Small Business

PPP Update: Loan Forgiveness Application Released

by

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

by

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?

by

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 I: Loan Eligibility

by

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.

Navigating the new business normal

by

No business sector has been spared the fear and uncertainty we’re all currently mired in.

As a firm, Magone & Company has been busy on several fronts — helping business clients seeking financing from the Small Business Administration (SBA) in the form of Economic Injury Disaster Loans (EIDL), applying for the Paycheck Protection Plan (PPP), and getting ahead of the continued business challenges to come.

If this is the new normal for the foreseeable future, here are some tips to help navigate it:

  • Cash is king. If you haven’t already done so, negotiate with landlords and vendors for some accommodation on your payment terms.
  • If you received a PPP loan, bring back your workforce and pay them within 8 weeks of receipt to ensure loan forgiveness. If you have not already done so, establish a separate account for these funds and transfer them into your operating account when paying payroll and related expenses. Keep in mind to reduce the payroll for the fund transfer for any employee making more than $100,000 annually, or $8,333 monthly/$4,166 semi-monthly. If the funds are used to pay payroll in excess of $100,000 they will not be forgiven.
  • If you have an existing credit facility, make certain you are diligent with loan covenants. Making certain to communicate immediately with lenders if you will not be meeting the various covenants — especially reporting covenants for annual financial statements.
  • Update your budgets and cash flow projections. If you don’t usually prepare them, prepare them now! You can’t go by the seat of your pants when negotiating vendor terms, rent and/or mortgage deferral.
  • Stay in touch with your banker. Let them know what changes you have made in your business, how business has been in the last six weeks, and your projections for the remainder of the year.
  • Make informed decisions. As difficult as it is to consider pay reductions, furloughs or terminations, be realistic when reviewing updated budget and cash flow numbers to determine if your business can support your previous headcount.
  • During this period, communicate with customers and vendors. More is better. Let your customers know you’re open for business, and your vendors know you’re still in business and paying their invoices.

The government has stated its desire to replenish the PPP in the amount of $250 billion, so if you missed out on the first round of funding be ready to submit your application for the next round of funding.

Of course, this is general information. Be sure to check with your accountant or financial advisor for guidance specific to your situation. Don’t have anyone to help? We invite you to check in with our team for assistance with any aspect of your business operation or future strategy.

 

3 tax resolution strategies from the IRS

by

Whew, tax time has passed! Or has it? While taxes are a fact of life, tax problems shouldn’t be. If you find yourself in hot water with the IRS, they’ll come to collect what you owe by any means possible — from garnishing your wages to putting a lien on your property. Luckily, there are valuable tax relief options out there to help resolve your tax debt and get you back in good standing with Uncle Sam.

#1 First time Penalty Abatement policy
The IRS doesn’t like being ignored, and if you don’t respond to their initial notices, pricey penalties will keep accruing. But under its First-time Penalty Abatement policy, the IRS may provide administrative relief from a penalty that would otherwise be applicable.

#2 Offer in Compromise (OIC)
You’ve probably seen or heard advertisements from tax relief firms that claim they can settle your tax debt for less than the full amount. An Offer in Compromise can help get your debt down to a manageable payment. To even be considered, you must ensure you’re in compliance and file any unfiled tax returns.

#3 Structured payment plan
Can’t pay the lump sum you owe in full? Your specific tax situation will determine which payment options are available to you, including a short-term payment plan (120 days or less) or a long-term payment plan (an installment agreement that’s longer than 120 days).

Ready for a fresh start?
Effective since 2011, the IRS’s Fresh Start Initiative aims to help more individuals and small businesses take advantage of the flexible programs available to settle tax debt. For details, contact Magone & Company at (973) 301-2300 to schedule a no-obligation consultation and learn more about your options.