Lawmakers and the Administration continue drafting measures attempting to blunt the economic fallout from coronavirus. While most businesses and individuals must still file their taxes by the April 15 deadline, if money is owed, payments – up to $1 million – can be deferred without penalty.
The Coronavirus Aid, Relief and Economic Security Act contains something for almost everyone. For small security businesses, access to nearly $350 billion in loans to help cover expenses such as payroll, rent and utilities. These loans of up to $10 million made available through lenders certified by the SBA, including banks and credit unions. The government will pay off the loan balance if the business either does not lay off workers or rehires already laid-off workers.
Delays in the payment of payroll taxes typically paid by employers on workers’ wages. The 6.2% tax on wages normally paid would instead have to be paid over the next two years. And, approximately $200 billion would be provided in tax assistance to small businesses, much of it through payroll tax deferrals.
These new financial assistance and tax breaks are in addition to the Family First Coronavirus Response Act that became law earlier in March, that included a short-term expansion of paid sick leave, under which employers must provide 14 days of paid sick leave if workers are ill or quarantined because of the virus or have to care for an infected family member.
Family and Medical Leave Act and Tax Credit
While laws, regulations and contract requirements may require a security business continue to operate, the Family and Medical Leave Act (FMLA) protects eligible employees. Under the FMLA, covered employers – those with more than 50 workers on the payroll – must provide employees job-protected, unpaid leave for qualified family and medical reasons. Employees on FMLA leave are entitled to the continuation of group health insurance coverage.
Employers have long been able to claim a tax credit for providing paid family and medical leave to employees. The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The applicable percentage is equal to 12.5% and increases by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages. The maximum applicable percentage is 25%.
The big issues with this and other tax credits is a cash flow shortage. A security business may be paying out new benefits, such as paid sick days, but must wait for reimbursement in the form of a tax credit. It is now a similar story with losses – whether resulting from the pandemic or other causes.
Business Interruption Insurance
Business Interruption Insurance is insurance coverage that replaces business income lost in a disaster. It is not sold as a separate policy – instead it is either added to a property/casualty policy or included in a comprehensive package policy as an add-on or rider.
The income covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster; however, remember that the insurer is only obligated to pay if the insured actually sustained a loss as a result of the interruption. The amount that may be recouped by a security business will not exceed the limit stated in the policy.
Inventory Impairment
When it comes to the inventories maintained by many security businesses, supply chains are being disrupted and product levels affected. Inventory that cannot be turned over because of mandated closures or travel restrictions may have to be evaluated for “impairment,” and changes in prices and reduction in the level of demand must also be taken into consideration.
There are two methods for deducting impairment, casualty or theft losses of inventory, including goods kept for resale to the public:
1. Deduct the loss by adding the amount of the loss to the “cost of goods sold,” or
2. Deduct the loss separately by removing the damaged inventory from “cost of goods sold” by making a downward adjustment t opening inventory or purchases. Naturally, the amount of the loss must be reduced by any reimbursement received.
Financing
A pre-established line of credit enables the security integrator to borrow in increments as needed, repay it, and borrow again as long as the credit line remains open. Typically, the operation is required to pay interest on any balance borrowed and a lesser amount for having ready access to the unexpended amount of the line of credit.
Most small business lines of credit are backed by the Small Business Administration (SBA) and offered through the SBA’s 7(a) Program. The SBA itself does not make loans; instead, it acts as a guarantor to lending institutions that, in turn, make these loans.
Although a business line of credit can provide cash flow when needed, other funding may be necessary at some point. President Trump has announced the government will be providing $50 billion to the SBA to aid small firms struggling because of supply disruptions or lower sales as a result of the virus.
The SBA also offers disaster assistance in the form of low-interest loans to businesses, renters and homeowners located in regions affected by declared disasters. These loans offset economic losses because of reduced revenues.
Although new legislation may increase the amounts, the SBA can already provide up to $2 million to help meet financial obligations and operating expenses. Loan amounts are usually based on the actual economic injury and the operation’s financial needs, regardless of whether the business suffered any property damage.
EIDL assistance is available only to small businesses that are unable to secure credit elsewhere. The interest rate for EIDLs will not exceed 4% per year with a term for the loan not to exceed 30 years.
Best of all, a security business may qualify for both an EIDL and a physical disaster loan, although the combined maximum loan amount is limited to $2 million.
Tax Relief
Keeping in mind that “lost income” is not a legitimate tax deduction, other provisions in the tax law may help security business owners and operators recover financially from the tax impact of a disaster, especially when the federal government declares their location to be a major disaster area.
Using his emergency authority, the President has, as mentioned, instructed the Treasury Department to defer income tax payments due April 15 without interest or penalties for individuals and businesses negatively impacted by the coronavirus. Despite ignoring the March 15 filing deadline for many business returns, this will reportedly add an additional $200 billion in liquidity to the economy.
Estimated Taxes
Those who are in business for themselves must estimate their expected tax bill for the year and make quarterly payments in lieu of payroll withholding. Pass-through entities such as S corporations, partnerships and the like, pay no taxes, instead passing the tax bill to the owner/shareholders.
Incorporated security businesses, like the self-employed and owners of pass-through entities, must also pay estimated taxes. Since those estimates are usually based on projected income early in the tax year, what happens when income plummets after those early-year projections are made? Changes might be in order.
Incorporated security businesses that have overpaid their estimated tax may apply for a quick refund if the overpayment is at least 10% of the expected tax liability and at least $500. Keeping in mind that the goal is to avoid penalties for underpaying estimated income taxes, prior to the end of the year, adjustments may be in order for all because of the virus.
President Trump signed a $7.8 billion emergency spending bill that reimburses state and local governments for the cost of fighting Coronavirus. It also includes $3.1 billion for stockpiling medical supplies and $300 million for government purchases of tests, vaccines and therapies to ensure that that low-income people have access.
Accounting for Losses
Still in the tax arena, a Net Operating Loss (NOL) occurs when a security business has more tax deductions than taxable income in a given year; however, the rules governing write-offs of losses are no longer quite as helpful in providing an infusion of badly-needed cash from previously paid taxes.
NOL carrybacks formerly generated a refund of taxes paid in earlier years that provided an often-badly needed infusion of cash. Today, most NOLs arising in tax years after 2017 can only be carried forward, and the NOL deduction is limited to 80% of taxable income.
While a security business operating as a pass-through entity – such as sole proprietorships, partnerships or S corporations – cannot get this break, their owners can apply the NOL on their personal tax returns. With regular corporations, the NOL carryforward is applied on the tax return of incorporated businesses.
As the ever-evolving fight against the Coronavirus continues, attention must be paid to new developments. Lawmakers are already planning to create additional programs that would supplement and/or expand the Coronavirus legislation that is already a reality and the actions taken by the Administration. So, more is on the way.
And, as always, the ever-changing response the Pandemic and the complexity of the rules when dealing with its economic impact, make professional assistance advisable.
Mark E. Battersby is a freelance writer who specializes in tax-related issues. Email him at [email protected].
