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The Washington State Department of Revenue (DOR) recently published guidance regarding its view on whether federal COVID-19 related financial assistance is subject to the Business & Occupation (B&O) tax (including loan forgiveness under the Paycheck Protection Program [PPP]).

According to the guidance, the DOR indicates that it does not believe the financial assistance is includable in the measure of the B&O tax, and that taxpayers should not report such amounts. It goes on to say that if legislative clarification is provided that results in a different conclusion, no interest or penalties will be imposed on any retroactive application of such clarification.

The guidance can be found on the DOR website.

If you have any questions, please contact any member of the SALT group.

© Clark Nuber PS and Developing News, 2020. 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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Opportunities in Times of Crisis

It’s no secret the COVID-19 pandemic has had a substantial negative impact on businesses. Companies deemed non-essential have closed their doors, employees have been furloughed or laid off, supply chains have been disrupted, and consumer demand is down. In these trying times, a quote by John F. Kennedy can help remind us of the opportunities that also exist: “The Chinese use two brush strokes to write the word ‘crisis’. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger, but recognize the opportunity.” Many business owners are responding to the danger this crisis has created by managing expenses, identifying sources of cash, postponing investments, dipping into reserves, and communicating regularly with family and shareholders. Times are tough, but the current circumstances have also provided opportunities for leaders to reset for the long-term health and sustainability of the business. The following are key areas to review at this time of opportunity:

Strategic Plan

The COVID-19 crisis has brought about rapid change in business operations and consumer preferences. Employees are largely working from home, consumers are picking up dinner curbside, students are learning online, doctors are prescribing treatment through videoconferences, and fitness classes are being held remotely. Will these trends continue? If so, is your business positioned to succeed in this new environment? Can the company meet the change in consumer preferences? During times of change, a clear business strategy is needed to set priorities and guide decision making. The business’ strengths, weaknesses, threats, and opportunities identified in the last strategic planning process may now be significantly different. Going through this planning process provides an opportunity to assess what is happening inside and outside the company and identify where change needs to be made. The strategic plan should detail the company’s present situation, outline a program for the future, and provide a process to get there.


We can learn a lot about ourselves, family members, and management during times of crisis. Take this opportunity to document the reactions you observe from those involved in the business. What are their concerns? Are there consistent values shared amongst family members? What risk tolerance do owners have? Business leaders should continually prepare for a crisis. Without a plan and governance structure already in place, owners may have found themselves particularly vulnerable during this crisis. It’s possible they’ve made reactive decisions that will not benefit the business over the long-term or have unintentionally caused family conflict. To mitigate these issues, consider establishing a board of directors that can assist management in reviewing strategy, risk management, and emerging issues. The board can act as a resource when discussing “what could go wrong” scenarios and help develop business responses to those potential events. What business risks have you identified during this crisis? And what should be established now to alleviate those risks going forward? A documented decision-making process that includes management and family members is another valuable governance tool. The tool provides transparency in the decision process, creates consistency, reduces the time to make decisions, and provides clarity on roles. One of the benefits of a documented process is that it can help avoid snap decisions, since it requires gathering sufficient information and supports logical thinking and thoughtful consideration. Another benefit is that the documented process will clarify who the decision makers are and what needs to be communicated to specific stakeholders. Read my article Peace, Love, and Family Harmony: Safeguarding the Long-Term Interest of Your Family Business for more thoughts on this subject.

Financial Resiliency

In order to support the legacy of the family business for generations to come, management must take steps to position their companies for financial resiliency during times of crisis, while also being a steward to the long-term financial health of the company. The current crisis required a quick response by business leaders to assess cash flow and liquidity concerns. Operating expenses had to be reduced as revenues declined. Budgets and cash flow forecasts had to be revised. Some business owners had to look for alternative means to raise cash to fund operations. In an economic crunch, companies must make these types of moves to ensure that enough cash is on hand to meet current obligations. Reductions to shareholder distributions may also be necessary; making for some difficult conversations with family members who rely on them. It may be time to consider documenting a distribution policy that specifies how cash flow available for distributions is calculated and situations when distributions may not be justified. The policy should balance the needs of both the business and the family shareholders. Hopefully, management has learned a lot about the financial needs of the business during this crisis and how quickly the business can respond. This knowledge can be applied when determining an adequate cash reserve and how maintaining one may affect the terms of the distribution policy.

In Conclusion

As family businesses move toward recovery, the lessons learned provide opportunities for families and their businesses to recommit to their values, reset their business strategies, develop governance policies, and establish strong balance sheets. What have you learned during your observations of this current crisis that, if addressed now, can set your business up for success in the future? What opportunities have you recognized? If you have further questions about this article or your family business, please contact me. © Clark Nuber PS, 2020. All Rights Reserved

Understanding the Different Types of Commercial Loans

Understanding the different types of commercial loans can be a challenge if you’re not in the finance sector. Before I became an accountant, I spent 12 years working in the banking industry. During my time there, I opened accounts, underwrote loans, worked on loan collection, and restructured problem loans. In summary, I have been involved in the complete lending cycle process from start to finish. With that experience, here’s a high-level introduction to the different types of commercial loans:

Revolving Business Line of Credit

A revolving business line of credit, which is similar to a credit card, has a loan limit that you can draw on up to the credit limit. Typically, a business would use a line of credit to fund working capital needs. The monthly payment is interest only, with principal due at maturity. Interest on the line of credit is usually a variable rate based on prime rate plus the lender margin. There is usually no prepayment penalty for paying off the principal before the maturity date. A standard line of credit has a 12-month period and typically may be renewed upon maturity. Most banks require businesses to pledge collateral to secure the revolving business line of credit. Typical types of collateral include accounts receivable, inventory, equipment, and business personal property. Note that business personal property is not the same as real property such as buildings and land. Business personal property includes, but is not limited to, office supplies, furniture, fixtures, and computers. Frequently, the lender will also impose financial covenant requirements to analyze the borrower’s ongoing operations and to predict their ability to repay the debt. Common covenants can include current ratio, debt to net worth, minimum net income threshold, debt service coverage ratio, and line rest requirements (meaning the line needs to be paid down to zero for a specified number of days). The financial reporting requirements for a line of credit can include business’ and owners’ federal tax returns and financial statements. Additionally, the lender may ask the borrower to complete a borrowing base certificate which calculates whether the borrower’s eligible accounts receivable, inventory, and fixed assets can support the outstanding loan balance and the loan limit.

Term Loan and Non-Revolving Line of Credit

A term loan can be either a short- or long-term loan. It is usually obtained for a specific reason, such as the purchase of machinery or equipment. The loan is amortized over a specified period of time per the loan agreement, and monthly payments include principal and interest. The interest rate could be fixed or adjustable during the life of the loan. Collateral, financial covenant, and financial reporting requirements are similar to those of a business line of credit. A non-revolving line of credit is where a borrower is given a loan limit and can draw against the line. However, drawing against the line will reduce the loan limit and it becomes a term loan. This is usually used by a borrower when they have multiple large purchases to make.

Construction Loan

A construction loan is a short-term loan used to fund the construction of a real property. It is an interest-only loan secured by the real property. In addition to tax returns and financial statements, a lender usually requires the following information to be submitted with the loan application: full set of plans, budget, feasibility study to support the business plan for the proposed construction, and a listing of current inventory (other real estate projects). Typically, a lender would order an appraisal report which uses comparable properties to provide a value estimate for the proposed property to be built. After a construction loan is made, a draw request will need to be submitted by the borrower with supporting documentation. This can include a construction in progress report, copies of invoices to be paid, and lien waivers from the vendors. Each item on the budget is monitored closely by the lender to ensure costs stay within the budget. Additionally, the lender also carefully monitors costs in excess of billings account and billings in excess of costs account. If the intent is to market and sell the property after construction is complete, then proceeds from the sale of the property will be applied against the loan balance. If the intent is to build and hold the property, then the loan balance will be converted to a commercial real estate loan.

Commercial Real Estate Loan

A commercial real estate loan is a permanent loan that typically ranges from five years to 20 years and is secured by the property. The loan is amortized over a specified period of time per the loan agreement. Its rental income is used to pay down the loan balance. The lender will analyze rental income generated from comparable properties, current rental market condition, and executed leases on the subject property to assess whether net operating income from the property supports the servicing of the loan. If net operating income is inadequate, the lender may ask the borrower for a first or second lien on another rental property, as well as the rental income from the additional property to support the loan payments. Common financial reporting requirements include tax returns, financial statements, copies of leases, and rent roll reports. The lender’s loan file usually includes an internally prepared loan amortization schedule.

Asset Based Loan

Asset based loans are typically made to companies with a higher business risk and those with cash flow problems. Interest rates on the asset based loan are higher than those of regular loans. The lender relies on the borrower’s accounts receivable to repay the debt. As such, they closely monitor the borrower’s accounts receivable and inventory. Lenders may require daily or weekly financial reporting on the collateral used to secure the loan as well. The lender also requires quarterly or annual collateral exams to be conducted. In a collateral exam, the bank sends a collateral examiner to the borrower’s site to perform an examination of its books and records, conduct an inventory test count, perform an inventory valuation estimate, examine fixed assets, and perform appraisal on the fixed assets. The lender will use the report produced by the collateral examiner to evaluate the credit risk and use that information to structure its loan and to assess the borrowing relationship.

In Conclusion

These are the high-level summaries of common types of business loans. Our accounting, consulting, and services team can assist you with cash flow management and projection. We can also assist with any of the bank-required financial reporting requirements, including preparation of business and individual tax returns, as well as compiled, reviewed, or audited financial statements. Contact a Clark Nuber professional if you have any questions.   Gracu Chu, Accounting and Consulting Services Manager at Clark Nuber PS Grace Chu is a manager in Clark Nuber’s Accounting and Consulting Services team. © Clark Nuber PS, 2020. All Rights Reserved

OMB Releases Memo Addressing PPP Double Dipping, Single Audit Extensions, and More

Note: This article is of importance to tax exempt organizations administering federal grant assistance. On June 18, 2020 the Office of Management and Budget (OMB) issued OMB Memo M-20-26 (the Memo). The Memo provides authorization to federal awarding agencies to further administrative relief exceptions as a result of the COVID-19 crisis. The Memo extends certain flexibilities provided under existing OMB Memos M-20-17 and M-20-20, which expired June 16, 2020, as well as OMB Memo M-20-11, which is set to expire July 26, 2020. The Memo also covers several new directives that are important for federal grantees to understand. Here is a quick summary of what is covered in the Memo to guide your review:

Paycheck Protection Program (PPP) Loans

The Memo provides long awaited guidance from the OMB on the topic of PPP loan “double dipping.” Federal agencies are given this directive: “Under this flexibility, payroll costs paid with the Paycheck Protection Program (PPP) loans or any other Federal CARES Act programs must not be also charged to current Federal awards as it would result in the Federal government paying for the same expenditures twice.” As you can see, the guidance is short and to the point.

Single Audit Extension

OMB Memo M-20-17 previously provided a six month Single Audit extension for entities with year-end dates through June 30, 2020. The Memo has removed the Single Audit extension for June 30, 2020 year-ends. This is a significant reversal from OMB Memo M-20-17. It’s important to note that the Memo does still provide a six month Single Audit extension for entities with a September 30, 2019 year-end, as well as a three month Single Audit extension for entities with a December 31, 2019 year-end. The Memo also retains the guidance that no further approval is needed to take advantage of these extensions, though entities are instructed to maintain documentation of the reason for the delayed filing. The Federal Audit Clearinghouse (FAC), via their website, is instructing entities to reference the memorandum in their Single Audit reporting packages submitted to the FAC as part of the data collection form process.

Allowability of Salaries and Other Project Activities

OMB Memo M-20-17 tasked federal agencies with issuing guidance to their recipients allowing them to continue to charge salaries of idle staff under unexpected or extraordinary circumstances. This also applied to costs that were necessary to resume activities supported by the award. The Memo authorizes federal agencies to extend these flexibilities through September 30, 2020. However, entities should be aware of new language directing federal agencies to inform their recipients that they are required to exhaust other available funding sources to sustain their workforce and must implement necessary steps to save overall operational costs. Entities should be alert to their federal agencies’ implementation of this provision via future grants policy statements or directives. We suspect further clarification will be sought by entities on this new provision.

Schedule of Expenditures of Federal Awards

In the Memo, the OMB has provided the directive that recipients and subrecipients must separately identify the COVID-19 Emergency Acts expenditures on the Schedules of Expenditures of Federal Awards and audit report findings. We encourage entities to closely read this newly released Memo and, just as much, monitor their federal agencies’ grants policy statements and other directives implementing provisions of the Memo. If you have questions regarding the implications of the Memo, contact a Clark Nuber professional. © Clark Nuber PS, 2020. All Rights Reserved

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