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HARDESTY & HANOVER, LLC Notes to Statement of Direct Labor, Fringe Benefits and General Overhead For the Year Ended December 31, 2019 NOTE 3: DESCRIPTION OF ACCOUNTING POLICIES (Continued) Goodwill Costs of investments in purchased companies in excess of the underlying fair value of net assets at dates of acquisition are recorded as goodwill and assessed for impairment when indicated. If considered impaired, goodwill will be written down to fair value and a corresponding impairment loss recognized. Retirement Plan The Company maintains a 401(k) plan, which provides that eligible employees may defer payment of taxes on a portion of their salary by making contributions in the plan through payroll deductions. The Company also provides an employer match. At the discretion of the Company, Hardesty & Hanover Holding LLC may contribute a supplemental amount to the profit sharing portion of the plan. Insurance Reserves The Company maintains insurance for certain insurable business risks. Insurance coverage contains various retention and deductible amounts. No accruals have been made in 2019 since the Company maintains insurance policies with deductible amounts. Income Tax Status – S Corporation The LLCs, with the consent of its members, has elected under the Internal Revenue Code and corresponding New York statue to be an S corporation. In lieu of corporation income taxes, the members of an S corporation are generally taxed on their proportionate share of the LLC’s taxable income. Therefore, no provision of liability for federal and New York state income taxes has been included in the financial statements and the deferred income tax liability has been calculated for this. The LLC is subject to New York City unincorporated business tax. Hardesty & Hanover Construction Services, LLC and Hardesty & Hanover, LLC are disregarded entities and will be reported under the consolidated tax filing of Hardesty & Hanover Holding, LLC. All intercompany transactions will be eliminated in consolidation. The LLC’s tax returns since 2016 generally remain open to possible examination. Deferred Income Taxes Deferred taxes are provided for temporary differences in the basis of assets and liabilities for financial and tax purposes, and arise principally from methods used for depreciation, accrued revenue and accrued expenses. See FAR Note N for the deferred tax adjustment. For federal income tax purposes, depreciation is computed using the modified accelerated cost recovery system (MACRS), section 179 and bonus depreciation. Expenditures for major renewals and betterments that extend the useful lives or property and equipment are capitalized. Joint Ventures The company is involved in a number of joint ventures that provide architectural, engineering and management services. -9-