Difficulty of care payments and employment taxes

Read this if you are a not-for-profit looking to learn more about tax filing deadlines.

State of New Hampshire: If your organization has a December 31 year-end, your annual report filing with the Charitable Trusts Unit and related payment are still due by May 15. If you are not ready to file, you may file Form NHCT-4 for an extension by May 15. If your organization has a June 30 year-end, you may email the State Attorney General to ask for additional time to July 15.

April 24, 2020, UPDATE: Commonwealth of Massachusetts: The Massachusetts Attorney General’s office has extended the Form PC filing requirement. All filing deadlines for annual charities filings for fiscal year 2019 have been extended by six months. This extension is in addition to the automatic six month extension that many not-for-profits receive. In addition, original signatures, photocopies of signatures, and e-signatures (e.g., DocuSign) will be accepted.

On April 9, 2020, the Internal Revenue Service (IRS) issued Notice 2020-23, its third round of tax filing relief guidance, which amplifies relief set forth in previously issued IRS notices providing relief to taxpayers affected by COVID-19. Notice 2020-23 also provides additional time to perform certain other actions. The Notice holds the special distinction of being the first to provide specific relief to not-for-profit organizations with return filing and tax payment obligations due between April 1 and July 15, 2020. The details are highlighted below:

Tax deadline extended to July 15, 2020
The Notice explicitly states that Form 990-T tax payment and filing obligations due during the period between April 1 and July 15 will be automatically extended to July 15, 2020. Additionally, Form 990-PF (and associated tax payments) as well as quarterly Federal estimated tax payments remitted via Form 990-W are also explicitly noted and are granted an extension to July 15.
    
While this is certainly good news, the more eagerly anticipated news is the Notice also includes “Affected Taxpayers” who are required to perform “Specified Time-Sensitive Actions” referenced in Revenue Procedure 2018-58. The Revenue Procedure specifically mentions exempt organizations as “Affected Taxpayers” required to perform “specified time-sensitive actions”—one such action being the filing of Form 990.

In summary (with the combined power of the Notice and Revenue Procedure), any entity with a Form 990, Form 990-EZ, Form 990-PF, Form 990-T, Form 990-W estimated tax filing requirement, Form 1120-POL or Form 4720 filing obligation due between April 1 and July 15, 2020 now have until July 15, 2020 to file. Needless to say this is very welcome news for an industry that like so many others, is being pushed to the brink during this turbulent and difficult time.

Additional extensions
Notice 2020-23 (with reference to Revenue Procedure 2018-58) also extends the due date of certain forms, notices, applications, and other exempt organization activities due between April 1 and July 15, 2020, until July 15, 2020 as noted below: 

• Community health needs assessments (CHNAs) and Implementation Strategies
• Application for Recognition of Exemption (Forms 1023 and 1024) 
• Section 501(h) Elections and Revocations (Form 5768)
• Information Return of US Persons with Respect to Certain Foreign Corporations (Form 5471)
• Political Organization Notices and Reports (Forms 8871 and 8872)
• Notification of Intent to Operate as a Section 501(c)(4) Organization (Form 8976) 

We are here to help
Please contact the BerryDunn not-for-profit tax team if you have any questions, or would like to discuss your specific situation.

Of all the changes that came with the sweeping Tax Cuts and Jobs Act (TCJA) in late 2017, none has prompted as big a response from our clients as the changes TCJA makes to the qualified parking deduction. Then, last month, the IRS issued its long-waited guidance on this code section in the form of Notice 2018-99. 

We've taken a look at both the the original provisions, and the new guidance, and have collected the salient points and things we think you need to consider this tax season. For not-for-profit organizations, visit my article here. And for-profit companies can read here.  

IRS Notice 2018-67 Hits the Charts
Last week, in addition to The Eagles Greatest Hits (1971-1975) album becoming the highest selling album of all time, overtaking Michael Jackson’s Thriller, the IRS issued Notice 2018-67—its first formal guidance on Internal Revenue Code Section 512(a)(6), one of two major code sections added by the Tax Cuts and Jobs Act of 2017 that directly impacts tax-exempt organizations. Will it too, be a big hit? It remains to be seen.

Section 512(a)(6) specifically deals with the reporting requirements for not-for-profit organizations carrying on multiple unrelated business income (UBI) activities. Here, we will summarize the notice and help you to gain an understanding of the IRS’s thoughts and anticipated approaches to implementing §512(a)(6).

While there have been some (not so quiet) grumblings from the not-for-profit sector about guidance on Code Section 512(a)(7) (aka the parking lot tax), unfortunately we still have not seen anything yet. With Notice 2018-67’s release last week, we’re optimistic that guidance may be on the way and will let you know as soon as we see anything from the IRS.

Before we dive in, it’s important to note last week’s notice is just that—a notice, not a Revenue Procedure or some other substantive legislation. While the notice can, and should be relied upon until we receive further guidance, everything in the notice is open to public comment and/or subject to change. With that, here are some highlights:

No More Netting
512(a)(6) requires the organization to calculate unrelated business taxable income (UBTI), including for purposes of determining any net operating loss (NOL) deduction, separately with respect to each such trade or business. The notice requires this separate reporting (or silo-ing) of activities in order to determine activities with net income from those with net losses.

Under the old rules, if an organization had two UBI activities in a given year, (e.g., one with $1,000 of net income and another with $1,000 net loss, you could simply net the two together on Form 990-T and report $0 UBTI for the year. That is no longer the case. From now on, you can effectively ignore activities with a current year loss, prompting the organization to report $1,000 as taxable UBI, and pay associated federal and state income taxes, while the activity with the $1,000 loss will get “hung-up” as an NOL specific to that activity and carried forward until said activity generates a net income.

Separate Trade or Business
So, how does one distinguish (or silo) a separate trade or business from another? The Treasury Department and IRS intend to propose some regulations in the near future, but for now recommend that organizations use a “reasonable good-faith interpretation”, which for now includes using the North American Industry Classification System (NAICS) in order to determine different UBI activities.

For those not familiar, the NAICS categorizes different lines of business with a six-digit code. For example, the NAICS code for renting* out a residential building or dwelling is 531110, while the code for operating a potato farm is 111211. While distinguishing residential rental activities from potato farming activities might be rather straight forward, the waters become muddier if an organization rents both a residential property and a nonresidential property (NAICS code 531120). Does this mean the organization has two separate UBI rental activities, or can both be grouped together as rental activities? The notice does not provide anything definitive, but rather is requesting public comments?we expect to see something more concrete once the public comment period is over.

*In the above example, we’re assuming the rental properties are debt-financed, prompting a portion of the rental activity to be treated as UBI.

UBI from Partnership Investments (Schedule K-1)
Notice 2018-67 does address how to categorize/group unrelated business income for organizations that receive more than one partnership K-1 with UBI reported. In short, if the Schedule K-1s the organization receives can meet either of the tests below, the organization may treat the partnership investments as a single activity/silo for UBI reporting purposes. The notice offers the following:

De Minimis Test
You can aggregate UBI from multiple K-1s together as long as the exempt organization holds directly no more than 2% of the profits interest and no more that 2% of the capital interest. These percentages can be found on the face of the Schedule K-1 from the Partnership and the notice states those percentages as shown can be used for this determination. Additionally, the notice allows organizations to use an average of beginning of year and end of year percentages for this determination.

Ex: If an organization receives a K-1 with UBI reported, and the beginning of year profit & capital percentages are 3%, and the end of year percentages are 1%, the average for the year is 2% (3% + 1% = 4%/2 = 2%). In this example, the K-1 meets the de minimis test.

There is a bit of a caveat here—when determining an exempt organization's partnership interest, the interest of a disqualified person (i.e. officers, directors, trustees, substantial contributors, and family members of any of those listed here), a supporting organization, or a controlled entity in the same partnership will be taken into account. Organizations need to review all K-1s received and inquire with the appropriate person(s) to determine if they meet the terms of the de minimis test.

Control Test
If an organization is not able to pass the de minimis test, you may instead use the control test. An organization meets the requirements of the control test if the exempt organization (i) directly holds no more than 20 percent of the capital interest; and (ii) does not have control or influence over the partnership.

When determining control or influence over the partnership, you need to apply all relevant facts and circumstances. The notice states:

“An exempt organization has control or influence if the exempt organization may require the partnership to perform, or may prevent the partnership from performing, any act that significantly affects the operations of the partnership. An exempt organization also has control or influence over a partnership if any of the exempt organization's officers, directors, trustees, or employees have rights to participate in the management of the partnership or conduct the partnership's business at any time, or if the exempt organization has the power to appoint or remove any of the partnership's officers, directors, trustees, or employees.”

As noted above, we recommend your organization review any K-1s you currently receive. It’s important to take a look at Line I1 and make sure your organization is listed here as “Exempt Organization”. All too often we see not-for-profit organizations listed as “Corporations”, which while usually technically correct, this designation is really for a for-profit corporation and could result in the organization not receiving the necessary information in order to determine what portion, if any, of income/loss is attributable to UBI.

Net Operating Losses
The notice also provides some guidance regarding the use of NOLs. The good news is that any pre-2018 NOLs are grandfathered under the old rules and can be used to offset total UBTI on Form 990-T.

Conversely, any NOLs generated post-2018 are going to be considered silo-specific, with the intent being that the NOL will only be applicable to the activity which gave rise to the loss. There is also a limitation on post-2018 NOLs, allowing you to use only 80% of the NOL for a given activity. Said another way, an activity that has net UBTI in a given year, even with post-2017 NOLs, will still potentially have an associated tax liability for the year.

Obviously, Notice 2018-67 provides a good baseline for general information, but the details will be forthcoming, and we will know then if they have a hit. Hopefully the IRS will not Take It To The Limit in terms of issuing formal guidance in regards to 512(a)(6) & (7). Until they receive further IRS guidance,  folks in the not-for-profit sector will not be able to Take It Easy or have any semblance of a Peaceful Easy Feeling. Stay tuned.

Benchmarking doesn’t need to be time and resource consuming. Read on for four simple steps you can take to improve efficiency and maximize resources.

Stop us if you’ve heard this one before (from your Board of Trustees or Finance Committee): “I wish there was a way we could benchmark ourselves against our competitors.”

Have you ever wrestled with how to benchmark? Or struggled to identify what the Board wants to measure? Organizations can fall short on implementing effective methods to benchmark accurately. The good news? With a planned approach, you can overcome traditional obstacles and create tools to increase efficiency, improve operations and reporting, and maintain and monitor a comfortable risk level. All of this can help create a competitive advantage — and it  isn’t as hard as you might think.

Even with a structured process, remember that benchmarking data has pitfalls, including:

• Peer data can be difficult to find. Some industries are better than others at tracking this information. Some collect too much data that isn’t relevant, making it hard to find the data that is.
   
• The data can be dated. By the time you close your books for the year and data is available, you’re at least six months into the next fiscal year. Knowing this, you can still build year-over-year trending models that you can measure consistently.
   
• The underlying data may be tainted. As much as we’d like to rely on financial data from other organization and industry surveys, there’s no guarantee that all participants have applied accounting principles consistently, or calculated inputs (e.g., full-time equivalents) in the same way, making comparisons inaccurate.

Despite these pitfalls, benchmarking is a useful tool for your organization. Benchmarking lets you take stock of your current financial condition and risk profile, identify areas for improvement and find a realistic and measurable plan to strengthen your organization.

Here are four steps to take to start a successful benchmarking program and overcome these pitfalls:

1. Benchmark against yourself. Use year-over-year and month-to-month data to identify trends, inconsistencies and unexplained changes. Once you have the information, you can see where you want to direct improvement efforts.
2. Look to industry/peer data. We’d love to tell you that all financial statements and survey inputs are created equally, but we can’t. By understanding the source of your information, and the potential strengths and weaknesses in the data (e.g., too few peers, different size organizations and markets, etc.), you will better know how to use it. Understanding the data source allows you to weigh metrics that are more susceptible to inconsistencies.

3. Identify what is important to your organization and focus on it. Remove data points that have little relevance for your organization. Trying to address too many measures is one of the primary reasons benchmarking fails. Identify key metrics you will target, and watch them over time. Remember, keeping it simple allows you to put resources where you need them most.

4. Use the data as a tool to guide decisions. Identify aspects of the organization that lie beyond your risk tolerance and then define specific steps for improvement.

Once you take these steps, you can add other measurement strategies, including stress testing, monthly reporting, and use in budgeting and forecasting. By taking the time to create and use an effective methodology, this competitive advantage can be yours. Want to learn more? Check out our resources for not-for-profit organizations here.

Read this if your CFO has recently departed, or if you're looking for a replacement.

With the post-Covid labor shortage, “the Great Resignation,” an aging workforce, and ongoing staffing concerns, almost every industry is facing challenges in hiring talented staff. To address these challenges, many organizations are hiring temporary or interim help—even for C-suite positions such as Chief Financial Officers (CFOs).

You may be thinking, “The CFO is a key business partner in advising and collaborating with the CEO and developing a long-term strategy for the organization; why would I hire a contractor to fill this most-important role?” Hiring an interim CFO may be a good option to consider in certain circumstances. Here are three situations where temporary help might be the best solution for your organization.

Your organization has grown

If your company has grown since you created your finance department, or your controller isn’t ready or suited for a promotion, bringing on an interim CFO can be a natural next step in your company’s evolution, without having to make a long-term commitment. It can allow you to take the time and fully understand what you need from the role — and what kind of person is the best fit for your company’s future.

BerryDunn's Kathy Parker, leader of the Boston-based Outsourced Accounting group, has worked with many companies to help them through periods of transition. "As companies grow, many need team members at various skill levels, which requires more money to pay for multiple full-time roles," she shared. "Obtaining interim CFO services allows a company to access different skill levels while paying a fraction of the cost. As the company grows, they can always scale its resources; the beauty of this model is the flexibility."

If your company is looking for greater financial skill or advice to expand into a new market, or turn around an underperforming division, you may want to bring on an outsourced CFO with a specific set of objectives and timeline in mind. You can bring someone on board to develop growth strategies, make course corrections, bring in new financing, and update operational processes, without necessarily needing to keep those skills in the organization once they finish their assignment. Your company benefits from this very specific skill set without the expense of having a talented but expensive resource on your permanent payroll.

Your CFO has resigned

The best-laid succession plans often go astray. If that’s the case when your CFO departs, your organization may need to outsource the CFO function to fill the gap. When your company loses the leader of company-wide financial functions, you may need to find someone who can come in with those skills and get right to work. While they may need guidance and support on specifics to your company, they should be able to adapt quickly and keep financial operations running smoothly. Articulating short-term goals and setting deadlines for naming a new CFO can help lay the foundation for a successful engagement.

You don’t have the budget for a full-time CFO

If your company is the right size to have a part-time CFO, outsourcing CFO functions can be less expensive than bringing on a full-time in-house CFO. Depending on your operational and financial rhythms, you may need the CFO role full-time in parts of the year, and not in others. Initially, an interim CFO can bring a new perspective from a professional who is coming in with fresh eyes and experience outside of your company.

After the immediate need or initial crisis passes, you can review your options. Once the temporary CFO’s agreement expires, you can bring someone new in depending on your needs, or keep the contract CFO in place by extending their assignment.

Considerations for hiring an interim CFO

Making the decision between hiring someone full-time or bringing in temporary contract help can be difficult. Although it oversimplifies the decision a bit, a good rule of thumb is: the more strategic the role will be, the more important it is that you have a long-term person in the job. CFOs can have a wide range of duties, including, but not limited to:

• Financial risk management, including planning and record-keeping
• Management of compliance and regulatory requirements
• Creating and monitoring reliable control systems
• Debt and equity financing
• Financial reporting to the Board of Directors

If the focus is primarily overseeing the financial functions of the organization and/or developing a skilled finance department, you can rely — at least initially — on a CFO for hire.

Regardless of what you choose to do, your decision will have an impact on the financial health of your organization — from avoiding finance department dissatisfaction or turnover to capitalizing on new market opportunities. Getting outside advice or a more objective view may be an important part of making the right choice for your company.

BerryDunn can help whether you need extra assistance in your office during peak times or interim leadership support during periods of transition. We offer the expertise of a fully staffed accounting department for short-term assignments or long-term engagements―so you can focus on your business. Meet our interim assistance experts.

So far in our value acceleration article series, we have talked about increasing the value of your business and building liquidity into your life starting with taking inventory of where you are at and aligning values, reducing risk, and increasing intangible value.

In this article, we are going to focus on planning and execution. How these action items are introduced and executed may be just as important as the action items themselves. We still need to protect value before we can help it grow. Let’s say you had a plan, a good plan, to sell your business and start a new one. Maybe a bed-and-breakfast on the coast? You’ve earmarked the 70% in cash proceeds to bolster your retirement accounts. The remaining 30% was designed to generate cash for the down payment on the bed-and-breakfast. And it is stuck in escrow or, worse yet, tied to an earn-out. Now, the waiting begins. When do you get to move on to the next phase? After all that hard work in the value acceleration process, you still didn’t get where you wanted to go. What went wrong?

Many business owners stumble at the end because they lack a master plan that incorporates their business action items and personal action items. Planning and execution in the value acceleration process was the focus of our conversation with a group of business owners and advisors on Thursday, April 11th.

Business valuation master plan steps to take

A master plan should include both business actions and personal actions. We uncovered a number of points that resonated with business owners in the room. Almost every business owner has some sort of action item related to employees, whether it’s hiring new employees, advancing employees into new roles, or helping employees succeed in their current roles. A review of financial practices may also benefit many businesses. For example, by revisiting variable vs. fixed costs, companies may improve their bidding process and enhance profitability. 

Master plan business improvement action items:

• Customer diversification and contract implementation
• Inventory management
• Use of relevant metrics and dashboards
• Financial history and projections
• Systems and process refinement

A comprehensive master plan should also include personal action items. Personal goals and objectives play a huge role in the actions taken by a business. As with the hypothetical bed-and-breakfast example, personal goals may influence your exit options and the selected deal structure. 

Master plan personal action items:

•  Family involvement in the business
•  Needs vs. wants
•  Development of an advisory team
•  Life after planning

A master plan incorporates all of the previously identified action items into an implementation timeline. Each master plan is different and reflects the underlying realities of the specific business. However, a practical framework to use as guidance is presented below.

The value acceleration process requires critical thinking and hard work. Just as important as identifying action items is creating a process to execute them effectively. Through proper planning and execution, we help our clients not only become wealthier but to use their wealth to better their lives. 

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

The COVID-19 emergency has caused CMS (Centers for Medicare & Medicaid Services) to expand eligibility for expedited payments to Medicare providers and suppliers for the duration of the public health emergency.

Accelerated payments have been available to providers/suppliers in the past due to a disruption in claims submission or claims processing, mainly due to natural disasters. Because of the COVID-19 public health emergency, CMS has expanded the accelerated payment program to provide necessary funds to eligible providers/suppliers who submit a request to their Medicare Administrative Contractor (MAC) and meet the required qualifications.

Eligibility requirements―Providers/suppliers who:

1. Have billed Medicare for claims within 180 days immediately prior to the date of signature on the provider’s/supplier’s request form,
2. Are not in bankruptcy,
3. Are not under active medical review or program integrity investigation, and
4. Do not have any outstanding delinquent Medicare overpayments.

Amount of payment:
Eligible providers/suppliers will request a specific amount for an accelerated payment. Most providers can request up to 100% of the Medicare payment amount for a three-month period. Inpatient acute care hospitals and certain other hospitals can request up to 100% of the Medicare payment amount for a six-month period. Critical access hospitals (CAHs) can request up to 125% of the Medicare payment for a six-month period.

Processing time:
CMS has indicated that MACs will work to review and issue payment within seven calendar days of receiving the request.

Repayment, recoupment, and reconciliation:
The December 2020 Bipartisan-Bicameral Omnibus COVID Relief Deal revised the repayment, recoupment and reconciliation timeline on the Medicare Advanced and Accelerated Payment Program as identified below. 

Application:
Applications for accelerated payments can be found on each MACs' website. CMS has established COVID-19 hotlines at each MAC that are operational Monday through Friday to assist providers with accelerated or advance payment concerns. Access your designated MACs' website here.

The MAC will review the application to ensure the eligibility requirements are met. The provider/supplier will be notified of approval or denial by mail or email. If the request is approved, the MAC will issue the accelerated payment within seven calendar days from the request.

When funding is approved, the requested amount is compared to a database with amounts calculated by Medicare and provides funding at the lessor of the two amounts. The current form allows the provider to request the maximum payment amount as calculated by CMS or a lesser specified amount.

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

Read this if you are a business owner or interested in upcoming changes to current tax law.

As Joe Biden prepares to be inaugurated as the 46th President of the United States, and Congress is now controlled by Democrats, his tax policy takes center stage.

Although the Democrats hold the presidency and both houses of Congress for the next two years, any changes in tax law may still have to be passed through budget reconciliation, because 60 votes in the Senate generally are needed to avoid that process. Both in 2017 and 2001, passing tax legislation through reconciliation meant that most of the changes were not permanent; that is, they expired within the 10-year budget window. Here is a comparison of current tax law with Biden’s proposed tax plan.

If you have questions about your specific situation, please contact us. We’re here to help.

Did you know that there was more than a 40% increase (from $4.3 billion to $6.0 billion) in civil penalties assessed by the IRS regarding employment tax, for the 2016 fiscal year?

A recent report from the Treasury Inspector General for Tax Administration calls for more cases to involve criminal investigation by the Department of Justice. This is significant because the requirements needed to prove a civil violation under Sec. 6672 are nearly identical to the requirements of a criminal violation under Sec. 7202, and a criminal violation can result, among other penalties, in imprisonment for up to five years.

The issue of employment taxes encompasses all businesses, even tax-exempt entities. For fiscal year 2016, employment tax issues were involved in over 26% of audits of exempt organizations. One main reason why employment tax is a major issue? Its role in funding our government: employment taxes make up $2.3 trillion dollars (70%) of the $3.3 trillion dollars collected by the IRS for fiscal year 2016.

And noncompliance is a major issue, with roughly $45.6 billion of unemployment taxes, interest and penalties still owed to the IRS as of December 2015. This trend of increasing noncompliance, combined with the vital role employment taxes has in funding our government helps explain why the IRS has increased focus and enforcement in this area.

Should your independent contractor truly be an employee? Did you properly report fringe benefits as taxable income to the individuals who received them? Knowing the answers to these questions can help you stay in compliance with the law. If you have any questions about your employment tax situation, or how we can help you ensure compliance on this and other tax issues, please contact your BerryDunn tax advisor.