Many small business owners focus on generating more revenue every year, and that’s a wonderful goal. But not all revenue is created equally since some items are more profitable than others. If you sell more than one product or service in your business, then you may benefit from looking at your revenue mix.
While it’s fun to watch revenues grow, your business profit is what really matters. If your expenses grow faster than your profits, then you have a lot of activity going on, but you don’t get to keep as much of what you make.
An insightful exercise to try is to take a look at your revenue mix. Then you can ask “what if?” to optimize your profits.
Your Revenue Mix
Let’s say you offer three different services: Services J, K, and L. Your revenue pie looks like this:
J: $700K or 70% of the total
K: $150K or 15% of the total
L: $150K or 15% of the total
Total: $1.0 million
In this example, Service J is clearly the service making you the most revenue in your business. But is it making you the most profits?
The profit you receive from each of these service lines is as follows:
K: $10K loss
While Service J is generating the most profit volume for your business, it’s actually Service L that’s the most profitable. Earning $80K on $700K yields an 11.4% return on Service J, but earning $30K on $150K yields nearly double the return at 20%. Service L generates the most return. And if possible, Service K may need to be discontinued or turned around.
Your strategy for a more optimum revenue mix might be to sell as much of Service L as possible while eliminating or fixing the problem around Service K.
It’s fun to experiment with different revenue mixes. And of course, there are many more variables besides profit, such as:
- What services/products do you prefer to work on/sell?
- Are you able to sell more of the most profitable service or are there marketing limitations?
- Is one service a loss leader for the others?
- Are you able to adjust the price on the lower margin services to increase your profits?
There are many more questions to ask and strategies to consider to make you more money, which is why we love being accountants.
A New Mix
We hope you’ll spend some time analyzing your revenue mix and having fun asking yourself “what if?” If we can help you expedite the process or add our perspective, please reach out anytime.
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.
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.
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.
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.
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.
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.
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.
Do you need to spend money on printing, or can the printed item be delivered electronically?
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.
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.
Make sure employees manage their time effectively by providing the right training and supervision. This should help to reduce labor expenses.
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:
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:
The applicant must attest to the necessity of the loan, among multiple other certifications and declarations.
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.
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
Jan 6, 2021 SBA PPP Second Draw Interim Final Rule – 42 pages
A cashless business is one that processes all cash transactions electronically. There is no paper or coin money taken or handled. While no one society has become 100 percent cashless yet, most organizations are moving in that direction.
A business can become cash-free by providing multiple electronic alternatives to payment. Credit cards are the most common electronic payment implementation. This option most likely includes MasterCard, Visa, Discover, and American Express. Some businesses also have a PayPal account and offer that method for payments. Venmo, owned by PayPal, is an efficient mobile alternative, but it is mostly used for consumer-to-consumer transactions. And there is also cryptocurrency.
Cashless businesses are more efficient, help to reduce crime, and have a better audit trail of transactions. Going cash-free also saves money and time spent counting the money, storing the money, safeguarding the money, protecting employees at risk of becoming theft victims, and physically going to the bank.
On the negative side, credit card companies charge fees to merchants, although these can now be passed to the customer in most states. Electronic transactions also require a higher level of technology, and privacy is reduced. And while security is an issue, all merchants that take credit cards must comply with PCI (Payment Card Industry) security standards and sign a document each year stating so.
If your clientele does not keep their money in a bank or if they are not able (or have chosen not) to have a credit card, you may need to rethink going cashless. About 20 percent of U.S. households are challenged when it comes to having access to checking and savings accounts. This has led to several state and local laws being passed in the U.S. prohibiting a business from going cashless. Nothing has been passed at the national level as of this writing, however the Payment Choice Act was introduced in both chambers in mid-2020.
The pandemic has accelerated the move to cashless with the desire for contactless transactions. Several countries are leading the way to becoming cash-free as an entire country, including Sweden, Finland, Norway, China, and South Korea. Sweden’s government has been the most aggressive, claiming they will become a 100 percent cashless society by 2023.
Is going cashless right for you? Meeting your customers’ needs is a prime consideration. At the very least, you can move to increase the percentage of electronic transactions and decrease the percentage of cash transactions when feasible. This measure will save time and money in and of itself.
The Consolidated Appropriations Act, 2021 (CAA 2021) became law on December 27, 2020, and among many other things, provided for a second round of potentially forgivable Paycheck Protection Program loans to small businesses that were financially impacted by the effects of the pandemic.
The Act not only provides funds and guidelines for a round two of PPP money; it also expands PPP round one in a number of ways. Here are a few of the highlights.
Changes to PPP Round 1 Loans
Existing borrowers with PPP loans can reapply for a loan or request a loan increase as long as they have not received forgiveness. This includes borrowers that returned all or part of their PPP loan or whose loan maximum has increased due to regulations implemented after receipt of their loan.
Businesses that have not been granted forgiveness can spend PPP money and apply for forgiveness on an expanded list of expenses, including:
- Software, cloud computing, HR, and accounting
- Property damage
- Supplier costs
- Essential contracts in force prior to loan
- Worker protections, e.g. PPE
- Payroll costs can include group insurance including group life, disability, vision, dental
They can now choose their covered period at any time between 8 and 24 weeks (previously it was 8 OR 24 weeks only).
There will be a simplified forgiveness application for loans under $150,000. However, do note that this is not the rumored rubber stamp: the backup paperwork and calculations are still required.
The SBA has until January 21, 2021 to establish the guidelines for the application process.
PPP Second Draw Loans
Additional PPP monies will be available to qualifying businesses, up to loan amounts of $2 million. The business must:
- Employ 300 or fewer employees
- Have used or plan to use the full amount of PPP1
- Can prove a 25 percent drop in revenue in any quarter of 2020 compared to 2019
Businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives are eligible.
In round two, borrowers may receive a loan amount of up to 2.5X the average monthly payroll costs in the one year prior to the loan or the calendar year. Businesses with NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5X average monthly payroll costs. The rules for forgiveness are the same as in round one.
Organizations not eligible for PPP2 include:
- Businesses not in operation on Feb 15, 2020
- Businesses that received a Shuttered Venue Operator Grant
- Entities normally ineligible for SBA loans in general, except for nonprofits and religious organizations
- Political organizations and lobbyists
- Entities affiliated with entities in the People’s Republic of China
- Registrants under the Foreign Agents Registration Act
- Publicly traded companies
The entire program is extended to March 31, 2021.
There are also special provisions for these types of businesses:
- Farmers and Ranchers
- Housing Cooperatives
- News Organizations
- 501(c)(6) and Destination Marketing Organizations
- Businesses in bankruptcy proceedings
The disclosures have also gotten stronger, with specific provisions for collection of demographic information and required disclosures for leaders in government to publicize their receipt of PPP forgiveness as well as prohibition of them receiving PPP loans in the future.
The law gives SBA a deadline to act, which varies from 10-24 days depending on the section. The next course of action for businesses that want to apply for these funds is:
- Continue gathering your documents,
- Make your calculations,
- Check with your accountant if you need help,
- Select your SBA-approved bank, and
- Wait for both
- The SBA guidance and
- Your bank to open the application portal
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act starts on page 2042 of the 5593-page bill in case you want to see for yourself. And if not, know we’re here as your tax law interpreter, so feel free to reach out anytime.
On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 which included measures for both COVID-19 relief and sweeping funding provisions for the government through September 2021. While there are many sections of this law to explore, this article will focus on the stimulus checks.
Qualifying individuals will receive these economic impact payments, and the Washington Post reports that more than 85 percent of US households will receive a check. To qualify:
- For individuals making up to $75,000 per year, or if a couple, making up to $150,000 per year, the check will be $600.
- For individuals making between $75,000 and $86,900 (couples: $150,000 to $173,900), the check will be between $595 and $5. In this phaseout, the amount of the check decreases by $5 for every $100 of income above $75,000/$150,000, phasing out completely at $87,000/$174,000.
- The amount sent will be based on the amount you earned (adjusted gross income, to be exact) on your 2019 tax return.
- Includes children. The definition for child will be the same as the one used to calculate the child tax credit.
- Excludes dependent adults over 17 at the end of the tax year.
- Excludes persons who died on or before January 1, 2020.
- Includes individuals who file jointly with an ITIN, but excludes the person with the ITIN.
- Includes 2019 non-filers who receive benefits from Social Security Administration, Railroad Retirement Board, and the Department of Veterans Affairs.
Here are some examples: A family of four – mom, dad, and two children under 17 – that earns a total of $100,000 per year will receive $2,400. A single man earning $80,000 per year that lives with his disabled father will get $350 (80,000 – 75,000 = 5,000 / 100 = 50 * $5 = $250. $600 – $250 = $350). A woman with 2 small children earning $87,000 will not get anything.
Taxpayers do not have to do anything to receive their stimulus checks. Many taxpayers will receive their stimulus checks via direct deposit, if that information was included on your 2019 return. If the IRS does not have your bank account information, you will likely get a check or a pre-paid debit card. If you’ve moved, you can update your address by completing an IRS change-of-address form (allow six weeks).
The checks are supposed to start hitting bank accounts early in January. You do not have to pay tax on this income.
If you never got the first stimulus check, you can claim it on your 2020 tax return. Details are here on the IRS site. https://www.irs.gov/newsroom/recovery-rebate-credit
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.