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Interpreting the new CARES Act: What it means for your business

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The much-needed support for small businesses and non-profit organizations has been realized by the passage and signing on Friday March 27, 2020 by the President of The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which introduces the Paycheck Protection Program as a key provision in Title I — the Keeping American Workers Paid and Employed Act. In an effort to get our clients and friends information quickly, there may be revisions to the below as we take a deeper look into the law.

What is it?
The Paycheck Protection Program provides $349 billion in 100% federally guaranteed loans to small businesses and 501(c)(3) nonprofit organizations. Because many businesses have already laid off workers as a response to the pandemic, the program can be retroactive, with the covered loan period running from Feb. 15 to June 30, 2020, which allows previously laid off or furloughed employees to be returned to payrolls.

Who is eligible?
Any business or non-profit organization with not more than 500 employees is eligible, or otherwise qualifies as a “small business” under SBA size standards published in 13 part 121 of the CFR. More importantly, small business includes within its definition sole proprietorships, independent contractors and self-employed individuals.

How are the number of employees determined?
Generally speaking, the normal rules of attribution apply. Meaning any business that is controlled through voting, managerial, economic or influence would be counted toward the 500-employee cut-off for this program. The only exception is for hotels and restaurants as long as the number of employees is less than 500 per physical location.

How is the loan amount determined?
The loan amount is determined by reference to monthly payroll costs for the one year period prior to the loan. Payroll costs include:
1. Salaries, wages, commissions or similar compensation, up to $100,000 per employee
2. Cash tips
3. Payment for vacation, parental, family, medical or sick leave
4. Healthcare and retirement benefits
5. State and local taxes on wages
6. Payments of any compensation to or income of a sole proprietor or independent contractor that is wage, commission, income, net earnings from self-employment or similar that is not more than $100,000 in 1 year, as prorated for the covered period

Any compensation paid to employees outside the U.S. is excluded.

Once the monthly average of the above is determined, it is multiplied by 2.5. The business receives the lesser of 2.5x the monthly average payroll or $10,000,000.

I’m self-employed or an independent contractor and have no employees. How do I compute the loan amount?
If you are self-employed, or an independent contractor the rules above apply to you, except you will use your first $100,000 of self-employed income to determine the average monthly payroll. The law specifically states “the sum of payments to of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as pro-rated for the covered period.”

Although not clear, we imagine your self-employed health insurance can also be included in the computation. In addition, self-employed and independent contractors will be required to submit documentation substantiating such classification such as payroll tax filings, 1099-MISC and other information.

What expenses can I pay?
The money received can be used to pay the following:
1. Payroll costs
2. Payments for the continuation of group health care benefits, which includes paid sick, medical and family leave and insurance premiums
3. Employee salaries, commissions or similar compensations
4. Payments of interest on any mortgage obligation. However, the payment cannot be used for prepayment of or payments for principal.
5. Rent
6. Utilities
7. Interest on any other debt obligations that were incurred before the covered period.

How do I apply and what are terms?
Application for the loan will be made with your local banker who is an authorized SBA lender. The federal government is pushing for rapid adoption and expects to have numerous additional lenders in place in the weeks to come. We still don’t have clarity as to how the application process will work or when an application can be submitted. However, the normal requirements of the SBA will not be enforced such as personal guarantees, collateral, and unable to obtain credit elsewhere. Normal fees of the SBA will also be waived.

What we do know is there is a loan forgiveness provision, provided the funds are used as follows:
1. Payroll costs
2. Interest on certain mortgage obligations
3. Rent and utilities
In addition to using the funds on the costs above, there are provisions to maintain the ratio of employees during February 15, 2020 through June 30, 2020 to the number of employees for the same period in 2019, or for the period January 1, 2020 to February 29, 2020. The amount of forgiveness is also reduced by the amount that total salary or wages of any employee is reduced by more than 25 percent. However, anyone who makes more than $100,000 is not subject to this limitation as the wages above $100,000 were not included in the computation.

The amounts forgiven are excluded from gross income for federal income tax purposes.

To the extent the funds remain or are not used for the expenses above, the funds are required to be repaid over a maximum maturity of 10 years with an interest rate not to exceed 4%.

Other considerations
We have received many calls from our clients and colleagues regarding paying employees who are paid by person seen (in the case of non-profit organizations in behavior health) or commission. The question is how is the rate of pay determined? Our recommendation is to set the rate of pay based on a historical average of commission or persons usually seen based on prior year records for the employee. Remember, the funding is to allow a business or non-profit organization to retain their employees.

We understand these are uncertain times and we are committed to keeping our clients and friends informed as information becomes available.

Paycheck Protection Program just passed by Congress

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The Paycheck Protection Program (PPP) is now awaiting sign-off by President Trump. Below are some key provisions in anticipation of its signing. All details need to be vetted and changes can occur. We’re watching this closely. Here’s what we currently anticipate:

A completely new, temporary lending program to aid small business. The bill will provide roughly $350 billion to support loans through the new “Paycheck Protection Program,” which Congress designed to keep employees on the payroll and save small businesses. The Small Business Administration (SBA) will stand up a completely new program that will only nominally be part of the existing SBA Section 7(a) loan program. To expedite the funding of the new loans, the Treasury Department and SBA will expand the number of participating banks and credit unions; captive finance companies may also be included.

Minimal eligibility requirements. Any business operational on February 15, 2020, that paid salaries and payroll taxes will be eligible, but there is a limit of no more than 500 employees. Fortunately, the bill includes provisions to waive normal affiliation rules which should be applicable to many dealers. For dealers, there will be no test for total revenue.

Borrower certification to obtain loan. Borrowers will be required to make a good-faith certification that the loan is necessary due to economic conditions caused by COVID-19 and that it will use the funds to retain workers and maintain payroll, lease and utility payments.

Loans with terms NOT found in traditional bank loans. Lenders will not require application fees, closing costs, collateral or personal guarantees. The maximum interest rate will be 4%, and the first six months’ payments (principal and interest) will be automatically deferred. Finally, the lenders are not expected to perform credit analysis, because the loans will be 100% guaranteed by the SBA.

Maximum loan amount. The maximum amount will be 250% of an employer’s average monthly payroll (based on a 12-month look back from the date of the loan), but NOT MORE than $10 million.

Permitted uses of the loan. The loan can be used for “payroll costs,” which include salary, commission, or similar compensation (up to an annual rate of pay of $100,000 per employee); employee group health care benefits, including insurance premiums; retirement contributions; and covered leave from February 15, 2020, to June 30, 2020. Permitted uses also include payments of interest on mortgages, rent, utilities and interest on any other debt obligations that were incurred before February 15, 2020.

Loans may be forgiven. In general, borrowers will be eligible for loan forgiveness equal to the amount of certain expenses spent during an eight-week period after the origination date of the loan. These expenses are payroll costs, interest payments on any secured debt incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.

Percentage of employee retention related to amount of loan forgiveness. The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year, and by the reduction in pay of any employee in excess of 25% of the employee’s prior-year compensation. However, to encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that rehire previously laid-off workers by June 30, 2020, will still qualify and not be penalized for having a reduced payroll during the loan period.

No effect on Federal Income tax. Canceled indebtedness under this program will not be included in the borrower’s taxable income.

Loan amounts not forgiven. Any loan amounts not forgiven at the end of one year will be carried forward as an ongoing loan with terms of a maximum of 10 years at 4% interest or less.

We hope you’re finding these posts of value, and will keep you informed as new information becomes available.

 

SBA disaster relief for small businesses & nonprofits in NJ and other states

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Small business owners and nonprofit agencies may have been tossed a lifeline from the U.S. Small Business Administration, which just named New Jersey and several other states a declared disaster state in the wake of the Coronavirus pandemic.

This declaration will allow New Jersey small business owners and non-profit organizations impacted by COVID-19 to apply for SBA Economic Injury Disaster Loans (EIDLs) that provide financial assistance to help support their businesses.

EIDLs are secured loans up to $2,000,000 as determined by the SBA, with a maximum interest rate of 3.75% for small businesses — less if you are a non-profit organization. These working capital loans are designed to help small businesses and most private, non-profit organizations of all sizes meet their ordinary and necessary financial obligations like payroll and vendor payments that cannot be met as a direct result of a disaster.

These loans are intended to assist through the disaster recovery period, so we encourage every small business and nonprofit that qualifies to register and apply ASAP whether or not you ultimately end up requiring assistance. Note that these loans cannot be used to refinance long-term debt of a business.

Questions? The Magone & Company team of business advisors is here to help. Contact us if we can be of assistance.

Guess what? The IRS knows about your un-filed tax returns

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No one likes filing their taxes, but not filing them isn’t just a bad idea. It’s illegal. The IRS keeps detailed records, and chances are they’ve already noticed your lack of compliance. If you’re guilty of an unfiled return, it’s only a matter of time before they catch up with you and demand payment. So, do yourself and your finances a favor, and bring your return filing status up to date as soon as possible.

Here’s how to get started…

Consult with a professional. While the desire for a clean slate is commendable, now is not the time to go it alone. Before filing missing returns, you may want to consult with a qualified tax professional who can offer advice and support, from gathering the proper documents to ensuring that the necessary paperwork is completed correctly.

Gather documentation. Sort through your records and compile all the tax-related information you have on hand. If you’re missing W2 or 1099 forms from past years, your tax pro has the ability to help retrieve them. A professional can also help you construct your income and expenses when records have been lost or destroyed.

Run the numbers. A tax professional can file on your behalf, so you can learn the exact figures you may owe. According to the IRS, a surprising number of unfiled returns may actually be due for a refund. In fact, unfiled 2015 federal income tax returns left 1.4 billion in unclaimed refunds on the table.

If you’re dealing with the potential repercussions of unfiled tax returns, contact the tax resolution specialists at NJ CPA firm Magone & Company at (973) 301-2300 to schedule a no-obligation consultation, and get back on good terms with the IRS.

The latest guidance on tax payment relief

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We have received guidance regarding the special payment relief proposed by the Treasury Department on March 17. This payment relief includes:

Individuals: Income tax payment deadlines for individual returns, with a due date of April 15, 2020, are being automatically extended until July 15, 2020, for up to $1 million of the 2019 tax due. This payment relief applies to all individual returns, including self-employed individuals, and all entities other than C corporations, such as trusts or estates. The IRS will automatically provide this relief to taxpayers. You do not need to file any additional forms or call the IRS to qualify for this relief.

Corporations: For C corporations, income tax payment deadlines are being automatically extended until July 15, 2020, for up to $10 million of the 2019 tax due.

This relief also includes estimated tax payments for tax year 2020 that are due on April 15, 2020. Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020. If you file your tax return or request an extension of time to file by April 15, 2020, you will automatically avoid interest and penalties on the taxes paid by July 15.

We remind our clients and friends that for the vast majority, your tax return is due on April 15, 2020 without extension. This relief does not extend the filing date, only the payment of the tax liability.

We also remind you this relief applies only to federal income tax (including tax on self-employment income) payments otherwise due April 15, 2020, not state tax payments or deposits or payments of any other type of federal tax.

Here is the latest on the payment deferral and filing due dates for the states that have published information:

  • California — Filing and payments extended until June 15, 2020. Includes quarterly estimated tax payments.
  • Connecticut — Business returns extended until June 15, 2020, individuals until July 15th.
  • Michigan, Colorado, Georgia, Maryland, Massachusetts, Ohio, Oregon — State treasury departments have said they will mirror IRS guidance; however, there have been no official pronouncements issued yet.
  • South Carolina – Filing and payments extended until June 1, 2020 for individuals and corporate taxpayers. Quarterly estimates were not addressed.

Many state treasury departments are closed, but monitoring the IRS guidance. We continue to monitor various state payment deferral plans and due dates, and will communicate them if and when they are adopted.

Our team of tax professionals is here for you during this uncertain time. Please call the office at 973-301-2300 with any questions.

Are you setting the right pace for business growth? 6 mistakes that can cost you

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The market is great. Orders are coming in. Customers are happy. As we head toward Q2 of 2020, it may be an opportune time for you to focus on business growth.

But not so fast. Literally.

According to a recent study, two-thirds of the companies on the Inc 5,000 fastest-growing companies list have gotten smaller, been sold or closed their doors indefinitely, just five to eight years after earning the publication’s distinction.Business growth is good — if you’re managing it properly. As you’re planning for an expansion, be sure you’re making decisions that’ll support your business for the long haul.

From overestimating sales to hasty hiring missteps, the wrong moves can create disasters that you never saw coming.

  • Letting quality suffer. As your business becomes fixated on quantity — whether it’s servicing more customers or increasing product production — it’s easy to let quality slip. Keep in mind that first and foremost, you’re in business to provide superior products and services. If buyers lose faith in your brand, you may have a hard time repairing the damage.
  • Sluggish cash flow. Businesses need (a lot of) money to operate. As you’re growing, you may find that spending starts to outweigh revenue. Just because money is coming in the door doesn’t mean you can sidestep cash flow growing pains. It’s important to remain strategic and conservative, so you don’t end up in the hole.
  • Hasty hiring decisions. You’re expanding fast, and that means you may also need to expand your team. When time is of the essence and you’re rushing to fill a need, you may not allocate the necessary time or resources to find the best fit for critical positions. Remember that you want top-notch employees working on your behalf, and that process deserves careful time and consideration, as well as a comprehensive onboarding strategy.
  • Dropping the ball on service. Customer service demands will continue to increase with your business. If you don’t have the staff to handle the volume of product-related calls, orders or inquiries, your customers will feel the loss of customer care and personal attention, which may be perceived as poor management.
  • Putting all your eggs in one basket. Growing companies can set themselves up for failure by depending on one particular customer, vendor or employee for the majority of their success. The truth is, even the most loyal customers and vendors can jump ship and go elsewhere, and your employee of the month may be one job offer away from working for the competition.
  • Not scaling your technology. Every growing business needs technology that can grow along with it, ensuring your systems and processes are running efficiently. From data storage solutions to cloud-based applications, what does your business need now, and what technology might it require down the line? Don’t invest in solutions that aren’t going to serve your size, goals and budget for the future.

The tortoise or the hare?
Sometimes, in the race to grow, it’s better to step back and take your time to the finish line, so you can avoid costly mistakes that can hurt your business. If you need objective guidance mapping out a plan for long-term success, let us know how we can help.