Employers can now defer payroll tax withholding on employee compensation for the last four months of 2020 and then withhold the deferred amounts in the first four months of 2021, confirms a recent update from the IRS. President Trump’s memorandum on Aug. 8 gave employers the ability to defer payroll taxes for employees affected by the COVID-19 pandemic in an effort to provide financial relief.
The guidance directs that employers can defer the withholding, deposit, and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3102(a) and Railroad Retirement Act Tier 1 under Sec. 3201 from employee wages from Sept. 1 to Dec. 31, 2020.
Employers must then withhold and pay the deferred taxes from wages and compensation during the period from Jan. 1, 2021, and April 30, 2021, with interest, penalties, and additions to tax to begin accruing starting May 1, 2021. Included in the notice is a line that indicates, if necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee,” such as if an employee leaves the company before the end of April 2021, but does not provide details on what that entails.
Employees with pretax wages or compensation during any biweekly pay period totally less than $4,000 qualify for the deferral. Amounts normally excluded from wages or compensation under Secs. 3121(a) or 3231(e) are not included in calculating the applicable wages. The determination of applicable wages should be made on a period-by-period basis.
Companies may choose whether or not to enact the payroll tax deferral. We are closely monitoring updates related this and other presidential executive orders and will communicate if more information becomes available. For questions or assistance with this payroll tax deferral, contact us.
On Aug. 24, the Small Business Administration (SBA) and Treasury issued the latest interim final rule update to the Paycheck Protection Program (PPP) that seeks to clarify guidance related to owner-employee compensation and non-payroll costs. This guidance has been long-awaited and clears up several questions borrowers have had about forgiveness. Here are the main points:
1. Owner-employees of C or S corporations are exempt from the PPP owner-employee compensation rule for loan forgiveness if they have a less than 5% stake in the business. The intent is to provide forgiveness for compensation of owner-employees who do not have a considerable or meaningful ability to influence decisions over loan allocations. This clarifies earlier guidance that capped the owner-employee compensation regardless of what stake they have in the business.
2. Loan forgiveness for non-payroll costs may not include amounts attributable to the business operation of a tenant or subtenant of the PPP borrower. The SBA provides a few examples of what this means:
- Borrowers renting an office building and subletting a portion to another business can only claim the difference between their rental cost and the sublet income.
- Borrowers with a mortgage on the building in which it operates who lease a portion of the building to another business can only claim a portion of the mortgage interest limited to the percent share of fair market value of the space not leased.
- Borrowers sharing rented space with another business must prorate rent and utility payments like they would for 2019 tax filings or, if new, expected 2020 tax filings.
- Borrowers working from home may only claim the share of covered expenses deductible on the 2019 tax filings or, if new, expected 2020 tax filings.
3. To achieve loan forgiveness on rent or lease payments to a related third–party, borrowers must ensure that (1) the amount of loan forgiveness requested does not exceed the amount of mortgage interest owed on the property attributable to the business’s rented space during the covered period, and (2) the lease and mortgage meet the Feb. 15, 2020, requirement for establishment. Earlier guidance had not addressed related third-party leases.
It’s important to note that mortgage interest payments to a related party are not eligible for forgiveness as PPP loans are not intended to cover payments to a business’s owner because of how the business is structured – they are intended to help businesses cover non-payroll costs owed to third parties.
For questions on any of these rules or assistance with your PPP loan forgiveness application, contact us today.
CFOs are playing more pivotal roles in modern corporations than ever before, and the impact of the COVID-19 pandemic is shedding light on how CFOs can impact short and long-term financial stability. While growth is frequently considered the ultimate goal for a business, economic downturns like the one created by the pandemic show us that CFOs with eyes on long-term financial stability, and not just on growth, will be able to better help their organizations weather the storms of an economic crisis.
A CFO’s strategy for long-term success should incorporate thorough cost management protocols, a comprehensive and holistic approach to increasing value, and stewardship and championship of the bigger picture. Here’s what that means.
How CFOs impact direct costs
As the financial head of the organization, the CFO naturally serves as the rightful guardian of a business’s expenses. It’s through these direct costs that CFOs can implement stronger internal controls and recover lost revenue for long-term benefit. A CFO can improve long-term viability by analyzing:
Cost of Goods Sold (COGS) – COGS are a key area for reduction as they represent the largest operating expense for the business. Depending on the industry, these costs can be complex, and the biggest expense can come in the form of purchased components and materials. CFOs can optimize this area with help from sourcing programs that consolidate costs by choosing more goal-aligned suppliers.
Indirect Taxes – Indirect taxes are an often-overlooked area of opportunity for many businesses. These taxes can be found in areas like R&D, procurement, labor, utilities, and manufacturing and can represent 25% of personnel expenses. Making indirect taxes a regular component of your tax strategy allows you to reduce costs in this area by 10-20% with quick realization rates. Bonus: “Look-back” provisions can help you save even more.
Real Estate – With real estate, take a holistic inventory of your business and consolidate where possible. The COVID-19 pandemic showed us how much can be done at home or in fewer locations. Consider whether you need all your locations, your facility management costs, and negotiating your contracts. Also, plan for a future workforce that may expect a more flexible work-from-home situation. Just because you‘re growing doesn’t mean you will actually need all that extra space.
Product Optimization – If you haven’t invested and implemented benchmarking and KPIs for your products, you need to now. Data and analytics are key to understanding how you can improve margins and grow profit. With product rationalization, you can drill down into what is really profitable and make decisions on what to cut and what to expand. Look at customer buying habits and your company overhead and determine what’s really worth keeping on the shelves.
Labor – The key to optimizing labor costs lies within efficiency. Do you have the right people in the right seats? Can current employees be retrained to fill open needs? Consider where you can use automation and outsourcing to save on salaries/benefits and overhead.
Working Capital – Assessing your working capital for cost efficiency involves taking a look at:
- Cash flow – Know that cash in the bank doesn’t equal good cash flow. Understanding cash flow is key to making short and long-term projections through times of prosperity and crisis.
- Supplier/vendor relationships – Reconsider and negotiate vendor/supplier terms where necessary while preserving valuable relationships.
- Accounts receivable – Your AR should have set policies for payment plans/terms, follow up procedures, and multiple available payment methods.
- Accounts payable – Assess your AP for opportunities to free up cash flow such as automating electronic payments and diligently checking for discrepancies.
How CFOs impact value
CFOs not only help to optimize costs, but they are also integral in increasing company value because of their instinct and insight into the finances, the business, and how everything relates. Value is the ultimate determinate for long-term success in a business as it is the final measurement taken into consideration at the time of succession or buy-out. And, as any good business valuation professional will tell you, the business is not worth what you think it’s worth. The consensus among international accounting organizations is that value is defined by your customers/stakeholders and created and sustained through the responsible management of your organization’s tangible and intangible assets, resources, and relationships.:
One can clearly see how the areas of impact for CFOs listed in the costs section above directly relates to value creation in a business and the management of financial resources. The CFO is the gatekeeper for value creation and thus long-term viability.
How CFOs champion the big picture
Because the CFO is intimately connected to the financial health of the organization, they are also the eyes of the market. They see the trends and shifts directly in the numbers and can advocate for the right kinds of measurements to make long-term decisions. CFOs should take an active role in their organization’s strategic planning process and use their knowledge to translate the ebbs and flows of the business into scalable growth.
Now more than ever, CFOs are at the forefront of business viability and growth. Their knowledge is invaluable in times of crisis and prosperity, and their voice and action are essential for long-term financial stability.
Our outsourced CFO services can help you establish and maintain a long-term financial strategy for your business. Contact us for more information.
In an effort to help businesses cope with the impact of COVID-19, the CARES Act passed by Congress in March of this year eliminated some of the restrictions on the business interest deduction set in place in 2017 by the Tax Cuts and Jobs Act (TCJA). Now, the IRS has released much-needed guidance and final regulations for business interest expense deductions.
Limiting the business interest deduction was originally a way of helping pay for the TCJA and began with tax years starting after Dec. 31, 2017. The deduction was limited to the sum of:
- The taxpayer’s business interest income
- 30% (or 50% if applicable) of the taxpayer’s adjusted taxable income, and
- the taxpayer’s floor plan financing interest expense
The final regulations state that the deduction does not apply to:
- Certain small businesses with gross receipts of $26 million or less (applies to 2020 tax year, adjusted annually for inflation)
- Electing real property trades or businesses (cannot claim additional first-year depreciation deduction on certain types of property held)
- Electing farming businesses (cannot claim additional first-year depreciation deduction on certain types of property held)
- Certain regulated public utilities
Taxpayers must use Form 8990 to calculate and report their deduction and the carry-forward amount of disallowed business interest expense.
Additional regulations released by the IRS cleared up some of the remaining questions including issues related to the CARES Act. These additional regulations can be used with limitations until the final regulations are published in the Federal Register.
Additionally, a safe harbor was created in Notice 2020-59 that allows taxpayers engaged in a trade or a business managing or operating qualified residential living facilities to treat that as a real property trade or businesses in order to qualify as an electing real property trade or business.
Reach out for assistance with understanding and reporting your business interest expense.
On August 8, 2020, President Trump signed an executive order extending certain aspects of COVID-19 relief in the absence of a new bill from Congress. The executive order includes several measures to protect individuals as provisions of the CARES Act expire or have expired.
Here’s what was in the order:
Payroll tax delay – The order authorizes the Treasury to consider methods to defer the employee share of Social Security taxes (IRC section 3101(a) and Railroad Retirement Act taxes under section 3201(a)) for employees earning up to $104,000 per year ($4,000 biweekly) for a period beginning Sept. 1, 2020, through Dec. 31, 2020. No interest, penalty, or additional assessment would be charged on the deferred amount. At this point, this is not effective. It means the Treasury can exercise authority and explore ways to achieve forgiveness on the deferred amounts, such as legislation. While nothing will be done until the Treasury issues guidance, employers will need to be mindful of this as the liability of this payment could fall on them depending on the final rule.
Unemployment benefits – The $600 per week unemployment benefit authorized by the CARES Act expired on July 31. The executive order retroactively authorizes $400 per week from Aug. 1; however, states must contribute $100 and the remaining $300 would come from the federal government. The funding for the federal portion would come from the FEMA Disaster Relief Funds and would continue until the earlier of Dec. 6, 2020, or a drop in the Fund balance to below $25 billion. The state portion is to come from federal funds already distributed to the states. Questions of whether the FEMA funds can be used for this purpose are still outstanding.
Evictions – The evictions portion of the executive order asks the secretary of HHS and director of CDC to consider whether halting residential evictions is reasonably necessary to help prevent further spread of COVID-19 and also authorizes the Treasury Secretary and HUD Secretary to consider potential financial assistance for renters. The CARES Act banned evictions through July 25 for properties with federal mortgage programs or HUD funds.
Student loans – The student loan interest deferral enacted by the CARES Act is set to expire Sept. 30, 2020. The executive order would waive student loan interest until Dec. 31, 2020, for loans held by the Department of Education only.
Final guidance is required from the respective agencies before some of these measures can be enacted. Contact us with questions.
The Small Business Administration (SBA) and Treasury released an updated Paycheck Protection Program (PPP) FAQ on Aug. 4 in an effort to address PPP loan forgiveness issues that have arisen as borrowers begin to complete their applications. The 23 FAQs address various aspects of PPP forgiveness including general loan forgiveness, payroll costs, non-payroll costs, and loan forgiveness reductions. Here is a brief overview of some of the most notable clarified guidance.
General loan forgiveness
- Sole proprietors, independent contractors, and self-employed individuals with no employees and no employee salaries included in average monthly payroll at the time of PPP loan application should use PPP Loan Forgiveness Application Form 3508EZ.
- Borrowers who submit their loan forgiveness application within 10 months of the completion of the covered period do not need to make payments until the forgiveness amount is remitted to the lender by the SBA.
- Borrowers who must repay a portion of the loan should know interest is accrued from the time of disbursement and the SBA remittance of the forgiveness amount. Borrowers whose full loan is forgiven do not need to pay the accrued interest.
Payroll costs forgiveness
- Owner-employee is defined as someone who is both an owner and an employee of a C corporation. This was not previously defined.
- Compensation limitation for owners is cumulative across all businesses if there are multiple.
- S corporation considerations
- Health insurance costs do not qualify as compensation for S corporation employees that own at least 2% of the business nor for family members of such employees.
- S corporation owner-employees with less than 2% ownership can count health insurance costs.
- Unemployment and state income taxes are eligible for forgiveness.
- Employer retirement contributions are eligible capped at 20.833% of 2019 contributions.
- C corporation considerations
- Forgiveness is allowed for employee shareholder compensation including state unemployment and income taxes and corporate contributions to employee health insurance.
- Employer retirement contributions are eligible capped at 20.833% of 2019 contributions.
- Employer contributions for retirement and group health benefits that were accelerated from periods outside of the covered period or alternative covered period are not eligible for forgiveness.
Non-payroll costs forgiveness
- Payments of transportation utility fees assessed by state and local governments are eligible for forgiveness.
- The alternative payroll covered period does not apply to non-payroll costs.
- Leases that existed prior to Feb. 15, 2020, but expired or renewed during the covered period are eligible for forgiveness.
- Interest payments on mortgage loans for real or personal property that existed prior to Feb. 15, 2020, but were refinanced during the covered period are eligible for forgiveness.
- Benefits are not to be included in the determination for a 25% reduction in employees’ hourly or salary wages.
- It is still unclear whether tips for restaurant employees are included, so restaurant owners may want to make up for lost tips to avoid the reduction.
- Borrowers should include employees who made more than $100,000 in 2019 when calculating FTE reduction exceptions.
The FAQ document also includes several examples for making calculations related to the above questions. Contact us for questions and assistance with your PPP loan forgiveness application.
Economic downturns are an almost inevitable reality for nearly every business owner. Decisions made far away from your community, catastrophic and unpredictable weather events, and even global pandemics as we’ve seen this year can disrupt the health and viability of a business. During these challenging times, business owners have to make difficult decisions about the future of their business that not only affect them but also their employees, vendors, clients, and communities. It’s an enormous responsibility to bear, but you don’t have to go it alone.
Your CPA advisor is your best resource for tackling the challenges of an economic downturn. As an outside party, they can help you make smart business decisions that protect your vision and mission while remaining financially responsible. Your CPA can help you:
Optimize your books
Never underestimate the power of good bookkeeping. By keeping your books in order, your CPA can help you plan and project for the future at each stage of an economic downturn. This includes planning for temporary closures and tiered re-openings (and potentially a back-and-forth of both depending on the state of the country and market). When your books are clean and up to date, you can better project how events and decisions will impact your finances on a weekly, monthly, and quarterly basis. Your CPA can help you flex the numbers on fixed and variable expenses to account for increases in costs, decreases in income, and potential changes to payroll. Knowing your numbers intimately can help you make better-informed decisions.
Minimize your tax burden
During times of economic crisis, staying abreast of new and changing tax legislation will be essential to projecting tax burden and uncovering tax savings opportunities. Your CPA is the best person to handle this because they know your business and your industry inside and out and can help you uncover tax savings opportunities that are unique to your circumstances. They do all the research, and you reap the rewards. With a CPA’s assistance, you achieve deductions and credits you may not have realized were available and develop a plan to defer costs where allowed depending on your business, industry, and location. Taxes are not an area you should or need to face alone during an economic downturn. Your CPA has done the homework, so you don’t have to.
Rationalize your decision making
When markets are in flux and your business is facing unprecedented challenges, the decisions you make can make or break your business. But you don’t have to go it alone. Your accountant can help you make data-informed decisions whether that be how to pay vendors, when and how to apply lines of credit, and the best ways to use your capital. Negotiating contracts with vendors that meet your needs and theirs during a downturn will not only achieve cost savings but also preserve relationships – your CPA can help develop a plan that makes sense. Knowing when to engage lines of credit can help you make better moves that you can either afford to pay back later, or maybe prevent you from taking on credit you can’t handle – your CPA can guide you in this process. Knowing where to allocate capital will be key to maintaining operations, and you may need guidance on what expenses to cut and what to keep such as marketing and payroll – your CPA can help you project the ramifications. With your CPA by your side, you don’t have to operate in a silo of decision-making.
Maximize your sense of relief
Most of all, your CPA can provide perspective, alleviate business back-end burden, and help advise you on financially feasible and sound decisions when much of the world feels like it’s in chaos. You have a lot to focus on during a downturn including how to handle your customers and employees in a changing marketplace. Having someone who can help you stay fiscally viable as you work through tough times, and develop a plan for future success, provides a welcome peace of mind.
You don’t have to go through any economic downturn alone. Your CPA can help you shoulder the challenges and weather the storms so you can continue doing what you do best – running your business.
The U.S. Senate and House of Representatives have both unanimously agreed to extend the Paycheck Protection Program (PPP) by five weeks in an effort to continue providing relief for small businesses hit hard by the pandemic. Applications officially closed for the program on June 30 when the Senate voted for a last-minute extension. President Trump is expected to sign the bill.
This extension would give small businesses until Aug. 8 to apply for a share of the approximately $129 billion in remaining PPP funding through the Small Business Administration (SBA). Thanks to the PPP Flexibility Act passed on June 5, recipients have 24 weeks to use loan funds for payroll and other essential expenses like rent/mortgage and utilities. The Flexibility Act also lowered the threshold for payroll expenses to 60% to achieve full forgiveness with a few safe harbor considerations. Over 4.9 million loans have been approved by the SBA so far, worth more than $520 billion.
Contact us for assistance in compiling information for your PPP forgiveness application to present to your lender.
Your cash flow is the financial story of your business. It tells the story of your high points and low points, where the money comes in and goes out, and is the lifeline of your business in times of crisis. Proper cash flow management can mean the difference between survival and going under for small businesses especially in periods of market and economic downturn, such as the period of challenge faced currently by the ramifications of COVID-19.
Here are seven steps to managing your cash flow during a crisis.
1. Update your financial statements – The key to managing your cash flow is operating from current financial statements. As a first step, ask your CPA to provide you with an up-to-date look at your business’s financial picture and discuss the statement together. Your CPA can help you identify areas of opportunity and challenge to ensure you’re proactively optimizing your business’s financial situation no matter the circumstances of the marketplace.
2. Understand your fixed and variable expenses – Hand-in-hand with updated financial statements comes an understanding of your fixed and variable expenses. Sorting your expenses into these two buckets will help you to see where you have expenses you can cut temporarily or permanently to save cash, or where you can negotiate to improve your cash flow in times of need.
3. Know your credit options – Next, contact your banking professional to understand your credit options. In times of crisis, the likelihood of needing to dip into lines of credit increases, and you need to know what’s available to you, the terms, and have a plan for repaying it when the dust settles. This will help you project your cash flow as you begin to model scenarios through a period of challenge
4. Project your cash flow – Your first cash flow projection should be conducted using your current levels of income, expenses, and lines of credit so you can get a clear look at where you stand without change. Additionally, you will want to look back at least five years to see how your financial picture has fluctuated in the context of times of growth and downturn. Then, as you project outward into the future, break down your cash flow at micro increments, weekly or biweekly, to see where and when your cash reserves and credit lines may begin to run out. This can help you predict where you will need to make changes internally and when.
5. Increase income – Once you’ve projected your cash flow out, look at ways you can increase your income.
- Accounts receivable – You don’t have to be facing a period of crisis to start to clean up your accounts receivable (AR). Improving your AR timeline is essential to improving cash flow. Work with your customers to set up payment plans that make sense and adjust your AR policies where needed. Are you offering more time than necessary to pay-in-full? Are you following up with late payments? Are you offering multiple methods of payment? Now may be the time to start considering credit cards if you aren’t currently accepting them.
- Pivot your products/services – The COVID-19 pandemic is forcing many small businesses to pivot their offerings. Restaurants are offering delivery and takeaway, and grocery stores are offering personal shoppers as a couple of examples. As you look around, you’ll see small businesses across the country changing up the way they offer products and services to meet the needs of their customers. How can you pivot while staying true to your strengths?
- Offer gift cards/certificates – If you’re not already offering gift cards/certificates, this may be a good option to start if your services warrant it. Make it as easy as possible for customers to purchase these over the phone or online so you can start to realize some cash now.
6. Decrease expenses – Decreasing expenses is a natural place to start to try improving cash flow during a crisis, but it must be done carefully to maintain relationships with customers, vendors, and employees. Consider your fixed and variable expenses and what can be reduced or cut. Adjusting your utilities at the office if you’re working from home, implementing hiring freezes if you’re unsure about the future, and redistributing contract work to employees are just a few ways to decrease expenses. Additionally, consider:
- Negotiating contracts – Work with your suppliers to understand your options for delaying payments, keeping in mind that they have expenses to meet as well. Approach negotiating contracts carefully as you do not want to damage important relationships.
- Cutting payroll as a last resort – Before you implement lay-offs or furloughs, consider moving employees around the company to meet other needs, or offer work-from-home when possible. If you must make lay-offs or furloughs, ensure they meet the department of labor guidelines.
7. Rerun your cash flow model with different scenarios – Considering your options for increases in income and expenses, model your cash flow using various rates of change in those areas. Use realistic numbers to see how much of an improvement you can expect by making these adjustments over time.
Times of crisis can force small businesses to take a long hard look at their financial picture and address cash flow issues that may have been lingering long before the major event. By monitoring up-to-date financial statements and performing cash flow projections, you can become a better steward of your business’s finances in times of crisis and times of opportunity.
Many small business owners approach tax season with a can-do
attitude. This entrepreneurial spirit is admirable, but when it comes to compliance,
it is usually best to leave tax preparation to the experts. Being aware of
common mistakes, like failing to comply with tax laws, violating tax codes, or incorrectly
filling out forms, will help you avoid errors and unnecessary stress.
Underpayment of Estimated Tax
The Internal Revenue Service (IRS) requires businesses to
make estimated federal income tax payments to account for the tax not recouped
through a standard paycheck. Depending on how much you owe and your business
type, you will need to make payments based on the amount of income you made from
the business during the year and the amount of self-employment tax you owe
based on that income. Failure to make the appropriate payment will incur
accuracy-related penalties. Furthermore, business owners that do not
substantiate their tax position or prove reasonable cause for their position
will also incur a negligence penalty.
Employment Tax Deposits
What happens when a business owner yields their
responsibility to meet employment tax obligations in favor of meeting payroll,
debts of nonpayment, or trade obligations? Though it may not seem as important
as other financial obligations, failure to comply with employment tax obligations
will result in substantial penalties and possible criminal prosecution.
Reporting your total payroll tax liability and determining
your payroll deposit schedule depends on running the right report. A good
payroll software or outsourced payroll company can help you manage withhold
employment taxes and ensure the electronic fund transfers are accurate and
The IRS is a stickler for accurate and on-time payment. The
latter is almost a rite of passage for many business owners that need more time
to produce a precise return or take advantage of all their deductions. While it
is ideal to file your return by the IRS due date when you have all the
information, there are many instances that prevent this. Late payments are
acceptable so long as the IRS knows it will receive payment via an extension. The
critical difference between a late filer and a negligent filer is their intention.
Business owners that need to file their taxes after the April deadline should
make an extension request with Form 4868 by the tax filing deadline. If you
forget to submit the request, you will incur a penalty of 5% of the amount due
for every month or partial months your return is late.
Keep in mind that with your tax extension also comes another
deadline. If you fail to make the payment again, you will incur the 5% penalty
above. And finally, when you pay later, you pay more. Even with the extension,
the IRS will collect interest on any amount outstanding after the April
deadline. In addition to this interest payment, you may also pay a late-payment
penalty of 0.5% per month of the late unpaid tax. If you want to minimize your
total bill, consider paying at least 90% of your tax liability when you request
the extension. We can help make the right decision around extending versus
filing. If you have questions about which is best for you, please contact us.
Failing to Separate Business from Personal Expenses
This step is the year-long headache that reaches maximum tension
at tax-time. In an effort to simplify, many business owners will use one credit
card, thus making it difficult to distinguish legitimate business expenses from
personal ones. Overlooking this critical step results in more than just tax
errors. The time an owner needs to spend categorizing expenses is quite costly
to the business, and inaccurate financial information will result in inaccurate
financial statements. It may feel like it’s too late, but it is never too late.
Start categorizing your aging personal and business expenses and take the
proper steps to begin tracking them better in 2020.
Working with a reputable tax preparer year-round can
mitigate a lot of the stress that comes with tax preparation. If you need
assistance or would like to talk to one of the professionals in our firm, give
us a call today.