Jun 19, 2020
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.
Jun 17, 2020
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.
© 2020
Jun 15, 2020
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.
© 2020
Jun 12, 2020
As you may recall, the Small Business Administration (SBA) launched the Paycheck Protection Program (PPP) back in April to help companies reeling from the economic impact of the COVID-19 pandemic. Created under a provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the PPP is available to U.S. businesses with fewer than 500 employees.
In its initial incarnation, the PPP offered eligible participants loans determined by eight weeks of previously established average payroll. If the recipient maintained its workforce, up to 100% of the loan was forgivable if the loan proceeds were used to cover payroll expenses, certain employee health care benefits, mortgage interest, rent, utilities and interest on any other existing debt during the “covered period” — that is, for eight weeks after loan origination.
On June 5, the president signed into law the PPP Flexibility Act. The new law makes a variety of important adjustments that ease the rules for borrowers. Highlights include:
Extension of covered period. As mentioned, under the CARES Act and subsequent guidance, the covered period originally ran for eight weeks after loan origination. The PPP Flexibility Act extends this period to the earlier of 24 weeks after the origination date or December 31, 2020.
Adjustment of nonpayroll cost threshold. Previous regulations issued by the U.S. Treasury Department indicated that eligible nonpayroll costs couldn’t exceed 25% of the total forgiveness amount for a borrower to qualify for 100% forgiveness. The PPP Flexibility Act raises this threshold to 40%. (At least 60% of the loan must still be spent on payroll costs.)
Lengthening of period to reestablish workforce. Under the original PPP, borrowers faced a June 30, 2020 deadline to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020. Failure to do so would mean a reduction in the forgivable amount. The PPP Flexibility Act extends this deadline to December 31, 2020.
Reassurance of access to payroll tax deferment. The new law reassures borrowers that delayed payment of employer payroll taxes, which is offered under a provision of the CARES Act, is still available to businesses that receive PPP loans. It won’t be considered impermissible double dipping.
Important note: The SBA has announced that, to ensure PPP loans are issued only to eligible borrowers, all loans exceeding $2 million will be subject to an audit. The government may still audit smaller PPP loans, if there is suspicion that funds were misused.
This is just a “quick look” at some of the important aspects of the PPP Flexibility Act. There are many other details involved that could affect your company’s ability to qualify for a PPP loan or to achieve 100% forgiveness. Also, new guidance is being issued regularly and further legislation is possible.
© 2020
Jun 10, 2020
Restaurants and entertainment venues have been hard hit by the novel coronavirus (COVID-19) pandemic. One of the tax breaks that President Trump has proposed to help them is an increase in the amount that can be deducted for business meals and entertainment.
It’s unclear whether Congress would go along with enhanced business meal and entertainment deductions. But in the meantime, let’s review the current rules.
Before the pandemic hit, many businesses spent money “wining and dining” current or potential customers, vendors and employees. The rules for deducting these expenses changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs. And keep in mind that deductions are available for business meal takeout and delivery.
One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.
50% meal deductions
Currently, you can deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:
- The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.
- The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.
- You must be able to substantiate the expenses. There are requirements for proving that meal and beverage expenses qualify for a deduction. You must be able to establish the amount spent, the date and place where the meals took place, the business purpose and the business relationship of the people involved.
It’s a good idea to set up detailed recordkeeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.
Other considerations
What if you spend money on food and beverages at an entertainment event? The IRS has clarified that taxpayers can still deduct 50% of food and drink expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.
Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these meals provided to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.
Plan ahead
As you can see, the treatment of meal and entertainment expenses became more complicated after the TCJA. It’s possible the deductions could increase substantially under a new stimulus law, if Congress passes one.
© 2020
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