By Gary Pittsford, CFP®
In the last two months our personal lives and our business lives have been completely altered. All of the closely held businesses and the industries that we work with have been devastated financially because of this COVID-19 worldwide pandemic. In this article, we have tried to outline ideas that can be used by businesses, business owners, business employees and others affected by this coronavirus.
The index below outlines ideas for business owners and employees that you need to read immediately pertaining to the new law that was passed by Congress and signed by the president on March 28: the Coronavirus Aid, Relief and Economic Security (CARES) Act. In order to implement sections of this new law and all of our business planning ideas, you need to consult with several individuals.
First, make sure that your business accountant has read the CARES Act. Your accountant is going to be an important source of information for you to qualify for different sections of the new tax law outlined below.
Second, your corporate attorney can also be helpful in preparing any documents to qualify for parts of the new tax law.
Third, for all of the industries that Castle Wealth Advisors specializes in, we will make ourselves available to talk with business owners and association leaders about ideas that will help everyone through this pandemic disaster with financial ideas to implement.
Fourth, there are a lot of national organizations that have quickly gotten themselves ready to help you. Consider asking your local Chamber of Commerce if they have someone on staff who can help you apply for benefits from this new CARES Act. Consider contacting the National Federation of Independent Businesses and find out if they have a local office that can help you. Also, you might think about the SCORE Association, which has offices in many cities and states.
Fifth, contact your state Small Business Administration (SBA) and find out if they have a local field office near you. Many of the CARES Act provisions for small businesses will be handled by the SBA.
I. IDEAS FOR BUSINESSES
Paycheck Protection Program & Forgivable Loans
A significant benefit included in the CARES Act for small business owners is the paycheck protection program, a partially forgivable loan program offered through the Small Business Administration. Such loans must be issued by December 31, 2020 and can have a maximum maturity of 10 years. They may be provided through existing approved SBA lenders, (local banks) as well as lenders who are otherwise certified by the SBA to offer such loans. Furthermore, such loans will be 100 percent guaranteed by the SBA.
Qualifying for the Paycheck Protection Program
Businesses, including sole proprietors that have fewer than 500 employees, are eligible for this relief.
Under this paycheck protection program, lenders will generally be able to issue 7(a) small business loans up to a maximum of the lesser of $10,000,000 or 2.5 times the average monthly payroll cost over the previous year (excluding annual compensation of amounts over $100,000 per person). The proceeds of such loans may be used to pay a variety of costs including:
- Payroll costs
- Group health insurance premiums and other healthcare costs
- Salaries and/or commission
- Mortgage interest
- Other business interest incurred prior to February 15, 2020
Benefits of Loans Issued Under the Paycheck Protection Program
The single-largest benefit of a loan issued under the Paycheck Protection Program is the possibility of having all, or a portion, of the loan forgiven. The amount eligible to be forgiven is the amount spent, during the first eight weeks after the loan is made, on:
- Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000.
- Rent pursuant to a lease in force before February 15, 2020.
- Electricity, gas, water, transportation, telephone or internet access expense for services that began before February 15, 2020.
- Group health insurance premiums and other healthcare costs.
There is a catch to these provisions. In order for the above amounts to be forgiven, the business must maintain the same number of employees (or equivalents) from February 15, 2020 through June 30, 2020 as it did during either the same period in 2019, or from January 1, 2020 until February 15, 2020. To the extent this requirement is not met, the amount eligible for forgiveness will be reduce ratably. Additional reductions in the amount to be forgiven will be incurred if employees with under $100,000 of compensation have their compensation cut by more than 25 percent as compared to the most recent quarter. The good news is that any debt forgiven pursuant to this provision is not included in taxable income for the year.
Finally, payments from loans made under the Paycheck Protection Program will be deferred for a period of not less than six months, and no longer than one year.
Qualifying for Employee Retention Credit
The “trigger” for a company to begin to be eligible for the credit is either that operations of the company have been fully or partially suspended during a quarter as a result of governmental authority, or a quarter in which the revenue in 2020 that has less than 50% of the revenue from the same quarter in 2019. Remember when calculating the business income for the quarter the Act refers to the revenue for the quarter and not profit.
Calculating the Employee Retention Credit
For business planning purposes, it is important for employers to not only understand that they are eligible for a credit, but also to know how much of a credit they are eligible for, as this will help you make better business decisions. In the simplest terms, the credit is equal to 50 percent of the wages paid to each employee, up to a maximum of $10,000 of wages per employee.
For small businesses (100 or fewer employees), all wages (up to the $10,000 maximum limit per employee) are eligible to count towards the credit.
Deferral of Payment of Payroll Taxes
Section 2302 of the CARES Act provides employers with another payroll-related tax break. With the exception of employers who have debt forgiven by the CARES Act for certain loans provided by the SBA, employers are eligible to defer payroll taxes from the date of the enactment, through the end of the year until the end of 2021 and 2022.
More specifically, 50 percent of the payroll taxes that would otherwise be due during this period may be deferred until December 31, 2021. The remaining 50 percent is due on December 31, 2022.
Good news for self-employed persons. This relief applies to them also, at least with respect to the employer equivalent portion of their self-employed taxes. Accordingly, 50 percent of an individual’s self-employment taxes from the date of enactment through the end of 2022 may be deferred, with 50 percent of that amount (so 25 percent of the 2020 self-employment taxes) due December 31, 2021 with the remaining deferral amount due on December 31, 2022.
Net Operating Loss Rules Have Changes
This could be a very important benefit for business owners in 2020. Please discuss this idea in great detail with your outside accounting firm.
Section 2303 of the CARES Act amends the rules for corporations with net operating losses (NOLs). For many years, NOLs were allowed to be carried back up to two years, and forward up to 20 years. The Tax Cuts and Jobs Act of 2017 changed those rules, however, for 2018, 2019 or 2020, to allow such losses to be carried back five years and forward indefinitely. In theory, this should allow companies to reduce prior years’ tax bills, allowing them to claim refunds of amounts previously paid, to provide further liquidity to get them through this coronavirus crisis.
The CARES Act further enhances the ability of companies to use their NOLs to offset prior years’ tax liabilities by amending another rule put into place by the TCJA. Under this act, NOLs were only able to offset up to 80 percent of taxable income. Section 2303 of the CARES Act amends the law to allow for up to 100 percent of taxable income to be offset for 2018, 2019, and 2020.
II. IDEAS FOR THE BUSINESS OWNER
A new date to remember. Any person with a federal income tax return or payment due on April 15, 2020 is eligible for relief under notice 2020-18 from the Treasury Department. A “person” includes any type of taxpayer, such as an individual, a trust, an estate, a corporation or any type of unincorporated business entity.
The payment due refers to both 2019 federal income tax payments, including payments of tax on self-employed income, and 2020 estimated federal income tax payments, including payments of tax on self-employed income regardless of the amount owed. The return or payment must originally be due on April 15, 2020. This relief does not apply to federal income tax returns and payments due on other dates. The Treasury notice postpones those 2019 return filings and payments due on April 15, 2020 until July 15, 2020.
III. IDEAS FOR BUSINESS SURVIVAL
Now is the time to make hard decisions about your company and prepare it to become lean and strong quickly. Outlined below are some ideas that you should consider for your company:
- Renegotiate loans with lenders and vendors and ask for lower interest rates and longer terms.
- If you pay rent on your buildings, ask for several months of rent deferral or possibly reducing the rent by 50 percent. The rent not paid can be added to the tail end of the lease.
- Take a hard look at your payroll costs as you enter the second and third quarters of the year. Talk with your accountants, attorneys and bankers about using all of the government loan programs available for the next several months, but long-term make decisions about where the payroll should be in the last half of 2020. Talk to your national associations and get industry guidelines about what is normal for payroll and rent in your industry. Also, those of us at Castle Wealth Advisors have a lot of that information.
- Sell old inventory. Have a tent sale and get rid of old or obsolete inventory that has been lying around for more than two or three years. Now is the time for you to accumulate cash and build up your war chest rather than leaving old inventory laying on the top shelf or in the warehouse.
- Start being more aggressive on collecting your accounts receivable.
- Maintain your gross margins at their highest levels based on your industry averages. In the next six to 12 months when this coronavirus is over, you need to have the highest gross margins possible going into an economic recovery.
- Be aggressive on depreciation and write-offs in 2020. Previously, in this article, we talked about net operating losses, (NOL’s) and you should read that section carefully.
- Look at each item on your profit and loss statement and start cutting unnecessary costs. Cut out the fat and get lean. Make all the cuts now that you have been thinking about for the last five years.
- Make a new business priority. Promise yourself that for the next three months you will spend at least two hours per week working “on” the business and continue to improve the profit and loss statement and the balance sheet. In the second quarter, coming up, you need to make several financial changes so that your company comes back quickly in the third and fourth quarter of 2020.
Business owners need to quickly contact their accountants, bankers, SBA regional office, and get details on how to apply for different sections of the CARES Act. This coronavirus disaster will come to an end and we will all be stronger on the other side. Be safe and stay healthy.
To read the full article including ideas for taxpayer/family, click here.
Gary Pittsford, CFP®, is president and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely-held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary@Castle3.com.