On March 27 the CARES Act was signed into law in response to the COVID-19 pandemic. Below is an overview of the types of assistance available to small businesses in an effort to lessen some of the economic impact.
Paycheck Protection Program (PPP) Loan
This is a $350 billion loan program that will provide loans to small businesses for 2.5 times the average monthly payroll based on payroll reports from the previous year, with a cap of $10 million.
The interest rate for the Payment Protection Plan is 1%, and loan payments for any non-forgivable parts will be deferred for six months. The loan can become forgivable if funds are used for approved expenses: payroll costs, including continuation of health care benefits during periods of paid sick, medical, or family leave; insurance premiums; employee salaries and commissions; payments of interest on any mortgage obligation, rent, and utilities; and interest on any other debt obligation incurred before February 15, 2020. No more than 25% of the loan forgiveness can be related to non-payroll costs, and the amount of the loan available for forgiveness will be reduced if full-time employee count, salaries, or wages decrease.
Businesses and charitable nonprofits with fewer than 500 employees, self-employed individuals, sole proprietors, and independent contractors are eligible. There may be some exception to larger restaurant and hospitality businesses who have less than 500 employees per location.
Emergency Economic Injury Grants
Small businesses, private nonprofits, sole proprietors, and independent contractors who were in operation as of January 31, 2020 are also eligible for $10,000 of SBA economic injury disaster loans (EIDLs) without a repayment requirement. These loans can be used to pay for expenses such as payroll, paid sick leave to employees, production costs, as well as business debts, rent, and mortgage payments. However, using these funds to refinance pre-existing debt or to pay dividends in not permitted. The deadline to apply for an EIDL is December 16, 2020 for most states.
Debt Relief for SBA Borrowers
Included in the stimulus package is $17 billion for immediate relief to small businesses through standard SBA 7(a), 504, or microloans, which covers loan payments for existing SBA borrowers for six months. This includes principal, interest, and fees. This relief is also offered to new borrowers who take out an SBA loan within six months after March 27, 2020.
Employee Retention Credit
For employers whose businesses were fully or partially suspended as a result of COVID-19, the CARES Act specifies a refundable payroll tax credit for 50% of wages paid by employers during the pandemic. This also applies to business owners whose gross receipts declined by more than 50% when measured against the same quarter in 2019. Qualified employers with 100 employees or less are entitled to the credit, whether business is open or subject to a shut-down order. However, employers with greater than 100 employees qualify for the credit based on wages paid to employees while business is halted due to COVID 19-related circumstances.
Entrepreneurs are tasked with not only managing their business finances, but their personal finances as well, and when needs, circumstances, and priorities don’t align with the two, managing it all can feel overwhelming. To keep personal finances from getting pushed to the side, below are some tips to help you handle your own money while overseeing your business’s.
Plan for Rainy Days
Building an emergency fund for rainy days is not novel advice, but business owners might want to stash away even more than the recommended three to six months’ worth of living expenses. Are you prepared for circumstances like irregular fluctuations in cash flow, loss of a major client, or a national pandemic? Keep in mind that the purpose of an emergency fund is not to earn a big yield on this money but to be sure it’s there and accessible, so keep it in an FDIC-insured cash bank account.
Separate Business and Personal Finances
When you first start a business, open a business bank account and apply for a business credit card for business expenses. In addition to helping you build business credit, this will streamline your tax prep during tax season, lend more credibility to your business as an actual business, remove personal liability in case of adversity, and eliminate the burden of your business’s financials from your personal accounts.
Automate Bill Payment Schedules
A common personal financial tip is to automate your bill payment schedule, so consider carrying this practice over to your business finances as well. This will hep to prevent you from getting overwhelmed with both personal and business bills, thereby avoiding late payment fees and knocks to your credit score.
Manage Your Personal Credit
You know how crucial good credit is for your business, so it makes sense to keep your personal credit in check as well. Be sure to pay bills on time even if there are months when you can only make the minimum payment. Also be aware of your credit utilization (the percentage of credit that you’re actually using versus your total available credit limit). Keeping your credit utilization below 30% will keep your credit in good standing for loan approval.
Save for Retirement
Although it’s typical for business owners to invest profits back into their business, you still need to prepare for retirement, and investing and diversifying your savings may help you save more money for retirement than you could as an employee. SEP IRAs, SIMPLE IRAs, Solo 401(k)s, and SIMPLE 401(k)s are all retirement plan options available to small businesses. Research each one to determine which would be the best fit for you and your business. As for diversifying investments, look into options like stocks, bonds, ETFs, and money market mutual funds. Allocating your assets into different funnels will give you some breathing room should your business experience a struggle period.
Look to Tax Professionals
It’s no secret that U.S. tax laws are complex, and different business entities have different taxation rules. An accountant or tax professional can help you determine what your obligations are. To streamline the process, be sure to keep clear and organized records all year long.
With the learning curve of the first tax filing season in the TCJA era behind us, year-end tax planning is a perfect time to incorporate those lessons learned. Here is a general overview of some steps business owners can take in their year-end tax planning.
If your business has acquired a fixed asset or property (one that you don’t intend to sell for at least one year and will be used to earn long-term income), and it’s placed in service before the end of the year, you can typically write off the cost in 2019. Thanks to changes made by the TCJA, this now applies to both new and used assets. The TCJA boosted the deduction limit to $1.02 million with a phase-out threshold of $2.55 million for 2019. It also increased bonus depreciation to 100% for property placed in service after September 27, 2017 and before January 1, 2023.
The IRS recently clarified that food and beverage costs are deductible by 50% in certain circumstances and when those costs are stated separately from entertainment on invoices or receipts.
One of the most significant changes made by the TCJA affects owners of pass-through entities (partnerships, S corporations, and LLCs) as it authorized a deduction of up to 20% of the owner’s qualified business income (QBI) for the tax years 2018 through 2025. The QBI deduction is reduced for some taxpayers based on the amount of their income, so some individuals may need to consider reducing their taxable income so it falls under the $157,500 threshold ($315,000 for married filing jointly), whether by making contributions to retirement plans or health savings accounts, or even through charitable contributions. Something to keep in mind is that specified service business owners, which includes most personal-service providers, are not eligible for the deduction if their taxable income is above a certain threshold.
It isn’t a bad idea to complete minor repairs by the end of the year because the deductions can offset taxable business income. However, costs of improvements to business property must be written off over time. If you’re unsure whether a specific renovation or upgrade falls under a repair or an improvement, the IRS recently issued regulations that clarify the distinctions.
Estimated Tax Payments
If your corporation is anticipating a small net operating loss for 2019 but a substantial net income in 2020, you might think about accelerating just enough of the corporation’s 2020 income to create a small amount of net income for 2019. You could also choose to defer some 2019 deductions. This way, rather than having to pay estimated taxes based on 100% of your 2020 taxable income, you will be able to base your estimated tax installments on the comparatively small amount of income shown on your 2019 return.
With the overwhelming amount of pressure and decisions to make when starting a small business, stress can cause even savvy industry gurus to fall for common startup mistakes. In the best scenarios, mistakes will set you back a bit, but in worst-case scenarios, they can hurt your potential and outlook for long-term success. Below are common startup mistakes that can have a negative impact on your small business.
Miscalculating Startup Costs
The perils of starting a business with an insufficient budget, or an underestimated one, can be a shot in the foot before you even get running. Plan to have at least six months’ worth of income in the bank before officially cutting the ribbon to open your business. This will give you some time to get up and going, garner some clients, and generate invoices and payment.
Neglecting to create a marketing strategy
Most new businesses are going to have to put some brain power and cash behind a good marketing plan, and this should be done well in advance of turning on the lights for customers and clients. These plans should include online, offline, social media, and any other means of marketing to get the word out. Will marketing and social media be outsourced, will you handle it personally, or will you bring someone on board to solely handle this task?
Failing to be frugal
Whether through a bank loan, a generous loan from a relative, sales of your own assets, or years of saving your own money, you’re going to have some capital to spend on rent, equipment, products, employees, etc. Keep in mind that profits won’t roll in overnight. Spend your savings wisely, do your research, and make your money stretch.
Thinking you can be a one-man operation
Even if you’re a one-man or one-woman business in the beginning, you’ll need people in your corner. You’ll inevitably want to shoot around ideas with someone; you may need someone, even on a very part-time basis, just to handle invoices and office files; you’ll want feedback, advice, and even potential contacts. Consider if it makes sense for your business to create a board of advisors.
The Internal Revenue Service (IRS) recently released a new document clarifying the new rules related to section 199A. If you’re unfamiliar with 199A, this section is a part of the tax code that references a new deduction of up to 20 percent of qualified domestic business income (QBI) for pass-through entities such as sole-proprietorships, partnerships, S-corporations, trusts, or estates. This section is extremely intricate, but the newly released regulations have cleared up many of the questions raised by the original legislation.
Like many of the other provisions of the Tax Cuts and Jobs Act (TCJA), the rules for 199A are effective for the tax year 2018. This particular deduction will go away unless further action is taken, expiring in 2025. This particular deduction allows business entities to take up to a 20% deduction of QBI. Qualifying for this particular deduction can be tricky as it is only for pass-through entities. Other information about your business (what kind of work you do, wages paid, etc.) may also preclude you from some or all of the deduction.
In order to be deemed a section 162 business that would qualify for the 199A deduction, you must be involved hands-on with the activity of your business on a consistent basis. Typically, if you think you’re running the business, you are most likely involved enough to be qualified. In regards to rental property, this gets a little more complicated. Under Revenue Procedure 2019-7, the IRS claims that rental property is a qualified business if 250 hours or more of rental services are provided for the year and separate books and records are kept for each rental. However, you can’t qualify and lose the deduction if you use the rental for yourself more than two weeks of the year. Matters get even more complicated when the IRS requires you to handle each business (even if operating under the same legal entity) separately with the ability to calculate a QBI for each individual business.
Furthermore, you must know the business owner’s taxable income. If the business owner’s income falls above the thresholds listed below, the next matter is determining whether the business is a specified service trade or business (SSTB).
Business Owner’s Income Thresholds
- 2018: $157,500 – $207,500
- 2019: $160,700 – $210,700
- 2018: $315,000 – $415,000
- 2019: $321,450 – $421,450
Many questions around the 199A deduction that remain unanswered. In the foreseeable future, the 199A deduction will require professional attention as we adapt to the new tax laws. According to the IRS, 95 percent of business owners fall below the threshold amounts and don’t need to worry about the limitations of the deduction. As always, it is crucial to work with tax professionals, such as MKR CPAs, to ensure that your business isn’t missing out on important deductions and properly filing for your business’ needs.
The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.
The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.
The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.
If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.