The Cooperative Accountant - Fall 2020

Fall 2020 | The Cooperative Accountant

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CONTENTS

82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS –––––––––––––

FEATURES 3 From the Editor

By Frank M. Messina, DBA, CPA

4 Utility Cooperative Forum: Managing Risk at Your Electric Cooperative – Where Do We Go From COVID-19?

By Peggy Maranan, Ph.D.

10 ACCTFAX Bulletin Board

By Phil Miller, CPA; Greg Taylor, CPA, CVA, MBA; Bill Erlenbush, CPA

16 TAXFAX

By George W. Benson; Samuel G. Graber; Tara Guler, CPA, MST

29 Small Business Forum: Leveraging the Latest Software Tools for Business Process Automation

By Barbara A. Wech, Ph.D. Samuel C. Thompson, Ph.D.

PRESIDENT: *William Miller, CPA Electric Co-op Chapter Bolinger, Segars, Gilbert & Moss, LLP 8215 Nashville Avenue Lubbock, TX 79423

(806) 747-3806 bmiller@bsgm.com

EXECUTIVE COMMITTEE VICE PRESIDENT: *Nick Mueting (620) 227-3522 Mid-West Chapter nickm@.lvpf-cpa.com Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512 Dodge City, KS 67801

President Nick Mueting, CPA Lindburg, Vogel, Pierce, Faris, Chartered

SECRETARY-TREASURER: *Dave Antoni Capitol Chapter KPMG, LLP 1601 Market St. Philadelphia, PA 19103

Vice President David Antoni, CPA KPMG, LLP

(267) 256-1627 dantoni@kpmg.com

Secretary-Treasurer Eric Krienert CPA Moss Adams LLP

IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– Middleton, WI 53562 PRESIDENT: *Indicates Executive Committee Member *William Miller, CPA (806) 747-3806 NATIONAL OFFICE Electric Co-op Chapter bmiller@bsgm.com Bolinger, Kim Fantaci, Executive DirectorSegars, Gilbert & Moss, LLP136 S. Keowee Street 8215Executive Nashville Avenue Jeff Roberts, Association Dayton, Ohio 45402 Lubbock, TX 79423 Tina Schneider, Chief Administrative Officer info@nsacoop.org

Immediate Past President William Miller, CPA Bolinger, Segars, Gilbert & Moss, LLP

Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education VICE PRESIDENT: *Nick Mueting (620) 227-3522 Phil Miller, Assistant Director of Education Mid-West Chapter nickm@.lvpf-cpa.com THE COOPERATIVE ACCOUNTANT Winter 2018 Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512 Dodge City, KS 67801

At Large Erik Gillam, CPA Aldrich CPAs +Advisors

NATIONAL DIRECTORS

At Large Kent Erhardt CoBank, ACB

SECRETARY-TREASURER: *Dave Antoni Kent Chapter Erhardt Capitol KPMG, LLP Director 1601 Market St. CoBank, ACB Philadelphia, PA 19103

(267) 256-1627 dantoni@kpmg.com

IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 Jo Ann WI Fuller Middleton, 53562

For a complete listing of NSAC’s National Board of Directors and Director Committees, visit Alabama Farmers *Indicates Executive Committee Member National Society of Accountants for Cooperatives

Jeff Krejdl Director Ag Valley

Cooperative, Inc.

www.nsacoop.org NATIONAL OFFICE

Kim Fantaci, Executive Director

136 S. Keowee Street

Jeff Roberts, Association Executive

Dayton, Ohio 45402

Tina Schneider, Chief Administrative Officer

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Mark Feldm Director Crowe LLP

info@nsacoop.org

Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education Fall 2020

| The Cooperative Accountant

Eric Krienert, CPA Director THE COOPERATIVE ACCOUNTANT

Phil Miller, Assistant Director of Education

Winter 2018

Tucker Lem Director

From the

Editor

Frank M. Messina, DBA, CPA Alumni & Friends Endowed Professor of Accounting UAB Department of Accounting & Finance Collat School of Business

Struggles, frustration, confusion, social distancing – the Covid 19 pandemic has really forced us all to leave our routine comfort zones and learn to live a new way. Many are speculating how our culture not only professionally but also personally will change. Whole industries have been affected. Our human spirit is alive and well. We can embrace all these changes. It will be COOPERATION that leads us forward. Let’s keep our cooperative spirit going in all we do!

Remember, we too are always looking for you to share your knowledge since you may have some extra time on your hands (like others continue to do) with us through articles in The Cooperative Accountant. Feel free to contact me (fmessina@uab.edu) if you have any ideas or thoughts on a potential article contribution. Sharing knowledge is a wonderful thing for all!!!

Knowledge can change our world!

That is why we must remember – “The Past is history; the Future is a mystery, but this Moment is a Gift – that’s why it’s called the Present.”

Positively Yours, Frank M. Messina, DBA, CPA

Articles and other information which appear in The Cooperative Accountant do not necessarily reflet the official postion of he NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES and the publication does not constitute an endorsement of views or information which may be expressed.

The Cooperative Accountant (ISSN 0010-83910) is published quarterly by the National Society of Accountants for Cooperatives at Dayton, Ohio 45402. Second-class postage paid at Dayton, Ohio and at additional mail offices. The Cooperative Accountant is published as a direct benefit/service to the members of the Society and is only available to those that are eligible for membership. Subscriptions are available at university libraries, government agencies and other libraries (where there is already a current member) at a rate of $90.00 a year. International subscriptions are $110 a year. Land Grant colleges may receive a complimentary copy. Single copies are avaiable at a rate of $25.00 an issue. Postmaster: send address changes to National Society of Accountants for Cooperatives, 136 South Keowee Street, Dayton, Ohio, 45402.

Fall 2020 | The Cooperative Accountant

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Editor & Guest Writer Peggy Maranan, Ph.D Manager, Financial Accounting LCEC (Lee County Electric Cooperative, Inc.) PO Box 3455 North Fort Myers, FL 33918-3455 Phone (239) 656-2117 peggy.maranan@lcec.net

Introduction The year of 2020 will go down in history, one that will be discussed by future generations. Notably, the Coronavirus (COVID-19) pandemic experienced worldwide will be remembered, with historical comparisons made to the devastation brought on by the 1918 Spanish flu pandemic. While the flu of 1918 was devastating to worldwide populations also, the risk of experiencing another pandemic of that magnitude was far from most people’s minds when COVID-19 became a reality.

Most organizations and individuals were not fully prepared for the impacts that COVID-19 has had. Even with the most robust and matured planning programs and risk management models that were in place, most organizations were left not ideally prepared to deal the consequences of COVID-19. While many organizations did have some form of pandemic disaster plan, the realities of the COVID-19 experience proved that many of these plans were not sufficiently designed to deal with the magnitude nor duration of the COVID-19 impacts. Collins (2020) of CommercialRiskOnline, contends that “Covid-19 will be a game-changer for the risk management profession, rewriting the rulebook and changing the way organisations perceive and prepare for mega risks, according to risk management associations” (para. 1). The electric cooperative industry, while typically more focused on disaster planning than many other industries, also found themselves in a position of needing to reevaluate and update existing pandemic plans to address the realities presented 4

by COVID-19. This article will address some of these impacts to the electric cooperative industry in hopes of providing greater insight and understanding of how to better lead going forward in more effective risk management.

Industry Risks The Congressional Research Service (2020) recently prepared a report for the members and committees of Congress titled “COVID-19: Potential Impacts on the Electric Power Sector”. In this report, it was noted: The Coronavirus Disease 2019 (COVID-19) pandemic is impacting the electric power sector directly (e.g., illness and fatalities among workers) and indirectly (e.g., reduced electricity sales). Most indirect impacts to date have been caused by the economic effects of the pandemic. Long-term impacts are highly uncertain and likely depend on the pandemic’s ultimate toll on U.S. public health and the economy. (p. 1) The report goes on to further identify four key impact areas, already experienced and expected to continue for coming months: ● Reduced electricity demand – while the electric industry has historically been impacted by weather patterns, COVID-19 has introduced economic risk into the picture. Economic activity has slowed substantially, taking the country into a recession very quickly. Starting in March 2020, many electric companies saw Fall 2020 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM demand drop significantly from historical trends as businesses shut down when people went into quarantine to prevent the spread of the virus. With the phased re-opening of businesses throughout the country, there has been a rebound of electricity demand, but in many areas of the country electricity demand has not returned to pre-pandemic levels. Electricity prices for consumers in some areas did decline.

The decline in some instances was due to lower wholesale electricity prices. But, if this decline continues and is prolonged, this could result in higher wholesale prices if power plants become unprofitable due to the decreased demand. It could also cause power generators to delay or cancel construction of new power plants.

Since customer rates are set by regulators by geographic location, the impacts of demand and subsequently electricity rates will depend upon the circumstances of each electric utility. ● Electric reliability – The North American Electric Reliability Corporation (NERC), which has oversight of electric reliability in the US, noted that there were increased risks to potential workforce disruptions due to illness and quarantine. Additional risks due to the virus included possible supply chain disruption and increased cybersecurity risk due to more teleworking employees. NERC noted that these risks are likely to continue during this pandemic event, and new risks could emerge along the way. Additional reliability risks could include delayed maintenance activities due to pandemic impacts. And, very importantly, an electric company’s ability to respond to emergencies such as severe weather (i.e. hurricanes) and wildfires may also be impeded by the pandemic. ● Reduced bill payments – Many utilities had stopped service disconnections as the pandemic hit, knowing that there would be some customers unable to pay their monthly bills due to job loss. As phased re-openings of businesses are occurring, the decision regarding the best time to start disconnecting customers service for non-payment has been weighed. In many instances, this decision has been governed by regulatory agencies and the electric company has not had the choice in how long this temporary delay in disconnections lasts. In other instances, the decision has been with the electric company and each has attempted to strike the right policy balance. In the near term, many electric companies have had lost revenues and may continue to see this as we work our Fall 2020 | The Cooperative Accountant

way out of the pandemic. It is still not clear about the impacts of how lost revenues may be addressed when “normal” conditions return. If revenues lost are significant, regulators could require rate increases in the future to make up for expected revenue shortfalls. While Congress did not directly address lost revenues or delayed service disconnections, they did pass legislation intended to provide some temporary relief to enable some customers to pay their utility bills which could offset revenue losses in the near term. ● Industry investment activity – Over the last decade, the electric industry has been transforming in its use of energy sources and increasing investments in distributed generation technologies. The focus has been on energy efficiency and conservation. Along with that trend, there have been significant investments made in new technologies and improvements to existing infrastructure. In the near term, the pandemic may slow the continuation of these plans as companies are forced to address the more immediate impacts of the pandemic. If industry investment becomes slowed, Congress may need to reconsider existing tax incentive and grant policies, as many had expiration dates that may become difficult for companies to achieve as they are distracted with addressing more immediate pandemic impacts.

The list is not meant to be inclusive of all risks, but the report published by the Congressional Research Service is meant to call out impacts or concerns related to the electric industry in terms of items it found of note.

PWC (n.d.) recently published an article “COVID-19: What it means for the power and utilities industry”, in which they offered potential issues and steps to consider in the advent of COVID-19. These are listed below: 1. Possible issues - Crisis management and response: Companies may need to build added flexibility into the already robust businesscontinuity capabilities they have demonstrated during past emergencies (to address pandemicrelated impacts). Steps to consider: A. Draw on the long tradition of resource sharing and mutual assistance during emergencies.

Depending on the severity of the COVID-19 spread, utilities may have to ramp up coordination efforts to accommodate numerous and simultaneous health emergencies impacting their workforce, especially field workers.

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UTILITY COOPERATIVE FORUM B. Coordinate, as necessary, with the CEO-led Electricity Subsector Coordinating Council (ESCC), which works with federal agencies during emergencies that affect the nation’s electricity grids. Recently NERC and several Regional Transmission Organizations Independent System Operators provided preparedness guidance to their members.

2. Possible issues – Workforce: While some functions can be done remotely or outsourced, the industry faces a unique challenge that many others don’t. A large portion of the workforce is critical to the continued operation of the business and the safe, reliable delivery of power.

The industry is accustomed to relying on mutual aid assistance when resources are needed.

However, there is the possibility that typical partners may not have available capacity to help. While cybersecurity is always a top priority for industry firms, we note that there could be additional threats and vulnerabilities now. This is because workers will have significantly higher levels of remote access to core systems, and because employees and management could be more susceptible to social engineering efforts in the midst of a crisis. Steps to consider: A. Evaluate staffing for functions identified as critical to the business. Put risk mitigation programs in place for employees who need to work in large gatherings at a common worksite (e.g., both existing and enlisted field and construction crews).

B. Build flexible work arrangements, where viable, for non-essential staff.

C. Consider ways to increase automation and use emerging technology to minimize personto-person contact but still get the work done.

D. Remind employees about being suspicious of emails from unfamiliar sources to prevent successful phishing and business email compromise.

E. Conduct a phishing exercise now to reveal gaps in your defenses.

F. Strengthen your perimeter, using security tools to identify and deflect threats before bad actors can intrude.

G. Strengthen your remote access management policy and procedures. Make sure work-athome does not mean work-without-security; it’s now possible to transition to rapid, secure, remote work models within days rather than months.

3. Possible issues - Supply chain and operations: While regulated utilities are mandated to have access to adequate supplies of critical 6

parts, components, equipment and materials for emergencies, utilities might encounter shortages due to constrained production of supplies produced in countries highly affected

by COVID-19. Developers of renewable energy projects could potentially experience difficulties in getting critical components (e.g., photovoltaic cells, turbines) from suppliers in affected countries, especially those in Asia. Additionally, we expect some utilities to experience load reductions due to dampened demand for power from the commercial and industrial sectors.

They also may find that some customers are struggling to pay their bills. Steps to consider: A. Get a clear picture from foreign suppliers about any current or expected production declines that may cause delays in order fulfillment of critical infrastructure supplies such as transformers and other restoration materials. Firms may need to explore other sourcing options as a contingency plan.

B. Drawing on the culture of mutual assistance, companies should set plans for sharing physical resources (parts, components, wires, etc.) that might be in short supply due to supply chain disruption.

C. Companies should lift their business continuity plans and emergency-response playbooks to a higher level to maintain normal operations. That could involve enabling employees to work remotely, resolving supply chain sourcing issues, quarantining personnel, or restricting travel.

4. Possible issues - Financial reporting: Utilities may experience continued supply-chain disruptions surrounding parts for grid-wide maintenance and repairs — as well as necessary components for renewable energy projects (e.g., solar cells and wind-turbine components).

COVID-19 could also impact business continuity. Both scenarios could carry financialreporting implications. Additionally, companies experiencing significant workforce disruptions may struggle to meet required financial reporting, annual FERC and state reporting deadlines. Steps to consider: A. Evaluate if risk factor disclosures may need to be added or modified to address the risks of coronavirus or other pandemics (e.g., impact on operations, supply chains and business continuity).

B. Consider second-order effects, such as reduced demand due to businesses being shut down.

C. Determine if recent events may impact Fall 2020 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM current and future judgments and estimates inherent in financial reporting (e.g., receivables collectibility, debt covenants, impairments of investments).

D. Examine the current and potential future impact on operations, liquidity and capital resources (including consideration of trends and uncertainties).

5. Possible issues - Tax and Trade: Due to the COVID-19 outbreak, power and utility companies are reacting to and planning for changes to supply chains and, possibly, workforce mobility. These changes require careful consideration of potential tax implications. In particular, power and utility companies are concerned about the impact that supply-chain disruptions could have on the new construction of wind facilities, some of which may need to be placed in service in 2020 to qualify for maximum production tax credits. IRS guidance to provide extended placed-in-service dates would be a welcome relief. Steps to consider: A. Plan for the tax implications of any supplychain-related changes due to COVID-19, including changes to the utilization of tax attributes if declining demand and commodity prices continue for an extended period.

B. Developers of new utility-scale renewable energy (wind and solar) facilities need to consider if their projects would be disqualified from maximum production tax credits if they were delayed due to supplychain or other disruptions. These credits stipulate that projects be placed in service in 2020 to meet safe harbor or investment tax credits (based on when construction begins).

While many of these impacts noted above have already been felt and can be measured, uncertainty remains about what the future will bring as we are still in the midst of this pandemic. These are all areas of increased risk that should be monitored, and company strategies should be adjusted as needed to changing conditions and expectations.

The Way Forward McKinsey & Company (2020) has recently offered guidance on how to navigate a company’s planning around its individual circumstances. This guidance could pertain to any organization, in any industry.

They note that: Even as you assess the best course forward, the one thing you shouldn’t do is rely on what Fall 2020 | The Cooperative Accountant

we frequently see in regular strategic-planning processes: ducking uncertainty altogether or relegating it to a risk analysis at the back of the presentation deck. (p. 19) Instead, they offer this plan of attack in producing strategic plans that are truly focused on addressing real risks, changing risks, and to confront uncertainty head on. These are the five “frames” they recommend using in developing company plans: 1. Gain a realistic view of your starting position.

2. Develop scenarios for multiple versions of your future.

3. Establish your posture and broad direction of travel.

4. Determine actions and strategic moves that are robust across scenarios.

5. Set trigger points that drive your organization to act at the right time. (p. 19) Additionally, they recommend organizing your pandemic crisis team by adding a new work group to the existing pandemic response group, naming this new work group the “COVID-19” planahead team”. The role of this plan-ahead team is described below: Your plan-ahead team should be charged with collecting forward-looking intelligence, developing scenarios, and identifying the options and actions needed to act tactically and strategically. Unlike a typical strategy team, it will have to plan across all time horizons (two, four, and seven days; two and four weeks; one and two quarters; one and two years; and the next normal) to enable you to stay on top of escalating issues and the decisions that you need to make in this time of high uncertainty. (p. 18) McKinsey’s “Exhibit 1: A plan-ahead team is modular…” showing what the pandemic crisis team organization might look like is shown on the next page: While many electric companies have limited resources or staffing, the risk of not addressing meaningful planning should be weighed against available or needed resource requirements so that the best business case for planning is implemented.

Many electric cooperatives operate with staff already stretched thin with operational and tactical duties, leaving limited time available for strategy or planning activities. This results in staff members sometimes “wearing many hats” across many roles within the organization. The recommendation is 7

UTILITY COOPERATIVE FORUM tricky, and essential to get right.

12. It may be time for responsible acquisitions.

13. Cyber risk is growing.

14. Innovation may never have been so important.

15. The path ahead will surely have ups and downs and will require resilience. (pp. 38-40)

for companies to set clear goals, set clear priorities to achieve those goals, and commit the resources needed. Meaningful and effective planning will help in achieving those ends.

McKinsey also offers 15 emerging themes for boards and executive teams to manage through the pandemic. All of these bring their unique risks and challenges as we navigate through these transitional, pandemic times: 1. Boards must strike the right balance between hope for the future and the realism that organizations need to hear.

2. The unknown portion of the crisis may be beyond anything we’ve seen in our professional lives.

3. Beware of a gulf between executives and the rank and file.

4. Don’t overlook the risks faced by selfemployed professionals, informal workers, and small businesses.

5. Certain industries and sectors are truly struggling and require support.

6. Mid- to long-term implications and scenarios vary considerably.

7. What went wrong?

8. How can we prevent a backlash to globalization?

9. Companies need help with government relations.

10. Where will the equity come from, and with what strings attached?

11. The balance between profits and cash flow is 8

Some additional recommendations offered by McKinsey to navigate through this pandemic include taking the time to recognize how the people who depend on the company feel, have aspirations about the post-COVID world and build the resilience to make them a reality, strengthen your capability to engage and work with regulators and the government, watch out for non-COVID risks and make sure to carve out time to dedicate to familiar risks that have never gone away, and find out what went wrong (answer the uncomfortable truths that investigation uncovers). (p. 40) Summary Love (2020) offers that: In 1890, psychologist William James wrote that emotional events have such a huge effect on our minds they “almost leave a scar upon the cerebral tissues.” But for many of us – especially those isolating at home – memory researchers say it is more likely it will become a blur. (para. 5) Our memories may be impacted differently for how each of us is experiencing the pandemic. For instance, for those that were front-line healthcare workers, their memories may be much different than those that have had the luxury of limited impact due to the virus. McKinsey contends that it is the imperative of our time for us to pull together and work through the challenges of this virus. This is reflected in “Exhibit 1 – The imperative of our time” offered by McKinsey below: While we have learned much in the last few months since the virus appeared on the scene, we still have much to learn. From a risk perspective, we have had to respond to the immediate threat posed, and will now still need to keep working through the mid-term and longer-term impacts of the pandemic. While the immediate crisis Fall 2020 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM

required immediate action to protect people and businesses, the longer-term challenges will include keeping people safe and responding to economic issues affecting our customers and organizations.

We will need to move beyond any helplessness towards action on things that we can positively impact.

There are so many unknown risk factors. The duration of the pandemic is not known. Multiple waves of the pandemic could be possible. We are also unsure of whether re-infection of those previously infected is a possibility. Until there is expanded testing and scientific breakthroughs for proven treatments and vaccines, we wait not knowing the extent or severity of the ultimate health impacts to our population.

Fortunately, for the electric utility industry, our business model seems to be more protected from negative impact than most. While all the negative impacts previously noted in this article are real and significant, the industry is not at risk of folding as are some more vulnerable industries.

However, the pandemic is presenting a unique challenge for the electric industry to identify potential risks and be proactive about responding to the risks in order to minimize negative impacts to its customers. Some electric companies may have even experienced greater financial net margins during this pandemic due to lower fuel prices related to the cost of power obtained from generation suppliers.

Additionally, some have reported increased electricity demand due to largaqer amounts of employees working at home resulting in increasing residential electricity usage. But, overall, statistics show that net demand has decreased overall throughout the US since the pandemic hit.

For those in finance and accounting roles within our electric cooperatives, please keep in mind that financial planning, budgeting, and forecasting activities should reflect the overall strategic goals of the organization. They are a road map to achieving company goals. So, they should also be adapting to the risks discussed in this article, providing for the financial resources to be available to achieve overall company-wide objectives.

References Collins, S. (April 9, 2020). Risk management ‘rules changed’ by Covid-19. Retrieved August 29, 2020 from the following website: https://www.commercialriskonline.com/risk-management-rules-changedcovid-19/ Lawson, A. (June 12, 2020). COVID-19: potential impacts on the electric power sector. Congressional Research Service. Retrieved August 29, 2020 from the following website: https://crsreports.congress. gov/product/pdf/IN/IN11300 Love, S. (Aug. 21, 2020). You’ll probably forget what it was like to live through a pandemic. Retrieved August 29, 2020 from the following website: https://www.vice.com/en_us/article/5dmxvn/what-will-weremember-from-the-coronavirus-covid19-pandemic McKinsey & Co. (August 7, 2020). McKinsey on risk: special edition: the COVID-19 crisis.

Retrieved August 29, 2020 from the following website: https://www.mckinsey.com/business-functions/ risk/our-insights/mckinsey-on-risk PWC. (n.d.). COVID-19: What it means for the power and utilities industry. Research and Insights.

Retrieved August 29, 2020 from the following website: https://www.pwc.com/us/en/library/covid-19/ how-covid-19-is-impacting-power-and-utilities.html Fall 2020 | The Cooperative Accountant

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GENERAL EDITOR Philip W. Miller, CPA Assistant Education Director NSAC 18 Tow Path Lane South Richmond, VA 23221 (804) 339-9577 pwm01@comcast.net

ACCTFAX

ASSISTANT EDITORS Greg Taylor, CPA, CVA, MBA Shareholder Williams & Company (806) 785-5982 gregt@dwilliams.net

By Phil Miller, NSAC Assistant Education Director

Bill Erlenbush, CPA NSAC Education Director (309) 530-7500 nsacdired@gmail.com

EDITOR’S NOTE: Covid-19 is impacting all aspects of our lives. Accounting standards setting did not get a pass! In this issue of ACCTFAX, I will highlight (IN RED) communications from the major standard-setting bodies related to their responses to the pandemic.

FASB ISSUES ASU OFFERING LIMITED EFFECTIVE DATE DELAYS ON REVENUE RECOGNITION AND LEASES STANDARDS One-Year Delays Extended to Certain Companies and Organizations On June 3, 2020, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that grants a one-year effective date delay for certain companies and organizations applying the revenue recognition and leases guidance. Early application continues to be permitted.

“The FASB issued the ASU to allow certain companies and organizations who have not yet applied the revenue recognition and leases guidance to delay their implementation by one year,” stated FASB Chairman Russell G. Golden.

“We believe the deferral will provide these stakeholders a measure of relief during this unprecedented time.”

The ASU permits private companies and not-for-profit organizations that have not yet applied the revenue recognition standard to do so for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.

For leases, the ASU provides an effective date 10

deferral to private companies, private not-forprofit organizations, and public not-for-profit organizations that have not yet issued (or made available) their financial statements reflecting the adoption of the guidance. It is intended to provide near-term relief for certain entities for whom the leases adoption is imminent.

Under the ASU, private companies and private not-for-profit organizations may apply the new leases standard for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022.

Public not-for-profit organizations that have not yet issued (or made available to issue) financial statements reflecting the adoption of the leases guidance may apply the standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The ASU is available at www.fasb.org.

FASB APPROVES NEW STANDARDS AND A PROPOSED EFFECTIVE DATE DELAY AT FINAL MEETING OF CHAIRMAN RUSSELL G. GOLDEN Approves Standards to Improve Convertible Instruments and Contracts in an Entity’s Own Equity, Gifts-in-Kind; Delays Standard on LongDuration Insurance Contracts by One Year Fall 2020 | The Cooperative Accountant

ACCTFAX On June 10, 2020, The Financial Accounting Standards Board (FASB) approved the issuance of two upcoming Accounting Standards Updates (ASUs): one that improves financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity, and one that improves how not-for-profit organizations present and disclose contributed nonfinancial assets, also known as gifts-in-kind.

The FASB also voted to issue a proposed ASU that would delay the effective date for its standard that improves financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care, and annuities.

financial statement users and reduced cost and complexity for preparers and auditors.”

The upcoming ASU will be effective for public business entities that meet the definition of a U.S. Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption will be permitted. The FASB expects to issue the upcoming ASU during the 3rd quarter of 2020.

FASB to Issue ASU to Improve Convertible Instruments and Contracts in an Entity’s Own Equity Under the upcoming ASU, the accounting for convertible instruments will be simplified by removing major separation models required under current Generally Accepted Accounting Principles (GAAP). Accordingly, more convertible instruments will be reported as a single liability or equity with no separate accounting for embedded conversion features. Certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception will be removed and, as a result, more equity contracts will qualify for the scope exception. The upcoming ASU also will simplify the diluted earnings-per-share (EPS) calculation in certain areas.

In its original July 2019 Exposure Draft, the FASB also proposed simplifying the accounting for equity contracts by reducing form-oversubstance-based accounting conclusions that are driven by remote contingent events in the assessment of the derivatives scope exception.

However, based on mixed feedback from stakeholders during the public comment period, the FASB decided not to include those proposed changes in the upcoming ASU. Consequently, the FASB plans to continue to explore improvements on this aspect of the guidance in a separate Phase 2 project.

“The upcoming ASU will address areas of liabilities and equity guidance that stakeholders identified as overly complex, internally inconsistent, and the source of frequent financial statement restatements,” stated FASB Chairman Russell G. Golden. “We expect it to result in improved comparability of information for

FASB to Issue ASU on Accounting for Contributed Nonfinancial Assets by Not-forProfit Organizations The upcoming ASU will require a not-for-profit organization to present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets.

It also will require a not-for-profit to disclose the amount of contributed nonfinancial assets received, disaggregated by category, that depicts the type of contributed nonfinancial assets, and for each category of contributed nonfinancial assets received (as identified in (1.)): ● Qualitative information about whether the contributed nonfinancial assets were either monetized or utilized during the reporting period. If utilized, a description of the programs or other activities in which those assets were or are intended to be used. ● The not-for-profit’s policy (if any) about monetizing rather than utilizing the contributed nonfinancial assets. ● A description of any donor restrictions associated with the contributed nonfinancial assets. ● A description of the valuation techniques and inputs used to arrive at a fair value measure in accordance with Topic 820, Fair Value Measurement, at initial recognition. ● The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient not-forprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial assets.

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ACCTFAX The upcoming ASU will be effective for annual reporting periods beginning after June 15, 2021.

It is expected to be issued during the 3rd quarter of 2020. Additionally, the FASB also directed the staff to determine if educational efforts are necessary for valuing contributed nonfinancial assets and to monitor how the ASU improves transparency by providing better information to users.

FASB to Issue Proposed ASU That Would Delay Standard for Insurance Companies That Issue Long-Duration Contracts Finally, FASB voted to issue a proposed ASU that would grant insurance companies that issue long-duration contracts, such as life insurance and annuities, an additional year to implement Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. Stakeholders will have 45 days to review and provide comment on the proposed ASU, which the FASB expects to issue in the coming weeks.

FASB ISSUES PROPOSAL TO DELAY LONGDURATION INSURANCE STANDARD AND EASE EARLY ADOPTION PROVISIONS On July 9, 2020, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would help insurance companies adversely affected by the COVID-19 pandemic by giving them an additional year to implement Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for LongDuration Contracts (LDTI). However, for insurers that may not need the extra time, the proposal would make it easier and cost-effective to maintain their current timelines and early adopt LDTI. Stakeholders are asked to review and provide comment on the proposed ASU by August 24, 2020.

To facilitate early application and encourage accelerated delivery of better information to investors, the proposed ASU would allow insurance companies to restate only one previous period, rather than two, if they choose to early adopt LDTI. The proposed ASU would permit insurance companies to delay implementation by one year as follows: 12

● For SEC filers, excluding smaller reporting

companies as defined by the SEC, LDTI would be effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. ● For all other entities, LDTI would be effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025.

The proposed ASU, including information on how to submit comments, is available at www. fasb.org.

FASB PROPOSES CONCEPTS FOR DEFINING ELEMENTS IN A FINANCIAL STATEMENT On July 16, 2020, the Financial Accounting Standards Board (FASB) issued for public comment a proposed new chapter of its Conceptual Framework that defines 10 elements of financial statements. Stakeholders are encouraged to review and comment on the proposal by November 13, 2020.

The proposed chapter, Concepts Statement No. 8, Conceptual Framework for Financial Reporting – Chapter 4, Elements of Financial Statements, defines 10 elements of financial statements to be applied in developing standards for public and private companies and not-forprofit organizations. They are assets, liabilities, equity (net assets), revenues, expenses, gains, losses, investments by owners, distributions to owners, and comprehensive income.

The proposed new chapter would replace Concepts Statement No. 6, Elements of Financial Statements, clarifying and improving upon its elements. Specifically, the new chapter would: ● Clearly identify the right or obligation that gives rise to an asset or a liability ● Eliminate terminology that makes the definitions of assets and liabilities difficult to understand and apply ● Clarify the distinction between liabilities and equity and between revenues and gains and expenses and losses and ● Modify the distinctions in equity for not-forprofit entities.

The proposal is part of the FASB’s ongoing conceptual framework project, which also includes current projects that address measurement and disclosure concepts. More information on the Exposure Draft, including a FASB In Focus, is available on the FASB website at www.fasb.org.

Fall 2020 | The Cooperative Accountant

ACCTFAX FASB IMPROVES CONVERTIBLE INSTRUMENTS AND CONTRACTS IN AN ENTITY’S OWN EQUITY On August 5, 2020, the Financial Accounting Standards Board (FASB) issued a new Accounting Standards Update (ASU) expected to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.

The ASU simplifies accounting for convertible instruments by removing major separation models required under current Generally Accepted Accounting Principles (GAAP). Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas.

The ASU is effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption will be permitted.

In its original July 2019 Exposure Draft, the FASB also proposed simplifying the accounting for equity contracts by reducing form-oversubstance-based accounting conclusions that are driven by remote contingent events in the assessment of the derivatives scope exception.

However, based on mixed feedback from stakeholders during the public comment period, the FASB decided not to include those proposed changes in the ASU. Consequently, the FASB plans to continue to explore improvements on this aspect of the guidance in a separate Phase 2 project.

The ASU, a FASB in Focus overview, and a video about the standard are available at www. fasb.org.

Fall 2020 | The Cooperative Accountant

PRIVATE COMPANY COUNCIL JUNE 25, 2020 MEETING RECAP The Private Company Council (PCC) met on Thursday, June 25, 2020. Below is a brief summary of issues addressed by the PCC at the meeting: PCC Issue No. 2018-01, “Practical Expedient to Measure Grant-Date Fair Value of EquityClassified Share-Based Awards”: PCC and Board members discussed the potential practical expedient that would allow a nonpublic entity to determine the current price input of equityclassified share-option awards using a valuation method performed in accordance with the presumption of reasonableness requirements of Section 409A of the U.S. Internal Revenue Code.

PCC members decided that the Exposure Draft should be issued for public comment in August 2020. The issuance was previously delayed because of resource constraints faced by many private company stakeholders, which might have affected their ability to provide feedback.

FASB Accounting Standards Update No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities: FASB staff updated the PCC on the recent release of ASU 2020-05 which amends the effective date of Topic 606, Revenue from Contracts with Customers, and Topic 842, Leases, for certain entities, and provided details about the new effective dates. PCC members expressed broad support for the recent ASU and the relief it provides to private companies.

Distinguishing Liabilities from Equity: FASB staff provided the PCC with an overview and update on this FASB project. The final Update is expected to be issued in the third quarter of 2020. PCC and Board members discussed how to create awareness among private companies of the Update’s issuance and how the FASB can assist private companies with the implementation process.

Current Issues in Financial Reporting: PCC and Board members discussed practice issues arising from the current business environment under the COVID-19 pandemic. Topics discussed included borrowers’ accounting for debt modifications and troubled debt restructurings, interim impairment testing of nonfinancial 13

ACCTFAX assets, government assistance disclosures, and going concern assessments. FASB resources related to the COVID-19 pandemic can be found here. Furthermore, the Board emphasized that it continues to monitor conditions and stands ready to support private companies encountering technical accounting issues. Board members encouraged PCC members and other stakeholders to continue providing feedback.

Profits Interests and Their Interrelationship with Partnership Accounting: PCC and Board members engaged in preliminary discussions on private company issues in accounting for awards of profits interests and their interrelationship with partnership accounting. PCC members discussed specific areas such as scope, definition, measurement, and recognition of awards of profits interests. PCC members requested the FASB staff to conduct further research and outreach on those areas for discussion at a future PCC meeting.

FINANCIAL REGULATORS MODIFY VOLKER RULE On June 25, 2020, five federal regulatory agencies finalized a rule modifying the Volcker rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds—known as covered funds. The Volcker rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.

The finalized rule modifies three areas of the Volker rule by: ● Streamlining the covered funds portion of rule. ● Addressing the extraterritorial treatment of

certain foreign funds; and

● Permitting banking entities to offer financial

services and engage in other activities that do not raise concerns that the Volcker rule was intended to address.

The five federal agencies issuing the Volker modifications are: ● Federal Reserve Board (FRB) ● Commodity Futures Trading Commission

(CFTC)

● Federal Deposit Insurance Corporation (FDIC) 14

● Office of the Comptroller of the Currency

(OCC)

● Securities and Exchange Commission (SEC)

The rule will be effective on October 1.

IASB ISSUES AMENDMENT TO IFRS 16 REGARDING COVID-19 On May 28, 2020 the International Accounting Standards Board (IASB) published “Covid-19Related Rent Concessions (Amendment to IFRS 16)” amending the standard to provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification.

Background The COVID-19 pandemic has led to some lessors providing relief to lessees by deferring or relieving them of amounts that would otherwise be payable. In some cases, this is through negotiation between the parties, but can be as a consequence of a government encouraging or requiring that the relief be provided. Such relief is taking place in many jurisdictions in which entities that apply IFRSs operate.

When there is a change in lease payments, the accounting consequences will depend on whether that change meets the definition of a lease modification, which IFRS 16 Leases defines as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term).

Changes The changes in Covid-19-Related Rent Concessions (Amendment to IFRS 16) amend IFRS 16 to: ● Provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification; ● Require lessees that apply the exemption to account for COVID-19-related rent concessions as if they were not lease modifications; ● Require lessees that apply the exemption to disclose that fact; and ● Require lessees to apply the exemption retrospectively in accordance with IAS 8, but not require them to restate prior period figures.

Fall 2020 | The Cooperative Accountant

ACCTFAX The IASB considered but decided not to provide any additional relief for lessors as the current situation is not as equally challenging for them and the required accounting is not as complicated.

Effective date The amendment is effective for annual reporting periods beginning on or after June 1, 2020.

Earlier application is permitted, including in financial statements not yet authorized for issue at 28 May 2020. The amendment is also available for interim reports.

IASB FINALIZES NARROW-SCOPE AMENDMENTS TO IFRS 17 AND IFRS 4 The International Accounting Standards Board (IASB) has issued “Amendments to IFRS 17” to address concerns and implementation challenges that were identified after IFRS 17 ‘Insurance Contracts’ was published in 2017. The amendments are effective for annual periods beginning on or after January 1, 2023 with earlier application permitted. The IASB has also published “Extension of the Temporary Exemption from Applying IFRS 9 (Amendments to IFRS 4)” to defer the fixed expiry date of the amendment also to annual periods beginning on or after January 1, 2023.

Background Since IFRS 17 Insurance Contracts was issued in May 2017, the Board has been monitoring the implementation and has learned about concerns and implementation challenges. The Board had previously indicated that it would consider whether additional action is needed to address matters arising during implementation.

At the October 2018 meeting of the Board a list of 25 potential amendments to the standard was identified and the criteria against which any possible amendment would be considered were agreed. An exposure draft of proposed amendments was published on 26 June 2019 with comments requested by September 25, 2019.

Changes The main changes resulting from Amendments to IFRS 17 and Extension of the Temporary Exemption from Applying IFRS 9 (Amendments to IFRS 4) are: Fall 2020 | The Cooperative Accountant

● Deferral of the date of initial application of

IFRS 17 by two years, ● Additional scope exclusion for credit card

contracts, ● Recognition of insurance acquisition cash flows

relating to expected contract renewals, ● Clarification of the application of IFRS 17 in interim financial statements allowing an accounting policy choice at a reporting entity level, ● Clarification of the application of contractual service margin (CSM) attributable to investment return service, ● Amendments to require an entity that at initial recognition recognizes losses on onerous insurance contracts issued to also recognize a gain on reinsurance contracts held, ● Simplified presentation of insurance contracts in the statement of financial position, ● Additional transition relief for business combinations, ● Several small amendments regarding minor application issues.

The amendments to IFRS 17 are effective for annual periods beginning on or after January 1, 2023.

IASB DEFERS EFFECTIVE DATE OF IAS AMENDMENTS The International Accounting Standards Board (IASB) has published “Classification of Liabilities as Current or Noncurrent — Deferral of Effective Date (Amendment to IAS 1)” deferring the effective date of the January 2020 amend­ments to IAS 1 by one year.

Background On 23 January 2020, the IASB issued Classification of Liabilities as Current or Noncurrent (Amendments to IAS 1) providing a more general approach to the classification of liabilities under IAS 1 Presentation of Financial Statements based on the contractual arrangements in place at the reporting date. The amendments had an effective date of January 1, 2022.

The finalized amendment defers the effective date of the January 2020 amendments by one year.

15

TAXFAX

TAXFAX EDITOR George W. Benson Counsel McDermott Will & Emery LLP 444 West Lake Street Suite 4000 Chicago, IL 60606 (312) 984-7529 gbenson@mwe.com

IRS OFFERS SETTLEMENT TERMS FOR SYNDICATED CONSERVATION EASEMENT CASES

By Samuel G. Graber Taxpayers can generally deduct the fair market value of a donated conservation easement that preserves land in perpetuity if a number of technical requirements are satisfied. See IRC § 170(f)(3)(B)(iii) and (h); Treasury Regulation § 1.170A-7(b)(5) and § 1.170A-1(c)(1). In order to claim a deduction, a taxpayer must, among other things, obtain a qualified appraisal to determine the easement’s fair market value.

Treasury Regulation § 1.170A-13(c). Where there is a lack of comparable easement sales on which to base a valuation (as will generally be the case), an appraiser will determine the highest and best use and fair market value of the property without regard to the easement and then will determine the property’s value after it is encumbered with the easement. The value of the charitable contribution deduction equals the reduction in the property’s fair market value due to the easement restrictions.

See Treasury Regulation § 1.170A-14(h)(3).

The Internal Revenue Service (the “IRS”) has been concerned for a number of years with syndicated conservation easement transactions that it views as abusive. In Notice 2017-10, the IRS identified certain syndicated conservation 16

GUEST WRITERS

easement Samuel G. Graber transactions as Tax Attorney tax avoidance Frost Brown Todd LLC transactions 400 West Market Street 32nd Floor and provided Louisville, KY 40202 that such tel: (502) 568-0248 transactions fax: (502) 581-1087 (and sgraber@fbtlaw.com substantially similar Tara Guler, CPA, MST Senior Manager transactions) Baker Tilly Virchow Krause, LLP are listed Ten Terrace Court transactions.

Madison, WI 53718 In a listed Tel: (608) 240-6714 syndicated Fax: (608) 249-8532 conservation tara.guler@bakertilly.com easement transaction, a promoter syndicates ownership interests in real property through a partnership, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and a half times the investment amount. The promoter obtains an appraisal that greatly inflates the value of the conservation easement based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement. Often, the unrealistic valuation of the conservation Fall 2020 | The Cooperative Accountant

TAXFAX easement is attributable to unreasonable conclusions about the development potential of the real property. After the investors invest in the partnership, the partnership donates the conservation easement to a land trust. Investors in the partnership then claim deductions based on the appraisal’s inflated value, which grossly multiplies their actual investment in the transaction. The IRS considers transactions that are substantially similar to those identified above to be syndicated conservation easement transactions as well.

The effect of Notice 2017-10 is to subject participants, material advisors, and others involved in syndicated conservation easement transactions to additional reporting, due diligence and record-keeping requirements, including having to provide information about such transactions to the IRS on either Form 8886 (for participants) or Form 8918 (in the case of material advisors). If followed by affected taxpayers, these reporting requirements should make it relatively easy for the IRS to identify participants in listed syndicated conservation easement transactions.

In light of the fact that syndicated conservation easements are listed transactions, it is not surprising that a number of these cases are currently pending before the U.S. Tax Court. In IR-2020-130 dated June 25, 2020, the IRS Office of Chief Counsel announced a limited time settlement offer for certain taxpayers with pending docketed U.S. Tax Court cases involving syndicated conservation easements. An IRS representative subsequently indicated that the settlement offer applied to approximately 80 such cases.

Under the terms of the settlement offer: (i) the deduction for the contributed easement is disallowed in full; (ii) all partners must agree to settle, and the partnership must pay the full amount of tax, penalties, and interest before settlement; (iii) investors who are partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 1020% depending on the ratio of the deduction claimed to the partnership investment; and (iv) Fall 2020 | The Cooperative Accountant

partners who provided services in connection with any syndicated conservation easement transaction must pay the maximum penalty assessed by the IRS (typically 40%) with no deduction for costs.

The IRS release also notes that taxpayers should not expect to settle their docketed Tax Court cases on better terms, and that based on the existing state of the law, taxpayers should not later expect a better result than what is being provided in the settlement offer. This is consistent with the IRS viewpoint that the appraised values in these transactions have been enormously exaggerated and so will not withstand scrutiny and that, if the settlement offer is not accepted, a taxpayer can expect that the final resolution of his or her case will be the denial of the charitable contribution deduction and the imposition of substantial penalties and interest.

Subsequently, in IR-2020-152 dated July 13, 2020, the IRS announced that on July 9, 2020, the U.S. Tax Court struck down four abusive syndicated conservation easement transactions, which disallowed close to $21 million in conservation easement deductions.

The IRS then urged any taxpayer involved in syndicated conservation easement transactions who has received a settlement offer to accept it soon.

The settlement offer terms raise several questions for affected taxpayers and their advisors. First, the requirement that all partners in a partnership must agree to the settlement precludes partners from participating in the settlement initiative if even one partner refuses to participate. However, on July 14, 2020, an IRS representative stated in a public forum that the IRS would be willing to entertain settlement discussions with less than all the partners in a partnership, but that settlement terms would be more favorable to the IRS than those announced in IR-2020-130.

It also is not entirely clear how the mechanics of the settlement offer will operate in practice. The procedures for settling with the IRS differ depending on whether the relevant tax years fall under the centralized partnership audit rules 17

TAXFAX enacted under the Bipartisan Budget Act of 2015 (“BBA”) or under the former audit regime of the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). It has been noted that most of the docketed Tax Court cases appear to involve years governed by TEFRA; however, for cases involving more recent years where the BBA applies, requiring that all partners consent to the settlement offer appears to be inconsistent with the BBA rules which give the partnership representative the sole power to act on behalf of the partnership. As a result, the logistics for settling a case may be somewhat cumbersome in light of the fact that the BBA appears to provide a different framework for settlement than the IRS initiative.

The conservation easement settlement offer affords benefits and efficiencies to both the IRS and taxpayers. It allows the IRS to address a substantial number of docketed cases on comparable terms, thereby reducing the IRS’ administrative burden while at the same time providing taxpayers assurance that they are receiving substantially the same settlement terms as other similarly situated taxpayers.

CORONAVIRUS RELIEF LEGISLATION EMPLOYMENT TAX DEFERRAL AND TEMPORARY PAYROLL TAX CREDITS Tara Guler, CPA, MST As the COVID-19 pandemic pushes on, it is important to take advantage of the various stimulus package incentives offered to help businesses during this trying time. Many of the businesses may be eligible for certain payroll tax credits. In addition, all businesses are allowed to defer 2020 payroll tax deposits into 2021 and 2022.

The Families First Coronavirus Response Act (FFCRA) was enacted March 18, 2020 and contains two payroll tax credits designed to reimburse employers for amounts required to be paid employees under the Act: 1) The Emergency Paid Sick Leave Credit, and 2) The Emergency Family and Medical Leave Credit (FMLA). The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted March 27, 2020 and contains a 18

third credit, the Employee Retention Credit, intended (as its name suggests) to incent employers to retain employees. The CARES act also enacted the employment tax deferral provision.

Emergency Paid Sick Leave Credit The Emergency Paid Sick Leave Credit is available to employers with fewer than 500 employees who are required to pay an employee’s wages under the Paid Sick Leave Act. This Act requires employers to pay 80 hours of wages, which include qualified health plan expenses, to an employee if any one of the following conditions apply: 1. Employee experiences quarantine or selfisolation due to a COVID-19 diagnosis 2. Employee has been advised by a healthcare professional to self-quarantine 3. Employee experiences symptoms of COVID-19 and is seeking medical diagnosis 4. Employee is caring for an individual who is under quarantine or self-isolation order 5. Employee is caring for child because of school closure or unavailability of child care provider due to COVID-19 An employee is eligible to receive up to two weeks of pay at their regular pay rate due if the reason for the absence is under 1-3 above. The maximum amount an employee may receive per day is $511. This amount is reduced to $200 if the absence is due to 4 or 5 above.

The employer is allowed to recoup what it pays employees through a credit against the employer’s share of Social Security taxes (i.e., 6.2% times wages, capped at the wage base) for the amount paid for sick leave. The credit is refundable to the extent it exceeds the relevant payroll tax liability. Wages paid beginning April 1, 2020 through December 31, 2020 are eligible for this credit. In addition, the employer is eligible for advance payment of the credit via Form 7200.

Emergency Family and Medical Leave Credit The FMLA Credit is available to employers with fewer than 500 employees who are required to pay an employee’s wages under the FFCRA’s Fall 2020 | The Cooperative Accountant

TAXFAX amendments to the FMLA. This amendment requires that an employee be employed for at least 30 days and that the employee be unable to work due to school or day care closures as a result of COVID-19.

Under the FFCRA, the first 10 days of absence do not require the employer to pay compensation. After 10 days, employees receive two-thirds of regular pay, capped at $200 per day (maximum $10,000 per employee). Wages include qualified health plan expenses. The amount of the credit is equal to the total family leave paid to the employee. The employer is allowed a credit against the employer’s share of Social Security taxes (i.e., 6.2% times wages, capped at the wage base). The credit is refundable to the extent it exceeds the relevant payroll tax liability. Wages paid beginning April 1, 2020 through December 31, 2020 are eligible for this credit. In addition, the employer is eligible for advance payment of the credit via Form 7200.

The Employee Retention Credit The Employee Retention Credit is available to an “eligible employer” who paid “qualified wages” between March 13, 2020 and December 31, 2020.

An eligible employer is one who: ● Carried on a trade or business in 2020, and ● Had operations fully or partially suspended as a result of a governmental order due to COVID-19 or endured a “significant decline in gross receipts.” A significant decline means a 50% decline in gross receipts compared to the same quarter in the prior year. Eligibility for employers experiencing a significant decline in gross receipts continues until the quarter following the quarter where gross receipts are greater than 80% of the gross receipts in the same quarter of the prior year.

Employers with forgiven loans under the Payroll Protection Plan are not eligible for this credit.

The definition of qualified wages differs for companies with more than 100 employees and those with 100 or less employees, based Fall 2020 | The Cooperative Accountant

on their 2019 average employee count. For a company with more than 100 employees, qualified wages are those wages paid to an employee who is receiving compensation but is NOT providing services because the company fully/partially suspended operation or experienced a significant decline in gross receipts. For a company with 100 or less employees, all wages paid are qualified, regardless of whether the employee is providing services or not. This means that an employee can continue to work and the employer may still be eligible for the credit.

The credit is equal to 50% of qualified wages and must be reduced by any payroll credits claimed for the same employee under the two credits described above. Qualified wages include qualified health plan expenses and may not exceed $10,000 per employee.

The employer is allowed a credit against the employer’s share of Social Security taxes (i.e., 6.2% times wages, capped at the wage base) and the credit is refundable to the extent it exceeds the relevant payroll tax liability. In addition, the employer is eligible for advance payment of the credit via Form 7200.

Payroll Tax Deferral The CARES Act allows employers to defer their 6.2% share of the Social Security tax on wages paid from March 27, 2020 to December 31, 2020. Half of the deferred payment amount is due by December 31, 2021, with the other half due by December 31, 2022. This deferral takes into account all cash taxes due to the IRS on Form 941, including the above mentioned credits. Form 941 intends to simplify the calculation of the amount of payroll tax balance due or overpayment and in doing so nets the tax credits against the employer share of social security. As a result, if the payroll tax credits are in excess of the employer share of social security then no amount will be eligible for deferral for the quarter.

MORE ON THE TREATMENT OF TAXES RESULTING FROM PROPERTY SALES IN FARM BANKRUPTCY REORGANIZATIONS

By George W. Benson 19

TAXFAX Prior TAXFAX columns have discussed a 2005 amendment to Chapter 12 of the Bankruptcy Code intended to facilitate farm reorganizations. See, Winter, 2012 and Fall, 2019. Farm bankruptcy reorganizations often involve the sale of part, but not all, of a farming operation to raise money to pay creditors, triggering significant gains for tax purposes. Before the amendment, the Government had a priority claim for federal income taxes resulting from such sales. This often gave the Government power to prevent confirmation of any plan of reorganization.

The intent of the amendment was to deprioritize the Government’s claim, treating the Government as an unsecured creditor.

In debates leading up to the adoption of the 2005 amendment, Senator Grassley described its purpose as follows: “The bill lets farmers in bankruptcy avoid capital gains tax. This is very important because it will free up resources to be invested in farming operations that otherwise would go down the black hole of the Internal Revenue Service. Farmers need this chapter 12 safety net.”

Disputes arose as to the scope of the language of the actual 2005 amendment. In Hall v. United States, 566 U.S. 506 (2012), the Supreme Court concluded that the amendment applied only to sales before commencement of bankruptcy proceedings. This frustrated the purpose of the amendment. It led to efforts to amend the Bankruptcy Code yet again to make it clear that the provision applied to sales both before and after a farmer filed for bankruptcy.

Ultimately, the further amendment was enacted in 2017.

The Chapter 12 bankruptcy process is as follows: In a Chapter 12 proceeding, the farmer proposes a plan to repay the secured debt, to the extent of the value of the collateral, and to utilize the farmer’s disposable income for the period of the plan, generally three to five years from the date the plan is confirmed, towards paying unsecured creditors (including any secured debt in excess of value of the collateral). … In general, secured creditors 20

need not approve the plan, and a qualifying plan can be confirmed over the objection of creditors.

The debtor can retain assets, without the approval of the unsecured creditors, even when the unsecured creditors are projected to not be paid in full, so long as the debtor’s disposable income during the plan period goes to payments under the Chapter 12 plan, and the total payments are not less than what the unsecured creditors would receive upon a liquidation. Disposable income reflects a reduction for not only expenditures necessary to the operation of the business, but also for expenditures necessary for the support of an individual debtor and the debtor’s family.

Further, in determining what is available on a liquidation to unsecured creditors, the individual debtor can exempt certain assets, such as a homestead and retirement accounts in certain states. By claiming as many assets as exempt as possible, the Chapter 12 plan can enable the debtor to retain those assets, and yet be relieved from large unsecured debt, including, as described below, those income taxes that are treated as unsecured debt.”

“Eliminating the Inevitability of Farm Debt and Taxes through Chapter 12 Bankruptcy,” Alan S. Lederman, Bloomberg Law: Tax (July 6, 2020).

The Lederman article goes on to describe the importance of de-prioritizing tax claims to the success of farm bankruptcy reorganizations: “The key income tax advantage of a Chapter 12 bankruptcy is provided in 11 U.S.C. Section 1232(a). That section provides generally that unsecured federal and state income taxes imposed on the pre-petition, and on the postpetition, pre-discharge, gains of the Chapter 12 debtor, which arise from the sale, transfer, exchange or other disposition of any property used in the debtor’s farming operation, are to be treated as pre-petition unsecured claims.

Such taxes are thus potentially subject to discharge without being fully paid.”

While the 2017 amendment ended debate as to what is de-prioritized, disputes regarding the scope of de-prioritization have continued.

A number of cases have concluded that deFall 2020 | The Cooperative Accountant

TAXFAX prioritizing applies not only to sale of farmland, but also to sale of almost any property used in the debtor’s farming business. After discussing those cases, one bankruptcy court recently went so far as to apply de-prioritization to the proceeds of the sale of a crop insurance policy.

See, In re Pedersen, 593 B.R. 785 (Bankr. N.D. Iowa 2018).

In another recent case, the Government conceded that its claim for taxes on asset sales was de-prioritized, but argued that it nevertheless had the right under another section of the Bankruptcy Code to set a tax refund due to a farmer debtor off against a claim against the farmer for taxes resulting from an asset sale. The bankruptcy court held against the Government. See, In re Davies, 2020 BL 160451 (Bankr. N.D. Iowa 2020): As all of this Legislative history shows, Congress intended the priority stripping provision to be interpreted to promote successful reorganizations of family farming operations – by limiting the impact of the substantial capital gains taxes that tend to follow the sale of farm land or equipment – and to put that capital into the farmers’ hands – not the taxing authorities. Allowing taxing entities to setoff withheld taxes against these capital gains taxes runs directly counter to these objectives.”

The Lederman article describes the reorganization plan in Davies. The article concludes that after three years the Davies would likely emerge with their farming business intact (but reduced) and with significant assets. The Davies planned to sell a portion of their farm and related assets and to use the proceeds to pay secured debt. It was estimated that the sale would trigger almost $1 million of gain and approximately $221,000 of tax for federal and Iowa tax purposes. Those taxes would be de-prioritized and have the status of unsecured debt. It was projected that only about $4,000 would be paid during the workout period with remaining unpaid taxes discharged after three years.

In farm bankruptcies another tax issue needs to be considered, namely whether the ultimate discharge of any de-prioritized tax liability in Fall 2020 | The Cooperative Accountant

the bankruptcy gives rise to cancellation of indebtedness income or a reduction of tax attributes under Section 108. This short article does not address that question, but interested readers are directed to the Lederman article, cited above, for his views on the question.

PROPOSED REGULATIONS FOR EXCISE TAX ON EXEMPT ORGANIZATION COMPENSATION IN EXCESS OF $1 MILLION

By George W. Benson The Tax Cuts and Jobs Act of 2017 added imposed an excise tax (currently at a rate of 21%) on “applicable tax exempt organizations” paying compensation (including excess parachute payments) in excess of $1 million per year to any covered employee. This new excise tax adds to other provisions in the Code penalizing companies for paying “high” levels of compensation to key executives, such as Section 162(m) (disallowing a deduction for certain corporations that file with the SEC for applicable compensation to certain employees in excess of $1 million), Sections 280G and 4999 (disallowing a deduction by the corporation and imposing an excise tax on an employee with respect to certain golden parachute payments) and Section 4004 of the Cares Act limiting compensation that may be paid to certain employees if a corporation chooses to participate in certain coronavirus relief loan programs (other than the Payroll Protection Program) such as the Main Street Lending Program.

Section 521 cooperatives are commonly referred to as “exempt” cooperatives, but they have not truly been exempt from federal income tax since 1951. Nevertheless, Treas. Reg. § 1.1381-2(a)(1) provides that “[f]or purposes of any law which refers to organizations exempt from income taxes [a Section 521 cooperative] shall… be considered as an organization exempt under section 501.”

The basis for treating Section 521 cooperatives as exempt under Section 501 is unclear. In Certified Grocers of California, Ltd. 21

TAXFAX v. Commissioner, 88 T.C. 238 (1987), the Tax Court 4960. The preamble states that the proposed

By Barbara A.regulations Wech questioned treatment of Section 521 cooperatives are expected to apply to 261,000 as exempt under Section 501 for consolidated applicable tax exempt organizations, of which 600 return purposes: are Section 521 cooperatives. This number of “Whatever the situation may be with respect to Section 521 cooperatives seems high, but it has cooperatives exempt under section 521 – whether been years since the IRS released information as respondent may decree that such cooperatives to numbers of Section 521 cooperatives so there are to be treated as exempt under section 501, is no way to check its accuracy. the statute being silent, and are therefore not Because it is reasonable to expect that very permitted to file consolidated returns because of few Section 521 cooperatives will be subject to the prohibitions of section 1504(b)(1), except for the excise tax under Section 4960, this article the narrow exception of section 1504(e), see secs. will not describe Section 4960 and the proposed 1.1381-2(a)(1), 1.1502-100, Income Tax Regs. – is regulations in detail. Any Section 521 cooperative a matter which we may leave to another day and that pays any top executive in excess of $1 million another case.” per year should study these rules. Cooperatives Since Certified was nonexempt, it was not potentially covered should be aware that the necessary for the Tax Court to address this statute and regulations take a broad view of what question in rendering its decision, and so its constitutes compensation for purposes of the $1 questioning of the of the treatment of Section million threshold and under certain circumstances 521 cooperatives as exempt under Section 501 is compensation for services rendered to related dictum (not authority). The validity of this portion entities is included. of the regulations has not since been addressed by the Tax Court or any other court. However, PROPOSED REGULATIONS UNDER SECTION successfully challenging a regulation is difficult, 512(A)(6) WRESTLE WITH EXPENSE particularly where, as here, the regulation is ALLOCATIONS BETWEEN ACTIVITIES longstanding.

By George W. Benson Over the years, when enacting new provisions applicable to exempt organizations, Congress Nonexempt Subchapter T cooperativesare subject has often specifically excluded Section 521 to tax on net earnings from business done with cooperatives where appropriate (and where or for patrons who are not entitled to share in someone brings the necessity to do so to the patronage dividends (“nonmember business”) drafters’ attention). There is no exception from and on net earnings from nonpatronage activities Section 4960 for Section 521 cooperatives. In (“nonpatronage business”). Because of this, it fact, Section 521 cooperatives are specifically is often necessary for cooperatives to allocate included in the definition of “applicable tax expenses between patronage and nonmember/ exempt organizations” for purposes of Section nonpatronage activities.

4960. See Section 4960(c)(1)(B).

In the case of mixed activities (those serving The legislative history gives no clue as to why members on a patronage basis and nonmembers the drafters of Section 4960 felt it appropriate to on a nonpatronage basis), it has long been impose an excise tax on excess compensation established that, absent evidence to the contrary, paid by Section 521 cooperatives. Likely they it can be assumed that business done with or were not familiar with Section 521 cooperatives, for members and nonmembers are equally simply swept them in without much thought, and profitably (which has the effect of allocating gross no one complained. There are not many Section income and expenses between those activities in 521 cooperatives, most are small, and few, if any, pay compensation to an executive in excess of $1 proportion to the member/nonmember business ratio). For this purpose, the member/nonmember million per year. business ratio is normally based on a physical On June 11, the Treasury/IRS released a set measure of products handled or on a preof proposed regulations implementing Section 22

Fall 2020 | The Cooperative Accountant

TAXFAX patronage measure of gross receipts (amounts paid members and nonmembers for products marketed by the cooperative or amounts paid by members for supplies or services provided by the cooperative). See, A.R.R. 6967, III-1 C.B. 287 (1924), restated and superseded by Rev. Rul. 68-228, 1968-1 C.B. 385.

Recently, the Treasury released proposed regulations implementing Section 512(a) (6), which was added to the Code by the Tax Cuts and Jobs Act of 2017. Section 512(a) (6) requires exempt organizations engaged in several unrelated trades or businesses to silo each unrelated business for net operating loss carryover purposes. While Section 512(a)(6) and these proposed regulations are not applicable to nonexempt Subchapter T cooperatives, the proposed regulations provide some insight as to the Treasury/ IRS current thinking about the allocation of expenses between exempt and nonexempt activities which might of interest to nonexempt Subchapter T cooperatives.

Currently, Treas. Reg. § 1.512(a)-1(c) provides that, where facilities and personnel are used in both exempt and nonexempt activities, expenses related to the facilities and personnel “shall be allocated between the two uses on a reasonable basis.” It appears that many exempt organizations have used gross receipts for this purpose. However, the preamble to the proposed regulations indicates that the Treasury/IRS has reservations with respect to the use of the gross receipts method when an exempt organization charges less to users of its exempt function than to users of its nonexempt function.

As a consequence, the Treasury proposes to modify existing Treas. Reg. § 1.512(a)-1(c) by adding the following language: “However, allocation of expenses, depreciation, and similar items using an unadjusted gross-to-gross method is not reasonable. For example, if a social club charges nonmembers a higher price than it charges members for the same good or service, it must adjust the price of the good or service provided to members for purposes of determining the allocation of indirect expenses Fall 2020 | The Cooperative Accountant

to avoid overstating the deductions allocable to the unrelated business activity of providing goods and services to nonmembers.”

However, the preamble indicates that the Treasury/IRS is thinking further about allocations: “The Treasury Department and the IRS are concerned that permitting allocation methods based solely on reasonableness is difficult for the IRS to administer and may not provide certainty for taxpayers. Whether an allocation method is ‘reasonable’ depends on all the facts and circumstances. See Rensselaer Polytechnic Institute v. Commissioner, 79 T.C. 967 (1982), aff’d 732 F.2d 1058 (2d Cir. 1984) (finding an allocation method based on actual use to be ‘reasonable’ within the meaning of § 1.512(a)-1(c)). The Treasury Department and the IRS continue to consider the allocation issue and intend to publish a separate notice of proposed rulemaking providing further guidance on this issue.”

This statement is not surprising since the IRS has been studying expense allocation issues for exempt organizations for some time. It has received some input from interested parties.

For instance, in a letter to the IRS dated February 23, 2017, the AICPA recommended the following framework for expense allocations: Guidelines for allocation of indirect expenses 1. Deductible expenses must bear a proximate and primary relationship to the conduct of the activity.

2. Deductible expenses include both direct costs and indirect costs.

3. Indirect costs include fixed expenses (those which do not change when the unrelated activity is conducted or not conducted) and variable expenses (those which increase or decrease when the unrelated activity is conducted or not conducted).

4. The methodology for allocating expenses relating to dual use facilities/personnel is reasonable and consistently followed from 23

TAXFAX year to year, and should not cause the double-counting of any expense.

5. The methodology for allocating expenses relating to dual use facilities/personnel is based on the character of the expense involved. a. Facility costs (rent, mortgage interest, insurance, taxes, security, and utilities) apportioned based on portion of facility used (square footage and time) for each activity. b. Personnel costs (salary, benefits, and taxes) apportioned based on time spent on each activity. c. Information technology costs (software, computer services, and internet) apportioned based on allocation of personnel to activity. d. Office expenses (supplies, printing, postage, and subscriptions) are apportioned based on allocation of personnel to activity.

6. The AICPA recommends that the IRS permit the use of gross revenue, from each respective activity, to allocate direct and/or indirect expenses if there is no difference in the prices charged to earn unrelated versus related revenue. This provision is intended for use by organizations that are unable, or for which it is administratively impractical, to maintain or create records with respect to activities in which dual use facilities/ personnel are used and the associated expenses are clearly distinguished as related or unrelated.

7. The AICPA recommends that the IRS provide a simplified method for small businesses to determine expenses which are deductible against unrelated business income. Small organizations lack the resources to adequately document the information needed to identify expenses pertaining to dual use facilities/personnel used in related and unrelated activities.”

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What the IRS has done in the proposed regulations might be viewed as a back-door affirmation of the reasonableness of the gross receipts method where an exempt organization deals with users of exempt and nonexempt functions on the same basis and an approval, at least for now, of the AICPA’s recommendation 6.

This is an area worth monitoring though, as noted above, the Section 512 regulations do not apply to nonexempt Subchapter T cooperatives.

PROPOSED REGULATIONS NARROW EXCEPTIONS TO DISALLOWANCE OF DEDUCTION FOR FINES AND PENALTIES

By George W. Benson Section 162(f) (fines, penalties and other amounts) was substantially rewritten by the Tax Cuts and Jobs Act of 2017, and reporting requirements were added to the Code. See, Section 6050X. On May 13, the IRS released a set of proposed regulations implementing the TCJA revisions. See Prop. Treas. Reg. §§ 1.162-21 and 1.6050X-1.

Section 162(f)(1) provides that amounts paid to “a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of a law” are not deductible. Section 162(f)(2) excepts any amount which “(i) constitutes restitution (including remediation of property) for damages or harm which was or may be caused by violation of any law or the potential violation of any law, or (ii) is paid to come into compliance with any law which was violated or otherwise involved in the investigation or inquiry described in paragraph (1)” provided certain conditions are met.

The proposed regulations provide guidance as to the scope of the exceptions.

For instance, they provide that “forfeiture and disgorgement” are not included. The preamble explains: “Forfeiture and disgorgement focus on the unjust enrichment of the wrongdoer, not Fall 2020 | The Cooperative Accountant

TAXFAX the harm to the victim…In Nacchio v. United States, 824 F.3d 1370 (Fed. Cir. 2016), cert. denied, 137 S. Ct. 2239 (2017), the United States Court of Appeals for the Federal Circuit noted that, ‘[w]hile restitution seeks to make victims whole by reimbursing them for their losses, forfeiture is meant to punish the defendant by transferring his ill-gotten gains to the United States Department of Justice.’ …

Section 162(f)(2)(A)(i)(I) provides that restitution and remediation payments relate to the damage or harm caused, or that may be caused, by the violation, or the potential violation, of a law. The statute does not characterize restitution or remediation in connection with an unjust enrichment to a wrongdoer. Consistent with the statutory language, proposed § 1.162-21(f)(3)(i) provides that the purpose of restitution or remediation is to restore the person or property, in whole or in part, to the same or substantially similar position or condition as before the harm caused by the taxpayer’s violation, or potential violation, of a law.”

The bright line the proposed regulations draw between disgorgement and restitution/ remediation is controversial. It may have been muddled (at least in cases involving violations of the federal securities law) by a Supreme Court decision that came down shortly after the proposed regulations were released. See, Liu v. SEC, 591 U.S. (2020). In that case, the Supreme Court concluded that the SEC had authority to require disgorgement as an allowable equitable remedy under the federal securities law, but placed limits on permitted disgorgement (at least under federal securities laws) that make it more difficult to distinguish disgorgement from restitution. The Supreme Court may again focus on the nature of the equitable remedies of disgorgement and restitution in its next term. Certiorari has been granted in a case which concluded that Federal Trade Commission does not have authority to assert disgorgement or restitution as a remedy under applicable federal law. See, FTC v.

Credit Bureau Center LLC, 937 F.3d 764 (7th Cir. 2019).

The treatment of disgorgement and Fall 2020 | The Cooperative Accountant

forfeiture will almost certainly get close scrutiny before the proposed regulations are put in final form. One critic has written: “The IRS’s proposed rule, issued in May, prohibits companies that settled enforcement actions from deducting from their taxes not only fines and penalties – or their equivalents under alternative resolution mechanisms – but also disgorgement and forfeiture…

At the same time, it allowed deductions for amounts ordered paid in restitution to victims or in upgrading and implementing remedial compliance programs. In doing so, however, the Service ignores the very different legal underpinnings of disgorgement and forfeiture from fines and penalties and imposes concealed additional penalties upon settling companies by both depriving the settling companies of their ‘illicit’ gains or property while keeping the taxes paid on such gains or property in previous tax years – thus, in contrast to the Liu rule, the Service’s proposed rule effectively allows the government collectively to take more than the net gain from the offense through disgorgement. This approach is a step too far.”

“A Step Too Far? The IRS Proposes NonDeductibility of Disgorgement,” Philip Urofsky and Richard Gagnon, Bloomberg Law: Tax (July 7, 2020).

The proposed regulations also provide that amounts paid to reimburse the government or governmental entity for investigation costs or litigation costs are not deductible. The restitution and remediation exception also does not apply to payments that are, at the payer’s election, in lieu of a fine or penalty.

In order to be deductible, payments must meet two additional requirements – the “identification requirement” and the “establishment requirement.” Generally the “identification requirement” requires that there be a “court order (order) or an agreement [which] identifies a payment by stating the nature of, or purpose for, each payment each taxpayer is obligated to pay and the amount of each payment identified.” Prop. Treas.

Reg. § 1.162-21(b)(2)(i). The “establishment requirement” requires “the taxpayer [to 25

TAXFAX substantiate], with documentary evidence, the taxpayer’s legal obligation, pursuant to the order or agreement, to pay the amount identified as restitution, remediation, or to come into compliance with a law, the amount paid, and the date the amount was paid or incurred.” Prop. Treas. Reg. §1.162-21(b)(3)(i).

Section 162(f) does not apply “to any amount paid or incurred by reason of any order of a court in a suit in which no government or governmental entity is a party.” Section 162(f)(3). Note however, the definition of “government or governmental entity” includes nongovernmental entities which exercise self-regulatory powers in connection with a qualified board or exchange. Note also that the Code contains other provisions limiting the deductibility of amounts paid in connection with litigation such as Section 162(g) (relating to treble damages paid under the antitrust laws) and Section 162(q) (payments relating to sexual harassment and sexual abuse).

Section 6050X imposes a reporting obligation on the government and governmental entities receiving payments described in section 162(f). Section 6050X(a)(1) requires reporting of: “(A) the amount required to be paid as a result of the suit or agreement to which paragraph (1) of section 162(f) applies, (B) any amount required to be paid as a result of the suit or agreement which constitutes restitution or remediation of property, and (C) any amount required to be paid as a result of the suit or agreement for the purpose of coming into compliance with any law which was violated or involved in the investigation or inquiry.”

Prop. Treas. Reg. § 1.6050X-1 fleshes out the rules. A form (Form 1098-F) has been developed for this purpose.

Pending final regulations, rules for complying with the changes made by the TCJA are contained in Notice 2018-23, which is described in the preamble to the proposed regulations as follows: “On April 9, 2018, the IRS published Notice 2018-23, 2018-15 I.R.B. 474, to provide 26

transitional guidance on the identification requirement of section 162(f)(2)(A)(ii) and the information reporting requirement under section 6050X. Notice 2018-23 provides that information reporting is not required until the date specified in proposed regulations under section 6050X. Notice 2018-23 also provides that, until the Treasury Department and the IRS issue proposed regulations, the identification requirement is treated as satisfied if the order or agreement specifically states on its face that an amount is paid or incurred as restitution, remediation, or to come into compliance with a law.”

While the final Section 162(f) regulations will be applicable to years beginning after they are published in the Federal Register, the proposed regulations provide: “Until that date, taxpayers may rely on these proposed rules for any order or agreement, but only if the taxpayers apply the rules in their entirety and in a consistent manner.”

The proposed section 6050X regulations provide that the reporting obligation in the final regulations will be applicable “only to orders and agreements that become binding under applicable law on or after January 1, 2022.”

These rules apply to cooperatives just as they do to other business entities.

For a cooperative, the resulting impact of a disallowed deduction for a fines or penalty on the cooperative’s patronage dividend deduction must also be considered. The impact of such a disallowance is to create a permanent book-tax (Schedule M) difference.

Should a cooperative paying patronage based on book income simply ignore the tax disallowance because the fine or penalty continues to be a book expense? Presumably a cooperative paying patronage dividends based on taxable income should reduce its patronage dividend by the portion, if any, of the expense that is patronage. Should it go further and reduce its patronage dividend by a gross-up for any resulting tax expense reported for book purposes? Generally, Treas. Reg. § 1.1388-1(a)(1) provides generally that net Fall 2020 | The Cooperative Accountant

TAXFAX earnings for patronage dividend purposes shall not be reduced by federal income taxes.

2019 IRS DATA BOOK

By George W. Benson The IRS recently released the 2019 Data Book describing activities of the Internal Revenue Service during its fiscal year ended September 30, 2019. See, 2019 Internal Revenue Service Data Book, Publication 55B (June 2020) (the “2019 Data Book”). The information pertinent to cooperatives is largely consistent with what was reported for prior years. However, the IRS continues to mask a significant portion of the data.

The reported number of cooperative tax returns (Form 1120-C) has been little changed over the past few years: 8,973 in calendar 2014; 9,043 in calendar 2015; 9,303 in calendar 2016; 9,294 in calendar 2017; 7,500 (?) in calendar 2018; and 9,263 in calendar 2019. The number of cooperative returns is tiny compared to the number of other kinds of returns. It appears that the IRS has doubts as to whether all organizations qualifying as Subchapter T cooperatives are properly filing Form 1120-Cs since it added the following question to the 2018 Form 1120: “Is the corporation operating on a cooperative basis?”

See, 2018 Form 1120, Schedule K, question 20. This question has not led to a material change in the number off Form 1120-C filers.

The reported audit rate for cooperative returns continues to be low. The 2016 Data Book reported that there were 44 audits of cooperative tax returns (0.5% of returns filed).

The 2017 Data Book reported 40 audits (0.4% of returns filed). The 2018 Data Book reported 20 audits (0.2% of returns filed). This year, there were 24 reported audits (0.3% of returns filed). The 2019 Data Book reports that the audits concluded with proposed deficiencies of $734,000. The 2019 Data Book masks the breakdown between how much was agreed and how much was unagreed.

The 2019 Data Book also does not disclose Fall 2020 | The Cooperative Accountant

how many amended returns were filed. Nor does it contain any information as to what portion of refunds claimed was granted and what portion was audited and denied. This information was provided a couple of years ago but has not been provided in recent years. The stated reason is that detail is “not shown to avoid disclosure of information about specific taxpayers.”

The audit coverage rates are calculated using fiscal-year audits in the numerator and calendar-year tax returns in the denominator.

This approach is designed to reflect overall trends in audit activity. The reports have consistently reported a very low level of audit activity.

PROPOSED REGULATIONS IMPLEMENT TCJA CHANGE TO LIKE-KIND EXCHANGE RULES

By George W. Benson The Tax Cuts and Jobs Act of 2017 revised Section 1031 to limit the like-kind exchange rules to exchanges of real property held for productive use in a trade or business or for investment for real property of like kind. Real property held for sale does not qualify for Section 1031 treatment.

For this purpose, “like kind” has been interpreted very broadly. Almost any kind of real estate is regarded as “like kind.” Treas.

Reg. § 1.1031-1(b) provides: “As used in section 1031(a), the words ‘like kind’ have reference to the nature or character of the property and not to its grade or quality.

One kind or class of property may not, under that section, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale.”

Treas. Reg. § 1.1031-1(c) lists examples of 27

TAXFAX real property exchanges that qualify as “like kind.” Included are: “a taxpayer who is not a dealer in real estate exchanges city real estate for a ranch or farm, or exchanges a leasehold of a fee with 30 years or more to run for real estate, or exchanges improved real estate for unimproved real estate.” There are some limits. Section 1031(h) provides that real property located in the United States and real property located outside the United States are not “like kind.”

The Section 1031 regulations have never contained a definition of “real property.”

Given the new limitation of Section 1031 to exchanges of real property, the Treasury has proposed regulations defining the term for the first time for Section 1031 purposes.

These regulations are in addition to existing regulations dealing with such things as the treatment of boot and deferred like-kind exchanges. The preamble notes that there are definitions of “real property” in the Code and regulations for other purposes but believes that it is appropriate to adopt a definition designed specifically for Section 1031 purposes. This definition appears designed to minimize future disputes over what does and what does not qualify as “real property.”

Prop. Treas. Reg. § 1.1031(a)-3(a)(1) provides: “The term real property under section 1031 and §§ 1.1031(a)-1 through 1.1031(k)-1 means land and improvements to land, unsevered natural products of land, and water and air space superjacent to land. Under paragraph (a)(5) of this section, an interest in real property of a type described in this paragraph (a)(1), including fee ownership, co-ownership, a leasehold, an option to acquire real property, an easement, or a similar interest, is real property for purposes of section 1031 and this section.”

For this purpose, “improvements to land” include “inherently permanent structures and the structural components of inherently permanent structures.”

“Inherently permanent structures” include 28

“any building or other structure that is a distinct asset within the meaning of paragraph (a)(4) of this section and is permanently affixed to real property and that will ordinarily remain affixed for an indefinite period of time.”

The proposed regulations list a number of structures that qualify and principles to apply to determine whether items not on the list nevertheless qualify. These principles trace back to a Tax Court decision many years ago that concluded that billboards were not inherently permanent structures for purposes of the investment tax credit. See, Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975).

The term “structural component” means “any distinct asset, within the meaning of paragraph (a)(4) of this section, that is a constituent part of, and integrated into, an inherently permanent structure. If interconnected assets work together to serve an inherently permanent structure (for example, systems that provide a building with electricity, heat, or water), the assets are analyzed together as one distinct asset that may be a structural component.” Here, as well, the proposed regulations list a number of items which qualify as structural components and principles to apply to determine whether items not on the list nevertheless qualify.

In addition, the proposed regulations contain a number of examples illustrating what is and what is not real property for purposes of Section 1031.

Unsevered natural products of land (such as growing crops, plants and timber) are regarded as real property. However, once harvested, they become personal property.

A special rule applies to mutual ditch (irrigation) companies exempt under Section 501(c)(12). The stock of such companies is regarded as real property “if, at the time of the exchange, the shares have been recognized by the highest court of the State in which the company was organized, or by a State statute, as constituting or representing real property or an interest in real property.”

Fall 2020 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

ABSTRACT For decades, software development has required cooperatives to invest considerable time, talent, and treasure to build solutions for their specific problems that could not be resolved using Commercial Off The Shelf software alone. The growing field of Low Code / No Code software development offers cooperatives tools to reduce the resources required while building solutions tailored to the unique needs of each cooperative.

Software development tools and practices have steadily evolved and Low Code / No Code is a major step in the “democratization” of building software. When managed correctly, Low Code / No Code offers significant savings in the costs and time required to deliver automated business processes. However, user accessibility to Low Code / No Code based business process automation also poses risks for managers of cooperatives.

This article describes Low Code / No Code software development, provides an example of automating a business process, addresses the role that Low Code / No Code provides in a cooperative’s information technology operations, describes risks associated with this technology, provides recommendations, and details some of its limitations.

Fall 2020 | The Cooperative Accountant

TAXFAX

EDITOR Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham COLLAT School of Business 710 13th St. South Department of Management, Information Systems, & Quantitative Methods Birmingham, Alabama 35233 bawech@uab.edu GUEST WRITER Samuel C. Thompson, PhD Department of Management, Information Systems and Quantitative Methods University of Alabama at Birmingham COLLAT School of Business 710 13th St. South Office: (205)934-8384 scthompson@uab.edu

LOW CODE / NO CODE PLATFORMS AND TOOLS Low Code / No Code (LCNC) platforms and tools present a compelling opportunity for managers of cooperatives to automate business processes quickly and at less cost than through traditional software development methods (Bloomberg, 2017). However, the LCNC platforms and tools are being adopted so rapidly that they pose a risk to the operations of cooperatives as they can readily be implemented and used with customer/ member data, and without the approval of the 29

TCA SMALL BUSINESS FORUM Information Technology (IT) Department.

Computerization of business processes began in large banking and insurance companies that handled millions of repetitive transactions such as payroll, payments, and the associated accounting of these transactions.

As the relative costs of computerizing business processes has decreased, an increasing variety of business processes have been computerized. Automation offers speed and accuracy in processing that suffer when using more labor-intensive approaches. Modern business processes are often managed via Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) platforms that offer tighter integration of a business, but with significant financial and other costs before, during, and after implementation. These platforms have generally been adopted first by large organizations. Over time, the ERP and CRM platform vendors such as Oracle, SAP, and Salesforce have gradually brought out smaller scale versions of their products, more suited to the needs of medium-sized organizations.

However, for many cooperatives, these tools have remained out of reach.

Managers have found the financial and time savings of information technology compelling as they allow relatively few employees to serve the needs of an increasing number of customers or cooperative members. However, software development projects for many organizations are a large capital expense, consuming vast amounts of money and time.

In one widely-cited report, the average cost of a software development project for a small company was $434,000 and $2.3 million for a large company. Additionally, only 16.2 percent of these projects were completed on time and on budget (Standish Group, 2014). The return on investment of these projects may require an extended period of time to be realized.

As a result, many software projects are only undertaken to address truly compelling needs in an organization. This has been especially true for employees whose responsibilities do not allow them to sit in front of a desktop or laptop computer during most of their workday.

30

The personal computer began as a desktop device, evolved to a laptop device, and has most recently become a pocket-sized device in the form of the smart phone. While smart phone adoption has been overwhelming during the years since the iPhone’s introduction in 2007, the growth of skilled Application Development and Delivery (AD&D) professionals able to create smart phone “apps” has lagged considerably (Sharwood, 2017).

Until recently, the custom workflow applications implemented as smart phoneoriented “apps” more suited to these mobile employees have required AD&D professionals.

Tools such as Objective-C, HTML5, Javascript, and Cascading Style Sheets (CSS) have been the primary tools required to create smart phone apps. The cost of harnessing this level of technical expertise has mostly limited the deployment and adoption of mobile apps to large user bases such as consumers and employees of large organizations (Joorabchi, Mesbah, and Kruchten, 2013).

To address these organizational needs for lower cost computerization of processes as well as the provisioning of custom apps for mobile employees, LCNC platforms and tools available from Google, Mendix, Oracle, Salesforce, Microsoft, and others have enjoyed a rapidly growing market share, especially in the last few years (Umuhoza and Brambilla, 2016; Fryling, 2018). According to a Forrester Research article, the market for LCNC is expected to grow to $15.5 billion by 2020 (Richardson and Rymer, 2016). As the name implies, these software development platforms do not require extensive knowledge of computer languages or a standard Integrated Development Environment (IDE). Instead of an AD&D professional, a power user within an organization familiar with the processes of their department can use LCNC tools to automate those processes (Majchrzak, Ernsting, and Kuchen, 2015; Mew and Field, 2018). Given that LCNC is “democratizing” software development, shifting capabilities from professional software specialists to power users, these power users of LCNC are often referred to as “citizen developers.”

Fall 2020 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM FROM TEXT-BASED TO TRULY VISUAL TOOLS Currently, the vast majority of software is created using the text-based, “hand coded” paradigm. Even modern programming languages like Java and Visual Basic require developers to master instructions like public, void, string, class, var, rem, int, and so on.

Some programming languages are highly cases sensitive, others are not. All of them require careful management of symbols (; : - # * ,) . In comparison, the visual paradigm of these LCNC software development platforms is a palette of buttons, textboxes, and icons that are dragged onto a virtual canvas. The LCNC user, either a citizen developer or AD&D professional, then modifies these basic elements to suit their business needs. Even business logic is modeled using icons and ready-to-run software implementing this logic can be quickly tested and deployed.

Within the last year, the LCNC market was anticipated to maintain a compound annual growth rate of 46 percent (Worldwide Market Reports, 2019). In addition to small and medium sized businesses, major companies like Zurich Insurance, New Balance, Komatsu, and Ingersoll Rand are using LCNC to automate business processes. Recognizing an opportunity in the marketplace, Microsoft and Google have begun to offer their LCNC toolsets - Power Apps and App Maker, respectively. Power Apps can be added to Microsoft Office 365 and App Maker is an extension of Google’s G Suite.

AUTOMATING A BUSINESS PROCESS WITH LCNC For cooperatives, LCNC offers an opportunity to automate business processes that have previously been too expensive to address via “hand coded” software. This is especially true for business processes involving mobile employees. The LCNC toolsets make Androidbased smart phones and iPhones primary targets for mobile app development and deployment.

As an example of an LCNC-based business process automation, electric cooperatives must Fall 2020 | The Cooperative Accountant

have their field employees conduct periodic inspections of equipment. The Institute of Electrical and Electronics Engineers publishes the National Electrical Safety Code (NESC) every five years. These standards for managing electrical systems have been periodically published since 1913 (American Electric Power, 2019). For electrical cooperatives, NESC mandated inspections to insure the safety and functionality of electrical equipment are a set of standard business processes. These processes, especially the ones that are limited to annual or even less frequent inspections, may present an opportunity for automation via LCNC tools.

An electric cooperative’s field employee may periodically inspect member meters to insure they are operating safely, properly, and have not been tampered with by anyone. This business process may be based on a clipboardbound, paper form that is filled out while observing the condition of an electric meter.

The clipboard is carried along while the field employee walks between the member’s electric meter and the employee’s vehicle. Without LCNC, migrating this business process from “clipboard-and-paper” to “smart phone and app” may be considered too expensive to implement using traditional mobile software development processes. A central principle of user interface design is to capture data as close to its source as possible. In the electric meter inspection business process, the field employee either enters their observations periodically into a laptop in the vehicle or someone in a coop office copies from the paper forms via manual data entry at a desktop computer. This process is vulnerable to an array of problems. Paper entries could become smeared or damaged. Pages of readings may be misplaced, damaged or destroyed before their entries can be recorded digitally. The field employee may have trouble understanding their entries hours or days after initially recording them. The process could also be disrupted by an interruption such as a vehicle accident or breakdown. If a second person creates the digital entries, there is a likelihood of incorrect interpretation or recording of the original data. In either case, there is a delay 31

TCA SMALL BUSINESS FORUM between the original meter inspection and its entry into the electric cooperative’s computer systems.

In this example of migrating from “clipboard-and-paper” to “smart phoneand-app”, a citizen developer in the electric coop with deep knowledge of the operations department’s business processes could be tasked with automating equipment inspections. They could create a smart phone oriented form to be used by the field employees. A powerful feature of LCNC tools is that instead of simply providing textboxes labeled Street Address 1, Street Address 2, City, State and so on, the form presented on the field employee’s smart phone or other mobile computing device could provide a digitized map to them. Using the GPS capabilities of the mobile computing device, the field employee would be able to view their own location on a map, then tap the location icon of the cooperative member’s address icon and the app would automatically populate the Street Address 1, Street Address 2 and other fields of the form. To further minimize typing on the mobile computing device, the form could provide buttons to record standard observations such as, “Meter inaccessible, No problems observed, Damaged meter, Meter requires calibration, Evidence of tampering, Meter requires replacement” and so on. An entry area on the form could be provided for recording the in-service date of the meter, its model number, or other information that may be best obtained through direct observation. The mobile app could also provide textboxes for free-form recording of the field employee’s observations to address any issues not otherwise provided on the form. Also, details regarding specific observations could be addressed through additional buttons or textboxes accessed initially via one of the high-level buttons. Once the observations were ready for entry to the electric cooperative’s computer systems, the field employee would click a Submit button on their smart phone or other mobile computing device’s screen. This approach ensures the 32

data is collected as close to the source as possible.

While the construction of this example mobile app is familiar in software development, it differs radically in terms of complexity. The citizen developer of the LCNC development environment may not have to enter any computer code at all, just descriptive text for the buttons, maps, and textboxes presented to the field employee. If additional functionality or complex integration with the coop’s databases was needed, then this example would also entail some assistance from an AD&D professional.

Another advantage of developing software on an LCNC platform is the immediate feedback available to the app developer.

They can initially connect their smart phone’s web browser to the URL where the app’s current page is provided, then just pull down from the top of their smart phone’s screen to refresh the page with the latest version of the app. What the citizen developer sees is the same as what is seen by the app’s users. While this means rapid updates of a deployed, operational app can be provided, it also means that mistakes may be rapidly introduced, requiring revisions and the communication of corrections to the app’s users. Given this dynamic, it is recommended that apps be developed at a low level, on a small scale, and carefully tested to eliminate problems before operational deployment.

Once a small process has been successfully automated, the scope can be expanded to automate higher-level, related processes.

LCNC PRODUCTS In a 2016 report by Forrester Research, 42 vendors of LCNC products were identified.

At the high end of the cost and feature scale is Oracle with its Business Process Management Suite and related low-code platform for database apps. At the lower end of the cost and feature scale is Quick Base (formerly a division of Intuit, the company behind QuickBooks), which offers process and workflow automation software to include free trials. For ready leverage of large Microsoft Fall 2020 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM installations, that company offers its Power Apps platform for process and workflow automation. The financial costs of all these products tend to be lower than traditional software development projects, but higher than simply documenting business processes and workflows.

For cooperatives that have already implemented Oracle’s Business Process Management Suite, Salesforce CRM, or Microsoft’s Power platform, these products offer LCNC tools at additional cost. While potentially costly, the ready integration of the resulting LCNC-developed software may provide compelling business process automation opportunities for cooperative managers.

LCNC AS “SHADOW IT” One motivation for learning about LCNC is that it has already infiltrated many organizations via self-styled citizen developers trying to solve problems with software. As with many earlier technologies, adoption may be “organic”, as opposed to being formally evaluated and approved by the organization’s information technology department. Shadow IT is a term used to describe information technology that has been introduced and is in use without the approval of the organization’s Information Technology department. Shadow IT projects lack official sponsorship in an organization.

This poses a significant risk to an organization as it normally represents a violation of organizational policies and may lead to serious, negative consequences (Su, Levina, and Ross, 2016).

An example of the threat of Shadow IT would be a cooperative employee who has been provided an IT Department approved laptop computer for working remotely. The laptop would be provisioned with virus protection, a firewall, and Virtual Private Networking to help facilitate secure data management. The employee would be provided with a file share on a cooperative’s file server that could then be accessed using either the employee’s desktop computer in the office or from the cooperative’s laptop. However, that Fall 2020 | The Cooperative Accountant

employee could find the laptop burdensome and choose to work on the cooperative’s data files using their own desktop computer at home. The employee’s assigned files could be accessed easily from the employee’s office and home desktop computers using a cloudbased, Software-as-a-Service tool like Dropbox.

If other employees embraced this solution, the cooperative’s data would be at considerable risk of loss or damage. Family members sharing that employee’s home desktop computer might accidentally or deliberately access, modify, or copy sensitive cooperative data. This places the cooperative at risk of violating privacy laws with the resulting fines and lawsuits. Compromised data could be used by identity thieves. In one survey, 35 percent of enterprise employees agreed with the statement that they saw a “need to work around your company’s established security policies and procedures just to get your work done (RSA, 2007).” Vendors like Dropbox offer organizational file sharing solutions that are managed by an IT Department, but they work only if the IT Department is involved in this process.

Typically, the cooperative’s IT department requires that software be carefully tested and approved prior to formal adoption.

Resources like servers need to be provisioned with an operating system, backup software, fault-tolerance features, anti-virus, intrusion prevention software, and many other elements that ensure these resources function in accordance with the cooperative’s computing policies. If not, they are at risk of failure or service interruption due to improper vendor licensing of the operating system, an irrecoverable failure from lack of backup, service interruption given a lack of faulttolerance, and so on.

Since free trial periods are offered by most LCNC vendors and the products are accessed like basically any other website, LCNC presents low barriers to entry for citizen developers. As a result, these apps may be developed and deployed without any notice to a cooperative’s IT department or an approved purchase order from the accounting department. Nelson 33

TCA SMALL BUSINESS FORUM Petracek, CIO of LCNC provider Tibco, stated “It’s happening already, and if you don’t know about it, go find out where” (Boulton, 2019).

When LCNC developed software encounters problems, it is very likely to require resolution by the organization’s IT department. If the software that has been introduced has come to be considered “indispensable,” then it will have to either be supported or replaced with approved software. However, those who have come to rely on a technology solution, whether it was deployed formally or informally, typically will not accept having the automation of their business processes taken away. This makes it imperative for IT managers to inventory their software development assets, including these assets that may have been introduced organically, without official sanction.

Another risk of Shadow IT is the threat it poses to the alignment of IT with the overall strategy of the cooperative. What may begin as an organic, line employee level initiative to automate a few paper-based business processes could grow into something much larger. The resulting software infrastructure, developed “under the radar” of executives and information technology staff, is very likely to better reflect the needs and goals of its citizen developers and users than of the organization as a whole. This could interfere with moving the cooperative towards its strategic goals while consuming some of its limited pool of resources.

LIMITATIONS OF LCNC SOFTWARE DEVELOPMENT The LCNC platforms have features that make them powerful tools for citizen developers but limit the scope of their ability to automate business processes. The AD&D professionals accustomed to typical software development features such as reversion to earlier versions or check-in/check-out of code will either not find these features or will find only limited versions of these features in most LCNC products.

The LCNC vendors contend that leaving out these features accelerates code development and deployment but require the customer to 34

accept some risk. A typical problem resulting from these limitations is a citizen developer might make a change to an app that either breaks or disrupts it significantly and could be unable to restore it to its previous, fullyfunctional state. Careful, labor-intensive procedures for the citizen developer or AD&D professional may be required to mimic the usual code reversion capability of a teamoriented IDE. Two citizen developers could also find themselves inadvertently modifying the same code at the same time due to the lack of check-in/check-out features more typical of full-featured AD&D platforms. This can lead to multiple, difficult-to-resolve problems.

RECOMMENDATIONS The growing field of LCNC software development presents excellent opportunities for cooperative managers to automate business processes that have previously been regarded as too expensive to address. With low barriers to adoption, it is imperative that cooperative managers work proactively in evaluating the possibilities of LCNC adoption. Otherwise, they may be forced to work reactively as LCNC may “have already happened” inside the cooperative.

If the IT Department is consulted early in the process and appropriate governance procedures are followed, LCNC may present a compelling alternative to traditional software development projects for the automation of business processes of appropriate scope and complexity. While a cooperative may implement some of its software development via LCNC, mission critical processes would continue to be supported by AD&D professionals. As part of this supervision by the IT Department, the cooperative’s citizen developers should benefit from the expertise of the IT Department’s AD&D professionals working in support of those citizen developers and the end users who require automation of their business processes.

The LCNC platforms and tools indicate the shift from the text-based to a much more visual paradigm of software development. This Fall 2020 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM increased level of abstraction is facilitating the growth of citizen developers. Given the unique needs of cooperatives and the nature of their employees/members, the growth of LCNC software development is compelling.

Thousands of worker hours and millions of dollars to support costly, legacy business processes may be reduced using LCNC to automate these processes. Hundreds of organizations worldwide have successfully used

these platforms to rapidly automate business processes without the time, treasure, and talent that has typified software development for decades. However, the LCNC platforms have distinct limitations that only allow managers to accelerate software development while accepting some of the costs attendant to lacking the controls of more established software development toolsets.

REFERENCES American Electric Power. (2019) Guide for Electric Service and Meter Installations https://www. aepnationalaccounts.com/builders/Requirements.aspx Bloomberg, J. (2017) The Low-Code / No-Code Movement: More Disruptive Than You Realize, Forbes, https://www.forbes.com/sites/jasonbloomberg/2017/07/20/the-low-codeno-code-movementmore-disruptive-than-you-realize/#10091f0f722a Boulton, C. (2019). What is Low-Code Development? A Lego-like Approach to Building Software.

CIO. https://www.cio.com/article/3263392/what-is-low-code-development-a-lego-like-approach-tobuilding-software.html Fryling, Meg. (2019). Low Code App Development. The Journal of Computing Sciences in College, Volume 34, Number 6, April. West Haven, CT, USA. Joorabchi, M. E., Mesbah, A., & Kruchten, P. (2013). Real Challenges in Mobile App Development.

ACM/IEEE International Symposium on Empirical Software Engineering and Measurement, October, pp 15 – 24.

Majchrzak, T. A., & Ernsting, J. (2015). Achieving Business Practicability of Model-driven Crossplatform apps. Open Journal of Information Systems Volume 2, Issue 2, pp 4-15.

Mew, L., & Field, D. (2018). A Case Study on Using the Mendix Low Code Platform to support a Project Management Course. Proceedings of the EDSIG Conference, Norfolk, Virginia, USA. pp 1-11.

ISSN: 2473-3857 Richardson, C. & Rymer, J.R. (2016). Vendor Landscape: The Fractured, Fertile Terrain Of Low-Code Application Platforms. pp 1-23. Forrester Research, Inc. Cambridge, Massachusetts, USA. RSA. (2007). The Confessions Survey: Office Workers Reveal Everyday Behavior that places Sensitive Information at Risk. pp 1 – 12.

Sharwood, S. (2017). Developing World hits 98.7 percent Mobile Phone adoption. The Register.

August 3, 2017.

Standish Group International. (2014). The Chaos Report, United States of America.

Su, N., Levina, N., & Ross, J. W. (2016). The Long-Tail Strategy of IT Outsourcing. MIT Sloan Management Review, 57(2), pp 81 - 89.

Umuhoza, E., & Brambilla, M. (2016, August). Model driven development approaches for mobile applications: A survey. In International Conference on Mobile Web and Information Systems (pp. 93107). Springer, Cham.

Worldwide Market Reports (2019). Global Low Code Development Platform Market: Market Analysis, Insights, Trends, and Opportunity Analysis, 2017- 2027. https://www.verifiedmarketresearch.com/ product/low-code-development-platform-market/ Fall 2020 | The Cooperative Accountant

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