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Covid-19: A Hard Reset For Business

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Much like when your computer stalls and “fingers-crossed” you unplug it from the wall and plug it back-in, Covid-19 is forcing the global economy into a hard reset. In this article we will discuss two phases that some if not most business will go through during this pandemic hard reset. Make sure to discuss these ideas with your CPA and financial advisors.

Phase 1 – Survival

One of the most important things to focus on during uncertain times is cash flow both current and projected.

Identify the important cash flow priorities of your business such as employees, customers, landlord, lenders, vendors, shareholders, etc. Keep in mind that the ultimate goal is to return to normal business at some point in the future and it would be useful to maintain these priority relationships.

As you live and breath your cash flow everyday, you may come into a cash flow deficit situation. Before throwing in the towel, make sure you explore alternative solutions for cash flow issues such as:

  • SBA Loans (i.e. PPP, EIDL, etc.)
  • Payroll Tax Credits
  • Deferring Payments for Certain Payroll and Sales Taxes
  • Negotiating installment agreements to cover past due payables or taxes
  • Equity infusion

If these solutions aren’t working for you and your cash flow is continuing into a deficit, there are other options such as cancellation of debt or closing the business. However, please keep in mind that these options can trigger taxable income, cause serious damage to the credit of the business and its owners and take years to resolve. So, let’s stay in business and Rebuild!

Phase 2 – Rebuild

As the government slowly rolls out phases to re-open the economy it will be like a re-birth for some businesses. It is best to take this time to establish successful cash flow plans. Here is a sample of how to envision your cash flow and create a detailed plan and projection.

  • Make Money – Create cash inflow from Net Income, contributed capital, etc (non debt obligations – see next note)
  • Pay off Debt – Once the business is making money with positive cash inflow you can build a strong balance sheet by paying off debts. There are scenarios where debts are adequately-leveraged or debt is necessary, etc etc but a simple goal for your balance sheet could be Assets = Equity
  • Save Money – Some people advise to save money as you pay off debt, and others suggest to pay of the debt first because debt typically costs more than the earnings from savings….either way, Save Money.
  • Invest Money – Once you have paid off your debt and you have adequate savings, then you can invest in your business, such as PP&E, retirement plans, Reasearch & Development, etc.

As you create your various cash flow plans and projections, experiment with different ideas and what-if scenarios to create a range or metric for additional ways to measure future performance.

If you have any questions, please reach out and we can talk more about this and any other questions for you or your business. Info@mrarrachecpa.com or (949) 877-3143 (local) or (800) 425-0570 (toll-free).

Written by: Michael Arrache, CPA, EA (Newport Beach, CA)

California Franchise Tax Board answers important questions related to Recent Federal COVID-19 Response

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The FTB has posted the following new FAQs about conformity to various portions of the CARES Act:

Q: Are the payments that individuals receive from the federal government (i.e., $1,200 [$2,400 for individuals filing a joint return] and $500 per qualifying child) under the recently enacted federal CARES Act subject to California income tax?

A: No, these payments are not subject to California income tax.

Q: Is the emergency increase in unemployment compensation benefits (in the amount of $600 per week) that individuals receive under the recently enacted federal CARES Act subject to California income tax?

A: No, these payments are not subject to California income tax.

Q: Are the modifications for net operating losses (NOLs) in the recently enacted federal CARES Act applicable for California income and franchise tax purposes?

A: No, these modifications for NOLs do not apply for California income and franchise tax purposes.

Q: Does California conform to the federal early withdrawal penalty waivers for distributions from qualified retirement accounts under the recently enacted federal CARES Act?

A: Yes, the federal early withdrawal penalty waivers for distributions from qualified retirement accounts under the federal CARES Act also applies for California income tax purposes.

The FTB’s COVID-19 FAQs can be found at:

www.ftb.ca.gov/about-ftb/newsroom/covid-19/help-with-covid-19.html

Non-filers can still get Stimulus Checks

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IRS launches tool for non-filer economic impact payments (04-10-20)

The IRS has created a new website that allows non-filers to request economic impact payments. (IR-2020-69)

Individuals receiving Social Security retirement or disability benefits, or Railroad Retirement benefits, are not required to use this new tool to receive their payments. The IRS will still rely on Form SSA-1099 and Form RRB-1099 for purposes of determining the amount of the impact payment. However, if these individuals have dependents, and have not filed a return for 2018 or 2019, they should visit the website; otherwise, their payment will only be issued for the $1,200 for the recipient and not their spouse or any of their dependents.

Here is a list of who should go to the website and enter their information:

  • Individuals who haven’t filed a 2018 or 2019 return because their income is below the filing requirement threshold;
  • Veterans beneficiaries and SSI recipients; and
  • Social Security, SSDI, and Railroad Retirement beneficiaries with qualifying dependents.

Here is the link to the website:

www.irs.gov/coronavirus/non-filers-enter-payment-info-here

The IRS also announced that the website for other taxpayers to enter bank account information for direct deposit, and a website for everyone to check on the status of their payment, will be available next week.

CARES Act and SBA Disaster Loans

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Corona Virus Aid, Relief and Economic Security ACT (H.R. 748)

Payroll Protection loans

In addition to the tax provisions we previously reported, the CARES Act provides for Payroll Protection loans of up to $10 million to COVID-19 impacted businesses:

  • The loans are guaranteed 100% by the Small Business Administration (no personal guarantees or collateral required);
  • Businesses with 500 or fewer employees can borrow 2.5 times their average monthly payroll, up to a maximum of $10 million;
  • The loans may be forgiven for amounts used to cover basic operating expenses such as payroll costs, rent and mortgage, and utilities for up to eight weeks from the loan origination date;
  • Loan forgiveness will be reduced by reductions in employee compensation or layoffs of employees over the last year;
  • The canceled debt will not generate taxable income;
  • Businesses that take these loans will not qualify for the Employer Retention Credit; 
  • Any loan amount that isn’t forgiven has a maximum term of 10 years and a maximum interest rate of 4%; and
  • At press time, the SBA had not provided information to banks on the loan process, but we expect that to happen soon.

Read full CARES Act (H.R. 748) https://www.congress.gov/bill/116th-congress/house-bill/748/text

PLANNING OPPORTUNITY: Section 1106 of CARES Act allows for loan forgiveness in an amount equal to approximately 8-weeks of payroll, rent, utilities and certain interest. Contact your SBA advisor for more information.

Employer Retention Credit

The CARES Act also contains a refundable employer retention credit against quarterly employment taxes for employers impacted by COVID-19:

  • Impacted employers are those who fully or partially suspended operations due to COVID-19 or whose gross receipts declined in a quarter by more than 50% compared to the prior year;
  • The credit is equal to 50% of qualified wages paid after March 12, 2020, and before January 1, 2021, up to a $5,000 maximum per credit;
  • The credit is claimed against the 6.2% employer’s portion of Social Security taxes;
  • The IRS will be providing refund advances; and
  • The credit cannot be claimed by businesses receiving a CARES Act Payroll Protection loan from the Small Business Administration.

Rather than wait weeks after the employer has filed its quarterly Form 941, the IRS has set up two alternative ways employers can cash in these credits quickly:

  • They can retain the following employment taxes rather than depositing them:
    • Federal income taxes withheld for all employees;
    • The employee’s share of Social Security and Medicare taxes (but only for the employee who received the paid benefits or qualified wages); and
    • The employer’s share of Social Security and Medicare taxes for all employees; or
  • Alternatively, employers may file Form 7200, Advance Payment of Employer Credits Due to COVID-19, to expedite a refund of the credit due in excess of the amount of previously retained employment taxes. The IRS has stated that they will try to issue refunds within two weeks.

Form 7200 may be filed for an advance payment of the credits anticipated for a quarter at any time before the end of the month following the quarter in which the employer paid the qualified wages. If necessary, it can be filed several times during each quarter.

Submit Form 7200 by faxing it to (855) 248-0552.

Form 7200 is available at:

www.irs.gov/forms-pubs/about-form-7200

Stimulus payments (Employees)

  • The payment is an advance payment of a 2020 tax credit;
  • The maximum credit is $1,200 per individual ($2,400 MFJ) plus $500 per qualifying child under 17 years old;
  • The credit is phased out by 5% ($5 for every $100 over the limit) for AGIs exceeding:
    • $150,000 for MFJ — phased out at $198,000 if there are no children;
    • $112,500 for HOH filers — phased out at $146,500 if the HOH has one child;
    • $75,000 for all other taxpayers — phased out at $99,000; and
    • For every child claimed, add an additional $10,000.
  • For people who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The stimulus payment will be deposited directly into the same banking account reflected on the return filed;
  • For taxpayers who did not provide direct deposit information, in the coming weeks the Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online so that individuals can receive payments immediately as opposed to checks in the mail; and
  • For individuals who did not file a 2018 or 2019 return, the IRS is developing a simplified process for them to file.

Here is a link to the IRS’s FAQs on these payments:

www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know