COVID-19 Update for the Week Ended May 16, 2020

 

The tax and financial impacts of COVID-19 continue to unfold rapidly. To help keep you up to date on these rapidly evolving changes, we have put together the most important things you should know from last week.  

1.  FINALLY! PPP Loan Forgiveness Guidance…. 

On Friday May 15, 2020, the Small Business Administration (SBA) issued the Paycheck Protection Program Loan Forgiveness Application 

In true bureaucratic style, in lieu of an explanation of the law, guidance came in the form of a fill in the box form along with schedulesworksheets, and instructions. We are certain that these formsschedules, and instructions will be updated many times in the weeks ahead.  

The form structure consists of the following: 

  • Loan Forgiveness Calculation Form 
  • This is a two-page form. The first page is a simple summary of the loan forgiveness components and calculation of the forgiveness amount. The second page is representations you must make about the loan and documentation provided. 
  • PPP Schedule A 
  • This schedule supplies the calculation of the items on the application. 
  • The instructions have the details of how the PPP calculations and exceptions will work. This is where most of the guidance is held. Wexpect these instructions to be debated and updated over the coming weeks.  
  • Schedule A Worksheet  
  • These worksheets provide detailed information about employees 
  • Optional Demographic Information Form 

The notable items contained in these forms, worksheets and instructions are: 

  • Creation of an “Alternative Payroll Covered Period” for biweekly or more frequent payroll. 
  • EIDL Advance Amounts will be reduced from the forgiveness by the SBA. 
  • Payroll incurred but not paid until the next regular payroll date count. 
  • Non-payroll costs paid or incurred and paid by the next regular billing date count. 
  • FTE Reduction and Safe Harbor calculation 
  • Salary/Hourly Wage Reduction calculation 
  • Documentation requirements  

 

Strategy and Advise 

Take the time to read the form and instructions. This will provide you with a better understanding of how these rules specifically apply to your situation.  

Continue to use the planning tool to help manage forgiveness. We will distribute an updated planning tool once available. Banks will provide electronic systems or processes for how documents will be submitted to them, so there is no need to fill out these forms now unless you want to walk through the process. 

We will hold an online seminar Tuesday afternoon to go over the mechanics of these forms and address any questions. Keep your eye out for a separate invitation. We will distribute a copy of the online seminar if you are unable to attend.  

2.  Is your PPP Loan Necessary? Just kidding 

We spent the last couple of weeks focusing on the vague language of the eligibility requirements for Paycheck Protection Program (PPP) loans.  

On May 13, 2020, Treasury updated its Frequently Asked Questions (FAQs) to include safe harbor exception to these rules. The new rule states that any business (including its affiliated) which received a PPP loan less than $2 million is deemed to have applied in “good faith”. This means that if your loan was less than $2 million then it was necessary to support current operations and you will not be subject to penalties, fines, or criminal actions for getting the loan. 

The vague language and complicated analysis to determine if your loan was “necessary to maintain current operations” still applies to any business (including affiliates) which received a loan more than $2 million. However, the date for returning the funds with no questions ask or repercussions has been extended until May 18, 2020.  


3.  Part
nerships & Seasonal Employers Get Second Chance at PPP Loan  

On May 13, 2020, the SBA issued a new interim final rule which allows partnerships and seasonal employers to increase their PPP loan. 

In April there was significant confusion about how to recognize partners compensation and the allowable period a business with seasonal employees could use for calculating the maximum loan. In late April, the SBA clarified and changed the rules. However, some business had already received their loan and were precluded from obtaining any underfunded amounts. 

The new rule allows these businesses to go back and increase the amount of the loan.  

 

Strategy and Advise 

If you are a partnership or have seasonal employees, you may be eligible for a loan increase under these rules. Please contact your lender as soon as possible to determine if the original application was properly calculated. Please do not hesitate to contact us if you need assistance in making this determination or calculating the proper loan amount under these rules.  

In addition to the items above, it is important to note that on Friday, May 15, 2020 the House of Representatives passed a $3 trillion Stimulus 4 package (“CARES 2”). The legislation is dead on arrival at the Senate but sets the stage for further negotiations over the next few weeks. We anticipate another round of stimulus legislation. However, we do not expect this legislation until June or July.  

In these uncertain times, we are continually evolving to ensure that we do what is in the best interest of our clients, team, and community. 

We will continue to closely monitor the economic and tax changes and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.  

We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.  

Thank you for your continued support and stay safe!  

© 2020 

 

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COVID-19 Update for the Week Ended May 9, 2020


As businesses begin to reopen and hopefully life gets back to normal, we have entered that cerebral zone where we absorb all the changes that have occurred along with their financial impact. This is the beginning of the financial healing process, the recovery.” As we enter this chapter, we are focused on the refinements of the changes and how best to move forward. The speed of new programs has slowed as Congress debates the best path forward. We will take this time to regroup, focus on better understanding the changing landscape and develop strategies to move forward. Hopefully, the need for this weekly update will diminish in the coming weeks as we focus on recovery and reconstruction. We will continue to monitor important developments and communicate relevant information.  

Last week was the first step in the recovery process and here are the most important things you should know. 

1.  Is your PPP Loan Necessary to Support Current Operations? 

Most of last week was spent focusing on the vague language and continuing interest on the eligibility requirements of Paycheck Protection Program (PPP) loans.   The Treasury has expressed its intent to target all PPP loans in excess of $2 million as well as other loans it considers appropriate. Unfortunately, the rules are extremely vague and do not provide a clear answer to the eligibility of operating businesses.  

We have published a detailed overview of these rules along with our interpretation and actions that should be taken 

The basis of these rules is that you acted in good faith and that at the time you made the loan application (or April 23rd if later) and the loan was necessary to support ongoing operations. It is critical that you document your determination so that future events do not distort your determination at the time the loan application was made. Here is what you should document: 

  • Prepare an anecdotal overview of all the factors affecting your business 
  • Outline the current economic impacts on your business including sales, expected increase expenses, remote work force, etc. 
  • Outline your current debt structure along with available lines of credit and investors 
  • Prepare liquidity ratios for your current and historical business. These are financial ratios such as current ratio, quick ratio, operating cash flow ratio and cash conversion cycle.  
  • Prepare high level financial models of the business over the next 2 years. 
  • Outline any other factors or probable risk that your business can experience. 

Strategy & Advise  If you are unable to make the determination or need assistance, please contact us and your lawyer to help make a reasonable determination. However, if you find that you cannot satisfy this requirement then you can return the funds by May 14, 2020 (FAQ #43) to avoid punitive actions.

The Treasury will certainly focus on abuses of these loans. We believe every business, regardless of size, should take the steps outlined above and be prepared to 
demonstrate why the loan was “necessary to support ongoing operations.” 

2.  Impact on PPP Loan if Employee Refuses to Return  

On May 3, 2020, Treasury added 
Question 40 to its Frequently Asked Questions (“FAQs”).   

Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?   

Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.  

This rule makes it clear for laid off workers that the word employee is specific to the individual. Consequently, any employee who refuses to return to work is dropped from the calculation of loan forgiveness, provided we document the events and refusal.   

Our interpretation of the CARES Act and the interim final rules up to this point has been that the word “employee” was meant in its generic sense. This is the first sign that it might have a different meaning or differentiate between laid-off and terminated workers. Unfortunately, Treasury has yet to provide clear and complete guidance regarding loan forgiveness. We will continue to monitor these developments and provide information once it becomes available.  

3.  Last Chance to Get Stimulus Payment Direct Deposited 

On May 8, 2020, the IRS 
announced that taxpayers have until noon on May 13, 2020 to provide direct deposit information through the Get My Payment function of their website.  

After noon on May 13, 2020 the IRS will begin preparing millions of files to send paper checks. These checks should start arriving through late May and into June. The IRS warns all taxpayers to be on the lookout for scams related to these Economic Impact Payments. Since all service centers of the IRS are currently closed, any contact representing to be from the IRS should be viewed as suspicious.  

4.  What to do if you Received a Stimulus Payment in Error 

The Internal Revenue Service has 
posted information on how people who weren’t supposed to receive their economic impact payments should return the money. These rules generally apply to taxpayers that were deceased before the payment was received, are incarcerated or are non-resident aliens in 2020.  If the payment was a paper check: 

  • Write “Void” in the endorsement section on the back of the check. 
  • Mail the voided Treasury check immediately to the appropriate IRS location listed below. 
  • Do not staple, bend, or paper clip the check. 
  • Include a note stating the reason for returning the check.  

If the payment was a paper check and you have cashed it, or if the payment was a direct deposit: 

  • Submit a personal check, money order, etc., immediately to the appropriate IRS location listed below. 
  • Write on the check/money order made payable to “U.S. Treasury” and write 2020EIP, and the taxpayer identification number (social security number, or individual taxpayer identification number) of the recipient of the check. 
  • Include a brief explanation of the reason for returning the EIP. 

In these uncertain times, we are continually evolving to ensure that we do what is in the best interest of our clients, team, and community. 

We will continue to closely monitor the economic and tax changes and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.  

We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.  

Thank you for your continued support and stay safe!  

© 2020 

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Is your PPP Loan Necessary to Support Current Operations?




If we did not have enough to worry about during the pandemic, now the Treasury added a standard to the Paycheck Protection Program (PPP) regarding eligibility based on liquidity and access to capital. 

This new standard has created a great deal of concern among businesses that still operated in full or limited capacity during the crisis. This concern has been magnified by the banks protecting themselves through notices to its customers outlining all the bad things (penalties, fines, criminal charges, etc.) that will happen if you do not meet these new standards. 

Further complicating this matter is the lack of guidance provided by Treasury. During the pandemic, Treasury wrote a series of Frequently Asked Questions (“FAQs”), which are updated often, as our primary source of information about the PPP loan program. On April 23, 2020, Treasury added the sublime Question 31 which states: 

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?  

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. (…) 

There are so many ill-defined words in this statement it is impossible to comprehend none the less determine if you are eligible. The words seem subjective and maybe that was the intent. Ancient philosophers would struggle with making sense of its meaning. I am no philosopher, but I should be qualified to interpret what this means. So, I foolishly began the process of dissecting the wisdom handed down by Treasury. 

“…good faith that their PPP loan request is necessary.” 

Well, I was not off to a good start. What exactly is good faith? Generally, the term means acting honestly and fairly based on the context of the situation. The lawyers will surely argue this word in depth once a claim arises under this rule. Since it is hard to know if some acted in “good faith” it is usually much easier to determine if someone acted in “bad faith” or intentionally dishonest. Based on all the uncertainty regarding these rules, unless you intentionally committed fraud or acted in “bad faith” this should be the easiest standard to satisfy.  

As long as you acted in “good faith” you should not fear the dreaded “criminal action” stick wielded often by Treasury and the banks. 

Necessary? Alan Gassman wrote a great article earlier this week for Forbes. Mr. Gassman tracks the legislative history of the vagueness of the word starting with the Supreme Court case of McCulluch v. State in 1819. Subject to significant debate by legal scholars, this is a very low standard and should be easy for most businesses to satisfy. 

We cleared the first hurdle, pending lots of legal debates. However, it seems as though with little effort we can demonstrate that we acted in good faith and that the loan was necessary.  

current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 

This seemed straight forward. Current economic uncertainty” seems easy enough but my curiosity got the better of me. There are two paramount theories that make this an easy standard to satisfy. First, “Knightian Uncertainty” was developed by economist Frank Knight in his 1921 book “Risk, Uncertainty and Profit”. The theory is that there is unquantifiable knowledge about some possible occurrence (unpredictable future events like a pandemic), opposed to the presence of quantifiable risk.  Second, is the “Black Swan Theory” developed by Nassim Nicholas Taleb in his 2007 book “The Black Swan”. The theory explains the disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology as well as the non-computability of the probability of the consequential rare events using scientific methods (small probabilities). Both widely accepted theories give rise to our ability to satisfy the “current economic uncertainty” standard. 

Does this economic uncertainty impact how you “support the ongoing operations of your business? In reviewing this, I get caught up on the word “ongoing.” Generally, the word means continuing but considering current events over what period? It is our opinion that based on the level of “economic uncertainty,” as substantiated by Knight and Taleb, ongoing means continuing your business into the foreseeable future. Based on the level of uncertainty, this will mean a change to your business model and financial fundamentals in order to take reasonable actions maintain “ongoing operations.” This is a subjective standard but with financial models the necessity of the loan should easily demonstratable. 

taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. 

This is the standard that has us concerned. The CARES Act removed the clear “credit elsewhere” standard which provided that if you cannot get a loan somewhere else then you qualify. Instead, Treasury opted to replace that clear standard with the more subjective “…access other sources of liquidity…”test. This is a factor-based test with a much lower standard than the clear “credit elsewhere” rule. 

We think that the layman’s interpretation of this is simply, do you have enough money (or access to money such as credit or public markets) to operate as you did before the crisis for the near future based on the current economic uncertainty 

 

Steps to Take 

The basis of these rules is that you acted in good faith and that at the time you made the loan application (or April 23rd if later) the loan was necessary to support ongoing operations. It is critical that you document your determination so that future events do not distort your determination at the time the loan application was made. Here is what you should document: 

  • Prepare an anecdotal overview of all the factors impacting your business 
  • Outline the current economic impacts on your business including sales, expected increase expenses, remote work force, etc. 
  • Outline your current debt structure along with available lines of credit and investors 
  • Prepare liquidity ratios for your current and historical business. These are financial ratios such as current ratio, quick ratio, operating cash flow ratio and cash conversion cycle. These ratios mathematically demonstrate the cash health of the business. 
  • Prepare high level financial models of the business over the next 2 years. 
  • Based on the level of uncertainty sales projections should be low and increased expenditures for new business requirements should be included. 
  • Since the PPP loan repayment period is over 2 years, we believe this is the correct period for “ongoing” operations. 
  • Incorporate liquidity ratios into the projections to show not only historical cash needs but cash requirements under the current economic uncertainty. 
  • Outline any other factors or probable risk (not “black swans”) that your business can experience. 

If you are unable to make the determination, then please contact us or your CPA firm along with your lawyer to help make a reasonable determination. However, if you find that you cannot satisfy this requirement than you can return the funds by May 14, 2020 (FAQ #43) to avoid punitive actions. 

Conclusion 

The Treasury has continued to emphasize and expand their focus on these rules. These rules apply to all businesses (FAQ #37 published on April 28, 2020) and it is Treasury’s intent to review all PPP loans in excess of #2 million (FAQ #39 published on April 29, 2020) 

The Treasury will certainly focus on abuses of these loans. We believe every business, regardless of size, should take the steps outlined above and be prepared to demonstrate why the loan was necessary to support ongoing operations.” 

© 2020 

 


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COVID-19 Update for the Week Ended May 2, 2020


The tax and financial impacts of COVID-19 continue to unfold rapidly. To help keep you up to date on these rapidly evolving changes, we have put together the most important things you should know from last week.

1. PPP Forgiveness Expenses NOT Deductible
 
On Thursday, April 30th the IRS issued Notice 2020-32 which clarified the treatment of expenses paid with funds forgiven through the Paycheck Protection Program (PPP). It was no surprise to us that in this ruling the IRS confirmed that expenses paid for with PPP loans that are forgiven will not be deductible.

Most taxpayers and preparers incorrectly assumed that businesses receiving a PPP loan which was forgiven would not have to pay tax on the loan forgiveness and would also get the benefit of deducting the expenses paid for with the loan proceeds. The CARES Act was silent to this point but being able to deduct the expenses would be a clear violation of §265(a)(1). Congress could pass a law to circumvent this section of the Code, but we think that is not likely.

The consequence is that the PPP loan forgiveness would in essence be taxable since it eliminates deductions. For instance, if you receive a PPP loan of which $100,000 is forgiven because you used the funds to pay “covered expenses” allowed by the CARES Act (generally eligible payroll costs, rent, utilities and mortgage interest) then you will not be able to deduct those “covered expenses” in addition to not recognizing the income from the loan forgiveness.

2. PPP Loan Forgiveness Spreadsheet

As the Paycheck Protection Program (PPP) begins to fund loans, our attention moves to the forgiveness portion of the law and its specific application. We still do not have guidance, so there is significant uncertainty and open items related to how these provisions will work. Ultimately, your bank and SBA will make the final determination on what will be allowed for forgiveness. However, we must plan for our business and fully leverage the forgiveness provisions of the law.
 
Boyer & Ritter, CPAs and Albin Randall & Bennett CPAs have created a strategic alliance to develop and update a PPP Loan Forgiveness Workbook along with a detailed tutorial and case study. The workbook is for planning purposes only, since there are many unanswered questions and your bank will determine its own set of rules. The workbook, tutorial and case studies can be found here. This is great tool and resource for planning how the forgiveness should play out and guide you through the expense payment decisions. We would recommend watching the workbook tutorial first.

Please take some time to review this information and use it as a guide for what portion of your loan should be forgiven. These expenses should coincide with your 13 week rolling cash projections and strategic plan for recovery.
 

3.  An Eye on Recovery
 
There is much debate about the right way to reopen the economy in the aftermath of COVID-19. Regardless of where you stand on the issue of balancing health and economic concerns, one thing is certain, businesses will begin to reopen at some point and economic activity will start.

We have been working with clients to develop the best strategic plan and financial models necessary to navigate this crisis. Please see our high-level overview of the strategic themes that are emerging from this work. Your specific industry and how the pandemic affected your business will determine how your business will look after the crisis and its lasting impact. It is important to develop a strategic plan and supporting models to successfully navigate through recovery.  

4.  PPP New Rules
 
The banks have been distributing information warning business that they need to certify that they have “current economic uncertainty makes this loan request necessary to support the ongoing operations” or they need to repay the loan by May 7, 2020 to avoid penalties. This has created significant concerns for many businesses, particularly those still operating during the crisis.

This is the result of the highly publicized loans to some publicly traded corporations like Ruth’s Chris and Shake Shack. In response, the Treasury revised its Frequently Asked Questions (“FAQs”).  Treasury added Questions 31 and 37 to address this matter and expand its guidance.

The new rule states that a business must consider its current business activity and its ability to “access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to the business.” Specifically, the guidance makes clear that a PPP loan applicant must carefully review and certify that “current economic conditions make this loan request necessary to support the ongoing operations of the applicant.”

You will need to make the required certification in good faith and should be prepared to demonstrate to the Small Business Administration (SBA), upon request, the basis for your certification. The guidance is not limited to public companies (see FAQ Question 37). Knowingly making a false statement to obtain a guaranteed loan from the SBA is not acting in good faith and is punishable under law, including material fines, possible criminal charges and imprisonment.

Treasury further provided that any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

Strategy & Advise

We consider these measures to be a warning by Treasury to carefully consider your qualification for a PPP loan under these optics. Since, each business is different it should consider its individual facts and circumstances separately. We believe the key factors of consideration are access to capital to provide adequate liquidity and due to uncertainty at the time of the loan makes it necessary to support ongoing operations. These are extremely vague guidelines and there are no clear answers. We advise that if you believe the determination is not clear in your case that you prepare a detailed financial matrix of the use of funds and its necessity to support on going operations while preserving adequate liquidity. Although we may not be able to avoid a inquiry from the SBA, it will demonstrate a good faith assessment when making the certification.

5.  Stimulus checks

The IRS continues to distribute stimulus payments under the CARES Act. The IRS made significant improvements to “Get My Payment” functionality on its website.

Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds.

Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child under the age of 17 as of the end of 2020.

If you have not received your stimulus payment you can use this tool to check the progress of your payment. Due to IRS shutdowns, this tool is the only transparency into these payments. Unfortunately, there is no other mechanism in place to find out the status of these payments or to correct errors.

In these uncertain times, we are continually evolving to ensure that we do what is in the best interest of our clients, team, and community.

We will continue to closely monitor the economic and tax changes and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.

We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.

© 2020

Posted in Blog | Comments Off on COVID-19 Update for the Week Ended May 2, 2020

An Eye on Business Recovery




 

There is much debate about the right way to reopen the economy in the aftermath of COVID-19. Regardless of where you stand on the issue of balancing health and economic concerns, one thing is certain, businesses will begin to reopen at some point and economic activity will start.

Your specific industry and how the pandemic affected your business will determine how your business will look after the crisis and its lasting impact. Regardless, no business will look or run the same as it did before the coronavirus (“BC”). We need to start focusing intently on what our business will look like after the pandemic and how to not only recover but prosper as we move forward.

The visual that comes to mind is that of a tsunami coming onto shore with the water being the economic impact of the crisis. Those closest to the shoreline are those most set back by the pandemic, think restaurants and airlines, while those less hurt are furthest from the shoreline, like trucking and essential supply chain. Everyone is impacted. However, depending on how close you are to shoreline will determine how drastic you will need to react in its aftermath.

We believe that no matter where you are on the beach, planning, analytic measurements and innovation will determine your ultimate success.

Planning for the first wave:

To combat the economic crisis, businesses have cut expenses to reflect their decrease in revenue. In some cases, it has been scaling up to match new demands like online shopping and grocery stores. None the less, as businesses open, we will see an initial shift in consumer patterns. Depending on your industry, this could mean a short-term spike in sales due to pinned up demand, hair salons and dentists come to mind.

It is critical that you forecast and model this initial impact to your business. There are lots of factors to consider, such as when and how employees return to work and changes to customer interactions along with new regulatory requirements. This not only affects how your business operates but the underlying financial impact on your business. There will be an immediate change in revenue, cost, and profit.

There has been much publicity around the Paycheck Protection Program (PPP) which provides loans to small businesses to pay employees and certain overhead, such as rent. This access to capital will be essential for how you map out your recovery. It is critically important that you fully understand how the first wave of reopening will affect you and the capital it will take to return your business to profitability.

This is a complex decision for your business with lot of considerations. It is vitally important that before you begin to execute, you construct a short-term business model, financial forecast, and budget to work out the details and supply a blueprint for the weeks ahead. This will provide you with the basis of making decisions and monitoring progress so you can adjust, as necessary.


The need for a life jacket

As Warren Buffet said, “only when the tide goes out do you discover who’s been swimming naked.”

Unfortunately, this was abundantly clear as businesses felt the impact of the coronavirus. We saw immediately which businesses did not have adequate reserves and those that only had a single sales channel.

Restaurants have been most adversely impacted by the crisis and demonstrate the impact of a single sales channel strategy. Most restaurants derive their revenue from customers coming into a brick and mortar location, a single sale channel. When the crisis forced those locations to close, restaurants had to quickly develop an alternative sales channel. This took the form of carry out, curbside pick-up and delivery.

The lesson learned is that we need to develop multiple sales channels to mitigate our risk. As we think through the first wave of reopening, it is important to implement or expand a multiple sales channel strategy into our business model and forecasts.

The PPP can provide us with an opportunity to fund the expansion of our business model. PPP supplies us the opportunity to hire employees  and pay them with funds provided by the federal government. However, it does not require us to hire the same role. For instance, instead of hiring wait staff in a restaurant you might hire drivers or marketing staff to support the expanding sales channel.

Monitoring your progress and adjusting as necessary will be critical during this stage of recovery.

 

Getting in the boat

As we start getting more comfortable with the new economics, we need to innovate.

Since the pandemic  forced us to deconstruct our business plan, we can reinvent our business to provide creative solutions to unfamiliar problems . Technology will initially play a big part in this for most businesses. Video conferencing and applications for pick up orders are easy examples. However, the innovation will need to go much deeper. How will remote workers fit into your new business model? What impact will it have on your current space or security infrastructure? How do you manage and motivate remote team members? All of these will have to be considered, developed, and monitored as your new business model evolves.

Depending on the type of business, social distancing and regulations will create the biggest challenges. However, creative solutions are already beginning to surface. As I write, there is active debate over the prospect of closing streets to allow restaurants to expand its seating capacity into public space. The idea is creative, innovative, and interesting, but the devil is in the details. Under this idea, we would need government approval, traffic, parking, and resident considerations need to be addressed, sanitation concerns, licensing, budgetary impact, and the list goes on. This might have too many barriers, but the idea of one restaurant to convert its parking lot into a drive-in theater has less barriers and achieves sustainability quicker. During this time of recovery, it is critical develop innovative strategies that best use the resources at your disposal.

Plan on paper and implement in stages, your customers will tell you what works. “The Lean Start Up” by Eric Ries can provide you with great insight into this approach. Monitor your progress and adjust, as necessary. Develop key performance indexes and measurements before you begin to provide you with the information  needed to navigate the changes.

 

Smooth sailing

Although things are bleak at this time and not all businesses will weather this storm, we are confident that in time we will return to calm waters. We believe that creative entrepreneurs with strong financial fundamentals and analytics will develop stronger more resilient business than before the crisis.

 

©2020


Posted in Blog | Comments Off on An Eye on Business Recovery

COVID-19 Update for the Week Ended April 25, 2020




 

What You Should Know from the Week Ended April 25, 2020

The tax and financial impacts of COVID-19 continue to unfold rapidly. To help keep you up to date on these rapidly evolving changes, we have put together the most important things you should know from last week.

1.     PPP & EIDL Gets More Money

On Friday, April 24th President Trump signed the Paycheck Protection Program and Health Enhancement Act into law. The bill provides $484 billion in additional funding to replenish and supplement key programs under the CARES Act, including the Paycheck Protection Program (PPP), small business disaster loans and grants (EIDL), hospitals and health care providers and testing.

Paycheck Protection Program (PPP): Appropriates an additional $321 billion in funding, with $60 billion set aside for small, midsize and community lenders (including minority lenders).

Disaster Loans Program: Appropriates an additional $50 billion for the Disaster Loans Program and an additional $10 billion for Emergency Economic Injury Disaster Loan (EIDL) Grants.

The Small Business Administration (SBA) will resume receiving PPP loan applications on Monday, April 27, 2020 at 10:30am EDT. We anticipate this additional funding to be exhausted quickly,

New applications for EIDL are not being taken at this time. We expect the SBA to begin processing the applications already received until the funding is exhausted. The SBA also changed the $10,000 grant to be $1,000 per employee up to $10,000. This will allow more businesses to obtain the grant. However, we believe the funds will run out quickly based on the number of applications already received by the SBA.

Strategy & Advice! If you missed out on the first round of funding, there is limited time to try to obtain a PPP loan. We believe that the big banks are ready to flood the SBA when the process opens, so we expect a lot of delays. We also think that the $250B will get exhausted quickly. Consequently, if you are with a big bank, where you are in their queue will determine your probability. Due to the $60B, smaller banks should continue to do well during this round of funding because they can personally handle the applications and loan amounts are generally lower. Once the dust settles from this round of funding, we will conduct separate webinars for those that were funded and those that were not.

 

2. Renewed Interest in Section 139 Tax-Free Payments to Employees

This is not new law but under the current circumstances it is worth addressing.

In 2002, in the wake of the September 11th attacks, Congress enacted Code Section 139 which allows employers to make “qualified disaster relief payments” to employees. These payments are tax-free to the employee and fully deductible by the employer. Since COVID-19 is a “federally declared disaster” payments for expenses brought about by the pandemic are eligible.

This allows us to pay employees for expenses such as:

  • The costs associated with enabling an employee to work from home throughout the pandemic, including the cost of a computer, cell phone, printer, supplies, and even increased utility costs of the employee.
    • We are not certain if some of these costs would be eligible for forgiveness under a PPP loan. However, our interpretation is that they would not be eligible.
  • The cost of an employee’s childcare or tutoring for family members that are not permitted to attend school throughout the pandemic.
  • Medical expenses of the employee that are not compensated for by insurance (for example, the employee’s deductible and out-of-pocket expenses).
  • The cost of over-the-counter medications and hand sanitizer.

This is not intended to be an exhaustive list, but you get the general idea of types of expenses that would be allowed. It does not include items that would otherwise be recognized as income such as compensated sick leave.

Additionally, since the law was developed to address needs during a period of crisis, there is no requirement for a written plan, documentation or reporting. However, we advise you maintain records of the transaction and purpose in case a question arises.

Since, we have not seen a national emergency since 9-11, there is some uncertainty associated with future regulation. Until then you should use the law as written to help you, your business and your employees manage through this crisis.

Strategy & Advice! Since we able to provide funds to our employees to help them manage through this crisis while still receiving a tax deduction, we should seriously consider the use of these provisions. This is a great tool which should be part of our strategy as you continue to manage through this crisis.

 

3.     IRS Operations During COVID-19

The IRS has basically closed all service centers and only mission-critical functions are operating on a limited basis.

The IRS issued an update to its operations earlier this week, reminding taxpayers that it is not processing any paper returns or correspondences. The IRS has implemented special provisions for levies and liens to help alleviate some taxpayer hardships.

During this time, we will have limited access to IRS staff and resolution. If you do not have an active matter which has been assigned a Revenue Officer, your case will be suspended until the IRS reopens. We anticipate significant delays in IRS responses and tax matter resolutions as the IRS begins the opening process. Currently, there are no published dates as to when some of these services will be reinstituted.


4.    
Stimulus checks

The IRS continues to distribute stimulus payments under the CARES Act. This week the IRS has answered some questions regarding its “Get My Payment” functionality.

Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds.

Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child under the age of 17 as of the end of 2020.

The IRS has set up the Get My Payment website/tool that:

  1. Shows taxpayers either their EIP amount and the scheduled delivery date of the EIP by direct deposit or paper check, or that a payment has not been scheduled; and
  2. Allows taxpayers who did not use direct deposit on their last filed tax return to provide their direct deposit information which will speed their receipt of their EIP.

The IRS, on its website, has also provided information regarding Get My Payment, including:

  • If you filed your 2018 or 2019 tax return and it has been processed, you can check the Get My Payment website for the status of your economic impact payment.
  • The status of a payment is either:
    • That it has been processed;
    • A payment date is available;
    • Payment is to be sent either by direct deposit or mail; or
    • You are eligible for an EIP, but a payment has not been processed and a payment date is not available.
  • If spouses filed jointly, either spouse can use Get My Payment by providing his or her own information for the security questions used to verify identity.
  • Depending on your specific circumstances, it may not be possible for you to access Get My Payment. If you usually do not file a tax return, or if your identity cannot be verified when answering the required security questions, you will not be able to use Get My Payment.
  • If your bank account/direct deposit information has changed since you last filed an income tax return, you might be able to use Get My Payment to update it. Get My Payment cannot update direct deposit bank account information after an economic impact payment has been scheduled for delivery. To help protect against potential fraud, Get My Payment also does not allow people to change direct deposit bank account information already on file with the IRS. However, people who did not use direct deposit on their last tax return to receive a non-EIP-related refund, or if their direct deposit information was inaccurate and resulted in a non-EIP-related refund check being mailed, will be able to provide direct deposit information via Get My Payment.
  • If you elected to split your EIP between several accounts, you cannot use Get My Payment to designate which account to have your payment deposited in. The IRS will deposit the payment to the first bank account that you listed on Form 8888, Allocation of Refund.
  • If your direct deposit is rejected, your EIP will be mailed to the address that the IRS has on file for you.

Due to IRS shutdowns, this tool is the only transparency into these payments. Unfortunately, there is no other mechanism in place to find out the status of these payments or to correct errors.

In these uncertain times, we are continually evolving to ensure that we do what is in the best interest of our clients, team and community.

We will continue to closely monitor the economic and tax changes and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.

We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.

© 2020


Posted in Blog | Comments Off on COVID-19 Update for the Week Ended April 25, 2020

Cash payments and tax relief for individuals in new law

A new law signed by President Trump on March 27 provides a variety of tax and financial relief measures to help Americans during the coronavirus (COVID-19) pandemic. This article explains some of the tax relief for individuals in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Individual cash payments

Under the new law, an eligible individual will receive a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI).

Individuals who have no income, as well as those whose income comes entirely from Social Security benefits, are also eligible for the payment.

The AGI thresholds will be based on 2019 tax returns, or 2018 returns if you haven’t yet filed your 2019 returns. For those who don’t qualify on their most recently filed tax returns, there may be another option to receive some money. An individual who isn’t an eligible individual for 2019 may be eligible for 2020. The IRS won’t send cash payments to him or her. Instead, the individual will be able to claim the credit when filing a 2020 return.

The income thresholds

The amount of the payment is reduced by 5% of AGI in excess of:

  • $150,000 for a joint return,
  • $112,500 for a head of household, and
  • $75,000 for all other taxpayers.

But there is a ceiling that leaves some taxpayers ineligible for a payment. Under the rules, the payment is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the payment is completely phased out when AGI exceeds $146,500.

Most eligible individuals won’t have to take any action to receive a cash payment from the IRS. The payment may be made into a bank account if a taxpayer filed electronically and provided bank account information. Otherwise, the IRS will mail the payment to the last known address.

Other tax provisions

There are several other tax-related provisions in the CARES Act. For example, a distribution from a qualified retirement plan won’t be subject to the 10% additional tax if you’re under age 59 ½ — as long as the distribution is related to COVID-19. And the new law allows charitable deductions, beginning in 2020, for up $300 even if a taxpayer doesn’t itemize deductions.

Stay tuned

These are only a few of the tax breaks in the CARES Act. We’ll cover additional topics in coming weeks. In the meantime, please contact us if you have any questions about your situation.

© 2020


Posted in Blog | Comments Off on Cash payments and tax relief for individuals in new law

COVID-19 Update for the Week Ended April 18, 2020




5 Things You Should Know from the Week Ended April 18, 2020 

The tax and financial impacts of COVID-19 continue to unfold rapidly. To help keep you up to date on these rapidly evolving changes, we have put together the 5 most important things you should know from last week. 

1. You received a PPP Loan. Now what?  

It was a crazy week with much of our attention focused on the Paycheck Protection Program (PPP). As most everyone knows, the PPP met its limit on funding and no new applications will be accepted. Congress is discussing expanding the program, but for now there is no expansion available. 

If you were fortunate enough to receive a PPP loan, you must now rapidly focus your attention on the next eight-weeks and what portions are available for loan forgiveness. We have put together an overview of how the forgiveness process will work and what we believe is eligible for forgiveness.  

There are many unanswered questions currently regarding forgiveness and exactly how it will work. We are closely monitoring these developments. Once we receive additional guidance, we will distribute more information. If you have any questions about your specific situation or the forgiveness process, please do not hesitate to contact us. 

Strategy & Advice! We believe that prudent economic standards should take precedent over loan forgiveness. In other words, first do what is right for your business before considering the loan forgiveness rules. It is critically important to develop a detailed rolling 13-week cash projection to help you navigate these uncertain times. Since there are significant unanswered questions, we suggest you maintain good detailed records, talk with your banker on their process and keep your eye out for new guidance. We will publish additional information as it becomes available. Lastly, you can still utilize the payroll tax deferral provisions outlined below until you receive notice of loan forgiveness.  

 
2.  What to do if you did NOT get a PPP Loan? 

We understand your frustration. You did everything right – had your paperwork in order and timely submitted, but issues outside of your control caused you to not get much needed capital for your business. As we write this update on Sunday night (April 19th), it appears as if Congress is close to approving additional funding for this program. Fingers crossed, but if they do not come to an agreement, we need to consider Plan B. Here is what you need to do: 

First, update your rolling 13-week cash projection to reflect the lack of PPP funds. Open candid discussions with your landlord, lenders and vendors on the state of your business and how you plan to move forward. Ask for favorable terms, deferments and renegotiate where possible. As businesses begin to reopen and we start to fully understand the new economy, we will continue to revise our projections. See last week’s update for additional strategies and how to leverage unemployment benefits.  

There are still some incentives out there. The biggest one available is the Employee Retention Credit. The IRS published Frequently Asked Questions (FAQs) and we developed an overview which are helpful resources for understanding who is eligible.   

Basically, businesses partially or completely suspended due to COVID-19 can receive a refundable credit of 50% of wages paid to employees starting March 13, 2020, up to $5,000 per employee. This benefit is available only if you do not get a PPP loan. This credit  is in addition to any credits for sick and family leave under the Families First Coronavirus Response Act 

How do you get the money for this credit 

Last week, the IRS revised Form 7200 and its instructions. This is a very simple form which allows you to claim the credit not only for the first quarter 2020 but to obtain advance credits for second quarter benefits. You do not have to wait until you file your quarterly payroll tax reports. However, the advance payments will need to be reconciled on your quarterly payroll tax returns. This form is faxed to the IRS which will expedite payment of the advanced credit.  

 

3.  Payroll Tax Deferral 

Last week, the IRS issued Frequently Asked Questions (FAQs) which answers many questions about the deferral of employment tax deposits and payments through the end of the year.  

The CARES Act provides that employers may defer the deposit and payment of the employer’s portion of Social Security taxes and certain railroad retirement taxes starting March 27, 2020 through the end of the year. This amounts to 6.2% of wages, up to the social security wage limit ($137,700) per employee. The amount deferred through the end of the year is due at 50% on December 31, 2021, and the remaining 50% on December 31, 2022. 

This deferral is not available to anyone receiving loan forgiveness under a PPP loan. FAQ 4 specifies that employers who have received a PPP loan may defer deposit and payment of the employer’s share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date that the PPP loan is forgiven and continues to be deferred until the “applicable” due dates.  

Strategy & Advice! These provisions will be implemented through your payroll systems and providers. It is important to coordinate with your payroll vendor to insure these amounts are properly deferred and remitted when due.  

 

4.  Net Operating Loss Carryback 

The CARES Act modified the rules for net operating losses for tax years beginning after December 31, 2017 and ending before January 1, 2021. This new rule allows businesses (and individuals) to carryback these losses 5 years. Please see our detailed overview of changes to the NOL rules published in late March.  

Last week the IRS issued Rev Proc 2020-24 and Notice 2020-26 to provide guidance on how to carryback these losses and time frames for making such elections. In these pronouncements, the IRS outlined expedited filing rules by filing either Form 1139 or Form 1045 for any affected years. Under these expedited rules (with certain limitations), the IRS will have 90 days to examine the refund request and apply necessary refunds or credits.  

Strategy & Advice! Since we anticipate significant losses for the 2020 tax year, the planning for these losses will become a big part of our 2020 tax planning strategies. We will generally address these strategies once we are past the shelter-in-place orders and as we approach year end. However, if you incurred a net operating loss in either 2018 and/or 2019, it is important to take actions currently to take advantage of the new expedited refund rules. Please contact us if you incurred losses in those years or want to discuss your specific situation.  

 

5.  Stimulus checks 

Stimulus checks (economic impact payments) are being sent to individuals and will continue over the next several months. The stimulus payment is $1,200 per person plus $500 per dependent child. These benefits begin to phase out for single individuals once adjusted gross income (AGI) exceeds $75,000 or $150,000 for married couples. The phase out is $5 per $100 over the AGI limit until completely phased out. 

The benefits are disbursed based on your 2019 tax return if filed. If your 2019 return is not filed, then they will look at your 2018 tax return. There is no action that needs to be taken to get this payment.  

The IRS launched a website last week to allow people to see if they qualify, check the status of their payment, and update direct deposit information. Unfortunately, the website has not functioned properly. It generally provides an incorrect error message. This message does not affect your payment. The IRS is working through these problems and has rectified many of these issues. The IRS website is being updated daily and we recommend using it to track your payment progress. Unfortunately, there is no other mechanism in place for tracking, requesting or inquiring about these payments.  

In these uncertain times, we are continually evolving to ensure that we do what is in the best interest of our clients, team and community. 

We will continue to closely monitor the economic and tax changes and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.  

We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.  

Thank you for your continued support and stay safe!  

© 2020 


Posted in Blog | Comments Off on COVID-19 Update for the Week Ended April 18, 2020

What we know (or don’t know) about PPP Loan Forgiveness




PPP Loan Forgiveness As of April 17, 2020

 Congratulations! You are one of the lucky businesses who received (or is about to receive) a loan under the Paycheck Protection Program (PPP). Now that you have gotten your loan, our attention needs to focus on the forgiveness portion of the program. If you thought there was a lot of confusion and uncertainty involved in getting the loan, that pales in comparison to the forgiveness provisions. At the time of this writing, we know very little about how the forgiveness provisions will work. We are waiting on additional guidance from the SBA and Treasury to provide us with a better understanding of how this portion of the program will work. We have more questions than answers currently, but here is what we know (or think we know):

1.  Eight Week Coverage

This one is pretty clear, so let’s start there. Eligible “costs incurred, and payments made” over the eight weeks after you receive the funds from the PPP lender will be eligible for forgiveness under the program. This 8-week period is the “covered period”.

 2.  Eligible costs.

The following are the costs that are eligible for forgiveness:

  • Payroll costs;
  • Any payment of interest on any mortgage obligation (not including any prepayment of or payment of principal on a mortgage obligation) that was incurred before February 15, 2020,
  • Any payment of rent under a leasing agreement in force before February 15, 2020,
  • Any utility payment, including payment for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

For a business with employees, payroll costs are equal to the sum of:

  • Salary, wage, commission, or similar compensation; for a partnership, recent guidance from the SBA explains that payroll costs include not only guaranteed payments to a partner, but also any partner’s share of income of the partnership subject to self-employment income. These limited to $100,000 per-employee or per-partner.
  • Payment of cash tip or equivalent;
  • Payment for vacation, parental, family, medical, or sick leave;
  • Allowance for dismissal or separation;
  • Payment required for the provisions of group health care benefits, including insurance premiums;
  • Payment of any retirement benefit; or
  • Payment of State or local tax assessed on the compensation of employees.

Payroll costs do NOT include:

  • The compensation of an individual employee — or the self-employment income of a partner in a partnership – in excess of $100,000, as prorated for the covered period;
  • Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period;
  • Any compensation of an employee whose principal place of residence is outside of the United States;
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; 
  • Qualified family leave wages for which a credit is allowed under section 7003 of that same Act; or
  • Independent contractors not treated as employees for payroll tax purposes.

For a self-employed taxpayer, recent guidance defines payroll costs in a purely mechanical fashion as the net self-employment income reported on a 2019 Form 1040 Schedule C, Line 31.

3.  Requirements for full forgiveness

In order to get the full amount you borrowed forgiven, you need to meet a few requirements.

  • 75% of the funds must be spent on payroll costs;
  • No reduction in Full Time Equivalent Employees (“FTEs”)—meaning you must keep your staffing at the same levels from the beginning to the end of the loan period; and
  • No reduction on a salary more than 25% per employee for those under making under $100K

On the surface, that seems simple enough. Unfortunately, as we start digging into the specifics of how exactly we apply this, many unanswered questions arise. The potential saving grace is that the lender who you received your PPP loan from will ultimately be the one who decides what amount is forgiven and what documentation is needed. We anticipate a significant amount of guidance and clarification on how the forgiveness piece will work. Here are the major open items we see currently: 

  • What does “costs incurred and payment made” mean?

In its literal meaning it would lead us to interpret this to mean cost I actually incurred and paid during the eight-week period. But what about costs incurred before or after this period but paid during this period (i.e. April rent)? What if I pay my utilities by credit card? Do I have to pay off the credit card during the 8-week period? 

  • How does the reduction of FTEs and employee pay work?

Without additional guidance, here is how we think the forgiveness works:
For the reduction in FTEs. FTEs are measured and averaged using each pay period during the 8-week period. The average number of FTEs is then compared to a base period.

The employer gets to choose the base period that is most beneficial, either:

      >    February 15, 2019 – June 30, 2019, or 
      >   January 1, 2020 – February 29, 2020.

Example: A business receives a $100,000 PPP loan.

    • Average FTEs during the 8-week period was 21.
    • Average FTEs between February 15 – June 30, 2019 was 35.
    • Average FTEs between January 1 – February 29, 2020 was 30.

This business would choose the 2020 period as the base period because the average is lower. The calculation for maximum loan forgiveness would be: 21/30 * $100,000 = $70,000. This means that $30,000 of the loan will have to be repaid.

In addition to the FTE rules above, employee salaries/wages cannot be cut more than 25% during this eight-week period. This step is very math-intensive because you must look at every employee (who made less than $100,000 in 2019) individually. The CARES Act includes an “apples to oranges” comparison by utilizing a base period of 12-weeks and comparing those wages to our 8-week period. We don’t believe that was their intent. We anticipate guidance on this disparity since if we apply the law as written it would reduce the forgiveness amount for every loan regardless of the facts. Based on our interpretation of the intent of the law, here is how we believe it would work:

Assume Employee A makes $1,000 per week for 40 hours, but you cut his salary to $650 per week during the eight-week period. If A was receiving the reduced salary for all eight weeks, you would reduce the maximum loan forgiveness by $800 ($1,000 * 25% = $250 is the allowed reduction; A’s reduction is $1,000 – $650 = $350. Penalty is computed as: ($350 – $250) * 8 weeks = $800).

There are many open questions regarding how we would apply these provisions, such as what if an employee leaves?

  • What is rent, and does related party rent count?

The CARES Act does not specify rent for real or personal property, so we assume it means both. However, you can only include rent paid under a leasing agreement in force (signed) before February 15, 2020. There is no reference to related parties in CARES, so we assume that rent paid to related parties is included. Capital leases are excluded because they are a financing agreement and not a leasing agreement.

  • What utilities are included?

Payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. A “transportation utility” has been interpreted to mean fuel costs for business vehicles.

  • What interest expense is included?

Interest on loans secured by real or personal property that were in effect before February 15, 2020. If your line of credit is secured by real or personal property, then the interest paid on the line would be included.

  • Is the forgiven amount considered taxable income?

No. It is unclear at this point if we will still be able to deduct the expenses that we incurred and paid with the proceeds of the loan 

  • How will the forgiveness process work? 

As indicated earlier, you will be required to request forgiveness for your lender. The forgiveness provisions are not automatic nor are they guaranteed. Your lender will outline the documentation requirements. The Act provides that a borrower must submit to the lender an application, which must include a host of certifications and documentation verifying payments made. The lender then has 60 days to decide on forgiveness. And while the CARES Act states that if the lender receives the required documentation and certifications from the borrower, the lender will not be subject to SBA enforcement action or penalties if it chooses to forgive the loan. It appears at this point that the forgiveness will be based on your representation and documentation.

We will continue to closely monitor this matter and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.

We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.

© 2020


Posted in Blog | Comments Off on What we know (or don’t know) about PPP Loan Forgiveness

Using your financial statements during an economic crisis

The economic fallout from the coronavirus (COVID-19) pandemic has forced business owners to reevaluate their operations and make difficult decisions. One place to look for the information you need to make rational, reasonable moves is your financial statements. Under U.S. Generally Accepted Accounting Principles, these typically comprise a statement of cash flows, a balance sheet and an income statement.

Cash flow

A statement of cash flows should be organized into three sections: cash flows from operating, financing and investing activities. Ideally, a company generates enough cash from operations to cover its expenses.

For many businesses, the COVID-19 pandemic has caused revenue to drop precipitously without a proportionate decrease in certain (fixed) operating expenses. Keep a close eye on whether you’re reaching a danger point. To generate additional cash flow, you may need to borrow money — consider a Small Business Administration loan, if you’re eligible.

Assets and liabilities

Your balance sheet tallies your company’s assets, liabilities and net worth — creating a snapshot of its financial health on the statement date. Assets are typically listed in order of liquidity. Current assets (such as accounts receivable) are expected to be converted into cash within a year, while long-term assets (such as your plant and equipment) will be used to generate revenue beyond the next 12 months.

Similarly, liabilities are listed in order of maturity. Current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year.

As its name indicates, the balance sheet must balance — that is, assets must equal liabilities plus net worth. Net worth is the extent to which the book value of assets exceeds liabilities. In times of distress, certain assets (such as receivables, financial assets, pension funds and inventory) may need to be written off, and intangibles (such as brands and goodwill) may become impaired. These changes may cause the book value of a company’s net worth to be negative, suggesting that the business is insolvent. Other red flags include current assets growing faster than sales, and a deteriorating ratio of current assets to current liabilities.

Income and overhead

An income statement shows revenue and expenses over the accounting period. Revenue has fallen for many businesses as the result of social distancing during the COVID-19 outbreak. Fortunately, certain variable expenses — such as materials and direct labor costs — have also fallen.

Unfortunately, most fixed expenses — such as rent, equipment leasing fees, advertising, insurance premiums and manager salaries — are ongoing. Review costs that are categorized on the income statements as overhead and sales, general and administrative expenses. Consider whether you can scale back these items, renegotiate them or convert them into variable costs over the long run.

For example, you might return a leased copier that isn’t being used, decrease your insurance coverage or rely more on independent contractors, rather than employees, for certain tasks.

Sudden changes

Your existing financial statements may not account for the sudden changes inflicted upon businesses worldwide by COVID-19. We can assist you in evaluating them, gleaning insightful data using updated numbers, and generating new ones going forward.

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