

At least 75% of the loan proceeds must be used to cover payroll costs. The rest is discretionary within the other categories.

2. What counts as a “payroll cost” for this purpose?

The SBA has indicated that payroll costs include the following:

• Salary, wages, commissions or tips of up to $100,000 a year for each employee,
• Employee benefits, such as costs for vacation time, parental or family leaves, medical or sick leaves, allowances for separation or dismissal, payments required for the provisions of group health care benefits (including insurance premiums), and payment of retirement benefits, and
• State and local taxes assessed on compensation.

For self-employed individuals and independent contactors, payroll costs may include wages, commissions, income or net self-employment earnings of up to $100,000 per employee.

3. What businesses are eligible to participate?

The benefits of the PPP are generally available to organizations — including small businesses, not-for-profit organizations, certain tribal business concerns and veteran groups — with fewer than 500 employees. (There are exceptions for businesses with more than 500 employees in certain industries.) Self-employed individuals, independent contractors and sole proprietors can also get in on the action. To be eligible, an organization must have been in existence as of February 15, 2020.

4. How do you apply for a loan?

The program officially launched for small businesses and sole proprietors on April 3, but some lenders were still putting the mechanics in place on that date. Loans for self-employed individuals and independent contractors start on April 10.

According to an SBA fact sheet, you can apply through any existing SBA lender or any federally insured depository institution or federally-insured credit union, as well as participating Farm Credit System institutions. Other regulated lenders may provide loans after they’ve been approved and have enrolled in the program. (However, some businesses have complained that banks won’t take an application from them unless they have a preexisting lending relationship.)

Visit the SBA website for the application form. Once you’ve collected all the information required on the form, contact an approved lender to start the application process. At last count, the SBA had established a network of more than 1,800 approved lenders.

The loan application process for the PPP is designed to be easy and user-friendly. Eligible borrowers are supposed to receive approval on the same day that they apply for a loan. “Speed is the operative word … with lenders using their own systems and processes to make these loans. We remain committed to supporting our nation’s more than 30 million small businesses and their employees, so that they can continue to be the fuel for our nation’s economic engine,” said SBA Administrator Jovita Carranza.

5. Do you have to prove that losses are related to COVID-19?

The SBA says that loans under the program are available to any eligible business for which current economic uncertainty makes the loan necessary to support ongoing operations. After you submit an application, your lender will determine the need for your business based on the prevailing SBA guidelines.

Currently, there’s no provision for separate SBA reviews, but the rules in this area are still evolving. Keep an eye out for new developments that may affect your business.

6. What’s the loan limit?

The limit on loan proceeds from the PPP depends on the needs of your business. Generally, loans can be for up to two months of your average monthly payroll costs in 2019, plus an extra 25% of that amount to cover other operating expenses. However, there’s a $10 million cap on the total. If you operate a seasonal or new business, you’re required to use a different applicable time period for your calculation. Payroll costs are capped at $100,000 per year per employee.

7. How are loans forgiven?

According to the SBA, your business will owe money when your loan is due if you use the proceeds for purposes other than the specified costs during the eight-week period after you’ve received the loan proceeds. Due to the high demand, it’s expected that no more than 25% of the forgiven amount may be for nonpayroll costs.

Furthermore, your loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee that earned less than $100,000 in 2019 on an annualized basis. Your business has until June 30, 2020, to restore its full-time employment and salary levels for any changes made between February 15, 2020, and April 26, 2020.

To request loan forgiveness, you must submit a request to the lender servicing the loan. The request should include documents verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. In addition, you must certify that the documents are accurate and that you used the forgiveness amount to retain employees and make qualified payments. The lender is required to make a decision on the forgiveness request within 60 days.

8. What’s required for certification?

As part of your loan application, you’ll need to certify, in good faith, the following points:

• The current economic uncertainty makes the loan necessary to support your ongoing operations.
• The funds will be used to retain workers and maintain payroll or to make mortgage, lease and utility payments.
• You haven’t received, nor will you receive, another loan under this program.
• You’ll provide to the lender documentation verifying the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments and covered utilities for the eight weeks after getting the loan.
• All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.

You also must acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. And you must allow your lender to share your organization’s tax information with SBA-authorized representatives, including authorized representatives of the SBA Office of Inspector General, when appropriate.

Additional Questions

These questions cover just the basics. The SBA and other federal agencies continue to provide details. But it’s important to realize that this is a limited-time opportunity. The program ends on June 30, 2020, or when the program has given out the $349 billion in funds allocated to it under the CARES Act. So, contact your financial and business advisors as soon as possible to maximize your benefits.

View all Yeo & Yeo’s COVID-19 Resources.

Efforts to contain the spread of the novel coronavirus (COVID-19) have led to suspension of many economic activities, putting unprecedented strain on businesses. The Securities and Exchange Commission (SEC) recently issued guidance to help public companies provide investors and other stakeholders with useful, accurate financial statement disclosures in today’s uncertain marketplace. Nonpublic companies and non-profit organizations can utilize this guidance as well to ensure their disclosures are informative to users of financial statements.

10 questions

Here are 10 questions for companies to consider when making COVID-19-related disclosures:

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

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

We can help

These considerations are unprecedented for many of our clients. It may require companies to use different methods to calculate estimates than have been used in the past. Historic trends may not be as valuable as anticipated future results in determining necessary adjustments. Contact us for assistance in crafting COVID-19 disclosures or assistance in evaluating estimates in light of these unusual conditions.

View all Yeo & Yeo’s COVID-19 Resources.

© 2020

The IRS issued Notice 2020-23, Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic, an update to Notice 2020-18. The notice extends more tax deadlines to cover individuals, trusts, estates, corporations and others. The following is a summary of the key points.   

• Individual tax returns Form 1040 series, including Nonresident Alien returns
• Corporate returns 1120, 1120S
• Partnership returns 1065
• Estate and trust returns 1041
• Estate tax returns 706
• Gift tax returns 709
• Exempt organization business income tax Form 990-T
• Private Foundation Returns Form 990-PF
• Quarterly estimated tax payments that are submitted on 990-W, 1040-ES, 1041-ES, 1120-W. Note: This now includes the first and second quarters.

The Paycheck Protection Program isn’t the only relief for small businesses provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among other provisions, the new law also expands the Small Business Administration (SBA) Express Bridge Loan program.

This program was created in 2017 to help businesses in federally designated areas expedite SBA loans of up to $25,000. This option has now been extended to small businesses affected by the coronavirus (COVID-19) outbreak.

An Express Bridge Loan may be obtained through any qualified SBA Express lender that has a relationship with the business seeking the loan. If your business qualifies, you may get your hands on the money within 45 days of the application date.

For more information about the SBA Express Bridge Loan program and other SBA resources relating to the COVID-19 outbreak, visit the SBA website or contact your financial advisor.

Federal Funding

MDE issued a waiver for all schools for Title funding due to the recent Governor-mandated school closings due to COVID-19. This waiver allows schools flexibility in Title spending for students and teachers for technology purchases. Specifically, the waiver allows schools flexibility for:

• Title I Funds:
  • To purchase Hot Spots and other internet access tools for students
  • To purchase devices for teacher use to support student learning
  • To purchase student devices (computers, iPads, etc.)
• Title IIA Funds:
  • To support training for educators to help them learn how to deliver instruction and connect with students virtually
  • To support professional development opportunities delivered virtually to support goals identified in district improvement plans
  • To purchase devices needed to support the teacher trainings
• Title IV Funds:
  • To support technology (devices, access, etc.)
  • To purchase more than the 15% limit normally applied for technology

For more information, refer to MDE’s memo, Flexibility in Title Funds for Technology

Charging employee salaries to federal programs

Schools may use federal funds to compensate employees who are currently paid from these sources. In other words, if a local education agency currently pays an employee using Title funds, it may continue to use Title funds to pay that employee during the period of closure.

Also, it is allowable to continue to charge salaries and benefits for special education staff teleworking and staff not working using IDEA Part B funds following the district’s policy of paying salaries from all funding sources, federal and non-federal. Staff would be paid from the same funding sources similarly as before the COVID-19 crisis and supported by time and effort documentation.

For more information and a Q&A, refer to the MDE’s memo, Use of Federal Title Funds During Mandated COVID-19 Closure

Nutrition Programs

MDE has requested a waiver for all Michigan school districts for statutory and regulatory requirements of the Child Nutrition Program. This includes a waiver for the Emergency Food Assistance Programs and the Commodity Supplemental Food Program.

MDE has also opened advance payments for school nutrition programs and is focused on providing meals during this time of crisis to all students in need.

Template for Continuity of Learning

MDE released a template for all local school districts and public school academies (PSAs) to develop a response for the Continuity of Learning during the COVID-19 crisis shutdown. Submissions must first go the local intermediate school districts (ISDs) for all local education agencies (LEAs) or the respective charter school authorizer for PSAs. The plan will also cover a budget outline for the new learning plan.

See MDE’s Continuity of Learning and COVID-19 Response Plan Template.

State Aid Updates

Pupil Membership – October 2019 pupil count data (audited for most districts) and audited February 2019 counts were used in the calculation of the blended membership count for the March payment used to calculate Section 20 Foundation allowances.

See all MDE memos related to updates for COVID-19: MDE COVID-19 Updates

Special Note Related to GASB

The Governmental Accounting Standards Board (GASB) has also been providing updates due to concerns with the COVID-19 pandemic. GASB is reviewing a proposed Statement that would postpone the effective dates of provisions in certain pronouncements. The proposal has tentatively identified provisions that became effective or will become effective for reporting periods beginning after June 15, 2018, through Statement No. 92, Omnibus 2020, and Implementation Guide No. 2019-3, Leases. Particularly for schools, this is important as that includes Statement No. 84, Fiduciary Activities, and Statement No. 87, Leases.

Yeo & Yeo will continue to follow GASB changes and let you know when something has been finalized.

The coronavirus (COVID-19) outbreak is causing havoc in the global markets and the U.S. economy. In today’s uncertain marketplace, it’s important to stay on top of your financial status, including taking measures to protect your retirement nest egg over the long-term.

One idea to consider is converting a traditional IRA to a Roth IRA. This is a proactive strategy you might use while asset values and tax rates are relatively low. Here’s what you need to consider before converting your account.

Traditional Vs. Roth

First, let’s review the key differences between traditional and Roth IRAs:

Traditional IRAs. Contributions to a traditional IRA may be wholly or partially tax-deductible. But deductions are phased out if these two conditions are met:

1. Your modified adjusted income (MAGI) exceeds a specified level, and
2. You (or your spouse if you’re married) are an active participant in an employer-sponsored retirement plan.

Therefore, depending on your situation, only a small part of a traditional IRA, if any, may reflect deductible contributions.

Roth IRAs. Contributions to a Roth are never tax-deductible, regardless of your MAGI. However, qualified distributions from a Roth IRA that’s been in existence for at least five years are 100% tax-free. For this purpose, qualified distributions include withdrawals:

• Made after age 59½,
• Made or on account of death or disability, or
• Used to pay qualified first-time homebuyer expenses (up to a lifetime limit of $10,000).

Other nonqualified Roth IRA distributions are taxed at ordinary income rates under special “ordering rules.” When you take a distribution, contributions are treated as coming out first, so this part is exempt from tax if the contributions weren’t deductible. This treatment is followed by conversion and rollover amounts and, finally, earnings. These ordering rules reduce any potential tax liability during the first five years of the account’s existence.

In other words, when you convert assets in a traditional IRA to a Roth, you’re usually doing it for the lure of tax-free payouts in the future. But a conversion isn’t a slam-dunk by any means.

Factors to Consider

Under prior law, you had until October 15 of the same year to reverse (or “recharacterize”) an ill-fated conversion. For example, a reversal might have been advised if you converted the account and then asset values subsequently declined. However, under the Tax Cuts and Jobs Act (TCJA), for 2018 and beyond, you can no longer recharacterize a Roth IRA back into a traditional IRA. The TCJA’s repeal of the recharacterization privilege is permanent.

So, it’s important to think through the details before you convert to a Roth IRA. Some of the questions to ask when deciding whether (and when) to make a conversion include:

How much tax will you owe? When you convert to a Roth IRA, you must pay tax on the funds transferred, just like a traditional IRA distribution. You might not want to convert if your account balance is high and you expect asset values to drop. Conversely, a declining value might encourage a conversion. 

Do you have money to pay the conversion tax bill? If you don’t have enough cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. For example, you might arrange to pay the tax out of the funds being converted. This will erode your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.

What is your retirement horizon? Your stage of life can affect your decision. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to soon retire and start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.

How do you expect your tax rate to change in retirement? If you anticipate being in a lower tax bracket when you retire than you’re in now, you may not want to convert — it might be easier to absorb tax on future distributions than it is to pay a conversion tax this year. On the other hand, if you expect to be in a higher tax bracket in retirement than you’re in now, a conversion now often makes sense, absent any other extenuating circumstances. To complicate matters, Congress could change tax rates in the future.

Will you have other sources of retirement income, besides your IRAs? If most of your retirement funds are invested in assets that would trigger taxes on distribution — likes growth stocks or a 401(k) plan — a Roth conversion may provide some flexibility later in life. It can help meet your lifestyle or estate planning objectives without triggering tax on every withdrawal. Because you can’t predict how the tax laws will change over time, it’s a good idea to build some tax diversification into your accounts.

Another important factor to consider is required minimum distributions (RMDs). With a traditional IRA, you must begin taking RMDs by April 1 of the year after the year you turn age 72. (This requirement was extended from age 70½ by the SECURE Act, beginning in 2020.) For each subsequent tax year, an RMD must be made by December 31 of that year.

However, there are no mandatory lifetime distributions with a Roth IRA. This can help preserve wealth for your heirs.

What’s Right for You?

Always contact your tax advisor before converting a traditional IRA to a Roth IRA. He or she can discuss the pros and cons, along with providing other retirement planning recommendations.

View all Yeo & Yeo’s COVID-19 Resources.

Normally, you must start taking annual required minimum distribution (RMDs) from tax-favored retirement plan accounts and from traditional IRAs set up in your name, once you reach:

• 70½ if you attained age 70½ before 2020,
• or 72 if you attain age 70½ after 2019.

Fortunately, the CARES Act suspends all RMDs that would normally be required for 2020. This suspension also applies to your initial RMD if you turned 70½ last year and didn’t take that initial RMD last year. (The initial RMD is actually for calendar year 2019.) Before the CARES Act, the deadline for taking that initial RMD was April 1, 2020. Now, thanks to the CARES Act, you can put off any and all RMDs that you would have otherwise had to take this year.

For 2021 and beyond, the RMD rules will be applied as if 2020 never happened. In other words, all the RMD deadlines will be pushed back by one year and any deadlines that would have otherwise applied for 2020 will simply be ignored. Contact your tax advisor for more information about RMD relief.

View all Yeo & Yeo’s COVID-19 Resources.

The coronavirus (COVID-19) pandemic is causing economic hardship for many people and businesses in the United States. On March 27, the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Trump. A key provision of the new law allows tax-favored treatment for people who take so-called coronavirus-related distributions from tax-favored retirement accounts. Here’s the story.

Tax-Favored Distributions

IRA owners who are adversely affected by the coronavirus pandemic will be eligible to take tax-favored coronavirus-related distributions (CVDs) of up to $100,000 from their IRAs. You can recontribute (repay) a CVD back into your IRA within three years of the withdrawal date and treat the withdrawal and later recontribution as a totally tax-free rollover.

In effect, the CVD privilege allows you to borrow up to $100,000 from your IRAs and then recontribute the amounts any time up to three years later with no federal income tax consequences.

There are no limitations on what you can use CVD funds for during that 3-year period. For example, if you’re cash-strapped, you can use the money to pay your bills and recontribute later when your financial situation has improved. Or you can help your adult kids out or pay down your home equity line of credit.

Important: The CARES Act also may allow you to take tax-favored CVDs from your employer’s qualified retirement plan, such as a 401(k) or profit-sharing plan, if the plan allows it. If allowed, the tax rules for CVDs taken from qualified plans are similar to those for CVDs taken from IRAs. Employers and the IRS have lots of work to do to figure out the details about how CVDs taken from qualified plans will work. Contact a tax professional or the appropriate person with your company for more information. But be patient. It may take a while for the details to fall into place.

Ground Rules

There are seven basic rules for taking CVDs from IRAs:

1. You can take one or more CVDs up to the $100,000 limit.
2. CVDs can come from different IRAs.
3. The 3-year recontribution period for each CVD begins on the day after you receive it.
4. You can make your recontributions in a lump sum or through multiple recontributions.
5. You can recontribute to one or several IRAs, and they don’t have to be the same accounts you took the CVDs from in the first place.
6. As long as you recontribute the entire CVD amount within the 3-year window, the whole transaction or series of transactions are treated as tax-free IRA rollovers.
7. If you’re under 59½, the 10% penalty tax that usually applies to early IRA withdrawals is waived for CVDs.

Plus, if your spouse owns one or more IRAs in his or her own name, he or she may be eligible for the same distribution privilege.

Qualifying Distributions

CVDs must be taken between January 1, 2020, and December 30, 2020, by an eligible individual. That means an individual:

• Who’s diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention,
• Whose spouse or dependent (generally a qualifying child or relative who receives more than half of his or her support from you) is diagnosed with COVID-19 by such a test,
• Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced due to COVID-19,
• Who’s unable to work because of lack of childcare due to COVID-19 and experiences adverse financial consequences as a result,
• Who owns or operates a business that has closed, had operating hours reduced due to COVID-19 and has experienced adverse financial consequences as a result, or
• Who has experienced adverse financial consequences due to other COVID-19-related factors.

IRS guidance on how to interpret the last two factors is needed and is presumably forthcoming. Contact your tax advisor for the latest developments.

Failure to Recontribute CVDs

Beware: You’ll be taxed on the CVD amount that you don’t recontribute within the 3-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½.

You can choose to spread the taxable amount equally over three years, apparently starting with 2020. But here it gets tricky, because the 3-year window won’t close until sometime in 2023. Until then, it won’t be clear that you failed to take advantage of the tax-free CVD rollover deal. So, you may have to amend a prior-year return to report some additional taxable income from the CVD. The IRS is expected to issue additional guidance to clarify this issue.

You also have the option of simply reporting the taxable income from the CVD on your 2020 individual income tax return Form 1040. Again, you won’t owe the 10% early withdrawal penalty if you’re under 59½.

Beyond CVDs

The CVD privilege can be a helpful, flexible tax-favored financial tool for eligible IRA owners and company retirement plan beneficiaries during the pandemic. But it’s just one of several financial relief measures available under the CARES Act that include tax relief. Your tax advisor can help you take advantage of relief measures that will help you get through the COVID-19 crisis.

View all Yeo & Yeo’s COVID-19 Resources.

The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 pandemic. The employee retention credit is available to employers, including nonprofit organizations, with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.

The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

IRS issues FAQs  

The IRS has now released FAQs about the credit. Here are some highlights.

How is the credit calculated? The credit is 50% of qualifying wages paid up to $10,000 in total. So the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.

Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Therefore, an employer may be able to claim it for qualified wages paid as early as March 13, 2020. Wages aren’t limited to cash payments, but also include part of the cost of employer-provided health care.

When is the operation of a business “partially suspended” for the purposes of the credit? The operation of a business is partially suspended if a government authority imposes restrictions by limiting commerce, travel or group meetings due to COVID-19 so that the business still continues but operates below its normal capacity.

Example: A state governor issues an executive order closing all restaurants and similar establishments to reduce the spread of COVID-19. However, the order allows establishments to provide food or beverages through carry-out, drive-through or delivery. This results in a partial suspension of businesses that provided sit-down service or other on-site eating facilities for customers prior to the executive order.

Is an employer required to pay qualified wages to its employees? No. The CARES Act doesn’t require employers to pay qualified wages.

Is a government employer or self-employed person eligible? No. Government employers aren’t eligible for the employee retention credit. Self-employed individuals also aren’t eligible for the credit for self-employment services or earnings.

Can an employer receive both the tax credits for the qualified leave wages under the Families First Coronavirus Response Act (FFCRA) and the employee retention credit under the CARES Act? Yes, but not for the same wages. The amount of qualified wages for which an employer can claim the employee retention credit doesn’t include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.

Can an eligible employer receive both the employee retention credit and a loan under the Paycheck Protection Program? No. An employer can’t receive the employee retention credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program, which is authorized under the CARES Act. So an employer that receives a Paycheck Protection loan shouldn’t claim the employee retention credit.

For more information

Al full list of the IRS Employee Retention Credit FAQ can be visited here. Contact us if you need assistance with tax or financial issues due to COVID-19.

View all Yeo & Yeo’s COVID-19 Resources.

© 2020

During the unprecedented challenges that the coronavirus (COVID-19) pandemic has imposed on workers and employers, states have been announcing changes to unemployment insurance (UI) benefits.

Here are some of the actions:

Alabama. The Alabama Department of Labor (ADOL) has announced that it is offering temporary relief to employers for unemployment insurance (UI) benefit claims related to COVID-19. All charges will be waived against those employers who file partial unemployment compensation claims on behalf of their employees so that experience ratings won’t be impacted. The waiver will continue until further notice.

Employers will need to answer “Yes” when asked if the claim is COVID-19 related when they file partial unemployment claims beginning on March 23. Any claims filed from March 16 through March 20 will be addressed on a one-by-one basis. If an employer is unable to file partial claims for their employees, the employer should contact the ADOL that they waive their right to respond to any BEN 241 (Request for Separation Information. The BEN 241 will still be mailed, however, employers won’t need to respond if they notify ADOL in writing that they waive this right. Waivers may be emailed to Ben241waiver@labor.alabama.gov or by faxing (334) 309-9098. The statements should be on company letterhead and should include the state unemployment insurance account number.

Arizona. Governor Doug Ducey issued Executive Order 2020-11, retroactively effective March 11, 2020, expanding UI benefits during the COVID-19 pandemic. Workers will be eligible for UI benefits if:

1. The employer has ceased operation either permanently or temporarily;
2. The worker is under quarantine and doesn’t have available paid leave even if the worker is expected to return to work after the quarantine;
3. The worker must leave due to risk of exposure or to care for a family member with COVID-19; or
4. Any reason the Arizona Department of Economic Security determines is consistent with guidance provided by the U.S. Department of Labor. The one-week waiting period and work search requirements have been waived. An employer’s experience rating won’t be adjusted for claims related to COVID-19. The order will remain in effect until further notice.

Arkansas. The Arkansas Division of Workforce Services (DWS) notes in its FAQs on its website that whether an employer will be charged for UI claims related to COVID-19 will depend on the circumstances.

The DWS will examine the reason for separation and, if appropriate, non-charge benefits within federal and state guidelines. The DWS states that generally benefits paid as a result of a layoff, regardless of the reason, are charged to the employer’s account.

California. On March 17, Governor Gavin Newsome issued an executive order suspending the advance notice provision of the California Worker Adjustment and Retraining Notification Act (WARN) due to the coronavirus (COVID-19) epidemic, beginning March 4. The state’s WARN act requires employers with 75 or more employees to provide 60 days’ written notice of a mass layoff, relocation, or termination affecting 50 or more employees. Under the order, businesses must still provide written notices to employees , but aren’t subject to the 60-day advanced notice requirements.

The notice must be provided with as much notice as practicable and must contain:

A brief statement for the basis of reducing the notification period indicating that the termination is COVID-19 related due to “business circumstances that were not reasonably foreseeable”, and

The statement “If you have lost your job or have been laid off temporarily, you may be eligible for Unemployment Insurance (UI).

More information on UI and other resources available for workers is available at: https://www.labor.ca.gov/coronavirus2019/

Colorado. The Colorado Department of Labor and Employment has put emergency rules in place to waive waiting week, job search, and benefit charging requirements during the COVID-19 emergency. The rules provide that a contributing employer’s account won’t be charged directly for any COVID-19 related UI benefit claims and therefore such claims will not impact the employer’s rate. The emergency rules state that quarterly unemployment contribution payments and reports will be considered timely if:

1. A COVID-19 infection at the employer’s workplace resulted in ceasing or reducing operations; or
2. The employer or an immediate family member has been requested to quarantine by a medical professional, local health office, or the Secretary of Health.

Connecticut. The Connecticut Department of Labor (CTDOL) clarified that employers will be required to report new and rehired employees after the Governor’s current COVID-19 related restrictions have been lifted. Rehired workers are workers that have been separated from the employer for more than 60 consecutive days. New hires must be reported to the CTDOL within 20 days of hire.

The CTDOL also clarifies in its FAQs that there’s no extension currently in place for the first fiscal quarter payments. That payment is due April 30, 2020. Employers that have missed a deadline for filing an unemployment appeal due to COVID-19 related reasons may do so with “good cause,” which would include COVID-19 related reasons. 

Employers are advised if the deadline has been missed, they should file as soon as possible and explain why the appeal was late. Appeals may be filed online.

Delaware. The Delaware Division of Unemployment Insurance (DUI) has released FAQs regarding the COVID-19 impact on unemployment.

The DUI notes that Delaware no longer has a waiting week. The FAQs further note that contributory employers may see an increase in their tax rate due to COVID-19 unemployment claims. Reimbursing employers are charged dollar-for-dollar for benefits paid which could result in higher than expected unemployment costs. Employers can apply for a rehire credit. The DUI requests that employers register for SIDES to report electronically at oes.delwareworks.com.

Florida. For the latest updates visit http://floridajobs.org/

Georgia. A recent executive order from Governor Brian Kemp includes temporary actions to provide economic relief to those unemployed through no fault of their own during the COVID-19 emergency. As such, the following is temporarily suspended:

1. The $30 to $50 deductible earnings threshold for unemployment claims; and
2. The maximum unemployment benefits payable in a benefit year requirement (the lesser of 1/4 of base period wages or 14 to 20 times the weekly benefit amount).

Idaho. A proclamation from Governor Brad Little includes the following unemployment insurance-related provisions:

1. Employers that pay quarterly unemployment tax won’t be charged when employees are laid off due to COVID-19;
2. The one-week waiting period for benefits is waived for otherwise eligible claimants;
3. An additional 14 days is provided to appeal benefit claims decisions (for both employers and claimants);
4. It is now easier for claimants to be considered job-attached if the layoff is due to COVID-19 (the employer must provide reasonable assurance of a return to work and the claimant must available/suitable for work); and
5. The available for work criteria is considered to be met if the claimant is isolated and unavailable to work at the request of a medical professional, his or her employer or local health district and the claimant will be returning to work.

Indiana. A recent executive order from Governor Eric Holcomb temporarily waives the one-week waiting period (retroactive to March 8, 2020) for claimants to receive unemployment benefits as a result of the COVID-19 emergency. To read the executive order: https://www.in.gov/gov/files/EO_20-12_Further_Directives_Helping_Hoosiers.pdf

The Indiana Department of Workforce Development has issued FAQs for employers. They announce relief for employers that unable to file their 1st quarter 2020 state unemployment insurance contribution and wage report and make the corresponding payments. To access the FAQs: https://www.in.gov/dwd/files/Indiana_Unemployment_FAQ_Employers.pdf

Iowa. Governor Kim Reynolds announced that the deadline for the first quarter unemployment tax payments that are due April 30 may be extended to July 31. Payments for both the first and second quarters are due July 31. Eligible employers include those employers with 50 or fewer employees and must be in good standing with no delinquencies in quarterly payments.

Eligible employers who elect to take the extension must contact the Unemployment Insurance Tax Division by calling (888) 848-7442 or by sending an email to Q1tax@iwd.iowa.gov by Friday, April 24 at 4:30 pm. All employers must file the Quarterly Employers Contribution and Payroll Report electronically by 4:30 on April 24 to avoid a late report filing penalty.

Kansas. A new law (L. 2020, S27) increases the number of weeks a worker can claim unemployment benefits from 16 weeks to 26 weeks for unemployment claims filed on or after January 1, 2020. Claimants may receive compensation for the one-week waiting period after completing three consecutive weeks of unemployment. These provisions would not apply to initial claims effective on and after April 1, 2021. Additionally, the Kansas Department of Labor has posted resources regarding COVID-19 and unemployment benefits on its website. To access the resources: https://www.dol.ks.gov/covid19response

The one week waiting period for those seeking unemployment benefits as a result of COVID-19 is suspended, as is the requirement that those receiving benefits be actively seeking employment.

Kentucky. Governor Andy Beshear announced changes in mass layoff parameters. Any employer with at least 50 employees, who is laying off at least 15 employees, is encouraged to file a claim on behalf of their employees through the E-Claims process. Employers who need additional information regarding the E-Claims process can contact UIeclaims@ky.gov.

The Kentucky Career Center, Division of Unemployment Services has updated its website with a set of frequently asked questions (FAQs) that can be accessed here: https://kcc.ky.gov/career/Pages/What%20You%20Need%20To%20Know.aspx

The questions explain that the one-week waiting period for claims related to COVID-19 is waived. The work search requirement is waived if the worker has the reasonable expectation that they will return to work at a future date. The FAQs state that unemployment benefits are not currently available to self-employed individuals or contractors, however, the Governor is actively working on a solution and will be announcing information soon.

Michigan. Governor Gretchen Whitmer issued Executive Order 2020-24, retroactively effective March 16, 2020, which clarifies and expands UI benefit eligibility and cost-sharing with employers. The Order rescinds an earlier Executive Order (2020-10). A worker may be eligible for UI benefits if the worker is under quarantine or isolation due to being immunocompromised, displaying symptoms of COVID-19, being in contact in the last 14 days with someone with COVID-19, to care for someone with COVID-19, or to care for a family member due to a government direct (such as a school closure). Claimants may receive up to 26 weeks of benefits.

The Michigan Unemployment Insurance Agency is authorized to approve an employer’s participation in the shared-work plan regardless if certain requirements have been met. Employer accounts won’t be charged for COVID-19 related claims if an employee has been laid or placed on a leave of absence due to COVID-19. However, this won’t apply to employers who have misclassified workers. The Order, which expires on April 22, temporarily suspends the work search requirements.

Minnesota.  A new law (L. 2019, H4531), effective immediately, suspends the one-week waiting period for individuals affected by the COVID-19 applying for unemployment benefits, as well as the five-week business owner benefit limitation. It further amends the definition of “suitable employment” for those receiving unemployment benefits to provide that employment isn’t suitable if:

1. The employment puts the health and safety of the applicant at risk due to potential exposure of the applicant to COVID-19; or
2. The employment puts the health and safety of other workers and the general public at risk due to potential exposure of the other workers and the general public to COVID-19.

New Jersey. The New Jersey Division of Unemployment Benefits updated its website to include important information about claiming benefits due to COVID-19. You can access the information here: https://myunemployment.nj.gov/labor/myunemployment/covidinstructions.shtml

The webpage contains specific information for those applying for benefits, and notes that if a claimant is waiting to be recalled to his or her present job, or delaying a job search until this crisis ends or subsides, he or she may answer “yes” to the question asking if the applicant is actively seeking work. A recipient may also respond “no” to the question regarding “did you refuse any work?” if any employment offer was turned down due to concerns related to COVID-19. The one-week waiting period for those applying for benefits has also been suspended.

New York. As part of Governor Andrew Cuomo’s executive order to help relieve the economic impact of the coronavirus (COVID-19) outbreak, New York state has waived the seven-day waiting period for workers affected by the emergency (for example, through closures or quarantines) to claim unemployment benefits.

For those filing new claims, the day to file is based on the individual’s last name as follows: letters A through F on Monday, letters G through N on Tuesday and letters O through Z on Wednesday. If the individual’s filing day is missed, file on Thursday or Friday The New York Department of Labor has a step-by-step guide for claimants filing online. To access the guide: https://labor.ny.gov/ui/how_to_file_claim.shtm.

North Dakota. Governor Doug Burgum issued Executive Order 2020-08, effective March 13, 2020, that expands UI benefits for workers and cost-sharing with employers impacted by the COVID-19 emergency. UI benefits claimed due to a COVID-19 related reason will not be charged against the account of the employer. The register for work and work search requirements have been waived. Requirements under North Dakota law are suspended to the extent income reduction for business owners is required when calculating monetary eligibility for unemployment benefits related to COVID-19. The order will remain in effect until rescinded.

Oklahoma. The Oklahoma Employment Security Commission (OESC) updated its FAQs and note that the work search requirements have been temporarily waived during the COVID-19 emergency. You can access the FAQs here: https://www.ok.gov/oesc/Businesses/Employer_FAQs_about_Unemployment_Insurance_and_COVID-19.html

The FAQs further note that recently passed legislation provides that contributing employers won’t be charged for COVID-19 related unemployment claims until the end of 2020. However, the OESC states that employers are likely to see a rate increase in the annual rate calculations for 2021 as a result of these claims. Reimbursing charges to reimbursing employers shall not be waived and must be paid timely. Employers who aren’t able to reach the OESC to respond to a OES-617 (Notice of Application for Unemployment Benefits) may fax a response to (405) 962-7524 or mail a reply to: P.O. Box 52006, Oklahoma City, OK, 73152-2006. While workers can’t file for partial unemployment, the OESC advises that employers who have experienced a work hours reduction to less than full-time can file a claim. All earnings over $100 would be deducted from the weekly benefit amount. If the employee earns more than their weekly benefit amount plus $100, the employee wouldn’t be eligible for benefits.

Texas. The Texas Workforce Commission (TWC) has updated its website with a COVID-10 Resource webpage for employers. To access the page: https://www.twc.texas.gov/news/covid-19-resources-employers

The webpage notes that due to the COVID-19 crisis, the due date for the first quarter UI tax reports and payments is extended to May 15, 2020. Filing can begin after April 15, 2020. The webpage also features a link to FAQs for employers. The FAQs note that if an employer must cease operations due to a closure order, the employer is permitted to ask for chargeback protection on unemployment benefits paid as a result. A copy of the shutdown order should be included with responses to unemployment claims and the employer should state the closure was mandated by a local or state order. However, if the reason for the work separation was merely a cautionary period of time off to minimize potential exposure of others to someone who might be infected, but might not be, chargeback protection would most likely not be extended to the employer. The one-week waiting period for claimants to receive UI benefits has been waived.

The TWC administers the Shared Work Program, which may help employers avoid laying off employees. Shared work allows employers to supplement employee wages lost because of reduced work hours with partial unemployment benefits. Under the program, employers must reduce employee normal weekly work hours by at least 10% but not more than 40%. 

Utah. The Utah Workforce Services (UWS) has released FAQs regarding the federal CARES Act and unemployment. To access the FAQs: https://jobs.utah.gov/covid19/caresuifaq.pdf

The FAQs advise that claimants that have applied for, or are currently receiving unemployment insurance (UI) benefits, aren’t required to apply again to access benefits under the CARES Act. The UWS notes that it is awaiting guidance from the U.S. Department of Labor for the implementation of these benefits. Once program guidelines have been provided, the additional $600 provided under the CARES Act will be effective for weeks beginning March 29. No guidance is available on pandemic unemployment assistance at this time. This benefit is available only to individuals who are ineligible for traditional and extended unemployment. The FAQs provide the information that would be required to apply for pandemic unemployment assistance.

Vermont. The Vermont Department of Labor announced that due to heavy call volume, it is temporarily suspending the opening or reopening of unemployment claims via the Mass Claims spreadsheet. Employers should continue to report a layoff on the spreadsheet. To file a claim, an employer or the workers should following the described here: https://labor.vermont.gov/unemployment-insurance/ui-claimants/establishing-unemployment-claim. Or call the Initial Claim line at: (877) 214-3300 or (888) 807-7072. The Vermont Department of Labor won’t be enforcing requirements under the WARN Act. However, employers are encouraged to reach out to the Vermont Department of Labor and the Vermont Agency of Commerce and Community Development for assistance. Employers may contact Cindy Robillard, Business Services Manager at cindy.robillard@vermont.gov with any questions.

Virginia. The Virginia Department of Labor and Industry (DOLI) has issued FAQs regarding Governor Ralph Northam’s Executive Order No. 53 restricting nonessential businesses from operating. They can be accessed here: https://www.doli.virginia.gov/wp-content/uploads/2020/03/Frequently-Asked-Questions-Regarding-EO-53.pdf

The DOLI states that employers who are required to slow or cease operations won’t be financially penalized for an increase in workers requesting unemployment benefits. The FAQs further note that workers are eligible to collect UI benefits if a workplace is temporarily closed or work hours are reduced.

West Virginia. Governor Jim Justice issued an executive order that expands UI benefits to workers due to the coronavirus (COVID-19) public health emergency. From March 16 through the duration of the state of emergency, the one-week waiting period, work search, able to work and available to work, and actively seeking work requirement are waived.

Contact Your Tax or Payroll Advisor

Be aware that state guidance is being released daily and rules are being modified. Contact your tax or payroll advisor for more information in your situation.

View all Yeo & Yeo’s COVID-19 Resources.

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

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

Waiver of 10% early distribution penalty

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

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

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

Waiver of required distribution rules

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

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

New charitable deduction tax breaks

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

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

Far beyond

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

View all Yeo & Yeo’s COVID-19 Resources.

© 2020

The Coronavirus Aid Relief, and Economic Security (CARES) Act includes several sections that impact retirement plans. These retirement plan changes are permitted, not mandatory. If plan sponsors decide to opt-out and not implement these changes, they should document that decision. Plan sponsors implementing some of these changes are required to amend the Plan no later than the last day of the plan year that begins on or after January 1, 2022 (e.g. December 31, 2022, for calendar year plans). Plan sponsors should contact their third-party service providers for guidance.

Section 2202
Special rules for use of retirement funds [(defined contribution 401(k), 401(a), 403(b)]

Applies to participants diagnosed with the virus SARS-CoV-2 or with COVID-19 (or if their spouse or dependent are diagnosed), or if they experience adverse financial consequences due to coronavirus-related situations (quarantined, terminated, furloughed, laid off, or reduced work hours). Plan administrators can rely on a participant’s certification that they satisfy the requirements.

• Tax-favored withdrawals from retirement plans (coronavirus-related distribution):
  • Applies to the period January 1, 2020, through December 31, 2020
  • Distributions are limited to $100,000
  • Distributions are exempt from the 10% early withdrawal penalty tax, and will not be subject to the mandatory 20% tax withholding
  • The taxable income can be included ratably over the three-taxable-year period beginning in 2020 instead of all in 2020 unless the participant opts out of this special income tax treatment
  • Distributions can be repaid over three years after the date of the distribution in one or more payments to an eligible retirement plan (treated as a rollover)

• Loans from qualified plans:
  • Increase in limit on loans not treated as distributions – lesser of $100,000 or 100% of the participant’s vested balance (was $50,000 or 50% of the participant’s vested balance). This applies for 180 days beginning on the date of the enactment of the Act (March 27, 2020).
  • Delay of repayment – loan repayment scheduled due dates during the period beginning on the date of the enactment of this Act and ending on December 31, 2020, will be delayed for one year. Interest will continue to accrue, and the loan will likely require re-amortization.

Section 2203
Temporary waiver of required minimum distribution rules – applicable to the 2020 calendar year [defined contribution 401(k), 401(a), 403(b)].

Section 3607
Expansion of Department of Labor (DOL) authority to postpone certain deadlines – expanded circumstances to include a public health emergency declared by the Secretary of Health and Human Services. The DOL is permitted to extend certain filing deadlines under ERISA by up to one year; refer to the DOL for guidance to come.

Section 3608
Single-employer plan funding rules (defined benefit pension plans):

• Delay in payment of minimum required contributions – payments originally due in 2020 are extended to January 1, 2021 (interest will accrue).
• Benefit restriction status – a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020, as the AFTAP for plan years which include calendar year 2020. This may help avoid benefit restrictions.

• A scammer will call and tell you that you qualify for a special COVID-19 government grant and must verify your identity to process the request.
• A scammer will suggest that you can get more money from the government or get your check faster if you share personal information and pay a small “processing fee.”
• A scammer will send you a bogus check in the mail for an odd amount and require you to verify the check online or call a number.
• A scammer will ask if you are interested in a COVID-19-related small business loan.

• Call to demand immediate payment over the phone
• Call about taxes owed without first having mailed you a bill
• Threaten to bring in police or other law-enforcement groups to have you arrested
• Demand that you pay taxes without allowing you to question or appeal the amount they say you owe
• Require you to use a specific payment method for your taxes, such as a prepaid debit card, gift card, or wire transfer
• Ask for credit or debit card numbers over the phone

We at Yeo & Yeo were proud to celebrate our 97th anniversary on April 1, 2020. It’s was a day for us to be proud of our leading CPA firm, and especially grateful for our clients.

Recently named by Forbes as a Top Recommended Tax and Accounting Firm for 2020, Yeo & Yeo will continue to sustain a thriving Michigan business dedicated to building strong relationships and helping clients meet their long-term financial and business goals.

“We understand that we are in the relationship business. We are honored to have developed lasting relationships with our clients and become their trusted advisors,” says Thomas Hollerback, President & CEO. “We are also proud that through the years, we have stayed true to our roots by contributing our time, talent and passion to the great communities we serve.”

Today Yeo & Yeo has more than 200 professionals in nine offices across Michigan. Through our companies, Yeo & Yeo CPAs & Business Consultants, Yeo & Yeo Technology, Yeo & Yeo Medical Billing & Consulting and Yeo & Yeo Wealth Management, we provide a complete resource for our clients.

We thank you – our clients and communities – for making 97 years possible and for allowing us to be part of your success story.

The rules for reporting leasing transactions are changing. Though these changes have been delayed until 2021 for private companies (and nonprofits), it’s important to know the possible effects on your financial statements as you renew leases or enter into new lease contracts. In some cases, you might decide to modify lease terms to avoid having to report leasing liabilities on your balance sheet. Or you might opt to buy (rather than lease) property to sidestep being subject to the complex disclosure requirements.

Updated standard

In 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases. The effective date for calendar year-end public companies was January 1, 2019. Last fall, the FASB deferred the effective date for private companies and not-for-profit organizations from 2020 to 2021.

The updated guidance requires companies to report long-term leased assets and leased liabilities on their balance sheets, as well as to provide expanded footnote disclosures. Increases in debt could, in turn, cause some companies to trip their loan covenants.

Updated lease terms

The updated standard applies only to leases of more than 12 months. To avoid having to apply the new guidance, some companies are switching over to short-term leases.

Others are incorporating evergreen clauses into their leases, where either party can cancel at any time after 30 days. An evergreen lease wouldn’t technically be considered a lease under the accounting rules — even if the lessee renewed on a monthly basis for 20 years. This might not be the best approach from a financial perspective, however, because the lessor would likely charge a higher price for the transaction. There’s also a risk that short-term and evergreen leases won’t be renewed at some point.

Lease vs. buy

The updated standard is also causing organizations to reevaluate their decisions about whether to lease or buy equipment and real estate. Under the previous accounting rules, a major upside to leasing was how the transactions were reported under Generally Accepted Accounting Principles (GAAP). Essentially, operating leases were reported as a business expense that was omitted from the balance sheet. This was a major upside for organizations with substantial debt. Under the updated guidance, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans. Reporting leases also will require expanded footnote disclosures.

The changes in the lease accounting rules might persuade you to buy property instead of lease it. Before switching over, consider the other benefits leasing has to offer. Notably, leases don’t require a large down payment or excess borrowing capacity. In addition, leases provide significant flexibility in case there’s an economic downturn or technological advances render an asset obsolete.

Decision time

When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, with no universal “right” choice. Contact us to discuss the pros and cons of leasing in light of the updated accounting guidance. We can help you take the approach that best suits your circumstances.

© 2020

The Internal Revenue Service’s new People First Initiative temporarily suspends many collections and enforcement activities to ease the burden on people facing tax issues during the health crisis.

The changes range from postponing certain payments related to installment agreements and Offers in Compromise to collection and limiting certain enforcement actions. The projected start date is April 1, and the effort will run through July 15. During this period, the IRS will avoid in-person contacts but will continue to take steps to protect all applicable statutes of limitations.

Highlights of the People First Initiative include:

Installment Agreements — Payments due on existing installment agreements between April 1 and July 15, 2020, are suspended. Taxpayers who are currently unable to comply with the terms of an installment payment may suspend payments. Interest will continue to accrue on unpaid balances. People unable to fully pay their federal taxes can enter into a new monthly payment agreement with the IRS online or over the phone.

Offers in Compromise (OIC)

• Pending OIC applications — The IRS will allow taxpayers until July 15 to provide requested additional information to support a pending OIC.
• OIC Payments — Taxpayers may suspend all payments on accepted OICs until July 15, 2020, although interest will continue to accrue on unpaid balances.
• Delinquent Return Filings — The IRS will not default an OIC for taxpayers who are delinquent in filing their tax return for tax year 2018. However, taxpayers should file any delinquent 2018 return (and their 2019 return) before July 15, 2020. New OIC submissions can still be submitted.

Field Collection Activities — Liens and levies (including any seizures of a personal residence) initiated by field revenue officers will be suspended during this period. However, field revenue officers will continue to pursue high-income non-filers and perform other similar activities where warranted. Automatic, systemic liens and levies also will be suspended.

Passport Certifications to the State Department — IRS will suspend new certifications to the Department of State for taxpayers who are “seriously delinquent.” Certification prevents taxpayers from receiving or renewing passports.

Private Debt Collection — The IRS will not forward new delinquent accounts to private collection agencies during this period.

Field, Office and Correspondence Audits — During this period, the IRS generally will not start new field, office and correspondence examinations. They will continue to work refund claims where possible, without in-person contact. The IRS encourages taxpayers to respond to IRS correspondence requesting additional information if possible.  

• In-Person Meetings — In-person meetings regarding current field, office and correspondence examinations will be suspended, but IRS examiners will continue their examinations remotely, where possible.
• Unique Situations — Particularly for some corporate and business taxpayers, there may be instances where the taxpayers desire to begin an examination while people and records are available. When it’s in the best interest of both parties and personnel are available, the IRS may move forward with an examination.

Earned Income Tax Credit and Wage Verification Reviews — Taxpayers have until July 15, 2020, to respond to the IRS to verify that they qualify for the Earned Income Tax Credit or to verify their income. If unable to do so, taxpayers should reach out to the IRS, indicating the reason the information is not available. Until July 15, 2020, the IRS will not deny these credits for a failure to provide requested information. 

Independent Office of Appeals — Appeals employees will continue to work their cases over the telephone or by videoconference. Taxpayers are encouraged to respond to requests for information promptly.

Statute of Limitations — The IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving all applicable statutes of limitation. Where a statutory period is not set to expire during 2020, the IRS is unlikely to pursue actions until at least July 15, 2020.

For more information, visit www.irs.gov.

On March 27, 2020, Governor Whitmer signed Executive Order 2020-26, extending state and city income tax filing and payment deadlines for three months, to align with federal changes. The extension applies to state and city individual income tax filing deadlines and payments, as well as state and city corporate income tax filing deadlines and payments.  

• Any state or city individual or corporate income tax returns and payments originally due on 4/15/20 are now due on 7/15/20. 
• Any state or city corporate income tax returns and payments with an original due date of 4/30/20 are now due on 7/31/20.

First-quarter state and city estimated tax payments with a due date of 4/15/20 or 4/30/20 also are extended to either 7/15/20 or 7/31/20. The extension applies to both individual and corporate estimates. 

As with the federal changes, Michigan state and city extensions are automatic. Taxpayers do not need to file any additional forms or contact the Michigan Department of Treasury to qualify.

Whether your not-for-profit is newly deluged with demand for services or you’ve closed doors temporarily, it’s important to keep up with legislation responding to the coronavirus (COVID-19) crisis. On March 18, the Families First Coronavirus Response Act was signed into law to provide American workers affected by the pandemic with extended sick and family leave benefits.

The new law applies to your nonprofit if you have fewer than 500 employees, although you may be exempt if you have fewer than 50. Here are some details.

3 things to know

There are three important components of the new law:

1. Paid sick leave. If a staffer is ill, is instructed to be isolated by a physician or government authority or is caring for a sick family member or child whose school has closed, your organization must provide two weeks of paid leave. Pay part-time workers based on their average hours over a two-week period. Benefits are capped at $511 per day and $5,110 total for employees on leave because of their own health issue, or $200 per day and $2,000 total to care for others.

2. Job-protected leave. You must provide 12 weeks of job-protected leave for employees who need to take care of a child due to the closure of a school or day care center. This provision updates existing rules under the Family and Medical Leave Act. Employers are now required to pay workers two-thirds of their regular wages, not to exceed $200 per day and $10,000 total. You aren’t required to pay employees during the first 10 days off; however, they may choose to use accrued time off benefits at this time.

3. Employer payroll tax credits. To help employers pay for time off, the law enables tax credits. You may claim a 100% refundable payroll tax credit on wages associated with paid sick and medical leave and other expenditures associated with health benefit contributions. Additional wages paid to staffers due to the law’s leave requirement aren’t subject to the employer portion of the payroll tax.

Unemployment assistance

Congress has also provided $1 billion in emergency grants to states to process and pay unemployment insurance benefits. So if you need to lay off staffers during the extended COVID-19 crisis, this provision can help them manage the financial burden.

Of course, more is likely to be needed. Legislators are currently working out a deal to provide furloughed and laid-off workers with direct financial assistance as well as loans and other financial support for employers. Keep your eye on the news.

Staying afloat

If you have questions about how the Families First Act applies to your nonprofit, please contact us. Also, because many nonprofits operate on thin margins at the best of times, you may worry about staying afloat. We can analyze your position and help you come up with possible survival strategies.

© 2020

View all Yeo & Yeo’s Covid-19 Resources.

Roughly half of CFOs believe an economic recession will hit by the end of 2020, and about three-quarters expect a recession by mid-2021, according to the 2019 year-end Duke University/CFO Global Business Outlook survey. In light of these bearish predictions, many businesses are currently planning for the next recession. Are you? Here are four steps to help your company strengthen its balance sheet against a possible downturn.

1. Identify what’s most important

The balance sheet shows your company’s financial condition — its assets vs. liabilities — at a specific point in time. Some line items are more critical to your success than others. For example, inventory is a top priority for retailers, and accounts receivable is important to professional service firms.

A “common-sized” balance sheet can help you determine what’s most relevant. This type of statement presents each account as a percentage of total assets. Items that represent the highest percentages are generally the ones that warrant the most attention.

2. Analyze ratios

Ratios compare line items on your company’s financial statements. They may be grouped into four categories: 1) profitability, 2) solvency, 3) asset management, and 4) leverage. While profitability ratios focus on the income statement, the others assess items on the balance sheet.

For example, the current ratio (current assets ÷ current liabilities) is a solvency measure that helps assess whether your company has enough current assets to meet current obligations over the short run. Conversely, the days-in-receivables ratio (accounts receivable ÷ annual sales × 365 days) is an asset management ratio that gauges how efficiently you’re collecting receivables. And the debt-to-equity ratio (interest-bearing debt ÷ equity) focuses on your company’s use of debt vs. equity to finance growth.

3. Set goals

The common-sized balance sheet and ratios can be used to create “goals” for each key line item. What’s right depends on the nature of your business and industry benchmarks.

For example, you may strive to meet the following goals over the next year:

• Increase cash as a percentage of total assets from 5% to 15%,
• Improve the current ratio from 1.1 to 1.2,
• Decrease the days-in-receivable ratio from 40 to 35 days, and
• Lower the debt-to-equity ratios from 5.6 to 4.

4. Forecast the impact

Once you’ve set goals, devise a plan to achieve them. For example, you might cut fixed costs or forgo buying equipment to build up your cash reserves. In turn, stockpiling cash — along with improving collections — might help boost your current ratio.

Part of your plan should be forecasting how the changes will filter through the financial statements. This exercise can help you determine whether your goals are realistic. For example, if you decide to build up cash reserves, it might be difficult to simultaneously pay down debt. You can generate only a limited amount of incremental cash in a year. Forecasting can help pinpoint the shortcomings of your plans.

We can help

Markets are cyclical. So, it’s only a matter of time before another downturn happens. We can help you take steps to position your organization to weather the next storm — whenever it arrives.

© 2020

View all Yeo & Yeo’s Covid-19 Resources.

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

Close up on financial reporting

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

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

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

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

Disclosure requirements and best practices

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

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

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

Need help?

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

© 2020

View all Yeo & Yeo’s Covid-19 Resources.