Our Firm has had the unfortunate experience of seeing a very profitable business be liquidated because their cash flow was severely disrupted due to the outbreak of Covi-19 and they could not pay rent or wages after the expiration of PPP funds.

Cash is King in current turbulent times and for your business’s survival. Keeping the cash flowing is critical for any business to survive and many businesses were unprepared for the impact of COVID-19.

As the government starts to relax lockdown measures and starts to open businesses, many organizations should take this opportunity to review their future plans including their cash flow for the recovery phase. You could be working this week and then in lockdown next week because of a Government directive, or because you or a family member is a close contact or a casual contact of someone who has tested positive to COVID. If you have staff, the damage could be compounded.

Small business owners may well be in the driver’s seat, but many of them are driving without a roadmap and, if they’re looking at their numbers, they’re looking at them through the rear vision mirror. But it doesn’t have to be that way. Many businesses have found themselves with no cash buffers in their business and personal accounts. They’d been driving blindfolded, not aware of their business profitability or the level of debts racking up.

COVID-19 has brought to light issues that previously had been glossed over. It is likely that your cash flow is already being squeezed by a reduction in income together with additional expenses such as increased health and safety costs. A fresh pair of expert eyes may be able to assist you in evaluating your options more strategically and by identifying potential changes you can make to ease the pressure. Often a brief conversation with someone who understands the challenges you are facing can give you a fresh perspective or some new ideas.

Being able to see the profitability, assets and liabilities of your business in real time means that you will hit those road humps a lot less frequently.

Or maybe you take a standard amount of money haphazardly, irrespective of whether the business has made that much money. And that’s when the IRS and credit card debts start to blow out.

Whenever I suggest business owners pay themselves a regular amount from their business, it’s met with trepidation and questions like “but what if there isn’t enough money?”

The fact is, your personal bills don’t reduce if your business’s profit reduces.

Prepare your personal budget and determine an amount you need to generate from your business with a little buffer added.

So, guided by your numbers and your targets, if your profit is dipping and it’s likely that there won’t be enough money to make that weekly amount you need, you could put some of those contingency plans in place. Chase outstanding debtors. Finish off that job and invoice a few days ahead of schedule. Review your job costs and compare to your quote. Review your overheads. Revise your hourly rate.

You’re free to take more money out later on when cash builds up and you have your tax and employee obligations (if you have any) set aside. Again, your accountant can assist you

For some business owners, their liabilities many be unlimited and both their business and personal assets may be on the line and they may be unaware of this.

Now may not be the optimal time to change business structures, as doing so may affect your eligibility to COVID-19 support, but it may be worth having a chat to your accountant to ensure your assets are adequately protected for now and whether it may be prudent to change your business structure in the future. Even if only one owner, incorporating your business as a limited liability company (LLC) will limit creditors of the business to seek recovery only from the business.

As the saying goes “don’t put all your eggs into one basket”. With increased possibility of being sued and scams, mitigate risks by diversifying your assets. You can give property to family members, such as a spouse or children. Property jointly owned with a spouse using “tenancy by the entirety” has strong asset protection. You can also use trusts to add a layer of asset protection.

As a minimum, be sure to carry sufficient liability coverage, which is typically part of your business owner’s policy (BOP). Professionals should carry malpractice coverage. Consider an umbrella policy to add protection on top of existing coverage at a modest cost.

Many businesses have slow seasons due to the seasonal nature of their products or services, and this makes it easy for entrepreneurs to anticipate lower revenues, and plan accordingly. That was not the case with the COVID-19 pandemic. It struck without much warning and caught businesses off guard. As businesses temporarily close their doors, stay open in a limited capacity, or transition to remote work, they still have expenses. Their employees, suppliers, and vendors need to be paid. Of course, there are a number of other business expenses, such as office rent, utilities, insurance, phones, and postage.

Now is a good time to review your company’s expenses to identify those that you might be able to cut. Obviously, you cannot avoid paying office rent and business insurance, and you want to keep as many employees on your payroll as possible, but there are ways to trim your budget. For example, you can put the brakes on travel, trade shows, and company perks and freebies. Also, contact your accountant to ask if you can delay certain payroll tax deposits, or break them into multiple payments.

There is no telling how long the COVID-19 pandemic will affect the U.S. economy, so be proactive and start building up your cash reserve. You can start by totaling your company’s monthly expenses, and seeing how much cash you have remaining at the end of the month. Put as much money into your savings account that is feasibly possible.

If you cut any business expenses, you will have more cash on hand. Take a reasonable amount of what you would have spent on business expenses and stash it away for the future. Putting away even the smallest amounts of cash will add up faster than you might imagine.

When you backed yourself and started your business you took a considerable risk. And you deserve to be rewarded well for the risk you took.

Some believe that their retirement nest egg is in fact the business they are building. But we’ve seen during COVID-19, businesses that have been successfully operated for generations have been wiped out overnight and some have even been left with debts.

The Paycheck Protection Program is winding down, and even at its height, getting a forgivable loan under the program has been quite challenging. In the meantime, you can expect your cash flow to remain tight.

Many state and local governments and private corporations have already stepped up to offer special emergency loans, grants, and pools of funds to assist small businesses.  While the CARES Act has gotten all the buzz, there are other local programs that exist. In Maryland several jurisdictions have similar loan & grant programs to do the same or serve a similar purpose.

Here is a quick list of jurisdictions with programs (click the link for additional details)
Anne Arundel County, Baltimore City, Baltimore County, Carroll County, Cecil County, Frederick County, Montgomery County, Prince George’s County .

If you need new funding, explore the following options:

• The SBA’s Economic Injury Disaster Loan Program, which offers financial aid of up to $150,000 and an emergency grant for small businesses of up to $10,000
• The SBA’s 7(a) Program that offers loans of up to $5 million for working capital infusion, refinancing debts, and similar uses
• The SBA’s 504 loan program, which also offers funding of up to $5 million for such purposes as buying real estate or equipment
• The Federal Reserves’ Main Street Lending Program, which offers loans for small and medium businesses at a minimum amount of $250,000
• While you may not be able to match the 1 percent rate of emergency federal stimulus, good credit and a good relationship with your local lender means that loans today generally remain affordable. Explore any existing lines of credit your business has or could establish, particularly if there’s land or equipment that could secure a loan.
• A revenue-based financing from your bank, which provides funding to produce a product or service in exchange for a percentage of your business’s revenues

Always keep in mind that each financing option carries certain risks and requirements, so it’s advisable to consult your accountant before signing on to any of these.

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Our accurate reporting and on-time accounting services make us the best CPA In Columbia MD. Get in touch for a free consultation today and experience the best tax preparation services in Columbia, MD.

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Sources:

PPP Loans Are Ending. Here’s Where Small Businesses Can Turn Now, CNBC.com
CPAs Tell How to Stay on Sound Financial Footing During Crisis, BusinessJournalDaily.com

The purpose of this blog is to get the IRS to owe you money.

Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.

Here are seven powerful business tax deduction strategies that you can easily understand and implement before the end of 2020.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2020 prepayments cannot go into 2022. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Thursday, December 31, 2020, you mail a rent check for $36,000 to cover all of your 2021 rent. Your landlord does not receive the payment in the mail until Tuesday, January 5, 2021. Here are the results:

• You deduct $36,000 in 2020 (the year you paid the money).
• The landlord reports taxable income of $36,000 in 2021 (the year he received the money).

You get what you want—the deduction this year.

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2020, he would have had to pay taxes on the rent money in tax year 2020.

Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2020. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jim Schafback, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2020 income by moving that income to 2021.

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2020.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

Let’s be real: there’s little to be grateful for with COVID-19, with one of the several exceptions being the potential opportunities to turn NOLs into cash for your business.

Two NOL opportunities come from the Coronavirus Aid, Relief, and Economic Security (CARES) Act:

1. The CARES Act allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years for refunds against prior taxes.
2. The CARES Act allows application of 100 percent of the NOL to the carryback years.

Before the CARES Act, you could not carry back your 2018, 2019, or 2020 losses, and your NOL could offset only up to 80 percent of taxable income before your Section 199A deduction.

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made in the TCJA.

QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

If you have such property on an already filed 2018 or 2019 return, it’s on that return as 39-year property. You now have to change it to 15-year property, eligible for both bonus depreciation and Section 179 expensing.

When it comes to your taxes, business deductions are king. The more business deductions you can claim, the better. The more business deductions you claim, the less you pay in regular taxes.

Yes, paying less in taxes is good.

Here are the seven last-minute tax deduction strategies we covered in this article:

1. Prepaying your 2020 expenses right now reduces your taxes this year, without question. While it’s true you kicked the can down the road some, perhaps you have an offset with a big deduction planned for next year. And even if you don’t have such a plan at the moment, you have plenty of time to create one or to put additional big deductions in place for 2021.
2. The easiest year-end strategy of all is simply to stop billing your customers, clients, and patients. Once again, this kicks the can down the road some and makes your 2021 tax planning more important.
3. With 100 percent bonus depreciation and increased Section 179 expensing in 2020, you can make significant purchases of equipment, machinery, and furniture and write off 100 percent of the value. Make sure you place the assets in service on or before December 31, 2020, to get the deduction this year.
4. Charges to your credit cards can create deductions on the day of the charge. This is absolutely true if you are a sole proprietor or if you operate as a corporation and the credit card is in the name of the corporation. But if you operate as a corporation and the credit card is in your personal name, your corporation needs to reimburse you before December 31 to create the 2020 deduction at the corporate level.
5. Make sure to claim all your legitimate deductions. Don’t think you have too many, and don’t try to avoid deductions that you think could be a red flag. First, it’s unlikely you could have enough deductions to create a red flag. Second, no one knows what those red flags are. Third, if the deduction is legitimate, it doesn’t matter if the IRS audits it—you’ll win.
6. If your deductions exceed your income, you will have a loss for the year and that loss can create an NOL. The good news here is that the NOL can give your business a cash infusion from the taxes you paid five years ago.
7. If you placed QIP in service in 2018 or 2019, you have some work to do because that QIP is no longer 39-year property; it is 15-year property and requires a 100 percent bonus depreciation deduction if you don’t elect out of bonus depreciation