The economic fallout from the coronavirus (COVID-19) pandemic has forced business owners to reevaluate their operations and make difficult decisions. One place to look for the information you need to make rational, reasonable moves is your financial statements. Under U.S. Generally Accepted Accounting Principles, these typically comprise a statement of cash flows, a balance sheet and an income statement.
A statement of cash flows should be organized into three sections: cash flows from operating, financing and investing activities. Ideally, a company generates enough cash from operations to cover its expenses.
For many businesses, the COVID-19 pandemic has caused revenue to drop precipitously without a proportionate decrease in certain (fixed) operating expenses. Keep a close eye on whether you’re reaching a danger point. To generate additional cash flow, you may need to borrow money — consider a Small Business Administration loan, if you’re eligible.
Assets and liabilities
Your balance sheet tallies your company’s assets, liabilities and net worth — creating a snapshot of its financial health on the statement date. Assets are typically listed in order of liquidity. Current assets (such as accounts receivable) are expected to be converted into cash within a year, while long-term assets (such as your plant and equipment) will be used to generate revenue beyond the next 12 months.
Similarly, liabilities are listed in order of maturity. Current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year.
As its name indicates, the balance sheet must balance — that is, assets must equal liabilities plus net worth. Net worth is the extent to which the book value of assets exceeds liabilities. In times of distress, certain assets (such as receivables, financial assets, pension funds and inventory) may need to be written off, and intangibles (such as brands and goodwill) may become impaired. These changes may cause the book value of a company’s net worth to be negative, suggesting that the business is insolvent. Other red flags include current assets growing faster than sales, and a deteriorating ratio of current assets to current liabilities.
Income and overhead
An income statement shows revenue and expenses over the accounting period. Revenue has fallen for many businesses as the result of social distancing during the COVID-19 outbreak. Fortunately, certain variable expenses — such as materials and direct labor costs — have also fallen.
Unfortunately, most fixed expenses — such as rent, equipment leasing fees, advertising, insurance premiums and manager salaries — are ongoing. Review costs that are categorized on the income statements as overhead and sales, general and administrative expenses. Consider whether you can scale back these items, renegotiate them or convert them into variable costs over the long run.
For example, you might return a leased copier that isn’t being used, decrease your insurance coverage or rely more on independent contractors, rather than employees, for certain tasks.
Your existing financial statements may not account for the sudden changes inflicted upon businesses worldwide by COVID-19. We can assist you in evaluating them, gleaning insightful data using updated numbers, and generating new ones going forward.
© 2020 Covenant CPA
On March 27, President Trump signed into law another coronavirus (COVID-19) law, which provides extensive relief for businesses and employers. Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Employee retention credit
The new law provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.
Employer eligibility. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
The credit isn’t available to employers receiving Small Business Interruption Loans under the new law.
Wage eligibility. For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for whom the employer claims a Work Opportunity Tax Credit.
The term “wages” includes health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.
Payroll and self-employment tax payment delay
Employers must withhold Social Security taxes from wages paid to employees. Self-employed individuals are subject to self-employment tax.
The CARES Act allows eligible taxpayers to defer paying the employer portion of Social Security taxes through December 31, 2020. Instead, employers can pay 50% of the amounts by December 31, 2021 and the remaining 50% by December 31, 2022.
Self-employed people receive similar relief under the law.
Temporary repeal of taxable income limit for NOLs
Currently, the net operating loss (NOL) deduction is equal to the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2) 80% of taxable income computed without regard to the deduction allowed. In other words, NOLs are generally subject to a taxable-income limit and can’t fully offset income.
The CARES Act temporarily removes the taxable income limit to allow an NOL to fully offset income. The new law also modifies the rules related to NOL carrybacks.
Interest expense deduction temporarily increased
The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.
The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.
Bonus depreciation for qualified improvement property
The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The TCJA eliminated definitions for 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. It replaced them with one category called qualified improvement property (QIP). A general 15-year recovery period was intended to have been provided for QIP. However, that period failed to be reflected in the language of the TCJA. Therefore, under the TCJA, QIP falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.
The CARES Act provides a technical correction to the TCJA, and specifically designates QIP as 15-year property for depreciation purposes. This makes QIP eligible for 100% bonus depreciation. The provision is effective for property placed in service after December 31, 2017.
Careful planning required
This article only explains some of the relief available to businesses. Additional relief is provided to individuals. Be aware that other rules and limits may apply to the tax breaks described here. Contact us if you have questions about your situation.
© 2020 Covenant CPA
Businesses across the country are being affected by the coronavirus (COVID-19). Fortunately, Congress recently passed a law that provides at least some relief. In a separate development, the IRS has issued guidance allowing taxpayers to defer any amount of federal income tax payments due on April 15, 2020, until July 15, 2020, without penalties or interest.
On March 18, the Senate passed the House’s coronavirus bill, the Families First Coronavirus Response Act. President Trump signed the bill that day. It includes:
- Paid leave benefits to employees,
- Tax credits for employers and self-employed taxpayers, and
- FICA tax relief for employers.
Tax filing and payment extension
In Notice 2020-18, the IRS provides relief for taxpayers with a federal income tax payment due April 15, 2020. The due date for making federal income tax payments usually due April 15, 2020 is postponed to July 15, 2020.
Important: The IRS announced that the 2019 income tax filing deadline will be moved to July 15, 2020 from April 15, 2020, because of COVID-19.
Treasury Department Secretary Steven Mnuchin announced on Twitter, “we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”
Previously, the U.S. Treasury Department and the IRS had announced that taxpayers could defer making income tax payments for 2019 and estimated income tax payments for 2020 due April 15 (up to certain amounts) until July 15, 2020. Later, the federal government stated that you also don’t have to file a return by April 15.
Of course, if you’re due a tax refund, you probably want to file as soon as possible so you can receive the refund money. And you can still get an automatic filing extension, to October 15, by filing IRS Form 4868. Contact us with any questions you have about filing your return.
Any amount can be deferred
In Notice 2020-18, the IRS stated: “There is no limitation on the amount of the payment that may be postponed.” (Previously, the IRS had announced dollar limits on the tax deferrals but then made a new announcement on March 21 that taxpayers can postpone payments “regardless of the amount owed.”)
In Notice 2020-18, the due date is postponed only for federal income tax payments for 2019 normally due on April 15, 2020 and federal estimated income tax payments (including estimated payments on self-employment income) due on April 15, 2020 for the 2020 tax year.
As of this writing, the IRS hasn’t provided a payment extension for the payment or deposit of other types of federal tax (including payroll taxes and excise taxes).
This only outlines the basics of the federal tax relief available at the time this was written. New details are coming out daily. Be aware that many states have also announced tax relief related to COVID-19. And Congress is working on more legislation that will provide additional relief, including sending checks to people under a certain income threshold and providing relief to various industries and small businesses.
We’ll keep you updated. In the meantime, contact us with any questions you have about your situation.
© 2020 Covenant CPA
Many business owners put off writing a mission statement. Who has time to write down why you’re in business when you’re busy trying to run one! And perhaps even fewer owners have created a vision statement — possibly because they’re not sure what the term even means.
There are good reasons for creating both. Lenders, investors and job candidates appreciate strong, clear mission statements. And vision statements can give interested parties a clear idea of where a business is heading. In addition, you and your staff may benefit from the focus and direction that comes from articulating your mission and vision.
Describe your purpose
Let’s start with a mission statement. Its purpose is to express to the world why you’re in business, what you’re offering and whom you’re looking to serve. For example, the U.S. Department of Labor has this as its mission statement:
To foster, promote, and develop the welfare of the wage earners, job seekers, and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights.
Forget flowery language and industry jargon. Write in clear, simple, honest terms. Keep the statement brief, a paragraph at most. Answer questions that any interested party would want to know, such as:
- Why did your company go into business?
- What makes your products or services worth buying?
- Who is your target market?
Presumably, you know the answers to these questions. But putting them down on paper may help renew your commitment to your original or actual mission, or it may reveal some areas where you’ve gotten off track. For example, if your target demographic is Millennials, have you maintained that focus or wandered off course a bit?
Proclaim your ambition
So, a mission statement essentially explains why you’re here, what you do and who you’re looking to serve. What does a vision statement do? It tells interested parties where you’re headed and what you ultimately want to accomplish.
A vision statement should be even briefer than your mission statement. Think of a tag line for a movie or even an advertising slogan. You want to deliver a memorable quote that will get the attention of readers and reinforce that you’re not looking to make a quick buck. Rather, you’re moving forward into the future while providing the highest quality products or services in the here and now. For instance, the trademarked vision statement of the Alzheimer’s Association is simple and aims high: “A world without Alzheimer’s and all other dementia.”
Should you bring your operations to a screeching halt so everyone can work on a mission and vision statement? Certainly not. But if you haven’t created either, or haven’t updated them in a while, it’s a worthwhile strategic planning task to put together the language and see what insights come of it. We’d be happy to review your statements and help you tie them to sound budgeting and financial planning.
© 2020 Covenant CPA
Most companies wouldn’t go into business without some basic types of insurance in place, such as property coverage and a liability policy. For a company with more than one owner, there’s an additional type of risk-management arrangement that needs to be established: a buy-sell agreement.
If your business has yet to create one, you should start the process as soon as possible. A conflict over ownership change can distract a company at the very least — and devastate it at worst. But, even if you have a buy-sell in place, there are a couple key elements to regularly review: funding and valuation.
Evaluate your funding
For many businesses, payouts for a buy-sell agreement are funded with a cash-value life insurance policy or a disability buyout insurance policy. There are two main types of life insurance-funded buy-sell agreements:
1. Cross-purchase agreement. Co-owners buy insurance policies on each other, using the proceeds to buy a deceased or disabled party’s ownership shares. They receive a step-up in cost basis that may reduce taxes if the business is later sold. This option is usually preferable if there are three or fewer business co-owners.
2. Entity purchase agreement. The business entity buys insurance policies on each co-owner and uses the proceeds to buy a deceased or disabled owner’s shares, which are divided among the remaining parties. Co-owners receive no step-up in cost basis with an entity purchase agreement. This option is usually preferable if there are four or more owners, because it eliminates the need for each one to buy so many insurance policies.
Engage a valuator
It’s usually wise to hire a professional appraiser to perform a business valuation when drafting a buy-sell agreement. The valuation should then be updated periodically as circumstances that could affect the value of the company change. In fact, the buy-sell agreement itself should be reviewed by each co-owner from time to time to make sure it still reflects everyone’s intentions.
One specific issue to consider is how the “standard” of value is defined. A business valuation expert can provide definitions for a variety of relevant standards — including fair market value, fair value, book value and investment value. Different triggering events or departing shareholders may require different levels or standards of value.
Customize your agreement
Having a standard, boilerplate buy-sell agreement can be just as dangerous as not having one at all because its provisions may cause confusion or trigger disputes. Yours should be a customized, living document that provides a clear mechanism for equitable ownership change. Our firm can help you review the agreement you have in place or create one if you have yet to do so.
© 2020 Covenant CPA
If you’re a business owner, be aware that a recent tax law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a valuable tax credit known as the Work Opportunity Tax Credit (WOTC).
The WOTC was set to expire on December 31, 2019. But a new law passed late last year extends it through December 31, 2020.
Generally, an employer is eligible for the credit for qualified wages paid to qualified members of these targeted groups: 1) members of families receiving assistance under the Temporary Assistance for Needy Families program, 2) veterans, 3) ex-felons, 4) designated community residents, 5) vocational rehabilitation referrals, 6) summer youth employees, 7) members of families in the Supplemental Nutritional Assistance Program, 8) qualified Supplemental Security Income recipients, 9) long-term family assistance recipients and 10) long-term unemployed individuals.
For each employee, there’s a minimum requirement that the employee has completed at least 120 hours of service for the employer. The credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, a maid working in the employer’s home). Additionally, the credit generally isn’t available for employees who’ve previously worked for the employer.
There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.
Here are a few other rules:
- No deduction is allowed for the portion of wages equal to the amount of the WOTC determined for the tax year;
- Other employment-related credits are generally reduced with respect to an employee for whom a WOTC is allowed; and
- The credit is subject to the overall limits on the amount of business credits that can be taken in any tax year, but a 1-year carryback and 20-year carryforward of unused business credits is allowed.
Make sure you qualify
Because of these rules, there may be circumstances when the employer might elect not to have the WOTC apply. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of it. Contact us with questions or for more information about your situation.
© 2020 Covenant CPA
Have you applied for a business loan lately? Or had some repairs done on your facilities? Maybe you’ve signed a contract with a certain technologically inclined customer or vendor. In any of these instances, you (or one of your employees) probably had to electronically sign a digital document.
So, the next question is: Why isn’t your company using this technology? If the answer is, “We are,” kudos to you (assuming it’s working out). But if your reply is, “We’ve always used paper and don’t want to deal with the expense and hassle of converting to digital documentation,” you may want to reconsider — because it’s not going away.
Why go digital?
For businesses, there are generally three reasons to use digital documents with e-signatures:
1. Speed. When you can review and sign a business document electronically, it can be transmitted instantly and approved much more quickly. And this works both ways: your customers can sign contracts or submit orders for your products or services, and you can sign similar documents with vendors, partners or consultants. What used to take days or even weeks, as paper envelopes crisscrossed in the mail, now can occur in a matter of hours.
2. Security. Paper has a way of getting lost, damaged and destroyed. That’s not to say digital documents are impervious to thievery, corruption and deletion, but a trusted provider should be able to outfit you with software that not only allows you to use digital docs with e-signatures, but also keep the resulting files encrypted and safe from anyone or anything who would do them harm.
3. Service. This may be the most important reason to incorporate digital docs and e-sigs into your business. Younger generations have come of age, if not grown up, with digitized business services. They expect this functionality and may prefer a company that offers it to one that still requires them to put pen to paper.
What about the law?
Many business owners hesitate to dive into digital docs and e-sigs because of legal concerns. This is a reasonable concern. However, e-signatures are now widely used and generally considered lawful under two statutes:
- The Electronic Signatures in Global and National Commerce Act of 2000, a federal law, and
- The Uniform Electronic Transactions Act, which governs each state unless a comparable law is in place.
What’s more, every state has some sort of legislation in place legalizing e-signatures. There may be some limited exceptions in certain cases, so check with your attorney for specifics.
Is now the time?
To be clear, investing in digital documents with e-signatures, and training your employees to use them, is a major strategic initiative. You need to ensure the return on investment will be worth the effort. We can assist you in evaluating whether now’s the time to “go digital” and, if so, in setting a budget for the software purchase and implementation.
© 2020 Covenant CPA
Many of today’s businesses employ workers from across the generational spectrum. Employees may range from Baby Boomers to members of Generation X to Millennials to the newest group, Generation Z.
Managing a workforce with a wide age range requires flexibility and skill. If you’re successful, you’ll likely see higher employee morale, stronger productivity and a more positive work environment for everyone.
Definitions of the generations vary slightly, but the U.S. Chamber of Commerce Foundation defines them as follows:
- Members of the Baby Boomer generation were born from 1946 to 1964,
- Members of Generation X were born from 1965 to 1979,
- Members of the Millennial generation were born from 1980 to 1999, and
- Members of Generation Z were born after 1999.
Certain stereotypes have long been associated with each generation. Baby Boomers are assumed to be grumbling curmudgeons. Gen Xers were originally consigned to being “slackers.” Millennials are often thought of as needy approval-seekers. And many presume that a Gen Zer is helpless without his or her mobile device.
But successfully managing employees across generations requires setting aside stereotypes. Don’t assume that employees fit a certain personality profile based simply on age. Instead, you or a direct supervisor should get to know each one individually to better determine what makes him or her tick.
Here are just a couple best practices for managing diverse generations:
Recognize and respect value differences. Misunderstandings and conflicts often arise because of value differences between managers and employees of different generations. For example, many older supervisors expect employees to do “whatever it takes” to get the job done, including working long hours. However, some younger employees place a high value on maintaining a healthy work-life balance.
Be sure everyone is on the same page about these expectations. This doesn’t mean younger employees shouldn’t have to work hard. The key is to find the right balance so that work is accomplished satisfactorily and on time, and employees feel like their values are being respected.
Maximize each generation’s strengths. Different generations tend to bring their own strengths to the workplace. For instance, older employees likely have valuable industry experience and important historical business insights to share. Meanwhile, younger employees — especially Generation Z — have grown up with high-powered mobile technology and social media.
Consider initiatives such as company retreats and mentoring programs in which employees from diverse generations can work together and share their knowledge, experiences and strengths. Encourage them to communicate openly and honestly and to be willing to learn from, rather than compete with, one another.
A competitive advantage
Having a multigenerational workforce can be a competitive advantage. Your competitors may not have the hard-fought experience of your older workers nor the fresh energy and ideas of your younger ones. Our firm can help you develop cost-effective strategies for hiring, retaining and maximizing the productivity of employees.
© 2020 Covenant CPA
All complaints will be swiftly and thoroughly investigated.” No doubt this sentence, or something similar, appears in your company’s employee handbook. Unfortunately, there will likely be a time when you’ll have to put those words into action. Whether an employee alleges discrimination or harassment, or reports a coworker for theft or fraud, you’ll need to handle the complaint appropriately.
Keep these five best practices in mind to avoid unnecessary legal complications:
1. Maintain confidentiality. Take every precaution to keep details of the allegation private — especially the identities of the accused and the accuser. Remind managers that they need to have all conversations behind closed doors, store all meeting notes securely and speak only to those people who are necessary to the investigation. Assure workers involved in the investigation that it will be held in strict confidence and inform them that they aren’t free to talk about any part of the process.
2. Conduct productive interviews. Be prepared with an opening statement that describes what’s being investigated, then ask open-ended questions that encourage employees to say more than “yes” or “no.” Ask all interviewees the same questions so that you can compare answers, identify patterns and uncover discrepancies. Also, have a witness present to verify what occurred during the interviews.
3. Avoid bias. Keep an open mind while gathering facts. Just because an employee has a reputation around the office as a “troublemaker” or “crank,” doesn’t mean that person is lying or guilty of an impropriety. Consider hiring a third-party investigator, such as a fraud expert, to handle interviews. This can help preserve impartiality and show all parties that the investigation is being taken seriously.
4. Document activities. Make detailed notes on all the steps of your investigation. Include the dates and times of workspace searches, computer forensic activity and conversations. After every interview or action taken, review your notes to ensure they capture all relevant information.
5. Close the loops. Even if an investigation turns up no evidence of misconduct or criminal behavior, you need to follow up and close the loop with those involved. When complaints are found to have merit, take appropriate action as quickly as possible. You may be able to handle some minor issues with in-house personnel. But consult your legal and financial advisors — and possibly law enforcement — in more serious cases.
Contact us if you need help investigating a fraud allegation.
© 2020 Covenant CPA
This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-half cent, to 57.5 cents per mile. As a result, you might claim a lower deduction for vehicle-related expense for 2020 than you can for 2019.
Calculating your deduction
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.
The cents-per-mile rate comes into play if you don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the mileage rate is also popular with businesses that reimburse employees for business use of their personal vehicles. Such reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t, the reimbursements could be considered taxable wages to the employees.
The rate for 2020
Beginning on January 1, 2020, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 57.5 cents per mile. It was 58 cents for 2019 and 54.5 cents for 2018.
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the mileage rate midyear.
Factors to consider
There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2020 — or claiming them on your 2019 income tax return.
© 2019 Covenant CPA