I hope you are managing as well as you can through these tough times. While this current environment will pass and our new normal will appear, it's hard to know what to and not to focus on as relevant information to act on now and in the future. As I was binge watching the Netflix show Ozark over the weekend, Laura Linney's character, a trained lobbyist and very experienced with the anxious and stress filled situations which her money laundering husband gets them into, makes a statement I feel is very apropos to our current situation; "There's a saying in Politics. Never let a good crisis go to waste."
After digesting some of the new loan programs and retirement plan provisions of the CARES Act, I've tried to put together a simple overview of small business owners options and some planning strategies and action points which you may find helpful now and as you plan for the future. It's more important than ever to stay on top of the opportunities being presented by new laws and business conditions and take the steps now to be able to seize these opportunities.
SBA Loans: SBA Grant, PPP or EIDL
As a brief summary, there are 2 loans available through the Small Business Administration ("SBA") pursuant to the CARES Act:
- Paycheck Protection Program ("PPP") – Forgivable Loan (potentially) For Employers with less than 500 employees, Independent Contractors and Sole Proprietorships.
- Economic Injury Disaster Loan ("EIDL") – For Companies of all sizes and must apply through SBA. https://disasterloan.sba.gov/ela/
Here is a great site that goes into all your options with the SBA, SBA Loan Programs Site
Should I apply for either of these loans?
The threshold question you must ask prior to applying is: Should I apply for All or any of these loans?
- For the PPP, if you have a significant payroll which you have decided is critical for your short term and long term plans, you should apply.
- For the EIDL, it appears the benefit from a traditional SBA loans is streamlined underwriting, favorable interest rates and repayment based on your ability to repay.
If you are unsure which Loan may work best for you, you can apply for both. If you are approved, you should be able to decide which one is right for you. The funding of these loans has not started and Congress is discussing making additional funds available.
I've heard about these Loans being able to be forgiven, how does that work?
Loan forgiveness only (potentially) applies to PPP. The provisions for forgiveness are attached but simply they must be used 75% for payroll expenses.
The EIDL does have a provision that once you apply, your business may be eligible for a $10,000 advance on the EIDL loan. If that advance is given and the EIDL not approved, that advance does not need to be repaid.
What benefits are available if I don't take the loan?
There are some tax benefits available to Employers which don't take a loan. However, they are not available to those that DO take a loan so some analysis may be needed to be given to both. They are:
- Employee Retention Credit – The ACT allows a tax credit up to 50% of an employees wages up to $10K of wages. You can get more details here, https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
- An Employer may also defer up to half of their payroll taxes for the rest of 2020 up to 2021 under the Act. This will significantly help with cash flow.
While it appears these benefits are only available if you don't take a loan, understand that may change. The IRS will need to eventually give guidance here and the direction from congress is to make such provisions as taxpayer friendly as possible.
What if I already have a Business loan/Line of credit?
The SBA is given assistance to those business owners which already have SBA loans. They are offering 6 months of loan payment forgiveness. Click here for more information,
What if I apply for and don't get one of the SBA Loans?
If you apply for a loan but don't receive it due to the "first come first serve" nature of the loan, it's important to make a full assessment of your current financial situation and start to identify assets and strategies that could help you through these temporary challenges.
How has my experience been working with large financial institutions?
Many people have found it very challenging to get information and apply for these loans from many of the mega, "too large to fail" banks. If your investments are with a big brand wirehouse, have your representatives been in touch with you to communicate during this crisis and make you feel comfortable and your business valued?
For those seeking these new loans through their large financial institutions, they are directed to an online site where they are told to follow the directions and submit their application and cross their fingers. While this current situation has exacerbated service issues, have you really felt your business was valued by such large institutions before?
I have always maintained a strong relationship with community banks and most importantly my private banker. He has been there every step of the way during this crisis and keeping me informed on the application process, even if it's simply to say "We really don't know yet, but will let you know when we do." I have also taken the same approach with my clients during this time. While it's not been easy, reminding them to keep perspective, remain patient and persevere has been vital. Please click here for our previous communication on Perspective, Patience and Perseverance.
Re-assess Processes and Employee job functions.
Even in normal times it's difficult to navigate the balancing act of doing right by your employees and doing right by your business. If you have had to terminate employees immediately or feel that may be required in the near future, it's important to review whether your assessment of the necessity of employees tasks was accurate. Complacency and procrastination in our world got exposed in a fashion never previously thought possible. Be honest with yourself as you transition through this time as it may be the perfect time to implement processes and efficiencies you have been putting off.
Some strategies may be:
- Converting full time employees to part time independent contractors. If this is done, thought must be given to what the IRS considers an employee versus an independent contractor, https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
- Unemployment benefits have been significantly enhanced for the next 6 months. This may be the best course and you could look to rehire in 6 months if they are still available.
- Apprising your employees of the new rules regarding accessing retirement plan funds below may provide peace of mind. If you have made matching contributions over the years, those funds could be available for current needs.
- Make a full assessment of your systems and technologies. What and who was previously considered "essential" may no longer be the case. Take those previously believed "painful steps" to improve which may be much easier to accomplish now than a month ago.
- Whatever is chosen, clear and open communication should be made with them so they understand and can prepare themselves accordingly.
New Rules for accessing tax qualified assets within Individual Retirement Accounts and Group Retirement Plans.
The CARES Act contained many provisions to relax the rules around accessing retirement funds, for both individuals and employers, in Corporate and Individual retirement accounts. Here are some of the new rules:
- Individuals can take a "penalty" free distribution (normally 10% of the taxable amount of the distribution) of up to $100K from an individual or corporate retirement account. Such distributions ARE subject to income taxes but you have three years to pay those taxes.
- For Group Retirement Plans, individuals are now allowed to take loans up to $100K (Previously $50K) or 100% of their vested balance, whichever is less. Such loan's repayment can be deferred for 1 year and no interest on that loan for 3 years.
- Required Minimum distributions from IRAs are waived for 2020.
- To be eligible for these provisions, it needs to be a Coronavirus Related Distribution ("CRD") to a Qualified Person. To be considered a Qualified Person, a self attestation needs to be made that you were affected by Coronavirus related shutdowns. The definition is very broad and is intended to govern everyone.
- For Cash Balance retirement plans, the due date to fund such plans has been delayed to January 1, 2021. Of important note, if you do have a Cash Balance plan, the favorable loan and distribution provisions don't apply.
- For Group Retirement Plans which make matching contributions every payroll, those can be delayed until 2021.
Is taking a loan from a Retirement Plan a good idea?
Many people have a good amount of savings in either individual or group retirement Plans. I have personally always been a big proponent of borrowing from yourself as an alternative to traditional financing when appropriate. Such strategy is best when the need is temporary and to avoid the complication of traditional financing. As you review all your funding options for the next few months, it would be a good idea to have these assets be part of the analysis.
If I do need to access retirement funds, how should I do it?
Here are some thoughts and Ideas of how to access retirement funds. It's very important to review these strategies together with your overall plan. Creating a "waterfall" of funding options is always a good strategy, i.e., first try to for loan, second review existing loans, third review retirement plans, etc.,
- If a $100K distribution is made, the income tax owed may be offset by your business losses. These funds can then be used for personal expenses or contributed to the business. These funds can also be available for future tax deductible contributions back to a plan when business gets back on track.
- For 2021 and beyond, you may find value in being able to take a loan from a group retirement plan. Hence, 2020 may be the year to create a Group Retirement plan. The increase of the Loan provisions from $50K to $100K is temporary for 180 days but could be made permanent if the Plan document is changed.
- If you have a large IRA and don't have a group plan, it may be a good idea to create the plan and contribute a portion, if not all, of the IRA to the Plan. Such transfer is accomplished in the form of a rollover and not a Plan contribution. Once in the Group retirement Plan, a loan can be accessed as needed.
- Depending on your situation, it may benefit from both a $100K penalty free withdrawal and also a $100K Loan.
- If you have an existing Plan and are considering whether or not to make a profit share contribution for 2019, you may want to make that contribution to lower your 2019 taxes and then avail yourself of the use of those funds through a loan or distribution now in 2020.
- If you do feel accessing retirement funds may be in your future, you should segregate within your account the amount you feel you may access and allocate that amount to low risk investments to remove the risk of further stock market volatility.
Should I Consider refinancing my home or tapping Home Equity?
In light of the current crisis, the Federal Reserve has lowered interest rates to near zero. If you have a home mortgage of roughly 4.5% or more, it would make sense to look into refinancing to reduce your interest rates and get lower payments. Once again, the key here is to be proactive and start the conversation based not necessarily on your experience today but what things may look like a few months from now.
Summary
Over the last few weeks we have heard many times about the unprecedented situation we find ourselves in. While the statement is factually correct, personal and financial challenges, and the emotions with them, are a part of the human condition which have presented themselves in the past and will again in the future. While the nature of this current situation was unexpected, we could have all done a better job preparing for the unexpected. A well constructed Plan takes into account unexpected events and provides you options to weather turbulent events to not only survive, but thrive. As we weather the storm, tremendous opportunities are going to start presenting themselves for our personal and professional financial lives. Do not act nervously or anxiously fearing "missing out" on a perceived opportunity. Take a deep breath, analyze and consider your options and then move forward calmly and confidently appreciating truly how very little we can control and being ready for every upcoming opportunity when it presents itself.
Stay Safe and Well.