ACCOUNTING FOR CHANGE- NAVIGATING THE CORONAVIRUS HEADWINDS - - PDF document

The Aerospace & Defense Forum National Online Forum April 30, 2020 1

ACCOUNTING FOR CHANGE-

NAVIGATING THE CORONAVIRUS HEADWINDS PRESENTED BY MOSS ADAMS

Please ensure your mike is muted and your video is off. Questions will be welcomed via the Chat function. The event will start at 8:00AM PST.

Tax Implications

Kurt Lippmann & Jim Chevalier

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The Aerospace & Defense Forum National Online Forum April 30, 2020 2

2020 Deferred Tax Deadlines

Federal deferral from April 15, 2020 to July 15, 2020 includes:

• Income tax returns and income payments due (corporate and individual)
• 1st and 2nd quarter 2020 income tax payments (corporate and individual)
• Interest and penalties will not accrue until July 15, 2020

Deferral of Tax Filing & Payments

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Extension request for deferral to July 15th is not required Extensions for deferral to October 15th deadline are due on July 15th

Extensions

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Most, but not all, states have conformed to federal due date deferral, particularly for individuals Several states have not extended 1st quarter payment deadline, which remains at April 15th

State Deadlines?

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CARES Act and Impact for Business Taxpayers

Includes tax provisions impacting business, individual and trust taxpayers Includes non-tax provisions, including loans for struggling businesses and aid for state and local governments and certain impacted industries

CARES Act

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The Aerospace & Defense Forum National Online Forum April 30, 2020 5 NOLs allowed to be carried back up to 5 years

• For NOLs arising in years beginning after December 31, 2017, and before January 1,

2021

• Special rules for Section 965(a) income inclusion years

NOL 80% of income limitation rule deferred

• Rule suspended until years beginning after December 31, 2020
• 100% utilization of NOLs to offset CY income is now allowed

NOL Modifications for Corporations

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Excess business loss (EBL) rules under Section 461(l), enacted in 2018, are now suspended for tax years 2018, 2019, and 2020

• The EBL limitation rule required that losses attributable to a non-corporate taxpayer’s

trades or businesses cannot exceed $250,000, or $500,000 in the case of a joint tax return, with any amount carried forward to future years as a net operating loss carryforward.

EBL rules will be applicable for tax years 2021-2026

Excess Business Loss Limitation Deferred

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The Aerospace & Defense Forum National Online Forum April 30, 2020 6 QIP is any improvement made by a taxpayer to interior nonresidential real property after building is placed in service, with the exception of:

• Enlargement to building
• Any elevator or escalator
• Improvement to internal structural framework of the building

Tax reform technical correction restores Congressional intent Now, QIP placed in service starting in 2018 eligible for 15-year life and bonus depreciation (ADS life is 20 years, no bonus)

Qualified Improvement Property (QIP)

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Limitation on interest deduction increased to 50% of adjusted taxable income (up from 30%)

• Tax years beginning in 2019 and 2020 (for partnerships, 2020 only)

Taxpayers may elect to use 30% instead Taxpayer can elect to use 2019 adjusted taxable income (ATI) for 2020 limitation computation

• Potentially favorable if ATI in 2019 exceeds ATI in 2020

Section 163(j) Business Interest Limitation

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The Aerospace & Defense Forum National Online Forum April 30, 2020 7 Partnerships must continue to use 30% for tax years beginning in 2019, but can use 50% for 2020 Excess business interest expense in 2019:

• Partners able to deduct 50% in 2020
• Remaining 50% is subject to Section 163(j)

deductibility rules

Partnership Impacts

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Corporate AMT repealed by TCJA, with remaining credit recovered over 4 years Under CARES Act, able to recover any remaining credit in 2019 tax year Alternatively, election available to take credit in 2018 and file for a tentative refund

Faster Recovery of Corporate AMT Credit

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The Aerospace & Defense Forum National Online Forum April 30, 2020 8 Deposits of employer portion of Social Security taxes (6.2%) originally due between 3/27/20 and 1/1/21 may be deferred For self-employed individual, employer portion of Social Security taxes (6.2%) may be deferred, but employee portion still due with 2020 tax return Amounts deferred repaid over two years:

• 50% due on 12/31/21
• 50% due on 12/31/22

Payment of Payroll Taxes Extended

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For a qualifying employer, credit equal to 50% of wages paid to employee, in each qualifying quarter, up to a total of $10,000 of wages per employee for all quarters Maximum credit per employee is $5,000 Credit offsets FICA taxes due – any excess is refundable

Employee Retention Credit

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Qualifying businesses must have experienced either:

• 1. Partial or full suspension of operations due to governmental orders that

limited commerce, travel, or group meetings due to COVID-19

• 2. A significant decline in gross receipts (GR), which begins with the

quarter in which GR are less than 50% of the GR of the same prior calendar year quarter and ends with the quarter where GR are at least 80% of the GR for the same prior calendar quarter

Employee Retention Credit

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Eligible wages include regular wages paid plus health plan expenses allocable to the qualified wages under an employer-sponsored plan

• Businesses with 100 or less employees? Credit is allowed on all eligible wages paid

to employees regardless of whether they are performing services

• Businesses with greater than 100 employees? Credit is based solely on eligible

wages paid to employees who are not providing services due to COVID-19

Employee Retention Credit

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Families First Coronavirus Response Act (H.R. 6201)

Expands FMLA and paid sick leave requirements

• We recommend you consult with an attorney specializing in

employment law to assess the implications of these changes

• n your business

The Act offers payroll tax credits to offset costs for impacted employers

Families First Coronavirus Response Act

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The Aerospace & Defense Forum National Online Forum April 30, 2020 11 Credit is available to employers with 500 or less full-time and part-time employees who are required to comply with the new rules

• Employers should consult with a employment law attorney to confirm eligibility

Applies to wages paid for employees who need to take a paid leave as a result of COVID-19 beginning April 1, 2o2o, through December 31, 2020 Credit may be used against employers social security taxes equal to 100%

• f the qualified wages paid; excess credit may be refunded

Paid Sick Leave Credit

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Employees who must self-isolate, obtain a diagnosis or comply with a self- isolation recommendation with respect to COVID-19

• Qualified sick wages are paid at 100% rate of normal pay and are capped at $511 per

day for up to an aggregate total of 10 days or $5,110 in wages

Employees who have to care for a family member or child whose school or place of care has been closed

• Qualified sick wages are paid at 2/3 rate of normal pay and are capped at $200 per

day for up to an aggregate total of 10 days or $2,000 in wages

Paid Sick Leave Credit

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The Aerospace & Defense Forum National Online Forum April 30, 2020 12 In addition to the paid sick leave credit, employers may take an additional credit for employees who have to care for a family member or child whose school or place of care has been closed

• Qualified wages are paid at 2/3 rate of normal pay and are capped at $200 per day

and up to an aggregate total of an additional 10 weeks or $10,000 in wages

Paid Family Leave Credit

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Paycheck Protection Program Outline

Larry Schultz

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Forgivable Loans

• Process
• Tool
• Unforgiveable portion

Paycheck Protection Program

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Strategies to Capitalize

• n Opportunities

Abe Nour

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The Aerospace & Defense Forum National Online Forum April 30, 2020 14 The emergence and rapid global spread of COVID-19 has triggered swift, widespread disruption to the economy and financial markets. We identified the following key themes in the current lending environment:

• Continued commitment to current clients
• Sufficient on-hand liquidity to originate new loans
• Pipeline of acquisition financing opportunities drying up as M&A processes put
• n hold
• Tightened lending standards and increased cost of debt across the board

M&A and Debt Market

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The adaptations most organizations have made, such as virtual private networks (VPNs), aren’t well-suited to long-term remote access by a large number of employees. In terms of risk management, this means all factors of risk have risen:

• The likelihood of an attack increases because of the increased exposure of systems

and devices.

• The impact of an attack increases due to the difficulty in maintaining operations and

recovering under the combination of conditions.

• The value of the systems potentially impacted increases as they become central to all
• perations.

Cybersecurity Risk

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The Aerospace & Defense Forum National Online Forum April 30, 2020 15 Two common types of social engineering fraud that will likely increase during the COVID-19 pandemic:

• CEO Fraud: While working remotely, your employees anticipate digital

communications and instructions from decision makers. A scenario like the COVID- 19 pandemic makes it less likely that people will recognize malicious attempts at manipulation because they’re already anticipating deviations from normal procedures.

• System User Fraud: When you increase the use of your digital resources to interact

with customers, other businesses, and third-party vendors, you create greater

• pportunity for attackers to impersonate system users.

Cybersecurity Risk (cont.)

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Transactions in the COVID Environment

Jet Wales

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The Aerospace & Defense Forum National Online Forum April 30, 2020 16

Commercial Aerospace Valuations Hit Hard

31 SP500 MA Aerospace Index Boeing Spirit Aero SP500 MA Airline Index

Since January 1, 2020 S&P 500 <14%> MA Aerospace Index <42%> MA Airline Index <60%> Boeing <59%> Spirit Aero <74%> YTD Stock Value as of April 23, 2020

Valuing the Post-Covid Future of Commercial Aerospace

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Opportunities Evolve … They Don’t Disappear

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Look Forward

The current situation must be managed, but look forward for the strategic opportunities

Be Ready to Expand

The landscape has changed, and competitors or collaborative companies may be available

Get Capital Ready

Multiple capital sources are still available to provide both debt and equity for expansion

Buyers Become Sellers

Companies that aggressively acquired using debt … may become sellers

Sellers Become Buyers

Companies considering a sale transaction … may become buyers at attractive valuations.

Earnings-based valuation

• Cost of building from scratch versus purchase
• Capabilities, relationships, location, personnel
• Filling “Gaps” in the Buyer’s product line
• Potential consequences if a competitor gets target

Strategic importance to buyer Tax benefits Synergies Growth Predictable Earnings & Required Return

Predictable Growth

• Buyer’s perception of industry growth
• Company’s demonstrated ability to grow
• New growth initiatives or capabilities

Tax benefits of incremental depreciation/amortization created in an acquisition of assets or 338(h)(10) election or other tax credits Net cost synergies, capital savings, and revenue enhancements

• Cost synergies more easily quantified
• Revenue synergies more strategic and speculative

Determination of Transferable Earnings

• Required return on capital invested for buyer
• Adjustments to derive transferable cash flow

Strategic Value

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Anatomy of Value … Looking Beyond the Earnings

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• Pre-forced restructuring priorities
• Financial and operational realignment
• Distressed restructure and/or reorganization
• Tackle difficult decisions and drive rapid change that preserves and creates value
• While tools vary by industry, companies need to remain nimble and communicate

proactively with stakeholders – lenders, vendors, customers and employees

• Positioning for a capital raise or a distressed M&A transaction
• Aid in the preparation of the business through cleanup processes and procedures

related to the operations of the Company

• Out of court restructure to relieve the financial distress of operational cash position
• Preparation and assistance of in-court processes to de-lever and revitalize a debtor with

a variety of legal protections and remedies to reorganize

Managing Under Stress

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Financial & Operational Restructuring Capital Crisis Management

Cost Containment and Cash Flow

The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory offered through Moss Adams Wealth Advisors LLC. Investment banking

• ffered through Moss Adams Capital LLC.

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Questions?

CLOSING

Thank You Moss Adams

• Kurt Lippmann
• Jim Chevalier
• Larry Schultz
• Abe Nour
• Jet Wales

Reminders and Upcoming Events

• May 6th: National Online Forum “Emerging Labor &

Employment Issues Aerospace & Defense Companies Need to Consider”

• May 20: Dealing with Distress and Crises. –

turnarounds, dealing with crisis

• June 6: CMTC (tent)
• Check your email and A&D Forum website for

announcements and future National Online Forums

• A recording of this session will be posted on the A&D

Forum website under Presentations and National Online Forum

• *Note that National Online Forum meeting notices are sent

ONLY to those on an A&D Forum mailing list.

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