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COVID-19 Updates for Small Businesses and Non-Profits

I am sure you have been bombarded with updates related to the COVID-19 public health emergency. I am getting multiple emails and social media updates on a daily, or even hourly basis. Below are some crisis-related hot topics that are applicable to small businesses and small business owners. If I can help you navigate this in any way, please let me know. I truly want to help small businesses during this crazy time.

Tax Update

The 2019 tax filing deadline has been extended automatically from April 15 to July 15. No formal extension application is needed. This extended federal deadline applies to all taxpayers automatically. States have also been coming out with guidance on this. Missouri has extended their deadline to comply with the July 15 federal extended deadline.

What does this mean?

  • Balances due on your 2019 income tax returns are now not due until July 15.
  • First quarter estimated tax payments for 2020 (originally due April 15) are now not due until July 15.
  • Individuals can defer up to $1 million in payments. Businesses can defer up to $10 million in payments.
  • You now have until July 15 to contribute 2019 funds to your Individual Retirement Account.
  • Note that the 2nd quarter estimated tax payments for 2020 are still due June 15 (as of now).
  • Interest and penalties on any tax payments originally due April 15 will not start calculating until the extended July 15 date.

Families First Coronavirus Response Act (HR 6201)

This act was signed into law on March 18, 2020. Part of the Families First Coronavirus Response Act (FFCRA) aims to provide relief to individuals by way of providing leave to eligible employees that have been impacted by COVID-19. Provisions of this act are set to become effective April 1 and expire December 31, 2020. Generally, employers with fewer than 500 employees will be subject to the provisions. Eligible employers must post the notice of FFCRA requirements. See sample poster at:

https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf

Below is a breakdown of some of the major points of the act. Additional guidance will be forthcoming.

Emergency Family Medical Leave Expansion – Longer Term

The existing Family Medical Leave Act (FMLA) was expanded to include the current COVID-19 pandemic. Under the expansion, paid leave is included for employees who are unable to work (or telework) due to a school or childcare closure, or if the individual is unavailable as a result of COVID-19 precautions.

To be eligible, an employee must have been employed for at least 30 days. Eligible employers shall provide paid leave for each day that the eligible employee takes after an initial period of 10 days.

Generally, the amount to be paid is the lesser of:

The total amount is capped at $10,000. This assumes an eligible employee receives the maximum $200 per day for 50 days (10 weeks).

Note that the first two weeks under FMLA may be unpaid, or the employee may elect to use paid time off. Similar to other FMLA leave events, the employer must restore the employee to their position after the leave has ended.

There may be an exemption for employers that have less than 50 employees. However, the U.S. Secretary of Labor must determine that complying with the act would jeopardize the business’ ability to continue as a going concern. Additional regulations on this will be forthcoming.

There may also be an exemption for employers that have less than 25 employees with regards to restoring the employee to their position after leave. Employers may qualify only if the position no longer exists due to the economic conditions caused by the COVID-19 emergency; the employer reasonably tries to restore the employee to a similar position with equivalent pay and benefits; or if that is not possible, the employer makes reasonable efforts in the following year to let the employee know when an equivalent position exists again.

Emergency Paid Sick Leave – Short Term

Unlike FMLA, which is for unemployment for a longer time frame, the FFCRA also added an Emergency Paid Sick Leave act. Under this act, the employer shall provide paid sick time if the employee is unable to work (or telework) due to any of the below needs to leave:

  • Employee is subject to a Federal, State, or Local quarantine or isolation order
  • Employee is subject to a health care directed self-quarantine
  • Employee is having COVID-19 symptoms and seeking a medical diagnosis
  • Employee is caring for someone with any of the above
  • Employee is caring for a child whose school or childcare facility has been closed

Emergency Paid Sick Leave is to be provided for up to 2 weeks (80 hours) for full-time employees. Part-time employees are eligible for the average number of hours worked over a two-week period.

Unlike the FMLA provision, the emergency paid sick leave provision does not have an employment length requirement.

Employers cannot require employees to use other paid leave first (before paying the emergency paid sick leave). So, the employee can elect to use emergency paid leave before their regular accrued paid sick time.

The amount that shall be paid is dependent on the reason for the leave.

If the employee is caring for a child due to school or childcare facility closure, the amount to be paid is:

For all other reasons, the amount to be paid is the full regular rate of pay, up to $511 per day.

Employees who are health care workers or emergency responders are exempt.

Note that the Emergency Paid Sick Leave provision will not carry to future years, as the provision expires on December 31, 2020.

The FMLA expansion and Emergency Paid Sick Leave will result in payments to qualified individual employees that are affected. Additionally, the FFCRA includes provisions to reimburse employers for these payments.

Tax Credits for Employers

Part of the act provides for some relief for employers in the form of tax credits. While these tax credits will help reimburse payments the employer made to employees, the employers may still bear a bit of the burden. Since the payments are paid up front by the employer, they would bear the burden up front. The reimbursement will take place in the form of a credit on payroll tax forms filed at a later date. This could cause cash flow issues to businesses that are already struggling in the current economic environment.

The amounts to be claimed as a credit against payroll taxes include 100% of the qualified emergency family medical leave and emergency paid sick leave. These will be capped based on the calculation amounts mentioned in the sections above.

But what about individuals who are not employees, but self-employed?

Tax Credits for Self-Employed Individuals

To provide a similar relief for self-employed individuals, there will be a credit available against self-employment tax. These are calculated as if the individual was an employee qualifying for the leave but are claimed as a credit on the income tax return (as a reduction to self-employment tax).  It is anticipated that these tax credits can be used to offset estimated tax payments.

The amount of the credit is dependent on the reason for the leave.

If the self-employed individual is caring for a child due to school or childcare facility closure, the amount to be paid is

2/3 of the average daily self-employment income of the individual for the tax year, up to $200 per day.

The average daily self-employment income is calculated as:

For all other reasons, the amount of the credit is the full average daily self-employment income, up to $511 per day.

*All of the above will be covered via payroll tax credits for employers or tax credits for self-employed individuals, as discussed in the above sections.

Employees & Employers:

OR

 COVID-19 Testing & Treatment

One other item to note under the FFCRA is in regard to COVID-19 testing and treatment.  The act instructs that all health insurance plans are required to cover testing and any related health-care visits (office, urgent care, ER, or telehealth) free of charge related to COVID-19.  No copays or deductibles should apply.

SBA Disaster Loans

Under SBA Disaster Loan relief, small businesses and private non-profit organizations may be eligible for up to $2 million in assistance loans.

Funds may be used to pay debts, payroll, accounts payable, and other bills. Unlike the tax credits, these are loans that must be repaid.  However, the cash influx may be necessary for some small businesses to stay afloat.  The interest rate on these loans is 3.75% for small businesses and 2.75% for non-profits.

Conclusion

Stay tuned for more relief efforts and guidance in the upcoming days (or even hours).  Part II will focus on the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was passed last week.

In closing, know my thoughts and prayers are with all of the small businesses and non-profit organizations out there.  This truly is a trying and unprecedented time for all.  I will continue to support local as much as I can with the restrictions, and also help you all in any way I can.  If you need any assistance or guidance with any of the above, let me know.

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Unexpected Tax Bill

I OWE taxes?!?!  How can that be when I had a loss?

It is the midst of THE season. What season might that be? The dreaded tax season…

For those of you who have already optimized your finances, you can stop reading, as you will likely have minimal surprises when your tax return is complete. But those of you who haven’t should read on to figure out what might be causing you to owe money to the government, when you thought you had a LOSS for the year.

Cash vs. Accrual Basis

First, it’s important to know what your basis of accounting is. For a more detailed discussion on the basis of accounting, see the prior post “A Tale of Two Methods.” To briefly simplify, under the cash basis of accounting, you pay tax on income when you receive the money and you deduct the expense when it is paid or charged on a credit card. Under the accrual basis of accounting, you pay tax on income when you perform the service or complete the sale, and you deduct the expense when it’s incurred.

Many small businesses will be able to file under the cash basis of accounting, which is simpler. However, there may be impactful differences among the two methods. It is my experience that not understanding the methods or knowing what method you follow for tax purposes can create a major problem at tax time.

Without getting into too much accounting detail, the timing of when income and expenses are recognized can cause major differences between what is filed on a tax return, and what is kept in your internal accounting system. And, not only does this cause a difference in one year, but the opposite impact may occur the following year.

Small business scenario

The best way to understand this is to look at a simple example: John’s Janitorial Service performed a job for Rebecca on December 30. John booked the Accounts Receivable invoice on 12/30, as he needed to send the invoice to Rebecca so he could get paid. But Rebecca didn’t pay John until January 4.

On the accrual basis of accounting, John would pick that income up (and be taxed) on the current year tax return. However, if he is following the cash basis of accounting, he wouldn’t pick that income up (and be taxed) until the following year.

As you can see, the cash basis could cause a difference in the income shown on his books when compared to what is reported on his tax return for BOTH years. Depending on the change in Accounts Receivable and Accounts Payable, the fluctuations could be extreme and have a large impact.

Many times, businesses are looking at their accrual basis financial statements (which is how they run their business), without factoring in the cash basis financial statements (which is how they pay their taxes). This is the first issue that many have when getting hit with an unexpected tax bill.

Deduction limitations & other issues

The second issue is that there may be limitations on what can be deducted. For example, meals are only deductible at 50% for tax purposes. This means that half of the meal cost doesn’t provide a tax benefit.  Starting in 2018, entertainment expenses are not deductible at all for tax purposes — so no tax benefit for that golf membership or tickets to the Mizzou game. Political donations and some portions of dues also are not deductible at all. These expenses are examples of what accountants refer to as “book-tax differences,” meaning that there is a different treatment on the books (100% deductible) as opposed to on the tax return. There are numerous other items that may cause book-tax differences; these are just some of the more common ones.

Finally, errors in coding may also cause issues. Many times, financial statements have “adjustments” done due to incorrect entries that were made. A common example is coding the entire amount of the loan payment to interest expense. In reality, the principal repayment portion is not an expense, only the interest is. There may be other mistakes that are made that could cause major changes to the book financial statements.

One of the goals of Optimized CFO + Controller Services is to help business owners avoid surprises at tax time. By regularly looking at the financials, we can minimize any errors in coding. We can also project out estimated taxable income, factoring in some of these book-tax differences, and differences with the basis of accounting. If you’ve recently been shocked by an unexpected tax due, or unhappy with the amount of adjustments that are made each year on your tax return, I would love to talk.

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Margins: The Golden Ticket

Margins: The Golden Ticket Cover Photo

Margins, margins, margins. What’s the deal with margins? Why should you, as a business owner or manager, care about them?

Margins are the golden ticket in analyzing product sales. For most businesses that sell physical product, margins provide a meaningful way to evaluate sales and to ensure that they have priced their product to cover overhead costs.

Margins can be used to compare the sales of product and can be consistently evaluated over time, as well as over varying sales volumes. In addition, margins of your company can be compared to industry averages.

Calculating Margins

But what exactly are margins? How are they calculated?

When I refer to margins, I am mainly referring to your Gross Profit Margin (GP). Gross Profit Margin is calculated as Gross Profit divided by Gross Sales:

Gross Profit is calculated as Gross Sales less Cost of Goods Sold:

So, in other words, the Gross Profit Margin is calculating how much you are making in profit off every $1 in sales.

There are a few things to note to ensure that the margin is calculated appropriately. First, be sure that items that are included in cost of goods sold are truly the costs of the product that you are selling, and not what may actually be overhead costs. Also be sure that you have factored in all true costs.

For companies that are in the business of selling product for retail that they purchased from a supplier, it’s easy. For each item, the gross sale would be the sales price of the item, and the cost of good sold would be the cost to purchase the item.

For companies that are in the business of manufacturing a product, it’s a little more difficult. The gross sale of each item would be the sales price of the item, but the cost of goods sold would need to include all costs that went into making the item. This includes not only product costs, but also labor costs.

Note that the above explanations are fairly basic descriptions. With this post, I am not going to delve into the details of what is the correct cost of the items, which can differ depending on the inventory valuation method that your company is using. For purposes of this article, I am assuming you are starting with clean, clearly defined sales and cost of goods sold calculations.

In theory, the amount of gross profit is what you have left after selling the item to cover your company’s overhead costs.

Evaluating Margins

You may be thinking, “That’s great – I just need to have higher and higher margins.” But watch out! Margins are largely dependent on the industry. If you are in a very competitive industry, simply raising your prices in order to attain a higher margin will not necessarily bode well for gross sales if you have customers jump ship to competitors.

Also note that the concept of margins is best looked at in comparison – either over time or to others in your industry. Given that the margin calculation is basically taking the result down to a per dollar factor, margins are helpful to examine over time, and can be consistent even with varying sales volumes.

Do be careful that you aren’t looking at your margin calculation in a vacuum. For example, it doesn’t make sense to just calculate it once and not compare it – that isn’t telling you anything! It also doesn’t help to compare your margin to other companies that aren’t in your industry. Margins can vary drastically among industries. (Growing up, I was directly exposed to the extremely slim margins that gas station owners face. Quick actions were necessary to make it in that business, with volatile price changes, extreme competition, and tight margins).

Overall, margins can be a very helpful tool to evaluate how your business is doing. In my experience, most industries have fairly consistent margins. An exception would be a business that is in a highly seasonal or cyclical industry or area. If your company is in a stable industry and area, margins that are jumping all over the place can be a sign that something is either wrong with the accounting process for recording inventory and cost of goods sold, or that there could be more fraudulent factors at play, such as theft of product.

Margins, margins, margins – an important tool for analyzing profitability of your sales. I love educating clients on this topic and helping solve issues with margins. Let me know how I can assist.

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January 31st Deadline

Don’t forget! Tomorrow is the deadline for filing W-2 and W-3 forms, as well as 1099 forms, and providing them to workers and contractors.

 

1099 and W-2 Forms Deadline is January 31st!

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Quick Year-End Tax Tips

As we near the end of the year, that also means it’s almost tax time! Soon the tax forms will be rolling in. Here are a few year-end tips that may come in handy as the fiscal year comes to a close and new year’s resolutions are made.

Track Mileage

Remember to keep track of both your business miles and total miles. There are several different options for deducting vehicle expenses (including using the standard mileage rate of 58 cents per mile, or actual expenses). However, all methods require some tracking of mileage. There are several mileage tracking apps available. I use Mileage IQ, which is included with some versions of Microsoft Office 365 and is very simple to use. It will automatically pick up the mileage driven, and prompt the user to classify the drive as personal or business.

 Organize Receipts

Receipts should be kept for deductible items, including business expenses. The credit card statement itself will not suffice for proof in the event of an audit. Actual receipts are needed as documentation. Many people use the “shoe box method” of throwing receipts in one box. As you start a new year, it may be a good time to become more organized with your receipt tracking – whether that’s using file folders or implementing a paperless storage system.

Estimate tax payments & consider donations

If you have any purchase or investment decisions to make, there are still a few days left in the year. It can be very helpful to have a projection done of your estimated balance due. This can be used for items such as charitable donation planning, donating required minimum distributions from IRAs to charities, as well as determining what the final estimated tax payment due on Jan. 15, 2020 should be.

  • Charitable donation planning may involve “bunching” your charitable donations among the years in order to maximize the deductions in one year (and thereby helping to lower taxable income). This can be especially helpful for individuals who are on the upper limit of the 20 percent business income deduction’s income limitations.
  • Donating required minimum distributions from IRAs to charities is helpful for those who are of the age that they must take required minimum distributions (RMDs) out of their IRAs but are looking to minimize their taxable income. By sending the RMD straight to a charitable organization, the individual’s taxable income is reduced. This can also enable a benefit for charitable donations for individuals who may not otherwise itemize their deductions.

Determine next year’s budget

Year-end is always a great time to develop budgets for the following year. Spending time to develop an accurate, realistic budget that can be closely followed can not only help guide your spending but also help plan for saving. Budgets can be done for any organization, and also for individual households. Generally, starting with actual numbers for the current year, and projecting any anticipated changes for the next year, is a great method to follow.

Collect tax forms

Finally, be on the lookout for tax forms that will be headed your way. Generally, these forms should be received by individuals by Jan. 31. However, some investment companies get extensions to issue the investment forms.

  • Form W-2 reports the wages received and taxes withheld for employees.
  • Form 1099s are used to report investment income (1099-INT is for interest, 1099-DIV is for dividends), and also miscellaneous income (1099-MISC).
  • Form 1098s are used to report some deduction items, such as 1098-T for college tuition, and 1098 for mortgage interest.
  • Form K-1s are used to report income from a business (partnership or S Corporation) or a Trust.
  • When in doubt, forward any tax forms you receive to your income tax preparer!

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The Balance Sheet – King of Financial Statements

 

When considering financial statements, many business owners and managers spend 80% of their time and energy focused on the income statement (or profit and loss statement), and only 20% focusing on the balance sheet.  For some business owners, the percentages are closer to 100% and 0%.  But this split of time and focus is not the most effective.

The Balance Sheet Reigns

Contrary to popular belief, the balance sheet reigns supreme in the world of financial reports.  Why is this?

The balance sheet is a snapshot in time of the assets, liabilities, and equity of a company.  Items on the balance sheet can all be verified to external, or at least secondary, source documents.  In other words, the balance sheet accounts can all be validated.  Doing this “tie out” of the balance sheet ensures that the financial statements are reliable.

Without focusing time and energy on tying out the balance sheet, one cannot have any assurance on the income statement.  Yet, a correct tie out of the balance sheet will ensure that the bottom line net income is correct.

Focused Month-End Close

Therefore, the bulk of your company’s month-end close process should be balance sheet focused.  Instead of focusing the most resources on the income statement, the majority of time should be spent on tying out the balance sheet.  Not only should existing accounts be verified, but a big picture view should be taken to ensure that any and all assets, liabilities, and equity are included and that account balances are reasonable.  Only once the balance sheet has been tied out should any focus be placed on the income statement.

 

What’s your 80/20 split?  Are you focusing your attention on the true king of the financial statements (aka the balance sheet)?  Let me know if I can help you in tying out the balance sheet and gaining a better understanding of your financials.