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Save time and effort—our list of tips to prepare for
year-end
reporting

12.19.19

Editor's note: read this if you are a CFO, controller, accountant, or business manager.

We auditors can be annoying, especially when we send multiple follow-up emails after being in the field for consecutive days. Over the years, we have worked with our clients to create best practices you can use to prepare for our arrival on site for year-end work. Time and time again these have proven to reduce follow-up requests and can help you and your organization get back to your day-to-day operations quickly. 

  1. Reconcile early and often to save time.
    Performing reconciliations to the general ledger for an entire year's worth of activity is a very time consuming process. Reconciling accounts on a monthly or quarterly basis will help identify potential variances or issues that need to be investigated; these potential variances and issues could be an underlying problem within the general ledger or control system that, if not addressed early, will require more time and resources at year-end. Accounts with significant activity (cash, accounts receivable, investments, fixed assets, accounts payable and accrued expenses and debt), should be reconciled on a monthly basis. Accounts with less activity (prepaids, other assets, accrued expenses, other liabilities and equity) can be reconciled on a different schedule.
  2. Scan the trial balance to avoid surprises.
    As auditors, one of the first procedures we perform is to scan the trial balance for year-over-year anomalies. This allows us to identify any significant irregularities that require immediate follow up. Does the year-over-year change make sense? Should this account be a debit balance or a credit balance? Are there any accounts with exactly the same balance as the prior year and should they have the same balance? By performing this task and answering these questions prior to year-end fieldwork, you will be able to reduce our follow up by providing explanations ahead of time or by making correcting entries in advance, if necessary. 
  3. Provide support to be proactive.
    On an annual basis, your organization may go through changes that will require you to provide us documented contractual support.  Such events may include new or a refinancing of debt, large fixed asset additions, new construction, renovations, or changes in ownership structure.  Gathering and providing the documentation for these events prior to fieldwork will help reduce auditor inquiries and will allow us to gain an understanding of the details of the transaction in advance of performing substantive audit procedures. 
  4. Utilize the schedule request to stay organized.
    Each member of your team should have a clear understanding of their role in preparing for year-end. Creating columns on the schedule request for responsibility, completion date and reviewer assigned will help maintain organization and help ensure all items are addressed and available prior to arrival of the audit team. 
  5. Be available to maximize efficiency. 
    It is important for key members of the team to be available during the scheduled time of the engagement.  Minimizing commitments outside of the audit engagement during on site fieldwork and having all year-end schedules prepared prior to our arrival will allow us to work more efficiently and effectively and help reduce follow up after fieldwork has been completed. 

Careful consideration and performance of these tasks will help your organization better prepare for the year-end audit engagement, reduce lingering auditor inquiries, and ultimately reduce the time your internal resources spend on the annual audit process. See you soon. 

Related Professionals

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.

Current Tax Law
(TCJA–present)
Biden’s stated goals
Corporate tax rates and AMT

Corporations have a flat 21% tax rate and no corporate alternative minimum tax (AMT), which were both changed by the TCJA.

These do not expire.

Biden would raise the flat rate to the pre-TCJA level of 28% and reinstate the corporate AMT, requiring corporations to pay the greater of their regular corporate income tax or the 15% minimum tax (while still allowing for net operating loss (NOL) and foreign tax credits).

Capital gains and Qualified Dividend Income

The top tax rate is 20% for income over $441,450 for individuals and $496,600 for married filing jointly. There is an additional 3.8% net investment income tax.

Biden would eliminate breaks for long-term capital gains and dividends for income above $1 million. Instead, these would be taxed at ordinary rates.

Payroll taxes

The 12.4% payroll tax is divided evenly between employers and employees and applies to the first $137,700 of an individual’s income (scheduled to go up to $142,400 in 2020). There is also a 2.9% Medicare Tax which is split equally between the employer and the employee with no income limit.

Biden would maintain the 12.4% tax split between employers and employees and keep the $142,400 cap but would institute the tax on earned income above $400,000. The gap between the two wage levels would gradually close with annual inflationary increases.

International taxes (GILTI, offshoring)

GILTI (Global Intangible Low-Tax Income): Established by the TCJA, U.S. multinationals are required to pay a foreign tax rate of between 10.5% and 13.125%.

A scheduled increase in the effective rate to 16.406% is scheduled to begin in 2026.

Offshoring taxes: The TCJA includes a tax deduction for corporations that manufacture in the U.S. and sell overseas.

GILTI: Biden would double the tax rate to 21% and assess a minimum tax on a country-by-country basis.

Offshoring taxes: Biden would establish a 10% penalty surtax on profits for goods and services manufactured offshore and a 10% advanceable “Made in America” tax credit to create U.S. manufacturing jobs. Biden would also close offshoring tax loopholes in the TCJA.

Estate taxes

The estate tax exemption for 2020 is $11,580,000. Transfers of appreciated property at death get a step-up in basis.

The exemption is scheduled to revert to pre-TCJA levels.

Biden would return the estate tax to 2009 levels, eliminate the current step-up in basis on inherited assets, and eliminate the step-up at death provision for inherited property passed along by the decedent.

Individual tax rates

The top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married filing jointly. This was lowered from 39.6% pre-TCJA.

Biden would restore the 39.6% rate for taxable income above $400,000. This represents only the top rate.

Individual tax credits

Currently, individuals can claim a maximum of $2,000 Child Tax Credit (CTC) plus a $500 dependent credit.

Individuals may claim a maximum dependent care credit of $600 ($1,200 for two or more children).

The CTC is scheduled to revert to pre-TCJA levels ($1,000) after 2025.

Biden would expand the CTC to $3,000 for children age 17 and under and offer a $600 bonus for children age 6 and under. It would also be fully refundable.

He has also proposed increasing the child and dependent care tax credit to $8,000 ($16,000 for two or more children), and he has proposed a new tax credit of up to $5,000 for informal caregivers.

Separately, Biden has also proposed a $15,000 tax credit for first-time homebuyers.

Qualified Business Income Deduction under Section 199A

As previously discussed, many businesses qualify for a 20% qualified business income tax deduction lowering the effective rate of tax for S corporation shareholders and partners in partnerships to 29.6% for qualifying businesses.

Biden would phase out the tax benefits associated with the qualified business income deduction for those making more than $400,000 annually.

Education

Forgiven student loan debt is included in taxable income.

There is no tax credit for contributions to state-authorized organizations that sponsor scholarships.

Biden would exclude forgiven student loan debt from taxable income.

Small businesses

There are current tax credits for some of the costs to start a retirement plan.

Biden would offer tax credits for businesses that adopt a retirement savings plan and offer most workers without a pension or 401(k) access to an “automatic 401(k)”.

Itemized deductions

For 2020, the standard deduction is $12,400 for single/married filing separately and $24,800 for married filing jointly.

After 2025, the standard deduction is scheduled to revert to pre-TCJA amounts, or $6,350 for single /married filing separately and $12,700 for married filing jointly.

The TCJA suspended the personal exemption and most individual deductions through 2025.

It also capped the SALT deduction at $10,000, which will remain in place until 2025, unless repealed.

Biden would enact a provision that would cap the tax benefit of itemized deductions at 28%.

SALT cap: Senate minority leader Charles Schumer has pledged to repeal the cap should Biden win in November (the House of Representatives has already passed legislation to repeal the SALT cap).

Opportunity Zones

Biden has proposed incentivizing - opportunity zone funds to partner with community organizations and have the Treasury Department review the program’s regulations of the tax incentives. He would also increase reporting and public disclosure requirements.
Alternative energy Biden would expand renewable energy tax credits and credits for residential energy efficiency and restore the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit.


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

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Biden's tax plan and what may change from current tax law

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.

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Paycheck Protection Program: Updates on new and existing loans

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.
 

Article
FDIC issues its third quarter 2020 banking profile

Read this if you are a construction company.

I am pleased to introduce 2020 Tax Planning Opportunities: CARES Act, published in conjunction with CICPAC (Construction Industry CPAs-Consultants Association) by a national group of tax professionals focused on the construction industry. BerryDunn is proud to be one of CICPAC’s 65 member firms across the US, and one of only two in New England.

Within the document you’ll find an abundance of useful insights on the following topics and more related to the Coronavirus Aid, Relief and Economic Security (CARES) Act:

  • Paycheck Protection Program (PPP) loans
  • Net operating losses and excess business loss limitations
  • Qualified Improvement Property (QIP)
  • Payroll cash flow opportunities and employer tax credits

Every business has been impacted by COVID-19 in some form. The CARES Act offers opportunities galore for virtually every business. Now, perhaps more than ever, it’s time to work closely with your BerryDunn tax professional to ensure recovery through this difficult time. 

Read the entire document

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2020 tax planning opportunities: CARES Act whitepaper available now

Read this if your facility or organization has received provider relief funds.

The rules over the use of the provider relief funds (PRF) have been in a constant state of flux since the funds started to show up in your bank accounts back in April. Here is a summary of where we are as of November 30, 2020 with allowable uses of the funds.
 
The most recent Post-Payment Notice of Reporting Requirements is dated November 2, 2020. In accordance with the notice, PRF may be used for two purposes:

  1. Healthcare-related expenses attributable to coronavirus that another source has not reimbursed and is not obligated to reimburse
  2. Lost revenue, up to the amount of the difference between 2019 and 2020 actual patient care revenue

The Department of Health and Human Services (HHS) has issued FAQs as recently as November 18, 2020.  The FAQs include the following clarifications on the allowable uses:

Healthcare related expenses attributable to the coronavirus

  1. PRF may be used for the marginal increased expenses or incremental expenses related to coronavirus.
  2. Expenses cannot be reimbursed by another source or another source cannot be obligated to reimburse the expense.
  3. Other sources include, but are not limited to, direct patient billing, commercial insurance, Medicare/Medicaid/Children’s Health Insurance Program (CHIP), or other funds received from the Federal Emergency Management Agency (FEMA), the Provider Relief Fund COVID-19 Claims Reimbursement to Health Care Providers and Facilities for Testing, Treatment, and Vaccine Administration for the Uninsured, and the Small Business Administration (SBA) and Department of Treasury’s Paycheck Protection Program (PPP). This would also include any state and federal grants received as a result of the coronavirus.
  4. Providers should apply reasonable assumptions when estimating the portion of costs that are reimbursed from other sources.
  5. The examples in the FAQs for increased cost of an office visit and patient billing seem to point to only supplemental coronavirus related reimbursement needing to be offset against the increased expense.
  6. PRF may be used for the full cost of equipment or facility projects if the purchase was directly related to preventing, preparing for and responding to the coronavirus; however, if you claim the full cost, you cannot also claim the depreciation for any items capitalized.
  7. PRF cannot be used to pay salaries at a rate in excess of Executive Level II which is currently set at $197,300.

Lost revenues attributable to the coronavirus

  1. Lost revenues attributable to coronavirus are calculated based upon a calendar year comparison of 2019 to 2020 actual revenue/net charges from patient care (prior to netting with expenses).
  2. Any unexpended PRF at 12/31/20 is then eligible for use through June 30, 2021 and calculated lost revenues in 2021 are compared to January to June 2019.
  3. Reported patient care revenue is net of uncollectible patient service revenue recognized as bad debts and includes 340B contract pharmacy revenue.
  4. This comparison is cumulative, for example, if your net income improves in Q4, it will reduce lost revenues from Q2.
  5. Retroactive cost report settlements or other payments received that are not related to care provided in 2019 or 2020 can be excluded from the calculation.

Whether you are tracking expenses or lost revenues, the accounting treatment for both is to be consistent with your normal basis of accounting (cash or accrual).
 
As a reminder, the first reporting period (through December 31, 2020) is due February 15, 2021. The reporting portal is supposed to open January 15, 2021. Any unexpended PRF at December 31, 2020 can be used from January 1, 2021 through June 30, 2021, with final reporting due July 31, 2021.

The guidance continues to change rapidly and new FAQs are issued each week. Please check back here for any updates, or contact Mary Dowes for more information.

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Provider relief funds: Allowable uses 

Read this if you are an employee benefit plan fiduciary.

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. This article looks at distributions from your plan, specifically focusing on required minimum distributions (RMD) and coronavirus-related distributions.

Required minimum distributions

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 have been temporarily waived for retirement plans for 2020. This change applies to direct 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. Note: the waiver will not alter a participant’s required beginning date for purposes of applying the minimum distribution rules in future periods.

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, layoff, having hours reduced, or losing child care are eligible to receive a coronavirus-related distribution.

These 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. 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 COVID-19 pandemic. A result of this uncertainty has been changes to guidance and treatment of plan transactions, which has forced many of our clients to review and alter their control environments. We have provided our current understanding of the guidance the IRS has provided for the treatment surrounding distributions, specifically RMDs and coronavirus-related distributions. If you and your team have any additional questions specific to your organization or plan, please contact us

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Impacts of the CARES Act on employee benefit plan distributions

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

We are approaching the end of 2020 and we still don’t have final and authoritative guidance from the U.S. Department of Treasury and the Office of Management and Budget about how to treat the PPP loan forgiveness. Will the Federal Acquisition Regulation, Part 31.201-5, Credits, apply and drastically diminish overhead rates for 2020? Will any credit follow the timing of legal forgiveness? Will you be required to offset subsequent forgiveness against 2020 expenses? 

The lobbyists are hard at work fighting any offset. Will they gain legislative support or will a compromise be negotiated? In the face of so many unknowns, we encourage companies to plan for potential outcomes of this unique situation in order to avoid unwanted surprises in the years to come. What can be done now? Let’s first explore trends we’ve observed for A/E firms for this year:

  • Certain costs, such as travel, meals, seminars and overall office expenses, are lower in 2020 with many employees working from home. 
  • Employees are traveling less and are not participating in networking events; they are focusing more of their time on chargeable work. As a result, utilization rates are higher in 2020 compared to recent years. A 1% change in utilization generally results in an approximate 4% directional change in overhead rate. 

These lower spending, higher chargeability trends are pushing overhead rates down considerably for 2020 and, likely too, for 2021. Depending on the type and the length of projects contracted to include those overhead rates, resulting profitability will also be lower for a few more years when indirect costs increase to normal levels. Proper planning is extremely important in this situation. Here are some questions to ask when considering your options:

  • Are there opportunities to negotiate the project price or terms so project profitability is maintained? Can you negotiate higher labor rates or a fixed overhead rate? 
  • If there isn’t any room for negotiations on projects using actual audited overhead rates, should your company focus business development efforts on bidding on or seeking and forming strategic partnerships to pursue more non-governmental projects? 
  • If the company remains profitable and realizes savings in certain costs this year, can you find ways to spend and increase allowable indirect costs while simultaneously strengthening your company? Can you award higher employee bonuses to boost employee morale and help retain great talent? Or maybe now is the time to ramp up cybersecurity training to strengthen IT controls and employee awareness of how to prevent, detect, and respond to cyber threats or invest in cyber penetration testing. 

Targeted spending on allowable costs will help elevate your overhead rate and help position your company to emerge stronger post-pandemic. If you need any help modeling expected overhead rates or have questions about allowable overhead costs, please contact Estera or Linda. We're here to help. 

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Planning for overhead rate changes: Considerations and strategies

Read this if you are a Financial Operations Principal or in the compliance department.

On July 30, 2013 the Securities and Exchange Commission (SEC) amended certain reporting, audit, and notification requirements for broker-dealers registered with the SEC. Among other things, these amendments required broker-dealers to file one of two new reports with the SEC—a compliance report, if the broker-dealer did not claim it was exempt from Rule 15c3-3 under the Securities Exchange Act of 1934, or an exemption report if the broker-dealer did claim it was exempt from Rule 15c3-3 throughout the fiscal year. The Division of Trading and Markets of the SEC came out with frequently asked questions regarding the amendments made on July 30, 2013 and periodically updates this list of frequently asked questions. This list was updated July 1, 2020. Here are some of the most notable changes to the FAQs. For the full list, click here.

Exemption provisions

As noted above, a broker-dealer may claim exemption from Rule 15c3-3. Paragraph (k) of Rule 15c3-3 outlines four exemption provisions: (k)(1), (k)(2)(i), (k)(2)(ii), and (k)(2)(iii). Exemption provision (k)(1) may be claimed by broker-dealers that only perform direct-way mutual fund or variable annuity business. If the broker-dealer performs any other type of business, this exemption may not be claimed. Exemption provision (k)(2)(i) is commonly seen as a catch-all for broker-dealers whose businesses don’t qualify for a different exemption. However, to qualify, the broker-dealer cannot carry margin accounts, must promptly transmit all customer funds and deliver all securities received, and cannot otherwise hold funds or securities for, or owe money or securities to, customers. All transactions must be completed through one or more bank accounts specially designated for such transactions. Exemption provision (k)(2)(ii) is for broker-dealers that introduce transactions to a carrying broker-dealer on a fully disclosed basis. Lastly, exemption provision (k)(2)(iii) may be granted by the SEC upon written application by a broker-dealer. However, the SEC has never granted such an exemption.

Exemption report prohibitions

In some instances, a broker-dealer may not meet any of the exemption provisions of paragraph (k) of Rule 15c3-3. However, the broker-dealer may have also not held customer securities or funds during the fiscal year and therefore not be required to file a compliance report. In these instances, the broker-dealer should file an exemption report, along with a corresponding accountant’s report based on a review of the exemption report. 

Since the broker-dealer has not claimed an exemption under paragraph (k) of Rule 15c3-3, its exemption report should include a description of all the broker-dealer’s business activities and a statement that during the reporting period the broker-dealer (1) did not directly or indirectly receive, hold, or otherwise owe funds or securities for or to customers, other than money or other consideration received and promptly transmitted in compliance with paragraph (a) or (b)(2) of Rule 15c2-4; (2) did not carry accounts of or for customers; and (3) did not carry a propriety securities account of a broker or dealer (PAB accounts, as defined in Rule 15c3-3). Furthermore, on the broker-dealer’s FOCUS report, items 4550, 4560, 4570, and 4580 should be left blank.

Broker-dealers with multiple lines of business

Non-carrying broker-dealers may have multiple lines of business with customers. For instance, a broker-dealer may introduce some customer transactions to a carrying broker-dealer on a fully disclosed basis and also provide M&A transaction services. For the former, a (k)(2)(ii) exemption would be most appropriate. However, in the latter, a (k)(2)(i) exemption would be most appropriate. In these cases, it is common for the broker-dealer to disclose the exemption that best fits their primary line of business. However, the SEC has indicated the broker-dealer should disclose both exemption provisions in these instances, including any exceptions under either exemption. Each exemption provision being claimed should also be indicated on the broker-dealer’s FOCUS report. 

Similarly, some broker-dealers may provide activities that qualify under one or more of the exemption provisions of Rule 15c3-3 as well as activities that involve the activities described in items 1, 2, and 3 above. In these instances, the broker-dealer would not qualify for exemption from Rule 15c3-3 and would be required to file a compliance report with a corresponding accountant’s report based on an examination of the compliance report.

The exemption provisions for broker-dealers can be difficult to navigate. Further exacerbating the difficulty of navigating the exemption provisions, each broker-dealer has a different set of circumstances. The SEC’s Division of Trading and Markets also acknowledges these difficulties, hence the creation of its FAQ list. Broker-dealers should refer to this list, in conjunction with Rule 15c3-3, to ensure compliance. If further clarification is needed, the broker-dealer should consult their Financial Industry Regulatory Authority (FINRA) representative. 

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