Enjoy this quick update on accounting regulations.

 

PPP Forgiveness

Borrowers have 10 months from the end of the covered period (between 8 and 24 weeks at the borrower’s discretion) before the lender may request payments of principal and interest. Borrowers can claim forgiveness at any time during the term of the loan.

Forgiveness applications should not include qualified wages taken into account in determining the Employee Retention Credit.

Funding is considered nontaxable income and expenses paid with funding are deductible.

SBA Form – Eligibility

  • Form 3508 eligibility – all borrowers
  • Form 3508 EZ eligibility – limited to those that are one of the following: No salary/hourly wage reduction AND no FTE reduction or No salary/hourly wage reduction AND could not operate at same level
  • Form 3508 S eligibility – PPP Loans of $150,000 or less directly through SBA

Employee Retention Credit

Employers can claim the credit on an amended Form 941-X payroll report filed within three years from the date the Form 941 was filed or two years from the date the reported tax was paid, whichever is later. Employers may also claim using a Form 941.

Funding is considered nontaxable income and expenses paid with funding are non-deductible and wages paid during the period of eligibility will be reduced by the amount of the credit for tax purposes.

Restaurant Revitalization Fund

Funding is considered nontaxable income and expenses paid with funding are deductible.

Covered Period: February 15, 2020 to March 11, 2023

Eligible Expenses:

  • Business payroll costs (including sick leave)
  • Payments on any business mortgage obligation
  • Business rent payments (this does not include prepayment of rent)
  • Business debt service, both principal and interest (this does not include any prepayment of principal or interest) including PPP, SBA or EIDL Loans
  • Business utility payments
  • Business maintenance expenses
  • Construction of outdoor seating
  • Business supplies (including protective equipment and cleaning materials)
  • Business food and beverage expenses (including raw materials)
  • Covered supplier cost
  • Business operating expenses

Reporting Period: Required to report to SBA through application portal by December 31, 2021

Payroll Tax Deferral

Employers can defer payment of the employer portion of the Social Security tax (6.2%).

Failure to make these payments would trigger a penalty of 10% on the entire amount deferred with the due date of the deposit going back to the date the taxes were originally due. Payments are made through the EFTPS system which requires an active login.

ASC 842 – Preparing for the New Leasing Standard

The new lease accounting standard is expected to have a significant impact on retailers and hospitality clients. In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (codified as Accounting Standards Codification (ASC) Topic 842)

  • ASC 842 introduces a lessee model that brings most leases onto the balance sheet;
  • Aligns certain underlying principles of the lessor model with those in ASC 606 (the FASB’s new revenue recognition standard);
  • Addresses other concerns related to the current leasing model, which was based on 40- year-old guidance.

Main Objective

  • Address concerns about lessees using operating leases as a form of off-balance sheet financing
  • Leases will be:
    • Operating leases
      • Accretion of lease liability is part of lease cost
    • Financing leases
      • Accretion of lease liability is interest expense

Changes

  • Nearly all leases lasting more than a year will need to be captured on the lessee’s balance sheet
  • Including operating leases, which have traditionally been expensed on a straight-line basis with no balance sheet impact
  • Expanded lease disclosures in the footnotes
  • Need to scrutinize service contracts for components that are essentially “embedded leases”
    • Common mistake to overlook the embedded lease components of a service contract; treat entire contract as a service
    • Previously would have resulted in a disclosure issue under the old lease standard and no balance sheet issue

January 2018 - FASB issued a proposed ASU that would amend the new leasing standard to provide entities with “practical expedients” that would:

  • Limit application of the new standard to the most recent period presented
    • Entities will not have to restate comparative periods
  • Not require lessors to separate lease and non-lease components when certain conditions are met

Consumer Business Impacts

  • Typically have a vast number of operating leases (and potentially leases embedded in service contracts)
    • Real estate leases for individual stores
    • Real estate leases for distribution centers
    • Vehicle fleet leases (delivery)
    • Office equipment leases
    • Embedded leases
      • Supply contracts that require ‘dedicated facilities’
      • Will have to consider if accounted for as a leased asset on the retailer’s balance sheet
      • Consider if need to account for that fulfillment facility as a leased asset
  • Consider terms that automatically modify under certain circumstances (e.g., co-tenancy clauses) which cause modification considerations
  • Additional considerations for required impairment tests for individual store locations
    • More lease assets on the balance sheet (the ROU asset) could significantly increase the cash flows needed to recover those assets
  • Debt covenant implications (more $’s on balance sheet could trigger negative metric impacts)

 

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All the Acronyms and Accounting Considerations

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