|What if you decide to, or are asked to, guarantee a loan to your corporation? Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax consequences. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be blindsided.
Business vs. nonbusiness
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.
In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this tends to show that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.
Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if:
- You have a legal duty to make the guaranty payment, although there’s no requirement that a legal action be brought against you;
- The guaranty agreement was entered into before the debt becomes worthless; and
- You received reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only a few of the possible tax consequences of guaranteeing a loan to your closely held corporation. Contact us to learn all the implications in your situation.
As a business owner, increasing sales can be a great mood lifter. But what happens if you get a large order and have no way to pay for the supplies? Sales don’t always equal immediate cash in hand, which can put a strain on your business accounts and your ability to deliver on time.
Below, we’ll share what the difference between revenue (sales) and cash flow is, and how it can affect your business.
More revenue, more problems
While the thought of increased revenue causing more problems for a business owner can seem counterintuitive, there are challenges that increased sales can bring forth. But first, let’s talk about what revenue is.
Revenue is the total income generated by business’s sales before expenses are deducted. This is also known as cash inflow. Most often, this is income from your primary operations. Your business may also have non-operating income, which is generated from interest bearing accounts and investments.
When you have sales come in on credit, or terms, it can be weeks or months before you receive the full payment for the order. Additionally, credit card processors can take up to three days to deposit monies from sales, depending on your merchant services provider. Meanwhile, your business still must cover any expenses like building materials, new inventory, or payroll.
That’s where managing your cash flow comes in.
The ins and outs of cash flow
Cash flow is simply how money moves in and out of a business or bank account. Just like you have to budget your paychecks, bills, and expenses in your personal accounts, you have to manage the cash flow for your business.
As stated above, cash inflow is your revenue and your non-operating income. Cash outflow, then, is comprised of anything your business has to pay for (i.e., rent, inventory, supplies, payroll, refunds, and merchant chargebacks).
Creating a forecast for expected expenses and payments, plus when they’re expected to take place, can help you see where any shortages could be expected throughout the month. Keep in mind, the forecast can be affected by delayed sales payments and unexpected expenses.
To create a buffer and give yourself some breathing room in your cash flow, consider:
- Raising capital: This means selling a portion of your company to investors for an influx in cash.
- Maintaining a business line of credit: This loan allows you to draw funds when needed for expenses and pay them off on a payment plan, or when the revenue you were expecting comes in. Any money you use will incur interest charges as outlined in your loan agreement.
- Delaying payments: By negotiating the terms of payments for invoices in supplies, you can limit the amount of cash leaving your account at once. You can make payments in installments throughout the terms of the invoice or pay the balance of the invoice on the due date.
Managing your cash flow is an essential part of business ownership and can keep your company moving forward while minimizing growing pains. Our team can help you review your cash flow system and identify areas of strength or for improvement; or we can assist you in setting up your cash flow system from scratch. Give us a call to get started today.
The IRS has released additional guidance in Notice 2021-20 on the Employee Retention Tax Credit (ERC) with clarifications on the retroactive changes for expanded eligibility applicable to 2020. Employers who received a Paycheck Protection Program (PPP) loan have been waiting on guidance on claiming the credit in combination with forgiveness of their loan. The provisions outlined here apply to retroactive claims for 2020 as well as providing a plan for those yet to seek forgiveness.
Summary of ERC
As a reminder, eligibility to claim the 2020 ERC requires a business to have experienced a significant decline in revenues during 2020. Specifically, gross receipts for a calendar quarter during 2020 must have declined by 50% or more when compared to the same calendar quarter in 2019. Additionally, a company is eligible during any period where operations were suspended due to a government order.
- Employers with more than 100 FTEs can only claim the ERC on employees that are being paid qualified wages and not providing services.
- For 2020, the credit is available on 50% of qualified wages up to $10,000. The maximum credit amount per employee is $5,000.
- Health care costs are included when determining qualified wages.
- Wages paid as a result of the Families First Coronavirus Response Act (FFCRA) do not qualify.
Clarification on how to apply ERC with a PPP loan
The notice clarifies when and how PPP borrowers can claim the ERC on 2020 wages.
- Wages elected to be covered by the PPP forgiveness application but not granted.
- Wages in excess of the amount of their PPP loan – Example: An employer receives a $200,000 loan for wages but pays $230,000 in wages. Apply the $30,000 wages to ERC.
- The difference in wages and nonpayroll costs that are in excess of their PPP loan – Example: If a PPP loan equals $200,000 and the employer has $200,000 in forgivable wages and $70,000 in forgivable nonpayroll costs, reserve $70,000 in wages for ERC.
- Those that have already applied for forgiveness cannot amend their application to claim nonpayroll costs.
- For those yet to apply for forgiveness and eligible for the ERC, you will want to accumulate and submit nonpayroll costs to maximize eligible wages for the ERC.
The ERC requires specific documentation and support of facts and circumstances in order to qualify and receive the credit. For assistance with claiming the ERC, contact us.
The Internal Revenue Service recently unveiled a draft version of Form W-4, Employee’s Withholding Allowance Certificate. The revised form is in response to changes made by the Tax Cuts and Jobs Act and aims to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors. It is open for review and feedback until July 1, 2019.
We want to remind our clients that this is only a draft and the new form will not be used until 2020. However, we are closely following this and will continue to provide updates. Below is a high-level summary of what we know so far.
What’s being proposed? The new form will account for:
- Multiple sources of income within your
- Claiming dependents, specifically factoring in
the $2,000 child tax credit for each kid under 17 or the $500 credit for other
- Providing additional details of income that
didn’t have taxes withheld upfront such as interest, dividends and retirement
- The number of deductions you anticipate to
claim, thus reducing your withholding and allowing you to take more money home.
The final draft is expected to be released mid-to-late July.
We will continue to monitor changes to Form W-4 and keep you abreast. In the
meantime, we encourage taxpayers to make sure they have the right amount of tax
taken out of their paychecks and thus avoid a larger tax bill next year.
Taxpayers with major life changes, including marriage or a new child, should
especially check their withholding amounts.
Determining how much to withhold depends on your unique
financial situation. The professionals at Hamilton Tharp can help, call us
today for a paycheck checkup.
The Qualified Opportunity Zone Program has kept many
investors paralyzed in uncertainty due to regulatory confusion. In the update
below, we provide an overview of the highly sought-after guidance, which was recently
released by the Internal Revenue Service (IRS) and the US Treasury Department…
We have put together the following high-level overview of the 169-page guidance
and will explain how the new clarifications will impact investors.
First let’s recap: Opportunity
- The IRS defines eligible opportunity zone
property as QOZF stock, QOZF partnership interest, or QOZF business property.
Qualified opportunity property must exist and operate in a QOZ, be new to the
entity, and abide by specific requirements.
- The IRS states that all types of capital gains
are eligible for the Opportunity Zones tax incentives through the use of
Opportunity Funds, which invests at least ninety percent of its assets in
Qualified Opportunity Zone (QOZ) Property.
- Qualified Opportunity Zone Funds (QOZF) are
subject to specific regulations as set forth by the IRS, namely the types of
gains that may be deferred, the timeline by which the amounts by invested, and
how investors may elect to defer specified gains.
The original Opportunity Zone legislation left eager
investors with more questions then answers. Below are some of the challenges that
the guidance addresses.
- The vague term, “substantially all,” used in
various places of section 1400Z-2
- Rules surrounding transactions that trigger the
inclusion of gain that a taxpayer elected to defer under section 1400Z-2
- Unclear definitions of timing and amount of the
deferred gain that is included in the package
- The approved treatment of leased property used
by a QOZ business and use of QOZ business property in the QOZ
- Sourcing of gross income to the QOZ business
- Another vague term, “reasonable period,” for a
QOF to reinvest proceeds from the sale of qualifying assets without paying a
Below are a few of the key clarifications giving investors
the confidence to move forward:
- For use of the property, at least 70 percent of
the property must be used in a QOZ.
- For the holding period of the property, tangible
property must be QOZ business property for at least 90 percent of the QOF’s or
QOZ business’s holding period.
- The partnership or corporation must be a QOZ
business for at least 90 percent of the QOF’s holding period.
- Eligible business criteria expand from revenue
generation to service transactions and employee location.
The IRS also provided several situations where deferred
gains may become taxable. If an investor transfers their interest in a QOF,
e.g., if the transfer is done by gift, the deferred gain may become taxable.
However, inheritance by a surviving spouse is not a taxable transfer, nor is a
transfer, upon death, of an ownership interest in a QOF to an estate or a
revocable trust that becomes irrevocable upon death.
We encourage you to read
the update in its entirety as it includes additional guidance on the
term “original use,” and addresses all the issues mentioned above. If you are
still hesitant about moving forward with this investment opportunity, the
professionals in our office can help provide clarity, address your concerns and
answer any specific questions you may have.
Payroll fraud can put a huge dent in your bottom line – costing companies billions of dollars annually. Unfortunately, companies are often unaware that a corrupt employee is in their midst. According to data from the Association of Certified Fraud Examiner’s (ACFE) 2016 global fraud study, Report to the Nations on Occupational Fraud and Abuse, payroll fraud is an especially high risk for small organizations. In the United States, 131 cases of payroll fraud, representing 12.6% of all asset misappropriation schemes, were reported in 2016. While most fraud is uncovered within one fiscal year, payroll fraud tends to fly under the radar for an average of two years before detection and on average costs companies $90,000 per occurrence.
As business advisors, we stress the importance of internal controls to prevent fraud and theft and to ensure the accuracy of accounting data. However, many situations still exist in which organizations fail to establish adequate control systems to reduce transaction costs for many reasons. Whether it is a lack of information or a lack of personnel, the fact of the matter is that payroll fraud is usually perpetrated by a single or multiple insiders. The following strategies can help prevent and detect payroll fraud in your organization.
This is one of the most effective strategies, and if you do not already have one, we strongly recommend implementing processes that regularly check for schemes. Consider specialized software that combats ghost employee tactics by looking for red flags such as duplicate Social Security numbers, addresses or direct-deposit accounts. Another step is to be transparent with your audit plan. Making employees aware that you conduct such audits may be enough to deter them.
Compare payroll numbers against output. A spike in overtime hours during a slow month, for example, should prompt further investigation. We can help you analyze your data and identify any red flags.
- Adequately separate duties.
This will prevent incompatible functions from being performed by the same individual, especially in the accounting department. Ask your payroll company if they allow multiple people to be in the authorization chain of command. Most payroll companies allow for multiple recipients of payroll reports; be sure you send final reports to an outside accountant and the owner. If one employee handles payroll, we recommend hiring an outside person to input the information into the accounting system, acting as the internal control.
- Routinely check documentation.
Check documents such as timecards and any other payroll documentation. You should be on the lookout for employees who are claiming excess hours and overtime as well as any other items that seem suspect. If employees know you are regularly checking time cards, they will be less likely to test the waters.
- Controls for new and terminated employees.
These are often overlooked. Make sure you collect the right documentation when adding new employees. Equally important is following protocol for terminated employees. While failure to remove a terminated employee from payroll is not fraud, controls will help you avoid the embarrassment of paying an employee after termination.
If you have
concerns about payroll fraud in your organization, please call one of our
Have you ever stopped to think about whether outsourcing financial management functions of your business would benefit your organization?
You will probably be surprised how many activities they encompass and how vital they are to the success of your company. Your business thrives when these activities are in order. When faced with the options, a business owner quickly realizes that either they will need to manage their organization’s finances or hire someone else to do it.
planning, financial risk assessment, record-keeping, and financial reporting
are time-consuming cogs in the wheel of a functional business and are best
managed by someone who has the right qualifications. But the fact of the matter
is, CFOs cost money, and most small businesses do not have forty hours of work
for a qualified individual. Rightly dividing resources within an organization
is a critical matter, which is why outsourcing CFO services makes a lot of
What is an outsourced CFO?
An Outsourced CFO is a valuable partner that can:
- provide budget guidance,
- prepare and analyze financial statements,
- forecast cash flow,
- provide strategic financial planning and advisement,
- evaluate current bookkeeping systems, and
- act as a negotiator.
Beyond these critical finance utilities, an Outsourced CFO can deliver expert “back office” support to organizations so they can focus on growing their business. The finance function can be broken up into three main activities, each with a series of sub-functions.
- Transaction processing – accounts receivable, customer billing, credit and collections,
accounts payable, general accounting, payroll, tax accounting, cost accounting,
fixed asset accounting, benefits administration, and internal and external
- Control and risk management – budgeting, cash flow
management, insurance risk management, forecasting, tax planning, performance
reporting, treasury management, and internal and external audit
- Decision support – business performance analyses (ratio analysis, cost analysis,
pricing analysis), business planning support, and finance function
Is it time to consider outsourcing?
Determining whether to outsource requires a focused and deliberate
approach. Below are six advantages that
will help you decide whether outsourcing financial management would benefit
Operating Costs – Any change that will reduce costs without otherwise endangering
operations will generally be positive. Many businesses are just too small to
justify hiring a full-time, in-house CFO.
Efficiency – Inefficient operations harm your organization. A real advantage of outsourcing is that behind
your outsourced financial planning expert stands an entire team of accountants,
partners, consultants, and bookkeepers. When financial activities are
outsourced and analyzed by an independent party specializing in that activity,
efficiencies will result.
Flexibility – When a business owner wears too many hats, one is bound to fall
off. Outsourcing CFO functions will
allow your organization to become more flexible in its ability to deal with its
environment and core activities. Changes
that make an organization more agile will make it better able to excel.
Risk – Outsourcing a function may reduce the risk an organization
faces. Outsourcing payroll, for example,
is likely to reduce risk, as experts will now do the job.
Ideas – Outsourcing CFO duties will bring new ideas to the table. Small
businesses need to recognize that outsourcing an expert will give them a clear
advantage with complex financial activities.
Growth Potential – Many organizations are limited in their ability to take on more
activities because their current staff is spread too thin. Outsourcing financial activities can allow
business owners and other staff to engage in better-targeted tasks.
Before determining whether to outsource financial management functions, there are many factors to consider including the size of your business, industry, number of employees, volume of transactions, and skill sets.
As a business owner, accepting the “virtual” reality of outsourcing means adjusting your expectations. In this environment, you will not be your CFOs only client, but you will have access to exceptional quality. If you are involved in the authorization process and can extend trust beyond your four walls, then you will truly benefit from this arrangement. However, if you are hung up on signing checks and are not able to hand over responsibilities, you will hinder the process and negate the experience.
Outsourcing services from your organization may enable you to operate more effectively. With our requisite knowledge of different types of organizational structures, we can help you create innovative changes in your organization. If you would like to learn more, please call our office to speak with one of our professionals and learn how you can enhance the success of your business.
Learn more about our outsourced CFO services by clicking here.