Many business leaders are concerned about the impact that COVID-19 has had on their business. Over the past several months, our experts have answered many questions about new loan programs, grants, and tax laws to help their businesses survive. We asked a few of our partners to share their thoughts on some common questions. Here’s what they had to say about how businesses can recover from COVID-19.
Q: How can businesses financially recover from the impacts of COVID-19?
Answer: If you’re looking to rebuild your business and need a game plan, strive for balance in terms of immediate cash needs and long-term viability:
- Keep the lines of communication open with your financial institution. Stay on top of required financial documentation, borrowing base certifications, renewals, etc. to help preserve access to working capital.
- Resist the urge to fall back into old habits. Take advantage of new lessons learned in terms of efficiency, cost control, and communication.
- Reassess your terms of sale to shorten your cash conversion cycle. The ramp-up consumes cash – be sure you stay on top of your receivables.
- Continue to embrace technology and leverage it to keep you ahead of the curve.
- Innovate. Search for new markets and expanded applications for your goods or services.
Q: What options do businesses have to minimize their tax liability?
Answer: The CARES Act introduced several new opportunities for businesses to reduce their tax liability. Some may be a fit for your business; others may not. I think there are three tax laws worth your attention – the employer retention credit, qualified improvement property, and net operating loss rules.
1. Payroll tax relief
If you weren’t eligible for a PPP loan, look into whether you’re eligible for payroll tax relief in the form of the employee retention credit. This is a refundable payroll tax credit up to $5,000 per employee if certain pandemic-related requirements are met.
And, you may be eligible to delay paying your employer portion of payroll taxes through the end of 2020. If your business received a loan that was forgiven under the CARES Act, you might not be eligible for that delay.
2. Depreciate qualified improvement property
If you made significant leasehold improvements in 2018 or 2019, find out if they meet the definition of qualified improvement property (QIP). The CARES Act corrected an error that was made in the Tax Cuts and Jobs Act, which previously made QIP ineligible for accelerated depreciation. This correction is retroactive to Jan. 1, 2018.
Now, QIP has a 15-year life and is eligible for bonus depreciation. Depending on the specifics of your situation, you could amend past tax returns or file a change of accounting method form to take advantage of this deduction and potentially receive a refund.
3. Carry back NOLs
The Tax Cuts and Jobs Act eliminated the ability to carry back net operating losses (NOL). But the CARES Act reverses this, allowing you to carry back NOLs that arise in taxable years 2018 and 2019.
You can carry NOLs back to each of the five taxable years before the year of the loss. If you had income in previous years, this could result in significant tax refunds and help with any immediate cash flow needs.
Make sure to connect with a tax professional to learn more about these tax provisions and any other opportunities that may be available to you.
Q: With so many companies applying for SBA loans (like the Paycheck Protection Program and EIDLs) and relief grants to stay in business, what can they expect when filing their 2020 tax return?
Answer: Unlike most everything else in 2020, by the time 2020 tax returns are filed, taxpayers should have some certainty regarding a number of items that are currently up in the air as I write this. Here’s an example.
The amount of your Paycheck Protection Program (PPP) loan that’s forgiven is excluded from your company’s gross income. But currently, the expenses you paid for with the loan proceeds are disallowed (meaning you can’t deduct them). There’s no double-tax benefit for you.
However, many professional associations and members of Congress are pushing for these expenses to be deductible. In the coming months, we hope to get answers on how to treat these expenses on a 2020 tax return. If you’re a fiscal-year taxpayer, you may have to amend your tax returns if changes are made after you file your return.
Further, we don’t have guidance as to how a taxpayer determines which expenses are disallowed. It would seem reasonable that the disallowed expenses would be limited to payroll, rent, utilities, and interest. These are the categories of expenses for which you could use your PPP loan.
However, we don’t know how to allocate the expense disallowance to each of those expense categories. A pro-rata allocation would seem reasonable; however, if another method is allowed, it could provide a tax planning opportunity for taxpayers subject to the interest expense limitation under IRC §163(j).
As we look ahead, we expect to get clarity in the next few months, especially after the November election. Taxpayers should have guidance regarding these issues – hopefully, with plenty of time to implement any beneficial tax planning strategies!
Q: What can businesses do to remain financially stable during turbulent times? What should they include in their financial plans to prepare for unforeseen business challenges?
Answer: Budgeting, planning, and forecasting are more critical than ever. Utilizing flexible budgets to analyze the impacts of changing expectations can be an excellent tool for sensitivity analysis on KPIs. Managing cash and cash flow is extremely important. More than ever, business owners realize that “cash is king.” Actions taken to preserve and improve cash flow are paramount.
Staying close to employees, customers, vendors, suppliers, lenders, and other business partners is critical. Being proactive and openly communicating in those relationships will allow your company to work in a more team-centric approach while navigating these challenging times and help you avoid bad surprises.
Challenges lead to opportunities for those who seek them out. The impacts on businesses now can allow for the reinvention of processes that have become inefficient or outdated.
It can lead to new innovation or the adoption of policies and procedures that have been on the back burner. It can also lead to exploring new products, services, or markets that can enhance future success.
An overall theme of not being reactive, but being honestly introspective and then proactive, can help an organization prepare for and thrive through these business challenges.