Tag: COVID-19

Tax and Relocation Implications For The Mobile Workforce

Posted on by info

The novel coronavirus that causes the disease COVID-19 has become a global issue. Since the virus was declared a pandemic by the World Health Organization (WHO), we have seen more border entry restrictions, quarantines and travel bans implemented to stop the virus’ spread. The evolving situation has made managing a mobile workforce more challenging.

Managing Mobile Talent 

As the global pandemic accelerates worldwide, so does anxiety among mobile employees and their families who are “away” from home – on assignment, recently relocated or repatriating. While recommendations depend on the stage of the assignment or relocation and local situations (e.g., mandatory shelter in place, etc.), these observations can inform decisions you may be struggling with.

Pause/Fast Forward Button
In the face of travel restrictions and shelter in place orders, an increasing number of our clients (41%) are deferring new initiations. The situation is very fluid, but many have cited a three-week pause. Mercer research indicates 32% of companies have implemented hiring freezes and as a result, new hire initiations will be the first to decrease. Further, many intern programs are on hold. That said, there are also companies that are rapidly ramping up and reorganizing, pushing the fast-forward button but with intense concern over long term costs.

(Stealth) Repatriations
Among our client base, repatriations have been limited (11%) as travel bans and quarantines have made it more difficult to mobilize returns or find a safe haven. Stealth repatriations seem to be spiking, creating significant permanent establishment (PE) issues and challenges tracking and staying in touch with employees. Global mobility may be the last to learn of stealth repatriations, when the employee or manager surfaces compensation issues or questions about expenses, which obviously creates more tax and compliance risks now and down-stream.

Managing Mobility
New Initiations
Moves that are essential or critical are proceeding with the understanding that services may vary based on local regulations (i.e., virtual inventory of household goods (HHG), “drive by” valuation, virtual destination tour, etc.).

Moves In-Process

  • Moves in-process are continuing on a case-by-case basis depending on the stage of the move and local restrictions. Keeping costly home sales together to control costs, delivering household goods where and if permitted, funding “quarantine expenses” and covering extended temporary living and storage, etc.
  • Assignees may get a “hardship” allowance or a “shelter in place” per diem.

Destination In-Process
Using virtual solutions, home finding in some locations is continuing. A comprehensive phone-based needs assessment allows the counselor to collect and curate listings/information.

Exceptions
Managing an increasing number and variety of exceptions is creating an incredible burden on global mobility, but with tax, visa and business/budget implications it will be vital to detail circumstances for all future reporting and analysis.

Managing the Tax Implications

We continue to closely monitor the tax landscape for global mobility programs and have identified unanticipated compliance risks for expats as a result of this global pandemic. Global mobility program managers should consider whether these risks apply to their expats and whether prudent action is needed to minimize the exposure created.

  • Shadow Payroll Reporting: Companies are repatriating their expats temporarily to address challenges in the host jurisdiction with the virus. In doing so, this may have an impact on the shadow payroll reporting in the host jurisdiction; we recommend that you review the shadow payroll calculations and modify the level of income reported and income and social tax withholdings to account for the absence.
  • Hypothetical Tax Withholding: If an expat is repatriated temporarily to his or her home country and is tax equalized and deducting a hypothetical tax, it may be prudent to suspend his or her hypothetical tax withholding and switch back to actual income tax (and potentially social tax) withholdings.
  • State Tax Residency: For U.S. outbound expats, repatriating back to the U.S. temporarily may create a tax residency issue in their state of residence. This may require turning on actual state tax withholding or addressing a potential underfunding of state tax withholdings from previous pay periods when the intent had been to break state tax residency.
  • Permanent Establishment Risk: When the initial reporting on the virus broke, several expats were relocated to a neighboring country or another country in the region instead of their home country with the expectation of a short timeframe and which allowed the expat to continue to work from the same region. This creates the potential for corporate tax exposure in that country. We recommend that you review such expats’ job responsibilities and assess the exposure with your corporate tax department.
  • Income Tax Treaty Relief: Many expats are currently quarantined in their host country and are unable to repatriate back to their home country or even a neighboring country due to travel restrictions. These travel restrictions could lead to short term expatriates exceeding the 183-day threshold prevalent in many income tax treaties. This could give rise unexpectedly to tax residency and income taxation in the host country. You should closely monitor the anticipated day counts in the host country and identify any employees that are close to exceeding the 183-day threshold.
  • Unbudgeted Tax Costs: Incremental costs to evacuate employees and their families and house them temporarily while they are unable to work in their assignment country could be a taxable benefit in kind. Company policies should be reviewed to determine if these costs are tax protected and budgets and accruals should be reviewed to account for these added costs.
  • Tax Filing and Tax Payment Deadlines Extended: Several countries have already announced extended filing and payment deadlines, including the U.S., Canada, and Japan. This will impact the timing of tax filings, tax equalization settlements, and home and host country tax payments. Companies should monitor these updated deadlines to manage cash flows optimally and inform their business leaders accordingly.
  • Foreign Earned Income Exclusion: If a temporary repatriation jeopardizes a U.S. outbound expat’s ability to meet the bona fide residence or physical presence tests to qualify for the foreign earned income exclusion, the foreign tax credit is usually a viable fallback position to minimize potential double taxation provided taxes are being paid in the host country. For U.S. state tax purposes, if the state does not allow a credit for foreign taxes paid, there could be an unexpected increase in actual state tax costs.

Take Advantage of SBA Loans and Payroll Tax Incentives

Posted on by info

Background

In light of the novel coronavirus (COVID-19) global pandemic, many small-to-medium sized businesses are struggling to manage revenue losses amid prolonged economic uncertainty.  

To offset the pandemic’s financial impacts, Congress has passed several stimulus bills, including the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that can provide for increased cashflow as well as tax savings.

Businesses should quickly consider how these provisions could help their companies during this uncertain time to ensure they are maximizing available benefits.
 

SBA Paycheck Protection Program

This $350 billion forgivable loan program, included in the CARES Act, significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.

What can the loan be used for?
The loan can cover costs including payroll, continuation of health care benefits, employee compensation (excludes compensation in excess of $100,000 on an annual basis), mortgage interest obligations, rent or lease payments, utilities, and interest on debt incurred before the covered period.

Who is eligible for the program? 
To qualify for the program, businesses must have either fewer than 500 employees (including full time, part time and “other” employees), meet the SBA’s size standards, or have less than $15 million of tangible net worth and less than $5 million of average net income in the last 2 years. There are some special eligibility rules for businesses in the hospitality and dining industries.

How much can a business borrow?
The maximum amount for these loans is two times the average total monthly payroll costs, or up to $10 million. The interest rate may not exceed 4%. Business can also defer payment of the principal, interest and fees for six months to one year.

Is there loan forgiveness?
Yes, provided your business meets certain conditions. Your business will be eligible to apply for loan forgiveness equal to the amount you spent during an eight-week period after the loan closing date on:​ 

  • Payroll costs
  • Interest on mortgages
  • Payments of rent
  • Utility payments  

Principal payments of mortgage payments will not be eligible for forgiveness.

How do you apply?
Applications and underwriting are handled by SBA-approved banks. While documentation requirements will vary between institutions, we would expect them to include the following:

  • Current personal financial statement
  • Latest available personal tax return
  • Latest available business tax return
  • Latest available internal 2019 YE financials
  • YTD internal 2020 financials
  • Spreadsheet detailing the following:
    • List of all full-time employees with eight weeks salary + payroll taxes
    • Cost of two months of rent with copies of leases
    • Cost of two months of mortgage interest with copy of loan payments
    • Cost of two months of utility costs with copy of utility payments

What is required to be eligible?
Borrowers will need to include a Good-Faith Certification that:

  • The loan is needed to continue operations during the COVID-19 emergency.
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
  • The applicant does not have any other application pending under this program for the same purpose.
  • From February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under this program.

Are there any other considerations to be aware of?

  • Given these very limited requirements for borrowers, we may see additional guidance from the SBA on how banks should be underwriting these loans.
  • Additionally, the CARES Act does not appear to have overridden the SBA’s “affiliation” rules. Entities are considered “affiliates” when they are controlled by or under common control of another entity. This classification generally includes private equity owners.  Business cannot exceed the size thresholds for either the primary industry of the business alone, or the industry of the business and its affiliates, whichever is greater. For groups of affiliates that operate in different industries—a typical case for private equity portfolio companies—industry code is based on the primary income producing entity. However, there is some ambiguity in the text of the CARES Act, so additional guidance may be forthcoming.

Employee Retention Credit

The CARES Act provides eligible employers with a refundable credit against payroll tax liability.

How much does the credit cover?
The credit is equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits).

Who is eligible for the credit?
Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:

  • Business operations are fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings.
  • A year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.

For employers of more than 100 employees, only wages for employees who are not currently providing services for the employer due to COVID-19 causes are eligible for the credit. For employers of 100 or fewer employees, qualified wages include those for any, regardless of if the employee is providing services.

Employers receiving a loan under the SBA Paycheck Protection Program are not eligible for this credit.

Delay of Employer Payroll Taxes

The CARES Act postpones the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security.

When are the deferred payments due?
The deferred amounts are payable over the next two years – half due December 31, 2021, and half due December 31, 2022.

Who is eligible for the deferral?
All businesses and self-employed individuals are eligible. However, employers who receive a loan under the SBA Paycheck Protection Program and whose indebtedness is forgiven are not eligible for the payroll tax deferral.

How We Can Help

Small to medium-sized businesses have many potential avenues—including the SBA loan program and payroll tax incentives—to help offset costs during this uncertain time. However, navigating the complex loan application process is a daunting task. The payroll tax provisions in the CARES Act interact with the SBA loan provisions, adding to the complexity. 

In the immediate term, we can assist in analyzing which approach will be the most beneficial for your employees and your company. Those seeking SBA loans will need to move quickly to get their loans approved and funded. We can help you navigate the required paperwork and help organize the necessary information in an expedited manner—so you can boost your cashflow ASAP.

In addition to maximizing these available options, there are also beneficial income tax provisions to claim on income tax returns, including 2019 returns. We can assist companies in determining possible cash tax refunds through net operating loss (NOL) carrybacks and quick refunds of 2019 taxes already paid.

Considerations On Accounting and Financial Reporting for Bank CFOs as They Navigate Business Impact

Posted on by info

Individuals that serve in an executive and leadership capacity at banks are making important operational and business decisions to keep their employees’ wellbeing a priority while mitigating organizational risk during the novel coronavirus (COVID-19) pandemic.  

Within the coming months, data will begin to demonstrate the human and operational impact, but without a doubt, the impact on financial institutions will be significant.

As leaders are tasked to make crisis management, business continuity, liquidity, capital, and revenue/cost management decisions at a rapid pace, it can be easy to lose sight of some of the critical accounting and financial reporting decisions banks must address amid this unpredictable environment. Below, we’ve outlined four considerations for senior management at financial institutions to consider as they continue to develop and execute on crisis management plans:
 

​1. Asset quality & impairment

The economic impact of the COVID-19 pandemic will be felt by companies large and small, but many have a heightened concern for small business owners and their support staff. As a result, banks are sure to see credit issues arise as borrowers are no longer able to make timely loan repayments. As just about every state in the U.S. has issued a state of emergency, a recent Interagency statement encouraged,  “financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. ” Two of the primary concerns for banks are troubled debt restructurings (TDR) and current expected credit loss (CECL) under ASC, 326, Credit Losses.

Troubled Debt Restructuring:
Providing loan payment flexibility naturally raises questions on how to account for loan modifications (e.g. troubled debt restructurings). GAAP states that a loan is a TDR when a borrower is troubled and the bank grants a concession to the borrower it would not otherwise consider. While Interagency Statements are not authoritative GAAP[1], some are taking comfort in knowing that the banking agencies stated that they will, “not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices.” On March 22, 2020, the agencies released that they have confirmed with staff of the FASB that, “short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs.”

Management should consider the need for establishing internal policies and practices in applying the interagency recommendations. While modifications of loan terms do not automatically result in TDRs, careful evaluation is required to determine if a modification results in a TDR. Management should ensure consistent criteria, practices, and policies are in place

CECL implications
The Current Expected Credit Losses (CECL) standard has long been debated by accounting and business professionals, and has even drawn interest from political factions for several years up through its effective date of January 1, 2020[2]. COVID-19 has exacerbated the debate with commentary from the chairwoman of the FDIC urging delay and exclusions of the final rule from FASB. CECL requires entities to consider what is known and knowable, as well as, reasonable and supportable forecasts. The determination of when events became known or knowable and the periods beyond which the entity is able to make or obtain reasonable and supportable forecasts will be critiqued by bank regulators and auditors alike.

While this facet of the standard is sure to cause challenges in the current environment, consideration of confirming and contradictory evidence will go a long way in supporting management’s conclusion

March 25 stimulus package provides TDR and CECL relief
On March 25, 2020, the Senate passed a stimulus package that provides temporary TDR relief beginning March 1, 2020 and extending for 60 days after the end of the COVID-19 national emergency. The bill will allow banks to suspend requirements under GAAP for loan modifications related to COVID-19. Additionally, the relief extends to CECL, delaying the implementation to the conclusion of the national emergency or December 31, 2020, whichever comes first. The bill has not been signed into law as of the time of this publication.
 
Senior management is urged to be vigilant in ensuring proper analysis is performed over modifications and to avoid making sweeping approvals without understanding the specific facts and circumstances for each individual borrower

2. Internal controls over financial reporting

Commonly deemed “essential businesses” banks will likely remain open during the crisis, however, back office personnel may have the flexibility to work remotely. While remote working environments are critical to maintaining the safety of employees, it may impact the company’s internal control structure as normal routines are disrupted.

One example may be in the area of loan modification approvals. To respond to the inundation of calls and requests for refinance due to the Fed introducing rate cuts, COVID-19’s disruption of the normal working environment may necessitate a change in internal controls to accommodate remote work environments. There may be instances where internal controls are not operating as originally designed and may require temporary enhancement to cope with challenges related to working remotely and managing an increase in transaction volume.

Therefore, it’s critical that management re-evaluate their internal control structure and make any necessary adjustments as they conduct business for the foreseeable future.

3. Disclosures

The magnitude of the novel coronavirus continues to evolve, leading to uncertainty of the impact on the financial condition, liquidity and future results of bank operations. Although the fallout is still developing, the financial disclosure requirements have not been alleviated and, for many reasons, additional and more detailed disclosures may be necessary.  

Management’s disclosures in the financial statements are to inform the shareholders, public, and/or regulatory authorities on the active monitoring on its financial condition, liquidity, operations, suppliers, industry and workforce.  For those with SEC filing requirements, risk factors and trends should consider the effects of the novel coronavirus.

The length of time of these disruptions is currently unclear, and while they are anticipated to be temporary, banks should consider disclosing the following (not exhaustive):

  • Markets: How the bank is monitoring the fluctuations in the markets (e.g. interest rates, and fair value of investments for other than temporary impairment).
  • Material adverse effect: Outcomes if disruptions continue and how/if there is any material adverse effect on the bank’s results of future operations, financial position, liquidity, and strain on the bank’s capital reserve ratios.
  • Concentrations: Concentration that present greater risk (e.g. borrowers, geographic locations, etc.).
  • Goodwill, Intangible Impairment: Evaluate if triggering events require an interim impairment assessment.
  • Going Concern: Banks may face difficulty collecting from borrowers and/or other events that negatively affect operating cash flows and liquidity, and capital. If management concludes there is substantial doubt, then disclosure in the financial statements is required, even if management’s plans alleviate that substantial doubt.
  • Subsequent Events: It is possible information may be received after the balance sheet date about factual conditions that existed at the balance sheet date (e.g. payment delinquencies or an appraisal about the fair value of loan collateral), which would need to be accounted for and considered at the balance sheet date (e.g. December 31, 2019). Other events occurring after the balance sheet date may require disclosure only as to the subsequent impact on the bank’s business through the date the financial statements were issued or available to be issued.

4. Cybersecurity strategy for remote employees

With vast amounts of consumer information and cash reserves, banks and financial institutions have always been a rich target for cybercriminals. The COVID-19 pandemic has only exacerbated this threat, as many employees are now working in remote environments that are not necessarily subject to the same cybersecurity safeguards that are standard procedure in a secure office space. According to Gartner, 40% or more of cyber vulnerabilities are directly linked to employee behavior, so it’s critical that banks adopt cybersecurity plans now that applies to remote locations.
 
While bank CFOs are supporting their leadership team on specific crisis management deliverables related to financial management, they must also be the voice in the room guiding the organization on the critical accounting and financial reporting rules that the bank must comply with in order to meet their financial reporting obligations. While we’re in unprecedented times, keeping abreast of guidance from FASB and reviewing internal control changes and other accounting procedures now will help streamline operations during the COVID-19 pandemic.

[1]  Authoritative GAAP related to TDRs can be located within ASC 310-40

[2] For SEC issuers that do not meet the definition of a smaller reporting company and are a December 31 year end.