Just last week, the Small Business Administration (SBA) announced that it has reopened the Economic Injury Disaster Loan (EIDL) and EIDL Advance program to eligible applicants still struggling with the economic impact of the COVID-19 pandemic.
The EIDL program offers long-term, low-interest loans to small businesses and nonprofits. If your company hasn’t been able to procure financing through the Paycheck Protection Program (PPP) — or even if it has — an EIDL may provide another avenue to relief.
Applicants must be businesses with 500 or fewer employees, sole proprietors, independent contractors or certain other small entities. EIDL funds come directly from the SBA and provide working capital up to certain limits.
The loans have terms of up to 30 years and interest rates of 3.75% for businesses and 2.75% for nonprofits. The first payment is deferred for one year. Plus, the Coronavirus Aid, Relief and Economic Security (CARES) Act has temporarily waived requirements that applicants must have been in business for one year before the crisis and be unable to obtain credit elsewhere. A borrower of $200,000 or less doesn’t need to provide a personal guarantee.
Recipients must use EIDL proceeds for working capital necessary to carry a business until resumption of normal operations and for expenditures needed to alleviate specific economic hardships related to the pandemic. These may include fixed debts (such as rent or mortgage), payroll, accounts payable and other bills that could’ve been paid had the disaster not occurred and aren’t already covered by a PPP loan.
EIDL proceeds may not be used to refinance indebtedness incurred before the COVID-19 crisis or to pay down loans owned by the SBA or other federal agencies. Loan funds also cannot be used to pay federal, state or local tax penalties, or any criminal or civil fine or penalty. (Other limitations apply.)
Under the CARES Act, EIDL applicants may request an Emergency Economic Injury Grant, also referred to as an “EIDL advance,” of up to $10,000. The grant is to be paid within three days and must be used to:
- Provide paid sick leave to employees unable to work because of COVID-19,
- Retain employees during business disruptions or substantial shutdowns,
- Meet increased costs to obtain materials unavailable because of supply chain disruptions,
- Make rent or mortgage payments, or
- Repay other obligations that cannot be met because of revenue losses.
Recipients of an emergency grant don’t have to repay it — even if the business is eventually denied an EIDL. However, in April, the SBA announced that it has implemented a $1,000 cap per employee on EIDL advances up to the $10,000 maximum. Thus, an applicant with three employees would receive an advance of only $3,000.
The EIDL program may not have received as much attention as the PPP, but it’s equally valuable to small businesses and nonprofits striving to remain operational during the ongoing public health and economic crisis.
Some companies are expected to report impairment losses in fiscal year 2020 because of the COVID-19 crisis. Depending on the nature of your operations and assets, the pandemic could be considered a “triggering event” that warrants interim impairment testing.
Examples of assets that may become impaired include long-lived assets (such as equipment and real estate), acquired goodwill and other intangibles (such as customer lists and brands). Here’s what you should know if your organization’s balance sheet includes these types of assets.
What’s a triggering event?
Under U.S. Generally Accepted Accounting Principles (GAAP), goodwill testing must be performed at least annually for public companies that report goodwill on their balance sheet, and for private companies and not-for-profit organizations that don’t elect to amortize goodwill. Goodwill also must be tested for impairment “if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.” This situation is referred to as a so-called “triggering event.”
There are no bright-line rules for which events trigger a goodwill impairment test. However, the accounting rules outline the following elements to consider:
- Macroeconomic conditions, such as a deterioration in general economic conditions, limitations on accessing capital and fluctuations in foreign exchange rates,
- Industry and market considerations, such as an increased competitive environment, a change in the market for an entity’s products or services, and a regulatory or political development,
- Cost factors, such as increases in raw materials or labor rates,
- Overall financial performance trends, such as negative or declining cash flows or a decline in revenue compared with prior periods, and
- Other relevant events specific to the entity or reporting unit, such as changes in management, key personnel, strategy or customers; contemplation of bankruptcy; or litigation.
For public companies, a sustained decrease in share price — considered in both absolute terms and relative to peers — may qualify as a triggering event.
Entities that follow GAAP also should consider whether to test their other intangibles and long-lived assets for impairment. Triggering events for these assets are similar to those considered for goodwill. Triggering events must be evaluated within the context of your specific organization.
To test or not to test?
Private entities and nonprofits that have elected the accounting alternative to amortize goodwill don’t get a break from impairment testing when a triggering event occurs. Given the current economic environment, some business and not-for-profit entities are unexpected to conclude that it’s necessary to perform interim impairment tests for goodwill and other assets.
However, impairment testing isn’t a foregone conclusion. During the pandemic, some organizations may experience an increase in demand and profitability for their products and services, despite the overall decline in the macroeconomic conditions of the overall economy. These entities may not be required to perform interim impairment tests.
How to report and measure losses
If an asset is impaired, the amount reported on the balance sheet for that asset is reduced to its fair value. In addition, a loss is reported under other operating income and expenses on the income statement, reducing the organization’s earnings by a proportionate amount.
Quantifying impairment can be complicated in today’s uncertain marketplace. Estimating fair value may require external market analyses and complex discounted cash flow techniques. We can help you get it right. Contact us for more information.
Just about every business owner’s strategic plans for 2020 look far different now than they did heading into the year. The COVID-19 pandemic has changed the economy in profound ways, forcing many companies to recalibrate suddenly and severely.
As your business moves forward in this uncertain environment, it’s important to re-evaluate competitiveness. You may have lost an edge that previously existed, or you may have the opportunity to gain one. Here are some critical elements to consider.
Objectively assess leadership
More than likely, you and your management team have had to make some difficult decisions over the last few months. Even if you feel confident that you’ve done most everything right, objectively examine and discuss your successes, failures, strengths and weaknesses.
For instance, maybe you’ve had some contentious interactions with employees while adjusting to remote work environments or increased safety protocols. Ask your managers whether underlying tensions exist and, if so, how you might improve morale.
Reassess external relationships
Most businesses rely on relationships to function competitively. These include connections with customers, suppliers, lenders, advisors and the local community. In addition, if your company is subject to regulatory oversight, it must cooperate with local, state and federal officials.
Review and discuss the state of each of these relationships. Are you getting positive customer feedback on your response to the crisis? Have you been paying suppliers on time? If not, are you openly communicating about potential solutions?
Examine supply chain and technology
Competitiveness can hinge on a company’s ability to access the supplies it needs to operate profitably, and the crisis has had a major impact on supply chains. Are you in danger of being cut off or limited from any mission-critical supplies or materials?
Also, look into whether you have access to optimal and scalable technology that allows you to produce and deliver competitive products or services. This has become a major issue in many industries as companies pivot to operate more virtually and do less business in-person.
Look to the future
Finally, identify how COVID-19 and the resulting economic fallout is affecting your industry. Many sectors have obviously struggled, but others are booming in response to pandemic-driven needs for certain supplies and services.
Study how this year’s changes are affecting industry outlook and projected customer demand. You may need to operate more cautiously to deal with lower revenue for another year or more. Then again, now could be the time to claim greater market share if competitors have been struggling more than you.
Rise to the challenges
The pandemic has complicated strategic planning for every business owner. You must now anticipate not only the usual challenges to your competitiveness, but also the difficulties of operating safely in a pandemic and recovering economy.
If you operate a small business, or you’re starting a new one, you probably know you need to keep records of your income and expenses. In particular, you should carefully record your expenses in order to claim the full amount of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns if you’re ever audited by the IRS or state tax agencies.
Certain types of expenses, such as automobile, travel, meals and office-at-home expenses, require special attention because they’re subject to special recordkeeping requirements or limitations on deductibility.
It’s interesting to note that there’s not one way to keep business records. In its publication “Starting a Business and Keeping Records,” the IRS states: “Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.”
That being said, many taxpayers don’t make the grade when it comes to recordkeeping. Here are three court cases to illustrate some of the issues.
Case 1: Without records, the IRS can reconstruct your income
If a taxpayer is audited and doesn’t have good records, the IRS can perform a “bank-deposits analysis” to reconstruct income. It assumes that all money deposited in accounts during a given period is taxable income. That’s what happened in the case of the business owner of a coin shop and precious metals business. The owner didn’t agree with the amount of income the IRS attributed to him after it conducted a bank-deposits analysis.
But the U.S. Tax Court noted that if the taxpayer kept adequate records, “he could have avoided the bank-deposits analysis altogether.” Because he didn’t, the court found the bank analysis was appropriate and the owner underreported his business income for the year. (TC Memo 2020-4)
Case 2: Expenses must be business related
In another case, an independent insurance agent’s claims for a variety of business deductions were largely denied. The Tax Court found that he had documentation in the form of cancelled checks and credit card statements that showed expenses were paid. But there was no proof of a business purpose.
For example, he made utility payments for natural gas, electricity, water and sewer, but the records didn’t show whether the services were for his business or his home. (TC Memo 2020-25)
Case number 3: No records could mean no deductions
In this case, married taxpayers were partners in a travel agency and owners of a marketing company. The IRS denied their deductions involving auto expenses, gifts, meals and travel because of insufficient documentation. The couple produced no evidence about the business purpose of gifts they had given. In addition, their credit card statements and other information didn’t detail the time, place, and business relationship for meal expenses or indicate that travel was conducted for business purposes.
“The disallowed deductions in this case are directly attributable to (the taxpayer’s) failure to maintain adequate records,“ the court stated. (TC Memo 2020-7)
We can help
Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach to how you keep records can protect your deductions and help make an audit much less painful.
Outsourcing may appeal to organizations that are currently struggling with mounting overhead costs during the COVID-19 crisis. By outsourcing, you convert certain fixed overhead costs associated with compensating and supporting employees into variable costs that can be scaled back in an economic downturn — or dialed up in times of growth and transition.
One department that’s ripe with outsourcing opportunities is finance and accounting. There are many external providers of such specialized, time-consuming services as payroll processing, tax preparation and bookkeeping. You can even outsource your controller or CFO function. But do the benefits of outsourcing these tasks outweigh the potential downsides?
Recognize the upsides
Outsourcing finance and accounting functions allows you to work with financial professionals of varying levels of experience and expertise tailored to the functions they’ll perform. These responsibilities could include:
- Processing payables, receivables and cash transactions,
- Reconciling accounts at each month-end,
- Preparing financial statements, budgets and forecasts,
- Assisting with tax and financial reporting requirements, and
- Communicating financial matters to your shareholders and/or board of directors.
Depending on your needs and budget, you can outsource the tasks that make sense for your organization. You also may benefit from occasionally using other firm experts — investment advisors, HR and IT support, and valuation specialists, as necessary.
Another benefit that many smaller organizations derive in working with external accounting and financial service providers is reduced fees for year-end audit and tax services — because of the professional attention to accounting and finance functions received throughout the year. And most of the accounting questions that typically arise in an audit already will have been resolved.
Be aware of the trade-offs
Cost is a top concern when outsourcing these functions. But keep in mind that, with an outside firm, you pay only for the amount and level of services you require.
For example, an in-house accountant may spend some time doing work that someone at a lower pay level could handle equally well. Outsourcing also will spare your organization the expenses associated with a regular employee, such as payroll taxes, health insurance, paid leave and training to stay atop any tax law or regulatory changes and continuing education requirements.
If you use an outsider to perform the duties of your CFO or controller, that person may not be at your immediate disposal whenever a financial question arises. Meetings with the CPA firm will need to be planned and scheduled. You’ll also need to determine how financial data will flow between your company and the accountant who’s providing these services. Some tasks may be difficult to perform remotely.
To outsource or not to outsource?
Outsourcing finance and accounting functions is a smart move for many organizations — but it’s not right for everyone. Contact us to discuss the pros and cons of using this strategy in your organization.