When the COVID-19 crisis exploded in March, among the many concerns was the state of the nation’s supply chains. Business owners are no strangers to such worry. It’s long been known that, if too much of a company’s supply chain is concentrated (that is, dependent) on one thing, that business is in danger. The pandemic has only complicated matters.

To guard against this risk, you’ve got to maintain a constant awareness of the state of your supply chain and be prepared to adjust as necessary and feasible.

Products or services

The term “concentration” can be applied to both customers and suppliers. Generally, concentration risks become significant when a business relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region.

Concentration related to your specific products or services is something to keep a close eye on. If your company’s most profitable product or service line depends on a few key customers, you’re essentially at their mercy. If just one or two decide to make budget cuts or switch to a competitor, it could significantly lower your revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, your profit margin could narrow considerably. This is especially problematic if your number of alternative suppliers is limited.

To cope, do your research. Regularly look into what suppliers might best serve your business and whether new ones have emerged that might allow you to offset your dependence on one or two providers. Technology can be of great help in this effort — for example, monitor trusted news sources online, follow social media accounts of experts and use artificial intelligence to target the best deals.

Geography

A second type of concentration risk is geographic. When gauging it, assess whether many of your customers or suppliers are in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a substantial impact. As we’ve unfortunately encountered this year, the severity of COVID-19 in different regions of the country is affecting the operational ability and capacity of suppliers in those areas.

These same threats apply when dealing with global partners, with the added complexity of greater physical distances and longer shipping times. Geopolitical uncertainty and exchange rate volatility may also negatively affect overseas suppliers.

Challenges and opportunities

Business owners — particularly those who run smaller companies — have always faced daunting challenges in maintaining strong supply chains. The pandemic has added a new and difficult dimension. Our firm can help you assess your supply chain and identify opportunities for cost-effective improvements.

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During the COVID-19 pandemic, many small businesses are strapped for cash. They may find it beneficial to barter for goods and services instead of paying cash for them. If your business gets involved in bartering, remember that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

For example, if a computer consultant agrees to exchange services with an advertising agency, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there is contrary evidence.

In addition, if services are exchanged for property, income is realized. For example, if a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. Another example: If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock. 

Joining a club

Many businesses join barter clubs that facilitate barter exchanges. In general, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

Bartering is generally taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,000 credit units one year, and that each unit is redeemable for $1 in goods and services. In that year, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income at a 24% rate.

Forms to file

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

Many benefits

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. Contact us if you need assistance or would like more information.

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If your business was fortunate enough to get a Paycheck Protection Program (PPP) loan taken out in connection with the COVID-19 crisis, you should be aware of the potential tax implications.

PPP basics

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020, is designed to provide financial assistance to Americans suffering during the COVID-19 pandemic. The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the PPP. In April, Congress authorized additional PPP funding and it’s possible more relief could be part of another stimulus law.

The PPP allows qualifying small businesses and other organizations to receive loans with an interest rate of 1%. PPP loan proceeds must be used by the business on certain eligible expenses. The PPP allows the interest and principal on the PPP loan to be entirely forgiven if the business spends the loan proceeds on these expense items within a designated period of time and uses a certain percentage of the PPP loan proceeds on payroll expenses.

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:

1. Payroll costs;
2. Interest (not principal) payments on covered mortgage obligations (for mortgages in place before February 15, 2020);
3. Payments for covered rent obligations (for leases that began before February 15, 2020); and
4. Certain utility payments.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage, make payments on a covered lease or make eligible utility payments.

Cancellation of debt income

In general, the reduction or cancellation of non-PPP indebtedness results in cancellation of debt (COD) income to the debtor, which may affect a debtor’s tax bill. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.

Expenses paid with loan proceeds

The IRS has stated that expenses paid with proceeds of PPP loans can’t be deducted, because the loans are forgiven without you having taxable COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit.

However, the IRS’s position on this issue has been criticized and some members of Congress have argued that the denial of the deduction for these expenses is inconsistent with legislative intent. Congress may pass new legislation directing IRS to allow deductions for expenses paid with PPP loan proceeds.

PPP Audits

Be aware that leaders at the U.S. Treasury and the Small Business Administration recently announced that recipients of Paycheck Protection Program (PPP) loans of $2 million or more should expect an audit if they apply for loan forgiveness. This safe harbor will protect smaller borrowers from PPP audits based on good faith certifications. However, government leaders have stated that there may be audits of smaller PPP loans if they see possible misuse of funds.

Contact us with any further questions you might have on PPP loan forgiveness.

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On August 8, President Trump signed four executive actions, including a Presidential Memorandum to defer the employee’s portion of Social Security taxes for some people. These actions were taken in an effort to offer more relief due to the COVID-19 pandemic.

The action only defers the taxes, which means they’ll have to be paid in the future. However, the action directs the U.S. Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Legislative history

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act. A short time later, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act. Both laws contain economic relief provisions for employers and workers affected by the COVID-19 crisis.

The CARES Act allows employers to defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New bill talks fall apart 

Discussions of another COVID-19 stimulus bill between Democratic leaders and White House officials broke down in early August. As a result, President Trump signed the memorandum that provides a payroll tax deferral for many — but not all — employees.

The memorandum directs the U.S. Treasury Secretary to defer withholding, deposit and payment of the tax on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020. This means that the employee’s share of Social Security tax will be deferred for that time period.

However, the memorandum contains the following two conditions:

• The deferral is available with respect to any employee, the amount of whose wages or compensation, as applicable, payable during any biweekly pay period generally is less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods; and 
• Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax. 

The Treasury Secretary was ordered to provide guidance to implement the memorandum.

Legal authority

The memorandum (and the other executive actions signed on August 8) note that they’ll be implemented consistent with applicable law. However, some are questioning President Trump’s legal ability to implement the employee Social Security tax deferral.

Employer questions

Employers have questions and concerns about the payroll tax deferral. For example, since this is only a deferral, will employers have to withhold more taxes from employees’ paychecks to pay the taxes back, beginning January 1, 2021? Without a law from Congress to actually forgive the taxes, will employers be liable for paying them back? What if employers can’t get their payroll software changed in time for the September 1 start of the deferral? Are employers and employees required to take part in the payroll tax deferral or is it optional?

Contact us if you have questions about how to proceed. And stay tuned for more details about this action and any legislation that may pass soon.

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During the COVID-19 crisis, you can’t afford to lose sight of other ongoing risk factors, such as cyberthreats, fraud, emerging competition and natural disasters. A so-called “stress test” can help reveal blind spots that threaten to disrupt your business. A comprehensive stress test requires the following three steps.

1. Identify the risks your business faces

Here are the main types of risks to consider:

• Operational risks (based on the inner workings of the company),
• Financial risks (involving how the company manages its finances, including the threat of fraud and the effectiveness of internal control procedures),
• Compliance risks (related to issues that might attract the attention of government regulators, such as environmental agencies and the IRS), and
• Strategic risks (regarding the company’s market focus and its ability to respond to changes in customer preferences).

If you’ve conducted a risk analysis in prior years, beware: Current risk factors may be different due to changes in market conditions, business operations and technology. For example, if your business pivoted to more online orders or remote working arrangements during the pandemic, it may now be more exposed to cyberattacks than it previously was.

2. Establish a risk management strategy

Meet with managers from all functional lines of business — including sales and marketing, human resources, operations, procurement, IT, and finance and accounting — to discuss the risks that have been identified. The goal is to improve your team’s understanding of business threats and to brainstorm ways to manage those risks.

For example, if your company operates in an area prone to natural disasters, such as earthquakes or wildfires, you should have a disaster recovery plan in place. Review copies of the disaster recovery plan and ask when it was last updated.

In addition to asking for feedback about identified risks, encourage managers to share any additional risk factors and projections regarding the potential financial impact. Their frontline experience can be eye-opening, especially during these unprecedented times.

3. Review and update your strategy

Managing risk is a continuous process. After creating your initial risk mitigation strategy, your management team should meet periodically to review whether it’s working. If it isn’t, brainstorm ways to fortify it.

For example, if your company’s disaster recovery plan has been activated recently, ask your management team to assess its effectiveness. Then consider making changes based on that assessment.

Need help?

While risk is part of operating a business, some organizations are more prepared to handle the unexpected than others. To ensure your company falls into the “more prepared” category, implement a stress test. We can help you assess current risks and develop a plan that’s right for you.

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While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to launch new businesses. For example, some businesses are being launched online to provide products and services to people staying at home.

Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

How expenses must be handled

If you’re starting or planning a new enterprise, keep these key points in mind:

• Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
• Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
• No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Expenses that qualify

In general, start-up expenses include all amounts you spend to:

• Investigate the creation or acquisition of a business,
• Create a business, or
• Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking ahead 

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

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The IRS and the U.S. Treasury had disbursed 160.4 million Economic Impact Payments (EIPs) as of May 31, 2020, according to a new report. These are the payments being sent to eligible individuals in response to the economic threats caused by COVID-19. The U.S. Government Accountability Office (GAO) reports that $269.3 billion of EIPs have already been sent through a combination of electronic transfers to bank accounts, paper checks and prepaid debit cards.

Eligible individuals receive $1,200 or $2,400 for a married couple filing a joint return. Individuals may also receive up to an additional $500 for each qualifying child. Those with adjusted gross income over a threshold receive a reduced amount.

Deceased individuals

However, the IRS says some payments were sent erroneously and should be returned. For example, the tax agency says an EIP made to someone who died before receipt of the payment should be returned. Instructions for returning the payment can be found here: https://bit.ly/31ioZ8W

The entire EIP should be returned unless it was made to joint filers and one spouse hadn’t died before receipt. In that case, you only need to return the EIP portion made to the decedent. This amount is $1,200 unless your adjusted gross income exceeded $150,000. If you cannot deposit the payment because it was issued to both spouses and one spouse is deceased, return the check as described in the link above. Once the IRS receives and processes your returned payment, an EIP will be reissued.

The GAO report states that almost 1.1 million payments totaling nearly $1.4 billion had been sent to deceased individuals, as of April 30, 2020. However, these figures don’t “reflect returned checks or rejected direct deposits, the amount of which IRS and the Treasury are still determining.”

In addition, the IRS states that EIPs sent to incarcerated individuals should be returned.

Payments that don’t have to be returned

The IRS notes on its website that some people receiving an erroneous payment don’t have to return it. For example, if a child’s parents who aren’t married to each other both get an additional $500 for the same qualifying child, one of them isn’t required to pay it back.

But each parent should keep Notice 1444, which the IRS will mail to them within 15 days after the EIP is made, with their 2020 tax records.

Some individuals still waiting

Be aware that the government is still sending out EIPs. If you believe you’re eligible for one but haven’t received it, you will be able to claim your payment when you file your 2020 tax return.

If you need the payment sooner, you can call the IRS EIP line at 800-919-9835 but the Treasury Department notes that “call volumes are high, so call times may be longer than anticipated.”

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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. Our firm can help you identify, quantify and analyze all the factors that contribute to stability and profitability.

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There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.

Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.

Why the new form?

Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.

What businesses will file?

Payers of nonemployee compensation will now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

Can a business get an extension?

Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.

Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:

• The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.
• A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.
• The operation of the filer was affected by fire, casualty or natural disaster.
• The filer was “in the first year of establishment.”
• The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.

Need help?

If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

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Did you recently file your federal tax return and were surprised to find you owed money? You might want to change your withholding so that this doesn’t happen next year. You might even want to do that if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan.

Withholding changes

In 2018, the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks. In general, the amount withheld was reduced. This was done to reflect changes under the Tax Cuts and Jobs Act — including an increase in the standard deduction, suspension of personal exemptions and changes in tax rates.

The tables may have provided the correct amount of tax withholding for some individuals, but they might have caused other taxpayers to not have enough money withheld to pay their ultimate tax liabilities.

Review and possibly adjust

The IRS is advising taxpayers to review their tax situations for this year and adjust withholding, if appropriate.

The tax agency has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the increased child credit, the new dependent credit and the repeal of dependent exemptions. You can access the IRS calculator here:   target=”_blank”>https://bit.ly/2OqnUod.

Changes may be needed if…

There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:

• Adjusted your withholding in 2019, especially in the middle or later part of the year,
• Owed additional tax when you filed your 2019 return,
• Received a refund that was smaller or larger than expected,
• Got married or divorced, had a child or adopted one,
• Purchased a home, or
• Had changes in income.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payments are due on July 15 and September 15.)

Good time to plan ahead

There’s still time to remedy any shortfalls to minimize taxes due for 2020, as well as any penalties and interest. Contact us if you have any questions or need assistance. We can help you determine if you need to adjust your withholding.

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