New Business Direction LLC
The Employee Retention Credit is one of the many IRS tax breaks for businesses that was included in the 2020 CARES Act as well as the recent Consolidated Appropriations Act, 2021. This credit is intended to provide financial relief to businesses that suffered from the effects of coronavirus but retained their employees.
The credit is available to eligible employers that paid qualified wages from March 13, 2020 through June 30, 2021. To be eligible, a business’s operations must have been fully or partially suspended as a result of national, state, or local orders or it must have experienced a significant reduction in gross receipts within a single quarter of 2020 compared to the same quarter of 2019 (this is defined as fifty percent or more in the first three quarters of 2020 and twenty percent or more in the fourth quarter of 2020 and first two quarters of 2021).
Wages and health costs paid by the employer on behalf of the employee can be counted for the credit, and there is a cap of $10,000 per employee per year in 2020 and $10,000 per employee per quarter in 2021. For 2020, the credit amounts to fifty percent of qualifying wages, and for 2021, the credit covers seventy percent of qualifying wages. Any wages used in a Paycheck Protection Program loan forgiveness process are not eligible; in other words: no double-dipping.
This tax credit is a little different as it interplays with payroll taxes and not income or business taxes. The credit can be taken on the IRS Form 941. Some employers can request an advance by completing Form 7200. Tax professionals are awaiting further guidance on details of the expanded program.
For qualifying employers, the amount received from the credit can be substantial. Since this credit affects your payroll taxes, payroll tax forms, and payroll tax filings, you will want to make sure it doesn’t fall through the cracks, especially if your payroll function and income tax preparation are handled by two different companies.
If you believe your business may be eligible, contact your tax professional to see how to get started.
Independence is a key concept in accounting, especially in the assurance or auditing area of accounting. Assurance services are services where a licensed CPA reviews an organization’s financial statements and accounting records and provides an opinion about them. This opinion takes the form of a report that can be shared with third parties such as banks and shareholders. Auditing services are one of many forms of assurance services.
Only a licensed CPA can provide assurance services; this is regulated by the states. A CPA who provides certain assurance services must be independent of the business that it is writing an opinion for. Essentially, independence means that the auditor must be able to do their work objectively and with integrity. And it goes further. The auditor must not be perceived as having any kind of bias or connection with the business it is auditing. There must be no perception of any impropriety.
To this end, the auditor must not have a relationship with the company’s executives. A CPA cannot, for example, audit her brother’s company. A CPA cannot be an investor in the company and also be the auditor because of the financial relationship. The audit opinion must not be influenced in any way by a relationship between the auditor and anyone in the company. The CPA must be able to provide an honest, professional, and unbiased opinion when auditing financial statements.
Being independent also means the CPA must have a healthy dose of skepticism. A common phrase in the accounting profession is “Trust, but verify.”
Numerous rules abound to protect auditor independence. For example, an auditor cannot be paid on a contingent or commission basis. All practicing CPAs must complete ethics courses every few years, and these almost always include independence scenarios and case studies.
If you have any questions about independence or assurance, please feel free to reach out any time.
A great way to start 2021 is to take a fresh look at your business finances. Many things changed in 2020, and if you are in the habit of spending on the same items year after year, it’s the perfect time to decide what is essential and what can go.
There are only a few ways to increase profits when you think about it in black and white terms. You can either raise revenues or cut costs. Let’s take a look at where we can potentially cut costs.
Publications
These expenses tend to be monthly or yearly, and we tend to just let them automatically renew time after time. But do we really need them? Take a look in your Dues and Subscriptions account to evaluate what you really need to stay informed, and cancel the rest.
Memberships
If you are a member of an organization or two, what benefits are you getting from your investment? Does it raise revenue for you? Do you use everything the membership offers? If not, it might need to go on the chopping block.
Memberships are especially tricky if the organization provides a local meeting component as a benefit and your state or county has been shut down. There’s a tradeoff right now between supporting the organization so that it’s still there when we can freely meet again and being responsible about your own business costs.
Office/Store Rent
With many employees working from home, the question has come up in many businesses about how much space they really need. As leases expire, consider how much space you really need. Some employees may love to work from home permanently, which frees up space.
Retail stores that have moved their business online may be able to cut back on customer-facing space but might need more inventory storage space. A restaurant that has successfully transitioned to pickup and delivery orders might be able to get by with a smaller seating area.
Software Apps
Are you paying for any technology applications that you are simply not using? This is a good place to look for cuts.
Some applications charge by number of contacts. Keeping your lists clean inside these apps will avoid increases and cut costs in some cases.
Office Supplies
Do you really still need things like staplers and scissors on everyone’s desk? If your business is going paperless, you can save a lot on office supplies.
Printing
Do you need to spend money on printing, or can the printed item be delivered electronically?
Shipping/Postage
While information can be delivered electronically, physical goods still need to be shipped. Make sure you have the best deal with your shipping vendors based on your volume. You may also need to consider building your shipping costs into the price of the product or add a shipping fee to the bill if you don’t already.
Marketing
A great way to increase profits is to become more intentional about your marketing costs. Are you able to measure what’s working and what isn’t? Or are you doing the same thing year after year?
Marketing has changed so much, even in the last few years. It might be time to implement digital marketing methods, which can be more cost-effective than older, outdated methods.
Labor
Make sure employees manage their time effectively by providing the right training and supervision. This should help to reduce labor expenses.
Telephone/Internet
Has your business changed? Do you need all those extra features you are paying for? Could you do without those extra lines? Would another phone plan save you money on long distance or international calls? Many telecommunication companies will often bargain with you or offer you a new deal just for checking in with them.
This gives you ten places to look to cut costs and correspondingly increase profits for 2021. If you need help reviewing your income statement, please reach out.
Qualifying small businesses can now apply for Paycheck Protection Program (PPP) loans through certain lenders. The Small Business Administration (SBA) reopened its PPP portal on January 11, 2021 after Congress passed and the President signed legislation in December 2020, authorizing the continuation of the program and an additional $284 billion in funds.
The program allows for two types of applications:
- First Draw Loans to qualifying entities that did not receive a PPP loan in 2020, and
- Second Draw Loans for previous PPP loan recipients and with a narrower set of qualifications.
First Draw PPP Loans for First-Time Borrowers
Borrowers that qualify for first-draw PPP loans can apply for up to 2.5 times their average monthly payroll costs (with caps), for a maximum loan amount of $10 million. Generally speaking, the applicants must have been in operation on February 15, 2020 and be among the following types of businesses:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans
- Sole proprietors, some self-employed individuals, and independent contractors
- Nonprofits, including churches
- Sec. 501(c)(6) businesses
- Food or lodging operations with NAICS codes that start with 72 and with fewer than 500 employees per location
- Certain news operations with qualifying NAICS codes in the 51 range
A number of entities are specifically prohibited from receiving loans.
The SBA application for First Draw Loans is here:
https://www.sba.gov/document/sba-form-2483-ppp-first-draw-borrower-application-form
The applicant must attest to the necessity of the loan, among several other declarations.
Second Draw PPP Loans for Borrowers That Received a PPP Loan in 2020
Borrowers that qualify for a second-draw PPP loan can apply for up to 2.5* times their average monthly payroll costs (with caps), for a maximum loan amount of $2 million. Generally speaking, the applicants must qualify as follows:
- Employ no more than 300 employees
- Have spent all of their first PPP loan on eligible expenses
- Do not have to apply for forgiveness for the first loan ahead of receiving the second loan
- Can show a 25 percent drop in gross receipts in any one 2020 calendar quarter from 2019. If it’s easier to show a 25 percent drop for the entire 2020 year compared to 2019, applicants can submit their tax returns as proof.
*Companies with NAICS code 72, which generally speaking are food and lodging operations, can borrow up to 3.5 times their average monthly payroll costs (with caps).
The SBA application for Second Draw Loans is here:
https://www.sba.gov/document/sba-form-2483-sd-ppp-second-draw-borrower-application-form
The applicant must attest to the necessity of the loan, among multiple other certifications and declarations.
Loan Forgiveness
PPP loan recipients can apply to have PPP loans forgiven if the funds are used within a specified covered period from 8 to 24 weeks on the following eligible costs: payroll (60 percent of funds), rent, covered worker protection and facility modification expenditures, covered property damage costs, certain supplier costs, accounting (!) expenses, and a handful of other qualifying expenses.
Timing
The SBA portal opened Monday, January 11, 2021 for first-draw loans by lenders (about 10 percent) that cater to underserved communities. These include Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs), Certified Development Companies (CDCs) and Microloan Intermediaries.
On Wednesday, January 13, 2021, the SBA application portal began accepting applications for Second Draw loans. A few days later, additional lenders will be added to the portals.
SBA says it “plans to dedicate specific times to process and assist the smallest PPP lenders with loan applications from eligible small businesses.”
What to Do Next
Here are some suggested steps to get ready for this next round of PPP funds.
- Determine which lender you want to use to apply for PPP funds.
- Visit your lender website to see if they have a PPP notification signup so you can get notified of updates.
- Collect the documents you need for the application.
a. Payroll summary reports
b. Profit and loss statements
c. Tax returns - Begin calculating the amounts you’ll need for the application:
a. Gross receipts by quarter for 2020 and 2019
b. Average monthly payroll costs, including cap limits for wages over $100,000, for the year you want to use (2020, 2019, or the year from the application date) - Contact us if you need help with documentation or calculation or other advice.
- Contact your tax preparer about tax ramifications.
- Contact your attorney to evaluate the loan agreement.
Further PPP Resources
Updated PPP Lender forms, guidance, and resources are available at www.sba.gov/ppp.
CARES Act Treasury page: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
Jan 6, 2021 SBA PPP Interim Final Rule – 82 pages
https://home.treasury.gov/system/files/136/PPP-IFR-Paycheck-Protection-Program-as-Amended-by-Economic-Aid-Act.pdf
Jan 6, 2021 SBA PPP Second Draw Interim Final Rule – 42 pages
https://home.treasury.gov/system/files/136/PPP-IFR-Second-Draw-Loans.pdf
One of the biggest tax issues of 2020 has been clarified with the signing of the Consolidated Appropriations Act, 2021, (CAA 2021), and that was whether expenses that are normally deductible and that were paid with the proceeds of a Paycheck Protection Program (PPP) loan that is forgiven are truly deductible.
The CARES Act, which became law on March 27, 2020, was drafted so quickly that the question of deductibility was left out, but several members of Congress made it clear that deductibility was the intent all along. The IRS went the other way, publishing a notice (2020-32), a revenue ruling (2020-27), and a revenue procedure (2020-51), that took the opposite stance: PPP-related expenses that were forgiven were not deductible, therefore potentially causing business’s taxes to become much higher.
Congress has now reversed the IRS’s position with CAA 2021 in Section 276 (PPP) and 278 (EIDL). Gross income does not include forgiveness of PPP loans and emergency EIDL grants. Deductions are allowed for normally deductible expenses paid with PPP loan proceeds that were forgiven. It also provides deductibility for Second Draw PPP loans. This is all good news for taxpayers with PPP loans.
However, there could be timing issues that could reduce the deductibility of the full amount of the PPP expenses. There could also be amounts “at risk,” which is a tax term that limits your deductions in certain cases.
All of these issues need to be carefully considered on a case-by-case basis. Your tax professional is your best source to help you review all of these factors so that both your PPP loan forgiveness and allowable deductions are timed to reduce your tax bill.
Many clients are asking us about whether their taxes will go up now that there will be a change in Presidents in January. The short answer is no.
A US President does NOT have the power to raise or lower taxes. Period. That power is reserved for the legislative branch of the government. Only Congress can pass or change law to raise or lower your taxes. Once a law has passed in both the Senate and the House, the President can sign the act into law.
A change in Administration does NOT repeal all prior laws. The Tax Cuts and Jobs Act of 2017 is still in effect, and many provisions are written to last through 2025.
What a new President can do is ask Congress to pass a law to raise revenue for the government. The President can give direction but cannot make law himself when it comes to taxes.
A new Congress often does like to pass a new tax bill so that they have made their “mark.” But the timing of it will vary due to a variety of factors, including priorities, which party controls the Senate and House, and many, many other things. We won’t know the full makeup of the Senate until January 2021 when the two runoff races in Georgia are complete.
For those of you history buffs, the very first federal tax was created during Abraham Lincoln’s presidency. It was called the Revenue Act and was a tax of three percent on everyone making over $800 per year. The immediate need was to raise money for the Civil War.
The 13-Week Cash Flow Forecast
If you’re having ups and downs in your cash balance, the 13-week cash flow forecast is the perfect tool to help gain clarity around your cash needs. It will help a business owner predict what their cash balance will be 13 weeks (one calendar quarter) in the future.
The forecast calculations start with entering cash receipts and cash disbursements into a spreadsheet. Start with actual spending and receipts for the first week, then use estimates for the remaining weeks. Include planned expenditures such as overhead, payroll, and loan payments. Add in inventory purchases. Project your receipts based on history or recent changes in your business.
Once you’ve completed your forecast, you can make changes and do what-if scenario planning. For example, if the forecast shows that you will run out of cash in week seven, you have some time to decide what you need to do to remedy the shortfall. Options might be:
- Accelerate the collection of your receivables.
- Dip into your line of credit to cover a portion the shortfall.
- Furlough some of your workers.
Plug your selected scenario into the forecast to see how much that relieves your shortfall.
The benefits of creating a 13-week cash flow forecast are many. You can see what actions need to be taken and when to take them well ahead of time. You can also see how much of an action you need to take. For example, instead of furloughing 50 percent of your staff, you may only need to furlough 25 percent. Or instead of borrowing $50,000, you might only need $20,000.
The cash flow forecast can also save time when developing your annual budget. Budgets are especially useful when business conditions are volatile or when business owners need all the clarity they can get.
Try your hand creating a 13-week cash flow forecast for your business, or reach out to us for help any time.
Learn about the Audit Trail Feature in QuickBooks Desktop and Online from Rhonda Rosand, CPA from New Business Directions, LLC.
The Audit Trail tracks the who did what when: it tracks the history of a transaction, where it started, what changes were made and what it looks like now. This tool can be especially useful to accountants.
This is a great video to help you understand and gain control over your A/P process:
Many families and small business owners may have seen decreases in income over the last several months. Money struggles can cause us to experience stress and worry, and none of us need that right now. Instead we need to boost our immune systems and decrease stress.
Here are some tips on how we can take back control of our finances and reduce our stress around money.
- Assess your situation.
Take an inventory of your bank accounts, credit cards, and other financial accounts. This helps you to see
the entire picture. You can be financially healthy in different ways. For example, you might be low on income, but if you have healthy savings or plenty of assets, you might be just fine.
- Track your spending.
When you can see where the money is going, you can make good decisions about what changes you need to make. Using software like QuickBooks or simply a spreadsheet can help you see how much you really need for things like the rent or mortgage, food, utilities, and other necessities.
- Make any changes that you need to.
If you have more expenses than income, here are several ways to get back in balance:
- Cut any unnecessary spending. For example, trade the expensive $100+ cable bill for a $15 Netflix subscription, at least for a while.
- File your taxes early, especially if you have a refund coming.
- Avoid temptation spending if you don’t have enough for the basics. Remember what’s important and find the will to curb impulses.
- Sell some of the items you own that you no longer need to raise money.
- Get a second job.
- Get support from local nonprofits that can help you if you qualify.
- If you must, dip into your savings or 401(k).
- Ask family members to help.
- Build a budget and stick with it.
Making a plan helps some people reduce their stress a great deal. They feel good that they now have goals and can develop new habits that will work for their lifestyle.
In your software or spreadsheet, commit to monthly spending limits for each major category: housing and utilities, food, transportation, clothing, entertainment, savings, paying off debt, and other.
Each month, track how you did by comparing your actual spending with your planned spending. Give yourself a grade on how you did, and either reward yourself or make the changes you need to.
- Pay off debt.
If you have debt, make a plan to pay it off systematically. Here are some ways you can speed that up:
- Pay down the debt that has the highest interest rates. You might even be able to consolidate and refinance your debt to a lower rate.
- Make a payment every single month, even if it’s small.
- See a credit counselor for more ideas on how to get out of debt faster.
- Build a cushion for the future.
If your spending and income is balanced, but you don’t have a savings cushion, that can also be stressful. You need a safety net to fall back on for times just like these.
Decide on an amount that you can put away for a “rainy day” fund, and stick to it. It’s also never too early to start saving for your retirement years. The younger you start, the more your money will grow into a significant nest egg, providing comfort and flexibility in your final years.
- Identify any other stressors related to money.
Perhaps a relative constantly asks you for money, and this causes you stress. In this case, you may have to make a “tough love” decision to reduce your stress while maintaining family relationships. These are very personal, individual decisions that include factors far beyond finance. But if they are causing stress, some kind of action should be taken.
- Make your accounts work for you.
If possible, select credit cards that give cash back, miles, or other perks. Keep your bank balance high enough so that you don’t get charged a monthly fee, and try to get an account that pays interest. You won’t get rich from these things, but they are fun perks that help you save.
- Invest wisely so you can sleep at night no matter what happens.
Understand your risk tolerance level when it comes to investments, and avoid investments that are too risky. You’ll sleep better at night knowing your money is safe.
Hopefully, these tips will help you decrease your money stress and improve your control over your finances.
