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Tax & AccountingImpact of Receiving COVID-19 Funding
June 25, 2020
Introduction to Our Panelists
James Hunt, CPA, CGMA
Michael Garczynski, CPA, CGMA
Kevin Highlander, CPA
Jeffrey Petrell, JD, CPA, CGMA
Question & Answers • Q&A Chat Function in Webex ➽• Or Email questions to panelists
Meeting the Challenge
• Government Mandated Closures/Restrictions
• Social Distancing
• Maintaining Client/Customer Relationships
• Healthy & Adequate Workforce
• Cash Flow
• Application & Receipt of Government Funding
Received Funding?
• Paycheck Protection Program (PPP)• Economic Injury Disaster Loan (EIDL)• Employee Retention Credit (ERC)• Provider Relief Fund (PRF) from the Department of Health & Human Services (HHS)
• Family First Coronavirus Response Act (FFCRA)• State Funding• Local Funding
What Now?
What do I need to know to properly account for these funds and what are the tax implications I need to be aware of?
Accounting
• ASC 470 – Debt• IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance• ASC 958-605 – Accounting Guidance for Contributions Received and Contributions Made• ASC 450-30 – Gain Contingencies – Very similar to ASC 470 so we will not be covering it• ASC 740 – Accounting for Income Taxes• Proposed GASB Technical Bulletin – Accounting for Financial Reporting Issues Related to the CARES Act and Coronavirus Diseases – June 9, 2020* Note disclosure will be necessary to explain the accounting method and why it was chosen.
Accounting Standards Codification (ASC)International Accounting Standards Board (IASB)Governmental Accounting Standards Board (GASB)Coronavirus Aid, Relief, and Economic Security (CARES) Act
ASC 470 Debt
• Applies to For-Profit and Not-For-Profit• Can Apply Regardless of What You Believe will be Forgiven• Debt Not Derecognized Until Paid Off or Legally Released• Gain Would be Presented as Extinguishment of Debt (included in performance indicator)• Accrue Interest Based on Government Rate No Additional Imputed Interest
ASC 470 Debt
Cash (Maybe Segregate) XXX
Credit - Loan - Government Funding(*) XXX
To record receipt of government funding
Loan - Government Funding XXX
Credit - Gain on Early Extinguishment of Debt XXX
To record forgiveness of debt once legally released
* Description of liablity could vary depending on the type of funding. Example: PPP might be labeled “PPP Loan” and PRF Advance might be labeled “PRF Deferred Revenue.”
IAS 20 Accounting
Government Grants and Disclosure of Government Assistance• Applies to For-Profit and Not-For-Profit• Should Have “Reasonable Assurance” Conditions Met for Forgiveness• Reflected as Deferred Income - into income as qualifying expenses incurred
• Separate Line Item on Income Statement• Could Also Net with Related Expenses
IAS 20 Accounting
Balance Sheet Cash XXX
Deferred Income XXX
To record receipt of government funding
Income Statement Deferred Income XXX
Income XXX
To record income as qualifying costs are incurred
Government Grants and Disclosure of Government Assistance
ASC 958-605 Accounting
Guidance for Contributions Received and Contributions Made• Applies to For-Profit and Not-For-Profit• Refundable Advance Recorded on Balance Sheet Until Conditions of Forgiveness Substantially Met or Explicitly Waived• FASB: Forgiveness Application is Administrative Function Not Condition for Forgiveness• Income is Contribution Revenue for Not-For-Profit & Other Income for a For-Profit
ASC 958-605 Accounting
Balance Sheet Cash XXX
Refundable Advance XXX
To record receipt of government funding
Income Statement Refundable Advance XXX
Other Income XXX
To record income once the conditions for forgiveness have been substantially met or explicitly waived
Accounting Guidance for Contributions Received and Contributions Made
ASC 958-605 Not-For-Profit Entity
Government Accounting Standards Board
Certain CARES Act Programs Provide Resources for the Effects of COVID-19
• Applicable eligibility requirements - loss of revenue attributable to the effects of COVID-19 - payroll related to personnel - to support the operations of private hospitals - to assist in preventing homelessness
• Governmental hospitals should recognize CARES Act resources as liabilities until the applicable eligibility requirements are met, including the incurrence of eligible expenditures.
• When the government hospital has met the eligibility requirements, the hospital should recognize revenue for CARES Act resources received.
Government Accounting Standards Board
Balance Sheet Cash XXX
Liability XXX
To record receipt of government funding
Statement ofOperations
Liability XXX
Revenue XXX
To record revenue once the eligibility requirements are met
Governmental Hospital
Government Accounting Standards Board
CARES Act Resources Provided Through the Provider Relief Fund
• The resources provide program support for specific activities and reimburse allowable costs rather than to pay for services and, therefore, are provided as subsidies and should be reported as non-operating revenues.
• Resources provided to governments through the Provider Relief Fund’s Uninsured Program constitute payment for care or treatment of uninsured individuals and testing for COVID-19 should be reported as operating revenues.
Government Accounting Standards Board
Forgivable loan pursuant to the Paycheck Protection Program in the CARES Act
• The governmental entity should continue to report the loan as a liability until that entity is legally released from the debt. The governmental entity should report an inflow of resources in the reporting period to the extent that the entity is legally released from the debt.
ASC 740 Accounting for Income Taxes
• CARES Act tax laws impact - tax provisions - deferred tax assets - liabilities
• Companies should include effects of changes - statement period which includes 03.27.20
• Periods ending prior to 03.27.20 - quantify expected impact of changes - determine if disclosure needed on expected effect of CARES Act
ASC 740 Accounting for Income Taxes
Net Operating Losses (NOLs)• Suspension of 80% limitation for NOLs generated after 12.31.17 and before 01.01.21
• Carryback of NOLs generated during this period to 5 previous years - Could result in reclasses from deferred tax assets to income tax receivable
ASC 740 Accounting for Income Taxes
Interest Expense Limitations Changed• The CARES Act increases limit of deductible business interest expense from 30% of adjusted taxable income (ATI) to 50% of ATI for taxable years beginning in 2019 and 2020
• May elect to calculate 2020 interest expense based on 2019 ATI - if making this election reflect in current provision
ASC 740 Accounting for Income Taxes
Alternative Minimum Tax (AMT) Credits• Remaining AMT credits can now be refunded in 2019 and should be presented in income tax receivableQualified Improvement Property• Favorable changes to depreciation and if elected should be reflected in tax provisionValuation Allowance• CARES Act changes should be considered during assessment of ability to use deferred tax assets
COVID-19 Funding Tax Considerations
• Economic Injury Disaster Loan (EIDL) and Advance• U.S. Dept. of Health & Human Services (HHS)• Health Resources & Services Administration (HRSA)• Federal Emergency Management Agency (FEMA)• Funding from States• Paycheck Protection Program (PPP)
Other Considerations
• Payroll Tax Deferrals• Leave Based Donation Programs
EIDL Sources
• Advances up to $10K currently taxable for federal income tax (FIT) - Small Business Administration (SBA) General Counsel working with Treasury to confirm
• Expenses paid from grant deductible for federal and state income tax purposes - states looking into taxability and whether to deviate from federal
HHS HRSA
• HHS, HRSA funds taxable for FIT purposes
• Expenses paid from federal funds deductible for FIT purposes
• States looking into taxability currently following federal
• Exempt income if Section 501(c)(3)
FEMA
• FEMA funds are not currently taxable for FIT purposes
• Expenses paid from federal funds NOT deductible for FIT purposes
• Not taxable for state income tax purposes
Funds from States
• State funds from CARES Act are currently taxable for federal and state income tax purposes
• Expenses paid from the funds are deductible
• Exempt income if Section 501(c)(3)
Other Funding Issues
• If fiscal year filer, taxable income results if taxable funds not expended during fiscal year to offset income
• If funds from multiple sources, track expenses, make sure not to double count when reporting what funds were used for
PPP Loan Forgiveness tax issues
• CARES Act, Section 1106(b) - Loan recipient can receive forgiveness provided the funds are used for certain covered costs: payroll costs, interest on a covered mortgage obligation, rent, utilities
• CARES Act, Section 1106(i) - Exclusion from gross income for amounts forgiven
PPP Loan Forgiveness tax issues (continued)
• Internal Revenue Service (IRS) Notice 2020-32 - Deduction of covered expenses disallowed - Asserts exclusion of loan forgiveness income is subject to the rules under Internal Revenue Code (IRC) §265
• IRC §265 - No deduction allowable for expenses allocable to tax exempt income
PPP Loan Forgiveness tax issues (continued)
Timing of Disallowed Deductions?
• Exclusion of income should not occur until loan is forgiven.• Lenders must issue a decision within 60 days from receipt of loan forgiveness application.• SBA will remit funds to lender for approved forgiveness applications within 90 days.• Per SBA interim final rule (IFR), borrowers have up to 10 months after end of covered period to submit loan application before repayment starts.
PPP Loan Forgiveness tax issues (continued)
8 week versus 24 week covered period• 8 week period – possibility to have covered costs and loan forgiveness in same year• 24 week period – covered costs and loan forgiveness will straddle 2020 and 2021 tax years
SBA has a 6 year window to conduct a loan review• Normal statute of limitations for amending a return is 3 years
PPP Loan Forgiveness tax issues (continued)
Retirement Plan Profit Sharing Contributions• Must be paid by the due date of the return, including extensions.• Retirement benefits are one of the allowable payroll costs under PPP program.• SBA IFR indicates that payroll costs “paid or incurred” are eligible for forgiveness. May impact businesses paying 2019 profit sharing or safe harbor retirement contributions with PPP funds.• Elect to use 24 week period to mitigate?
PPP Loan Forgiveness tax issues (continued)
Impact on 2019 and 2020 Income Tax Filings• Depending upon timing of loan forgiveness, disallowed deductions may impact both 2019 and 2020 income tax return filings.
Amended returns may be required.• Example: Taxpayer has filed 2019 return and paid the profit sharing retirement contribution with PPP funds.• Example: Taxpayer uses 24 week covered period and files 2020 return prior to applying for forgiveness and does not disallow deductions.
PPP Loan Forgiveness tax issues (continued)
Statute of Limitations Issue • SBA review period – 6 years • Amended return filing period – 3 years
What happens if SBA reviews a loan after 3 year period for amending return has expired?• May negatively impact taxpayers that disallowed the deduction in accordance with IRS Notice 2020-32.• The window for amending return is closed and the deductions are permanently lost.
PPP Loan Forgiveness tax issues (continued)
Other Issues for Consideration• Legislative change allowing for expense deductibility.• If return is filed and taxpayer has disallowed expenses, then an amended return will need to be filed to claim the deductions.
Partial Forgiveness and Impact on Return After Filing• May be attributable to reduction in full-time equivalent (FTE) count or payroll reduction.• Forgiveness reduction due to EIDL advance.
PPP Loan Forgiveness tax issues (continued)
Potential Accuracy Related Penalty?• Equal to 20% of the portion of the underpayment to which it applies.
Applicable to Negligence or Disregard of Rules and Regulations• May be avoided by disclosing on the return – Form 8275.• Reg. 1.6662-3(b)(2) – a taxpayer that takes a position contrary to a revenue ruling or notice has not disregarded the ruling or notice if the contrary position has a realistic possibility of being sustained on its merits.
PPP Loan Forgiveness tax issues (continued)
Accuracy Related Penalty (continued)
• Any substantial understatement of income tax. - Based on set thresholds: - For individuals, the greater of: - 10% of tax required to be shown on return (5% if taking Sec. 199A deduction); or - $5,000 - For corporations, the lesser of: - 10% of tax required to be shown on return (or, if greater, $10,000); or - $10,000,000
PPP Loan Forgiveness tax issues (continued)
Impact on 2020 Tax Planning & Estimated Tax Payments • Will impact quarterly estimates – 1st and 2nd quarter due July 15th• Impact on annualization – in what quarter should the disallowed deductions be recognized?• How does this impact the qualified business income deduction?
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PPP Loan Forgiveness tax issues (continued)
State Tax Considerations
• Pennsylvania – has passed a Bill which would permit for state purposes the deductions disallowed at the federal level for personal income tax. There is no relief for corporate income tax purposes.
• Ohio – No additional guidance at this time.
• West Virginia – No additional guidance at this time.
PPP Loan Forgiveness tax issues (continued)
Potential Legislative Remedy • S. 3612 / H.R. 6821 Small Business Expense Protection Act - Seeks to clarify that the deductibility of covered expenses for purposes of the PPP are not affected by loan forgiveness
Payroll Tax Deferral
• CARES Act provides that employers and self-employed individuals may defer 50% of federal payroll taxes. - For payroll taxes incurred between 03.27.20 and 12.31.20.
• Employer’s portion of the Old-Age, Survivors, and Disability Insurance (OASDI) Tax - 6.2% percent.
• 6.2% of OASDI for self-employed individuals.
Payroll Tax Deferral (continued)
• Extended payment dates - 50% of deferred payroll taxes due 12.31.21 - Remaining balance due 12.31.22.
• PPP recipients were previously not eligible to defer payroll taxes after receiving a decision from lender concerning loan forgiveness.
• PPP Flexibility Act eliminates this restriction. Taxpayers with PPP loans that are forgiven may continue to defer 2020 payroll taxes.
Leave-Based Donation Program
• IRS issued guidance in June 2020 Leave-Based Donation Programs• Employers can make deductible monetary donations for relief of victims of COVID-19 pandemic based on the value of paid time off (PTO) that employees voluntarily forgo• Donated amounts will not be treated as compensation and employees will not be allowed to claim a charitable deduction for the value foregone
Leave-Based Donation Program
• Payments have to be made to a Sec. 170(c) organization for the relief of victims of the COVID-19 pandemic and paid to the organization before 01.01.21• Employers may deduct these cash payments as charitable contributions or ordinary and necessary business expenses• Some employers have related foundations for these purposes or would have to locate a community foundation that supports this
Name Email Address Phone Number
James Hunt [email protected] 724.658.1565
Michael Garczynski [email protected] 412.635.6270
Jeffrey Petrell [email protected] 412.635.6270
Kevin Highlander [email protected] 304.346.0441
For this deck and many other COVID-19 resources go to ourCOVID-19 Resource Center
The information provided is not a substitute for professional advice or services. We strive for accuracy yet, keep in mind, information of this nature changes regularly. You should consult a qualified professional advisor before taking any action.
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