Skip to Main Content

insightsarticles

Guidance from the US Department of Education Dear Colleague Letter

03.23.20

In early March 2020, the US Department of Education (ED) issued a Dear Colleague Letter, “Guidance for interruptions of study related to Coronavirus (COVID-19),” posting a subsequent update March 20 to include the document “Frequently Asked Questions Related to COVID-19.” The information below has been excerpted directly from the letter and compiled with the needs of our higher education clients in mind.

This electronic announcement addresses concerns regarding how higher education leaders should comply with Title IV, Higher Education Act (HEA) policies for students whose activities are impacted by the coronavirus and COVID-19:

  • Either directly because the student is ill or quarantined, or 
  • Indirectly because the student was recalled from travel-abroad experiences, can no longer participate in internships or clinical rotations, or attends a campus that has temporarily suspended operations.

This information provides some flexibility for schools working to help students complete the term in which they are currently enrolled. Some of the most important changes to note:

  • Federal Work Study (FWS)
    For students enrolled and performing FWS at a campus that must close due to COVID-19, or for a FWS student who works for an employer that closes as a result of COVID-19, the institution may continue paying the student federal work-study wages during that closure if it occurred after the beginning of the term, the institution is continuing to pay its other employees (including faculty and staff), and the institution continues to meet its institutional wage share requirement.
  • Length of academic year
    If at any point an institution determines it will close as the result of a campus health emergency, it may contact the school participation team to request a temporary reduction in the length of its academic year.
  • Professional judgement
    Financial aid administrators (FAA) have statutory authority to use professional judgement to make adjustments on a case-by-case basis to the cost of attendance or to the data elements used in calculating the EFC to reflect a student’s special circumstances. The use of professional judgement where students and/or their families have been affected by COVID-19 is permitted, such as in the case where an employer closes for a period of time as a result of COVID-19. 
  • Reentering the same payment period
    If an institution that has closed subsequently re-opens during the same payment period or period of enrollment, and permits students to continue coursework that they were taking at the time of the closure, students that return to class at that time are considered to have reentered the same period and retain eligibility for Title IV aid that they were otherwise eligible to receive before the closure.

We highly recommend you read the full letter, as it outlines additional important details and includes recently added FAQ documents.

Questions? Please contact Renee Bishop, Sarah Belliveau, or Mark LaPrade. We’re here to help.

For further reading
Guidance for interruptions of study related to Coronavirus (COVID-19) 
FAQs
COVID-19 ("Coronavirus") Information and Resources for Schools and School Personnel
 

Related Services

Related Professionals

Principals

Read this if you are a plan sponsor of employee benefit plans.

This article is the seventh in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here.

The COVID-19 pandemic has challenged individuals and organizations to continue operating during a time where face-to-face interaction may not be plausible, and access to organizational resources may be restricted. However, life has not stopped, and participants in your employee benefit plan may continue to make important decisions based on their financial needs. 

To help you prepare for a potential IRS examination, we’ve listed some requirements for participants to receive Required Minimum Distributions (RMD), hardship distributions, and coronavirus-related distributions, recommendations of actions you can perform, and documentation to retain as added internal controls. 

Required Minimum Distributions

Recently, the IRS issued a memo regarding missing participants, beneficiaries, and RMDs for 403(b) plans. If an employee benefit plan is subject to the RMD rules of Code Section 401(a)(9), then distributions of a participant’s accrued benefits must commence April 1 of the calendar year following the later of 1) the participant attaining age 70½ or 2) the participant’s severance from employment. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, RMDs was temporarily waived for retirement plans for 2020. This change applied to defined contribution plans, such as 401(k), 403(b), 457(b) plans and IRAs. 

In addition, RMDs were waived for IRA owners who turned 70½ in 2019 and were required to take an RMD by April 1, 2020 and have not yet done so. Do note the waiver will not alter a participant’s required beginning date for purposes of applying the minimum distribution rules in future periods. Although you may be applying this waiver during 2020, it is important you prepare to make RMDs once the waiver period ends by verifying participants eligible to receive RMDs are not “missing.”

There are instances in which plans have been unable to make distributions to a terminated participant due to an inability to locate the participant. In this situation, the responsible plan fiduciary should take the following actions in applying the RMD rules:

  1. Search the plan and any related plan, sponsor and publicly available records and/or directories for alternative contact information;
  2. Use any of the following search methods to locate the participant: a commercial locator service, a credit reporting agency, or a proprietary internet search tool for locating individuals; and
  3. Attempt to initiate contact via certified mail sent to the participant’s last known mailing address, and/or through any other appropriate means for any known address(es) or contact information, including email addresses and telephone numbers.

If the plan is selected for audit by the IRS and the above actions have been taken and documented by the plan, the IRS instructs employee plan examiners not to challenge the plan for violation of the RMD rules. If the plan is unable to demonstrate that the above actions have been taken, the employee plan examiners may challenge the plan for violation of the RMD rules.

We typically recommend management review plan records to determine which participants have attained age 70½. Based on the guidelines outlined above, we recommend plans document the actions they have taken to contact these participants and/or their beneficiaries.

Hardship distribution rules

A common issue we identify during our employee benefit plan audits is that the rules for hardship distributions are not always followed by the plan sponsor. If the plan allows hardship withdrawals, they should only be provided if (1) the withdrawal is due to an immediate and heavy financial need, (2) the withdrawal must be necessary to satisfy the need (you have no other funds or ways to meet the need), and (3) the withdrawal must not exceed the amount needed. You may have noted we did not add the plan participant must have first obtained all distribution or nontaxable loans available under the plan to the list of requirements above. This is due to the recently enacted Bipartisan Budget Act of 2018 (the Act), which removed the requirement to obtain available plan loans prior to requesting a hardship. Thus, the removal of this requirement may increase the number of eligible participants to receive hardship withdrawals, if the three requirements noted are satisfied. The plan sponsor should maintain documentation the requirements for the hardship withdrawal have been met before issuing the hardship withdrawal.

The IRS considers the following as acceptable reasons for a hardship withdrawal:

  1. Un-reimbursed medical expenses for the employee, the employee’s spouse, dependents or beneficiary.
  2. Purchase of an employee's principal residence.
  3. Payment of college tuition and related educational costs such as room and board for the next 12 months for the employee, the employee’s spouse, dependents, beneficiary, or children who are no longer dependents.
  4. Payments necessary to prevent eviction of the employee from his/her home, or foreclosure on the mortgage of the principal residence.
  5. For funeral expenses for the employee, the employee’s spouse, children, dependents or beneficiary.
  6. Certain expenses for the repair of damage to the employee's principal residence.
  7. Expenses and losses incurred by the employee as a result of a disaster declared by the Federal Emergency Management Agency (FEMA), provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster.

Prior to the enactment of the Act, once a hardship withdrawal was taken, the plan participant would not be allowed to contribute to the plan for six months following the withdrawal. The Act repealed the six-month suspension of elective deferrals, thus plan participants are allowed to continue making contributions to the plan in the pay period following the hardship withdrawal. Prior to the Act we had seen instances where the plan participant was allowed to continue making contributions after the hardship withdrawal was taken. Now we would expect participants who received a hardship distribution to continue making elective deferrals following receipt of the distribution.

Coronavirus-related distributions

Under section 2202 of the CARES Act, qualified participants who are diagnosed with coronavirus, whose spouse or dependent is diagnosed with coronavirus, or who experience adverse financial consequences due to certain virus-related events including quarantine, furlough, or layoff, having hours reduced, or losing child care, are eligible to receive a coronavirus-related distribution. 

Distributions are considered coronavirus-related distributions if the participant or his/her spouse or dependent has experienced adverse effects noted above due to the coronavirus, the distributions do not exceed $100,000 in the aggregate, and the distributions were taken on or after January 1, 2020 and on or before December 30, 2020.  Such distributions are not subject to the 10% penalty tax under Internal Revenue Code (IRC) § 72(t), and participants have the option of including their distributions in income ratably over a three year period, or the entire amount, starting in the year the distribution was received. Such distributions are exempt from the IRC § 402(f) notice requirement, which explains rollover rules, as well as the effects of rolling a distribution to a qualifying IRA and the effects of not rolling it over. Also, participants can be exempt from owing federal taxes by repaying the coronavirus-related distribution. 

Participants receiving this distribution have a three-year window, starting on the distribution date, to contribute up to the full amount of the distribution to an eligible retirement plan as if the contribution were a timely rollover of an eligible rollover distribution. So, if a participant were to include the distribution amount ratably over the three-year period (2020 – 2022), and the full amount of the distribution was repaid to an eligible retirement plan in 2022, the participant may file amended federal income tax returns for 2020 and 2021 to claim a refund for taxes paid on the income included from the distributions, and the participant will not be required to include any amount in income in 2022. We recommend the plan sponsor maintain documentation supporting the participant was eligible to receive the coronavirus-related distribution. 

There is much uncertainty due to the current status of the COVID-19 pandemic, and this has forced many of our clients to review and alter their control environments to maintain effective operations. With this uncertainty comes changes to guidance and treatment of plan transactions. We have provided our current understanding of the guidance the IRS has provided for the treatment surrounding distributions, specifically RMDs, hardship distributions, and coronavirus-related distributions. If you and your team have any additional questions which may be specific to your organization or plan, an expert from our Employee Benefits Audit team will be gladly willing to assist you. 
 

Article
Defined contribution plan distributions: Considerations and recommendations

Read this if you are at a not-for-profit organization.

There is no question that cryptocurrency has been gaining in popularity over the past few years. It may be hard to believe, but Bitcoin, the first and most commonly known form of cryptocurrency, has been around since the good old days of 2009! What was once only seen as a quasi-asset traded solely on the dark web by a handful of private yet savvy investors has recently begun to step out into the light. With this newly found mainstream popularity come many questions from the not-for-profit (NFP) sector about how their organizations should proceed when it comes to donations of cryptocurrency, and how they might benefit (or not) from doing so. 

This article will answer some of the questions we’ve received from clients in this area and attempt to shed some light on the tax reporting and compliance requirements around cryptocurrency donations for not-for-profit organizations, as well as other topics not-for-profit organizations should consider before dipping their toes into the crypto current.

So, what exactly is cryptocurrency? 

Cryptocurrency is a digital asset. It generally has no physical form (no actual coins or paper money). Further, it is not issued by a central bank and is largely unregulated. Its value is dependent upon many factors, the largest being supply and demand.

Can a not-for-profit organization accept cryptocurrency as a donation?

Yes! For tax purposes, cryptocurrency is considered noncash property, and is perfectly acceptable for not-for-profit organizations to accept.

With that said, NFPs absolutely need to review and update their gift acceptance policies as necessary as to whether or not they are willing to accept cryptocurrency. Having a clear and established policy position in place one way or the other can mitigate any confusion or misunderstanding between the organization and a potential donor.

The organization may also want to consider adding language to the policy regarding its intent to either hold the asset or sell it as soon as administratively possible. A savvy donor may request that the organization hold the cryptocurrency donation for a period of time after the donation is made, so organizations will want to have clear policies in place.

What about acknowledging the donor’s gift?

Standard donor acknowledgement rules still apply. Any donation of $250 or more requires a standard “thank you” acknowledgement to the donor. Remember, the IRS has deemed cryptocurrency to be noncash property, which means a description of the donated property (but not its value) should be mentioned in the donor acknowledgement.

Are there any other forms I need to be aware of?

Yes. Forms 8283 & 8282 apply to donations of cryptocurrency. Where the donation is noncash, the donor should be providing the organization with Form 8283, Noncash Charitable Contributions, for a claimed value of more than $500. Further, if the claimed value is more than $5,000, the Form 8283 should be accompanied by a qualified appraisal report. Form 8283 should be signed by the donor, the qualified appraiser (if applicable), as well as the recipient organization upon acceptance.

NOTE: Form 8283, Part V, Donee Acknowledgement, contains a yes/no question asking if the organization intends to use the property for an unrelated use. Where the property in question is cryptocurrency, the answer to this question is likely always to be ‘yes’.

Should the organization sell the underlying cryptocurrency within three years of acceptance, the organization must complete Form 8282, Donee Information Return, and file a copy with the IRS as well as providing a copy to the original donor. Other rules apply if the organization transfers the property to a successor donee.

NOTE: Organizations may want to consider referencing the Forms 8283 & 8282 in their aforementioned gift acceptance policy.

How is a cryptocurrency donation reported on the financial statements and Form 990?

If donated and held by the organization as of the end of the year, it will be reported as an intangible asset on the balance sheet, and contribution revenue on the statement of activities. 

Similar reporting would follow for 990 purposes—the donation would be reported as part of noncash contribution revenue with additional reporting on 990, Schedule B, Schedule of Contributors, and Schedule M, Noncash Contributions, as necessary.

Why should I accept cryptocurrency?

This is by far the hardest question to answer, for a variety of reasons. There is no question that cryptocurrency has its risks. Cryptocurrency is known to be highly volatile. Bitcoin, which originally was valued at eight cents per coin in 2010 soared to an all-time high of over $63,000 back in April of 2021—and then two months later sold for around $34,000 per coin. And who could forget the recent Dogecoin (I’m still not sure how to pronounce that) phenomenon? It too in recent months became a sensation only to see its value plummet by almost 30% in a single day after an appearance by Elon Musk on Saturday Night Live (it did subsequently rebound after a Musk tweet).

The fact is no one really knows where the value of cryptocurrency is headed, so should a not-for-profit organization decide to proceed, you should be aware it may not be worth what it was when originally accepted, which could be either good or bad depending on the day. Ultimately, any value is still good for a not-for-profit organization, but the risks with cryptocurrency and its volatility are very real.

Other things to know about crypto

As of right now, cryptocurrency has its own trading platforms. Robinhood, a platform in the news recently when it halted trading of Gamestop’s stock when speculative traders got the price to soar to all new highs, being the most well known. Large investment firms are well on their way to creating their own platforms as cryptocurrency gains in popularity, so we certainly recommend speaking with your current investment advisors to find the platform that best suits your needs.

Cryptocurrency is held in a digital wallet, which can only be accessed by a password, or private keys. Digital wallets can be stored locally on a computer, but there are also web-based wallets.

There have been horror stories about people losing or forgetting passwords, ultimately rendering the cryptocurrency worthless because it cannot be accessed. Cryptocurrency, due to its private nature, is very desirable by hackers who could also potentially access the wallet and steal its contents. And if stored locally, the currency could be lost forever if the computer containing the wallet were to become corrupted or compromised.

Organizations holding cryptocurrency will need to ensure proper internal controls are in place to make sure the funds are secure and cannot be easily accessed or potentially stolen. Working with your internal IT department is a good strategy here. The questions above are not intended to be all inclusive. Cryptocurrency is still finding its way in the world and we’ll continue to keep an eye on any developments and keep clients up to date as cryptocurrency continues to expand its reach and as further guidance is issued.

If you have any questions, please contact me or another member of our not-for-profit tax services team. We're here to help.

Article
Cryptocurrency and the charitable contribution conundrum

Read this if you are a New Hampshire resident, or a business owner or manager with telecommuting employees (due to the COVID-19 pandemic).

In late January, the Supreme Court asked the Biden Administration for its views on a not-so-friendly neighborly dispute between the State of New Hampshire and the Commonwealth of Massachusetts. New Hampshire is famous amongst its neighboring states for its lack of sales tax and personal income tax. Because of the tax rules and other alluring features, thousands of employees commute daily from New Hampshire to Massachusetts. Overnight, like so many of us, those commuters were working at home and not crossing state boundaries.

As a result of the pandemic and stay-at-home orders, Massachusetts issued temporary and early guidance, directing employers to maintain the status quo. Keep withholding on your employees in the same manner that you were, even though they may not be physically coming into the state. New Hampshire was against this directive from day one and sought to sue Massachusetts over its COVID-19 telecommuting rules for employees who had previously been sitting in an office in the Bay State. The final nail in the coffin was an extension of the guidance in October. 

New Hampshire’s position
New Hampshire took particular issue because it does not impose an Individual Income Tax on wages and it believed that the temporary regulations issued by the Commonwealth overstepped or disregarded New Hampshire’s sovereignty—in violation of the both the Commerce and Due Process Clauses of the U.S. Constitution. Each clause has historically prohibited a state from taxing outside its borders and limits tax on non-residents. For Massachusetts employers to continue withholding on New Hampshire residents' wage earnings, New Hampshire argues, Massachusetts is imposing a tax within New Hampshire, contrary to the Constitution.

What makes the New Hampshire situation unique is that it does not impose an income tax on individuals, a “defining feature of its sovereignty”, the state argues. New Hampshire would say that its tax regime creates a competitive advantage in attracting new business and residents. Maine residents, subject to the same Massachusetts rules, would receive a corresponding tax credit on their Maine tax return, making them close to whole between the two states. Because there is no New Hampshire individual income tax, their residents are out of pocket for a tax that they wouldn’t be subject to, but for these regulations.

Massachusetts’ position
Massachusetts' intention behind the temporary regulations was to maintain pre-pandemic “status quo” to avoid uncertainty for employees and additional compliance burden on employers. This would ensure employers would not be responsible for determining when an employee was working, for example, at their Lake Winnipesaukee camp for a few weeks, or their relative’s home in Rhode Island. 

Additionally, states like New York and Connecticut have long had “convenience of the employer” laws on the books which imposed New York tax on telecommuting non-residents. Additionally, Massachusetts provided that a parallel treatment will be given to resident employees with income tax liabilities in other states who have adopted similar sourcing rules, i.e., a Massachusetts resident working for a Maine employer.

Other voices
The US Supreme Court requested a brief from the Biden administration. Additionally, many states wrote to the court on behalf of New Hampshire. To demonstrate the impact a decision against New Hampshire could have, New Jersey said that it expects to issue $1.2 Billion in tax credits to its residents because New York declined to loosen their strict telecommuting rules. In the final days before the Court recessed, it declined to hear the case brought by the State of New Hampshire against the Commonwealth of Massachusetts. Had the Court decided to move forward with the case, it stood to impact long-standing, pre-pandemic telecommuting rules by New York and others.

What now?
For Massachusetts employers specifically, you should review current withholdings and ensure compliance with the temporary regulations. The state of emergency has been lifted in Massachusetts, and the rules have an end date of September 19, 2021. Employers who haven’t been following the regulations will have a costly tax exposure to correct. 

Massachusetts’ temporary regulations were not unique as dozens of states issued temporary regulations asserting a “status quo” regime for those employees who would normally be commuting outside their home state. Unwinding from the pandemic is going to be a long road, and for all employers, it’s important that you review the rules in each state of operation and confirm that the proper withholding is made.

If you have questions about your specific situation, please contact the state and local tax consulting team. We’re here to help.

Article
New Hampshire v. Massachusetts: Sovereignty or status quo?

Read this if you are a business owner. 

Consider the value of the following two hypothetical companies. Roger owns Wag More, Bark Less (WMBL), a pet service company that employs 10 full-time dog walkers. Anita owns a very similar company, Happy Dog Walking Service (Happy Dog), which also happens to employ 10 full-time dog walkers. These companies are both almost identical, and last year, they generated the same amount of revenue and income. A key difference, however, is in the management styles of the owners. Roger is extremely disorganized and has difficulty with record retention, locating information, and tracking and analyzing data. He is relatively inexperienced as a manager. Anita, meanwhile, is very punctual and organized and has 15 years of management experience. She is very capable of monitoring dog-walking data to optimize routes, manage employee utilization, and track client satisfaction. Which company is more valuable? 

Despite being identical in terms of service offering and size, most people would identify Happy Dog as being more valuable. Alarm bells start to ring in a valuation analyst’s head when learning about the sloppy management style, lack of experience, and poor use of data at WMBL. The difference in value should be substantial. Despite generating the same amount of profit last year, Happy Dog could be worth twice as much as WMBL because these risk factors may jeopardize future profits.

In addition to the risk factors from the above example, there are many other drivers of business value.

Valuation formula

In its simplest form, the valuation of a business can be reduced to the following formula based on earnings before interest, taxes, depreciation, and amortization (EBITDA). Factors that affect value do so by affecting the valuation multiple. Companies such as WMBL would be worth a lower multiple of EBITDA, and a higher multiple would be justified for less risky companies such as Happy Dog. 

Estimating an EBITDA multiple

A generic multiple often thrown around is 5x EBITDA. EBITDA multiples from the DealStats database show a slightly lower average over time. From 2017 to 2019, the EBITDA multiples were around 5x, then declined in 2020 and 2021. The chart below shows trends in historical EBITDA multiples.1 

Median Selling Price/EBITDA with Trailing Three-Quarter Average


In reality, EBITDA multiples vary widely by industry. For example, in the DealStats database, the median EBITDA multiple for retail trade was 3.8x compared to 6.5x for manufacturing companies.2 The chart below presents EBITDA multiples by industry from the DealStats database.

Selling Price/EBITDA Interquartile Range by Industry Sector (Private Targets)


Even within a specific industry, multiples can vary dramatically. For example, from the chart above, the median wholesale trade multiple was slightly above 5.0x, but the 75th percentile multiple for this industry was approximately 10.0x. 

Factors affecting EBITDA multiples

Differences in valuation multiples from company to company reflect differences in risk profiles. High-risk companies command lower multiples than safe investments. The following chart illustrates how certain operational risk factors may affect the valuation multiple.

Other factors that affect valuation multiples include the following:

  • Access to capital
  • Supplier concentration 
  • Supplier pricing advantage 
  • Product or service diversification 
  • Life cycle of current products or services 
  • Geographical distribution 
  • Currency risk 
  • Internal controls 
  • Business owner reliance
  • Legal/litigation issues 
  • Years in operation
  • Location   
  • Demographics 
  • Availability of labor 
  • Employee stability 
  • Internal and external culture 
  • Economic factors 
  • Industry and government regulations 
  • Political factors 
  • Fixed asset age and condition 
  • Strength of intangible assets 
  • Distribution system 
  • IT systems 
  • Technology life cycle 

One model to assess risk and select an appropriate multiple is the exit and succession planning software prepared by MAUS Business Systems (“MAUS”). The MAUS Business Attractiveness model assists analysts in assessing and diagramming the risk profile of a company. This model was developed to assess business attractiveness to potential acquirers based on common risk factors. Analysts can use this software as part of their assessment of an appropriate valuation multiple. This model is also a helpful communication tool because it provides a visual representation of a company’s risk profile and highlights the areas in which a company can improve. 

Using this model, analysts assess a company’s risk profile regarding several key factors. MAUS then generates a report that includes a series of diagrams like the one below. Business attractiveness factors are positioned around the outside of a polygon. If a company performs well regarding a particular factor, a point is plotted towards the outside of the polygon. If the company performs poorly, a point is plotted towards the center of the shape. The points are then connected to visualize a company’s risk profile. 

Business Risk & Value Factors

         

The larger the colored shape is in the MAUS diagram, the higher the valuation multiple should be. However, these factors do not all affect the multiple equally. The valuation multiple may be highly responsive to some factors and less responsive to others. Additionally, each factor may not have a linear effect on the valuation multiple. For these reasons, formula-based estimates of valuation multiples are often inaccurate, although a great place to start for a ballpark indication of value. For matters of importance where accuracy is paramount, we strongly recommend consulting with a valuation professional. In addition to valuation expertise, an outside party provides an independent, unbiased assessment of value. 

Conclusion

The value of a business can be affected dramatically by its risk profile. Analysts value businesses based on a number of different factors that affect value. 

1,2 DealStats Value Index 2Q 2021, Business Valuation Resources, LLC (www.bvresources.com).

Article
Factors affecting the value of a company

Read this if you are required to collect sales tax in Massachusetts.

New tax updates and prepayment requirements have been announced for Massachusetts businesses.

They include new due dates and prepayment requirements. The changes apply to: 

  • Sales/use tax
  • Sales tax on services
  • Meals tax
  • Room occupancy excise tax 

Due date for sales and use tax returns

The due date on these taxes filings has also changed. Instead of due dates being the 20th of the following month, the date has been changed to 30 days after the previous month end. For example, a January return will now be due on March 2nd instead of February 20th.

Note: If your tax liability exceeded $150,000 for the calendar year 2020, prepayment of tax collected in 2021 is required:

  • Tax collected for the 1st through the 21st of the month are due on the 25th
  • Remainder due when return is filed

State resources:

If you have questions on these changes, and how they may affect your filing, please contact our Tax Consulting Team. We’re here to help.

Article
Changes to Massachusetts sales and use tax

Read this if you are working with an auditor.

The standard report an auditor issues on an entity’s financial statements was created in 1988, and has only had minor tweaking since. Amazing when we think about how the world has changed since 1988! Back then:

  • The World Wide Web hadn’t been invented
  • The Simpsons wasn’t yet on TV, and neither was Seinfeld
  • The Berlin Wall was still standing
  • The Single Audit Act celebrated its fourth birthday

The Auditing Standards Board (ASB), an independent board of the American Institute of CPAs (AICPA) that establishes auditing rules for not-for-profit organizations (as well as private company and federal, state, and local governmental entities) has decided it was high time to revisit the auditor’s report, and update it to provide additional information about the audit process that stakeholders have been requesting.

In addition to serving as BerryDunn’s quality assurance principal for the past 23 years, I’ve been serving on the ASB since January 2017, and as chair since May 2020. (And thanks to the pandemic our meetings during my tenure as chair have been conducted from my dining room table.)  We thought you might be interested in a high-level overview of the coming changes to the auditor’s report, which will be effective starting with calendar 2021 audits, from an insider’s perspective.

So what’s changing?

The most significant changes you’ll be seeing, based on feedback from various users of auditor’s reports, are:

  1. Opinion first
    The opinion in an audit report is the auditor’s conclusion as to whether the financial statements are in accordance with the applicable accounting standards, in all material respects. People told us this is the most important part of the report, so we’ve moved it to the first section of the report.
  2. Auditor’s ethical responsibilities
    We’ve pointed out that an auditor is required to be independent of the organization being audited, and to meet certain other ethical responsibilities in the conduct of the audit.
  3. “Going concern” responsibilities
    We describe management’s responsibility, under U.S. generally accepted accounting principles, and the auditor’s responsibility, under the auditing rules, for determining whether “substantial doubt” exists about the organization’s ability to continue in existence for at least one year following the date the financial statements are approved for issuance.
  4. Emphasis on professional judgment and professional skepticism
    We explain how an audit requires the auditor to exercise professional judgment (for example, regarding how much testing to perform), and to maintain professional skepticism, i.e., a questioning mind that is alert to the possibility the financial statements may be materially misstated, whether due to error or fraud.
  5. Communications with the board of directors
    We point out that the auditor is required to communicate certain matters to the board, such as difficulties encountered during the audit, material adjustments identified during the audit process, and which areas the auditor treated as “significant risks” in planning and performing the audit.
  6. Responsibility related to the “annual report”
    If the organization issues an “annual report” containing or referring to the audited financial statements, we explain the auditor is required to review it for consistency with the financial statements, and for any known misstatements of fact.
  7. Discussion of “key audit matters”
    While not required, your organization may request the auditor to discuss how certain “key audit matters” (those most significant to the audit) were addressed as part of the audit process. These are similar to the “critical audit matters” publicly traded company auditor’s reports are now required to include.

Yes, this means the auditor’s report will be longer; however, stakeholders told us inclusion of this information will make it more informative, and useful, for them.

Uniform Guidance standards also changing

Is your organization required to have a compliance audit under the federal Uniform Guidance standards? That report is also changing to reflect the items listed above to the extent they’re relevant.

What should you do?

Some actions to consider as you get ready for the first audit to which the new report applies (calendar 2021, or fiscal years ending in 2022) include:

  1. Ask your auditor what your organization’s auditor’s report will look like
    Your auditor can provide examples of auditor’s reports under the new rules, or even draft a pro forma auditor’s report for your organization (subject, of course, to the results of the audit).
  2. Outline and communicate your process for developing your annual report
    If your organization prepares an annual report, it will be important to coordinate its timing with that of the issuance of the auditor’s report, due to the auditor’s new reporting responsibility related to the annual report.
  3. Discuss with your board whether you would like the auditor to include a discussion of “key audit matters” in the auditor’s report
    While not required for not-for-profits, some organizations may decide to request the auditor include a discussion of such matters in the report, from the standpoint of transparency “best practices.”

If you have any questions about the new auditor’s report or your specific situation, please contact us. We’re here to help.
 

Article
A new auditor's report: Seven changes to know

Read this if you work at a not-for-profit (NFP) organization.

At our recent not-for-profit CPE Recharge event (you can access presentations from the event here), we asked participants to identify their top three concerns. Overwhelmingly, 83% of respondents identified financial stability as their number one concern, with the remote workforce coming in second at 57%, and cybersecurity and government funding tied for third place as top concerns at the organization.

Remarkably, these responses were consistent across NFP industry groups, including higher education institutions, social services agencies, and healthcare organizations. While remote workforce and cybersecurity concerns go hand-in-hand and are top of mind for not-for-profit leadership as organizations navigate a return to work, the renewed focus on financial stability highlights a change in focus for not-for-profit organizations.

The burden of financial stress for NFPs is not new, as this concern certainly pre-dates the pandemic, but by the end of the first quarter of 2020, many organizations had shifted away from the long-term financial stability planning to an emergency response—more immediate concerns included revenue generating and cost cutting. This shift back toward a discussion of long-term financial stability is a positive sign as organizations (and their finance departments) are beginning to pivot away from the short-time reactive response, to proactive planning for the future.

Our respondents further reported that while financial stability is a top concern, 36% were not concerned and 46% were only somewhat concerned about their organization’s financial health:

We haven’t forgotten the 16% of respondents “very concerned” about their financial health—we are not all out of the woods yet and some industries were feeling economic tightening before the pandemic. Certain relief funding was only recently made available (we’re looking at you, Shuttered Venue Operating Grant), and there will undoubtedly be other programs over the coming year that organizations can use to bridge the funding gap in 2022. We continue to watch state and federal relief programs and our panel of COVID-19 relief program experts are here to help as you continue to navigate the requirements.

As we move away from the short-term emergency response toward more future-oriented planning, it is a good opportunity to learn the lessons from the NFPs that fared well in this time of crisis. While success and profitability have varied across the not-for-profit industry, we have found a few common themes in organizational financial success during the pandemic storm. Those organizations have:

  • Explored new funding opportunities, including taking a thoughtful approach to relief programs 
  • Considered cash flow strategies, like non-critical expense cuts and renegotiating contracts
  • Communicated their value to donors, who responded in kind
  • Evaluated new strategic partnerships 
  • Expanded service delivery options and program offerings 
  • Emergency preparedness plans in place and adequate strategic reserves

While the not-for-profit CFO dream antidote for long-term sustainability may come in the form of a healthy strategic reserve, many organizations without that flexibility continued to thrive throughout the pandemic, a result of dedicated staff members and a continued focus on overall mission. COVID-19 has changed the way NFP organizations do business, and the industry is now ready to look into the future. 

And we’ll be here, as will our Recharge event! If you have any questions about the various funding programs, including HEERF, provider relief funds, employee retention credit, or others, please contact the not-for-profit accounting team. We’re here to help.

Article
Not-for-profit update: Brighter days ahead

Read this if your company does business in the EU.

Major changes are coming to the EU VAT laws on the online supply of goods and services. The rules, which apply as from July 1, 2021, will affect U.S.-based businesses selling or facilitating sales to private individuals in EU member states. With just over a month remaining before the rules become effective, such businesses should begin immediately to prepare for their new VAT registration and collection responsibilities.

What are the new EU VAT rules?

The EU VAT rules applicable to cross-border B2C e-commerce activities are undergoing a major “refresh”—or modernization—as from July 1, 2021 (postponed six months from the originally planned effective date of January 1, 2021). From July, updated VAT rules will apply to online sales (including online marketplaces) to EU private consumers and to the import of low value goods. (The European Commission published explanatory notes on the rules on September 20, 2020, which include clarifications, FAQs and examples.)

The objectives of the new EU VAT rules are to: (i) simplify compliance obligations for vendors that potentially have to comply with the VAT rules in the 27 EU member states; (ii) increase VAT revenue for the individual member states by bringing more transactions within the scope of the EU VAT net; and (iii) reduce VAT fraud.

Any business making or facilitating online sales or deliveries of goods to consumers in the EU will likely be impacted in some way by the changes.

The EU VAT law changes are as follows:

Intra-EU sales to consumers

All B2C sales of goods will be taxed in the country of destination, meaning that sellers will need to collect VAT in the EU member state to which the goods are shipped.

The existing thresholds for distance sales in the EU will be abolished and replaced by an EU-wide registration threshold of €10,000 (approximately $12,000). This is an important change and potentially could create considerable EU VAT registration and reporting obligations for U.S.-based businesses selling goods from warehouses located in the EU if not proactively addressed.

To reduce the administrative burden and simplify VAT reporting, a new reporting system, called the One-Stop Shop (OSS) will be expanded to include the distance sale of goods. U.S. businesses can register for the OSS scheme in the EU member state of dispatch and can report and remit the VAT due via a pan-EU VAT return instead of having to VAT register in each EU member state.

Sales via online marketplaces

In certain circumstances, businesses that operate an online marketplace, known as an “electronic interface” in the EU) or that facilitate the sale of third-party goods through an online marketplace will be considered the “deemed supplier” of the goods sold to EU customers and will be required to collect and pay VAT on such sales. As a result, businesses that sell via online marketplaces (e.g., Amazon, eBay, etc.) will not be required to account for VAT on such sales. 
Imports of low value goods

The VAT exemption for “low-value imports,” i.e., goods coming from outside the EU that do not exceed a value of €22 (approximately $26) will be abolished. Instead, the sale of low-value goods not exceeding €150 (approximately $180) to consumers in the EU through the business’ own website will be subject to VAT at the applicable rate in the destination country. The VAT due on low value goods can either be collected at the point of sale by the seller or collected from the consumer before the goods are released by the customer broker/delivery service. Where the seller opts to collect VAT at the point of sale, it can VAT register under the new Import One-Stop Shop (IOSS) system to account for and remit the VAT due.

VAT registration under the IOSS has several benefits, including:

  • Transparency to consumers: The customer will not be faced with any unexpected VAT costs since the total amount paid for the goods is VAT-inclusive;
  • Reduced compliance burden: Sellers can use a single IOSS registration to report and pay the VAT due on all sales covered by IOSS. Otherwise, if the seller acts as the importer (e.g., sells goods under delivered duty paid terms), it may need to register for VAT in multiple EU member states;
  • Quick customs clearance: IOSS is designed to enable goods to be cleared through customs quickly as no VAT is due at the time of importation, thus facilitating the speedy delivery of goods; and
  • Flexible logistics: IOSS simplifies logistics since goods can be imported into the EU in any EU member state. If IOSS is not used, goods can only be imported and cleared for customs in the destination EU member state, which may result in delays and additional costs.

How will the changes impact nonresident sellers?

As noted above, the EU rule changes will significantly affect U.S.-based businesses selling or facilitating the sale of goods and services online to consumers located in the EU. With just over a month left before the rules become effective, any U.S.-based business that may be impacted should take immediate steps to:

  • Understand the EU rules and how they will apply;
  • Assess the impact of the rules on supply chains;
  • Consider the impact on pricing due to different VAT rates applying in different jurisdictions;
  • Identify any adjustments that can be made (where possible) to mitigate the impact of the rules;
  • Be prepared to comply with new VAT obligations, including additional registrations, charging and collecting VAT, filing tax and/or information returns, etc.;
  • Update and adapt accounting and billing systems and master data records to identify when VAT should be applied and the appropriate rates in multiple jurisdictions; and
  • Cancel existing EU VAT registrations for distance sales that may be replaced by the OSS registration.

Failure to comply with the rules could result in the imposition of interest and penalties on the historic VAT liability. In addition to the EU VAT consequences, business selling goods that are imported into these jurisdictions must also take into account any customs implications because any compliance deficiencies could result in imported goods being delayed in customs, causing customers to be frustrated by shipping delays.

For questions about your specific situation, please contact the International Tax team. We’re here to help. 

Article
New VAT rules in the EU: What U.S. e-commerce businesses need to know