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Mandatory capitalization of R&E expenses—will the new rules impact your business?

04.13.22

Read this if you invest in research and development. 

Businesses that invest in research and development, particularly those in the technology industry, should be aware of a major change to the tax treatment of research and experimental (R&E) expenses. Under the 2017 Tax Cuts and Jobs Act (TCJA), R&E expenditures incurred or paid for tax years beginning after December 31, 2021, will no longer be immediately deductible for tax purposes. Instead, businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research conducted within the U.S. or 15 years for research conducted in a foreign jurisdiction. The new mandatory capitalization rules also apply to software development costs, regardless of whether the software is developed for sale or license to customers or for internal use.

Tax implications of mandatory capitalization rules

Under the new mandatory capitalization rules, amortization of R&E expenditures begins from the midpoint of the taxable year in which the expenses are paid or incurred, resulting in a negative year one tax and cash flow impact when compared to the previous rules that allowed an immediate deduction.

For example, assume a calendar-year taxpayer incurs $50 million of US R&E expenditures in 2022. Prior to the TCJA amendment, the taxpayer would have immediately deducted all $50 million on its 2022 tax return. Under the new rules, however, the taxpayer will be entitled to deduct amortization expense of $5,000,000 in 2022, calculated by dividing $50 million by five years, and then applying the midpoint convention. The example’s $45 million decrease in year one deductions emphasizes the magnitude of the new rules for companies that invest heavily in technology and/or software development.

The new rules present additional considerations for businesses that invest in R&E, which are discussed below.

Cost/benefit of offshoring R&E activities

As noted above, R&E expenditures incurred for activities performed overseas are subject to an amortization period of 15 years, as opposed to a five-year amortization period for R&E activities carried out in the US. Given the prevalence of outsourcing R&E and software development activities to foreign jurisdictions, taxpayers that currently incur these costs outside the US are likely to experience an even more significant impact from the new rules than their counterparts that conduct R&E activities domestically. Businesses should carefully consider the tax impacts of the longer 15-year recovery period when weighing the cost savings from shifting R&E activities overseas. Further complexities may arise if the entity that is incurring the foreign R&E expenditures is a foreign corporation owned by a US taxpayer, as the new mandatory capitalization rules may also increase the US taxpayer’s Global Intangible Low-taxed Income (GILTI) inclusion.

Identifying and documenting R&E expenditures

Unless repealed or delayed by Congress (see below), the new mandatory amortization rules apply for tax years beginning after December 31, 2021. Taxpayers with R&E activities should begin assessing what actions are necessary to identify qualifying expenditures and to ensure compliance with the new rules. Some taxpayers may be able to leverage from existing financial reporting systems or tracking procedures to identify R&E; for instance, companies may already be identifying certain types of research costs for financial reporting under ASC 730 or calculating qualifying research expenditures for purposes of the research tax credit. Companies that are not currently identifying R&E costs for other purposes may have to undertake a more robust analysis, including performing interviews with operations and financial accounting personnel and developing reasonable allocation methodologies to the extent that a particular expense (e.g., rent) relates to both R&E and non-R&E activities.

Importantly, all taxpayers with R&E expenditures, regardless of industry or size, should gather and retain contemporaneous documentation necessary for the identification and calculation of costs amortized on their tax return. This documentation can play a critical role in sustaining a more favorable tax treatment upon examination by the IRS as well as demonstrating compliance with the tax law during a future M&A due diligence process.

Impact on financial reporting under ASC 740

Taxpayers also need to consider the impact of the mandatory capitalization rules on their tax provisions. In general, the addback of R&E expenditures in situations where the amounts are deducted currently for financial reporting purposes will create a new deferred tax asset. Although the book/tax disparity in the treatment of R&E expenditures is viewed as a temporary difference (the R&E amounts will eventually be deducted for tax purposes), the ancillary effects of the new rules could have other tax impacts, such as on the calculation of GILTI inclusions and Foreign-Derived Intangible Income (FDII) deductions, which ordinarily give rise to permanent differences that increase or decrease a company’s effective tax rate. The U.S. valuation allowance assessment for deferred tax assets could also be impacted due to an increase in taxable income. Further, changes to both GILTI and FDII amounts should be considered in valuation allowance assessments, as such amounts are factors in forecasts of future profitability.

The new mandatory capitalization rules for R&E expenditures and resulting increase in taxable income will likely impact the computation of quarterly estimated tax payments and extension payments owed for the 2022 tax year. Even taxpayers with net operating loss carryforwards should be aware of the tax implications of the new rules, as they may find themselves utilizing more net operating losses (NOLs) than expected in 2022 and future years, or ending up in a taxable position if the deferral of the R&E expenditures is material (or if NOLs are limited under Section 382 or the TCJA). In such instances, companies may find it prudent to examine other tax planning opportunities, such as performing an R&D tax credit study or assessing their eligibility for the FDII deduction, which may help lower their overall tax liability.

Will the new rules be delayed?

The version of the Build Back Better Act that was passed by the US House of Representatives in November 2021 would have delayed the effective date of the TCJA’s mandatory capitalization rules for R&E expenditures until tax years beginning after December 31, 2025. While this specific provision of the House bill enjoyed broad bipartisan support, the BBBA bill did not make it out of the Senate, and recent comments by some members of the Senate have indicated that the BBB bill is unlikely to become law in its latest form. Accordingly, the original effective date contained in the TCJA (i.e., taxable years beginning after December 31, 2021) for the mandatory capitalization of R&E expenditures remains in place.
 
The changes to the tax treatment of R&E expenditures can be complex. While taxpayers and tax practitioners alike remain hopeful that Congress will agree on a bill that allows for uninterrupted immediate deductibility of these expenditures, at least for now, companies must start considering the implications of the new rules as currently enacted. 

Topics: r&d

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Read this if your company is considering financing through a sale leaseback.

In today’s economic climate, some companies are looking for financing alternatives to traditional senior or mezzanine debt with financial institutions. As such, more companies are considering entering into sale leaseback arrangements. Depending on your company’s situation and goals, a sale leaseback may be a good option. Before you decide, here are some advantages and disadvantages that you should consider.

What is a sale leaseback?

A sale leaseback is when a company sells an asset and simultaneously enters into a lease contract with the buyer for the same asset. This transaction can be used as a method of financing, as the company is able to retrieve cash from the sale of the asset while still being able to use the asset through the lease term. Sale leaseback arrangements can be a viable alternative to traditional financing for a company that owns significant “hard assets” and has a need for liquidity with limited borrowing capacity from traditional financial institutions, or when the company is looking to supplement its financing mix.

Below are notable advantages, disadvantages, and other considerations for companies to consider when contemplating a sale leaseback transaction:

Advantages of using a sale leaseback

Sale leasebacks may be able to help your company: 

  • Increase working capital to deploy at a greater rate of return, if opportunities exist
  • Maintain control of the asset during the lease term
  • Avoid restrictive covenants associated with traditional financing
  • Capitalize on market conditions, if the fair value of an asset has increased dramatically
  • Reduce financing fees
  • Receive sale proceeds equal to or greater than the fair value of the asset, which generally is contingent on the company’s ability to fund future lease commitments

Disadvantages of using a sale leaseback

On the other hand, a sale leaseback may:

  • Create a current tax obligation for capital gains; however, the company will be able to deduct future lease payments.
  • Cause loss of right to receive any future appreciation in the fair value of the asset
  • Cause a lack of control of the asset at the end of the lease term
  • Require long-term financial commitments with fixed payments
  • Create loss of operational flexibility (e.g., ability to move from a leased facility in the future)
  • Create a lost opportunity to diversify risk by owning the asset

Other considerations in assessing if a sale leaseback is right for you

Here are some questions you should ask before deciding if a sale leaseback is the right course of action for your company: 

  • What are the length and terms of the lease?
  • Are the owners considering a sale of the company in the near future?
  • Is the asset core to the company’s operations?
  • Is entering into the transaction fulfilling your fiduciary duty to shareholders and investors?
  • What is the volatility in the fair value of the asset?
  • Does the transaction create any other tax opportunities, obligations, or exposures?

The Financial Accounting Standards Board’s new standard on leases, Accounting Standards Codification (ASC) Topic 842, is now effective for both public and private companies. Accounting for sale leaseback transactions under ASC Topic 842 can be very complex with varying outcomes depending on the structure of the transaction. It is important to determine if a sale has occurred, based on guidance provided by ASC Topic 842, as it will determine the initial and subsequent accounting treatment.

The structure of a sale leaseback transactions can also significantly impact a company’s tax position and tax attributes. If you’re contemplating a sale leaseback transaction, reach out to our team of experts to discuss whether this is the right path for you.

Article
Is a sale leaseback transaction right for you?

Read this if you are a business owner or leader in a company.

To expand or contract a business as market conditions change requires flexibility, agility, and foresight. For companies who want to be positioned as well as possible at the forefront of a recession, taking concrete steps now can ease the pain of an economic downturn or other unforeseen challenge.

How can companies navigate economic uncertainty and build resilience in their organizations?

  • Contain costs. When met with financial constraints—or the need to rapidly invest in growth areas—it will be critical to contain unnecessary expenses. Consider what costs can be pared back:
    • Can you pause certain projects and initiatives and reallocate funds where there is the greatest opportunity for growth?
    • Do you need to maintain your physical workplace, or can you trim the overhead?
    • Can you consider alternative staffing models to reduce costs?
  • Build a safety net of liquidity. Whether your business needs a capital reserve to invest in areas of growth or to pay the bills while waiting out the storm, conserving liquidity will help fortify the financial health of your company. Investigate all potential funding sources available, as well as the terms attached to potential loans and grants.
  • Cultivate a nimble workforce. An adaptable workforce is key to scaling your business up or down. Be prepared to: reskill and upskill your existing workers to fill new roles; staff for agility so workers can serve as pinch hitters to serve areas with spikes in demand; and consider hiring contractors and freelancers in roles with a lot of variance of demand.
  • Outsource infrastructural needs. One way to minimize fixed costs and help ensure best-in-class operational agility is by hiring external experts for non-core business functions, such as technology, finance, accounting, and human capital resources. Business operations are critical to maximizing workforce productivity and financially navigating a challenging climate. External experts working with companies across industries to scale during a recession can offer tried and true best practices to chart what would otherwise be uncharted territory.

While it’s impossible to know precisely what lies ahead, companies that take these four steps will be better poised to contend with whatever comes their way—whether it be a recession or an unprecedented growth opportunity.

Article
Four levers for building resilience

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.

Article
Asset retirement obligations in alternative/renewable energy

Read this if your organization receives charitable donations.

As the holiday season has passed and tax season is now upon us, we have our own list of considerations that we would like to share—so that you don’t end up on the IRS’ naughty list!

Donor acknowledgment letters

It is important for organizations receiving gifts to consider the following guidelines, as doing some work now may save you time (and maybe a fine or two) later.

Charitable (i.e., 501(c)(3)) organizations are required to provide a contemporaneous (i.e., timely) donor acknowledgment letter to all donors who contribute $250 or more to the organization, whether it be cash or non-cash items (e.g., publicly traded securities, real estate, artwork, vehicles, etc.) received. The letter should include the following:

  • Name of the organization
  • Amount of cash contribution
  • Description of non-cash items (but not the value)
  • Statement that no goods and services were provided (assuming this is the case)
  • Description and good faith estimate of the value of goods and services provided by the organization in return for the contribution

Additionally, when a donor makes a payment greater than $75 to a charitable organization partly as a contribution and partly as a payment for goods and services, a disclosure statement is required to notify the donor of the value of the goods and services received in order for the donor to determine the charitable contribution component of their payment.

If a charitable organization receives noncash donations, it may be asked to sign Form 8283. This form is required to be filed by the donor and included with their personal income tax return. If a donor contributes noncash property (excluding publicly traded securities) valued at over $5,000, the organization will need to sign Form 8283, Section B, Part IV acknowledging receipt of the noncash item(s) received.

For noncash items such as cars, boats, and even airplanes that are donated there is a separate Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, which the donee organization must file. A copy of the Form 1098-C is provided to the donor and acts as acknowledgment of the gift. For more information, you can read our article on donor acknowledgments.

Gifts to employees

At the same time, many employers find themselves in a giving spirit, wishing to reward the employees for another year of hard work. While this generosity is well-intended, gifts to employees can be fraught with potential tax consequences organizations should be aware of. Here’s what you need to know about the rules on employee gifts.

First and foremost, the IRS is very clear that cash and cash equivalents (specifically gift cards) are always included as taxable income when provided by the employer, regardless of amount, with no exceptions. This means that if you plan to give your employees cash or a gift card this year, the value must be included in the employees’ wages and is subject to all payroll taxes.

There are, however, a few ways to make nontaxable gifts to employees. IRS Publication 15 offers a variety of examples of de minimis (minimal) benefits, defined as any property or service you provide to an employee that has a minimal value, making the accounting for it unreasonable and administratively impracticable. Examples include holiday or birthday gifts, like flowers, or a fruit basket, or occasional tickets for theater or sporting events.

Additionally, holiday gifts can also be nontaxable if they are in the form of a gift coupon and if given for a specific item (with no redeemable cash value). A common example would be issuing a coupon to your employee for a free ham or turkey redeemable at the local grocery store. For more information, please see our article on employee gifts.

Other year-end filing requirements

As the end of the calendar year approaches, it is also important to start thinking about Form 1099 filing requirements. There are various 1099 forms; 1099-INT to report interest income, 1099-DIV to report dividend income, 1099-NEC to report nonemployee compensation, and 1099-MISC to report other miscellaneous income, to name a few.

Form 1099-NEC reports non-employment income which is not included on a W-2. Organizations must issue 1099-NECs to payees (there are some exclusions) who receive at least $600 in non-employment income during the calendar year. A non-employee may be an independent contractor, or a person hired on a contract basis to complete work, such as a graphic designer. Payments to attorneys or CPAs for services rendered that exceed $600 for the tax year must be reported on a Form 1099-NEC. However, a 1099-MISC would be sent to an Attorney for payments of settlements. For additional questions on which 1099 form to use please contact your tax advisor.

While federal income tax is not always required to be withheld, there are some instances when it is. If a payee does not furnish their Tax Identification Number (TIN) to the organization, then the organization is required to withhold taxes on payments reported in box 1 of Form 1099-NEC. There are other instances, and the rates can differ so if you have questions, please reach out to your tax advisor. 1099 forms are due to the recipient and the IRS by January 31st.

Whether organizations are receiving gifts, giving employee gifts, or thinking about acknowledgments and other reporting we hope that by making our list and checking it twice we can save you some time to spend with your loved ones this holiday season. We wish you all a very happy and healthy holiday season!

Article
Making a year-end list and checking it twice

Read this if you are in the senior living industry.

Happy New Year! While it may be a new calendar year, the uncertainties facing senior living facilities are still the same, and the question remains: When will the Public Health Emergency end, and how will it impact operations? Federal and state relief programs ended in 2022, and facilities are trying to find ways to fund operations as they face low occupancy levels. Inflation was at 7.1% in November and staffing remains a significant challenge. So, what can the industry expect for 2023?

Occupancy

Through the pandemic, occupancy losses were greater in nursing facilities than in assisted living (AL) and independent living (IL) facilities. This trend of care shifting away from nursing facilities had started before the onset of the pandemic. From 2018-2020, nursing facility volume decreased by over 5% while AL facilities occupancy increased by 1.1%.

Nursing facility occupancy nationwide was 80.2% in January of 2020 and declined to as low as 67.5% in January 2021. In 2022, nursing facility occupancy began to recover. As of December 18, 2022, nationwide occupancy had rebounded to 75.8%.

The assisted living and independent living markets were certainly impacted by the pandemic but not to the extent of the nursing facilities. AL and IL occupancy was reported at 80.9% in March 2021, a record low occupancy for the industry. Through the third quarter of 2022, NIC reported IL occupancy at 84.7%, which was up from 83.8% in the second quarter of 2022. AL occupancy was at 79.7%. in the third quarter of 2022. 

Providers are starting to see some positive signs with occupancy, but are reporting the recovery has been slowed by staffing shortages.

Cost of capital

The lending market is tightening for senior living providers and occupancy issues are negatively impacting facilities bottom lines. In addition, there has been significant consolidation in the banking industry. As a result, interest and related financing costs have risen. For those facilities that aren’t able to sustain their bottom lines and are failing financial covenants, lenders are being less lenient on waivers and in some cases, lenders are imposing default lending rates. 

Ziegler reports in their Winter 2022 report the lending market for senior housing is beginning to pick up. The majority of the lenders surveyed were regional banks, and reported they are offering both fixed and floating rate loans. Lenders are also reporting an increased scrutiny on labor costs coupled with looking at a facility’s ability to increase occupancy. 

Despite these challenges, analysts are still optimistic for 2023 as inflation seems to be tapering, which will hopefully lead to a stabilization of interest rates.

Staffing

Changes to five-star rating
In July 2022, the Centers for Medicare and Medicaid Services (CMS) modified the five-star rating to include Registered Nurse (RN) and administrator turnover. The new staffing rating adds new measures, including total nurse staffing hours per resident day on the weekends, the percentage of turnover for total nursing staff and RNs, and the number of administrators who have left the nursing home over a 12-month period.

Short-term this could have a negative impact on facilities ratings as they are still struggling to recruit and retain nursing staff. The American Healthcare Association has performed an analysis, and on a nationwide basis these changes resulted in the number of one-star staffed facilities rising from 17.71% to 30.89%, and the percentage of one-star overall facilities increasing from 17.70% to 22.08%.

Staffing shortages 
Much like the occupancy trend, nursing facilities faced staffing issues even before the pandemic. From 2018 to 2020, the average number of full-time employees dropped at a higher rate, 37.1%, than admissions, 15.7%. Data from the Bureau of Labor and Statistics and CMS Payroll Based Journal reporting shows nursing facilities lost 14.5% of their employees from 2019-2021 and assisted living facilities lost 7.7% over the same time period. This unprecedented loss of employment across the industry is leading to burnout and will contribute to future turnover.

This loss of full-time employees has created a ripple effect across the healthcare sector. Nursing facilities are unable to fully staff beds and have had to decline new admissions. This is causing strain on hospital systems as they are unable to place patients in post-acute facilities, creating a back log in hospitals and driving up the cost of care.

While the industry continues to experience challenges recruiting and retaining employees, the labor market is starting to swing in the favor of providers. Some healthcare sectors have recovered to pre-pandemic staffing levels. Providers are also starting to report lower utilization of contract labor.

While the industry continues to experience challenges recruiting and retaining employees, the labor market is starting to swing in the favor of providers. 

Minimum staffing requirement
CMS is expected to propose a new minimum staffing rule by early spring 2023. Federal law currently requires Medicare and Medicaid certified nursing homes provide 24-hour licensed nursing services, which are “sufficient to meet nursing needs of their residents”. CMS issued a request for information (RFI) as part of the Fiscal Year 2023 Skilled Nursing Facility Prospective Payment System Proposed Rule. CMS received over 3,000 comments with differing points of view but prevailing themes from patient advocacy groups regarded care of residents, factors impacting facilities' ability to recruit and retain staff, differing Medicaid reimbursement models, and the cost of implementing a minimum staffing requirement. In addition to the RFI, CMS launched a study that includes analysis of historical data and site visits to 75 nursing homes. 

In a study conducted by the American Healthcare Association, it is estimated an additional 58,000 to 191,000 FTEs will be needed (at a cost of approximately $11.3 billion) to meet the previously recommended 4.1 hours per patient day minimum staffing requirements.

One potential consequence of the minimum staffing requirement is higher utilization of agency staffing. Nursing facilities saw a 14.5% decrease in staffing through the pandemic and are still struggling to recruit and retain full-time staff. To meet the minimum staffing requirements, providers may need to fill open positions with temporary staffing. 

Provider Relief Funds (PRF) 

Don’t forget if you received PRF funds in excess of $10,000 between July 1 and December 31, 2021, Phase 4 reporting period opened January 1, 2023, and will close March 31, 2023.
Many of the changes to the industry brought on by the pandemic are likely to remain. Facilities who are putting a focus on their staff and working to create a positive work environment are likely to keep employees for longer.

While there are many challenges in the current environment, they were made to be met, and we are here to help. If you have any questions or would like to talk about your specific needs, please contact our senior living team. Wishing you a successful 2023.
 

Article
Status of the senior living industry: The good, the bad, and the uncertain

Read this if you are subject to SOC examinations.

In late October 2022, the American Institute of Certified Public Accountants’ (AICPA’s) Assurance Services Executive Committee (ASEC) released an update to the System and Organization Control (SOC) 2 reporting guide. Significant updates have been made to the Description Criteria implementation guidance and the Trust Services Criteria points of focus. Overall, the changes provide clarity around several recent and emerging industry topics and continue to promote reporting quality and consistency.

Summary of changes

Available for use now, the AICPA updates for SOC 2 examinations are significant and may require additional time and attention from companies who currently have a SOC 2 report or are planning on working toward compliance. High-level updates include incorporating new attestation standards (e.g., SSAE-20 and SSAE-21):

  • Updates to the Description Criteria implementation guidance for additional clarity regarding certain disclosure requirements, guidance on disclosure of how controls meet the requirements of a process or control framework, and guidance on disclosure of information about the risk assessment process and specific risks
  • Updates to the points of focus that support the application of the Trust Services Criteria that better reflect the ever-changing technology, legal, regulatory, and cultural risks, data management requirements, particularly related to confidentiality, and differentiating between a data controller and a data processor for privacy engagements
  • Incorporating, where appropriate, updates included in the AICPA Guide Reporting on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting (SOC 1 guide)
  • Incorporating, where applicable, additional guidance included in the AICPA Guide Reporting on an Examination of Controls Relevant to Security, Availability, Processing Integrity, Confidentiality, or Privacy in a Production, Manufacturing, or Distribution System (SOC for supply chain guide), particularly related to the risk assessment guidance

Additional updates

Other updates from the AICPA include, but are not limited to, the following:

  • Making qualitative materiality assessments (from the AICPA whitepaper on materiality)
  • Considering the service organization’s use of software applications and tools (from the SOC Tools FAQ)
  • Considering the operation of periodic controls that operated prior to the period covered by the examination
  • Considering management’s use of specialists
  • Performing and reporting in a SOC 2+ engagement (including an updated illustrative service auditor’s report)
  • Addressing considerations when the service organization has identified a service commitment or system requirement related to meeting the requirements of a process or control framework (such as HIPAA, ISO, or NIST)
  • Supplements and several appendices were removed and will be replaced with links to the appropriate documents on the AICPA website

If you currently have or will be working toward a SOC 2 report, it’s essential to understand the impact to the SOC 2 reporting process. Early preparation will help your organization stay ahead of the curve when it comes to achieving compliance. It is also essential to help ensure that frameworks are aligned and controls are in place to effectively guard against cybersecurity risks and protect sensitive data. If you have questions about SOC audits, or your specific situation, please contact our SOC Audits team. We’re here to help.

Article
Navigating changes to the SOC 2 guide

Read this if you are interested in well-being. This will be the first of two articles. This first article will focus on awareness. 

When the United States Surgeon General, Dr. Vivek Murthy, recently announced five priority areas of focus that represented “the most pressing public health issues of our time,” workplace well-being was one of the areas identified. According to the Current Priorities of the US Surgeon General website, the priority on workplace well-being aims to address the “numerous and cascading impacts for the health of individual workers and their families, organizational productivity, the bottom-line for businesses, and the US economy.” 

US Surgeon General current priorities:

  1. Workplace well-being
  2. Address the impacts of COVID-19
  3. Health misinformation
  4. Health worker burnout
  5. Youth mental health

Worker stress a growing challenge to employee well-being in many areas

The Surgeon General’s workplace well-being framework discusses many dimensions of well-being, with a focus on mental health. Research cited in the report suggests that worker stress levels grew from 2020 to 2021. In a different 2021 survey of 1,500 US adult workers across for profit, not-for-profit, and government sectors, 84% of respondents reported at least one workplace factor (e.g., emotionally draining work, challenges with work-life balance, or lack of recognition) that had a negative impact on their mental health. In most cases, the workplace factors contributing to stress can be managed or mitigated by integrating well-being into organizational planning and workforce development. 

Another study conducted by Mental Health America surveyed 11,000 workers across 17 industries in the US in 2021. It found that 80% of respondents felt that their workplace stress negatively affected their relationships with friends, family, and coworkers. The study also found that only 38% of those who know about their organization’s mental health services would feel comfortable using them. Statistics like this underscore the need for more deliberate efforts on the part of employers to provide services that support employees’ well-being. 

Well-being and human needs

At the core of the Surgeon General’s framework are five essentials of well-being and their associated “human need” components, all of which center around worker voice and equity. 

Well-being essential Human need
Protection from harm Safety
Security
Connection and community Social support
Belonging
Work-life harmony Autonomy
Flexibility
Mattering at work Dignity
Meaning
Opportunity for growth Learning
Accomplishment

As Dr. Murthy wrote in the introduction to the report, “We have the power to make workplaces engines for mental health and well-being. Doing so will require organizations to rethink how they protect workers from harm, foster a sense of connection among workers, show them that they matter, make space for their lives outside work, and support their long term professional growth.”

Parallels with BerryDunn’s well-being consulting approach

BerryDunn’s well-being approach aligns with the framework suggested by the Surgeon General. Today’s most effective well-being programs are multi-dimensional and emphasize a culture-first approach. In our experience, the most successful well-being programs are those that emphasize well-being as both a personal responsibility and a shared value that is promoted through policies, benefits, and cultural norms. 

For more information on how your organization can create and deliver a program that supports employees in the various aspects of well-being, or if you have other questions specific to your organization, please contact our Well-being consulting team. We’re here to help.

Article
Surgeon General identifies workplace well-being as a 2023 priority

Limited partners claiming an exemption from Self-Employment Contributions Act (SECA) taxes may be putting themselves at risk—in certain circumstances. In fact, more recently, it has become even riskier. Why? Because the rules are unclear, and the IRS has prioritized this issue in examinations and successfully challenged exemption claims in court.

Unfortunately, neither the tax code nor regulations define the term ‘limited partner.’ We share insights on the current state of the law and potential risks to limited partners who are considering claiming SECA tax exemptions.

Unsettled law and IRS scrutiny

Under the Internal Revenue Code, the distributive share of partnership income allocable to a “limited partner” is generally not subject to SECA tax, other than for certain guaranteed payments for services rendered.

Some taxpayers take the position that any taxpayer holding a limited partnership interest in a limited partnership formed under state law should be considered a limited partner for purposes of the SECA tax exception – regardless of the taxpayer’s level of activity in the partnership’s trade or business. However, the IRS has been challenging taxpayers taking such positions, and several recent court decisions that have considered this issue have found in favor of the government.

The IRS is giving the issue increased attention as one of its Large Business & International (LB&I) compliance campaigns. Through the SECA Tax compliance campaign, LB&I notes that individual partners—“including service partners in service partnerships organized as state-law limited liability partnerships, limited partnerships, and limited liability companies”—are making inappropriate claims of qualifying as limited partners that are not subject to SECA tax.

The Biden administration also sought to address the issue legislatively, proposing to eliminate the current exception from SECA tax for limited partners who provide services to and materially participate in the partnership’s trade or business. 

How courts have ruled on the issue

The IRS has been successful in a series of cases challenging SECA tax exemption claims involving limited liability companies (LLCs) and limited liability partnerships (LLPs)—as well as, in one instance, potentially a state law limited partnership. However, that entity’s legal status was not considered by the court. We present several case law scenarios for consideration:

Case Entity     Outcome
Renkemeyer, Campbell, & Weaver LLP v. Commissioner, 136 T.C. 137 (2011) Kansas limited liability partnership Members of the LLP law firm were not limited partners for SECA tax purposes and, therefore, income allocated to the partners was subject to SECA tax.
Riether v. United States, 919 F.Supp.2d 1140 (D. N.M. 2012)     LLC partnership Husband and wife were subject to SECA tax on their distributive shares from LLC.
Vincent J. Castigliola, et ux., et al. v. Commissioner, TC Memo 2017-62 Mississippi Professional Limited Liability Company (PLLC)   Members of PLLC in the practice of law were subject to SECA tax on their entire distributive share of the PLLC’s income, despite the fact that they received guaranteed payments commensurate with local legal salaries.
George E. Joseph, T.C. Memo. 2020-65 Partnership for federal tax purposes, but status as state law limited partnership was not specifically considered by court    Taxpayer was subject to SECA tax on his distributive share of partnership income, based on the taxpayer’s failure to demonstrate that he was a limited partner for purposes of SECA tax.


Courts have not yet specifically addressed the availability of the exemption in the case of a state law limited partnership. However, the IRS is now beginning to tee up court cases to challenge limited partners in state law limited partnerships where the limited partners have not been allocated self-employment income with respect to their distributive share of partnership income.

One such case that may offer some clarity is the Soroban Capital Partners LP litigation, where two petitions were filed with the Tax Court by a New York hedge fund management company formed as a Delaware limited partnership. The petitions challenge the IRS’ characterization of partnership net income as net earnings from self-employment. According to the petitions, each of the three individual limited partners spent between 2,300–2,500 hours working for Soroban, its general partner, and various affiliates. This suggests that the taxpayer does not plan to dispute that the limited partners were “active participants” in the partnership business. Resolution of this case could finally compel the Tax Court to squarely address the question of whether a state law limited partner qualifies for the “limited partner” exception to SECA. 

Mitigate risk until definitive guidance is delivered

While the IRS has been successful in arguing that active members of LLCs and LLPs are not limited partners for SECA tax purposes, the only case to date possibly involving a state law limited partnership failed to specifically address the issue. The pending litigation in Soroban Capital Partners LP could provide definitive direction.

Although there is currently no clear authority precluding “active” limited partners of a state law limited partnership from claiming exemption from SECA tax, such a position should be taken with caution and a clear understanding of the risks—including being subject to IRS challenge if audited. Moreover, the opportunity to take this position could close depending on the outcome of Soroban Capital Partners LP.

Written by Neal Weber and Justin Follis. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com

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Claiming an exemption from self-employment tax as a limited partner? Think twice.