by Jean Miller | Accounting News, Business Growth, News, Newsletter, Small Business
The Small Business Administration (SBA) recently announced significant changes to its 504 Loan Program. This program has traditionally been a vital resource for small businesses seeking long-term, fixed-rate financing, and earlier this month, the SBA introduced a rule change that could make it easier for small businesses to refinance existing debt. Here’s a closer look at the new rule and how it impacts small business owners looking to refinance through the SBA 504 Loan Program.
Key Changes to SBA 504 Debt Refinancing
The SBA’s new rule improves several components of the 504 Loan Program, particularly focusing on debt refinancing with expansion (meaning a business is growing and seeking funding) and without expansion (meaning a business is just restructuring existing debt). The goal of these changes is to make the program accessible to a wider range of small businesses.
Removal of the 50% Cap on Debt Refinance Without Expansion
Previously, the SBA 504 Loan Program levied a 50% cap on the amount of existing debt that could be refinanced without expansion. This limited small businesses from fully using the program to alleviate financial burdens. The new rule does away with the 50% cap, so small businesses can refinance a higher proportion of their debt, even if they are not planning to expand.
Loan-to-Value (LTV) Requirement Raised to 90%
Another significant update is the increase of the loan-to-value (LTV) ratio to 90% for debt refinancing without expansion, meaning businesses can now refinance up to 90% of their debt. This adjustment can alleviate financial stress for small business owners, making it easier to focus on maintaining the stability of their operations.
Alignment of the “Substantially All” Standard
The SBA has made the “substantially all” standard for 504 debt refinancing with expansion consistent with the standard for refinancing without expansion. Both types of refinancing now use a 75% threshold. This simplifies the criteria, expands access, and streamlines loan processing.
Inclusion of “Other Secured Debt”
The new rule allows for the inclusion of certain “other secured debt” in the refinancing process. This is a positive change allowing for further relief to small businesses that may have other forms of secured debt beyond traditional loans.
Revision of the Substantial Benefit Test
Lastly, the SBA has updated the substantial benefit test for 504 debt refinancing, both with and without expansion, when refinancing government-backed loans. The new test requires businesses to show a clear financial benefit, like lower monthly payments or better cash flow, to qualify for refinancing. This ensures that a refinance will actually help the business financially, regardless of whether it’s expanding.
These SBA rule changes outlined above could provide the financial relief many small businesses need, allowing them to consolidate debt, lower interest payments, and free up cash flow to focus on growth and sustainability.
by Jean Miller | Accounting News, News, Newsletter, Small Business, Tax
A crucial tax benefit for businesses is on the verge of expiring. The Qualified Business Income (QBI) deduction, a significant component of the 2017 Tax Cuts and Jobs Act (TCJA), is set to end on December 31, 2025. Read on as we go over how this deduction works and how its impending expiration could affect small businesses.
What is the Qualified Business Income (QBI) Deduction?
The Qualified Business Income (QBI) deduction, introduced by the TCJA, allows eligible small business owners to deduct up to 20% of their qualified business income from their taxable income. This deduction is available to individuals who own pass-through entities, such as sole proprietorships, partnerships, S corporations, and some rental property owners.
How Does the QBI Deduction Work?
To qualify for the QBI deduction, business owners must meet several criteria:
- Type of Income: The deduction applies to income earned from a qualified trade or business, excluding investment income.
- Income Limits: For 2024, the QBI deduction begins to phase out for single taxpayers with taxable income over $191,500 and for married couples filing jointly with income over $383,900. Beyond these thresholds, the deduction may be subject to limitations based on wages paid and the value of qualified property.
- Specified Service Trades or Businesses (SSTBs): If a business falls under SSTBs—such as those in health, law, or consulting—the deduction may be limited or unavailable if the taxpayer’s income exceeds certain thresholds.
The QBI deduction also excludes capital gains or losses, dividends, interest income, and income earned outside the United States.
How Could the Expiration of the QBI Affect Your Small Business?
Let’s say you’re a small business owner who earned $150,000 this year. Without the QBI deduction, you’d be taxed on the full amount, minus any other eligible tax credits. Based on the current tax brackets, a single filer would fall into the 24% tax bracket for income between $95,375 and $182,100. Thus, you’d end up paying 24% on a portion of your income, totaling $36,000 in taxes.
With the QBI deduction, you can reduce your taxable income by 20%. This means instead of being taxed on $150,000, you’d only be taxed on $120,000. Despite remaining in the same 24% tax bracket, your tax bill would decrease to $28,800, which translates into a savings of $7,200.
For businesses with larger earnings, the benefits are even more substantial. Suppose your business earns $600,000 in income. Without the QBI deduction, you’d be taxed on the entire $600,000. At a 35% tax rate for single filers with this level of income, you’d face a tax bill of $210,000.
Applying the QBI deduction allows you to reduce your taxable income to $480,000. This adjustment results in a tax bill of $168,000 at the same 35% tax rate. Therefore, the QBI deduction saves you $42,000 in taxes each year. For high-earning businesses, such deductions can lead to significant tax savings.
The Impending Expiration and Its Impact
Unless Congress extends or modifies the QBI tax provision, it will expire at the end of 2025, and business owners will no longer benefit from this valuable tax break. The impact on small business owners could include:
- Increased Tax Liability: Without the 20% deduction, business owners will face higher taxable income, leading to potentially higher federal income taxes. For many small businesses, this could mean a substantial increase in their overall tax burden.
- Strategic Tax Planning: Business owners should consider how the expiration might affect their long-term tax strategy. The loss of this deduction may impact decisions related to business expansion, compensation structures, and other financial planning aspects.
- Legislative Uncertainty: The fate of the QBI deduction is still subject to legislative changes. While there is potential for an extension or modification, business owners should prepare for the possibility that the deduction may not be available beyond 2025.
Preparing for the Change
Given the potential tax increase, small business owners should take proactive steps:
- Consult a Tax Professional: Tax advisors can help navigate the complexities of tax planning in light of the impending expiration. They can offer strategies to mitigate the impact and prepare for future changes.
- Review Financial Projections: Business owners should analyze how losing the QBI deduction will affect financial projections and budgeting, and adjust business strategies accordingly.
- Stay Informed: Keeping current with legislative developments and changes in tax laws will help you adapt your financial plans effectively.
by Jean Miller | Accounting News, Business Growth, News, Newsletter, Small Business
With less than three months before the 2024 presidential election, inflation remains stubborn and economic uncertainty continues. Both political and economic unpredictability can create volatility that requires businesses to be more strategic with financial management. Read on as we go over steps small business owners can take to ensure sustainable growth and financial stability.
Improve Operational Efficiency
Maximizing operational efficiency is crucial for ensuring long-term growth. Here are a few key things you can do:
- Streamline processes, automate repetitive tasks, and optimize your supply chain to enhance productivity while reducing costs.
- Evaluate your business operations regularly to identify bottlenecks or redundant activities.
- Implement technologies such as project management software or cloud-based solutions to make your business more agile, allowing you to respond swiftly to market changes.
Control Costs
Effective cost management is key during periods of economic uncertainty. Start by analyzing your financial statements to identify areas where expenses can be trimmed, such as:
- Renegotiating contracts
- Eliminating wasteful spending and scaling back on discretionary spending
- Searching for more affordable suppliers without compromising quality
- Optimizing your marketing budget
- Downsizing inventory.
Keeping a lean operation allows you to preserve cash that can be redirected toward initiatives that directly impact growth and stability. It also allows your business to remain flexible and better prepared to navigate financial challenges.
Seek Strategic Financing Options
While financing is pricier in today’s market, that shouldn’t stop you from getting the funding your business needs. Stay open-minded and flexible, explore creative solutions, and look at different financing options. In addition to traditional bank loans, consider alternative financing solutions such as Small Business Administration (SBA) loans, crowdfunding, or venture capital. These options often provide flexible repayment terms and are tailored to support businesses during challenging periods. Additionally, maintaining a good credit profile increases your chances of securing favorable financing terms when needed.
Focus on Customer Retention
Increasing customer retention rates can have a significant impact on your bottom line. Even a small boost in retention can lead to a large increase in profitability. Loyal customers tend to spend more over time and are more likely to refer others to your business. To build a loyal customer base, focus on delivering exceptional service, personalizing your interactions, and providing consistent value. Consider implementing strategies like loyalty programs, exclusive discounts, and proactive communication. Prioritizing customer retention not only stabilizes revenue but also strengthens your brand in uncertain times.
Economic and political uncertainty doesn’t have to be a roadblock to growth. Weather uncertainty by focusing on operational efficiency, controlling costs, retaining customers, and seeking financing options that support your long-term objectives.
by Jean Miller | Accounting News, News, Newsletter, Small Business
The Corporate Transparency Act (CTA), a significant piece of legislation affecting U.S.-based businesses, went into effect earlier this year. This new requirement mandates the reporting of beneficial ownership information to combat unlawful activities like money laundering and tax evasion. Small businesses, in particular, need to understand how this regulation impacts them and how to comply to avoid penalties. Here’s what you need to know about the Corporate Transparency Act and its implications for small businesses.
Understanding Beneficial Ownership
A beneficial owner is any individual who directly or indirectly exercises substantial control over a company or owns or controls at least 25% of the company’s ownership interests. This includes individuals who have the power to make significant decisions regarding the company’s operations, finances, or policies. Examples include a company president, a senior officer within the C-suite, someone authorized to appoint or remove senior officers or directors, and otherwise important decision-makers within the reporting company.
Which Businesses Are Affected?
The CTA applies to a wide range of entities, including corporations, limited liability companies (LLCs), and other similar entities created or registered in the U.S. However, there are exemptions for certain types of organizations, such as publicly traded companies, nonprofits, large operating companies with over 20 employees and more than $5 million in gross receipts, and entities already subject to substantial federal or state regulation.
Small businesses, especially those that do not meet the exemption criteria, must comply with the new reporting requirements. This includes many startups, family-owned businesses, and other closely held entities.
What Needs to Be Reported?
Businesses subject to the CTA must report specific information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The required information includes:
- Full legal name
- Date of birth
- Residential or business street address
- Unique identifying number from an acceptable identification document (such as a passport or driver’s license)
Additionally, companies must provide the name and address of the entity itself, along with details of the person filing the report.
How to Prepare for Reporting
Small businesses should take proactive steps to ensure compliance with the CTA:
- Identify Beneficial Owners: Conduct a thorough review of your ownership structure to identify all individuals who meet the beneficial ownership criteria. Because “beneficial owners” are classified as individuals possessing at least 25% ownership in an entity or exercising significant control over it, identifying these owners can be complex and nuanced. Therefore, it’s important to assess the company’s management structure and contractual agreements to pinpoint who holds ultimate control of the business.
- Gather Required Information: Collect and verify the necessary information for each beneficial owner, ensuring accuracy and completeness.
- Establish Record-Keeping Practices: Maintain organized records of beneficial ownership information, as this will facilitate ongoing compliance and ease the reporting process.
- Consult with Legal and Compliance Experts: Seek guidance from legal and compliance professionals to ensure your business understands and meets all regulatory requirements.
Reporting Deadlines and Penalties
For entities created or registered before January 1, 2024, the initial report must be filed with FinCEN by January 1, 2025. Businesses formed or registered after January 1, 2024, have 90 calendar days from the date of creation or registration to file their initial report.
Any updates or corrections to beneficial ownership information previously filed with FinCEN must be submitted within 30 days. Updates must be filed for each reporting company and each reportable beneficial owner after changes such as a new address update or a new passport or driver’s license number.
Failure to comply with the CTA can result in significant penalties. Willful violations, including providing false information or failing to report, can lead to civil penalties of up to $500 per day and criminal penalties of up to $10,000 and two years in prison.
by Jean Miller | Accounting News, Business Growth, News, Newsletter, Small Business
The Small Business Administration (SBA) is set to introduce a new working capital pilot program that promises to provide a significant boost to small businesses. This initiative, which is expected to roll out in the coming months, will offer government-backed credit lines of up to $5 million, making it a valuable resource for small business owners looking to manage their cash flow and invest in growth opportunities. Here’s everything you need to know about this upcoming program.
A Game-Changer for Small Businesses
The SBA’s new working capital lines are designed to be more attractive to both lenders and borrowers compared to the agency’s existing products. This program aims to address common challenges that small businesses face when trying to secure financing, such as high interest rates and stringent lending criteria. By offering more favorable terms, the SBA hopes to increase accessibility to much-needed funds.
Improved Access to Capital
One of the most significant benefits of the SBA’s new program is improved access to capital. Small businesses often struggle to secure financing due to strict lending criteria and high costs associated with traditional loans. The SBA’s backing reduces the risk for lenders, which can lead to more approvals and better terms for borrowers.
Generous Credit Limits
One of the standout features of the SBA’s working capital pilot program is the high credit limit. Small businesses will be able to access credit lines of up to $5 million. This substantial amount can help businesses cover operational expenses, invest in new equipment, expand their operations, or navigate through periods of reduced revenue.
Competitive Interest Rates
The interest rates for these working capital lines will be based on the prime rate plus an additional 3% to 6.5%. Given the current prime rate, this translates to an approximate range of 12% to 15% today. While this may seem high, it is important to note that these rates are relatively competitive compared to many alternative lending options available to small businesses, especially those that might not qualify for traditional bank loans.
Annual Fee Structure
In addition to the interest rates, the new working capital lines will come with an annual fee. This fee structure is designed to make the program sustainable while ensuring that it remains attractive to lenders and borrowers alike. The exact fee amount has not yet been disclosed, but it will be structured to support the needs of small businesses without being prohibitively expensive.
Stay Informed
As the SBA prepares to launch this pilot program, small business owners should stay informed about the latest developments. It’s a good idea to subscribe to SBA newsletters and follow updates on their website. Additionally, the SBA’s Export Finance Managers are expected to provide counseling to lenders interested in participating so they have the knowledge and resources to guide and support small businesses effectively.
