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Archives for May 2020

Managing Business Expenses: What You’re Not Doing Can Cost You

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Increasing your profits requires selling more and/or spending less. While building up your sales may require an extended effort — especially given the current economic climate — business costs are often very ripe for a quick trimming. Here are some possibilities to consider to help maintain profitability:

Supplies and other purchases
In any business, there are relatively few items that represent a large share of all outlays. The first step in cutting expenses is, therefore, to identify your highest costs. You may be able to trim many of these costs by ensuring you always bid out significant purchases or by more actively seeking less expensive alternatives. For many companies, inventory carrying costs are a huge expense. Focusing on matching your inventory quantities more closely to your short-term needs could result in significant savings.

Telecommunications and similar services
The ongoing services you buy may also offer the potential for cost savings. Revisit your choice of telecommunications vendor and your usage, and look carefully at your costs for financial services. If you borrow or maintain a line of credit, always compare the rates from more than one financing source before you commit. Make sure you’re not paying higher-than-necessary fees for your company’s checking and deposit services.

Cash management
To control cash outlays, take advantage of discounts for early payment whenever possible. And look to delay payments for as long as you can without giving up discounts. On the receiving side, deposit receipts daily, and always actively pursue collection of any invoices that are past due. To help control your working capital needs and, therefore, your credit costs, try to match any new liabilities to your anticipated cash flow.

Fixed expenses
One other category worth examining is fixed expenses that are long-term commitments. While you usually can’t change these quickly, be aware of when a window for change will open and prepare well in advance by considering lower cost alternatives

Feel free to give us a call at (973) 301-2300 to learn more ways to control your spending.

PPP Update: Loan Forgiveness Application Released

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On May 15, 2020, the Small Business Administration (SBA) and the U.S. Treasury Department published a Loan Forgiveness Application for the CARES Act Paycheck Protection Program (PPP). As with other aspects of the PPP, it raises more questions while answering others.

Similar to the PPP loan process, we see additional guidance being released once the public has had an opportunity to digest the highlights below and communicate questions to the SBA.  When this additional guidance will be issued is uncertain, as the first forgiveness applications will not be due for another 2-3 weeks based on receipt of funds on or about April 10, 2020.

Here are some highlights of key topics arising from the text of the Loan Forgiveness Application and its related Instructions (together, the “Application”):

  • Borrowers with a biweekly or more frequent payroll schedule may use an alternative eight-week covered period (the “Alternative Payroll Covered Period”) that begins on the first day of the borrower’s first payroll period following its loan disbursement date.
  • Full time equivalent (FTE) employees are determined based on a 40-hour work week, with an option to treat all employees who work fewer than 40 hours in a week as one-half (1/2) of an FTE.
  • Prepayments of business mortgage interest during the covered period are expressly NOT forgivable. Prepayments of other qualified costs (e.g., employee bonuses) are not addressed, although it appears owner bonuses to absorb a PPP shortfall are not allowed.
  • Qualified non-payroll costs incurred during the covered period that are paid on or before the next billing date (even if paid after the covered period) are forgivable. Payments during the covered period of qualified non-payroll costs that were incurred prior to the covered period (e.g., deferred rent) may also be forgivable, but additional guidance is needed to clarify this point.
  • Reductions in headcount do not include employees who refuse a written offer to come back to work, quit or were fired for cause.
  • Reductions in salary or wages are calculated by comparing the employees’ respective average pay rates during the applicable covered period to their respective average pay rates during the applicable reference period.
  • Borrowers will be required to provide proof to support payroll and non-payroll expenses paid during the eight-week period following the disbursement of PPP funds. The documentation can take of the form of bank statements, payroll records, federal and state payroll forms, payment receipts and/or cancelled checks, lease agreements and statements and utility invoices, as well as health insurance and pension contribution statements.
  • Certification of the borrower’s authorized representative is required, attesting to the accuracy of the information included in the application.
  • The borrower also needs to separately maintain, but not include with the application, proof that no amount of the PPP was used to pay salaries in excess of $100,000 annualized cap.

We strongly recommend reviewing the forgiveness application to understand all the requirements and to ensure you can produce the information when the time arises. As always, we’re here to help, so please reach out to any member of the Magone team.

Stay tuned — it’s going to get interesting.

Buying vs. Leasing: Getting the Best Deal on your Business Equipment

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To lease or not to lease? This is an issue many business owners often face. If your firm is weighing the pros and cons of leasing versus buying, here are some things to keep in mind.

Cost
Evaluating costs is more complicated than comparing the price of leasing a piece of equipment versus its purchase price. Consider the following:

  • How soon will the equipment need to be upgraded or replaced? Highly technical or specialized equipment becomes obsolete quickly and may be a good candidate for leasing.
  • How will you arrange for service and repair? Leasing arrangements often include maintenance of the equipment. If you’re thinking of buying, research the equipment’s repair history as well as the cost and availability of reliable service.
  • How long will you need the equipment? If your use will be short-term, then leasing may be the better option.

Cash
If you’ve been leasing your equipment, then your costs have been predictable. Purchasing equipment can substantially alter your cash flow and affect your business’ finances:

  • Can you save money by buying or leasing equipment? If — and when — cash savings will be realized is an important factor for you to weigh.
  • Do you have the cash available to purchase the equipment? If you use cash for a down payment, you may have less cash for operating and other business expenses.
  • How will financing your equipment purchases affect your ability to get credit for other things? If you anticipate having future credit needs, you may want to avoid adding equipment loans to your current debt load.

If you’re weighing leasing versus buying, give us a call at (973) 301-2300. We can help you look at how the various options will play out.

Traveling for Business and Pleasure: What’s Deductible?

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Business owners who travel out of town on business may choose to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities. Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, may also be deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip. For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

With smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

The Paycheck Protection Program — What’s Next? Part II: Loan Forgiveness

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Eligibility and usage are key factors in determining whether a small business will have its loan forgiven. In Part I of this post, we looked at eligibility factors.

Once PPP funds are received, what are the best practices to maximize your opportunity to have your loan forgiven? It may sound obvious, but make sure you’re using the funds for the forgivable purpose. These include the following:

  • Payroll costs (if you’re self-employed, these costs include the net profit amount from your business, as reported on your 2019 tax return)
  • Interest payments on mortgages incurred before 2/15/20
  • Rent payments on leases dated before 2/15/20
  • Utility payments under service agreements dated before 2/15/20

However, according to the SBA, not more than 25% of the forgivable loan amount (the amount of the loan used to pay forgivable expenses) may be attributable to non-payroll costs. In other words, at least 75% of the loan must be used for payroll costs.

If you have already laid off or furloughed workers, try to restore employee headcount and salary levels by 6/30/20. If you do so, any headcount and salary reductions that occurred between 2/15/20 and 4/26/20 will be ignored.

We’ve responded to many business owners who’ve indicated there is no work for employees, so “I will not bring back employees until there is work.”  NO. The intent of the funds is to keep a small business’ work force in place until the stay-at-home order is lifted. Once you obtain the funds, call employees and advise them you are paying them with PPP funds.

Keep in mind that you don’t have to rehire the same employees, and rehired workers don’t actually have to perform customary work duties. Before taking action, you should consult with your labor and employment attorney to work out the terms for rehiring workers.

We have been hearing from many business owners who offered reemployment to furloughed employees, who subsequently declined the offer. The Department of Treasury has recently come out with FAQ 40, which states the loan forgiveness of a company will not be reduced if an employer offered to rehire the same employee, but the employee declined the offer.  The Department of Treasury’s response in part states that “SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation.” The response goes on to say, “Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.”

Recordkeeping is key to forgiveness
To maximize the potential forgiveness, start planning now. Here are some thoughts:

  • Establish a separate checking account for the PPP funds. If a separate account cannot be established, develop a reconciliation of how the funds were used for payroll, rent and utilities. Keep in mind the maximum eligible payroll to be paid by the PPP is the equivalent of $100,000 divided by pay frequency.
  • Review headcount to the base year of 2/15/19-6/30/19. A decline in headcount will result in reduced forgiveness.
  • If it appears because of an inability to rehire your entire workforce there will be remaining funds, consider bonuses to your employees outside of your normal pay cycle.
  • Make certain all mortgage documents, leases and utility bills arose prior to 2/15/20.
  • Keep payroll records available, especially those from 2/15/19-6/30/19, to document headcount for the period 2/15/20-6/30/20.

Some additional thoughts on loan forgiveness
It would be naïve to think the rules for forgiveness would be left unchanged given the FAQ activity recently issued by the SBA and Department of the Treasury.  Given we can expect to see more FAQs, let’s answer some more possible questions revolving around forgiveness.

  1. What if my business is profitable during the period subsequent to using the funds?
  2. What if additional guidance is issued and it changes my eligibility?

The SBA seems to be leaning toward advising companies to NOT request forgiveness in the two circumstances above.  Will it mean the initial assessment of eligibility is unjustified?  Not necessarily, since there is a “good faith certification.” If facts and circumstances have changed dramatically since you were eligible, you may not want to seek forgiveness if the rules change based on what is known today.  The important thing to keep in mind is the certification that was made in the PPP application.  The penalties are severe if there is an intent to deceive (fraud).  The SBA seems to understand that a business could not have anticipated all factors dictating its need of PPP funds.

So, if you do apply for loan forgiveness, how soon? A business is eligible to apply for loan forgiveness after eight weeks. This coincides with the period for usage of the funds. The bank has 60 days to process the forgiveness paperwork. This means depending on the when the PPP funds are received, a business should count six months from the date of receipt and count back 60 days. Why? The six months coincides with the deferral period for the loan and repayment commences after the deferral period expires.

To ensure forgiveness is received in a timely fashion, allow for 60 days from submission of paperwork, but no more than four months after expiration of the eight-week payment period.

One thing is certain with PPP funds — there is more uncertainty than certainty in the interpretation of the law. Put your business in the best possible position to have its PPP loan forgiven. The key is to plan and document your eligibility and usage in advance.

As always, if we can be assistance in modeling your businesses’ repayment or helping to understand the law, please reach out.

The Paycheck Protection Program — What’s Next? Part I: Loan Eligibility

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As one of the largest loan programs in American history was rolled out to help small businesses, it’s not unexpected to see many questions and responses by the U.S. Treasury in the form of FAQs to help clarify the government’s intent with respect to PPP funds eligibility and usage. But are they leaving businesses with more questions than answers?

Eligibility and usage are cornerstones as to whether a company will have its loan forgiven, or whether its owners, officers and directors will be subject to penalties and criminal prosecution for making an application when their company has alternative access to capital, such as the cases involving Ruth’s Chris Steakhouse and Shake Shack.

In a recent tweet, Zachary Warmbrodt of Politico stated, “Marco Rubio says the names of business that received PPP loans will be made public. ‘Treasury, SBA is eventually going to have to release that. I always thought they were going to have to, and if they don’t, we’ll make them do it.’”

The message being sent by the government? All companies need to be prepared to justify eligibility and forgiveness. Let’s start with a look at eligibility.

Eligibility: As simple as it looks?
At first glance of the CARES Act, the only eligibility requirements were that a business had to have no more than 500 employees. For companies with a NAICS code beginning with 72 (hospitality and restaurants), their employee count was based on a per-location basis. In addition, there had to be economic uncertainty resulting from COVID-19 impacting the business — a rather broad statement.

The SBA, in consultation with the Department of the Treasury, has issued guidance in the form of FAQs 31 and 37 as it applies to large companies (publicly held) and private companies (the rest of us).

Here’s what FAQ31 for public companies states in part: “Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

Translation: It’s important to keep in mind that this is your certification, meaning banks may rely on a borrower’s certification regarding the necessity of the loan. In other words, just because your bank processes your loan application, that doesn’t mean you’re necessarily eligible for the funds.

FAQ 37 for private companies simply states see FAQ 31. So, what does this mean for the rest of us? To avoid problems, every business needs to document how it arrived at needing the funds based on the economic uncertainty surrounding COVID-19. Sounds simple, but consider these real-life examples:

  1. If a business doesn’t experience a significant revenue decline, but has a decline year over year of cash, does it qualify?
  2. Does a business where the business owner has some financial means qualify? Should this small business owner be required to liquidate investments or a 401(k) to infuse capital into their business?
  3. What about a small business with an established line of credit with a personal guarantee by the business owner? Should the small business owner be required to access these funds with a personal guarantee without regard to the PPP funds and jeopardize the small business owner’s personal financial well-being as well the well-being of the business?

I recently attended a webinar with some SBA representatives, where responses to most questions were referred to the Department of Treasury for additional guidance. However, there was much discussion regarding the above fact patterns.  In substance, the representatives continued to mention “good faith representation” regarding economic uncertainty.  At no time did anyone state that having a line of credit or a high net worth owner(s) would be a detriment to seeking the funds and being eligible. All stated it’s based on facts and circumstances and all factors should be considered in determining eligibility.

Economic uncertainty doesn’t only pertain to current conditions, but also the future economic impact on small business — meaning no one really knows how the economy will behave once the country is reopened. Receiving these funds may be the difference between survival, bankruptcy, or reduced work force.

In anticipation of being asked to justify your PPP application, have the following information ready:

  1. Business factors you were seeing which led you to change your business model from salary cuts to headcount reductions to overall expense reduction. One page is enough for a summary.
  2. Current and future impact on revenue/order cancellations.
  3. Impact on accounts receivable collections.
  4. Factors which led you to retain your employees.
  5. Concerns about the future which led you to apply for funding.
  6. Inability to access capital and liquidity
  7. Unwillingness or inability of a business owner to put funds into the business

[Important update 5.6 — Repayment date has now been extended to May 14, 2020. Borrowers do not need to apply for this extension.]
Although not all-inclusive, this should you give something to consider if and when the question is asked.  Keep in mind if a business is ineligible, it has until May 7, 2020 to return the funds with no repercussions. One thing the representatives on the webinar agreed upon is there will be more guidance, so stay tuned.