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CARES Act provides hospitals with emergency funding and policy wins

03.31.20

CARES Act update:

As anticipated, the House of Representatives approved the CARES Act on March 27, 2020, and the President has signed the measure. The provisions highlighted in our prior summary remain intact in the final measure. 

So…how are the emergency relief funds in the legislation accessed by healthcare providers?

  • Public Health & Social Services Emergency Fund (PHSSEF): The guidance on how hospitals will access the $100 billion in PHSSEF funds to offset “COVID-19 related expenses and lost revenue” is expected to be released shortly. Keep an eye on this space for further updates as information becomes available.
  • Medicare Advanced Lump Sum or Periodic Interim Payments: Application is made through the Fiscal Intermediary (FI). It should be noted that healthcare organizations do not qualify if they are in bankruptcy, under active medical review or program integrity investigation, or have outstanding, delinquent Medicare overpayments.
  • SBA Paycheck Protection Program (PPP): This application process begins with your local lender. Do not hesitate—contact your lender immediately as it is anticipated that application volume will be tremendous. For more specifics on this program compiled by BerryDunn experts, visit our blog.

We will continue to provide updates as more information becomes available. In the meantime, please feel free to contact the hospital consulting team. Despite the current circumstances we remain available to support your needs. 


On March 25, 2020 the US Senate unanimously approved the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act (The “Act”). The White House has signaled that it will sign the measure as approved by the Senate. 

Major provisions of the proposed legislation include:

  • $100 billion for hospital “COVID-19 related expenses and lost revenue”
  • $275 million for rural hospitals, telehealth, poison control centers, and HIV/AIDS programs
  • $250 million for hospital capacity expansion and response
  • $150 million for modifications of existing hospital, nursing home, and “domiciliary facilities” undertaken as part of COVID-19 response

The CARES Act also includes the following targeted relief and payment modifications under the Medicare and Medicaid programs:

  • The Medicare 2% sequester will be suspended from May 1, 2020 through December 31, 2020. 
  • “Through the duration of the COVID-19 emergency period”, the Act will increase by 20% hospital payments for the treatment of patients admitted with COVID-19. The add-on applies to hospitals paid through the Inpatient Prospective Payment System.
  • $4 billion in scheduled cuts to Medicaid Disproportionate Share Hospital payments will be further delayed from May 22, 2020 to November 30, 2020.
  • Certain hospitals, including those designated as rural or frontier, have the option to request up to a six month advanced lump sum or periodic interim payments from Medicare. The payments will:
    1. Be based upon net payments represented by unbilled discharges or unpaid bills,
    2. Equal up to 100% of prior period payments, 125% for Critical Access Hospitals
    3. In terms of paying down the “no interest loans”, hospitals will be given a four month grace period to begin making payments and at least 12 months to fully liquidate the obligation.

Non-financing provisions contained in the Act that will impact hospital operations include:

  • Providing acute care hospitals the option to transfer patients out of their facilities and into alternative care settings to "prioritize resources needed to treat COVID-19 cases." That flexibility will come through the waiver of the Inpatient Rehabilitation Facility (IRF) three-hour rule, which requires patients to need at least three hours of intensive rehabilitation at least five days per week to be admitted to an IRF.
  • Allowing Long-Term Care Hospitals (LTCH) to maintain their designation even if more than 50% of their cases are less intensive and would temporarily pause LTCH site-neutral payments.
  • Suspending scheduled Medicare payment cuts for durable medical equipment during the length of the COVID-19 emergency period, to help patients transition from hospital to home.
  • Disallow Medicare beneficiary cost-sharing payments for any COVID-19 vaccine.
  • Ensuring that uninsured individuals could receive free COVID-19 tests "and related service" through any state Medicaid program that elects to enroll them.

Other emergency-period provisions that directly affect other entities but have implications for hospitals:

  • Affording $150 billion to states, territories, and tribal governments to cover their costs for responding to the coronavirus public health emergency.
  • Physician assistants, nurse practitioners, and other professionals will be allowed to order home health services for Medicare beneficiaries, to increase "beneficiary access to care in the safety of their home."
  • Requiring HHS to clarify guidance encouraging the use of telecommunications systems, including remote patient monitoring, for home health services.
  • Allowing qualified providers to use telehealth technologies to fulfill the hospice face-to-face recertification requirement.
  • Eliminating the requirement that a nephrologist conduct some of the required periodic evaluations of a home-dialysis patient face-to-face.
  • Allowing federally qualified health centers and rural health clinics to serve as a distant site for telehealth consultations.
  • Eliminating the telehealth requirement that physicians or other professionals have treated a patient in the past three years.
  • Allowing high-deductible health plans with a health savings account (HSA) to cover telehealth services before a patient reaches the deductible.
  • Allowing patients to use HSA and flexible spending accounts to buy over-the-counter medical products without a prescription.

For more information
If you have questions or need more information about your specific situation, please contact the hospital consulting team. We’re here to help. 
 

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Read this is you are a business owner or an advisor to business owners.

With continued uncertainty in the business environment stemming from the COVID-19 pandemic, now may be a good time to utilize trust, gift, and estate strategies in the transfer of privately held business interests. 

As discussed in our May 26, 2020 blog post 2020 estate strategies in times of uncertainty for privately held business owners, there may be opportunity to free up considerable portions of lifetime gift and estate tax exemption amounts through transfers due to suppressed values of privately held businesses, and the uncertainty surrounding the impact of the 2020 presidential election on tax rates and future exemption and exclusion thresholds. 

An element to consider when building on this opportunity is the ability to transfer non-controlling interests in a business. These interests are potentially subject to discounts for lack of control and lack of marketability. This may further reduce the overall value transferred through a given strategy, potentially offloading a larger percentage of ownership in a business while retaining large portions of the gift and estate lifetime exemption. Let’s focus on the discount for lack of control (DLOC).

Discount for lack of control

In the context of a hypothetical willing buyer and willing seller, the buyer may place a greater value on an ownership interest with the ability to make changes at their discretion, compared to an alternative ownership interest lacking control. Simply put, buyers like to be in control, and they will pay less for the investment if the interest lacks these characteristics. 

When valuing non-controlling business interests there is an inherent discount to full value recognized to reflect the fact that the subject interest does not hold a controlling position. As a result of this discount, the value of a non-controlling interest in a company will differ from the pro-rata value per share of the entire company. DLOCs alone commonly reduce the value of the transferred interest by 5% to 15%.

All else being equal, a non-controlling ownership position is less desirable (valuable) than a controlling position. This is because of the majority owner’s right to control any or all of the following activities: managing the assets or selecting agents for this purpose, controlling major business decisions, asset allocation choices, setting salary levels, admitting new investors, acquiring assets, selling the company, and declaring/paying distributions.
 
Market-based evidence of proxies for DLOCs can be found within the following subscription-based databases (including, but not limited to): 

  • Control premium studies published in the Mergerstat® Review series by FactSet Mergerstat/Business Valuation Resources
  • Closed-end fund data
  • The Partnership Profiles, Inc. Minority Interest Database and Executive Summary Report on Re-Sale Discounts for applicable entity types

In addition to these resources, to fully assess the degree of discount applicable to a subject interest, consider company-specific factors when estimating the DLOC. The degree of control for a subject interest may be impacted by relevant state statutes and the governing documents of the subject company. These factors are analyzed in conjunction with the current operational and financial policies established and implemented in practice by management to establish a comprehensive view on the applicable degree of discount.

Conclusion

Hypothetical business owners are knowledgeable of the facts and circumstances surrounding a business interest. They take a close look at what they are buying before they make an offer. Like most people, they like to be in charge, and are therefore generally not willing to pay the pro-rata value for a minority interest in a business when the interest lacks control. To assess an appropriate discount for lack of control, consider resources such as those referred to above, then ensure the selected discounts are appropriate based on the factors specific to the company and interest being valued. 

Our mission at BerryDunn remains constant in helping each client create, grow, and protect value. If you have questions about your unique situation, or would like more information, please contact the business valuation consulting team.

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Read this if you are a home health agency (HHA).

The Centers for Medicare & Medicaid Services (CMS) proposed rule, CY2021, was published on June 30, 2020. The proposed rule indicates that the Request for Advance Payment (RAP) currently permitted will be eliminated for all 30-day home health periods beginning on or after January 1, 2021. If adopted, this proposed rule will impact the timing of cash flow for HHAs. HHAs will no longer receive an advanced payment, but rather will not be paid until approximately 45-60 days after the period of care has begun. The change in timing of the payment should be considered as part of your HHA’s cash flow forecasting.

Note: Although the RAP payment has been eliminated, HHAs will still be required to submit a zero dollar RAP bill at the beginning of each 30-day period to establish home health services. 

Also included in the proposed rule is a transition from a RAP to a Notice of Admission (NOA) in 2022. This is similar to the Notice of Election under the hospice benefit, since there will no longer be a RAP. It is proposed that HHAs would submit a one-time NOA that establishes care in place of the RAP for the patient until discharged. 

There will be a payment penalty if either the zero dollar RAP in CY2021 or NOA in 2022 is not submitted within five calendar days from the start of care. The penalty is proposed to be a payment reduction of 1/13th to the wage and case-mix adjusted 30-day period of care reimbursement for each day late until submitted, reducing the total reimbursement for patient care. HHAs should be monitoring the timeliness of RAP submissions to be prepared for this proposed change and avoid potential reimbursement reduction if this proposed rule is passed. Read the entire proposed rule.

Please contact a BerryDunn Home Health team member to assist you with evaluating the cash flow impact these proposed changes may have to your organization. 

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Read this if you are a solar developer or investor.

One of the most frequent questions we get from solar project developers is: “Will my investors be able to use the tax credits and the depreciation losses?” The answer, as with many things related to taxes, is “it depends.” One of the biggest hurdles is navigating the passive activity loss rules. While this is a fairly complicated topic, and includes a lot more of “it depends,” we’ll hit some of the major highlights here.

Passive or active?

For tax purposes, activities are grouped as either passive or active activities. Income from these activities are generally treated the same, aggregated as part of the taxpayer’s total taxable income and taxed according to the applicable tax bracket. Losses from these activities are treated very differently, though. Losses from active activities can be used to offset all taxable income, whereas losses from passive activities can only offset passive income. If there is not enough passive income in a given year to fully offset passive losses, the losses become suspended and carried forward. The losses carry forward until either there is passive income to offset or the activity is disposed of (sold or otherwise no longer owned), in which case the suspended losses release in full in that year.

Similarly, the Investment Tax Credit (ITC) takes on the attributes of the activity in which it is being generated. So if the solar project is determined to be an active activity for the investor, the ITC would be active and available to offset tax on all sources of income. But if the activity is determined to be passive, the ITC would be limited to use against tax on passive income. For an investor that has not considered this prior to purchasing a stake in a solar project, a limitation on the credit the investor can use could mean a reduction of the expected return on investment, and an unwelcome surprise.

Portfolio income

It is also important to point out here that a third type of income, portfolio income, is a very common type of taxed income comprised of interest, dividends, and gains from investments. This falls into a separate category from the active/passive analysis, which is often misunderstood. A taxpayer with lots of dividend income who thinks it is passive income ends up with a rude awakening as that is actually portfolio income and does not allow for the offset of passive activity losses.

Material participation test

IRS Publication 925 details all of the rules surrounding passive activities and includes a set of seven tests to determine material participation. If the taxpayer satisfies at least one of the material participation tests, the taxpayer’s share of the activity is considered active and not passive. The tests are: 

  1. You participated in the activity for more than 500 hours. 
  2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
  3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
  4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test.
  5. You materially participated in the activity (other than by meeting this fifth test) for any five (whether or not consecutive) of the 10 immediately preceding tax years.
  6. The activity is a personal service activity in which you materially participated for any three (whether or not consecutive) preceding tax years.
  7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

Tests one through six are pretty cut and dry, but the totality of the circumstances test presented in number seven is very open to interpretation. While this allows you to make an argument in your favor, it also gives the IRS more latitude to disagree with you, making it the riskiest test to rely on.

The IRS defines “participation” as “[i]n general, any work you do in connection with an activity in which you own an interest.” This does not include work that would be considered work only done by an investor – such as reviewing operations, preparing reports for your own use, or monitoring the finances or operations of the activity. The work in consideration must also not be work that is customarily done by the owner of that type of activity, nor your only reason for doing the work being to avoid treatment of the activity as passive.

While a contemporaneous log is not required to prove material participation, it is always a good idea to keep track of the work and hours you are performing on behalf of the activity in order to substantiate material participation. This is typically the first thing the IRS asks for in the event of an audit. 

As you can see from the seven tests, there is also room to switch between active and passive treatment in any applicable year. So it is important that you take the ITC in the year the project goes in service and the ITC is generated. If you are passive in year one and end up with suspended credits and or losses, a subsequent switch to active status would not change the attributes of those suspended items―they would remain passive.

Lastly, and important to note, this determination is made at the individual taxpayer level. Project investors need to work with their tax advisors and legal counsel to understand their personal tax situation before investing in a project. Depending on the individual situation, an active or a passive treatment may be more beneficial, as everyone’s tax situation is different. The most important thing is knowing ahead of time so that planning can be done and expectations can be set. No one likes a tax surprise!

If you have any questions about your specific situation or would like to know more, please contact the team. We’re here to help. 

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Passive activity loss limitation rules and solar project investment

Read this if you are a Maine business or organization that has been affected by COVID-19. 

The State of Maine has released a $200 million Maine Economic Recovery Grant Program for companies and organizations affected by the COVID-19 pandemic. Here is a brief outline of the program from the state, and a list of eligibility requirements. 

“The State of Maine plans to use CARES Act relief funding to help our economy recover from the impacts of the global pandemic by supporting Maine-based businesses and non-profit organizations through an Economic Recovery Grant Program. The funding originates from the federal Coronavirus Relief Fund and will be awarded in the form of grants to directly alleviate the disruption of operations suffered by Maine’s small businesses and non-profits as a result of the COVID-19 pandemic. The Maine Department of Economic & Community Development has been working closely with affected Maine organizations since the beginning of this crisis and has gathered feedback from all sectors on the current challenges.”

Eligibility requirements for the program from the state

To qualify for a Maine Economic Recovery Grant your business/organization must: 

  • Demonstrate a need for financial relief based on lost revenues minus expenses incurred since March 1, 2020 due to COVID-19 impacts or related public health response; 
  • Employ a combined total of 50 or fewer employees and contract employees;
  • Have significant operations in Maine (business/organization headquartered in Maine or have a minimum of 50% of employees and contract employees based in Maine); 
  • Have been in operation for at least one year before August 1, 2020; 
  • Be in good standing with the Maine Department of Labor; 
  • Be current and in good standing with all Maine state payroll taxes, sales taxes, and state income taxes (as applicable) through July 31, 2020;
  • Not be in bankruptcy; 
  • Not have permanently ceased all operations; 
  • Be in consistent compliance and not be under any current or past enforcement action with COVID-19 Prevention Checklist Requirements; and 
  • Be a for-profit business or non-profit organization, except
    • Professional services 
    • 501(c)(4), 501(c)(6) organizations that lobby 
    • K-12 schools, including charter, public and private
    • Municipalities, municipal subdivisions, and other government agencies 
    • Assisted living and retirement communities 
    • Nursing homes
    • Foundations and charitable trusts 
    • Trade associations 
    • Credit unions
    • Insurance trusts
    • Scholarship funds and programs 
    • Gambling 
    • Adult entertainment 
    • Country clubs, golf clubs, other private clubs 
    • Cemetery trusts and associations 
    • Fraternal orders 
    • Hospitals, nursing facilities, institutions of higher education, and child care organizations (Alternate funding available through the Department of Education and Department of Health and Human Services for hospitals, nursing facilities, child care organizations, and institutions of higher education.)

For more information

If you feel you qualify, you can find more details and the application here. If you have questions about your eligibility, please contact us. We’re here to help. 

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Read this if you are an engineering or architecture firm working with government agencies reimbursing overhead established in an overhead rate schedule based on direct labor.

It seems everyone is both anxious to gain forgiveness of their PPP loans and worried about the ramifications of requesting and being granted forgiveness. There is so much you need to consider to understand the potential impact forgiveness may have on your future cash flow and revenues. Let’s focus, though, on your overhead rate.

Some things to consider:

  • PPP loan forgiveness may significantly reduce your overhead rate. As a result, future contracts and related revenues from federal, state, or local government agencies will be impacted. 

    Federal Acquisition Regulation (FAR) 31.201-5 dictates that the applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by the contractor shall be credited to the government. If the credit will be used to reduce the indirect labor costs and rent, some of the largest costs of A/E firms, the overhead rate might be reduced by as much as 25% to 30%. 
  • Guidance on the timing of credit offset is still unclear.

    Do you offset 2020 expenses for forgiveness not settled until 2021 to better match cash flows and credit expenses relevant to forgiveness? Or reflect the forgiveness in the Schedule during the period forgiveness was formally received?
  • The IRS is currently communicating that the costs incurred to gain PPP loan forgiveness will not be deductible expenses, thus increasing 2020 taxable income.

    If your company is in a taxable position, federal income taxes will increase as a result and impact cash flows. And remember, federal income taxes are unallowable costs in overhead rate schedules under FAR Part 31.201-41.

Depending on the concentration of your contracts with federal agencies, the significance of overhead rate reimbursement on contract revenues and expectations for growth, it may actually be more beneficial to pay the loan back instead of asking for forgiveness.

The Department of Defense (DOD) weighs in:

Often the first agency to establish policy or make changes, the DOD has issued guidance in the form of answers to FAQs about CARES Act impacts on DOD pricing and contracting. Q23 specifically addresses the issue of PPP loan forgiveness. It states, “to the extent that PPP credits are allocable to costs allowable under contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments that are forgiven.” You can read that and other CARES Act credit guidance here. Even if you don’t directly work with DoD, other federal agencies and state DOT’s generally adopt DoD’s guidance. 

What if we apply forgiveness credit against direct labor? 

You might wonder, why not just apply the credit against direct and indirect labor in proportion to the actual payroll paid during the PPP loan covered period? If this was possible, the overhead rate might actually increase. Unfortunately, billing the government for direct labor costs offset on the overhead rate schedule with the credit of PPP loan forgiveness would violate FAR Part 31 cost principles. Since you can’t bill for credited costs, revenues for contracts with government agencies would be further reduced. 

We advise a wait and see approach.

The best action plan to do right now is to wait for better and clearer guidance. Industry associations such as ACEC are advocating for more favorable PPP loan forgiveness treatment. Furthermore, there are still quite a few unanswered questions by the SBA. 

If you have any questions related to your overhead rate and the impact of PPP loan forgiveness on your revenue from contracts with government agencies, please contact us. We’re here to help. 


 

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PPP loan forgiveness will likely impact your overhead rate!