For many small businesses, the grand reopening is still on hold. The rapid spread of the Delta variant of COVID-19 has mired a variety of companies in diminished revenue and serious staffing shortages. In response, the Small Business Administration (SBA) has retooled its Economic Injury Disaster Loan (EIDL) program to offer targeted relief to eligible employers.
A brief history
The EIDL program was in place well before 2020. However, the federal government has ramped up the initiative’s visibility while trying to help small businesses during the pandemic.
With the entire country essentially declared a disaster area, the CARES Act established an enhanced EIDL program for small businesses affected by COVID-19. It offered lower interest rates, longer repayment terms and a streamlined application process.
The American Rescue Plan Act upped the ante, offering eligible companies targeted EIDL advances that are excluded from the gross income of the person who receives the funds. The law stipulates that no deduction or basis increase will be denied, and no tax attribute will be reduced, because of this gross income exclusion.
The SBA’s most recent enhancements to the EIDL program offer “a lifeline to millions of small businesses who are still being impacted by the pandemic,” according to SBA Administrator Isabella Casillas Guzman. (Eligible employers include not only small businesses, but also qualifying nonprofits and agricultural companies in all U.S. states and territories.)
First and foremost, the loan cap has increased from $500,000 to $2 million. Eligible small businesses can use these funds for almost any operating expense, including payroll and equipment purchases. Funds can also be applied for certain debt payments. Specifically, the SBA has expanded the allowable use of EIDL funds to prepay commercial debt and pay down federal business debt.
In addition, the agency has implemented a new deferred payment period under which borrowers can wait until two years after loan origination to begin repaying their COVID-related EIDLs.
If you believe your small business could qualify and benefit from these newly enhanced EIDLs, first identify how much money you need and how soon you need it. The SBA is offering a 30-day “exclusivity window” to approve and disburse loans of $500,000 or less. Approval and disbursement of loans of more than $500,000 will begin after this 30-day period.
The agency has also rolled out a streamlined application process that establishes “more simplified affiliation requirements” modeled after those of the Restaurant Revitalization Fund. The deadline for applications remains December 31, 2021. As is the case with any government loan, it’s better to apply earlier rather than later in case funds run out.
Help with the process
For further details about the new and improved COVID-related EIDL program, go to sba.gov/eidl. And don’t hesitate to contact us. We can help you determine whether your small business qualifies for one of these loans and, if so, assist with completing the application process.
© 2021 Covenant CPA
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have a business in federally declared disaster areas.
Friday, October 15
- If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2020 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2020 to certain employer-sponsored retirement plans.
Monday, November 1
- Report income tax withholding and FICA taxes for third quarter 2021 (Form 941) and pay any tax due. (See exception below under “November 10.”)
Wednesday, November 10
- Report income tax withholding and FICA taxes for third quarter 2021 (Form 941), if you deposited on time (and in full) all of the associated taxes due.
Wednesday, December 15
- If a calendar-year C corporation, pay the fourth installment of 2021 estimated income taxes.
Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.
© 2021 Covenant CPA
The week of September 13-17 has been declared National Small Business Week by the Small Business Administration. To commemorate the week, here are three tax breaks to consider.
1. Claim bonus depreciation or a Section 179 deduction for asset additions
Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2021. That means your business might be able to write off the entire cost of some or all asset additions on this year’s return. Consider making acquisitions between now and December 31.
Note: It doesn’t always make sense to claim a 100% bonus depreciation deduction in the first year that qualifying property is placed in service. For example, if you think that tax rates will increase in the future — either due to tax law changes or a change in your income — it might be better to forgo bonus depreciation and instead depreciate your 2021 asset acquisitions over time.
There’s also a Section 179 deduction for eligible asset purchases. The maximum Section 179 deduction is $1.05 million for qualifying property placed in service in 2021. Recent tax laws have enhanced Section 179 and bonus depreciation but most businesses benefit more by claiming bonus depreciation. We can explain the details of these tax breaks and which is right for your business. You don’t have to decide until you file your tax return.
2. Claim bonus depreciation for a heavy vehicle
The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy SUVs, pickups and vans used over 50% for business. For federal tax purposes, heavy vehicles are treated as transportation equipment so they qualify for 100% bonus depreciation.
This option is available only when the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door.
Buying an eligible vehicle and placing it in service before the end of the year can deliver a big write-off on this year’s return. Before signing a sales contract, we can help evaluate what’s right for your business.
3. Maximize the QBI deduction for pass-through businesses
A valuable deduction is the one based on qualified business income (QBI) from pass-through entities. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. This deduction is subject to restrictions that can apply at higher income levels and based on the owner’s taxable income.
For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations. For these taxpayers, the deduction can also be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.
Because of various limitations on the QBI deduction, tax planning moves can unexpectedly increase or decrease it. For example, strategies that reduce this year’s taxable income can have the negative side-effect of reducing your QBI deduction.
These are only a few of the tax breaks your small business may be able to claim. Contact us to help evaluate your planning options and optimize your tax results.
© 2021 Covenant CPA
Commercial loans, particularly small business loans, have been in the news over the past year or so. The federal government’s Paycheck Protection Program has been helpful to many companies, though fraught with administrative challenges.
As your business pushes forward, you may find yourself in need of cash in the months ahead. If so, more traditional commercial loan options are still out there. Before you apply, however, think like a lender to be as prepared as possible and know for sure that the loan is a good idea.
4 basic questions
At the most basic level, a lender has four questions in mind:
- How much money do you want?
- How do you plan to use it?
- When do you need it?
- How soon can you repay the loan?
Pose these questions to yourself and your leadership team. Be sure you’re crystal clear on the answers. You’ll need to explain your business objectives in detail and provide a history of previous lender financing as well as other capital contributions.
Lenders will also look at your company’s track record with creditors. This includes business credit reports and your company’s credit score.
Consider the three C’s
Lenders want to minimize risk. So, while you’re role-playing as one, consider the three C’s of your company:
1. Character. The strength of the management team — its skills, reputation, training and experience — is a key indicator of whether a business loan will be repaid. Strive to work through natural biases that can arise when reviewing your own performance. What areas of your business could be viewed as weaknesses, and how can you assure a lender that you’re improving them?
2. Capacity. Lenders want to know how you’ll use the loan proceeds to increase cash flow enough to make payments by the maturity date. Work up reasonable cash flow and profitability projections that demonstrate the feasibility of your strategic objectives. Convince yourself before you try to convince the bank!
3. Collateral. These are the assets pledged if you don’t generate enough incremental cash flow to repay the loan. Collateral is a lender’s backup plan in case your financial projections fall short. Examples include real estate, savings, stock, inventory and equipment.
As part of your effort to think like a lender, use your financial statements to create a thorough inventory of assets that could end up as collateral. Doing so will help you clearly see what’s at stake with the loan. You may need to put personal assets on the line as well.
Gain some insight
Applying for a business loan can be a stressful and even frustrating experience. By taking on the lender’s mindset, you’ll be better prepared for the process. What’s more, you could gain insights into how to better develop strategic initiatives. Contact our firm for help.
© 2021 Covenant CPA
If you’re a business owner and you’re getting a divorce, tax issues can complicate matters. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.
Tax-free property transfers
You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).
Let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.
Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:
- A year after the date the marriage ends, or
- Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.
More tax issues
Later on, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).
What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.
Note that the person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.
In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.
Plan ahead to avoid surprises
Like many major life events, divorce can have major tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. We can help you minimize the adverse tax consequences of settling your divorce.
© 2021 Covenant CPA
Although COVID-19 remains a concern, many people have started traveling again — both for business and pleasure. Unfortunately, as travel demand has increased, so has travel-related fraud.
For example, some fraud perpetrators posing as airline employees call would-be victims to try to elicit credit card numbers. Other scam artists send phishing emails that appear to offer cheap seats or rooms. And there are plenty of fake websites masquerading as legitimate travel companies.
Don’t fall for fraud
As you plan your next trip, take these steps to help reduce fraud risk:
Ignore unsolicited communications. Whether you receive an email, text, flyer or telemarketing call regarding travel bargains, it’s probably smart to ignore it. Afraid of missing out on a legitimate deal? Directly contact the airline, hotel or rental car company featured in the promotion.
Book with established companies. Whether traveling for business or pleasure, make reservations with companies with names you know. If you’re booking with a new service provider, read online reviews by fellow travelers. Some review platforms allow you to search using keywords, others identify keywords frequently used by reviewers and allow you to filter for those reviews. Also perform an online search with the name of the company and words such as “fraud” or “scam.”
Watch out for lodging scams. Many travelers use online property marketplaces to find lodging. But you need to scrutinize listings. Some fraud perpetrators post ads for nonexistent properties with enticing, below-market rates. If a “property owner” asks you to move the conversation off the site to avoid fees, refuse the request. Reputable platforms provide certain protections, such as insurance in the event the transaction results in fraud. They also keep your credit card information confidential.
Work with trusted services. If you travel frequently for business or pleasure or don’t have time to research trips, consider engaging a travel advisor or travel agent. These professionals maintain close working relationships with legitimate companies, know about the latest deals, may be able to provide insider tips about your destination and can, of course, make reservations for you.
Go with your gut
Before booking your vacation or business trip, scrutinize it for signs of fraud. If you doubt the legitimacy of a service provider or are suspicious of individuals involved in a transaction, go with your gut and look elsewhere. Safe travel requires due diligence that starts long before your journey begins.
© 2021 Covenant CPA
Do you play a major role in a closely held corporation and sometimes spend money on corporate expenses personally? These costs may wind up being nondeductible both by an officer and the corporation unless proper steps are taken. This issue is more likely to arise in connection with a financially troubled corporation.
Deductible vs. nondeductible expenses
In general, you can’t deduct an expense you incur on behalf of your corporation, even if it’s a legitimate “trade or business” expense and even if the corporation is financially troubled. This is because a taxpayer can only deduct expenses that are his own. And since your corporation’s legal existence as a separate entity must be respected, the corporation’s costs aren’t yours and thus can’t be deducted even if you pay them.
What’s more, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, be advised that it shouldn’t be a practice of your corporation’s officers or major shareholders to cover corporate costs.
When expenses may be deductible
On the other hand, if a corporate executive incurs costs that relate to an essential part of his or her duties as an executive, they may be deductible as ordinary and necessary expenses related to his or her “trade or business” of being an executive. If you wish to set up an arrangement providing for payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may be authorized to attend out-of-town business conferences on the corporation’s behalf at your personal expense.
Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. Turn the receipts over to the corporation and use an expense reimbursement claim form or system. This will at least allow the corporation to deduct the amount of the reimbursement.
Contact us if you’d like assistance or would like to discuss these issues further.
© 2021 Covenant CPA
Fraud is costly for all victimized companies, but it’s even worse in the construction sector. According to the Association of Certified Fraud Examiners’ Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse, construction companies affected by fraud lose a median $200,000 per fraud incident, compared with $125,000 per incident for all organizations.
Some types of fraud are more prevalent in the construction industry, particularly payroll and billing fraud. These can lead to legal liability and fines. For example, paying under-the-table cash wages to avoid paying payroll taxes could result in criminal charges and significant penalties. To prevent your managers and workers from acting illegally or unethically, tighten your internal controls.
Certain internal controls are essential — including segregation of duties. This means that multiple employees should handle multiple financial or accounting tasks. For example, the person who processes cash transactions shouldn’t also prepare your company’s bank deposits. If you don’t have enough accounting employees to segregate duties, consider outsourcing some or all accounting functions. Also, have monthly bank statements sent directly to you or a manager independent of your accounting department.
You can reduce purchasing fraud threats by naming someone other than your purchasing agent — you or an estimator, for instance — to review vendor invoices, purchase orders and other documents. Also use prenumbered purchase orders and regularly check materials and supplies to ensure they correspond to what was ordered.
Kickbacks and bid-rigging can be kept to a minimum with scrutiny. If your company is suddenly winning bids that you haven’t in the past and that seem like a stretch, verify that your bid processes have been followed. Sometimes employees disguise illegal activities as change orders, so be sure to scrutinize each change order.
To minimize the risk of payroll fraud in your company, ask someone independent of your accounting department to verify the names and pay rates on your payroll. And if you don’t already, pay employees using direct deposit, rather than with checks or cash. You may also want to make surprise jobsite visits to compare employee headcounts to time reports and wage payments.
Don’t forget to enlist the help of fraud experts. We can review your accounting records and inventory and visit jobsites to help assess risk and suggest additional internal controls.
© 2021 Covenant CPA
No matter the size or shape of a business, one really can’t overstate the importance of sound accounts receivable policies and procedures. Without a strong and steady inflow of cash, even the most wildly successful company will likely stumble and could even collapse.
If your collections aren’t as efficient as you’d like, consider these five ways to improve them:
1. Redesign your invoices. It may seem superficial, but the design of invoices really does matter. Customers prefer bills that are aesthetically pleasing and easy to understand. Sloppy or confusing invoices will likely slow down the payment process as customers contact you for clarification rather than simply remit payment. Of course, accuracy is also critical to reducing questions and speeding up payment.
2. Appoint a collections champion. At some companies, there may be several people handling accounts receivable but no one primarily focusing on collections. Giving one employee the ultimate responsibility for resolving past due invoices ensures the “collection buck” stops with someone. If budget allows, you could even hire an accounts receivable specialist to fill this role.
3. Expand your payment options. The more ways customers can pay, the easier it is for them to pay promptly. Although some customers still like traditional payment options such as mailing a check or submitting a credit card number, more and more people now prefer the convenience of mobile payments via a dedicated app or using third-party services such as PayPal, Venmo or Square.
4. Get acquainted (or reacquainted) with your customers. If your business largely engages in B2B transactions, many of your customers may have specific procedures that you must follow to properly format and submit invoices. Review these procedures and be sure your staff is following them carefully to avoid payment delays. Also, consider contacting customers a couple of days before payment is due — especially for large payments — to verify that everything is on track.
5. Generate accounts receivable aging reports. Often, the culprit behind slow collections is a lack of timely, accurate data. Accounts receivable aging reports provide an at-a-glance view of each customer’s current payment status, including their respective outstanding balances. Aging reports typically track the payment status of customers by time periods, such as 0–30 days, 31–60 days, 61–90 days and 91+ days past due.
With easy access to this data, you’ll have a better idea of where to focus your efforts. For example, you can concentrate on collecting the largest receivables that are the furthest past due. Or you can zero in on collecting receivables that are between 31 and 60 days outstanding before they get any further behind.
Need help setting up aging reports or improving the ones you’re currently running? Please let us know — we’d be happy to help with this or any aspect of improving your accounts receivable processes.
© 2021 Covenant CPA
Without trust between you and your employees, your business probably wouldn’t be very successful. Delegating responsibility, sharing ideas, working as a team — all require a certain level of trust. However, too much trust can lead to occupational fraud and conflicts of interest. To maintain the proper balance, establish a policy that outlines your disclosure expectations and require employees to follow it.
What constitutes conflict of interest? Let’s look at a fictional example: Veronica is the manager of a manufacturing company’s purchasing department. She’s also part owner of a business that sells supplies to the manufacturer — a fact she hasn’t disclosed to her employer. And, in fact, Veronica has personally profited from her business’s lucrative long-term contract with her employer.
What makes this scenario a conflict of interest isn’t so much that Veronica has profited from her position, but that her employer is ignorant of the relationship. When employers are informed about their employees’ outside business interests, they can act to exclude employees, vendors or customers from participation in transactions where there might be a conflict of interest. Or they can allow parties to continue participating in a transaction — even if it runs contrary to ethical best practices. But it’s the employer’s, not the employee’s, decision to make.
Prevention is the best policy
Sometimes employees simply neglect to inform their employers about possible conflicts of interest. In other cases, they go to great lengths to hide conflicts. Perhaps they’re afraid a conflict will jeopardize their jobs or get them into legal trouble.
Prevention is the best policy here. Develop conflict-of-interest policies and communicate them to all employees. Provide specific examples of conflicts and spell out exactly why you consider the activities depicted to be deceptive, unethical and possibly illegal. Don’t forget to state the consequences of nondisclosure of conflicts, such as immediate termination.
Providing personal information
You might also require employees to complete an annual disclosure statement on which they list the names and addresses of their family members, their family’s employers and business interests, and whether the employees have an interest in those entities (or any others). To help ensure accurate statements, provide employees with a hotline to call if they have questions about your policy, aren’t sure how it relates to their circumstances or want to report someone else with an apparent conflict.
Also protect your business from conflicted vendors and customers. Before entering into a new agreement, compare the names and addresses on your employee disclosure statements with ownership information provided by prospective business partners.
Not necessarily fraud
Conflicts of interest aren’t necessarily fraud. But if you don’t know how an employee is personally profiting off your company, it could suffer serious consequences, including financial losses. Contact us for help reducing this risk.
© 2021 Covenant CPA