The American Rescue Plan Act (ARPA), signed into law in early March, aims at offering widespread financial relief to individuals and employers adversely affected by the COVID-19 pandemic. The law specifically targets small businesses in many of its provisions.
If you own a small company, you may want to explore funding via the Small Business Administration’s (SBA’s) Economic Injury Disaster Loan (EIDL) program. And if you happen to own a restaurant or similar enterprise, the ARPA offers a special type of grant just for you.
Under the ARPA, eligible small businesses may receive targeted EIDL advances from the SBA. Amounts received as targeted EIDL advances are excluded from the gross income of the person who receives the funds. The law stipulates that no deduction or basis increase will be denied, and no tax attribute will be reduced, because of the ARPA’s gross income exclusion.
In the case of a partnership or S corporation that receives a targeted EIDL advance, any amount of the advance excluded from income under the ARPA will be treated as tax-exempt income for federal tax purposes. Because targeted EIDL advances are treated as such, they’ll be allocated to the partners or shareholders — increasing their bases in their partnership interests.
The IRS is expected to prescribe rules for determining a partner’s distributive share of EIDL advances for federal tax purposes. S corporation shareholders will receive allocations of tax-exempt income from targeted EIDL advances in proportion to their ownership interests in the company under the single-class-of-stock rule.
Restaurant revitalization grants
Under the ARPA, eligible restaurants, food trucks and similar businesses may receive restaurant revitalization grants from the SBA. As is the case for EIDL loans:
- Amounts received as restaurant revitalization grants are excluded from the gross income of the person who receives the funds, and
- No deduction or basis increase will be denied, and no tax attribute will be reduced, because of the ARPA’s gross income exclusion.
In the case of a partnership or S corporation that receives a restaurant revitalization grant, any amount of the grant excluded from income under the ARPA will be treated as tax-exempt income for federal tax purposes. Because restaurant revitalization grants are treated as tax-exempt income, they’ll be allocated to partners or shareholders and increase their bases in their partnership interests.
Just like EIDL advances, the IRS is expected to prescribe rules for determining a partner’s distributive share of the grant for federal tax purposes. And S corporation shareholders will receive allocations of tax-exempt income from restaurant revitalization grants in proportion to their ownership interests in the company under the single-class-of-stock rule.
Help with the process
The provisions related to EIDL advances and restaurant revitalization grants are effective as of the ARPA’s date of enactment: March 11, 2021. Contact us for help determining whether your small business or restaurant may qualify for financial relief under the ARPA and, if so, for assistance with the application process.
© 2021 Covenant CPA
The U.S. Department of Labor (DOL) recently issued EBSA Disaster Relief Notice 2021-01, which is of interest to employers. It clarifies the duration of certain COVID-19-related deadline extensions that apply to health care benefits plans.
Extensions to continue
The DOL and IRS issued guidance last year specifying that the COVID-19 outbreak period — defined as beginning March 1, 2020, and ending 60 days after the announced end of the COVID-19 national emergency — should be disregarded when calculating various deadlines under COBRA, ERISA and HIPAA’s special enrollment provisions.
The original emergency declaration would have expired on March 1, 2021, but it was recently extended. Although the agencies defined the outbreak period solely by reference to the COVID-19 national emergency, they relied on statutes allowing them to specify disregarded periods for a maximum of one year. Therefore, questions arose as to whether the outbreak period was required to end on February 28, 2021, one year after it began.
Notice 2021-01answers those questions by providing that the extensions have continued past February 28 and will be measured on a case-by-case basis. Specifically, applicable deadlines for individuals and plans that fall within the outbreak period will be extended (that is, the disregarded period will last) until the earlier of:
- One year from the date the plan or individual was first eligible for outbreak period relief, or
- The end of the outbreak period.
Once the disregarded period has ended, the timeframes that were previously disregarded will resume. Thus, the outbreak period will continue until 60 days after the end of the COVID-19 national emergency, but the maximum disregarded period for calculating relevant deadlines for any individual or plan cannot exceed one year.
Communication is necessary
The DOL advises plan sponsors to consider sending notices to participants regarding the end of the relief period, which may include reissuing or amending previous disclosures that are no longer accurate. Sponsors are also advised to notify participants who are losing coverage of other coverage options, such as through the recently announced COVID-19 special enrollment period in Health Insurance Marketplaces (commonly known as “Exchanges”).
Notice 2021-01 acknowledges that the COVID-19 pandemic and other circumstances may disrupt normal plan operations. The DOL reassures fiduciaries acting in good faith and with reasonable diligence that enforcement will emphasize compliance assistance and other relief. The notice further states that the IRS and U.S. Department of Health and Human Services concur with the guidance and its application to laws under their jurisdiction.
Plan sponsors and administrators will likely welcome this clarification but may be disappointed in its timing and in how it interprets the one-year limitation. Determinations of the disregarded period that depend on individual circumstances could create significant administrative challenges.
In addition to making case-by-case determinations, plan sponsors and administrators must quickly develop a strategy for communicating these complex rules to participants. Contact us for further information and updates.
© 2021 Covenant CPA
The U.S. economy is still a far cry from where it was before the COVID-19 pandemic hit about a year ago. Nonetheless, as vaccination efforts continue to ramp up, many experts expect stronger jobs growth and more robust economic activity in the months ahead.
No matter what your business does, you don’t want your sales staff hamstrung by overly complicated procedures as they strive to seize opportunities in the presumably brighter near-future. Here are five ways to streamline and energize your sales process:
1. Reassess territories. Business travel isn’t what it used to be, so you may not need to revise the geographic routes that your sale staff used to physically traverse. Nonetheless, you may see real efficiency gains by creating a strategic sales territory plan that aligns salespeople with regions or markets containing the prospects they’re most likely to win.
2. Focus on top-tier customers. If purchases from your most valued customers have slowed recently, find out why and reverse the trend. For your sales staff, this may mean shifting focus from winning new business to tending to these important accounts. See whether you can craft a customized plan aimed at meeting a legacy customer’s long-term needs. It might include discounts, premiums and extended warranties.
3. Cut down on “paperwork.” More than likely, “paperwork” is a figurative term these days, as most businesses have implemented electronic means to track leads, document sales efforts and record closings. Nevertheless, outdated or overly complicated software can slow a salesperson’s momentum.
You might conduct a survey to gather feedback on whether your current customer relationship management or sales management software is helping or hindering their efforts. Based on the data, you can then make sensible choices about whether to upgrade or change your system.
4. Issue a carefully chosen challenge. What allows a business to grow is not only retaining top customers, but also creating organic sales growth from new products or services. Consider creating a sales challenge that will motivate staff to push your company’s latest offerings. One facet of such a challenge may be to replace across-the-board commission rates with higher commissions on new products or “tough sells.”
5. Align commissions with financial objectives. Along with considering commissions tied to new products or difficult-to-sell products, investigate other ways you might revise commissions to incentivize your team. Examples include commissions based on:
- Actual customer payments rather than billable orders,
- More sales to current customers,
- Increased order sizes,
- Delivery of items when customers prepay, or
- Number of new customers.
Again, these are just ideas to consider. Ultimately, you want to set up a sales compensation plan based on measurable financial goals that allow your sales staff to clearly understand how their efforts contribute to the profitability of your business. Contact us for help evaluating your sales process and targeting helpful changes.
© 2021 Covenant CPA
When the Small Business Administration (SBA) launched the Paycheck Protection Program (PPP) last year, the program’s stated objective was “to provide a direct incentive for small businesses to keep their workers on the payroll.” However, according to federal officials, the recently issued second round of funding has distributed only a small percentage of the $15 billion set aside for small businesses and low- to moderate-income “first-draw” borrowers.
In late February, the SBA, in cooperation with the Biden Administration, announced adjustments to the PPP aimed at “increasing access and much-needed aid to Main Street businesses that anchor our neighborhoods and help families build wealth,” according to SBA Senior Advisor Michael Roth.
5 primary objectives
The adjustments address five primary objectives:
1. Move the smallest businesses to the front of the line. The SBA has established a two-week exclusive application period for businesses and nonprofits with fewer than 20 employees. It began on February 24. The agency has reassured larger eligible companies that they’ll still have time to apply for and receive support before the program is set to expire on March 31.
2. Change the math. The loan calculation formula has been revised to focus on gross profits rather than net profits. The previous formula inadvertently excluded many sole proprietors, independent contractors and self-employed individuals.
3. Eliminate the non-fraud felony exclusion. Under the original PPP rules, a business was disqualified from funding if it was at least 20% owned by someone with either 1) an arrest or conviction for a felony related to financial assistance fraud in the previous five years, or 2) any other felony in the previous year. The new rules eliminate the one-year lookback for any kind of felony unless the applicant or owner is incarcerated at the time of application.
4. Eventually remove the student loan exclusion. Current rules prohibit PPP loans to any business that’s at least 20% owned by an individual who’s delinquent or has defaulted on a federal debt, which includes federal student loans, within the previous seven years. The SBA intends to collaborate with the U.S. Departments of Treasury and Education to remove the student loan delinquency restriction to broaden PPP access.
5. Clarify loan eligibility for noncitizen small business. The CARES Act stipulates that any lawful U.S. resident can apply for a PPP loan. However, holders of Individual Taxpayer Identification Numbers (ITINs), such as Green Card holders and those in the United States on a visa, have been unable to consistently access the program. The SBA has committed to issuing new guidance to address this issue, which, in part, will state that otherwise eligible applicants can’t be denied PPP loans solely because they use ITINs when paying their taxes.
The PPP could evolve further as the year goes along, potentially as an indirect result of the COVID-19 relief bill currently making its way through Congress. Our firm can keep you updated on all aspects of the program, including the tax impact of loan proceeds.
© 2021 Covenant CPA
If your business sponsors a 401(k) plan, you might someday consider adding designated Roth contributions. Here are some factors to explore when deciding whether such a feature would make sense for your company and its employees.
Roth contributions differ from other elective deferrals in two key tax respects. First, they’re irrevocably designated to be made on an after-tax basis, rather than pretax. Second, if all applicable requirements are met and the distribution constitutes a “qualified distribution,” the earnings won’t be subject to federal income tax when distributed.
To be qualified, a distribution generally must occur after a five-year waiting period, as well as after the participant reaches age 59½, becomes disabled or dies. Because of the different tax treatment, plans must maintain separate accounts for designated Roth contributions.
Pluses and minuses
The Roth option gives participants an opportunity to hedge against the possibility that their income tax rates will be higher in retirement. However, if tax rates fall or participants are in lower tax brackets during retirement, Roth contributions may provide less after-tax retirement income than comparable pretax contributions. The result could also be worse than that of ordinary elective deferrals if Roth amounts aren’t held long enough to make distributions tax-free.
Nonetheless, if your business employs a substantial number of relatively highly paid employees, a Roth 401(k) component may be well-appreciated. This is because participants can make much larger designated Roth 401(k) contributions than they can for a Roth IRA — in 2020 and 2021, $19,500 for designated Roth 401(k) versus $6,000 for Roth IRA.
Catch-up contributions for individuals 50 or older are also considerably higher for designated Roth 401(k) contributions — in 2020 and 2021, $6,500 for designated Roth 401(k)s versus $1,000 for Roth IRAs. And higher-paid participants who are ineligible to make Roth IRA contributions because of the income cap on eligibility could make designated Roth contributions to your plan.
Yet participants will need to know what they’re getting into. They’ll have to consider:
- Current and future tax rates,
- Various investment alternatives,
- The risk of needing a distribution before they qualify for tax-free treatment of earnings (which would trigger taxation of those earnings), and
- Loss of some rollover options.
For plan sponsors, the separate accounting required for Roth contributions may raise plan costs and increase the risk of error. (One common mistake: treating elected contributions as pretax when the participant elected Roth contributions, or vice versa.)
And because Roth contributions are treated as elective deferrals for other purposes — including nondiscrimination requirements, vesting rules and distribution restrictions — plan administration and communication will be more complex.
Not for everyone
Before adding Roth contributions to your 401(k), be sure participants are adequately engaged and savvy, and will derive enough benefit, to make it worth the risks and burdens. We can assist you in deciding whether this would be an appropriate move for your business.
© 2021 Covenant CPA
The events of the past year have taught business owners many important lessons. One of them is that, when a crisis hits, customers turn on their computers and look to their phones. According to one analysis of U.S. Department of Commerce data, consumers spent $347.26 billion online with U.S. retailers in the first half of 2020 — that’s a 30.1% increase from the same period in 2019.
Although online spending moderated a bit as the year went on, the fact remains that people’s expectations of most companies’ websites have soared. In fact, a June 2020 report by software giant Adobe indicated that the pandemic has markedly accelerated the growth of e-commerce — quite possibly by years, not just months.
Whether you sell directly to the buying public or engage primarily in B2B transactions, building customers’ trust in your website is more important than ever.
Among the simplest ways to establish trust with customers and prospects is to convey to them that you’re a bona fide business staffed by actual human beings.
Include an “About Us” page with the names, photos and short bios of the owner(s), executives and key staff members. Doing so will help make the site friendlier and more relatable. You don’t want to look anonymous — it makes customers suspicious and less likely to buy.
Beyond that, be sure to clearly provide contact info. This includes a phone number and email address, hours of operation (including time zone), and your mailing address. If you’re a small business, use a street address if possible. Some companies won’t deliver to a P.O. box, and some customers won’t buy if you use one.
Keep contact links easy to find. No one wants to search all over a site looking for a way to get in touch with someone at the business. Include at least one contact link on every page.
Add trust elements
Another increasingly critical feature of business websites is “trust elements.” Examples include:
- Icons of widely used payment security providers such as PayPal, Verisign and Visa,
- A variety of payment alternatives, as well as free shipping or lower shipping costs for certain orders, and
- Professionally coded, aesthetically pleasing and up-to-date layout and graphics.
Check and double-check the spelling and grammar used on your site. Remember, one of the hallmarks of many Internet scams is sloppy or nonsensical use of language.
Also, regularly check all links. Nothing sends a customer off to a competitor more quickly than the frustration of encountering nonfunctioning links. Such problems may also lead visitors to think they’ve been hacked.
Abide by the fundamentals
Of course, the cybersecurity of any business website begins (and some would say ends) with fundamental elements such as a responsible provider, firewalls, encryption software and proper password use. Nonetheless, how you design, maintain and update your site will likely have a substantial effect on your company’s profitability. Contact us for help measuring and assessing the impact of e-commerce on your business.
© 2021 Covenant CPA
Using a strengths, weaknesses, opportunities and threats (SWOT) analysis to frame an important business decision is a long-standing recommended practice. But don’t overlook other, broader uses that could serve your company well.
A SWOT analysis starts by spotlighting internal strengths and weaknesses that affect business performance. Strengths are competitive advantages or core competencies that generate value (and revenue), such as a strong sales force or exceptional quality.
Conversely, weaknesses are factors that limit a company’s performance. These are often revealed in a comparison with competitors. Examples might include a negative brand image because of a recent controversy or an inferior reputation for customer service.
Generally, the strengths and weaknesses of a business relate directly to customers’ needs and expectations. Each identified characteristic affects cash flow — and, therefore, business success — if customers perceive it as either a strength or weakness. A characteristic doesn’t really affect the company if customers don’t care about it.
The next SWOT step is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit business performance.
When differentiating strengths from opportunities, or weaknesses from threats, the question is whether the issue would exist without the business. If the answer is yes, the issue is external to the company and, therefore, an opportunity or a threat. Examples include changes in demographics or government regulations.
As mentioned, business owners can use SWOT to do more than just make an important decision. Other applications include:
Valuation. A SWOT analysis is a logical way to frame a discussion of business operations in a written valuation report. The analysis can serve as a powerful appendix to the report or a courtroom exhibit, providing tangible support for seemingly ambiguous, subjective assessments regarding risk and return.
In a valuation context, strengths and opportunities generate returns, which translate into increased cash flow projections. Strengths and opportunities can lower risk via higher pricing multiples or reduced cost of capital. Threats and weaknesses have the opposite effect.
Strategic planning. Businesses can repurpose the SWOT analysis section of a valuation report to spearhead strategic planning. They can build value by identifying ways to capitalize on opportunities with strengths or brainstorming ways to convert weaknesses into strengths or threats into opportunities. You can also conduct a SWOT analysis outside of a valuation context to accomplish these objectives.
Legal defense. Should you find yourself embroiled in a legal dispute, an attorney may want to frame trial or deposition questions in terms of a SWOT analysis. Attorneys sometimes use this approach to demonstrate that an expert witness truly understands the business — or, conversely, that the opposing expert doesn’t understand the subject company.
Tried and true
A SWOT analysis remains a useful way to break down and organize the many complexities surrounding a business. Our firm can help you with the tax, accounting and financial aspects of this approach.
© 2021 Covenant CPA
Many business owners generate financial statements, at least in part, because lenders and other stakeholders demand it. You’re likely also aware of how insightful properly prepared financial statements can be — especially when they follow Generally Accepted Accounting Principles.
But how can you best extract these useful insights? One way is to view your financial statements through a wide variety of “lenses” provided by key performance indicators (KPIs). These are calculations or formulas into which you can plug numbers from your financial statements and get results that enable you to make better business decisions.
Learn about liquidity
If you’ve been in business for any amount of time, you know how important it is to be “liquid.” Companies must have sufficient current assets to meet their current obligations. Cash is obviously the most liquid asset, followed by marketable securities, receivables and inventory.
Working capital — the difference between current assets and current liabilities — is a quick and relatively simple KPI for measuring liquidity. Other KPIs that assess liquidity include working capital as a percentage of total assets and the current ratio (current assets divided by current liabilities). A more rigorous benchmark is the acid (or quick) test, which excludes inventory and prepaid assets from the equation.
Accentuate asset awareness
Businesses are more than just cash; your assets matter too. Turnover ratios, a form of KPI, show how efficiently companies manage their assets. Total asset turnover (sales divided by total assets) estimates how many dollars in revenue a company generates for every dollar invested in assets. In general, the more dollars earned, the more efficiently assets are used.
Turnover ratios also can be measured for each specific category of assets. For example, you can calculate receivables turnover ratios in terms of days. The collection period equals average receivables divided by annual sales multiplied by 365 days. A collection period of 45 days indicates that the company takes an average of one and one-half months to collect invoices.
Liquidity and asset management are critical, but the bottom line is the bottom line. When it comes to measuring profitability, public companies tend to focus on earnings per share. But private businesses typically look at profit margin (net income divided by revenue) and gross margin (gross profits divided by revenue).
For meaningful comparisons, you’ll need to adjust for nonrecurring items, discretionary spending and related-party transactions. When comparing your business to other companies with different tax strategies, capital structures or depreciation methods, it may be useful to compare earnings before interest, taxes, depreciation and amortization (EBITDA).
As your business grows, your financial statements may contain so much information that it’s hard to know what to focus on. Well-chosen and accurately calculated KPIs can reveal important trends and developments. Contact us with any questions you might have about generating sound financial statements and getting the most out of them.
© 2021 Covenant CPA
A new year has arrived and, with it, a fresh 12 months of opportunities to communicate with customers and prospects. Like every year, 2021 brings distinctive marketing trends to the table. The COVID-19 pandemic and resulting economic challenges continue to drive the conversation in most industries. To get more for your marketing dollars, you’ll need to tailor your message to this environment.
Continue to invest in digital
There’s good reason to remind yourself of digital marketing’s continuing value in our brave new world of daily videoconferencing and booming online shopping. It’s affordable and allows you to communicate with customers directly. In addition, it provides faster results and better tracking capabilities.
Consider or re-evaluate strategies such as regularly updating your search engine optimization so your website ranks highly in online searches and more people can find you. Adjust your use of email, text messages and social media to communicate with customers and prospects.
For instance, craft more dynamic messages to introduce new products or special events. Offer “flash sales” and Internet-only deals to test and tweak offers before making them via more expansive (and expensive) media.
Seek out better deals
During boom times, you may feel at the mercy of high advertising rates. In the current uncertain and gradually recovering economy, look for better deals. The good news is that there are many more marketing/advertising channels than there used to be and, therefore, much more competition among them. Paying less is often a matter of knowing where to look.
Track your marketing efforts carefully and dedicate time to exploring new options. For example, podcasts remain enormously popular. Could a marketing initiative that exploits their reach pay dividends? Another possibility is shifting to smaller, less expensive ads posted in a wider variety of outlets rather than engaging in one massive campaign.
Excel at public relations
When the pandemic hit last year, every business had to address current events in their marketing messaging. This stood in stark contrast to decades previous, when companies generally tended to steer clear of the news. Nowadays, public relations is a key component of marketing success. Your customers and prospects need to know that your business is aware of the current environment and adjusting to it.
Ask your marketing department to craft clear, concise but exciting press releases regarding your newest products or services. Then distribute these press releases via both traditional and online channels to complement your marketing efforts. In this manner, you can disseminate trustworthy information and maintain a strong reputation — all at a relatively low cost.
Your company’s marketing dollars need to provide a return on investment just as robust as its budget for production, employment and other key areas. Our firm can help you evaluate your marketing efforts from a financial perspective and identify ways to make those dollars go further.
© 2021 Covenant CPA
Some might say the end of one calendar year and the beginning of another is a formality. The linear nature of time doesn’t change, merely the numbers we use to mark it.
Others, however, would say that a fresh 12 months — particularly after the arduous, anxiety-inducing nature of 2020 — creates the perfect opportunity for business owners to gather their strength and push ahead with greater vigor. One way to do so is to ring in the new year with a systematic approach to renewing everyone’s focus on profitability.
Create an idea-generating system
Without a system to discover ideas that originate from the day-in, day-out activities of your business, you’ll likely miss opportunities to truly maximize the bottom line. What you want to do is act in ways that inspire and allow you to gather profit-generating concepts. Then you can pick out the most actionable ones and turn them into bottom-line-boosting results. Here are some ways to create such a system:
Share responsibility for profitability with your management team. All too often, managers become trapped in their own information silos and areas of focus. Consider asking everyone in a leadership position to submit ideas for growing the bottom line.
Instruct supervisors to challenge their employees to come up with profit-building ideas. Leaving your employees out of the conversation is a mistake. Ask workers on the front lines how they think your business could make more money.
Target the proposed ideas that will most likely increase sales, cut costs or expand profit margins. As suggestions come in, use robust discussions and careful calculations to determine which ones are truly worth pursuing.
Tie each chosen idea to measurable financial goals. When you’ve picked one or more concepts to pursue in real life, identify which metrics will accurately inform you that you’re on the right track. Track these metrics regularly from start to finish.
Name those accountable for executing each idea. Every business needs its champions! Be sure each profit-building initiative has a defined leader and team members.
Follow a clear, patient and well-monitored implementation process. Ideas that ultimately do build the bottom line in a meaningful way generally take time to identify, implement and execute. Don’t look for quick-fix measures; seek out business transformations that will lead to long-term success.
A carefully constructed and strong-performing profitability idea system can not only grow the bottom line, but also upskill employees and improve morale as strategies come to fruition. Our firm can help you identify profit-building opportunities, choose the right metrics to evaluate and measure them, and track the pertinent data over time.
© 2020 Covenant CPA