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Treasury issues prevailing wage and apprenticeship requirements guidance

12.07.22

The US Department of the Treasury and the Internal Revenue Service on November 29 announced the release of guidance providing taxpayers information on how to satisfy the prevailing wage and apprenticeship requirements to qualify for enhanced tax benefits under the Inflation Reduction Act’s clean energy provisions. 

The publication of Notice 2022-61 and further guidance in the Federal Register—published on November 30, 2022—begins the 60-day period for these key labor provisions to take effect. In other words, these requirements will apply to qualifying facilities, projects, property, or equipment for which construction begins on or after January 30, 2023. So, in order to receive increased incentives, taxpayers must meet the prevailing wage and apprenticeship requirements for facilities where construction begins on or after January 30, 2023.

Prevailing wage and apprenticeship requirements

The Inflation Reduction Act, which President Biden signed into law on August 16, 2022, introduced a new credit structure whereby many clean energy tax incentives are subject to a base rate and a “bonus multiplier” of 5X. To qualify for the bonus rate, projects must satisfy certain wage and apprenticeship requirements implemented to ensure both the payment of prevailing wages and that a certain percentage of total labor hours are performed by qualified apprentices. 

Projects under 1MW or that begin construction within sixty days of the date when the Treasury publishes guidance regarding the wage and apprenticeship requirements are automatically eligible for the bonus credit.

The newly released guidance addresses the Inflation Reduction Act's two labor requirements—providing prevailing wages and employing a certain amount of registered apprentices—that taxpayers must meet for clean energy developments to qualify for the bonus rate. Both the prevailing wage and apprenticeship requirements apply to the following tax incentives:

  • Advanced energy project credit
  • Alternative fuel refueling property credit
  • Credit for carbon oxide sequestration
  • Clean fuel production credit
  • Credit for production of clean hydrogen
  • Energy-efficient commercial buildings deduction
  • Renewable energy production tax credit
  • Renewable energy property investment tax credit

The prevailing wages requirements also apply to the following tax incentives:

  • New zero-efficient home credit
  • Zero-emissions nuclear power production credit

New guidance

The new guidance describes the process for identifying the applicable wage determination for a specific geographic area and job classification on the Department of Labor’s sam.gov website. If no prevailing wage determination is posted for a specific geographic area and/or job classification, the notice provides that taxpayers should contact the DOL’s Wage and Hour Division, which would then provide the taxpayer with the labor classifications and wage rates to use.

For purposes of the apprenticeship requirements, the guidance provides specific information regarding the apprenticeship labor hour, ratio, and participation requirements. The guidance also describes the good faith effort exception, whereby a taxpayer will be deemed to have satisfied the apprenticeship requirements with respect to a facility if the taxpayer has requested qualified apprentices from a registered apprenticeship program and the request has been denied or the program fails to respond the request within five business days.

The guidance also specifies the recordkeeping requirements taxpayers must comply with to substantiate that they paid workers a prevailing wage and satisfied the apprenticeship requirements.

Beginning of construction guidance

As mentioned above, taxpayers must meet the prevailing wage and apprenticeship requirements with respect to a facility to receive the increased credit or deduction amounts if construction of the facility begins on or after the date sixty days after the Treasury publishes guidance. Notice 2022-61 confirms the use of long-standing methods for establishing the date of beginning of construction:

  • The physical work test (starting physical work of a significant nature)
  • The 5% safe harbor (incurring 5% or more of the total cost of the facility)

For purposes of both tests, taxpayers must demonstrate either continuous construction or continuous efforts—the continuity requirement—for beginning of construction to be satisfied.

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BerryDunn experts and consultants

Read this if you are at a financial institution and concerned about fraud.

Financial fraud by the numbers

Back in 2021, BerryDunn’s David Stone wrote about occupational fraud at financial institutions. This article mainly cited information from a 2020 Report to the Nations: Banking and Financial Services Edition (2020 Report) published by the Association of Certified Fraud Examiners (ACFE). Fast forward to 2023, and the ACFE’s 2022 Report to the Nations (2022 Report) displays that occupational fraud continues to be a concern.

Financial institutions account for 22.3% of all occupational fraud worldwide, up from 19% in the 2020 Report. These fraud causes have a median loss of $100,000 per case—which was the same as the 2020 Report. Cases had decreased from the 2020 Report from 368 to 351; however, financial institutions remain the most susceptible industry to occupational fraud.

What does a fraudster look like, and how do they commit their crimes? How do you prevent fraud from happening at your organization? And how can you strengthen an already robust anti-fraud program? These questions, raised in David’s 2021 article, remain relevant today. 

Profile of a fraudster

One of the most difficult tasks any organization faces is identifying and preventing potential cases of fraud. This is especially challenging because most employees who commit fraud are first-time offenders with no record of criminal activity, or even termination at a previous employer.

The 2022 Report reveals a few commonalities between fraudsters. The amounts from the 2020 Report are shown in parentheses for comparison purposes:

  • 6% of fraudsters had a prior criminal background (3%)
  • Men committed 73% of fraud and women committed 27% (71%, 29%)
  • 37% of fraudsters were an employee, 39% worked as a manager, and 23% operated at the executive/owner level (56%, 27%, 14%)
  • The median loss for fraudsters who had been with their organizations for more than five years was $193,500 compared to $75,000 for fraudsters who had been with their organizations for five years or less ($150,000, $86,000)

Employees who committed fraud displayed certain behaviors during their schemes. The ACFE reported these top red flags in its 2022 Report:

  • Living beyond means—39% (42%)
  • Financial difficulties—25% (33%)
  • Unusually close association with vendor/customer—20% (15%)
  • Divorce/family problems—11% (14%)

These figures give us a general sense of who commits fraud and why. But in all cases, the most pressing question remains: how do you prevent the fraud from happening?

Preventing fraud: A two-pronged approach

As a proactive plan for preventing fraud, we recommend focusing time and energy on two distinct facets of your operations: leadership tone and internal controls.

Leadership tone

The Board of Directors and senior management are in a powerful position to prevent fraud. By fostering a top-down culture of zero tolerance for fraud, you can diminish opportunity for employees to consider, and attempt, fraud.

It is crucial to start at the top. Not only does this send a message to the rest of the company, but frauds committed at the executive level had a median loss of $337,000 per case, compared to a median loss of $50,000 when an employee perpetrated the fraud. This is compared to a median loss of $1,265,000 and $77,000 per case, respectively, in the 2020 Report.

Internal controls

Every financial institution uses internal controls in its daily operations. Override of existing internal controls, lack of internal controls, and lack of management review were cited in the 2022 Report as the most common internal control weaknesses that contribute to occupational fraud.

The importance of internal controls cannot be overstated. Every organization should closely examine its internal controls and determine where they can be strengthened—even financial institutions with strong anti-fraud measures in place.

The experts at BerryDunn have created a checklist of the top 10 controls for financial institutions, available in our whitepaper on preventing fraud. This is a list we encourage every financial leader to read. By strengthening your foundation, your company will be in a powerful place to prevent fraud. 

Read more to prevent fraud

Employees are your greatest strength and number one resource. Taking a proactive, positive approach to fraud prevention maintains the value employees bring to a financial institution, while focusing on realistic measures to discourage fraud.

In our free white paper on preventing financial institution fraud, we take a deeper look at how to successfully implement a strong anti-fraud plan. Download the white paper here.

Commit to strengthening fraud prevention and you will instill confidence in your Board of Directors, employees, customers, and the general public. It’s a good investment for any financial institution. If you have questions about your specific situation, please visit our Ask the Advisor page to submit them, or contact a member of the Financial Institutions team. We’re here to help.

Article
Preventing fraud at financial institutions 2023 update: An anti-fraud plan is the best investment you can make

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!

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Making a year-end list and checking it twice

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.

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Is a sale leaseback transaction right for you?

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.
 

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

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.

Read this if you work for a charitable, not-for-profit organization that accepts gift-in-kind donations.

Not-for-profit organizations frequently receive contributions of nonfinancial assets, commonly referred to as gifts-in-kind. Examples of nonfinancial assets that could be considered gifts-in-kind include property, vehicles, equipment, the right to use property, vehicles or equipment, materials or supplies, or time and services. The Financial Accounting Standards Board (FASB) determined that existing Generally Accepted Accounting Principles (GAAP) do not provide sufficient transparency to readers of financial statements. Prior guidance gave little specific guidance on presentation of gifts-in-kind other than contributed services. Therefore, FASB issued Accounting Standards Update (ASU) 2020-07 Not-for-Profit Entities (Topic 958), effective for annual periods beginning after June 15, 2021, improving that transparency.

This article will provide a summary of the new gift-in-kind standard along with a refresher on existing tax implications of gifts-in-kind.

GAAP valuation of gifts-in-kind

The new ASU does not change the basis of measurement for gifts-in-kind, only the related disclosures. For instance, contributions of services are still only recognized if the services (1) either create or enhance nonfinancial assets or (2) require specialized skill, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation.

Tax valuation of gifts-in-kind

There is no separate valuation for in-kind contributions for Form 990 or 990-PF reporting purposes. In-kind contributions should be reported on the Form 990 or 990-PF on the same basis as the financial statements.

Donated services and use of facilities are not included in revenue or expenses on the Form 990. Instead, they are included as reconciling items on Schedule D, reconciliation from financial statements to the Form 990, at the same amounts as reported on the financial statements.

GAAP disclosures and groupings for gifts-in-kind

The ASU specifies that gifts-in-kind need to be presented as a separate line item in the statement of activities rather than being included with other contributions. Additionally, the financial statements will need to disaggregate the various types of contributed nonfinancial assets. For instance, if a donor provides free office space to a not-for-profit and another donor provides free accounting services, these types of contributions should be shown separately in a footnote disclosure or in the statement of activities.

Not-for-profits will also have to disclose information about whether the gifts were monetized or used (for instance, if a contributed vehicle was sold) and what program they were used for, along with their policy regarding monetizing or using contributed nonfinancial assets. The ASU also requires disclosure of any donor-imposed restrictions on the gift-in-kind and what methods were used to value it. Finally, the financial statements must disclose the principal or most advantageous market used to arrive at the fair value measure if the organization is prohibited by the donor from selling or using the contributed nonfinancial asset in that market.

Tax disclosures and groupings for gifts-in-kind

The nature of the gift-in-kind determines where and how it is disclosed on Form 990. Gifts of nonfinancial assets (i.e. fixed assets, materials, supplies) are disclosed on Form 990 as noncash contributions. The total noncash contributions an organization receives during the year and records as revenue may mean additional schedules for your filing.

A public charity that receives total noncash contributions of $25,000 or more must also complete Schedule M. Private foundations do not complete Schedule M.

If an individual noncash contributor rises to the level of Schedule B reporting (by contributing a minimum of either $5,000 or, for some public charities, 2% of total contributions for the year), a description of the noncash contribution, date of contribution and the amount recorded as revenue must be disclosed on Schedule B. Schedule B is not subject to public disclosure for section 501(c)(3) public charities. However, the Form 990-PF’s Schedule B is subject to public disclosure.

Schedule M has specific groupings of noncash contributions, such as gifts of clothing and household items, vehicles, and real estate. Unlike Schedule B, Schedule M does not require the breakout of individual contributors. There are no groupings of like-kind contributions on Schedule B as individual donors must be reported separately.

Donated services and use of facilities are not disclosed on Schedule M. In contrast to GAAP reporting, donated services and use of facilities are removed from both revenue and expenses for Form 990 and 990-PF purposes as previously mentioned.

In addition to the reporting mentioned above, if your organization receives noncash contributions, there may be additional considerations to evaluate as well. The BerryDunn team is here to help answer any questions.

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ASU 2020-07: The gift (in-kind) that keeps on giving

Read this if you are a community bank.

The Federal Deposit Insurance Corporation (FDIC) recently issued its third quarter 2022 Quarterly Banking Profile. The report provides financial information based on Call Reports filed by 4,746 FDIC-insured commercial banks and savings institutions. The report also contains a section specific to community bank performance. In third quarter 2022, this section included the financial information of 4,308 FDIC-insured community banks. BerryDunn’s key takeaways from the report are as follows:

Community banks see $1.0 billion increase in third quarter 2022 to $8.5 billion in quarterly net income. 

Community banks’ quarterly net income increased 13.5% in third quarter 2022 from second quarter 2022. Net interest income increased $2.0 billion and more than offset the increases in noninterest expense and provisions for credit losses and a decrease in noninterest income. Unrealized losses on securities totaled $76.1 billion in the third quarter, up from $55.3 billion in the second quarter, primarily due to increases in market interest rates.

Community bank net interest margin (NIM) increased to 3.63% due to strong net interest income growth.

Community bank NIM increased 32 basis points from the year-ago quarter and 30 basis points from second quarter 2022. Net interest income growth exceeded the pace of average earning asset growth. The average yield on earning assets rose 48 basis points while the average cost of funds rose 18 basis points from the previous quarter. 


Loan and lease balances continue to grow in third quarter 2022, with 83.3% of community banks reporting quarterly loan growth.

Loan and lease balances had widespread growth, with 81.9% of community banks reporting annual growth. Community banks saw annual loan growth in all portfolios except commercial and industrial (C&I). Despite C&I showing a decrease in annual loan balances, with the exclusion of Paycheck Protection Program (PPP) loan repayment and forgiveness, C&I loans would have shown annual growth of 21.6%. Total annual loan growth, with the exclusion of PPP loan repayment and forgiveness, was 15.7%.


Community banks reach record low for noncurrent loan rate since Quarterly Banking Profile (QBP) data collection began in first quarter 1984. 

Loans and leases 90 days or more past due or in nonaccrual status (noncurrent loan balances) hit a record low in third quarter 2022 at 0.47%. Over half of community banks reported quarter-over-quarter declines in the balance of noncurrent loans. The reserve coverage ratio (allowance for credit losses (ACL) to noncurrent loans) hit a QBP record high of 263.4%, as noncurrent loan balances hit an all-time low and the ACL continues to remain above pre-pandemic averages. Similarly, the ratio of reserve coverage to annualized quarterly net charge-offs continues to remain elevated due to an elevated ACL and low net charge-offs. The net charge-off rate was .06% for third quarter 2022, unchanged from third quarter 2021.

Institutions continue to move ahead with cautious optimism. The Federal Open Market Committee (FOMC) already increased the target federal funds rate by 375 basis points in 2022, with an additional increase expected in December 2022. Although rising rates have been the largest contributor to strengthening net interest margins, the impact these rate increases will have on the long-term economy is still yet to be seen. Inflation also continues to be elevated, although October statistics seemed to indicate some waning of inflation. As a result, the FOMC has indicated they expect smaller rate increases going forward, with a 50-basis point increase anticipated during their December 14th meeting. With increasing rates, many institutions are wondering if now is a good time to lock in duration on their balance sheet. And, if so, what is the best way to fund this duration, especially with deposit growth being outpaced by loan growth and unrealized losses on securities at unprecedented levels? Also, as we’ve recently seen, the economic situation can change significantly very quickly, which has many wondering to what extent the federal funds rate will remain relatively elevated. Many still believe we are destined for an economic downturn in 2023. Depending on the extent of this downturn, we could see federal funds rate decreases, something that hasn’t been fathomed for a couple years. 

The new interest rate environment also poses some unique opportunities on the liability side of the balance sheet. Customers that may not have been rate shopping due to low rates may now be looking to see what other products from other institutions are available. And these customers may not be looking solely for higher rates; they may also be looking for institutions that offer a better overall suite of services and products. Thus, not only do institutions need to be defensive and protect those customers already on their balance sheet, but they should also identify unique opportunities to attract new customers. Higher deposit rates may get a prospective customer in the door, but it is likely the other products and services an institution can offer that will win the customer. As always, please don’t hesitate to reach out to BerryDunn’s Financial Services team if you have any questions.

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FDIC Issues its Third Quarter 2022 Quarterly Banking Profile