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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The IRS and the U.S. Department of Treasury have announced new relief for federal taxpayers affected by the coronavirus (COVID-19) pandemic. The IRS had already extended certain deadlines to file and pay federal income taxes and estimated tax payments due April 15, 2020, without incurring late filing penalties, late payment penalties or interest. The additional relief, outlined in Notice 2020-23, applies to a wider variety of tax filers. The IRS also has announced new tools for taxpayers expecting Economic Impact Payments (also known as “recovery rebates”).

The extensions in a nutshell

The extensions apply to taxpayers, including Americans living and working abroad, with filing or payment deadlines on or after April 1, 2020, and before July 15, 2020. Covered tax forms and payments include:

• Individual income tax payments and returns,
• Calendar-year or fiscal-year corporate income tax payments and returns,
• Calendar-year or fiscal-year partnership return filings,
• Estate and trust income tax payments and returns,
• Gift and generation-skipping transfer tax payments and returns, and
• Tax-exempt organizations’ payments and returns.

The due dates for these payments and returns are automatically postponed to July 15, 2020. Taxpayers don’t need to contact the IRS, file any extension forms, or send letters or other documents to take advantage of the extensions. The accrual of interest, penalties and additions to tax for failure to file or pay will be suspended from April 1, 2020, to July 15, 2020, resuming on July 16, 2020.

The IRS is also extending the earlier relief regarding quarterly estimated tax payments. As of now, the payments ordinarily due on both April 15 and June 15 aren’t due until July 15. This applies to individual and businesses that must make estimated tax payments.

Extensions for other time-sensitive actions

Notably, the IRS is giving taxpayers extra time to perform specified other time-sensitive actions originally due to be performed on or after April 1, 2020, and before July 15, 2020. Those include filing petitions with the U.S. Tax Court or seeking review of a Tax Court decision, filing claims for tax credits or refunds, and filing a lawsuit based on a tax credit or refund claim. Taxpayers generally have three years to claim refunds, so the deadline for 2016 refunds otherwise would be April 15, 2020 (three years after the April 2017 filing date for 2016 tax returns).

Unfortunately for some taxpayers, the notice also provides the IRS with additional time to perform certain time-sensitive acts. It allows a 30-day postponement if the last date for performance of an action is on or after April 6, 2020, and before July 15, 2020. This extension could affect taxpayers who are currently under IRS examination, whose cases are with the Independent Office Appeals or who file amended returns or submit payments for a tax for which the assessment period would expire in that time period.

Economic Impact Payment tools

On April 10, 2020, the day after announcing the deadline extensions, the IRS launched a new online tool allowing quick registration for Economic Impact Payments for individuals who don’t normally file an income tax return. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides for payments of up to $1,200 for eligible individuals or $2,400 for married couples, plus $500 for each qualifying child. Eligible taxpayers who filed tax returns for 2019 or 2018 will receive the payments automatically.

The non-filer tool is intended for people who didn’t file a tax return for 2018 or 2019 and who don’t receive Social Security retirement, survivors or disability benefits. It’s available at IRS.gov.

The IRS says it expects to launch another tool, called “Get My Payment,” by April 17. It will provide taxpayers with information on the status of their payments, including the date payments are scheduled to be deposited in their bank accounts or mailed to them. Eligible taxpayers also will be able to provide their bank account information to expedite payment, assuming the payment hasn’t already been scheduled for delivery.

Stay tuned

The IRS, Department of Treasury, Congress and the Trump administration continue to work on new forms of relief to help individuals and businesses cope with the effects of the COVID-19 crisis. Turn to us for all of the latest developments and available opportunities.

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.

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No one said estate planning is easy, and this is especially true if you have a “blended family.” The good news is that there are two trust types — a qualified terminable interest property (QTIP) trust and an irrevocable life insurance trust (ILIT) — that can provide for your children from a previous marriage while also taking care of your current spouse and any children from your current marriage.

QTIP trust

At minimum, you should have a will in place that specifies how your wealth should be distributed. Otherwise, a significant portion of your estate may go to your children from a previous marriage — even if they’re now adults and don’t need the assets as much as your current spouse and any other children.

To implement your wishes for wealth distribution, you may find it helpful to establish a QTIP trust. This trust qualifies for the estate tax marital deduction, meaning that assets you transfer to the trust aren’t taxed when you die, and the entire amount is available for your spouse’s support. But unlike an ordinary marital trust, a QTIP trust can provide your spouse with income for life while preserving the principal for your children (from either your current or previous marriage, or from both) or other beneficiaries.

When your spouse dies, though, the trust assets will be subject to tax as part of his or her estate, even if the assets are to pass to your children as instructed in your will.

ILIT

In some cases — particularly when one spouse is considerably younger than the other — a QTIP trust may not be the best solution. That’s because the children from a first marriage, who may be much older than those from the second marriage, may have to wait years until the younger spouse dies and they can receive their inheritance.

In situations like this, an ILIT may be a better solution. The ILIT purchases life insurance on the older spouse, who makes annual exclusion gifts to the trust to cover the premiums. If the ILIT is designed properly, there won’t be any estate tax on the insurance proceeds.

When the older spouse dies, the trust collects the death benefit and pays it out to the children from the first marriage. The older children receive their inheritance immediately, and the other assets remain available to provide for the younger spouse and children.

Discuss your plans

Before choosing any estate planning approach, discuss your plans with your loved ones. Even if your plan is inherently fair, it may not be perceived that way without an explanation. In addition, consider the consequences of different wealth transfer strategies. QTIP trusts and ILITs are only two of the many tools available to control the distribution of your wealth in a way that minimizes taxes and maximizes benefits for everyone involved. Contact us with any questions.

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The Coronavirus Aid, Relief and Economic Security Act (CARES Act) allocates nearly $350 billion to a new lending program through the Small Business Administration (SBA), aimed at helping employers cover their payrolls during the coronavirus (COVID-19) pandemic. The loans under the Paycheck Protection Program (PPP) are subject to 100% forgiveness if certain criteria are satisfied, and neither the government nor lenders will impose fees.

The program is open to virtually every U.S. small business — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. It’s available through June 30, 2020, but on a “first-come, first-served” basis. The U.S. Treasury Department is urging businesses to apply promptly.

Eligible borrowers

The PPP generally is available to small organizations with fewer than 500 employees. The term “employees” includes full-time, part-time and any other status workers.

For businesses in the accommodation and food services sector, the 500-employee threshold is applied on a per physical location basis. The SBA’s normal affiliation rules also don’t apply to companies that receive financial assistance from an SBA-licensed Small Business Investment Company or certain franchises.

Loan requirements

The SBA is waiving its usual requirements for loans. Businesses need not provide personal guarantees or collateral — or demonstrate the inability to obtain some or all of the loan funds from other sources (also known as the Credit Elsewhere requirement).

Instead, borrowers must certify in good faith all of the following:

• They were operating on February 15, 2020, and had employees for whom they paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC,
• Current economic uncertainty makes the loan necessary to continue ongoing operations,
• The funds will be used to retain workers and maintain payroll, or to make mortgage interest, rent and utility payments for eight weeks (75% of loan proceeds must be used for payroll costs),
• They don’t have, and won’t receive, another loan under the PPP, and
• The number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments and covered rent payments and utilities.

Independent contractors, sole proprietors and self-employed individuals must provide additional documentation, such as payroll processor records, payroll tax filings, Form 1099s and, for sole proprietors, income and expenses.

Note that, in the days leading up to the opening of the application process, some banks expressed concern that a lack of guidance could result in significant delays in issuing loans. The Treasury Department didn’t release its interim final rule until the evening before the program began accepting applications, so lags in funding may occur.

Loan amounts and terms

Eligible businesses can obtain loans for 2 1/2 months of their average monthly payroll costs plus the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020 (less the amount of any advance under an EIDL COVID-19 loan, which doesn’t have to be repaid). Seasonal or new businesses will use different applicable time periods for the calculation.

Loans are subject to a $10 million cap. Payroll costs are limited to $100,000 annualized for each employee; amounts above that must be excluded from the calculation. Independent contractors who have the ability to apply for a PPP loan on their own don’t count for purposes of a borrower’s payroll.

Payroll costs include compensation, cash tips, severance, employee benefits (including leave), and state and local taxes on compensation. For sole proprietors, independent contractors and self-employed individuals, payroll includes wages, commissions, income and net earnings from self-employment.

Payroll excludes payroll and income taxes and compensation paid to employees who don’t live in the United States. It also doesn’t include qualified sick or family leave wages paid under the recent Families First Coronavirus Response Act.

The loans carry a fixed interest rate of only 1% and, although the CARES Act provided for terms of up to 10 years, will run for two years. All payments are deferred for six months, but interest will continue to accrue. Borrowers can pre-pay without penalties or fees.

Loan forgiveness

Businesses can qualify for loan forgiveness for amounts used for payroll costs, mortgage interest, and rent and utility payments over the eight weeks after receiving the loan. While the CARES Act provides that a borrower can spend up to 50% of loan proceeds on nonpayroll costs and still qualify for forgiveness, the final regulations indicate that no more than 25% of the loan proceeds can be used for such costs and benefit from forgiveness.

Borrowers also must maintain staff and payroll to qualify for full forgiveness. Loan forgiveness will be reduced if salaries and wages are reduced by more than 25% for any employee who made less than $100,000 annualized in 2019. Businesses will have until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020.

Businesses can submit a request for forgiveness to their lenders. Requests must include documents verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. Lenders must make forgiveness decisions within 60 days.

Act now!

The application process for eligible small businesses and sole proprietors began April 3, 2020, and independent contractors and self-employed individuals can begin to apply on April 10, 2020. Businesses might be able to expedite the process by seeking loans from financial institutions where they have existing lending relationships. Contact us for additional information.

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