The Clayton & McKervey Response Team is working with clients to navigate the challenges presented by COVID-19 and to take advantage of the opportunities available through the CARES Act. With a laser focus on serving closely held, middle market companies, our experience in both finance and operations find us well-equipped to guide businesses at this critical time. We are recommending a five-step review for businesses and can help with any step in the process.
Step 1: Paycheck Protection Program (PPP) Analysis
We know that the CARES Act provides up to $10,000,000 Small Business Interruption Loans for most entities with 500 employees or less. This provision is designed to sustain small business and make it easier to get back up and running once the pandemic subsides. While the loan application may look easy, there are several calculations to work through. We can help:
Compute & compare average monthly payroll – This may seem like a straight forward computation, but compensation has a specific definition with explicit limitations and includes items that you may not anticipate when you attempt this computation alone. We can help.
Project loan forgiveness – A key element of these loans is the ability for some or all of the loan to be forgiven. Once you have computed the historical information that you need to apply for the loan, we can help you project the amount of the loan that will be forgiven under the program.
Step 2: Business Loss Check-in
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. We can examine what this means in the short and long term.
Assess individual 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. Our team can review prior year returns to capture additional refunds related to business loss rules.
Plan for your future – 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. Contact us to learn more.
Mitigate 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; plus, losses incurred in 2018, 2019, and 2020 can be carried back five years. We can determine how carry back losses incurred when the corporate tax rate was 21% will benefit you when carried back to years when the corporate tax rate was 35%.
Step 3: Buy/Sell Check List
Whether or not you have been looking to grow through acquisition, this interruption may present opportunities to acquire customers, equipment and workforce.
Vet buying opportunities – We all know the key to acquisition is the valuation of the 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. We can help you with your due diligence on these opportunities.
Determine selling strategy – Business owners who were looking to sell prior to the pandemic may be even more incentivized to do so now. We can advise you on the impact on COVID-19 on your cash position, the benefit of the SBA Loan programs, and review of your current Quality of Earnings to help inform the decision.
Step 4: Estate Plan Review
Now is an ideal 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, let’s discuss what this means for 2020. Our Private Client Services Practice Group can be engaged in a few areas.
Closely held company consult – 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. We can run the numbers.
Publicly traded stock review – It may also be a good time to gift stock holdings that are still in a gain position, but whose value has decreased, and you anticipate will rebound. A quick calculation will guide your decision.
Social security assessment – 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.
Individual Retirement Account Planning – For taxpayers who are required to take an Required Minimum Distribution (RMD) in 2020, the CARE Act suspended the distribution requirement for the current year. This will allow you to significantly defer income into a future period and avoid taking large draws when your portfolio has been diminished due to market activity.
Step 5: Business “Right-Sizing”
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, or we can discuss the application of time-saving data analytics tools to leverage today’s data into tomorrow’s realities.
Cash flow analysis – Businesses will want to plot expected cash receipts from customers into 13-week columns under various scenarios to understand the impacts. Our template can get you started and our Data Analytics Practice Group can support the analysis in an easy-to-view model.
Vendor payment analysis – Similarly, companies will need to plot vendor payments into a model to gain optics on short-term cash flow. Our payment discount program model and critical/non-critical vendor model can get you through this process.