To help navigate the myriad business disruptions caused by COVID-19, Congress has been busy working on a Stimulus package to help taxpayers. For a deep dive into those topics, please see our article on Summary of Cares Act.
Following are five business categories that present new and immediate considerations in light of the various stimulus packages that have been passed recently:
PAYCHECK PROTECTION PROGRAM
The CARES Act, passed March 27, 2020 provides for up to $10,000,000 Small Business Interruption Loans for most entities with 500 employees or less. We previously discussed some of the parameters of this program in our article Paycheck Protection Program.
The point of the program is to sustain small business and make it easier to get back up and running once the pandemic subsides. So, while many business owners may be reluctant to incur additional debt during these uncertain times, the program has loan forgiveness provisions that mitigate the risk.
UTILIZATION OF BUSINESS LOSSES
Tax legislation passed in 2017 placed limitations on the use of losses. This impacted both corporations and an individual’s use of pass-through losses. The CARES Act temporarily lifts this limitation.
- Individual use of Pass-through business losses – Pass-through business losses incurred in 2018, 2019, and 2020 can be temporarily used to fully offset income from other sources and bring taxable income to $0. To the extent taxpayers filed returns with business loss limitations in 2018 or 2019, returns can be amended to fully apply such losses against other income and claim refunds of taxes previously paid.
- Planning opportunity – If you have been considering converting a traditional IRA to a Roth IRA, 2020 may be the year to do so. If your business has incurred significant losses, those losses may shelter the tax associated with a conversion.
- Corporate losses – Corporate losses incurred in tax years beginning before January 1, 2021, can now be carried forward and used to offset 100% of taxable income in future years. In addition, losses incurred in 2018, 2019, and 2020 can be carried back 5 years. This change will allow taxpayers the opportunity to carry back losses incurred when the corporate tax rate was 21% to years when the corporate tax rate was 35%.
Whether or not you have been looking to grow through acquisition, this interruption may present opportunities to acquire customers, equipment and workforce. As a buyer, the key to acquisition is the valuation of the acquisition target. Since some sectors have been perceived to be overvalued, and some small business owners may not have sufficient resources to weather this storm, now may be an opportune time to look at growth through acquisition. In addition, business owners who were looking to sell prior to the pandemic maybe even more incentivized to do so now.
ESTATE PLANNING OPPORTUNITIES
Now is a great time to review the assets in your estate and consider gifting assets that have lost appreciation. If you have been considering gifting stock to children, 2020 may be a great time.
- If you have a closely held company you may be able to support a lower valuation and implement estate planning strategies that were previously on hold.
- If you have large publicly traded stock portfolios, it may also be a good time to gift holdings that are still in a gain position, but whose value has decreased, and you anticipate will rebound.
For taxpayers who have retired and elected to defer claiming social security, now may be the time to rethink that strategy, especially for those currently drawing on their portfolio.
DEPLOYING DATA-ANALYTICS USING YOUR EXISTING DATA TO SCENARIO PLAN AND RIGHT-SIZE YOUR BUSINESS
Time spent on cash flow projections, budgeting, and other modeling will increase dramatically as you work through best/worst case scenarios. You can use the wealth of information that you already have in your accounting software as a starting point. This can be done using Excel, which continues to be a great tool in a pinch. We can help you use Excel to quickly export reports from your accounting software and create a rolling 13-week cash flow analysis by:
- Plotting expected cash receipts from customers into 13-week columns under various scenarios
- Model impacts of payment discount programs
- Plot vendor payments into 13-week columns
- Bifurcate vendor payments between critical and non-critical vendors
Broad use of data analytics and the application of industrial automation/Industry 4.0 technologies will be the differentiator for many businesses who survive and thrive in the post-pandemic era.
Clayton & McKervey can help in these and other areas. Contact us for assistance.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.