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Value creation and ESG: Building a better future—and business

By:

A Senior in BerryDunn’s Accounting and Assurance Practice Group, Jake works with clients to prepare financial statements and gain an understanding of accounting and reporting requirements. He works primarily in the commercial and employee benefit sectors.

Jake Black
09.07.22

Read this if you are a construction or architecture and engineering firm looking at ESG initiatives at your organization.

Environmental, Social, and Governance (ESG) is an ever-growing topic that may have a significant impact on the future growth and sustainability of your company. Beyond the awareness of ESG, the key question is, “Why should I care?” While there are a multitude of answers to this question, there is one answer that can propel your business forward to outpace your competitors and create value. 

ESG initiatives for construction, engineering, and architectural firms can be broken down into four separate value creation opportunities: growth through competitive bidding, cost-reduction, investment optimization, and cultural enhancement. Here we look at the benefits of each that your company can leverage to improve your competitive advantage.

Growth through competitive bidding

According to recent data, the construction industry accounts for nearly half of total CO2 annual global emissions, including 27% from building operations, 10% in building materials and construction, and 10% in other construction activities. Combined with the US goal of net-zero emissions by 2050 set by the White House, there is a heightened focus on environmentally sustainable construction. As reduced emissions goals evolve at the state and local government level, there are increased opportunities for ESG-focused companies to expand into new geographic markets and continue to grow in existing ones. Particularly for government-driven projects, there has been increased screening of contractors for their prior and current sustainability performance. By improving your ESG profile, you may be able to get more government projects moving forward. 

Cost-reduction

When it comes to cost-reduction, ESG initiatives are often thought of in a negative light. Through a strong ESG program, there are a multitude of cost-saving opportunities. Operational costs can be reduced by implementing ESG initiatives that promote reduced water and energy consumption. Some key cost-saving opportunities for contractors, architects, and engineers may lie in the Social (behavior around people, political and social issues) and Governance (corporate behavior, including compensation and profits) pillars of ESG. Cultural enhancement is linked to reduced employee turnover, which can increase productivity and reduce labor and overhead costs. A strong ESG approach also lowers the risk of regulatory and legal intervention, which can reduce costs by eliminating project delays and mitigate risk of liability. 

Investment optimization

Shifting focus to employ an ESG-conscious approach could help minimize exposure to long-term investment risk due to environmental and sustainability concerns. While there are certainly upfront costs when implementing an ESG strategy, failure to act or explore now may eventually result in even greater expense in the future. Regulatory frameworks are in the process of being created that will ban or limit the use of certain building products. The cost of removing banned products and installing eco-friendly ones in the future will likely exceed the cost of using eco-friendly products today. ESG is a forward-thinking process that requires some up-front cost and effort that most believe will pay in dividends in the future. 

Cultural enhancement

ESG-conscious companies can attract and retain talent, improve employee morale and motivation, improve productivity, and lower costs. ESG components in the workforce can range from health and safety precautions on job sites to well-being initiatives and staff learning and development programs. Studies show that the Millennial and Gen Z generations place a larger importance on a company’s ESG program than former generations. These two generations will overwhelmingly account for the majority of the workforce in the next five to 10 years. ESG programs that place a focus on employee well-being are beneficial for the employee, employer, and in turn the environment. 

Implementing a strong ESG approach doesn’t happen all at once. By making small inroads in some of the areas mentioned above, you can better position your company for success in the future and take advantage of the many opportunities ESG may provide. 

If you have questions about ESG or have a question about your specific situation, please contact our construction team. We’re here to help you find and navigate new opportunities.

Topics: ESG

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BerryDunn experts and consultants

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 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 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

Article
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.

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

Read this if your organization is required to report on Provider Relief Funds.

On October 27, 2022, HRSA released an update to its Post-Payment Notice of Reporting Requirements for Provider Relief Funds (PRF) and American Rescue Plan (ARP) funds, the first update since June 11, 2021. Although many of the updates are used to add the additional reporting periods for PRF (Periods 5 through 7) and incorporate ARP into the reporting requirements, there are several things you can do to prepare and understand the nuances of Period 4 reporting. By way of a reminder, here are the remaining reporting time periods: 

Be aware. Did you know?

Before we provide a refresher on the data elements you need to prepare your portal submission, here are some very important elements to be aware of:

  1. Phase 4 and ARP payments are required to be maintained in interest-bearing accounts.
  2. ARP monies must be utilized before any unspent general PRF distributions. 
  3. ARP distributions cannot be transferred or allocated to another recipient, because distributions were determined specific to the historical claims data of the qualifying recipient. If reporting is performed at the parent level, parent entities can still report on the ARP payments received by their subsidiaries.
  4. PRF and ARP monies can be used for lost revenues only through the end of the quarter in which the Public Health Emergency (PHE) ends. Currently, the PHE has been extended through April 11, 2023.
  5. Reporting through the HRSA portal will be on a cumulative basis. This may provide you the opportunity to change your option election for lost revenue (for the cumulative period) or correct for previous reporting errors.

Steps for reporting the required data elements

As a result of changes in requirements and the ARP distribution, the steps for reporting have morphed. Data will be entered in the following order:

  1. Interest earned on PRF payments prior to Phase 4
  2. Interest earned on Phase 4 and ARP payments 
  3. Other assistance received
  4. Use of ARP payments for eligible expenses
  5. Use of ARP payments for lost revenues 
  6. Use of Nursing Home Infection Control (NHIC) Distribution payments
  7. Use of General and Targeted Distribution payments for eligible expenses
  8. Use of General and Targeted Distribution payments for lost revenues
  9. Net unreimbursed expenses attributable to COVID-19

Although PRF and ARP funds have similar utilization, it is important to review the Terms and Conditions associated with each distribution to help ensure compliance that the funds are used appropriately.  

Data elements you will need

The following is a category overview of the data elements that will be requested as you complete your portal submission:

  1. Reporting entity identifying information
  2. Associated subsidiary questionnaire—TIN(s), total PRF Targeted Distributions
  3. ARP subsidiary attestation
  4. Acquired or divested subsidiary information
  5. Interest earned on PRF and ARP payments
  6. Tax status and Single Audit information 
  7. Other assistance received, broken down by quarters:
    a.   Department of the Treasury or SBA
    b.   FEMA
    c.   HHS COVID Testing
    d.   Local, state, and tribal government assistance
    e.   Business insurance
    f.    Other
  8. Use of ARP payments (and related earned interest) on eligible expenses
  9. Use of ARP payments (and related earned interest) on lost revenues attributed to COVID 
  10. Use of NHIC Distribution payments
  11. Use of PRF General and Targeted Distribution payments (and related earned interest) on eligible expenses
  12. Use of PRF General and Targeted Distribution payments (and related earned interest) on lost revenues attributed to COVID
  13. Net unreimbursed expenses
  14. Personnel, patient, and facility metrics
  15. Survey

Two reminders for reporting expenses and lost revenues:

  1. Recipients with qualifying expenses of $500,000 or more will need to report expenses in greater detail. As a refresher, the expanded categories are as follows:

    General and Administrative (G&A) expense categories: Mortgage/rent, insurance, personnel, fringe benefits, lease payments, utilities/operations, and other G&A

    Healthcare related expense categories: Supplies, equipment, IT, facilities, and other health care related expenses
  2. Patient service revenue must be reported at net and broken down by payor (Medicare Part A & B, Medicare Part C, Medicaid/CHIP, commercial, self-pay, and other)

The final step in the portal is to complete the required survey, which often catches recipients off-guard as they grow weary toward the end of rigors of the submission and ready to cross the finish line. Be prepared to respond to questions on the impact the PRF and ARP payments have made for your organization, whether the benefits have been overall operations, solvency, staff retention, COVID operations, etc.

HRSA audits—next steps

In addition to a federal Single Audit requirement when a recipient expends more than $750,000 of federal funding in one year (regardless of whether those federally sourced funds came directly from the federal government or were passed from a state or local government), HRSA may also perform its own audits of recipients. These audits will address the data used by the recipients to report on their usage of PRF and ARP monies. Recipients will need to provide support for lost revenue and expenses that justify the use of the funds that they received.

The HRSA is going to drill down on the revenue numbers, specifically looking at the general ledger (GL) and other select revenue tests. On the expenses side, they are going to review the GL, invoice dates, payments and more.

To complete this audit, HRSA will require a significant amount of supporting documentation. Ideally, most of these documents should already have been copied and set aside as support in anticipation of financial reporting requirements. Below is a partial list of items that could be requested during the audit:

  • GL details
  • Listing of expenses reimbursed with PRF and ARP payments grouped into specified categories
  • Listing of patient care revenue by payor
  • Listing of other sources of assistance
  • Listing of expenses reimbursed with the other assistance received
  • Detailed inventory listing of IT supplies
  • Budget attestation from CEO or CFO and board minutes showing ratification of the budget before March 27, 2020
  • Documentation of lost revenue methodologies
  • Audited financial statements
  • CMS cost reports for Medicare and Medicaid
  • Other supporting documentation

If certain documentation isn’t available, recipients will need to request copies from their vendors. Missing documentation may make it difficult to justify the use of funds and may result in recipients having to repay a portion or all of their provider relief funding.

It is possible that certain expenses were not allowable under PRF and ARP. However, that doesn’t necessarily mean recipients will have to repay their funds. Recipients may have other lost revenue or expenses that would be allowed under PRF and ARP—but only if they have the documentation to prove it. That’s why it’s crucial that recipients have all relevant documentation for expenses and lost revenue over the periods they received provider relief funding.

To get ready for a potential HRSA audit, there are at least three immediate steps you should take:

  • Select a responsible point person. One person should be responsible for coordinating the process to help ensure that nothing falls through the cracks or is overlooked. 
  • Keep your PRF/ARP filing reports on hand. Pull any related supporting documentation and collate it into one place if it isn’t already.
  • Identify what support is needed by doing a gap analysis. Determine where you need additional support or expertise and seek to close these gaps before the notification of any audit process.

Insufficient documentation may result in the recapture of provider relief funding by the HRSA. Fortunately, a lack of documentation is preventable with the right support and resources in place. If you would like more information or have any questions about your specific situation, please contact us. We’re here to help.

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Are you ready for PRF Period 4 reporting?

In a closely held business, ownership always means far more than business value. Valuing your business will put a dollar figure on your business (and with any luck, it might even be accurate!). However, ownership of a business is about much more than the “number.” To many of our clients, ownership is about identity, personal fulfillment, developing a legacy, funding their lifestyle, and much more. What does business ownership mean to you? In our final article in this series, we are going to look at questions around what ownership means to different people, explore how to increase business value and liquidity, and discuss the decision of whether to grow your business or exit—and which liquidity options are available for each path. 

While it may seem counterintuitive, we find that it is best to delay the decision to grow or exit until the very end of the value acceleration process. After identifying and implementing business improvement and de-risking projects in the Discover stage and the Prepare stage (see below), people may find themselves more open to the idea of keeping their business and using that business to build liquidity while they explore other options. 

Once people have completed the Discover and Prepare stages and are ready to decide whether to exit or grow their business, we frame the conversation around personal and business readiness. Many personal readiness factors relate to what ownership means to each client. In this process, clients ask themselves the following questions:

  • Am I ready to not be in charge?
  • Am I ready to not be identified as the business?
  • Do I have a plan for what comes next?
  • Do I have the resources to fund what’s next? 
  • Have I communicated my plan?

On the business end, readiness topics include the following:

  • Is the team in place to carry on without me?
  • Do all employees know their role?
  • Does the team know the strategic plan?
  • Have we minimized risk? 
  • Have I communicated my plan?

Whether you choose to grow your business or exit it, you have various liquidity options to choose from. Liquidity options if you keep your business include 401(k) profit sharing, distributions, bonuses, and dividend recapitalization. Alternatively, liquidity options if you choose to exit your business include selling to strategic buyers, ESOPs, private equity firms, management, or family. 

When it comes to liquidity, there are several other topics clients are curious about. One of these topics is the use of earn-outs in the sale of a business. In an earn-out, a portion of the price of the business is suspended, contingent on business performance. The “short and sweet” on this topic is that we typically find them to be most effective over a two- to three-year time period. When selecting a metric to base the earn-out on (such as revenue, profit, or customer retention), consider what is in your control. Will the new owner change the capital structure or cost structure in a way that reduces income? Further, if the planned liquidity event involves merging your company into another company, specify how costs will be allocated for earn-out purposes. 

Rollover equity (receiving equity in the acquiring company as part of the deal structure) and the use of warrants/synthetic equity (incentives tied to increases in stock price) is another area in which we receive many questions from clients. Some key considerations:

  • Make sure you know how you will turn your rollover equity into cash.
  • Understand potential dilution of your rollover equity if the acquiring company continues to acquire other targets. 
  • Make sure the percentage of equity relative to total deal consideration is reasonable.
  • Seller financing typically has lower interest rates and favorable terms, so warrants are often attached to compensate the seller. 
  • Warrants are subject to capital gains tax while synthetic equity is typically ordinary income. As a result, warrants often have lower tax consequences.
  • Synthetic equity may work well for long-term incentive plans and for management buyouts. 

We have found that through the value acceleration process, clients are able to increase business value and liquidity, giving them control over how they spend their time and resources.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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Decide: Value acceleration series part five (of five)

Digital assets, such as cryptocurrencies and non-fungible tokens (NFTs), are changing how consumers and businesses pay, bank, and invest. A recent survey by Capitalize found that 60% of respondents would like a cryptocurrency investment option in their 401(k) plans. Several service providers, including Fidelity, have responded to that request by offering 401(k) participants direct but limited cryptocurrency investment options. Meanwhile, earlier this year, the Department of Labor (DOL) issued a stern warning about cryptocurrencies in 401(k) accounts. Here are some ways the federal government is assessing the benefits and risks cryptocurrencies pose to consumers, investors, and businesses.

White House calls for research on digital assets

In March 2022, the Biden administration issued an executive order calling for the federal government to report its findings on the risks and benefits of cryptocurrencies and other digital assets. For six months, various agencies conducted research and offered recommendations for responsibly developing the US digital asset industry. The result of this work was a fact sheet that was released in September. It outlines six main concepts for the development of responsible digital assets nationally and globally: consumer and investor protection; promoting financial stability; countering illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

Protecting consumers, investors, and businesses

The US government believes that without a solid framework of rules and regulations for digital assets, innovations in this sector could be harmful to consumers, investors, and businesses alike. In response to the White House calling for research on digital assets, several federal agencies issued reports addressing the potential benefits and challenges in protecting Americans from some of the potential risks posed by digital assets.

The Treasury Department’s report noted that about 12% of Americans own some form of digital asset. While the number of people holding these assets has grown, the volume of fraud and other scams has also increased. The Federal Trade Commission (FTC) reported that more than 46,000 incidents of cryptocurrency-related fraud occurred between January 1, 2021, and March 31, 2022, valued at more than $1 billion.

The Treasury Department’s report made four main recommendations:

  • Expand regulatory oversight
    Regulators including the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) should expand and increase investigations and enforcement related to digital assets, especially regarding potential misrepresentations made to consumers. Agencies also should increase their coordination of enforcement efforts between agencies as such efforts have been effective in shutting down fraudulent actions.
  • Increase focus on scams in online activities like gaming and entertainment
    The Consumer Financial Protection Bureau (CFPB) and FTC should expand investigations into consumer complaints. The Department of Labor should also ensure that 401(k) plans and participants are protected from aggressive marketing, conflicts of interest, and bad-faith cryptocurrency investments.
  • Encourage cross-collaboration between agencies
    While several regulatory agencies have issued guidance to deal with increasing cryptocurrency issues, the Treasury Department would like to see more cross-collaboration among agencies to create more comprehensive oversight. Building a more connected, cross-agency response is critical to promote safety and reduce consumer, investor, and business confusion, as well as the potential for fraud.
  • Educate consumers on digital assets
    Through its website MyMoney.gov, the Financial Literacy and Education Commission (FLEC) has taken the lead on educating consumers, investors, and businesses on financial issues. Now the FLEC will educate the public on common digital asset risks and scams and ways to report abuse. FLEC member agencies will also review the lack of information available to more vulnerable groups to help better understand the risks and opportunities they face. Lastly, the FLEC will engage with industry experts and academics to promote and coordinate public/private partnerships for financial education outreach.

Take a long-term approach to digital assets

Financial advisors often encourage investors to focus on the long-term and avoid trying to time the market with their 401(k) investments. Similarly, plan sponsors may want to take a long‑term perspective regarding their own approach to digital assets. Given today’s massive surge in the variety and scope of digital assets, plan sponsors should seek to understand their role in the financial landscape before rushing to implement changes.

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Digital assets: Potential benefits and risks for employee benefit plans