A widely circulated article about the COVID-19 pandemic, written by author Tomas Pueyo in March, described efforts to cope with the crisis as “the hammer and the dance.” The hammer was the abrupt shutdown of most businesses and institutions; the dance is the slow reopening of them — figuratively tiptoeing out to see whether day-to-day life can return to some semblance of normality without a dangerous uptick in infections.
Many business owners are now engaged in the dance. “Reopening” a company, even if it was never completely closed, involves grappling with a variety of concepts. This is a new kind of strategic planning that will test your patience and savvy but may also lead to a safer, leaner and better-informed business.
When to move forward
The first question, of course, is when. That is, what are the circumstances and criteria that will determine when you can safely reopen or further reopen your business. Most experts agree that you should base this decision on scientific data and official guidance from agencies such as the U.S. Department of Health and Human Services and Centers for Disease Control and Prevention (CDC).
But don’t stop there. Although the pandemic is, by definition, a worldwide issue, the specific situation on the ground in your locality should drive your decision-making. Keep tabs on state, county and municipal news, rules and guidance. Plug into your industry’s experts as well. Establish strategies for expanding operations or, if necessary, contracting them, based on the latest information.
Testing and working safely
Running a company in today’s environment entails refocusing on people. If employees are unsafe, your business will likely suffer at some point soon. Every company that must or chooses to have workers on-site (as opposed to working remotely) needs to consider the concept of COVID-19 testing.
Employers are generally allowed to test employees, but there are dangers in violating privacy laws or inadvertently exposing the company to discrimination claims. The CDC has said that routine testing will likely pass muster “if these goals are consistent with employer-based occupational medical surveillance programs” and “have a reasonable likelihood of benefitting workers.” Consult your attorney, however, before implementing any testing initiative.
There’s also the matter of working safely. If you haven’t already, look closely at the layout of your offices or facilities to determine the feasibility of social distancing. Re-evaluate sanitation procedures and ventilation infrastructure, too. You may need to invest, or continue investing, in additional personal protective equipment and items such as plastic screens to separate workers from customers or each other. It might also be necessary or advisable to procure or upgrade the technology that enables employees to work remotely.
Move forward cautiously
No one wanted to do this dance, but business owners must continue moving forward as cautiously and prudently as possible. While you do so, don’t overlook the opportunity to identify long-term strategies to run your company more efficiently and profitably. We can help you make well-informed decisions based on sound financial analyses.
During the COVID-19 pandemic, many small businesses are strapped for cash. They may find it beneficial to barter for goods and services instead of paying cash for them. If your business gets involved in bartering, remember that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.
For example, if a computer consultant agrees to exchange services with an advertising agency, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there is contrary evidence.
In addition, if services are exchanged for property, income is realized. For example, if a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. Another example: If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock.
Joining a club
Many businesses join barter clubs that facilitate barter exchanges. In general, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.
Bartering is generally taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,000 credit units one year, and that each unit is redeemable for $1 in goods and services. In that year, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.
If you join a barter club, you’ll be asked to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income at a 24% rate.
Forms to file
By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.
By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. Contact us if you need assistance or would like more information.
Your nonprofit organization may be required to hire an independent outside CPA to audit its books, depending on its annual gross receipts and other factors. Even when external audits aren’t mandated, however, they’re often recommended. These audits can provide assurance to donors and other stakeholders that your organization is operating with integrity and within acceptable accounting guidelines.
Most nonprofits conduct internal audits on a regular basis, perhaps quarterly or annually. These audits are typically performed by a board member or a member of the organization’s staff. The objective is to review the organization’s financial statements, accounting policies and spending habits.
Internal audits promote fiscal responsibility and are essential to good governance. But they’re often conducted by people who don’t have extensive audit training and who have a vested interest in issuing a clean bill of health.
Outside auditors may be in a better position to determine whether your statements offer a fair picture of your finances. In an external audit, a CPA examines your organization’s financial statements and issues an opinion on whether those statements adhere to Generally Accepted Accounting Principles (GAAP) or another reporting framework.
To support this opinion, the auditor tests underlying records such as your nonprofit’s bank reconciliations, accounts payable records and contribution classifications. The auditor also evaluates your organization’s internal controls, including procedures for fraud prevention and detection.
This type of audit is completely separate from an internal audit. Though external audits are optional for nonprofits in some states, they’re required in others. Be sure you learn the rules that apply to your organization.
Preparing for the audit
You can facilitate external audit fieldwork by anticipating information requests and inquiries from your auditor. He or she will ask for various financial documents, including:
- Financial statements,
- Bank correspondence,
- Board meeting minutes, and
- Payroll, accounts receivable and accounts payable records.
Your auditor also may ask to review records related to loans, leases, grants, donations and fundraising activities. In addition, be ready to answer questions about such issues as how money and other resources are received and spent, what the organization does to comply with applicable laws, and how financial transactions are recorded.
We can help
Internal audits are essential. But they’re no substitute for an external audit by a qualified CPA, especially in light of the major changes to GAAP in recent years and increasing government scrutiny of nonprofits. Contact us to discuss whether you’re required to obtain an external audit under state or federal guidelines. Even if your organization isn’t required to submit CPA-audited statements, you’re sure to benefit from the expertise of an independent financial professional.
There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.
Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.
Why the new form?
Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.
Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.
What businesses will file?
Payers of nonemployee compensation will now use Form 1099-NEC to report those payments.
Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.
Can a business get an extension?
Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.
Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:
- The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.
- A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.
- The operation of the filer was affected by fire, casualty or natural disaster.
- The filer was “in the first year of establishment.”
- The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.
If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.
In 2016, the Financial Accounting Standards Board (FASB) published guidance that requires major changes to how leases are reported on financial statements. One area of the guidance that’s especially complicated relates to “embedded” leases.
Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), requires organizations to report on the balance sheet the assets and liabilities associated with leasing office space, vehicles and other assets. Public companies implemented the updated guidance in 2019.
In June, the FASB extended the effective date for ASU 2016-02 for private companies and not-for-profit organizations. The one-year deferral is welcome news for smaller organizations that have been trying to get a handle on the complex new rules during the COVID-19 crisis.
Hidden in the fine print
In some cases, a contract that qualifies as a lease doesn’t have the word “lease” written across the top. Instead, a lease may be embedded in a contract’s terms.
Unless private companies and nonprofits adopted the changes early, they’re currently expensing operating lease payments as they’re incurred, as per prior guidance. Carving out embedded leases from supply or service contracts wasn’t a big deal under those rules; the costs would be classified as operating expenses either way. But the updated guidance requires service contract payments to continue being expensed while embedded leases are reported on the balance sheet.
The updated guidance is clear about the identification and criteria for an embedded lease: A contract contains a lease if it conveys the right to control the use of an identified asset in exchange for cash or other consideration. This includes the right to obtain substantially all the economic benefits from the asset for a specific period.
Equipment leases may be buried in supply and service contracts with equipment manufacturers. Likewise, lease agreements may contain nonlease components, such as maintenance and property taxes.
During the implementation phase for the updated guidance, you’ll need to train other departments, such as procurement, sales, operations and information technology, to recognize when contract terms convey the right to control the use of a specific asset. After implementation, you’ll need to execute controls or processes to identify embedded leases when contracts are signed.
To simplify matters, consider adopting the practical expedient in the updated accounting guidance that allows lessors to combine lease and nonlease components. While this treatment will increase the lease liability reported on your balance sheet, simplified reporting may be worthwhile, depending on the size and duration of the embedded leases.
For private companies and private not-for-profits, the updated lease guidance now goes into effect for fiscal years beginning after December 15, 2021 (or interim periods beginning after December 15, 2022). For public not-for-profits, the updated guidance now goes into effect for fiscal years beginning after December 15, 2019, including interim reporting periods.
A one-year deferral isn’t an excuse to procrastinate. The issue of embedded leases shows how implementing the updated guidance can be challenging and may require significant changes to systems and procedures. We can help.