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The Employee Retention Credit (ERC) has ended early with the signing of the Infrastructure Investment and Jobs Act into law. Previously set to expire as of December 31, 2021, the credit has retroactively ended as of September 30, 2021.

Taxpayers can still make retroactive claims for 2020 and 2021 Q1–Q3. However, no new claims may be made for 2021 Q4, unless you are a Recovery Startup Business. If a business qualifies as a Recovery Startup Business, the employee retention credit is still available for 2021 Q4.

Why Is It Ending Early?

The ERC has been a huge source of additional COVID relief funds for many taxpayers these past two years. However, a provision was included in the infrastructure bill this past summer that created an early end to the program.

The infrastructure bill passed the Senate back in August, and the House tried multiple times over the weeks that followed to pass it. However, many Democrats wanted the infrastructure bill packaged with a spending bill, so they could pass the two simultaneously.

On Friday, November 5, the House decided to move forward without the spending bill and passed the infrastructure bill. President Biden signed the infrastructure bill into law on Monday, November 15.

Next Steps

If you were planning to take the employee retention credit in 2021 Q4, work with your third-party payroll provider to verify whether any tax payments for 2021 Q4 were reduced because of planning for the credit. Many large payroll providers did not allow their clients to adjust their deposits in 2021 Q4 due to the uncertainty of the infrastructure bill over the past few weeks

We might see the employee retention credit retroactively reinstated for 2021 Q4 through one of the year-end tax extender bills in December. Various groups have already begun writing letters to Congress to request the credit be reinstated for 2021 Q4. However, where this goes is uncertain.

If you are looking for more information on the ERC, please check out the related articles on our website or reach out to one of our professionals for more information.

© Clark Nuber PS and Developing News, 2021. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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Top 10 Manufacturing Tax Incentives for 2021

The manufacturing industry makes up the backbone of the U.S. economy and, as such, there are many tax incentives aimed at helping manufacturers grow and thrive. Below, you’ll find 10 of these manufacturing tax incentives available to you in 2021:

Depreciation Expensing Under Section 179 and Bonus Depreciation

Manufacturers are allowed to expense up to $1.05 million in fixed asset additions under Section 179 if the total additions are less than $2.62 million each year. Section 179 expense is limited to taxable income and allows the taxpayer to select which assets to expense and how much. It’s important to note more states allow Section 179 than bonus depreciation. Manufacturers can also claim bonus depreciation that allows immediate write off of all fixed asset additions, with no limits. This can be taken without taxable income limitation and can put the business in a taxable loss position, but it must be taken on all additions in the same asset class. Many states do not allow bonus depreciation.

Research and Development (R&D) Credit

Manufacturers are in an excellent position to claim this credit, which was created to provide a tax credit for the development or improvement of new or existing products or processes. The R&D process must be technological in nature, involve process of experimentation, and be subject to uncertainty. The credit is based on R&D wages (direct, support, and supervision), materials, and subcontract costs. It is calculated in different ways using a 20% or 14% rate. And it can be claimed as an income tax credit (for all businesses) or as a payroll tax credit (only for those businesses with less than $5 million in sales and operating for five years or less).

Cash Method for Tax

Manufacturers under $26 million in gross receipts (using a prior three-year average) can elect to use the cash method for tax purposes. This method matches the tax to when the income is received and the expenses are paid. It requires capitalizing materials to inventory (labor and overhead related to inventory are expensed). The cash method creates a big deduction when the business changes to the cash method, allows for additional deferral of income as the company grows, and makes year-end tax planning very flexible.

Last In First Out (LIFO) Inventory Method

For manufacturers with increasing inventory costs, the LIFO costing method provides for inventory to be valued using base year values, with new costs being expensed currently. This method creates larger deductions for the business as the inventory pricing increases. To use the LIFO method, the company must also use LIFO for book purposes, which can also result in lower book income.

Entity Structure Planning

Based on a manufacturer’s current situation, and its long term and short term objectives, it may make sense to change the manufacturer’s type of entity for tax purposes. For example:
  • A partnership may want to change to an S corporation to increase its QBI deduction (see below) and save on self-employment tax.
  • An S corporation may wish to revoke its S status to pay tax at the lower C corporation rates (currently 21%). They could also take advantage of FDII (see below) if the owners do not want/need distributions, the company needs to conserve cash, or to hold the C corporation stock five years to take advantage of the Qualified Small Business Stock exclusion (QSBS/Section 1202 stock).
  • A C corporation may wish to make an S election so the owners can take more money out of the business and have one layer of tax if the company plans to sell in five or more years.
A change from an S or C Corporation to a partnership could be a taxable event.

Qualified Business Income (QBI) Deduction

This incentive is for manufacturers who operate as an S corporation, a partnership, or sole proprietorship. It allows a 20% deduction (through 2025) of the company’s taxable operating income— limited to 50% of wages or 25% of wages and 2.5% of qualified property. For those owners at the highest tax rate of 37%, the manufacturing income is taxed at 29.6%.

Interest Expense Limitations

Manufacturers over $26 million in gross receipts (prior three-year average) have an interest expense limitation up to 30% of taxable income, plus interest, depreciation, and amortization expense. Starting in 2022, the interest expense will be limited to 30% of taxable income, plus interest expense only. Manufacturers should carefully plan for this limitation by evaluating their debt and equity situation.

Foreign Derived Intangible Income Deduction (FDII)

This incentive is for manufacturers who export goods. It has the effect of cutting the tax rate on foreign source income to as low as 13.125% for C corporations through 2025. It is not available for S corporations, partnerships, or sole proprietorships.

Employee Retention Credit (ERC)

The ERC for 2021 is for manufacturers who had a decline in sales by more than 20% by quarter for 2021 over 2019. This credit is refundable and is based on 70% of an employee’s wages, plus health insurance. This is limited to $10,000/employee for each quarter the business qualifies (maximum credit is $7,000/employee/quarter). The business gets the credit each quarter it qualifies plus the following quarter (even if it doesn’t qualify). These wages cannot be also used for PPP loan forgiveness. Legislation was recently signed to end this credit for wages paid after September 30, 2021.

WA Sales and Use Tax Exemption

Manufacturers in Washington state are exempt from sales and use tax on machinery and equipment used directly in manufacturing or research and development. Also included is the labor and services to install, repair, alter, or improve the qualifying machinery and equipment. This exemption is similar those provided by many other states.

Have Questions?

Manufacturers should consider their situation and see how these tax incentives can help their business and its owners through these challenging times. Please consult with your Clark Nuber professional or contact Rene Schaefer with any questions. © Clark Nuber PS, 2021. All Rights Reserved.

OMB Uniform Guidance on Administrative Requirements – Update for Procurement Standards

Originally published on 6/30/2021; updated to reflect changes in the OMB 2021 compliance supplement. If your organization receives federal funding subject to the rules and regulations in the Uniform Guidance, make note of changes made in the fall of 2020 to the procurement standards. Though these changes were made and became effective in November 2020, many not-for profit organizations are now receiving federal grants for the first time, highlighting the need to be aware of the procurement standards contained in the Uniform Guidance.

Overview

Procurement refers to the purchase of goods or services, typically for other-than-payroll and certain non-payroll expenses. Procurement standards require entities to establish policies and procedures before making purchases with federal funding and are often more prescriptive than how a typical not-for-profit would procure goods and services The revisions made to the Uniform Guidance this last fall are effective for new federal awards (subawards) and amendments to existing awards issued on or after November 12, 2020. Though, in theory, the changes discussed below would not be effective for awards existing prior to, and not amended after this date, the 2021 OMB Compliance Supplement – Part 3-I Procurement noted that audit findings should not be reported in the Single Audit if an entity applied a documented change in procurement threshold, after the November 2020 effective date, for federal awards existing as of and not amended subsequent to that date. Under the revisions to the Uniform Guidance, the following were key changes noted:
  • Organization of the existing Procurement Methods as Informal, Formal, and Non-competitive. The Revised Uniform Guidance did not add/remove existing Procurement Methods.
  • Wording changes that may not seem like a significant change but should be reviewed, nonetheless. The red-lined version of the Revised Uniform Guidance can be found here.
  • Potential for increases to micro-purchase thresholds to over $10,000.
To get started, the following are the Procurement Methods identified in the Uniform Guidance. I have detailed below what each means, and the changes, if any, that were included in the Revised Uniform Guidance.
  • Informal
    • Micro-purchase (up to $10,000)
    • Small purchase (up to $250,000)
  • Formal (over the small purchase threshold; $250,000+)
    • Proposals
    • Sealed bids
  • Non-competitive (sole source)

Informal Procurements

Purchases in the informal category include micro-purchases and small purchases.

Micro-purchases

Micro-purchases do not require formal procurement processes as long as the not-for profit considers the price to be reasonable based on research, experience, purchase history, or other information and documents it files accordingly. Purchase cards can be used for micro-purchases if procedures are documented and approved by the entity. With the latest changes in the requirements, entities now have the possibility to increase their micro-purchase threshold up to $50,000 with a self-certification that any one of the following conditions are met:
  • The entity is a low-risk auditee (as defined in section 200.520 of 2 CFR 200). The concept of “low-risk auditee” is used in the Single Audit but evaluates against prescribed criteria in the referenced Uniform Guidance – 2 CFR Part 200. The evaluation looks at audit results for the entity’s past two years of Single Audits.
  • They perform an annual internal risk assessment to identify, mitigate, and manage financial risks
  • They are a public institution whose State law allows a higher threshold
Entities may even increase the micro-purchase threshold to over $50,000, but it does require approval by their cognizant agency for indirect costs.

Small Purchases

Small purchases are those between the micro-purchase threshold and up to $250,000. This threshold is also referred to as the “simplified acquisition threshold,” or SAT. Small purchases require price or rate quotations from an adequate number of qualified sources. These can be as informal as website or catalog prices, or more formal, such as written quotations from a vendor. As there is no defined minimum for “adequate number,” it’s important for entities to establish what they consider to be an adequate number of sources in their accounting policies and procedures. It’s also important for the entity to retain documentation of the price/rate quotes that it obtained.

About Thresholds

It's key to note that the thresholds referred to above are maximum limits. An entity can typically choose a lower dollar amount for any of the thresholds discussed here by incorporating them into its accounting policies and procedures. If an entity does elect a lower threshold, it is bound to that lower threshold for compliance purposes. In other words, during an entity’s Single Audit, the auditor will test procurement purchases against the purchasing thresholds established in the entity’s policies and procedures. For all procurement purchase thresholds, the entity needs to establish them in its accounting policies and procedures, even if the entity is defaulting to the maximum limits in the Uniform Guidance.

Formal Procurements

Purchases in the formal category are those over the small purchase threshold, and they typically require obtaining multiple bids through a formal process.

Sealed Bids

Sealed bids are publicly solicited and award a firm, fixed-price contract to the lowest eligible bidder.

Proposals

Proposals are used when awarding either a fixed price or a cost-reimbursement contract. They are also publicly solicited and are used when sealed bids are not appropriate. The entity often needs to perform technical evaluations of the proposals in order to consider all of the relevant factors.

Non-Competitive Procurements

Non-competitive procurements are only allowed under one of the following specific circumstances:
  • Purchases below the micro-purchase threshold;
  • Purchases only available from a single source;
  • The purchase needs to be completed more quickly than a sealed bid or proposal procurement process would allow, such as in an emergency situation like a natural disaster;
  • The federal awarding agency or pass-through entity approves the use of non-competitive procurements in response to a written request from the entity; or
  • Sealed bids or proposals were sought, but competition was deemed inadequate due to lack of eligible responses.
When using the non-competitive procurement, it is key that you confirm:
  1. One of the conditions does apply to the underlying procurement; and
  2. Justification for use of this method (i.e. condition that was met) is clearly documented.

Conclusion

With new procurement standards in effect, take the time now to ensure your entity is up to date with the revised thresholds and use the revision as a reminder to ensure your policies and procedures over federally funded procurement of goods and services meet requirements of the Uniform Guidance. Read through the guidance and review your written policies and procedures. And avoid future non-compliance and potential audit findings by revising your practices and documentation today. If you have questions on the new procurement standards, please send me an email. © Clark Nuber PS, 2021. All Rights Reserved.

What to Expect When Applying for SSPA Compliance

Since the emergence of specialty service providers, data sharing between companies has grown at an exponential rate. As a result, specialty service providers are increasingly being asked to demonstrate their ability to protect confidential corporate data and private personal information as a condition of being hired. Microsoft, who leverages specialty service providers extensively, has been a leader in driving compliance practices relative to security and privacy concerns with their Supplier Security and Privacy Assurance program (SSPA). According to their program guide, “SSPA is a partnership between Microsoft’s Procurement, Corporate External and Legal Affairs, and Corporate Security groups to ensure privacy and security principles are followed by its suppliers.” Any supplier that processes Microsoft’s confidential information or the personal data of its employees and/or customers must comply with this program as a condition of being hired by Microsoft. And, while the SSPA program was designed to be a one-size-fits-all solution, the steps in the annual compliance cycle can vary greatly depending on the type of information being processed, the data’s location, and the size of the organization. What follows is general information to help suppliers navigate the SSPA program and better understand the flow of a single compliance cycle with the SSPA program, from beginning to end.

Components of the SSPA Process

First, let’s understand the various components and major steps in the process. Each compliance cycle involves (a) an update to the supplier profile, (b) an update to individual requirements of the SSPA program by Microsoft, known as the Data Protection Requirements (DPR), (c) an annual self-attestation to a supplier’s compliance with the DPR, and, in some circumstances, (d) an independent assessment, also known as an audit. Let’s look at each one in turn.

Profile

An SSPA profile provides buyers at Microsoft with a variety of information about compliant companies and helps them understand which suppliers are able to fulfill different Statements of Work (SOWs), based on the specifications required. Profiles contain information like where a supplier is located, the relative size of the supplier, and a supplier’s current SSPA status (i.e., green for compliant, or red for non-compliant), but it also answers more specific questions like the following, among others:
  • Is this supplier approved to process both personal and confidential information, or just one or the other?
  • Is this supplier able to process information outside of a Microsoft-controlled environment?
  • Is this supplier approved to use subcontractors?
  • Does this supplier use freelancers?
  • Is this supplier an approved Software-as-a-Service (SaaS) provider?
As referenced in the first question above, the SSPA program classifies data handled, or “processed” in the SSPA vernacular, into two main categories: Personal Data and Confidential Data. These are defined terms, and Microsoft provides several examples of each in the SSPA Program Guide: Personal Data ranges from simple contact information to government identification numbers and credit card/bank account numbers. Confidential Data refers to pre-release marketing information on unannounced Microsoft products; information relating to the development, testing, or manufacture of Microsoft products, which includes software and other intangible products; as well as unannounced corporate financial data, among others. The data provided is used to build a profile for each supplier. The SSPA program has 10 defined profiles (as of Version 7 of the program, released in November 2020). Each profile is designed to help Microsoft buyers understand which suppliers can perform on SOWs they are creating. And each profile comes with a unique set of compliance responsibilities. Suppliers are able to update their profile at any time, so long as they do not have an open task within the SSPA compliance portal. Open tasks would represent an incomplete self-attestation or independent assessment, described further below. It is important for suppliers to be aware that changes to these questions may change the pre-defined profile assigned to them. For example, while changing your profile from Confidential Data only to both Personal and Confidential Data may allow you to perform more work for Microsoft, it may require additional compliance steps as well.

Data Protection Requirements

At the heart of the SSPA program is the Data Protection Requirements, or DPR. The DPR is a list of 53 requirements (as of Version 7 of the program, released in November 2020) broken into 10 topical sections, as follows: [table id=38 /] The DPR is typically updated once a year, in November. The topics noted above have been consistent since 2017, but the specific requirements have had subtle modifications over the years. In addition, the evidence expected to be provided to demonstrate compliance is updated each year as well. Depending on the assigned profile, the list of requirements presented in the DPR task may include just a subset of the entire 53-requirement program. For example, suppliers that handle sensitive Confidential Data, but do not handle Personal Data, will only be required to attest to their compliance with Sections A, E, and J. The other sections relate primarily to handling of Personal Data and, therefore, are excluded from the self-attestation task entirely.

Self-Attestation

Regardless of the profile to which a supplier has been assigned, if they process any kind of Personal Data or Confidential Data they must review and complete a self-attestation of their compliance with the DPR once a year. The launch of the self-attestation task, also referred to by Microsoft as the DPR task, generally coincides with the supplier’s anniversary date as a supplier with Microsoft. Upon receiving the self-attestation task, a supplier will need to review each requirement and select from the following possible answers: Compliant, Does Not Apply, Local Legal Conflict, or Contractual Conflict. Compliant and Does Not Apply are the two most common answers. If a supplier selects Does Not Apply as a response, the supplier will need to add an explanation for why the requirement does not apply. For example, a requirement that does not apply for many suppliers is requirement 51, which relates to processing credit card transactions on Microsoft’s behalf. A response of Does Not Apply will prompt a response such as “Supplier does not process credit card transactions on Microsoft’s behalf.” Upon completing the task, the supplier will submit their responses. The SSPA team will then review the submission from the supplier. This review will focus on any responses that are other than Compliant. Reviewers check engagement activity associated with a supplier account to validate the selection of Does Not Apply. The SSPA team may ask for clarification of one or more selections. As such, it is important for suppliers to be detailed in their explanations. “Local Legal Conflict” and “Contract Conflict” are only accepted if the supporting references are provided and the conflict is clear. Suppliers have 90 days to complete the self-attestation task. If the task is not submitted within this timeline, the status of the supplier will turn to red and no new purchase orders will be allowed to process until the status returns to green. The self-attestation task is meant to be completed and approved by the SSPA team prior to the independent assessment, which we will cover next. The independent assessment goes much smoother when the supplier has the scope of requirements pre-approved by SSPA. The assessor will be able to use that scope as a starting point, and it will cause fewer questions when the independent assessment is ultimately reviewed and approved by Microsoft.

Independent Assessment

In addition to the self-attestation task, certain defined profiles also require an independent assessment task to be completed. This step provides third-party verification that a supplier is compliant with the SSPA program. This task is generally launched following the completion of the self-attestation task. It is the supplier’s responsibility to find and hire an assessor at their own cost. Microsoft has a list of pre-approved assessors, which is available at this link. The independent assessment task must be completed within a 90-day window, although a one-time extension of 90 days is generally available upon request. It is important to note that the self-attestation and the independent assessment are separate steps, but they cover the same 53 requirement program. The self-attestation is required of all suppliers in the Microsoft ecosystem that handle sensitive information, but the independent assessment is only needed by a subset of those suppliers. For purposes of the self-attestation, a supplier stating they are compliant with a requirement means that they have a practice in place to address the underlying issue. For purposes of the independent assessment, not only does a supplier need to have a practice in place to comply with the applicable requirements, but they also need to have evidence that can be presented to an assessor to demonstrate their compliance. For example, Section E of the program has to do with retention of data. To comply with the requirements in this section, generally, a supplier will need to have a practice around destroying data in accordance with the terms and conditions in their statements of work with Microsoft. An unwritten routine is sufficient for compliance with the self-attestation, but a higher standard of documentation is required for the audit. This additional documentation can be a policy, a flow chart, a screenshot of a system used to manage retention/destruction of data, etc. The assessor will complete the independent assessment and issue a report. The report is brief and provides a summary of a supplier’s compliance with the DPR, as opposed to a detailed presentation of evidence of compliance with each requirement. The supplier will then need to submit the assessor’s report to Microsoft through the compliance portal. Like the self-attestation task, if the independent assessment is not submitted timely, the supplier’s status will change to red, and no new purchase orders will be allowed to process until the status returns to green.

Conclusion

This process is repeated on an annual basis centered around the supplier’s anniversary date as a supplier for Microsoft. Assuming a supplier continues to process the same kind of information and perform the same kind of work for Microsoft, they can expect to complete the same steps on an annual basis. On the other hand, if a supplier’s work changes, they will have an opportunity to update their profile, which may cause changes to the number of requirements scoped into the DPR task and may change the necessity of the independent assessment task. The SSPA program serves as a stage gate in the procurement process for Microsoft. At a minimum, the SSPA program provides assurance to Microsoft about the ongoing state of security and privacy controls in place at its suppliers. Beyond that, the program helps suppliers understand the additional responsibilities that come along with new work awarded to them and helps Microsoft make sure those requirements are in place prior to the work commencing. If you have questions about SSPA compliance and what your next steps should be, send me an email and I’d be happy to connect. ©2021 Clark Nuber PS. All rights reserved.

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