Our CPAs’ advice for small and scaling business owners weathering the pandemic
In times of economic turbulence, a certified public accountant (CPA) can help small and scaling business owners prepare financially for what’s ahead. At ShindelRock, our CPAs have been monitoring the near-hourly changes the COVID-19 pandemic has brought to the tax, regulatory and business environments. To help owners establish a plan of action, especially amid the recent State of Michigan non-essential business closure order, our CPAs offer the following tools for business survival:
- Focus on your cash position. Examine a 13-week cash flow projection and consider a “worst case scenario”, considering extended accounts receivable terms and a significant drop in demand for your product or service.
- Use the 13-week projection to identify key areas to triage. Can you curb travel expenses, or freeze hiring? Ask vendors like your landlord or suppliers to extend favorable terms for payment. Proactively call on your lenders and ask for an increase in credit and other temporary liquidity measures. However, be cautious when considering widespread lay-off or furloughing of employees and think through the long term consequences. The payroll savings may help in the short-term, but might you cause lasting harm to your relationship with your staff by taking an aggressive stance with their employment status? You may need a fully engaged team to restart operations once the crisis passes in order to stave off permanent closure.
- Slash expenses further if needed. Review business and household expenditures and see if there are any opportunities to reduce costs in the long-term (i.e., reduce cable subscription from 600 channels to 500 channels, cancel one or more magazine subscriptions, consolidate individual Spotify accounts to a family subscription), or in the short-term (change to higher speed internet for lower than current costs for 3-months, but be sure to change back after the trial period). Take a look at your credit card statements and bank statement for the last three months and see what recurring expenses exist and that you may have forgotten about, no longer need, or can do without for the next few months, or that may even be there by mistake!
- Shore up your credit position. This is also a good time to evaluate your credit report and address any items that should be disputed and fix any inconsistencies across the three agencies, like misspellings of your name, addressees, employers, etc. as these can affect your score to some degree. Ask credit card companies for an increase in credit, and redeem available credit card points or rewards for cash, credits, or Visa/MC/AmEx credit cards.
- Evaluate your business insurance policies for business interruption coverage. It is expected that insurance carriers will look to interpret the policy terms as a narrowly as possible to exclude the COVID-19 pandemic as a covered event. Consult with your attorney and be ready with documentation in the event that your business does qualify and/or legislation forces insurance companies to include it as a covered event.
- Examine personal finances to find cash to temporarily fund your business. Temporarily turn off deferrals from your personal paycheck for your 401k or other retirement contributions. Refinance rates are as low as they’ve been in many years, and a mortgage refinance may allow you to pull out some or all of the equity in your home to provides a cash reserve. To the extent the equity is used to fund your business, you can deduct portion of the interest expense on your business return. Always check first to make sure there is no prepayment penalty. If you were paying more than required on mortgage and other loans, stop. Rather, take the funds and set them aside as an emergency reserve. When your business has stabilized, you can resume extra payments and also take whatever is remaining in reserve and pay towards the debt. It may cost a bit more in interest expense, but you will have gained by having the cash available if needed. Similarly, look to consolidate business loans to take advantage of lower payments and possibly lower interest rates. Again, make sure there is no prepayment penalty.
- Use the downturn in the market to make moves that will impact future tax savings or cash flow. For example, one of these tactics, converting tax-deferred retirement accounts to a Roth IRA, is best done in when account values are low.
- Take advantage of state and federal relief programs. Our website lists many new and innovative programs that small and scaling business owners can take advantage of, including the extension of the federal income tax filing and payment deadline to July 15, the Michigan Small Business Relief Program, which will provide up to $20 million in support for small businesses negatively impacted by COVID-19.
Other relevant programs include:
- The $2 trillion CARES Act, bringing benefits like approximately $350 billion for SBA guarantees of forgivable loans for small and medium sized businesses. The “Paycheck Protection Program” (PPP) loans up to 250% of monthly payroll costs, up to a possible $10 million, and may be forgiven if the business maintains its payroll through June 30, 2020. And unemployment compensation provisions provide $250 billion in extended unemployment insurance programs, expands eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay.
- Michigan’s Work Share program, allowing employers to maintain operations during declines in regular business activity rather than laying off workers;
- Small business support programs, like the SBA’s Economic Injury Disaster Loan program or the MEDC’s $20 million Michigan small business grant and loan program. Generally, the SBA’s Michigan and federal websites are a good source of information and starting point for business owner’s applying for relief program.
- Families First Coronavirus Response Act (FFCRA or Act). If you are an employer, you and your employees may qualify for Paid Sick or Paid Medical Leave. Employers receive a reimbursement in the form of a refundable tax credit for wages and health insurance costs paid on behalf of qualifying employees. The details and limitations are here;
- Michigan’s Sales, Use and Withholding Relief measures allow businesses a 30-day extension to file and pay the sales taxes due on March 20;
- The IRS’ 90-day extension to file tax returns and pay any balances normally due April 15. If you are due a refund, work with your tax preparer to file the return as soon as possible. Also, consider having it direct deposited rather than waiting for a check through the mail. The State of Michigan has matched this policy, extending the state income tax filing and payment deadline to July 15.
- Check with your state for temporary expansions in unemployment eligibility and cost-sharing. In Michigan, Gov. Whitmer’s Executive Order 2020-10 allows employees to be deemed “laid off” – and thus eligible to apply for and receive unemployment benefits – if they self-quarantine or self-isolate for any of the following reasons:
- being immunocompromised;
- displaying the symptoms of COVID-19;
- having contact in the last 14 days with someone with a confirmed diagnosis of COVID-19;
- needing to care for someone with a confirmed diagnosis of COVID-19; or
- having a family care responsibility as a result of a government directive.
Significantly, employers will not be charged for unemployment benefits if their employees become unemployed because of an executive order requiring them to close or limit operations. This can relieve some pressure of providing unemployment benefits to employees laid off during the Stay Home, Stay Safe Executive Order.
As a last resort, see if your retirement account provides for loans or hardship withdrawals to keep your business and personal finances afloat. For a 401(k) loan, you can borrow up to the lesser of 50% of your vested balance or $50,000. The loan has to be repaid through payroll (so you must be employed) and over 5 years. If you are no longer employed with that employer during the loan repayment period (fired, quit, temporary layoff), then the loan becomes due within 60 days. If not repaid within the 60 days the balance is deemed to be an early taxable distribution subject to income tax and a 10% early withdrawal penalty.
You could also temporarily take money out of an IRA account (for no more than 60 days). If the amount is not repaid within 60 days, the unreturned amount is deemed to be an early taxable distribution subject to income tax and a 10% early withdrawal penalty. Note that if there are any tax withholdings when withdrawn, this amount must also be repaid, and you will need other sources to repay this portion. You are allowed to do this 60-day withdrawal and repayment only once during a 12-month period, but this rules applies to each separately held account. So if you have more than one IRA account, there are more options available; always consult with your tax advisor first.
The tax and accounting professionals at ShindelRock will continue to update our website with new resources for small and scaling business owners as they become available, or contact your ShindelRock professional for individualized advice for your business.