Reassessing Profit Margins During the Pandemic

If there is a silver lining at all to COVID-19’s effect on industry, it’s that its forced managers to re-evaluate their profit margins. Striving to optimize profitability has never been more of a factor in financial endurance as it is right now. Handled correctly, the changes implemented to survive financially during COVID-19 will reap its greatest benefits once the worst of the pandemic is behind us. The good starting point in a reassessment is to disaggregate the components feeding into company margins and identify those reaping the greatest rewards. There are several ways to dissect and capitalize on profitability streams.

• By customer: As a rule of thumb, analysts estimate that the top 20% of customers generate approximately 120% of company profits; and the bottom 20% account for 100% of losses. While it feels counter intuitive to many business owners whose mantra is to grow a customer base, culling your revenue pool is probably one of the quickest ways to improve profitability. Start by identifying which customers belong in the top, middle, and bottom buckets. Which of the poor performers can be renegotiated, and which need to be let go?
• By product: Unless a manufacturer produces a single homogenous item, there will be variability in margins by product. Managers that do not have visibility at this level do themselves a disservice. Identifying fixed and variable costs by product reveal which perform at or above expectations, and which hurt the bottom line.
• By distribution channel: How business owners get their products to their customers can have vastly different cost structures. How much does it cost to use traditional wholesalers, regional distributors, direct-customer avenues? Will there be repercussions to the business in upsetting the apple cart? Are there new opportunities in web-based sales?
• By supply chain: Time is money. Logistical challenges to get inventory in the door and through processing plays an inherent role in product costs. Examine the interface between engineering and production. Which products can be produced to QC standards, within budget, and put out to market quickly?

This self-examination may be borne of the need to stay afloat during these unprecedented times, however, it does create an opportunity. Understanding what truly drives company profit puts management in a position to devise and execute a margin optimization strategy. A focused plan based on relevant data will mitigate the financial strain of the pandemic and, even more importantly, fortify the business model in a post COVID-19 economy.

If you have any questions on how your business would benefit from a profit margin evaluation, please call us at 401-921-2000, or reach us through email or complete our online contact form.

Health care providers have dedicated their resources to providing patients with the care they need throughout a rapidly evolving pandemic. During these unprecedented times, medical providers have been faced with additional costs related to treating coronavirus patients as well as lost revenues due to government shutdowns and the suspension of elective procedures. To help mitigate the financial impact on providers, the U.S. Department of Health and Human Services (HHS) issued Provider Relief Fund (PRF) payments to be used towards eligible coronavirus related expenses and to help cover lost revenues.

Recipients of these funds agreed to certain terms and conditions, including reporting requirements pertaining to the use of these funds. If in any Payment Received Period you received one or more payments totaling $10,000 or more in the aggregate, you are subject to the reporting requirements.  Failure to meet these requirements could result in HHS seeking recoupment of the funds. The following table provided by HHS summarizes each Payment Received Period, along with the Deadline to Use the Funds and the respective Reporting Time Period:

Summary of Reporting Requirements

*On September 10, 2021, HHS offered a 60-day grace period for Period 1. Although the reporting time period and deadline to use the funds has remained the same, HHS will not initiate collection procedures during this grace period.

Providers will be required to report on eligible coronavirus related expenses, such as personal protective equipment, tele-health costs, touch-free technology, hazard pay to employees, physical barriers meant to reduce the spread of COVID-19, and costs related to COVID testing to name a few. The expenses need to be for the preparation for, prevention of or response to coronavirus.  Additionally, if you received any other funds, either from federal, state, or local governments or from business insurance, those monies need to be reported and applied against the eligible expenses first. If you have not used all the PRF payments for eligible expenses, you will need to provide information on lost revenues attributable to coronavirus.  HHS is allowing several different methods to report on lost revenues.

Additional reporting requirements will include interest earned on the funds if they were held in an interest-bearing account, metrics related to personnel, patients and facilities and you will need to answer various questions about the impact of the payments during the period of availability. Providers that expend $750,000 or more in federal funds, including the PRF payments, are subject to a Single Audit requirement.

The reporting requirements outlined above are a general overview of the complex calculations and reporting required to comply with HHS guidelines. For additional information and guidance related to the Provider Relief Fund payments and the related reporting requirements, click here. If you would like assistance or advice regarding your reporting obligations, please call us at 401-921-2000, or complete our online contact form.

Under the American Rescue Plan Act of 2021 (ARP), new tax credits are being provided for paid leave to employees who take time off related to COVID-19. The ARP allows small and medium-sized employers, and certain governmental employers, to claim refundable payroll tax credits equal to 100% of the qualified sick leave. Eligible employers that are entitled to claim the refundable tax credits include businesses and tax-exempt organizations with fewer than 500 employees and pay qualified sick leave wages. Self-employed individuals are eligible for similar tax credits.

Qualified sick leave includes wages for an employee who is directly affected, experiencing symptoms, and seeking a medical diagnosis for COVID-19 as well as employees in the process of obtaining or recovering from the effects of any COVID-19 vaccination. The credit is allowed for up to 80 hours of paid sick leave in an amount equal to the employee’s regular wage, capped at $511 per day for a total of 10 workdays, for a total cap of up to $5,110.

Businesses and nonprofits will be eligible to claim the tax credits available to eligible employers that pay sick and family leave from April 1, 2021 through September 30, 2021. The Emergency Paid Sick Leave Act allows employers to reclaim the original credit as written under the Families First Coronavirus Response Act from its enactment up to March 31st, 2021. Employers can claim the credit again from April 1st, 2021 to September 30, 2021 for another 10 days on the same employee if needed.

Eligible employers claiming the credits for qualified leave wages must retain records and documentation related to and supporting each employee’s leave. Credits can be claimed on Form 941, Employer’s Quarterly Federal Tax Return. Eligible employers can keep the federal employment taxes that they otherwise would have deposited, including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the eligible employer’s share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. If the eligible employer does not have enough federal employment taxes on deposit to cover the amount of the anticipated credits, the eligible employer may request an advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Self-employed individuals may claim comparable credits on the Form 1040, U.S. Individual Income Tax Return. The credit will be based on the net earnings during the year divided by 260 days to determine the credit limitations. The ARP increased the day limitation to 60 days ($12,000 overall; $200 per day).

More Information

• IRS: Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations
• IRS: American Rescue Plan tax credits available to small employers to provide paid leave to employees receiving COVID-19 vaccines; new fact sheet outlines details

If you have any questions on the above and how it applies to you, please call us at 401-921-2000, or reach us through email or complete our online contact form.

Treasury Secretary Janet Yellen called for a global minimum tax for US multinationals in a speech to the Chicago Council of Global Advisors on April 5, 2021. Under the proposal, US Multinational Enterprises (MNEs) would pay at least a 21% tax rate on profits earned in every country with foreign operations. The proposal increases the current GILTI rate of 10.5% and would apply more broadly by eliminating the exclusion for the 10% return on tangible fixed assets.

The initiative follows President Joe Biden’s campaign platform that called for raising the US corporate income tax (CIT) rate to 28% and replacing the current global intangible low-tax income (GILTI) tax with a much stronger minimum tax on foreign earnings.

The current GILTI tax on foreign subsidiary earnings has the following main elements:

• 5% effective tax rate (21% CIT rate with a 50% earnings deduction)
• Exclusion of a 10% return on foreign tangible assets
• Global pooling of foreign profits and foreign tax credits (FTCs)
• Elective High Tax Exclusion (HTE) for Controlled Foreign Corporations (CFCs) with effective tax rate above 18.9% (90% of standard CIT rate)

By contrast, Biden’s foreign minimum tax proposal has the following main elements:

• 21% effective tax rate
• Full income tax base (no exclusion of basic returns on foreign investments in tangible assets)
• Would eliminate pooling of profits and FTCs (by imposing country-by-country limitation)

It is noted that alternative versions of the US GILTI rules changes are being worked on and will likely be considered in the House and Senate. In addition, it will also be important to see how any eventual US changes align with the OECD’s Base Erosion and Profit Shifting (BEPS) Pillar 2 proposal for worldwide minimum corporate income taxation.

It is noted that while the OECD BEPS Pillar 2 initiative is still under discussion, it appears likely to set a minimum tax rate of about 12.5% and would exclude a normal rate of return on foreign investment. As a result, Biden’s proposal could put US MNEs at a competitive disadvantage and reignite corporate inversions (transactions where US MNEs become foreign MNEs).

More Information

If you have any questions regarding these tax updates, please call us at 401-921-2000, or reach us through email or complete our online contact form.

Many of us have been spending more time than ever at home lately, and with all that at-home time, may have noticed a few shortcomings throughout the entire house. Things that we overlooked before are now glaringly obvious, especially when it comes to functionality. Some households now have two parents working from home, as well as schooling being done remotely. Finding areas to accommodate everyone can be a challenge. To address these concerns, many people are building home offices in their basements, designating specific locations in their living areas or bedrooms, and upgrading lighting, internet services, and more.

The Home Improvement Boom

Adding office space, building a deck, upgrading landscaping and kitchen renovations are all popular projects, and the pandemic has not slowed down the pace of home renovations. According to a recent U.S. Census Bureau report, sales at home and garden centers, hardware stores, and building supply stores have seen a year-over-year increase of 22.6%.  Only the category of online sales showed a bigger year-over-year increase. According to Houzz, there was a 58% increase in request for home professionals in June 2020, compared to June 2019.

 All of this is not surprising, given that many employers shut down, and non-essential employees were required to work remotely. Working from home has saved many employees on commuting time, and that has opened up a few extra hours for home projects. Plus, our surroundings impact our mental health. The pandemic has invoked increased stress in most individuals, and having a pleasant, functional environment can boost people’s mood. This effect increases when combined with the sense of accomplishment from a project well-done. Even a simple coat of paint and some organization and decluttering can make a huge difference. 

Paying for Home Improvements 

It may be difficult to find the funds to pay for improvements, especially if you have been out of work due to COVID-19. Some projects, such as painting and adding new cabinet hardware, are inexpensive. Others, obviously, can be quite costly. A popular way to pay for home improvements has always been a home equity loan or home equity line of credit (often referred to as a HELOC). Because interest rates have been low, a cash-out refinance or a HELOC are even more attractive options. While taking on additional debt is always something to be considered carefully, if your projects will increase your home’s value, then it may make sense. Another benefit of a HELOC in these uncertain times is the access to cash it provides, particularly for those who do not have a liquid emergency fund. If you are considering one of these options, do not wait. Some lenders are overwhelmed with applications to process right now, so get the ball rolling as soon as possible.

Tax Implications of Home Improvements 

There may be tax implications if you borrow against your home. If you itemize, on your personal income tax return, a portion of the interest and real estate taxes may be limited. Fewer people itemized these last few years because of the $10,000 limit imposed on the deductibility of taxes and the higher standard deduction provided by the Tax Cuts and Jobs Act of 2017.

Under current tax law, home mortgage interest on debt up to $750,000 (or $1 million if the debt originated prior to December 16, 2017) used to purchase or improve your home (that includes your primary residence and a second home) is tax deductible. Home mortgage interest on debt that is not used for home purchase or improvements can no longer be deducted. Therefore, it is important to calculate your deductible vs. non-deductible interest if you itemize and have home mortgage debt that was used for anything other than home purchase or improvement. Keep in mind, these limits are cut in half if you are married filing separately. There are also other restrictions that may apply to your situation. 

In addition, major improvements can add to the basis of your home and ultimately reduce the gain on the sale. If you are selling your primary residence, there is a gain exclusion of $250,000 for single and $500,000 for married filing jointly. There are different rules for gain on sale of rentals and vacation homes. 

More Information

If you have any questions regarding the above tax issues and limitations, please call us at 401-921-2000, or reach us through email or complete our online contact form.

The Employee Retention Credit (ERC) was first enacted as part of the CARES Act, then further enhanced and extended by the Taxpayer Certainty and Disaster Relief Act. Through this program, eligible employers can generate maximum tax credits of $5,000 per employee in 2020 and $14,000 ($7,000 per quarter) per employee in 2021. Currently, the ERC is only available through June 30, 2021, which is why maximum funding equates to $14,000 for 2021. Credits will offset payroll taxes reported on quarterly payroll filings (i.e. Federal income tax deposits withheld on behalf of employees’ Social Security, and Medicare taxes).  

Below is a brief summary of who can qualify for this credit in 2020 and/or 2021:

Qualifications for the 2020 Credit:

• Employer of any size, with the exception of government entities
• Must be engaged in a trade or business
• Must have qualified wages in a calendar quarter in which either of the situations described below occurred:
  • Business operations were fully or partially shut down due to COVID-19 restrictions issued by government order
  • The business must prove they have a significant decline in gross receipts (does not need to be COVID-19 related)
    • The business is eligible for the credit starting with the first calendar quarter they had a >50% decline in gross receipts compared to the same calendar quarter in 2019 
    • The business continues to be eligible for the credit until the end of the calendar quarter where gross receipts rebound to >80% of 2019 receipts for the same calendar quarter or until December 31, 2020 if gross receipts fail to rebound 
• Related employers need to aggregate their gross receipts to prove eligibility for this credit
• Wages used to calculate the credit must have been paid between March 13, 2020 and December 31, 2020 
• The credit rate is 50% of qualified wages up to $10,000 per employee during the year
  • Wages used for Paycheck Protection Program loan forgiveness calculations or family and sick leave credits under the Families First Coronavirus Response Act cannot be reused in this credit calculation
• For employers with 100 or fewer full-time employees, all qualifying wages are eligible for the credit. For employers with over 100 full-time employees, only wages paid to individuals not rendering services qualify for the credit.           

Qualifications for the 2021 Credit:

• Employer of any size, including certain government employers  
• Must be engaged in a trade or business
• Must have qualified wages in a calendar quarter in which either of the situations described below occurred:
  • Business operations were fully or partially shut down due to COVID-19 restrictions issued by government order
  • Decline in gross receipts of at least 20% when comparing a 2021 calendar quarter to the same 2019 calendar quarter
    • if you were not in business in 2019 you may still qualify for the credit 
• Related employers need to aggregate their gross receipts to prove eligibility for this credit
• The credit rate is 70% of qualified wages up to $10,000 per employee, per quarter
  • Wages used for Paycheck Protection Program loan forgiveness calculations or sick leave credits under the Families First Coronavirus Response Act cannot be reused in this credit calculation
• For employers with 500 or fewer full-time employees, all qualifying wages are eligible for the credit. For employers with over 500 full-time employees, only wages paid to individuals not rendering services qualify for the credit.           

More Information

If you have any questions regarding the ERC, or guidance on your specific situation, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.

Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27, 2020, the Provider Relief Fund was created. Many qualified healthcare providers were able to obtain federal funding to assist in keeping their doors open and continuing to serve patients during the coronavirus outbreak. This was a lifeline for many healthcare entities, however, most recipients will have some additional reporting requirements regarding the funds they received.

When entities including commercial, states, other local governmental entities, and not-for-profit organizations obtain and expend federal assistance of $750,000 or more, (including funds received from the Provider Relief Fund), they reach the threshold for an audit by a Certified Public Accountant (CPA). This audit checks for compliance with federal laws and guidelines and is termed a “single audit” as it was introduced in 1984 to replace the numerous audits that had been in place for various federally funded programs.

If your organization did not expend $750,000 or more in federal funds, you will not have to undergo a single audit.

If you did expend $750,000 or more, auditors will need to verify that the funds were used in compliance with applicable federal programs. During this process, auditors look at eligibility and cash management in addition to the proper use of funds received under the applicable program including invoices, contracts, and financial statements. Therefore, providers are strongly encouraged to keep detailed accounting records and be able to demonstrate that funds expended were used as intended by the specific program. Auditors will also need to report on internal control deficiencies and other relevant findings. Depending on the complexity of the recipient’s entity and how accurate and organized the books and records are, this could be relatively straightforward, or very involved and quite costly.

A single audit is typically due 9 months after the end of the provider’s fiscal year. Many providers work on a fiscal year ending June 30, which would make this audit due on March 31, 2021. So, if you expended $750,000 or more in funds, you will need to hire a CPA with experience performing single audits and begin the process, if you haven’t already; the sooner the better. Single audit extensions may be granted on a case by case basis.

The U.S. Department of Health and Human Services (HHS) has noted that commercial organizations (for-profit entities) can choose to have a financial audit under Generally Accepted Government Auditing Standards (GAGAS) instead of choosing to have a single audit. More guidance is still anticipated from HHS in regards to this second option but this option would reduce the scope of the audit by removing the requirement to perform the compliance audit component and limits the scope of the audit to consideration of HHS awards (including Provider Relief Funds) instead of all federal awards.

If you have any questions about your responsibilities and need help navigating through these compliance requirements, our team stands ready to assist you.

Feel free to reach out to us through our contact form here or by calling our office at 401-921-2000 to begin discussing your situation and next steps.

The COVID-19 pandemic is not yet over, and contractors will continue to feel its impact for subsequent years. As far as accounting and financial statements are concerned, preparations should be made for possible changes, including adjustments to Generally Accepted Accounting Principles (GAAP) requirements and disclosures.

GAAP Changes

Some significant possible changes to GAAP requirements and disclosures affect the following topics: 

• Contract modifications
• Debt modifications
• Loan covenants
• Going concern
• Inventory
• Property, Plant, and Equipment (PPE)
• Risks and uncertainties
• Securities
• Subsequent events 

These changes will vary from contractor to contractor due to each running their own unique business.

Effects of an Economic Downturn

With the economy slowing and, in some places, shutting down during this pandemic, it is evident it can lead to long term changes to the economy. Contractors need to take into consideration the following possible effects. 

Contracts, debt modifications, loan covenants, and going concern are all directly impacted by this. Contractors will have to analyze their current contracts and possibly renegotiate to proceed on. The same goes for amending existing debt agreements regarding liquidity. The impact on going concern evaluations will require the disclosure of the results from COVID-19 and possible reassessments. This would include things such as key financial ratios, financial projections, and their ability to meet debt covenants.

Inventory and PPE are both similarly affected. ASC Topic 330 states when production is lower than typical, it is required to expense, as an alternative to capitalizing, an allocation of fixed overhead costs. Due to the decrease in the workforce, an adjustment to the carrying value of inventory may be necessary and then disclosed. As for PPE, the carrying amount of an asset may no longer be recoverable, which is required to be disclosed as well.

Risk and Uncertainties

After any pandemic, it is expected there could be a significant increase in risks and uncertainties reported on the financial statements. It is required that contractors disclose the impact of COVID-19 and the effect on their current and future operations for their business. Some areas which are expected to be impacted are volume discounts, variable considerations, rebates in revenue contracts, and asset impairment evaluations. Along with risks and uncertainties come securities. It is no secret that COVID-19 had a major impact on the decline of the economy, therefore capital markets were negatively affected. Therefore, it is required for an individual disclosure to be made of equity securities, debt securities, and equity method investments.

Disclosure

Regarding COVID-19 and subsequent events, contractors must review and disclose the events that occurred because of the pandemic. With the disclosure of a non-recognized subsequent event, the financial impact should be stated as well. Significant disclosures contractors should consider are:

• Government-mandated restrictions
• Staff reductions
• Investment losses

As this pandemic continues, it leaves many contractors wondering what lies ahead. Even though the future is unforeseeable, if contractors act now and take advantage of the resources they are given, they will be prepared. The time to begin planning is now, as it’s important for businesses to know any tax changes and filing requirements. If you have any questions, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.

The Tax Cuts and Jobs Act of 2017 (TCJA) created legislation limiting the deductibility of business interest expense on businesses with average annual gross receipts of $25 million or more (amount is indexed annually for inflation) in the previous three years and businesses considered tax shelters as defined under the Internal Revenue Code. The limitation generally reduces the deductibility of business interest expense to 30% of the taxpayer’s adjusted taxable income. The recent passing of the CARES Act generally increased the deductibility of business interest expenses from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020.

State-By-State Variations

As each state has their own respective tax structure, there are varying degrees of conformity to the federal business interest expense limitations discussed above. Accordingly, businesses may have the added complexity of tracking business interest expense limitations at the state level, which only gets compounded for those businesses operating in multiple jurisdictions. There are currently 35 states that conform to some version of the 163(j) business interest expense limitation, and of these, 22 states conform to the recently increased limitation provided in the CARES Act of 50%, whereas 13 of these states conform to 163(j) as it was originally adopted in the Tax Cuts and Jobs Act of 2017. 

More Information

If you are a business who is subject to the limitation on business interest expense, and seek guidance in this area, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.

If you sustain a casualty loss due to a federally declared disaster under Section 165(i), you may elect to deduct a casualty loss in the tax year before the casualty actually occurred. Taxpayers have the option of claiming a deduction for the casualty loss either in the year the loss occurred or the prior year. To claim the deduction in the prior year, an election may be made to accelerate this loss. In 2019, the IRS finalized a proposed regulation it had issued in 2016 that states this election must be made 6 months after the original due date of the current year return. Under the prior rules, the election had to be made by the unextended due date of the current return.

Who Can Benefit?

Any taxpayer that has suffered a disaster-related loss as defined in Sec. 165 (h)(5) can benefit from this election. This is specifically beneficial for taxpayers who have income to take the loss against on prior year returns and are expecting to have a loss in the current year.

Additional Considerations

The election can be revoked for up to 90 days after the due date of the election. This may be a beneficial election particularly during the 2020 tax year where many businesses may be experiencing losses due to the pandemic. 

If you have any questions regarding the tax implications of electing to accelerate disaster losses, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.