Financial Institutions and Banking Financial News

Is Your Bank in Compliance?

The Dodd-Frank Act gives the Consumer Financial Protection Bureau (CFPB) broad authority to prosecute unfair, deceptive or abusive acts or practices (UDAAP) by banks and other financial providers. Early last year, the CFPB announced a new policy that gave institutions a reprieve from UDAAP enforcement actions. But in March 2021, it rescinded this policy, signaling a return to more aggressive enforcement.

UDAAP refresher

During the COVID-19 pandemic, many banks have changed the way they do business — for example, by reducing lobby hours, closing branches, and relying more on mobile banking apps and online transactions — and many of these changes may be here to stay. So, given the CFPB’s more aggressive enforcement stance, it’s a good idea for banks to review their UDAAP compliance policies and update them to reflect current business practices.

One reason UDAAP might be problematic is that its restrictions are quite broad and, in some cases, vague. Generally, an act or practice is unfair if it causes, or is likely to cause, substantial injury to consumers and such injury isn’t reasonably avoidable. Deceptive acts or practices are those that mislead or are likely to mislead consumers, provided the consumer’s interpretation is reasonable under the circumstances and the act or practice is material.

An act or practice is abusive if it materially interferes with a consumer’s ability to understand a product or service’s terms or conditions. Alternatively, abusive acts or practices may take unreasonable advantage of consumers’ 1) lack of understanding, 2) inability to protect their interests, or 3) reasonable reliance on banks to act in their interests.

CFPB guidance provides a nonexhaustive list of examples of conduct that may, depending on the facts and circumstances, constitute UDAAPs. They include:

  • Collecting or assessing a debt or additional amounts in connection with a debt (for example, interest, fees or charges) not expressly authorized by the agreement or permitted by law,
  • Failing to credit a consumer’s account with timely submitted payments and then imposing late fees,
  • Taking possession of property without the legal right to do so,
  • Revealing the consumer’s debt, without consent, to the consumer’s employer or coworkers,
  • Falsely representing the character, amount or legal status of the debt, and
  • Threatening any action that isn’t intended or authorized, including false threats of lawsuits, arrest, prosecution or imprisonment for nonpayment of debt.

Certain misrepresentations also may qualify as UDAAPs. For instance, a bank can’t falsely claim that a debt collection communication is from an attorney or government-affilitated source. Banks also can’t lie about whether information about a payment or nonpayment would be furnished to a credit reporting agency — or falsely promise to waive or forgive debts if consumers accept a settlement offer.

COVID-related updates

The COVID-19 pandemic has caused most businesses, including banks, to change the way they do things — so now’s a good time for a review. For example, have you permitted borrowers to skip loan payments under certain circumstances? Will that policy continue even after the pandemic ends? If so, you need to ensure that your policy is designed and communicated in a manner that isn’t unfair, deceptive or abusive to your customers.

During the pandemic, many banks have relied more heavily on electronic transactions in light of social distancing guidelines, a practice that may continue post-pandemic. If your bank permits customers to receive disclosures and other documents electronically, be sure that your policies and practices are fair, clearly communicated and don’t negatively impact customers without access to the necessary technology.

Even physical access and security practices may raise UDAAP concerns. For example, could reducing branch hours be perceived as unfair or abusive to specific customers? And what about masks or other face coverings? Ordinarily, banks prohibit them. But by necessity, exceptions have been made pursuant to mask mandates during the pandemic. In the absence of a mandate, what will your bank’s policy be going forward? Will you require customers to remove their masks, even if they’re at higher risk or simply feel more comfortable wearing one? Whatever your policy, it should be carefully designed and communicated to avoid UDAAP issues.

Training is key

Any time a bank changes its business practices or establishes new ones, it’s important to evaluate whether those changes raise UDAAP concerns. Even if your policies are fair on paper, they can still trigger UDAAP liability if they’re not put into practice properly. So be sure that bank staff or other representatives are adequately trained.

To ensure that your bank is still compliant after all of the recent changes, contact one of our financial institution experts today.


CFPB renews focus on UDAAP enforcement

In January 2020, the Consumer Financial Protection Bureau (CFPB) issued a policy statement providing some relief to banks for unfair, deceptive, or abusive acts or practices (UDAAP). Pursuant to the statement, the CFPB said it wouldn’t challenge conduct as abusive unless the harm to consumers outweighed the benefits. It also pledged to end “dual pleading” — that is, charging a bank with both abusiveness and unfairness or deception based on the same conduct — and to refrain from seeking monetary relief when a bank made a good-faith effort to comply with the law.

In March 2021, the CFPB rescinded the policy statement, finding it inconsistent with the CFPB’s mission. Going forward, it will exercise the “full scope” of its enforcement authority, although it will consider good faith and other relevant factors in using its prosecutorial discretion.



Worker Classification Is Still Important

In 2020 and 2021, many companies have experienced “workforce fluctuations.” If your business has engaged independent contractors to address staffing needs, be careful that these workers are properly classified for federal tax purposes.

Tax obligations

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, the company must withhold federal income and payroll taxes, and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if the amount is $600 or more).

No uniform definition

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors, though other factors are considered.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Internal Revenue Code Section 530. In general, this protection applies only if an employer filed all federal returns consistent with its treatment of a worker as a contractor and treated all similarly situated workers as contractors.

The employer must also have a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. (Note: Sec. 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.)

Asking for a determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Consult a CPA before filing Form SS-8 because filing the form may alert the IRS that your company has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Latest developments

In January 2021, the Trump Administration published a final rule revising the Fair Labor Standards Act’s employee classification provision. The rule change was considered favorable to employers.

The Biden Administration initially delayed the effective date and then issued a Notice of Proposed Rulemaking (NPRM) to withdraw the rule. After reviewing approximately 1,000 comments submitted in response to the NPRM, it withdrew the rule change before the deferred effective date. Contact your tax advisor for any help you may need with employee classification.

© 2021

Helpful Articles Tax

Boost Your Cash Flow with a Cost Segregation Study

For businesses planning to buy, build or substantially improve real property, a cost segregation study can help accelerate depreciation deductions, reduce taxes and boost cash flow. Lookback studies can also be done for prior years. This article explains how cost segregation studies work and how tax deductions are recovered.

A cost segregation study is one way to boost cash flow

If your business is planning to buy, build or substantially improve real property, a cost segregation study can help you accelerate depreciation deductions, reduce your taxes and boost your cash flow. Even if you’ve invested in real property in previous years, you may have an opportunity to do a lookback study and catch up on the deductions you missed.

How it works

Generally, commercial real property (other than land) is depreciable over 39 years, and residential real property is depreciable over 27.5 years. A cost segregation study identifies real estate components that are properly treated as personal property depreciable over, say, five or seven years, or land improvements depreciable over 15 years. By allocating a portion of your costs to these shorter-lived assets, you can accelerate depreciation deductions and substantially reduce your tax bill. And if these assets qualify for bonus depreciation, the tax savings can be even greater.

In some cases, assets that qualify as personal property are apparent. Examples include furniture, fixtures, equipment and machinery. But often, property eligible for accelerated depreciation is less obvious. For example, building components that ordinarily would be treated as real property depreciable over 39 years may be classified as five- or seven-year property if they’re essential to special business functions.

An example: A manufacturing company built a $20 million factory and placed it in service in June 2021. To accommodate its manufacturing processes, the design called for a reinforced foundation, specialized electrical and plumbing systems, and other structural components closely related to manufacturing functions.

A cost segregation study supports allocation of $6 million of the factory’s cost to these components, which are depreciable over seven years rather than 39 years. As a result, the company increases its depreciation deductions by approximately $774,000 in Year 1, $1.05 million in Year 2 and $895,000 in year three (not counting any available bonus depreciation).

Recovering deductions

Suppose you invested in a building several years ago but allocated the entire cost to real property. Depending on how much time has passed and the documentation you have available, it may be possible to conduct a lookback study and reallocate a portion of the cost to shorter-lived personal property. Applying to the IRS for a change in accounting method may allow you to claim a catch-up deduction for the extra depreciation deductions you missed over the years.

Is it right for you?

Are you wondering if a cost segregation study would pay off for your business? Our tax experts can help you weigh the potential tax savings against the cost of a study.

© 2021

Helpful Articles Tax

Are you liable for “nanny taxes”?

If you employ household workers — which may include nannies, babysitters, housekeepers, cooks, gardeners, health care workers and other employees — it’s important to understand your tax obligations, commonly referred to as “nanny taxes.” Here’s a quick review.

Which workers are covered?

Simply working in your home doesn’t necessarily make a worker a household employee. You’re not required to withhold or pay taxes for independent contractors — such as occasional babysitters who work for many different families.

But the rules for distinguishing between employees (who trigger nanny tax obligations) and independent contractors (who don’t) are complicated, So be sure to consult your tax advisor if you’re uncertain.

Which taxes must you pay?

Your nanny tax obligations vary depending on the type of tax:

Income tax. You’re not required to withhold federal income taxes (or, usually, state income taxes) from a household employee’s pay, unless the employee asks you to and you agree. In that case, you’ll need to have the employee complete Form W-4 and you’ll need to withhold income taxes on both cash and noncash wages (other than certain meals and lodging).

FICA taxes. You must withhold and pay FICA taxes (Social Security and Medicare) if your household employee’s cash wages reach a specified threshold ($2,300 for 2021). If you meet the threshold, you must pay the employer’s share of Social Security taxes (6.2%) and Medicare taxes (1.45%) on the employee’s cash wages (but not on meals, lodging or other noncash wages). In addition, you’re responsible for withholding the employee’s share of these taxes (also 6.2% and 1.45%, respectively), although you may opt to pay the employee’s share rather than withholding it.

Note: There’s no FICA tax liability for wages you pay to certain family members or to household employees under the age of 18 if working for you isn’t their principal occupation. A student who babysits on the side would be one example.

Unemployment taxes. You must pay federal unemployment tax (FUTA) if you pay total cash wages to household employees (other than certain family members) of $1,000 or more in any quarter in the current or preceding calendar year. The tax applies to the first $7,000 of an employee’s cash wages at a 6% rate, although credits reduce that rate to 0.6% in most cases.

How are taxes reported and paid?

Unlike businesses, you generally don’t need to file quarterly employment tax returns for household employees. Rather, you report household employment taxes on Schedule H of your personal income tax return. However, if you own a business as a sole proprietor, you may add the taxes for household employees to the deposits or payments you make for your business employees and include household employees on Forms 940 and 941.

Even if you report household employment taxes on Schedule H, you’re still responsible for paying the tax throughout the year, either through quarterly estimated tax payments or by increasing withholdings from your wages. Otherwise, you’ll have to pay the tax when you file your return and be subjected to penalties for underpayment of estimated tax.

You’ll also need to file Form W-2 if you’re required to withhold FICA taxes or agree to withhold income taxes for a household employee.

Know your obligations as an employer

In addition to the tax requirements discussed above, there may be other obligations that come with being an employer. These may include complying with minimum wage and overtime requirements, and documenting immigration status. Turn to your tax advisor for more information.

© 2021

Helpful Articles Tax

Business Meal Expense Deductions

The TCJA permanently eliminated deductions for most business-related entertainment expenses paid or incurred after 2017. But it didn’t specifically address the meals, beverages and snacks that often accompany entertainment activities. Then, the CAA temporarily increased the deduction for certain business-related meal expenses. Many business owners today aren’t sure what they can deduct or how much they can deduct.

When can you deduct business-related meals . . . and how much can you deduct?

The Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses paid or incurred after 2017. For example, you can no longer deduct any of the cost of taking clients out for a round of golf, to the theater or for a football game. But the TCJA didn’t specifically address the meals, beverages and snacks that often accompany entertainment activities.

Then the Consolidated Appropriations Act (CAA), which was signed into at law in December of 2020, temporarily increased the deduction for certain business-related meal expenses.

If you’re like many business owners today, you may not be sure what you can deduct or how much you can deduct. Here’s what you need to know.

A 100% deduction

The CAA allows taxpayers to deduct 100% of the cost of business-related food and beverage expenses incurred at restaurants in 2021 and 2022. In previous years, deductions for business meals at restaurants were limited to only 50% of the cost.

Under the new law, for 2021 and 2022, business meals provided by restaurants are 100% deductible, subject to the considerations identified in preexisting IRS regulations. IRS guidance in Notice 2021-25, released in April, defines “restaurants” for the purpose of this tax break to  include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption.

However, restaurants don’t include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores. Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.

Pre-CAA regulations

In October 2020, the IRS issued final regulations which clarified that taxpayers could still deduct 50% of business-related meal expenses under the TCJA. These regs were written before the CAA change that allows 100% deductions for business-related restaurant meals provided in 2021 and 2022, but they still provide some useful guidance on the following issues:

Definition of food and beverage costsFood or beverages means all food and beverage items, regardless of whether they are characterized as meals, snacks, or other types of food and beverages. Food or beverage costs mean the full cost of food or beverages, including any delivery fees, tips and sales tax.

Treatment of food and beverages provided with entertainmentFor purposes of the general disallowance rule for entertainment expenses, the term “entertainment” includes food or beverages only if the food or beverages are provided at or during an entertainment activity (such as a sporting event) and the costs of the food or beverages aren’t separately stated.

Specifically, to be deductible, amounts paid for food and beverages provided at or during an entertainment activity must be:

  • Purchased separately from the entertainment, or
  • Stated separately on a bill, invoice or receipt that reflects the venue’s usual selling price for such items if they were purchased separately from the entertainment or the approximate reasonable value of the items.

Otherwise, the entire cost is treated as a nondeductible entertainment expense; the taxpayer can’t attempt to allocate costs between the entertainment and the food or beverages.

Treatment of business mealsUnder the final regs, a deduction is allowed for business-related food or beverages only if:

  • The expense isn’t lavish or extravagant under the circumstances,
  • The taxpayer or an employee of the taxpayer is present at the furnishing of the food or beverages, and
  • The food or beverages are provided to the taxpayer or a business associate.

A business associate means a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business such as a customer, client, supplier, employee, agent, partner or professional advisor — whether established or prospective.

Treatment of meals while traveling on businessUnder the final regs, the long-standing rules for substantiating meal expenses still applies and they can be deductible.

The regs also reiterate the long-standing rule that no deductions are allowed for meal expenses incurred for spouses, dependents or other individuals accompanying the taxpayer on business travel (or accompanying an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or other individual. For example, meal expenses for the taxpayer’s spouse would be deductible if the spouse works in the taxpayer’s unincorporated business and accompanies the taxpayer for business reasons.

Under the new law, for 2021 and 2022, meals provided by restaurants while traveling on business are 100% deductible, subject to the preceding considerations.

Need help?

There are additional circumstances under which your business can deduct 100% of the cost of meals, other food and beverages. Contact your tax advisor if you have questions or want more information.

© 2021