What Business Owners Should Know About Recent Accounting Changes
Whether it is working from home, virtual school, or curbside pickup at your favorite restaurant, 2020 has had no shortages of changes and required adaptations. Accounting in 2020 is not exempt from these changes. Below are four changes business owners need to know about related to accounting changes in 2020.
1. Revenue recognition (ASC 606) was delayed. One of the Financial Accounting Standards Board’s (FASB) largest undertakings in recent history was finally set to go into effect for non-public entities with years ending December 31, 2019, only to be delayed one more time in June of 2020.
The problem? In the first six months of 2020, many companies wrapped up 2019 accounting, which included implementing ASC 606. Companies delayed in finishing 2019 due to COVID or with fiscal year ends in 2020 may not have implemented yet; however, another delay is unlikely. Either way, companies need to understand the effect the standard has on their financial statement. Perhaps the changes to 2019 were minimal (or unrecorded because of the delay), but as business slows and COVID’s effect on the company becomes more clear, it is crucial to understand the change and begin to plan for any year-end adjustment. Bank covenants may be harder to reach in 2020, and having a late change in revenue recognition may be hard to explain to the bank.
2. Revenue recognition rules changed. As noted above, ASC 606 is the standard everyone will use for 2020. The standard removed existing standards and many industry-specific standards from Generally Accepted Accounting Principles. This means companies need to be careful to accelerate or change their revenue recognition policies without fully understating ASC 606. A delay in completing work due to supply shortages or a delay in payment from customers could affect when revenue can be recognized.
3. In June, FASB also delayed the new lease standard (ASC 842). FASB had already delayed the standard by one year in November of 2019. The June delay makes the ever-pending Lease standard effective for years beginning after December 15, 2021, effectively 12/31/2022 year ends. However, a welcome delay from a reporting standpoint. One of the most significant issues with the lease standard is it will be affected by leases entered into now. ASC 842 requires virtually all leases to be added to the balance sheet as a lease asset and lease liability. Large leases or numerous leases could significantly change the look and feel of a balance sheet. COVID may change business practices between purchasing and leasing equipment. Leasing may become more enticing, but a lease signed today may end up balance sheet in the future.
4. Paycheck Protecting Program Loans. The CARES Act introduced companies to Paycheck Protection Program (PPP) loans. These loans have been beneficial to many companies; however, they have also been an administrative nightmare for banks, the SBA, and Congress. Slow and changing information has made the loans complicated to account for. The AICPA has sited four standards as options to determine the timing of recording the forgiveness of debt. The most conservative approach is to wait for the SBA to forgive the debt before recording the revenue officially. However, this could happen in a different fiscal year of receipt of the funds and payment of related payroll expenses.
Companies need to review their PPP related expenses and determine when is the most appropriate time to record the forgiveness. There will be advantages and disadvantages to recording the forgiveness in either year. Working through those is key to determining the right time for your company to record the forgiveness. Items to consider include taxable income levels, extra expenses incurred in one year, overall business outlook, and future operations plans. PPP guidelines are in a constant state of change, making planning complicated.
Questions about recent accounting changes?
Accounting has not been left untouched in the changes required by COVID. Keeping up to date on the changing accounting landscape is vital for business. You are invited to join us for a free live webinar discussing how COVID-19 has changed business standards such as revenue recognition, leases, and accounting for PPP loans.
WHY SHOULD YOU ATTEND?
Be proactive with pending changes, so you have no surprises at the end of the year related to accounting changes and shifts in the PPP loan.
The Internal Revenue Service (IRS) finalized guidance regarding business interest expense limitations. Here is an overview of the rules.
Background of business interest expense limitations
The business interest expense limitation was created by the Tax Cuts and Jobs Act (TCJA) of 2017 and subsequently modified by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020. The TCJA established that for tax years 2018 and beyond, deductions for business interest expenses are limited to the total of three items:
Business interest income
30% of adjusted taxable income (ATI)
The interest expense of the taxpayer’s floor plan financing
The CARES Act made two changes: it adjusted item number two to 50% for tax years 2019 and 2020 and made it allowable for taxpayers to calculate their 2020 limit using their 2019 ATI. ,
New IRS Regulations
The IRS regulations offer instructions in four areas:
Determining the interest expense limitation
The definition of interest, for the purposes of the limitation
Who is subject to the limitation
How the limitation applies in various special cases
The guidance will go into effect 60 days from the date of its publication in the Federal Register, which has yet to be announced.
Additional Proposed Regulations
In addition to the new final guidance, the IRS published other proposed regulations regarding business interest expense deduction limitation issues, including how to allocate interest expense for passthrough entities and more. This proposed guidance’s release opens up a 60-day period for written and electronic comment submission and requests for a public hearing regarding the guidance.
Questions about Business Interest Expense Limitations?
We have over 45 years of experience helping businesses in numerous industries effectively manage taxes and their business. If you would like to learn more about how we can help, contact a Smith Schafer professional.
On August 8, 2020, President Trump issued an executive order and three memoranda providing or extending COVID-19 relief to individuals and organizations. On August 28, 2020, the Department of Treasury and Internal Revenue Service issued guidance for implementing the memorandum’s payroll tax deferral portion. Notice 2020-65 makes relief available to employers for wages paid from September 1, 2020, through December 31, 2020. This brief notice covers the deferral basics, but more questions remain unanswered. Here is what this notice does tell us.
Q: Which employers qualify for the relief?
A:Any employer affected by the COVID-19 emergency previously declared under section 501(b) of the Robert T Stafford Disaster Relief and Emergency Assistance Act and required to withhold Social Security taxes (6.2 percent).
Q: Applicable wages?
A:Any taxable wage or compensation less than $4,000 per bi-weekly pay period. Eligibility is determined by the pay period for each employee. An employee making more than $4,000 in any given bi-weekly payroll is not eligible for that payroll, but is eligible for previous or subsequent payroll periods as long as the given period’s wage is not over $4,000.
Q: Due date of deferred taxes?
A: The deferred taxes will be due ratably over the period of January 1 to April 30, 2021. During this period, an employer will withhold the deferred tax amount and remit to the appropriate agency. Remittance of taxes will be penalty and interest-free until May 1, 2021. Any unpaid taxes at that point will be subject to penalty and interest.
Q: Who is responsible for paying the deferred taxes?
A:The employer remains responsible for collecting and remitting any deferred taxes. The guidance does not address how employers should treat the deferred taxes of employees who later quit.
Q: Is the payroll tax deferral optional?
A:We believe the deferral is optional as the guidance states it is made “available,” but is silent as to if the deferral is mandatory. Currently, there is no forgiveness of the taxes; this is only a deferral. If an employer withholds the tax from employee pay, these amounts must be remitted using the employer’s regular deposit schedule.
Q: What recordkeeping is required?
A:Reconciliation of the withholding and deferrals will be required and happen on Form 941 starting in third-quarter 2020. The Form has currently been issued as a draft.
If an employer defers the employee’s social security, it is recommended that a signed statement is retained in the employment file identifying the repayment obligation. Detailed records of withholding deferrals for each employee, including which payroll periods the employee is eligible, will be required. Specific tracking, by employee, of repayment, will also be required starting in 2021.
Q: What if an employee leaves employment or reduces hours in 2021?
A: The guidance provided does not discuss what happens if an employee terminates employment. It also does not provide insight into when an employee’s earnings decrease and are not enough to cover the tax deferral owed in 2021. Guidance is unclear if the employer will be liable for the deferral amounts.
Many questions remain unanswered after the issuance of Notice 2020-65, but we anticipate more guidance to be forthcoming. Stay tuned for future updates from us as they are available.
On August 8, 2020, President Trump issued an executive order and three memoranda providing or extending COVID-19 relief to individuals and organizations.
The executive order directs various Cabinet and executive agency heads to find means of limiting evictions and foreclosures. The three memoranda provide for the deferral of:
Collection of payroll taxes
Supplemental unemployment payments
An extension of student loan payment deferments
Reduction of interest rates for student loans
At this time, many questions exist surrounding these directives, and additional guidance is needed before implementation.
Payroll Tax Deferral
The payroll tax memorandum directs the Secretary of the Treasury to defer withholding, deposit, and payment of the employee portion of social security tax on wages or compensation paid from September 1 through December 31, 2020. The deferral includes only the 6.2 percent social security portion of taxes under the Federal Insurance Contribution Act for employees with bi-weekly pre-tax income less than about $4,000.
Amounts deferred will be without penalties, interest, increased amounts, or additions to tax. The payroll tax memorandum directs the Secretary of the Treasury to issue guidance to implement the memo and find ways to eliminate the deferred tax.
Note: The payroll tax memorandum provides only for the deferral of the employee portion of the social security tax. If the Secretary of Treasury does not eliminate the deferred tax, an affected employee will be required to pay any remaining deferred tax. Until further guidance is issued, it is uncertain how an employee will pay the deferred tax following the end of the deferral period.
The memorandum raises several questions for employers, including:
Is it voluntary?
How do you determine which employees are eligible?
When will the tax be due?
How do you collect the deferred tax from employees?
When will the tax be due in the future?
Will the software providers be ready?
When will additional guidance be available?
We expect the Department of Treasury and IRS to issue additional guidance soon. We recommend employers continue to withhold and remit the employee portion of social security tax as usual.
Unemployment Insurance Benefits/Disaster Relief
In March, the CARES Act created the Federal Pandemic Unemployment Compensation Program, which provided an additional $600 per week to individuals collecting regular unemployment compensation benefits. This benefit expired on July 31, 2020.
The disaster relief memorandum directs the Federal Emergency Management Agency to provide benefits from the Department of Homeland Security’s Disaster Relief Fund. It advises states to use their Coronavirus Relief Fund allocation to provide financial relief to unemployed Americans affected by COVID-19, principally through an up to $400 per week supplemental unemployment compensation benefit. Seventy-five percent of the cost of the benefit shall come from those federal funds. State governments will be responsible for the remaining 25 percent, subject to an agreement between the federal government and the state concerning the program and funding.
The disaster relief memorandum makes two significant changes in eligibility compared to the $600 supplemental benefit under the CARES Act.
It limits eligibility to individuals who receive at least $100 per week in unemployment compensation assistance.
It requires the individual to certify that their lost wages are attributable to disruptions caused by COVID-19.
Student Loan Payment Relief
The student loan memorandum advises the Secretary of Education to continue student loan payment relief during the COVID-19 pandemic for specific federal student loans held by the Department of Education. It also directs the Secretary of Education to continue the temporary waiver of all interest on student loans until December 31, 2020. This memorandum further provides that student loan borrowers may continue to make payments if they wish to do so.
The housing executive order directs Cabinet members to consider steps to take action necessary to minimize residential evictions and foreclosures during the ongoing COVID-19 national emergency. The order advises cabinet secretaries to consider how to halt evictions and foreclosures temporarily and look at ways to provide temporary financial assistance to renters and homeowners struggling to make monthly payments, including providing Federal funds to landlords.
Based on the need for significant additional guidance at this time, we cannot recommend implementing the payroll tax deferral. We are monitoring developments closely. As more guidance is provided, Smith Schafer will keep you informed.
Rethink how work gets done. Remote. Secure. Collaborative. Productive.
Managing through the COVID-19 business disruption, you have been adapting and stretching your creativity to safeguard business continuity. You are learning what it takes to thrive in the new normal of business.
While no one can know how things will turn out, we want to provide a few ideas on bringing business back in the post-coronavirus world.
This time of disruption is also one of opportunity
If there is one thing we learned together, resilient businesses recognize opportunities in times of vulnerability. We learned how to work productively from home and do business virtually without missing a beat. We were forced to transform our business models as part of a disaster recovery response and are better for it.
Smith Schafer is a forward-thinking CPA and consulting firm, helping clients to be in a position of strength in the new reality of doing business today.
Embrace what you’ve learned. Rethink how work gets done. And let Smith Schafer help you prepare for tomorrow.
Help with accounting and financial tasks.
Assistance with PPP loans.
Advice on buying or selling a business.
Secure access to tax documents, financial statements, and other important information through our client portal.
Reliable and remote auditing and internal controls.
Client Testimonials Amidst COVID-19
We encourage you to reach out to your Smith Schafer advisor to discuss what you can do to get your business on the firmest footing possible as you approach returning to the workplace.
The Minnesota Legislature passed the Small Business Relief Grants Program. The program approved approximately $62 million for grants to Minnesota small businesses that have been impacted by the pandemic.
SMALL BUSINESSES CAN APPLY FOR RELIEF GRANTS
The Minnesota Small Business Relief Grant Application went live yesterday, June 23, 2020. Businesses may apply for the $10,000 grant if the following are met:
Minnesota company with Minnesota owners.
Total business revenue between March 1, 2020 and May 31, 2020, declined by 10 percent or more as a result of COVID-19, compared to the same period in 2019.
Less than 50 employees.
The grant is based on a lottery system, and businesses do not need to attach any documents to apply. However, if you receive the grant, documentation will be required.
The application must be completed online and is available on the MN Employment and Economic Development Website.