Impacts of the CARES Act on employee benefit plan distributions

Read this if you work at a renewable energy company, developer, or other related business. 

When entering into agreements involving tangible long-lived assets, an asset retirement obligation can arise in the form of a legal obligation to retire the asset(s) at a certain date. In the alternative/renewable energy industry, these frequently present themselves in leases for property on which equipment (i.e., solar panels) is placed. In the leases there may be a requirement, for example, that at the conclusion of the lease, the lessee remove the equipment and return to the property to its original condition.

When an asset retirement obligation is present in a contract, a company should record the liability when it has been incurred (usually in the same period the asset is installed or placed in service) and can be reasonably estimated. The fair value of the liability, typically calculated using a present value technique, is recorded along with a corresponding increase to the basis of the asset to be retired. Subsequent to the initial recognition, the liability is accreted annually up to its future value, and the asset, including the increase for the asset retirement obligation, is depreciated over its useful life.

As a company gets closer to the date the obligation is realized, the estimate of the obligation will most likely become more accurate. When revisions to the estimate are determined, the liability should be adjusted in that period.

It is important to note that this accounting does not have any income tax implications, including any potential increase to the investment tax credit (ITC).

These obligations are estimates and should be developed by your management through collaboration with companies or individuals that have performed similar projects and have insight as to the expected cost. While this is an estimate and not a perfect science, it is important information to share with investors and work into cash flow models for the project, as the cost of removing such equipment can be significant. 

Recording the liability on the balance sheet is a good reminder of the approximate cash outflow that will take place in the final year of the lease. If you have any questions or would like to discuss with us, contact a member of the renewable energy team. We’re here to help.

The FDIC, other interagency regulators, and accounting standard-setters are providing guidance for financial institutions serving customers affected by the coronavirus. Below are links to important COVID-19 resources.

• TDR and CECL relief is extended for financial institutions
• FDIC grants some banks temporary regulatory relief of Part 363 Audit and Reporting requirements
• May 2020 accounting standard delay status: GASB and FASB
• Federal Reserve Bank Announces Terms of PPP Liquidity Facility and Main Street Lending Program—April 9, 2020
• Revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus—April 7, 2020
• Paycheck Protection Program Lender Guide
• Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19)—As of May 27, 2020
• Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus
• FDIC Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory Assistance

Get the latest on the Paid Sick and Family Leave Act here.

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Check back for important updates on new and changing provisions. Please contact the financial services team with any questions.

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.

Read this if you are an employer looking for more information on the Employee Retention Credit (ERC).

The Coronavirus Disease 2019 (COVID-19) stimulus package signed into law by President Trump on December 27 makes very favorable enhancements to the Employee Retention Credit (ERC) enacted under the Coronavirus Aid, Relief and Economic Security (CARES) Act. 

Background

The CARES Act passed in March 2020 provided certain employers with the opportunity to receive a refundable tax credit equal to 50 percent of the qualified wages (including allocable qualified health plan expenses) an eligible employer paid to its employees. This tax credit applied to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages (including allocable qualified health plan expenses) taken into account with respect to each eligible employee for all calendar quarters in 2020 is $10,000, so that the maximum credit an eligible employer can receive in 2020 on qualified wages paid to any eligible employee is $5,000.

The ERC was for eligible employers who carried on a trade or business during calendar year 2020, including certain tax-exempt organizations, that either:

• Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
• Experienced a significant decline in gross receipts during the calendar quarter.

If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages were limited to wages paid to an employee for time that the employee was not providing services due to an economic hardship described above. If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described above.

Updated guidance: ERC changes

The bill makes the following changes to the ERC, which will apply from January 1 to June 30, 2021:

• The credit rate increases from 50% to 70% of qualified wages and the limit on per-employee wages increases from $10,000 per year to $10,000 per quarter.
• The gross receipts eligibility threshold for employers changes from a more than 50% decline to a more than 20% decline in gross receipts for the same calendar quarter in 2019. A safe harbor is provided, allowing employers that were not in existence during any quarter in 2019 to use prior quarter gross receipts to determine eligibility and the ERC. 
• The 100-employee threshold for determining “qualified wages” based on all wages increases to 500 or fewer employees.
• The credit is available to state or local run colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress (including organizations such as Fannie Mae, FDIC, Federal Home Loan Banks, and Federal Credit Unions). 
• New, expansive provisions regarding advance payments of the ERC to small employers are included, including special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
• Employers who received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. This change is retroactive to March 12, 2020. Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan.
• Removal of the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).

Takeaways

For most employers, the ERC has been difficult to use due to original requirements that prevented employers who received a PPP loan from ERC eligibility and, for those employers who did not receive a PPP loan, the requirement that there be a more than 50% decline in gross receipts. In addition, those employers who qualified for the ERC and had more than 100 employees could only receive the credit for wages paid to employees who did not perform services.

It is important to note that most of the new rules are prospective only and do not change the rules that applied in 2020. The new guidance should make it easier for more employers to utilize the ERC for the first two quarters of 2021. The following types of employers should evaluate the ability to receive the ERC during the first and/or second quarter of 2021:

• Those that used the ERC in 2020 (the wage limit for the credit is now based on wages paid each quarter and the credit is 70% of eligible wages);
• Those that previously received a PPP loan;
• Those that have a more than 20% reduction in gross receipts in 2021 over the same calendar quarter in 2019;
• Those employers with more than 100 but less than 500 employees who have had a significant reduction in gross receipts (i.e., more than 20%)1

For more information

If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help.

Read this if you are a bank.

Consolidated Appropriations Act
On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law. For financial institutions, aside from approving an additional $284 billion in Paycheck Protection Program funding, the CAA most notably extended troubled debt restructuring (TDR) relief. Originally provided in Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, this relief allows financial institutions to temporarily disregard TDR accounting under US generally accepted accounting principles for certain COVlD-19-related loan modifications. Under the CARES Act, this relief was set to expire on December 31, 2020. The CAA extends such relief to January 1, 2022.

Relief from CECL implementation was also extended from December 31, 2020 to January 1, 2022.

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If any questions arise, please contact the financial services team with any questions.

Read this if your company is seeking guidance on PPP loans.

The Consolidated Appropriations Act, 2021 (H.R. 133) was signed into law on December 27, 2020. This bill contains guidance on the existing Paycheck Protection Program (PPP) and guidelines for the next round of PPP funding.

Updates on existing PPP loans

Income and expense treatment of PPP loans. Forgiven PPP loans will not be included in taxable income and eligible expenses paid with PPP funds will be tax-deductible. This tax treatment applies to both current and future PPP loans.

Tax attributes and basis adjustments. Tax attributes such as net operating losses and passive loss carryovers, and basis increases generated from the result of the PPP loans will not be reduced if the loans are forgiven.

Economic Injury Disaster Loans (EIDL). Any previous or future EIDL advance will not reduce PPP loan forgiveness. Any borrowers who already received forgiveness of their PPP loans and had their EIDL subtracted from the forgiveness amount will be able to file an amended forgiveness application to have their PPP forgiveness amount increased by the amount of the EIDL advance. The SBA has 15 days from the effective date of this bill to produce an amended forgiveness application. 

Simplified forgiveness application for loans under $150,000. Borrowers who received PPP loans for $150,000 or less will now be able to file a simplified one-page forgiveness application and will not be required to submit documentation with the application. The SBA has 24 days from the effective date of this bill to make this new forgiveness application available. 

Use of PPP funds. Congress expanded the types of expenses that may be paid with PPP funds. Prior eligible expenses were limited to payroll (including health benefits), rent, covered mortgage interest, and utilities. Additional expenses now include software and cloud computing services to support business operations, the purchase of essential goods from suppliers, and expenditures for complying with government guidance relating to COVID-19.

These additional expenses apply to both existing and new PPP loans, but they do not apply to existing loans if forgiveness has already been obtained.
 
In addition, the definition of "payroll costs" has been expanded to include costs for group life, disability, dental, and vision insurance. These additions also apply to both existing and new loans.

Information for new PPP loans

Application deadline. March 31, 2021 

Eligibility for first-time borrowers. A business that did not previously apply for or receive a PPP loan may apply for a new loan. The same requirements apply from the first round of loans. The business must employ fewer than 500 employees per physical location and the borrower must certify the loan is necessary due to economic uncertainty.

Eligibility for second-time borrowers. Businesses that received a prior PPP loan may apply for a second loan, however the eligibility requirements are a little more stringent. The business must have fewer than 300 employees per physical location (down from 500 previously) and it must have experienced a decline in gross revenue of at least 25% in any quarter in 2020 as compared to the same quarter in 2019. The business must have also expended (or will expend) their initial PPP loan proceeds. 

Maximum loan amount. Lesser of $2 million or 2.5x average monthly payroll for either calendar 2019 or the 12-month period prior to the date of the loan. Businesses operating in the accommodations and food service industry (NAICS code 72) can use a 3.5x average monthly payroll multiple. If the business previously received a loan less than the new amount allowed, or if it returned a portion or all of the previous loan, it can apply for additional funds up to the maximum loan amount. 

New types of businesses eligible for loans.

• Broadcast news stations, radio stations, and newspapers that will use the proceeds to support the production and distribution of local and emergency information 
• Certain 501(c)(6) organizations with fewer than 300 employees and that are not significantly involved in lobbying activities 
• Housing cooperatives with fewer than 300 employees 
• Companies in bankruptcy if the bankruptcy court approves

Ineligible businesses. A business that was ineligible to receive a PPP loan during the first round is still ineligible to receive a loan in the new round. The new legislation also prohibits the following businesses from receiving a loan in the second round:

• Publicly traded companies 
• Businesses owned 20% or more by a Chinese or Hong Kong entity or have a resident of China on its board 
• Businesses engaged primarily in political or lobbying activities
• Businesses required to register under the Foreign Agents Registration Act 
• Businesses not in operation on February 15, 2020 

Forgiveness qualifications. New PPP loans will be eligible for forgiveness if at least 60% of the proceeds are used on payroll costs. Partial forgiveness will still be available if less than 60% of the funds are used on payroll costs. 

Covered period. The borrower may choose a covered period (i.e., the amount of time in which the PPP funds must be spent) between 8 and 24 weeks from the date of the loan disbursement.

Employee Retention Tax Credit. The CARES Act prohibited a business from claiming the Employee Retention Tax Credit if they received a PPP loan. The new legislation retroactively repeals that prohibition, although it is unclear how an employer can claim retroactive relief. The new bill also expands the tax credit for 2021. 

Additional guidance is expected from the SBA in the coming weeks on many of these items and we will provide updates when the information is released.

We’re here to help.
If you have questions about PPP loans, contact a BerryDunn professional.

Read this if you are a community bank.

On December 1, 2020, the Federal Deposit Insurance Corporation (FDIC) issued its third quarter 2020 Quarterly Banking Profile. The report provides financial information based on call reports filed by 5,033 FDIC-insured commercial banks and savings institutions. The report also contains a section specific to community-bank performance based on the financial information of 4,590 FDIC-insured community banks. Here are some highlights from the community bank section of the report:

• The community bank sector experienced a $659.7 million increase in quarterly net income from a year prior, despite a 116.6% increase in provision expense and continued net interest margin (NIM) compression. This increase was mainly due to loan sales, which were up 154.2% from 2019. Year-over-year, net income increased 10%.
• Provision expense decreased 32.3% from second quarter 2020 to $1.6 billion. That said, year-to-date provision expense increased 194.3% compared to 2019 year-to-date.
• NIM declined 41 basis points from a year prior to a record low of 3.27% (on an annualized basis). 
• Net operating revenue increased by $2.8 billion from third quarter 2019, a 12.1% increase. This increase was attributable to higher revenue from loan sales and an increase in net interest income mainly due to higher interest income from commercial and industrial (C&I) loans (up 14.8%) and a decrease in interest expense (down 36.8%).
• Average funding costs declined for the fourth consecutive quarter to 0.53%.
• Growth in total loans and leases was stagnant from second quarter 2020, growing by only 1%. However, total loans and leases increased by 13.4% from third quarter 2019. This increase was mainly due to C&I lending, which was up 71%. This growth in C&I lending was mainly comprised of Paycheck Protection Program loans originated in the second quarter.
• The noncurrent rate (loans 90 days or more past due or in nonaccrual status) remained unchanged at 0.80% from second quarter 2020. That being said, noncurrent balances were up $1.6 billion in total from third quarter 2019. This year-over-year increase was mainly attributable to increases in noncurrent nonfarm nonresidential, C&I, and farm loan balances.
• Net charge-offs decreased 22.1% year-over-year and currently stand at 0.10%.
• Total deposit growth since second quarter 2020 was modest at 1.8%. However, total deposits compared to third quarter 2019 were up 16.7%.
• The number of community banks declined by 34 to 4,590 from second quarter 2020. This change included one new community bank, three banks transitioning from non-community to community banks, eight banks transitioning from community to non-community banks, 29 community bank mergers or consolidations, and one community bank self-liquidation.

Community banks have been resilient and weathered the 2020 storm, as evidenced by an increase in year-over-year net income of 10%. However, tightening NIMs will force community banks to find creative ways to increase their NIM, grow their earning asset base, and identify ways to increase non-interest income to maintain current net income levels. 

Much uncertainty still exists. For instance, although significant charge-offs have not yet materialized, the financial picture for many borrowers remains uncertain, and payment deferrals have made some credit quality indicators, such as past due status, less reliable. The ability of community banks to maintain relationships with their borrowers and remain apprised of the results of their borrowers’ operations has never been more important. 

Despite the turbulence caused by the pandemic, there are many positive takeaways, and community banks have proven their resilience. Previous investments in technology, including customer facing solutions and internal communication tools, have saved time and money. As the pandemic forced many banks to move away from paper-centric processes, the resulting efficiencies of digitizing these processes will last long after the pandemic. 

If you have questions about your specific situation, please don’t hesitate to contact BerryDunn’s Financial Services team. We’re here to help.