Impact of COVID on IRS Processing

In light of the COVID-19 pandemic, the world has slowed down and so has the processing of tax returns at the Internal Revenue Service (IRS) due to reduced staffing. The IRS originally published notice at the end of August regarding the impact on IRS processing and continues to update it as needed. Here we outline things to keep in mind given the latest updated notice from the IRS.

IRS Notice Mailings

  • When the IRS began mailing backlogged letters and notices to taxpayers in an effort to normal operations, many of the notices were mailed with past due payment or response dates. As of now, the IRS does not intend to generate a new, revised notice. As an alternative, the IRS is planning to send Notice 1052, Important! You Have More Time to Make Your Payment, which will provide a new, updated pay or response date. If you have questions on the notice, visit IRS.gov/coronavirus for more information.
  • The IRS suspended the mailing of three notices – the CP501, the CP503, and the CP504 – that go to taxpayers who have a balance due on their taxes. This was done given the backlog of unopened mail and the effort to minimize any possible confusion that might be associated with delays in processing correspondence received from taxpayers.

Electronic Signatures

For returns mailed by or on December 31, 2020, the IRS is accepting the temporary use of electronic signatures for certain forms that cannot be filed electronically.

Taxpayer Correspondence

For any mailed tax returns and other correspondence to the IRS, you should expect to wait longer than usual for a response due to reduced staffing in mailing processing functions. Rest assured, the IRS is receiving mail, but its ability to correspond with taxpayers about a variety of issues including requests for information needed to process a tax return remains limited.

Payments to the IRS

If you have mailed a check with or without a tax return to the IRS, there is a possibility it is still unopened in the mail backlog. Any payments received by the IRS will be posted as the date it was received not the date the IRS processed them. It is imperative you do not cancel these checks to avoid penalties and interest and you should ensure funds will be available when the IRS can process them. The IRS did provide relief from bad check penalties for dishonored checks received between March 1 and July 15, although interest and penalties may still apply. Visit www.irs.gov/payments for options to make payments other than by mail.

Third-Party Authorizations

The IRS is working on reducing its backlog of third-party authorizations. Due to site closures relating to the COVID-19 pandemic, the IRS continues to exceed its five-business day target for approval. The current time frame for authorization approval is approximately 15 business days. The IRS requests you do not submit duplicate authorizations as that will only likely cause further delays.

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If you have questions regarding your correspondence with the IRS and are not getting a response from the IRS, we are happy to see if we can help. For additional information and to speak with one of our tax accountants, please call us at 630.954.1400 or click here to contact us. We look forward to speaking with you.

IRS Issues Guidance on Employee Payroll Tax Deferral

The economic challenges created by the COVID-19 pandemic have been felt by businesses and individuals across Chicago. Not only have unemployment numbers spiked to new highs, but the impact on economic output has been hit. It was reported by Crain’s Chicago Business that Illinois is expected to take a $76B reduction in economic output due to the pandemic. These numbers reflect the need for another federal stimulus package to help state, local government, and businesses manage.

Since Congress was unable to come to an agreement, earlier this month President Trump issued several Executive Orders. One of these was the creation of an employee payroll tax deferral program designed to provide individuals with immediate relief. Unfortunately, the lack of IRS guidance made it impossible for businesses to implement it for employees. On August 28, the IRS finally issued needed guidance (IRS Notice 2020-65) providing additional details on qualifying wages, repayment timeline, and other information. To help clients, prospects, and others, Selden Fox has provided a summary of key details below.

Applicable Wages

As highlighted in the Executive Order, an employer may – but is not required to – defer the employee portion of payroll taxes between the period of September 1, 2020, and December 31, 2020. The deferral applies only to the 6.2% Social Security tax withheld as part of the Federal Insurance Contributions Act (FICA) withholding. The 1.45% Medicare tax is excluded from this program. The guidance clarifies that pre-tax compensation and wages paid for a bi-weekly pay period threshold amount of $4,000 ($104,000 annualized) qualify as Applicable Wages. In cases where the pay period duration differs, then the equivalent amount must be met. Wages and compensation that exceed this amount are ineligible.

In addition, the determination of Applicable Wages is made on a pay period by pay period basis. This means an employee may have Applicable Wages for one pay period and not the next if the threshold is exceeded. Therefore, the ability to participate may change on an ongoing basis.

Tax Repayment

Payroll taxes that are deferred must be repaid between January 1, 2021, and April 30, 2021, otherwise interest, penalties, and additions to the amount owed will begin to accrue on May 1, 2021.

Employer Liability

An important term used in the guidance which businesses should carefully note is the way they address the “Affected Taxpayer”. In the guidance, the term refers to an employer and not an employee as the party making the deferral. The employer, while they can take into account the wishes of an employee, is ultimately the one making the election to take advantage of the deferral.  As a result, the party responsible for collecting and paying the deferred amount is actually the business. This has caused concern for many because it is unclear how collections will work when an employee has left the company or in similar situations. The door is open to potential risk factors which carefully need to be considered.

There is some concern that if Congress ultimately enacts a payroll tax forgiveness, they could draft the forgiveness to apply to only the deferred payroll taxes, and not forgive the amounts that employers elected to pay as previously scheduled.  Aside from presidential remarks, there had been no legislative proposals to forgive any payroll taxes, so this remains a purely speculative anecdote.

Suggested Next Steps

For businesses that do decide to participate in this deferral option, it is important to ensure the following steps are taken to set expectations and manage risk.

  • Send written communication to all employees outlining the expectation that anyone who participates in the program will be required to pay back deferred payroll taxes according to the timeline above.
  • Consult with a business attorney to draft a contract that requires participating employees to agree to additional Social Security tax withholding during the repayment timeline.
  • In the same contract, be sure to add language requiring the employee to reimburse the company for any deferred payroll taxes in the event they terminate employment or do not earn sufficient income.
  • When appropriate, be sure to communicate these changes to third party payroll providers including the obligation to increase withholding in the new year.

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The recently issued IRS guidance provides important details and information needed to properly administer the program. However, the number of unanswered questions has left many wondering if they should even participate. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

PPP Loan Forgiveness FAQs Updated

As the COVID-19 pandemic continues to setback businesses around the country and in Illinois, the businesses and organizations that were fortunate to receive Paycheck Protection Program (PPP) loans are now faced with working to secure loan forgiveness.

On August 4, 2020, the Small Business Administration (SBA) provided an update to its Frequently Asked Questions (FAQs) on the PPP to assist on the interpretation of the CARES Act and the PPP Interim Final Rules.

The FAQ is broken into the following sections:

  • General Loan Forgiveness
  • Loan Forgiveness Payroll Costs
  • Loan Forgiveness Nonpayroll Costs
  • Loan Forgiveness Reductions

Many of the questions address the revised 24-week Covered Period that came into play with the Interim Final Rules. The FAQ also addresses owner compensation specifically examining the differences that apply for C Corporations, S Corporations, Self Employed using Schedule C, Partners, and LLC Owners which has caused confusion. A number of the FAQs include examples to further illustrate how to interpret the availability of forgiveness.

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For those organizations, seeking to secure the highest forgiveness amount available Selden Fox can help. If you have questions on PPP loan forgiveness not addressed in the SBA FAQs, do not hesitate to call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

PPP Loan Forgiveness for the Self Employed and Owner Employees

The Paycheck Protection Program (PPP) has been an essential tool in helping Chicago businesses weather the COVID-19 pandemic. Since it was created as part of the CARES Act in March, it has become increasingly popular due to its many favorable terms. In fact, it was reported that as of June 30, 2020, the SBA had issued 202,143 loans totaling more than $22B to Illinois companies. This number is staggering and reflects both the depth of the pandemic and the popularity of the program. Perhaps one of the most attractive features is the opportunity to receive partial or full loan forgiveness. That being said, this has not occurred without significant confusion about the loan forgiveness application process, details, and other requirements.

In June, Congress assuaged concerns when it passed the PPP Flexibility Act of 2020, which made several changes including new applications and accompanying instructions. While resolving those concerns, the Treasury issued a new Interim Final Rule (IFR) addressing caps on loan forgiveness for the self-employed and owner-employees. To help clients, prospects, and others navigating forgiveness, Selden Fox has provided a summary of key details below.

Loan Forgiveness Limits

Broadly speaking, the IFR states that borrowers that received a PPP loan prior to June 5, 2020, may elect to use an eight-week Covered Period. In such cases, the amount of loan forgiveness available to owner-employees and self-employed individuals payroll compensation is limited to 8 weeks’ worth of 2019 compensation or $15,385 per individual, whichever in less. For borrowers who opt for the 24-week Covered Period, the amount of forgiveness requested for owner-employees and the self-employed payroll compensation is capped at 2.5 months of 2019 compensation or $20,833, whichever is less. Specific further guidance by entity type was also provided.

  • C-corporations – Owner-employees are limited by the amount of their 2019 cash compensation, employee retirement, and health insurance contributions made on their behalf.
  • S-corporations – Owner-employees are capped by the amount of 2019 employee cash compensation and employer retirement contributions. Health insurance contributions are generally excluded as they are counted in employee cash compensation for any shareholders owning more than 2% of the entity.
  • Schedule C or F Filers – They are limited to the amount of owner compensation replacement determined based on 2019 net profit. Health insurance contributions are excluded as they are counted in net self-employment income.
  • General Partners – These individuals are limited to the amount of 2019 net earnings from self-employment multiplied by .9235.
  • Self Employed Individuals – Loan forgiveness is limited to either 2019 compensation up to $15, 385 for an 8-week Covered Period or 2.5 months of 2019 compensation up to $20,833 for a 24-week Covered Period per owner. It is important to remember that retirement and health insurance contributions are already included in net self-employment income and cannot be added separately to the payroll calculations.

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During this time of COVID-19 resurgence and additional uncertainty, it is essential for businesses to capture the highest forgiveness amount available. Although many changes have been implemented to streamline the process, loan forgiveness can be complex to navigate. If you have questions about the information outlined above or need assistance with another COVID-19 issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Survey Reveals 60% of Charities Face Long Term Instability

If there is one word that summarizes the impact of COVID-19 on Illinois businesses, nonprofits, and individuals it would have to be instability. The concerns about virus transmission led Gov Pritzker to issue forced business closures, stay at home orders, and new workplace safety guidelines to protect both employees and customers. Although these changes initially helped to “flatten the curve”, once relaxed there has been a spike in the number of new COVID-19 cases and deaths. Although startling it reflects a larger problem with COVID-19—it is nearly impossible to predict what will happen next and the pace at which the Chicago economy will make a return to prosperity.

This has left many nonprofit organizations with more questions than answers about how to manage through the next 12 to 18 months. According to the Nonprofit Finance Fund COVID-19 Survey, 60% of respondents are currently experiencing conditions that threaten long term financial stability. At the same time, 61% reported a significant decrease (25% or more) in client usage of services. When combined these numbers reflect just how deep COVID-19 has impacted organizations. To help, clients, prospects and others, Selden Fox provides a summary of key survey findings here.

Nonprofit Survey Findings

  • Demand for Services – As the pandemic progresses there have been sudden changes in demand for services which create unique challenges for organizations. This is specifically the case when there is a rapid increase in service demand because many may not have the resources to adapt. According to the survey, 17% of respondents are currently experiencing a significant increase (more than 25%) for services while 31% anticipate such an increase later in the year. At the same time, 61% reported a significant decrease in demand for services, while 32% expect a decrease to arise later in the year. As service demands shift it is important for nonprofits to remain agile and be able to quickly respond to changing needs.
  • Revenue – As economic conditions remain challenging many organizations are facing difficulties generating both earned and donated revenue. According to the survey, 75% of respondents have reported a significant decline in earned revenue against the 3% who have reported an increase. At the same time, 50% have reported a reduction in donations against the 6% that reported an increase. While some organizations are experiencing positive changes, the overwhelming number are seeing an adverse impact.
  • Workforce Issues – Maintaining programming requires the involvement of staff and volunteers. The survey was seeking to determine if there have been disruptions in availability. The survey found that 56% of respondents reported limited staff availability due to disruptions in childcare, while 43% of respondents experienced a reduction in volunteer availability for the same reason. Unfortunately, there is often support needed from staff and volunteers that do not permit them to work remotely further exacerbating the problem.
  • Long Term Instability – The combination of decreasing revenue, the reduced demand for services, and disruption in staff availability makes it very difficult for organizations to maintain a positive financial outlook. It was found that 60% of respondents are currently facing destabilizing conditions that could impact long term viability, while 64% are anticipating this outcome later in the year. This finding highlights the need for immediate funding programs for organizations to help solidify their financial position for the duration of the pandemic. While the Paycheck Protection Program (PPP) and Main Street Lending Program permit nonprofit participation, more options are needed. 

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The challenges presented by COVID-19 will require nonprofits to streamline operations and make adjustments that not only reflect current income limitations but seek to bolster their financial position. For this reason, it is important to regularly review short- and long-term plans to make needed adjustments. If you have questions about the information outlined above or need assistance with a financial, tax, or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Revenue Recognition for Auto Dealers – Part 2: Balance Sheet and Disclosure Requirements

The Financial Accounting Standards Board (FASB) issued a standards update on “Revenue From Contracts With Customers,” replacing almost all revenue guidance under Generally Accepted Accounting Principles (GAAP) nearly six years ago. The new standard is effective for all companies, and many auto dealers although the changes have not had a material impact on most revenue lines. Instead, dealerships have been focusing on the modifications needed to remain compliant in recognizing revenue and on their financial statement disclosures.

Part 1 of this this two-part series examined how dealerships should recognize revenue using the Five-Step Model. Now, we will review the new presentation and disclosure requirements.

Under the new standard, an auto dealer must reconsider how they present assets and liabilities on their balance sheet in relation to whether a receivable is a traditional or a contract asset. A liability includes items like unused gift cards, reserves for parts or vehicle returns, and chargeback reserves. The distinction between receivables is whether the dealership’s right to collect is conditional or unconditional. When a dealership sells a vehicle, and the customer takes delivery or gains control of the asset, the performance obligation is complete. It is at that time the dealership has a right to receive consideration (payment). This transaction will then show on the balance sheet as a receivable.

When a dealership enters into a transaction that contains multiple services or parts, or a vehicle, it cannot demand payment for each performance obligation and must wait to bill the customer until all the obligations are met. Unbilled revenue is still recognized, even though the customer has not been billed. This conditional payment is considered a contract asset on the balance sheet. While both assets are subject to a degree of risk, a contract asset faces more risk because of its dependence on performance.

Dealerships must remember to account for contract liabilities, which encompasses the obligation to provide goods or services to a customer after payment. Annual disclosure requirements now demand that dealerships include qualitative information along with their quantitative data.

Additional disclosures to be considered include:

  1. In contracts with customers, disaggregated revenue must now be considered. Some dealerships were disclosing disaggregated revenue prior to the update, however, now all dealerships must;
  2. Dealerships must disclose new judgments made due to the adoption of ASC 606. The revenue recognition standard seeks to understand the judgments applied to the application of the new guidance, specifically around significant judgments in identifying performance obligations, estimating variable pricing, and allocations of the transaction price when more than one performance obligation exists, and changes to previously held judgments.; and
  3. Assets recognized from costs to obtain/fulfill contracts, although, this requirement is not expected to have a significant impact on dealerships.

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If you need assistance or have questions about revenue recognition compliance, Selden Fox can help. Our team has considerable experience in this area and is here to assist. For additional information please call us at 630.954.1400 or click here to contact us.

Revenue Recognition for Auto Dealers – Part 1: Five Step Model

Almost six years have passed since the Financial Accounting Standards Board (FASB) issued the standards update on “Revenue From Contracts With Customers,” replacing almost all revenue guidance under Generally Accepted Accounting Principles (GAAP). The new standard is effective for all companies, and for many auto dealers, although the changes have not had a material impact on most revenue lines. Instead, dealerships have been focusing on the modifications needed to remain compliant in recognizing revenue and on their financial statement disclosures.

In this two-part series, we will review how the new standards changed how dealerships recognize revenue with their customer contracts, as well as the new presentation and disclosure requirements.

Part 1: Recognizing Revenue with the Five-Step Model

Auto dealerships must adopt the principle of the standard, which is that a company should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the company expects to be entitled to in exchange for the goods or services.

  1. Identify the contract. To be considered a contract, the agreement must meet specific criteria. The agreement must create enforceable rights and obligations between the dealership and the customer. The payment terms must be identifiable, and the dealer should be reasonably assured they will be able to collect on their payment terms. Standard contracts in a dealership include Buyer’s Orders, parts purchase orders, service invoices, or repair orders, as well as F&I products.
  2. Identify performance obligations. Next, you must apply judgment to identify distinct performance obligations and allocate values to each one. For example, a dealer that sells a vehicle and includes five years of free car washes has established two performance obligations. The first obligation is the sale of the vehicle (product). The second obligation is the series of car washes (service). What makes each obligation distinct is its ability to be perceived as separately delivered products or services by the customer. When the performance obligation is substantial, a portion of the transaction price should be allocated to this obligation, and the associated revenue would be recognized over the expected life of the service.Prior to ASC 606, dealerships would accrue an expense for their “free for life” programs. Under the new standard, the programs should be recorded as deferred revenue for the estimated transaction price based off future events. If someone purchases a vehicle that comes with a free car wash for x amount of times a year, the dealership should estimate how many car washes the vehicle will receive over its’ life and recognize deferred revenue at the point of sale. Similarly, to the “free for life” programs are additional consideration for significant rewards/points programs. If they are material, the dealerships should defer a portion of the revenue recognized for service work for the amount of the future free service.
  3. Determine the transaction price: It is crucial to accurately estimate variable pricing at this stage, including discounts, gift cards, and chargebacks.
  4. Allocate the transaction price to the identified performance obligations: It is relatively easy to tie transaction prices when you have only one performance obligation. When a contract has more than one performance obligation; however, it is critical to allocate the transaction price based on their separate selling price.
  5. Recognize revenue as each performance obligation is satisfied: The complicated part at this stage is recognizing revenue at the correct time. New GAAP rules state that obligations met over a span of time, such as maintenance contracts or repair orders, need to be recognized over the period in which the obligation to the customer is satisfied. Then complications that arise under the new rules are reconciling add-ons that are not redeemed by the customer.One area this has come into play for auto dealers is extended warranties. Previously, revenue on the sale of an extended warranty was not recognized until received. Now, all potential consideration to be received must be estimated as variable consideration and recognized at the point of sale.

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If you need assistance or have questions about revenue recognition compliance, Selden Fox can help. Our team has considerable experience in this area and is here to assist. For additional information please call us at 630.954.1400 or click here to contact us.

AGC Survey Reveals Increasing Project Cancellations

The COVID-19 pandemic has created business conditions that few could have reasonably forecasted at the beginning of the year. The combination of stay at home orders forced business closures, and overall anxiety about COVID has left many dealing with radically new business conditions. The impact of these changes has altered consumer behavior creating a ripple effect across the economy.

For some, there are only minimal disruptions while others are unable to generate a profit due to the changing health and safety regulations. The construction industry has fared better than most as essential construction has been allowed to continue, but demand is down. According to the Association of General Contractors COVID-19 Survey 8th Edition (Midwest), 60% of respondents reported having contracts canceled for work scheduled to begin between June and August of this year. In addition, the prevailing reason for the cancellation was concern about COVID-19 danger surrounding projects. These insights are important as they reflect the state of the construction industry in the Midwest. To help clients, prospects, and others, Selden Fox has provided a summary of key survey findings here.

About the Survey

A total of 106 responses were received from industry companies across the Midwest. The survey was conducted online between June 9 and June 17, 2020, and respondents represent building, highway, utility infrastructure, and federal construction companies.

Key Survey Findings

  • Project Delays/Cancellations – The survey responses found that 51% of respondents indicated a project was halted which was underway in May or earlier. At the same time, 31% reported cancellations for projects scheduled to start in June, 15% cancellations for projects scheduled to start in July, and 14% cancellations for projects scheduled to start in August. The good news is that 28% reported no project delays or cancellations.
  • Reason for Cancellation/Delays – Beyond the sheer number of delays and cancellations its also important to understand why project statuses are being impacted. Survey responses indicated that owner concern about COVID-19 dangers surrounding the project was the leading reason (38% reported). Other reasons include the owner’s expectation of reduced project demand (34%), loss of current or expected tax, fee or toll revenue (21%), loss of private funding (19%), and to comply with state/local work stoppage requirements (17%).
  • Headcount Changes Due to Cancellations – Given the increasing number of project cancellations the AGC wanted to understand the corollary impact on headcount. It was found that 23% of respondents furloughed or terminated employees in May or earlier, 9% furloughed or terminated employees in June, and 20% anticipated needing to furlough or terminate employees over the following month. This stands in contrast to the 23% that added employees in May or earlier, 17% that added employees in June, and the 10% who expect to add employees in the coming month. These findings suggest some businesses were impacted harder than others and the time to recovery may be faster for them.
  • New “Pandemic Work” – Given the need to develop more capacity for certain health, medical, and other services, the survey asked about any new or expanded work. The results found that 78% of respondents have not received any new work, while 13% were awarded new medical projects in May or earlier, 6% medical projects in June, 6% other (non-medical) building projects in May or earlier, and 3% for other (non-medical) projects in June.
  • Return to “Normal” – The survey also wanted to understand how long respondents believe it will take before business returns to normal. The responses found that 38% believe six months or longer, 7% four to six months, 5% two to three months, 6% one month or less, and 18% simply do not know when things will return. What is interesting is 27% indicated their business is at, or exceeds, the levels from one year ago.

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The insights provided by the survey responses reveal just how much construction contractors have been impacted by COVID-19. Given the reported level of project delays and cancellations, it is over course imperative to review your cash flow planning strategies to ensure your business is well-positioned to weather unexpected surprises. If you have questions about the information outlined above or need assistance with a construction tax or audit issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.