8 things for small businesses to know about coronavirus relief bill [video]
With just days left in what will be one of the most memorable years of our lifetime, a new relief bill has been signed that will offer Americans the support they need to make it through the darkest time of the pandemic to date. There are many measures in the bill that are advantageous for small businesses as well, and to help you understand what you need to know, I spoke once again to Matt Garrett, Vistage speaker and CEO and Founder of TGG Accounting.
Here he shares eight things you need to consider to maximize the benefits in the new relief bill — listen for our full conversation about the implications you need to act on before year end.
1. Leverage new tax advantages for PPP loans.
Per the new act, small businesses will not have to pay taxes on forgivable PPP funds, which is a tremendous benefit to the businesses that were funded, followed all the rules, and either received forgiveness or are in the process of getting forgiveness. Garrett calls this “a huge boon to small businesses because if you got, for example, a half a million dollars in PPP funding, you could have been subject to as much as a quarter million dollars in tax, be it both the state and the federal level.”
The implication of this? A lot less taxable income in 2020 than businesses might have been projecting. For cash-basis taxpayers, it is advisable to push expenses into 2021 to manage your tax rate based on overall taxable income, which is likely less than it was just two weeks ago.
How states will handle this is unknown, so Garrett advises “it’s really important to be extremely careful with your cash. We don’t quite know what’s coming, so I would definitely reserve a little bit, but make sure you talk to your CPA. Each business’s tax situation is going to be different.” As an example, he shares “If you bought a big piece of equipment as a tax deduction under the CARES act, your taxable income has been reduced to such a level that this doesn’t really matter.”
2. Plan to secure PPP funding.
For businesses previously not eligible or that didn’t take the full amount of the PPP the first time around, the eligibility window has re-opened. This can significantly impact specific industries like hospitality, media and marketing related industries. For those not eligible in prior rounds, there might be opportunity for funding this time around.
3. Include new eligible expenses in PPP forgiveness.
While forgiveness rules continue to require that 60% of PPP loans are used for payroll, the allowable non-payroll expenses have been expanded to include things like software, cloud computing, HR and accounting. Additionally, the safe harbors that were previously enacted are still in place to protect businesses that could not return to the pre-pandemic payroll levels. Garrett is optimistic this will “really help a lot of people in terms of receiving forgiveness, as it broadens the base and allows businesses to use funds for more expenses over the same period of time.”
4. Determine eligibility for additional PPP funding.
Funding is now available for businesses that did not previously get funded, or for those — like bars or restaurants — that did not receive adequate funding in prior rounds. For those significantly impacted, funding is available for those with a 25% year-over-year drop in quarterly revenue from 2019 to 2020. As an example, if you had a 25% drop in revenue between Q2 2019 and Q2 2020, you are eligible for funding. To take advantage of this, Garrett advises “it’s very important to work with your internal accountants to figure out how you are recognizing revenue. Make sure you’re doing it on an accrual basis because this is a huge opportunity to get a second bite at the apple with new PPP funds.”
5. Make tax planning a priority.
As we are waiting for more guidance from the SBA, don’t spend time thinking about the administrative details now. Garrett recommends using the next few days for tax planning as there is limited time if you want to take actions before year end. From a tax standpoint, a lot is dependent on whether you file on an accrual or cash basis. Those who file on a cash basis are limited by time, but there are still opportunities if you file on an accrual basis.
6. Understand eligibility for new PPP funding.
Previously, the PPP loans were capped at $10 million, and this cap has been reduced to $2 million in this new round. If you are eligible — with a 25% reduction in revenue in Q2, Q3 or Q4 — for new round, small businesses can receive for 2.5 times their average monthly payroll based on 2019 payroll. For small businesses in hospitality, the multiplier increases to 3.5 times their average monthly payroll.
7. Maximize EIDL loans.
Previously businesses that took EIDL emergency grants and received PPP loans were required to reduce the amount of the EIDL grant from what could be forgiven in their PPP loan. Garrett shares that this new legislation “completely repeals the section of the CARES Act which required PPP borrowers to deduct that amount from their loan forgiveness. So now you can get the full forgiveness and get the full $10,000 in the EIDL loan.”
8. Leverage “Three-martini lunch” deductions.
For businesses that use networking and entertainment as customer engagement activities, the new act recognizes this as fully-deductible business expense compared to the 50% limitation in prior law. Not only is this a deductible expense for businesses, but this is also aimed at helping hospitality and restaurant industries who may have had volumes impacted by the 50% limitation.
When asked about the most important thing for CEOs to know right now he states emphatically to “talk to your CPA immediately and figure out what you’re doing for 2020 because your tax liability for 2020 just shrunk by some amount.” There are implications for tax rates, tax brackets and some businesses might now find themselves in a loss position. This opens the opportunity for personal planning as well. “If you’re in an S-Corp and are now in a loss position, this is flowing through to you,” Garrett shares. In that case, he recommends considering taking an IRA and turning it into a Roth IRA. And time is of the essence for changes like that.
This new legislation comes at the end of a year that has redefined disruption. The year ahead holds promise of a resolution of the COVID-19 crisis, and pent up demand that will lead to several years of growth. Garrett sums it up best. “This work by Congress is a bit of a ray of sunshine that we can celebrate the year end with,” he says.
- Latest COVID-19 relief for business owners: Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act – UBS Global Wealth Management
- New PPP guidance issued by SBA, Treasury – Journal of Accountancy