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Managing Cash Flow

Managing Cash Flow – The key to surviving in these crisis

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.

1. Know your business numbers and your financial position

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.

2. Pay yourself first and set yourself targets

Running a small business can be tough and there’s a tendency to take what it left at the end of the week.

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

3. Protect your assets

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.

4. Be proactive with spare dollars: Set aside and save

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.

5. Check out state, local, and private resources

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.
  • 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.

Sigma Accountants – Best Columbia Maryland Based CPA Firm

Sigma accountants are the best Tax Accountant in Maryland. We provide pocket-friendly accounting, bookkeeping, and consultancy services to dentists, dental practitioners, doctors, medical practitioners, and small businesses. We specialize in accounting for dental practices and help them increase their net worth.

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.

You can contact us via the contact form or follow us on social media for timely updates. Facebook, Instagram, LinkedIn.

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

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2020 Last-Minute Year-End Tax Strategies for Your Stock Portfolio

When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2020 income taxes.

The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies.

Here’s the basic strategy:

  • Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
  • Lower the taxes to zero—or if you can’t do that, then lower them to 23.8 percent or less by making the profits subject to long-term capital gains.

Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.

And if you can avoid that higher rate with some easy adjustments in your stock portfolio, doesn’t it make sense to do that now?

Big Picture

Here are the five basic tax rules you need to know to find the tax savings you desire in your stock portfolio:

  • On your short-term capital gains and ordinary income, you pay federal taxes at rates of up to 40.8 percent. The 40.8 percent comes from the top income tax rate of 37 percent plus the 3.8 percent Affordable Care Act tax on net investment income.
  • You pay taxes on your long-term capital gains at rates from zero up to 23.8 percent (20 percent for capital gains plus 3.8 percent on investment income), depending on your income level.
  • You pay taxes on your stock dividends at rates from zero to 23.8 percent, depending on your income level.
  • If your personal capital losses exceed your personal capital gains, the tax code limits your capital loss deductions to $3,000 and allows you to carry over losses in excess of the $3,000 to future years until realized.
  • You first offset long-term gains and losses before you offset short-term gains and losses.
  • Donate appreciated stock to charity.
  • Do not donate stock that would produce a tax loss.

Now that you have the basics, here are seven possible tax planning strategies.

Strategy 1

Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent).

In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

Strategy 2

Use long-term losses to create the $3,000 deduction allowed against ordinary income.

Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket).

Strategy 3

As an individual investor, avoid the wash-sale loss rule.

Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2020, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.

If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Strategy 5

Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)?

If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by

  • gifting them stock,
  • having them sell the stock, and then
  • having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to make a donation to a charity, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit.

It works like this:

  • Benefit 1. You deduct the fair market value of the stock as a charitable donation.
  • Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. You give it to a 501(c)(3) charity, and the following happens:

  • You get a tax deduction for $11,000.
  • You pay no taxes on the $10,000 profit.

Two rules to know:

  1. Your deductions for donating appreciated stocks to 501(c)(3) organizations may not exceed 30 percent of your adjusted gross income.
  2. If your publicly traded stock donation exceeds the 30 percent, no problem. Tax law allows you to carry forward the excess until used, for up to five years.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.

Your stock portfolio provides you with the seven great tax-planning opportunities we showed you in this article. For example, if you give money to charity, your parents, and/or your non-kiddie-tax children, you keep more tax money in your pocket (or the family’s pockets) by using appreciated stocks rather than cash.

Takeaways

You absolutely must plan for your opportunities inside the portfolio to offset your gains and losses. With planning, you win free money with the offsets, and you’ll find the offset game fun and easy to play.

The bottom line is that the seven strategies in this article give you straightforward ways to keep more of your money and send less to the IRS.

The end of the year is right around the corner. Because it takes time for stock transactions to settle and you don’t want to worry about settlement dates, get your portfolio tax-deduction optimized well before the end of the year—say, no later than December 20, 2020.

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7 Last Minute Business Deductions

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

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.

2. Stop Billing Customers, Clients, and Patients

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).

4. Use Your Credit Cards

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.

5. Don’t Assume You Are Taking Too Many Deductions

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.

6. Thank COVID-19

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.

7. Deal with Your Qualified Improvement Property (QIP)

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.

TAKEAWAYS

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

Sigma Accountant’s blog is intended for educational purposes and provides general information about tax accounting, business related topics. It is not intended to provide professional advice. By using this blog site, you understand that there is no CPA/client relationship between you and Sigma Accountants or its employees. The blog and website, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for competent counsel from a qualified advisor.

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