Coronavirus (COVID-19): Tax relief for small businesses

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. 

New law
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).

Contact us

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.

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The difference between a mission statement and a vision statement

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.”

Get inspired

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.

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Small business owners still have time to set up a SEP plan for last year

Do you own a business but haven’t gotten around to setting up a tax-advantaged retirement plan? Fortunately, it’s not too late to establish one and reduce your 2019 tax bill. A Simplified Employee Pension (SEP) can still be set up for 2019, and you can make contributions to it that you can deduct on your 2019 income tax return. Even better, SEPs keep administrative costs low.

Deadlines for contributions

A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP first applies. That means you can establish a SEP for 2019 in 2020 as long as you do it before your 2019 return filing deadline. You have until the same deadline to make 2019 contributions and still claim a potentially substantial deduction on your 2019 return.

Generally, most other types of retirement plans would have to have been established by December 31, 2019, in order for 2019 contributions to be made (though many of these plans do allow 2019 contributions to be made in 2020).

Contributions are optional

With a SEP, you can decide how much to contribute each year. You aren’t required to make any certain minimum contributions annually.

However, if your business has employees other than you:

• Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and

• Employee accounts must be immediately 100% vested.

The contributions go into SEP-IRAs established for each eligible employee. As the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made, but at a later date when distributions are made — usually in retirement.

For 2019, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction), subject to a contribution cap of $56,000. (The 2020 cap is $57,000.)

How to proceed

To set up a SEP, you complete and sign the simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). You don’t need to file Form 5305-SEP with the IRS, but you should keep it as part of your permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.

Although there are rules and limits that apply to SEPs beyond what we’ve discussed here, SEPs generally are much simpler to administer than other retirement plans. Contact us with any questions you have about SEPs and to discuss whether it makes sense for you to set one up for 2019 (or 2020).

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Marketing is a game of adjustments

In business, a failure to evolve may lead to failure. One way to keep your company rolling is to regularly adjust how you market products or services to customers and prospects.

A marketing strategy shouldn’t be a knee-jerk reaction to some enticing rumor or hot trend. Rather, it needs to be a carefully calculated effort that assesses profitability (not just revenue) and identifies a feasible price point for the products or services in question.

Evaluating targets

Consider each prospect, existing customer or targeted group as an investment. Estimate your net profit after subtracting production, sales and customer service costs.

More desirable customers will purchase a sizable volume with enough frequency to provide a steady income stream over time rather than serve as just a one-time or infrequent buyer. They also will be potential targets for cross-selling other products or services to generate incremental revenue.

Bear in mind that you must have the operational capacity to fulfill a given prospect’s demand. If not, you’ll have to expand your operations to take on that customer, costing you more in resources and capital.

Also, be wary of becoming too dependent on a few large customers. They can use this status as leverage to lowball you. Or, if they decide to pull the plug, it could be financially devastating.

Naming your price

Another key factor to consider in adjusting your marketing strategy is how much you’ll charge. It’s a tricky balance: Setting your price low may help to attract customers, but it can also minimize or even eliminate your profit margin.

In addition, think about what kind of payment terms you’re prepared to offer. Sitting on large accounts receivable can strain your cash flow. Establishing a timely payment schedule with customers is critical to sustaining your operations and supporting the bottom line.

If you must make a major cash outlay for setting up a new customer, such as for new equipment, consider offering initial pricing that includes a surcharge for a specified period. For example, if the normal product price is $1.00 each, you might want to arrange for the customer to pay $1.10 each until you have recovered the cost of the equipment, plus carrying charges.

Taking the risk

If your company has been around for a while, you know that marketing is risky business. An unsuccessful campaign can not only waste dollars in the short term, but also hurt morale and even trigger bad PR if it’s particularly misguided. The costs of doing nothing, however, may be even greater. We can assist you in evaluating the potential profitability of your marketing initiatives, as well as calculating viable price points for your products or services.

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Determine a reasonable salary for a corporate business owner

If you’re the owner of an incorporated business, you probably know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason is simple. A corporation can deduct the salaries and bonuses that it pays executives, but not its dividend payments. Therefore, if funds are withdrawn as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is taxed only once, to the employee who receives it.

However, there’s a limit on how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. The IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder or a member of a shareholder’s family.

How much compensation is reasonable?

There’s no simple formula. The IRS tries to determine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include:

• The duties of the employee and the amount of time it takes to perform those duties;

• The employee’s skills and achievements;

• The complexities of the business;

• The gross and net income of the business;

• The employee’s compensation history; and

• The corporation’s salary policy for all its employees.

There are some concrete steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:

• Use the minutes of the corporation’s board of directors to contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.)

• Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.

• Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).

• If the business is profitable, be sure to pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

Planning ahead can help avoid problems. Contact us if you’d like to discuss this further.

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How’s your buy-sell agreement doing these days?

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

Work Opportunity Tax Credit extended through 2020

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.

Several requirements

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.

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