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Department Of Homeland Security’s Cybersecurity Requirements For Pipeline Owners And Operators

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On Friday, May 7, 2021, Colonial Pipeline fell victim to a cyberattack that resounded throughout the pipeline owners and operators industry, resulting in the Department of Homeland Security (DHS) issuing two directives in response to the threat. The Colonial Pipeline cyberattack forced the company to proactively close down operations and disable IT systems. The perpetrators targeted the business side of the pipeline rather than operational systems as the motive was monetary rather than meant to halt pipeline activities.[1] Colonial Pipeline leadership made the difficult decision to cease the operations systems as well as the internal IT systems for purposes of protecting this critical infrastructure from possible compromise.

The shutdown of operations resulted in gasoline shortages from Texas through the Southeast, up the Eastern seaboard and through New Jersey. This type of disturbance in the supply chain was considered a threat to our national security.

Therefore, on May 27, 2021, DHS issued an initial cybersecurity requirement (“initial security directive” or “Security Directive”) for critical pipeline owners and operators: “The Security Directive [required] critical pipeline owners and operators to report confirmed and potential cybersecurity incidents to the DHS Cybersecurity and Infrastructure Security Agency (CISA) and to designate a Cybersecurity Coordinator, to be available 24 hours a day, seven days a week.  It also require[d] critical pipeline owners and operators to review their current practices as well as to identify any gaps and related remediation measures to address cyber-related risks and report the results to TSA and CISA within 30 days.”[2]

On July 20, 2021, after further review of this Security Directive, DHS’ Transportation Security Administration (TSA) issued a second Security Directive that requires “…operators of TSA-designated critical pipelines that transport hazardous liquids and natural gas to implement a number of urgently needed protections against cyber intrusions.”[3]

The TSA has stated: “[T]his Security Directive requires owners and operators of TSA-designated critical pipelines to implement specific mitigation measures to protect against ransomware attacks and other known threats to information technology and operational technology systems, develop and implement a cybersecurity contingency and recovery plan, and conduct a cybersecurity architecture design review.”

The challenging aspects of the second Security Directive, which builds on the initial Security Directive, are (1) the level of detail of the requirements, and (2) the strict timeframes that are imposed on each of the approximately fifty provisions outlined within the requirements. The timeframes range from 30-120 days for completion of specific criteria.

Additionally, further challenges will now require pipeline owners and operators to focus not only on their internal information technology systems, but also to pay particular attention to their operational technology systems when putting together mitigation measures to protect this portion of U.S. critical infrastructure. Having two systems, internal and operational—or client-facing systems—mirrors the telecommunications industry where each service provider has requirements to protect their internal systems along with those that support the Domestic Communications Infrastructure, or “DCI”.

Mitigations measures that can be considered by pipeline owners and operators include the following:

  • Overall plans for continuous monitoring of internal and operational systems.
  • Dedicated resources to communicate with members of DHS.
  • Annual independent third-party audits of physical and logical security controls.
  • Consideration for independent third-party monitorships who have the resources and expertise in information system infrastructure, security resiliency and working relationships with U.S. governmental agencies.

Knowing and understanding the most current DHS expectations can go a long way in facilitating compliance with the TSA second Security Directive for pipeline owners and operators.

[1] https://www.zdnet.com/article/colonial-pipeline-ransomware-attack-everything-you-need-to-know/

[2] https://www.dhs.gov/news/2021/05/27/dhs-announces-new-cybersecurity-requirements-critical-pipeline-owners-and-operators

[3] https://www.dhs.gov/news/2021/07/20/dhs-announces-new-cybersecurity-requirements-critical-pipeline-owners-and-operators

Construction Company Considerations In New Administration

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  • Infrastructure plan is an opportunity for the industry to improve its reputation
  • Construction firms are entering into joint ventures to bid on large projects
  • Data analytics can identify labor overages: case study

President Biden’s infrastructure plan is set to improve failing infrastructure, rebuild the economy and create new jobs. As of this writing, the plan, which Biden originally released on March 31 as a $2 trillion capital injection over 10 years, is a $579 billion proposal that has bipartisan agreement, though Democrats have signaled the bill may only move through Congress in tandem with a larger spending and tax increase package, which they may try to pass via the reconciliation process.

Regardless of what the infrastructure plan may ultimately look like, construction companies should consider what an increase in project demand could mean for their businesses. Already, some construction companies whose balance sheets might be too small or who don’t want to take on all the risk, are striking joint ventures or partnerships to bid on large projects that are anticipated to result from the infrastructure bill.

Construction firms should also consider changing workforce needs. The construction industry has faced a shortage of skilled workers since the last recession, and as project demand is expected to spike, recruiting and training a workforce with the skills required of infrastructure projects today will be essential.

According to a recent study by Moody’s Analytics, the economy would add about 19 million jobs between the fourth quarter of 2020 and the fourth quarter of 2030, and construction companies with experience in clean energy would likely benefit the most from the projected spend. Infrastructure projects today are more likely to be capital- and skill-intensive than they were in the New Deal era, according to a Brookings report.

A functioning infrastructure facilitates economic activity, and infrastructure investment supports job creation—two pillars of Biden’s approach to stimulating the post-pandemic economy. Infrastructure spending is often looked to as part of the solution for a depressed economy or labor market. While the economy has rebounded from its March 2020 lows, the unemployment rate is 5.9%, according to a July 2 U.S. Bureau of Labor Statistics report. The proposed plan aimed to create 5 million new jobs lost in the broader economy during the past year, including those in the construction industry.

Tech opportunities are reshaping the industry

Since 1998, America’s infrastructure has earned a consistent D- grade from the American Society of Civil Engineers (ASCE). Though it improved slightly to C- in 2021, the ASCE said the country is spending only half of what is required to support its infrastructure—which over time will result in significant economic loss, higher costs to businesses, consumers and manufacturers, and public safety concerns. The report also estimates that the gap between the country’s infrastructure needs and its likely spending on those needs is projected to top $2.6 trillion by 2029 and more than $5.6 trillion by 2039.

Construction leaders will need to do more than amplify recruiting efforts and diversify their skill sets to remain competitive and keep up with demand. They will need to continue to prioritize investing in technologies—artificial intelligence, robotics and machine learning, for example—and to implement time- and cost-reducing strategies, such as offsite construction.

While implementing one of these investments or strategies alone would not give a contractor a major competitive advantage, in aggregate they create greater overall efficiency and productivity. Internal efficiencies can then translate into lower project cost estimates.

The global pandemic has accelerated the construction industry’s adoption of technology considerably; the industry is poised to look very different in five to ten years. Data derived from new technologies can be used to increase transparency, build trust and ultimately improve the industry’s reputation over the long term. Online bid management platforms, for example, allow companies to digitize documents, making them clickable and giving prospects the ability to drill into the underlying details of estimates.

The opportunity to invest in the nation’s underinvested infrastructure will require a robust response from the construction industry, and construction leaders should be prepared for more incoming projects and infrastructure improvements over the next decade. While the short-term opportunity deriving from the infrastructure plan means construction companies may win more business, the long-term opportunity is for the industry as a whole to leverage technologies that increase transparency—offering prospects insights into customers, data, costs and projects—and thus improve reputation.

Additional Guidance On The Employee Retention Credit Issued By IRS

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On August 4, 2021, the IRS issued Notice 2021-49, which provides long overdue guidance for employers that have taken or are considering taking the employee retention credit (ERC) as initially made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and modified and extended under the American Rescue Plan Act of 2021 (ARPA). Generally, the maximum ERC for 2020 is $5,000 per employee, while the maximum for 2021 is $28,000 per employee.

The ARPA extended the ERC for wages paid after June 30, 2021 and before January 1, 2022. The IRS previously issued nearly 100 frequently asked questions (FAQs) and two notices (Notice 2021-20 and 2021-23) in an attempt to provide guidance on the ERC. However, these FAQs and notices fail to address some important questions, such as whether cash tips received by employees and wages paid to an owner with more than 50% ownership of a company are qualified wages for the ERC. Notice 2021-49 addresses this issue and clarifies other issues related to the mechanics of the credit. The notice also clarifies and provides additional guidance for several other important provisions of the ERC as modified by the ARPA.

In addition, on August 10, 2021, the IRS issued Revenue Procedure 2021-33, which provides a safe harbor for employers to exclude (1) the amount of the forgiveness of a Paycheck Protection Program (PPP) loan under the Small Business Act, (2) a shuttered venue operator grant under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), and (3) a restaurant revitalization grant under the ARPA from “gross receipts” for purposes of determining eligibility to claim the ERC.

Background

The CARES Act provides for a refundable tax credit for eligible employers that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020 and before January 1, 2021.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) amended and made technical changes to the ERC for qualified wages paid after March 12, 2020 and before January 1, 2021, primarily expanding eligibility for certain employers to claim the credit. The Relief Act also extended the ERC to qualified wages paid after December 31, 2020 and before July 1, 2021 and modified the calculation of the credit amount for qualified wages paid during that time. The Relief Act permitted employers to qualify for the ERC if they experienced revenue declines of 20% (previously 50%), and it changed the definition of large employer from an employer that averaged 100 employees to one that averages 500 employees, enabling businesses with 500 or fewer employees to take the ERC for all wages paid, rather than only for wage payments for which no services were provided. The Relief Act also allowed employers that received PPP loans to also take the ERC, retroactive to March 2020.

The following summarizes Revenue Procedure 2021-33 and some of the most significant issues addressed in Notice 2021-49.

Safe Harbor for Gross Receipts – Revenue Procedure 2021-33

Under Internal Revenue Code Section 448(c) for for-profit entities and Section 6033 for tax-exempt organizations, PPP loan forgiveness, shuttered venue operator grants and restaurant revitalization grants are not included in employers’ gross income but are included in gross receipts. Revenue Procedure 2021-33 provides a safe harbor for employers to exclude those amounts from gross receipts solely for determining ERC eligibility. The IRS said that Congress intended for employers to be able to participate in these relief programs and also claim the ERC. Therefore, including amounts provided under those relief programs in gross receipts for determining eligibility for the ERC would be inconsistent with Congressional intent.

Under the revenue procedure, an employer is required to consistently apply the safe harbor by (1) excluding the amount of the forgiveness of any PPP loan and the amount of any shuttered venue operator grant and restaurant revitalization grant from its gross receipts for all relevant quarters in determining eligibility to claim the ERC, and (2) applying the safe harbor to all employers treated as a single employer under the ERC aggregation rules.

Employers elect to use the new safe harbor by excluding amounts under those relief programs when claiming the ERC on Form 941, Employer’s Quarterly Federal Payroll Tax Form (or 941-X if filing an amended return). In other words, a separate “election” form is not needed. If an employer revokes its safe harbor election, it must adjust all employment tax returns that are affected by the revocation. Employers must retain in their records support for claiming the ERC, including their use of this new safe harbor for determining gross receipts.

Clarifications to the ERC Under Notice 2021-49

Applicable Employment Taxes

Notice 2021-49 confirms that, for the third and fourth quarters of 2021, eligible employers can claim the ERC against the employer’s share of Medicare tax (or the portion of Tier 1 tax under the Railroad Retirement Tax Act) after these taxes are reduced by any credits allowed under the ARPA for qualified sick leave wages and qualified family leave wages, with any excess refunded.

Recovery Startup Business

An ERC of up to $50,000 per quarter is available to “recovery startup businesses.” A recovery startup business is an employer that began carrying on a trade or business after February 15, 2020. The notice clarifies that an employer is not considered to have begun carrying on a trade or business until such time as the business has begun to function as a going concern and performed those activities for which it was organized.

The notice also states that a not-for-profit organization can be treated as an eligible employer due to being a recovery startup business based on all of its operations and average annual gross receipts. For ERC purposes, a not-for-profit organization is deemed to be a “trade or business.”

Further, a recovery startup business that has 500 or fewer full-time employees may treat all wages paid with respect to an employee during the quarter as “qualified wages.”

Finally, the aggregation rules apply when determining whether an employer is a recovery startup business, as well as to the $50,000 limitation on the credit. Thus, a recovery startup business would need to apply IRC Sections 52(a) (for related corporations), 52(b) (for related non-corporate entities, such as partnerships, trusts, etc.) and 414(m) (affiliated service group rules).

Qualified Wages

Qualified wages generally are determined differently based on whether the employer is a small or large employer, in that qualified wages for large employers are limited to wages paid to an employee for time the employee is not providing services due to a full or partial suspension of business operations or a decline in the employer’s gross receipts.

The notice clarifies the rule for qualified wages for a “severely financially distressed employer” (SFDE). An SFDE is an employer that, in the third or fourth quarter of 2021, has gross receipts of less than 10% of its gross receipts for the same quarter in 2019. For SFDEs, qualified wages are any wages paid in the quarter, regardless of the size of the employer. This is different from the standard ERC rule, which limits qualified wages for large employers to wages paid while the employee is not performing services.

Full-Time Employees Versus Full-Time Equivalents

Confusion abounds about the definition of “full-time employee” and whether “full-time equivalents” are to be included when determining whether an employer eligible for the ERC is a large or small employer. Notice 2021-49 clarifies that eligible employers are not required to include full-time equivalents when determining the average number of full-time employees. The notice also confirms that wages paid to an employee who is not a full-time employee may be treated as qualified wages if all other requirements are met.

Treatment of Tips and FICA Tip Credit

Considerable confusion has arisen as to whether tips count as qualified wages for the ERC, since customers (not the employer) generally pay the employee the tips. Notice 2021-49 clarifies that cash tips are qualified wages if all other requirements to treat the amounts as qualified wages are met. The notice also confirms that eligible employers are not prevented from receiving both the ERC and the FICA tip tax credit on the same wages.

Timing of Qualified Wages Deduction Disallowance

The IRS has provided guidance on the timing of the disallowance for wage deductions on the employer’s federal tax return relating to qualified wages claimed for the ERC. The IRS previously confirmed that employers must reduce the deduction claimed for employee wages on their federal tax return by the amount of qualified wages claimed under the ERC. Notice 2021-49 confirms that this reduction in the deduction amount must occur in the same tax year the ERC is claimed. Accordingly, if an employer files a claim for the credit for a prior tax year, it must also file an amended federal tax return to reduce the amount of the wage deduction claimed in the corresponding period.

Related Individuals

The IRS previously stated that wages paid to related individuals, as defined by IRC Section 51(i)(1), are not taken into account for ERC purposes. Notice 2021-49 clarifies that, by applying the ownership attribution rules, the definition of a “related individual” includes a majority owner (i.e., a person with more than 50% ownership) of an entity if the majority owner has a brother or sister (whether by whole or half-blood), ancestor or lineal descendant. The spouse of a majority owner is also a related individual for purposes of the ERC if the majority owner has a family member who is a brother or sister (whether by whole or half-blood), ancestor or lineal descendant.

Insight

Wages paid to a sole owner or majority owner will rarely qualify for the ERC, according to the guidance provided in Notice 2021-49, because of the way the ownership attribution rules are applied. The owner must have no family other than a spouse in order to treat his or her wages as qualified wages. Members of Congress have voiced their disagreement with this guidance. It is possible the IRS will revise their position regarding related individuals in future guidance.

Alternative Quarter Election for Calendar Quarters in 2021

The Treasury Department and the IRS have been asked whether an eligible employer must consistently use the alternative quarter election once it has been made. The Notice 2021-49 confirms that employers are not required to use the alternative quarter election consistently. For example, an employer may be an eligible employer due to a decline in gross receipts for the second quarter of 2021 using the standard quarter comparison; the employer could then use the alternative quarter election to be an eligible employer for the third quarter of 2021.

Gross Receipts Safe Harbor in Notice 2021-20

Notice 2021-49 confirms that the safe harbor rule that allows an employer to include the gross receipts of an acquired business that it did not own during a calendar quarter in 2019 continues to apply to employers that acquire businesses in 2021 for purposes of measuring whether there was a decline in gross receipts. In addition, an employer that came into existence in 2020 (e.g., the third quarter of 2020) should use that quarter to determine whether it experienced a significant decline in gross receipts for the first three quarters in 2021 and should determine whether it experienced a significant decline in gross receipts by comparing the fourth quarter of 2020 to the fourth quarter of 2021.

Insights

Guidance provided in Notice 2021-49 has created several opportunities for certain employers to obtain additional ERCs. For example, some restaurant employers may not have included cash tips as qualified wages for their previous ERC claims. Under the notice, those employers can now file amended returns to claim additional ERCs or employers who did not count amounts paid to full-time equivalent employees as qualified wages for the ERC may now do so. Revenue Procedure 2021-33 has also created an opportunity for certain employers that received PPP loan forgiveness, shuttered venue operator grant or restaurant revitalization grant to obtain additional ERC. Employers should review the contents of the notice and the revenue procedure with their tax advisor to determine if additional ERCs may be available, and if so, employers may file Form 941-X to request the additional credit or refund.

Employers should also determine if they may have claimed more ERC than they were entitled to based on the guidance in Notice 2021-49. For example, some small business owners may not have applied the ownership attribution rules correctly. If necessary, Form 941-X may be filed to correct the error. According to the notice, the IRS will not assess penalties for failure to timely pay or deposit tax if the taxpayer can show reasonable cause and not willful neglect for the failure.

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H.R. 3684, the Infrastructure Investment and Jobs Act, proposes to end the ERC on September 30, 2021 rather than December 31 (but recovery startup businesses would remain eligible through year-end). That provision may or may not be included in the infrastructure bill that is eventually signed into law (which is expected in the next month or so).