In my teens, I spent two summers working at a Boy Scout Camp. My first year, I worked as a troop guide and handicraft instructor teaching the Basketry Merit Badge. My second year, I worked as a troop guide and taught the Wilderness Survival Merit Badge.
The Basketry Merit Badge consisted of learning about safety and first aid you might need while working with basketry tools and materials, learning about and identifying types of baskets and weaves and then making two baskets (round and square) and weaving a seat. It was originally part of the Craftsmanship Merit Badge until the Craftsmanship Merit Badge was split into different areas and different badges in 1928. The first day of class, I would teach about the safety, first aid, tools, materials, types and weaves and then show the Scouts how to weave their baskets. They then had the week to make their two baskets and when they returned to pass them off, they would weave the seat and complete the Merit Badge. The first day filled with classes was busy with the middle of the week free as the Scouts would make their baskets with most of them returning to pass them off at the end of the week. I was in the Handicraft Area for questions and to offer help but most of the time during the middle of the week did not have students. Next to the basketry area was the wood carving area. The wood carving instructor was in his early twenties and was very talented. I would watch his lessons when I didn’t have students. I was not passionate about basketry. I was not passionate about wood carving either but I was interested. I carved two things that summer that I was happy with and learned a lot from the instructor. I went on to earn my Eagle Scout and counted Basketry and Wood Carving as two of the many Merit Badges I earned. Shortly after college I was asked to serve as a Scoutmaster for our local troop. I thought a Scoutmaster should have a nice hiking stick and I decided to carve one. I only recall carving one thing since that summer of watching the Wood Carving Instructor. I pulled out my pocket knife and found a piece of aspen and began carving. I carved an Eagle perched on the top of the stick and then all of the Scout rank advancement badges I had earned. I carved a handle and below the handle I carved the many Merit Badges I earned as a Scout. I took a long time carving. I know I spent over forty hours carving and probably 20 or so painting all the details. I didn’t have a passion for wood carving when I started but as I began to master the cuts and form and shape the wood into a representation of something else it began to become easier and more and more enjoyable as I began to master the craft. That stick is now one of my treasures. That first stick was carved with a pocket knife. I enjoyed the hobby and bought carving knives and gouges which made it faster and later sticks gave me even more experience. I have carved sticks for those close to me and one for each of my three boys when they earned their Eagle Scout Awards. They are a labor of love for me and are treasured by those who have them. They are as much functional as they are art and are proudly displayed. I never had a passion for wood carving until I had practiced enough to become good at it. Being good at something creates a passion. As you master something, passion for it becomes inevitable. You grow, move and change as you become a Craftsman and with it develop a passion. There are a lot of people who say that we should follow our passions – in study, jobs, and life. I believe the contrary. I believe you should pick something you enjoy and are interested in and then put in the hours to master it and with it will come the passion. Such was the case for me with wood carving. Such was the case for me with Taxes and Accounting. I am currently learning oil painting and hope to master it someday. As one instructor taught, “Once you learn the basics, the rest is just miles and miles of canvas.” Pick your passion and develop it by becoming master craftsman. Mastery is the easiest way to develop passion.
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As November approaches, my inbox is getting more and more emails from political candidates and parties, both Democrats and Republicans. I find it amazing. Despite its flaws, I love our democratic republic that is our United States of America.
I encourage all those eligible to register to vote, research and understand the positions of the candidates and vote your conscience. If you don't vote, you can't complain. As part of my education process prior to an election, I like to learn about the proposed tax plans of each candidate and thought I would take a moment to compare the two front runners for President of the United States from a tax policy position. First let's look at Individual Income Tax Rates. Currently, the top marginal tax rate for an individual is 37% on the Federal level. This is reached at $518k for single individuals and $622k for married filing joint returns. These rates will sunset after 2025. Vice President Joe Biden (Biden) would like to raise the top marginal rate to 39.6% for incomes over $400k. President Donald Trump (Trump) would like a 10% middle class tax break, either by lowering the 22% marginal rate to 15% or some other method or combination. This would apply to incomes over $40k for single taxpayers and $80k for married filing jointly. Trump would also like to make the current tax rates under the Tax Cuts and Jobs Act (TCJA) permanent (in other words, not sunset in 2025). Second, let's examine the candidates' Capital Gains Tax plans. Currently, the top rate for capital gains and qualified dividends in 20% which kicks in for taxpayers with incomes over $441k for individuals and $496k for married filing jointly. Rates for lower incomes are 0%, 10% and 15% as incomes grow to the 20% level. There is also a 3.8% net investment income tax to help fund Medicare. Trump would like to lower the capital gains rate, index the income tiers for inflation and provide an unspecified capital gains tax holiday (no capital gains tax for gains during a certain period of time). Biden suggests keeping the current capital gains structure but capping the amount that is eligible for the preferred rate, making incomes over $1 million taxed at the ordinary rates (his proposed 39.6% or current 37%). Next let's look at Tax Credits, in particular the Child and Dependent Tax Credits, the Earned Income Credit and First-Time Homebuyer Credit and Renter's Credit. Under the current law, dependent children with social security numbers that lived with the taxpayer that are under 17 years of age are eligible for a $2,000 per qualifying child Child Tax Credit. Other dependents that do not qualify for the child tax credit outlined above are eligible for a $500 Dependent Tax Credit up to a total of $1,200 per year maximum. Employed individuals over age 65 are not eligible for the Earned Income Credit. There are currently no credits for first-time home buyers or renters. Biden would like to raise the Child Tax Credit to $8,000 for one child and $1,600 for two or more children for taxpayers with incomes up to $125,000 phasing out completely at $400,000. He would also like to make working taxpayers over 65 eligible for the Earned Income Credit. He would also like to create a $5,000 tax credit for parents/caregivers of people who have certain physical and cognitive needs. Biden would also like to create a $15,000 first-time home buyers credit and make it refundable and advanceable. He would also like to create a renter's credit that would be enacted to reduce the cost of rent and utilities to 30% of the income of low income families that do not qualify for rent vouchers or subsidies. Trump would like to require those eligible for the $500 dependent care credit to have social security numbers. He would also like to keep the $2,000 child tax credit past the 2025 sunset date (when it reverts to $1,000). As for Deductions, current law has a standard deduction of $24,800 for married filing joint taxpayers and $12,400 for single taxpayers and $18,650 for head of household filers. After 2025, these will revert to pre-TCJA levels. Personal exemptions were eliminated under the TCJA. Trump would like to make the standard deductions under the current TCJA, which are indexed for inflation, permanent. Biden would keep the standard deductions and let them sunset but also limit itemized deductions to 28% meaning taxpayers in brackets higher than 28% would have their deductions limited. He would also like to phase out the Qualified Business Income Deduction of 20% of qualified business income to $400,000 of qualifying business income. For the Estate and Gift Tax, currently the exemption from this tax is $11,580,000 and will revert to approximately $5.8 million after the TCJA sunsets. Transfers of appreciated property are also eligible for a stepped up basis or the value upon date of death rather than what the deceased purchased the property for. Biden would like to eliminate the stepped-up basis on transfers of appreciated property. Trump would like to extend the higher exemptions beyond the 2025 sunset date and keep the stepped-up basis provision. There you have it. The above represents my best take on the candidates' tax positions currently. As politicians go, they may change their mind and what either one of them does once in office is another story. At least you will be more informed when choosing who to vote for. Prepare to vote. One of the lessons learned over the past several months is that we cannot succeed and/or thrive without the support of others. The pandemic has shed a light on just how connected and intertwined our world is. Our economies and livelihoods are linked with each other. We have learned that our actions have consequences, positive and negative, beyond our own bubbles.
The impacts of the virus will be felt long after a vaccine and herd immunity is reached. The way we live, the hobbies we have, the jobs we perform and the way we interact with each other will all have changed in some way or another. Will it be different? Yes. Will it be better? That depends on you. A fellow CPA and friend of mine, Michael Wall, recently wrote about three things – Routine, Habit and Normal. He talked about how each of these has been impacted by the pandemic and as a result, a lot of stress and anxiety has been created – not because of the virus but because of changes in our routines, habits and what is normal. His words struck me as something I needed to ponder more. My weekday routine used to be awake, scan the email inbox for anything that needed attention today, read a few articles, get up and shower, take my vitamins, drive to work, work, drive home, have family dinner, work on home projects, read, bedtime. The routine has been altered significantly since working from home started. In addition, the virus impacted tax season and time that would have normally been spent on now cancelled family vacations was spent on taxes. Energy spent without a recharge. My habits have changed too. The proximity of my temporary office is a lot closer to the kitchen than it used to be and I have gained some weight. I have had to force myself to get away from the house to do something different. My normal is different than it used to be. My bet is that yours is too. I wear a mask when in public spaces (because I care about the people around me and if it helps stop the spread, even a little, I will show I care.) My days often blend into each other. I have no vacations to look forward to or plan for. There are days I don’t leave the house. We don’t see family or do things with neighbors or friends. Changes to these three things have created stress and anxiety for me. I generally deal with both well but there have been times I have needed to talk, get out, or do something completely different to reset mentally. That is okay. Now we must ask ourselves what new habits we want? What new routines do we want? What new normal do we want? We can all twist, pry, shape and mold these to become better and make positive changes during these times. Some may also have to deal with negative changes such as job loss, health challenges, loss of a loved one, and loss of a business to name a few. While these changes do add extra challenges, I do think we can still rise higher through them. We can help and support one another to all make a better ”new.” In a normal year, your first quarter estimated tax payment, your tax return or your tax return extension and payment would all be due on April 15th and your second quarter estimated tax payment would be due on June 15th. This is not a normal year. This year all of the above are due July 15th. So, how much should you pay in estimated taxes? Do you even need to pay estimated taxes?
As employees, the employer takes out a portion of your paycheck as taxes and remits it to the government. When you are self-employed, you may have higher take home pay than your employee friends. That said, the government still wants their share of your earnings. They want it at least quarterly. At the end of each “quarter”, the IRS requires you to pay the tax on the business profits as well as any self-employment taxes that might be owed. If you expect to owe at least $1,000 in federal taxes for the year, you will be required to make estimated tax payments if you are an employee, sole proprietor, partner in a partnership, S-Corp shareholder, or member of a limited liability company or pay a penalty for failing to pay them. If you had no tax liability last year (paid no taxes), you do not need to make estimated tax payments this year but you may if you choose to. Making or not making estimated tax payments does not mean you will not owe taxes at the end of the year. The IRS wants you to pay the smaller of at least 90% of the tax due for the current year or 100% of the prior year (110% if prior year income was more than $125,000) to avoid penalties. The easiest way is to pay the 100% or 110% of last year rather than having to calculate your current income each quarter under the annualized income installment method. Estimated taxes should be paid on April 15th for the first quarter (January/February/March); June 15th for the second quarter (April/May); September 15th (June/July/August), and January 15th of the following year for fourth quarter (September/October/November/December). This year, 2020, the first two payments are due on July 15th. You can pay by check, electronic funds transfer or by credit card (subject to additional fees). You send these payments on a Form 1040-ES. States may also require estimated tax payments. Using the safe harbor calculation (no penalty assessed) amounts above may leave you over or under paid for tax due on the current year taxable income. Most people are okay with the refund resulting from an overpayment but are less happy about owing when they go to file their return. If you want to double check your numbers, you can use an annualized income method to calculate the tax. To start, you would figure out your year-to-date income/profit and use 15.6% for payroll taxes and the tax rate your income will fall in at year end. The United States of America uses a tiered progressive tax model, meaning the higher your taxable income, the higher your tax rate will be but to promote fairness, everyone pays the same rates on the same income amount (i.e. someone who has taxable income of $50,000 and another with taxable income of $500,000 will pay the same amount of tax on that first $50,000). Because of this, you will have a tax bracket, or the rate where your last taxed dollar falls into, and an effective tax rate, or the blend of the rates as you move up the income scale, which will generally be lower. The tax brackets range from 0% to 37%. (Visit IRS.gov and search for “tax rates” to see the current year rates). The married filing joint income brackets are twice the single filer until the 35% bracket. Multiplying the estimated taxable income by the estimated tax rate and adding any self-employment tax to it will give you an estimate of what will be due. To avoid the penalty, make at least the safe harbor (100% or 110% of prior year tax) as estimated tax payments, unless your income will be significantly lower in the current year. If your income will be higher in the current year, you can calculate the tax on the increase from prior year and add it to your estimates if your want to owe less at tax filing time. As always, you can also reach out to your CPA to have them help you calculate both the safe harbor amounts or annual income installments. The American humorist, Mark Twain said, “I can live for two months on a good compliment.” It is amazing how much nourishment comes from a sincere compliment well received.
Can you think back to the last time your boss, spouse, parent, child, neighbor…anyone, gave you a compliment or said something nice to you? I am willing to wait. How did it feel? Can you think back to the last time you gave a compliment to an employee, coworker, boss, parent, child, spouse, neighbor, friend…anyone? How did you feel when you gave the compliment? How did it make them feel? Focusing on the feeling of receiving and/or giving a compliment will lead you to make more compliments. These feelings are positive feelings and in times of pandemic, recession and general anxiety – they may be the boost you or someone else needs. A compliment should be sincere, kind and meaningful. If it is not genuine, it will be taken as such. How can you make better compliments? First, remember that everyone is different, and someone might value a certain compliment more than another. Rather than focus on what you feel is important, try to think about what the person you are going to give the compliment to feels is important. What do you think they would like to be complimented on? Second, be specific. Rather than saying, “you are a great leader” say “I really like how you lead. You are detailed and catch stuff the team might miss. You motivate us to do ____ and that makes us better.” Third, be real or genuine. If you don’t mean it, don’t say it. Fourth, use a question to prompt a conversation. Rather than saying, “You are so good at _____.” say “You are so good at _____. What’s your secret?” This shows interest in the person and allows you the opportunity to learn more about the person. Fifth, practice. Don’t go overboard but make an effort to give at least one sincere, meaningful compliment every day. Tack a compliment onto an expression of gratitude (“Thank you. I really appreciate your smile and the way you make me feel when I shop here.) Write a compliment letter and send it to that person’s boss or spouse. Write a positive review. Spread the compliments around. If you are lost at what a compliment is, do an internet search. There are hundreds of examples of compliments to become familiar with (remember to be genuine and make the words yours.) As Robert Orben said, “A compliment is verbal sunshine.” Scatter the sunshine and compliment someone. Fred C. Ball once said, “To be successful in business, you must drink, swear, lie and steal. Drink in knowledge. Continue to learn. Swear to do your best each and every day. Lie down and rest. Take some time for yourself and steal some time away for God.”
We should each make time in our weeks to learn. I miss listening to podcasts and audio books on my commute since moving my office home for the virus. I said it in college and I will say it again, “I don’t really like school but I love to learn.” Put some time on your calendar to learn. I have a ninety minute block of time on Fridays that I set aside as an Education block. When I was in my office, I was pretty good about taking that time. I need to re-dedicate myself to it since moving my office home for the virus. We owe it to ourselves and our customers to do our best. We recently had family photos taken, tagging on to a senior photo shoot. It is the first time in a long time we have paid someone to take our photos. They took the photos and then did their editing and then gave us a flash drive with our photos a little while later. As we went through the photos, we noticed that a lot of the photos they took weren’t on the flash drive. We asked if we could get the missing photos. They told us that the missing photos weren’t the best and that they didn’t want anything that wasn’t their best work out in the marketplace. Take their advice and only put your best work out there. This will mean that you need to do your best everyday. Take some time to rest. With all that is going on in the world, our brains and bodies are getting worn out faster dealing with the extra stresses and anxiety that have come with all that is happening. It is amazing what a nap can accomplish. Go to bed a little earlier and give your body and mind some time to rest. If you believe in a higher power, take some time to worship, express gratitude and serve your fellow human beings. Blessings as well as joy come from serving God and others. The events of the last few days have had me thinking a lot about a topic I really haven’t given much mental time to – race. The other night, I had a long conversation with my wife about what is going on in our country (and in other countries) as well as what our privilege is or is not. We are saddened to see violence, prejudice, hate, fear and unkindness so rampant. It was the first real conversation on the topic of race that I can recall having since high school.
I am a firm believer that hate is taught. I also believe that we all need more opportunities to love and be loved. We are past the point where “not hating” is enough. We must look for and take opportunities to love. I grew up in a lower middle-class suburban neighborhood of Salt Lake City. My childhood was spent running around the neighborhood playing with friends and returning home when the street lights turned on. I went to school with a predominantly White American group mixed with Latino American, Asian American, Polynesian American, African-American classmates and a few Native Americans. Most of my neighbors were white and therefore most of my friends were white. I had a few Latino and Vietnamese friends who lived near me that I would hang out with and play. I never have had close African American friends and I wish I did. I was never taught to hate but I am sure I could have taken more opportunities to love. Across the street from me was an African American couple. I waived to them. They waved back. They would support my school fundraisers and were kind. I don’t know their names and they stayed to themselves most of the time. That said, I guess I did too. They didn’t have any kids for me to play with so I didn’t spend time with them. They moved as I was entering my teen years and a white couple moved in. I missed an opportunity to love. For a couple years, our family hosted a wonderful Navajo young woman during the school year. She became a great friend and someone who I still call my sister. I took an opportunity to love. My aunt and uncle adopted two children from Mexico and I suddenly had two cousins my age to play with. I took an opportunity to love. I believe I went to the most ethnically diverse high school in my State. I honestly loved the cultural mix our school had. That said, I didn’t play sports so I didn’t hang out with the jocks that happened to be comprised of more African Americans and Polynesian Americans than Caucasians. I was friendly but not friends. I know I missed opportunities to love. I graduated high school, worked the summer and went to the local university in the Fall. That first year in college I was a number. I enjoyed my time as a volunteer Project Leader with the Bennion Center and classes at the Institute of Religion. That is where the positive memories of my freshman year came from. I was taking very full class loads to best make use of the limited scholarship money I had received so I didn’t spend much, if any, time socializing. I know I missed opportunities to love. I then went to Brazil for two years and fell in love with the people of Brazil. This was my first time out of America. While performing service, I met people from all over Brazil with varying degrees of skin tones. While some were white and some were black and many more the Latin American tones, I didn’t notice any overt racism but to say there wasn’t any would probably be a lie. I was given an opportunity to love and I took it. Upon my return, I went back to the University. My upper level classes were mostly filled with Caucasians and Asian Americans with a few Polynesians. We made friendships. I took opportunities to love but I know that our program wasn’t diverse enough. Entering the workforce, most of my jobs have lacked some diversity or a lot of diversity. There have been some Latinos, Asian Americans, Arab-Americans and African Americans in addition to the predominately white workforce in the companies I have had the opportunity to work with. I hope that each co-worker I have had the chance to rub shoulders with have felt my love for them. I am sure I could have taken more opportunities to love. In my life today, I have relatives and clients who are African American and my heart breaks for the pain and mistreatment that they and their families have had to endure by those who were taught to hate or by those who have not taken opportunities to love. I am not ignorant of my experiences or privilege compared to theirs. There is an open wound of racism that still festers in our communities that must be healed if we are to truly love one another. I have read much over the last few days, doing my best to avoid social media coverage, and have added additional material to my list to read in the near future trying to learn how I can support and take more opportunities to love them. I read this morning in “The Harvard Business Review” an article written by Laura Morgan Roberts and Ella F. Washington which described a few missteps in the racial discussion that we might make and should avoid as well as things we can do to show support those who suffer the impact of racism. The first misstep is keeping silent. It seems we are trained to default to silence rather than discussing race. We want to avoid conflict and being seen as prejudiced. As Desmond Tutu said. “If you are neutral in the situations of injustice, you have chosen the side of the oppressor.” We must speak up because silence is not enough. Based on the start of this blog post I have been silent for too long. I apologize and ask forgiveness. I have missed an opportunity to love. The second misstep is to become overly defensive. We all become defensive when our views, positions or advantages are challenged. We may begin to look to justify the mistreatment or we may focus instead on the improper looting or other behaviors rather than discussing the unjust act that lead people to the streets. “Openness means being able to listen to ideas that are outside one’s current mental models, being able to suspend judgment until after one has heard someone else’s idea.” (Warren Bennis) The third misstep is overgeneralizing. While similar groups of people have shared experiences, there is diversity within groups. We need to avoid generalizing groups or opinions. Allow individuals to share their unique experiences and honor that without having them put on the spot or asking them to speak on behalf of everyone in an identity group. After discussing three missteps we commonly make, the authors then move to things that I and the rest of us, should be doing to take meaningful action. The first is to acknowledge. Acknowledge any harm our friends of color have endured. Then begin a lifelong pursuit to learn about racism and the aggressions and micro-aggressions they have most likely faced. Give a space to allow anger, fear, disenchantment and disengagement. Then remember, it is not the job of a person of color to have to educate us about racism – we should learn on our own and have discussions to learn more. The second is to affirm. Affirm that they have a right to safety and personhood. Help them feel protected. Affirm that belief by replacing business leaders and elected leaders who fail to provide safety, protection and opportunities. Let them know their feelings matter and that you care, even if they don’t want to talk about what is going on. Finally, act. You can use whatever power or influence you have to effect change after some time spent critical thinking. Use words of understanding and encouragement. Engage. Speak up and practice anti-racism. Advocate for action in your workplace, community and city. Build a better world for us all. By acknowledging, affirming and acting we can practice loving. If we look for opportunities to love, we will find them. This has turned into a long post as I knew it would. It has allowed me to express my experiences and what I have started to learn and understand about the reality and consequences of racism. I pledge to seek opportunities to love. I will not remain silent when I see an injustice. I will use my influence to affect change. I know “not being racist” isn’t enough and I will work at becoming an anti-racist. A week and half ago, the Treasury and SBA released its highly anticipated Payroll Protection Program Loan Forgiveness Application. I considered writing about it last week but as there were rumors of additional guidance and potential changes in the works, I held off. Those rumors are still out there and there are two bills in Congress that would have impacts. I had promised a post about how to put out the flaming hot ball of tar you have been holding in the form of the PPP loan and so for now, as we are approaching the four week mark for some of the loans, let’s discuss forgiveness. The PPP Loan Forgiveness Application can be found at https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf Before you begin the application, you should gather the following information:
The forgiveness application starts with information about your business and your employee headcount and then asks you to list your compensation and eligible non-compensation costs. The sum of these costs is your potential forgivable loan amount before adjustments. The application then lists adjustments to the forgiveable amount which include a reduction if your average compensation per employee full time equivalent (FTE) was not at least 75% of the average compensation for the first three months of 2020. It also includes an adjustment if your FTE workforce was lower than during the first three months of 2020, subject to an exception for restoring FTE by June 30, 2020. Your PPP loan forgiveness amount is the lesser of your adjusted forgiveable amount, the total PPP loan amount or the total payroll costs divided by 0.75 (which is a representation of using 75% of the forgivable loan proceeds for payroll costs.). The Treasury continues to keep a list of frequently asked questions which provides a little more in depth information regarding certain scenarios. You may want to refer to them as well. They can be found at https://www.sba.gov/document/support--faq-lenders-borrowers The important takeaway from my review of the forgiveness application is to keep great records of the eligible expenses and supporting documents for each. The forgiveness application will be submitted by you to your lender and not the SBA which means that each lender may interpret forgiveness a little bit different from another lender, as we saw in the PPP loan application process. While absolutely possible for you to complete your PPP forgiveness application on your own, if you have any hesitations about doing it yourself, please hire your CPA to help you. We actually enjoy helping The US Treasury and Small Business Administration (SBA) have promised that all Paycheck Protection Program (PPP) Loans over $2 million that seek forgiveness will have the pleasure of an audit. While the size of the loan makes audits on loans over $2 million mandatory, there will be many others under the $2 million that will also have the audit experience. Are you ready? If you fail your PPP audit, part or all of your loan forgiveness may be in jeopardy in addition to prosecution by the Department of Justice under the False Claims Act. The audit and prosecution may not be the only worries. You may also be subject to investigations and reviews by the Pandemic Response Accountability Committee, Congressional Oversight Committee and the Special Inspector General for Pandemic Recovery. States may also jump on the bandwagon with their own enforcement initiatives. What is a borrower to do? Below are some steps you will want to consider regardless of your PPP loan size. First, if your loan is over $2 million or you are a publicly traded company, you will be audited so start your engines and prepare now. Second, regardless of your PPP loan size, prepare now. It will make the forgiveness process easier and you will be ready should the auditor choose you. Begin preparing your documents now. The support you prepare now and before an audit are considered to be much more persuasive than documents you prepare after the audit begins. Setting aside a little time to keep your records now will save a lot of time creating them after the fact. Organize yourself and your records. Keep receipts, reports and invoice documents organized. Third, document your analysis of your necessity to borrow loan funds to support your ongoing operations. Document your evidence as well. When you borrowed the PPP funds, you certified certain things including prior loans, the absence non-qualifying business activities, relationship with Congress and the SBA, current legal actions and obligations, and the big promises you made:
To the extent you have document and analyses to support your certifications, now is the time to gather them together. If your documents or analysis are currently missing, now is the time to create them. Judgement is required to certify that the loan request was necessary. Document your assumptions and project your revenue and expenses in times of normalcy and in this time of uncertainty. The analysis results and your supporting documents should support your certifications. If you have cash surpluses or savings for your business, be prepared to discuss why the cash alone would be insufficient to maintain operations and why the loan is needed. (Update - As of this morning 5/13/2020, the SBA has issued an additional response to their frequently asked questions (see question 46) where they have provided safe harbor for all PPP loans under $2 million in regards to determining that current economic uncertainty makes the loan request necessary to support ongoing operations. This is good new as it relieves a burden to prove certification for one of the elements for a large group of the PPP loans.) As part of this gathering process, take the time to assess the risk that your certifications may be found untrue or inaccurate. The court of public opinion has already ruled against larger companies who qualified for the loan under the program and were forced to return the funds for public relations reasons. The real courts will ultimately decide if the funds were necessary so do what you can to mitigate that risk in your documentation gathering process. Take the time to create a file of documents to support each certification you made on your application, including the ones you provided to the lender with your application (payroll run reports, payroll tax filings, etc.). Fourth, start thinking about loan forgiveness. We are still waiting for final guidance on loan forgiveness calculations (the hot flaming ball of tar mentioned in last week’s blog is still on fire) but you can start keeping meticulous records of how you use the funds. Keep payroll run reports. Gather your lease agreements and mortgage records. Keep copies of invoices and checks or bank EFT records. There should be supporting documents for each expense you plan and hope to have forgiven. You will also want to have supporting documentation to verify that your employee headcount and pay remained within the requirements for loan forgiveness. Fifth, if you have a loan over the $2 million threshold for a mandatory audit or are a public company, consider holding a trial run of an audit or a “mock audit” now to find the holes that you will need to fill before you have the real thing. As I tell my clients when they ask about an IRS audit, if you are prepared, have your documentation and support and haven’t done anything wrong then there is no need to fear being audited. That advice applies to the PPP loan audit too. Take the time now, before the audit, to prepare – keep accurate and adequate records, assess the risks and mitigate them, and keep moving forward. all"Forgive Them For They Know Not What They Do"
With the passage of the CARES act Congress gave the Small Business Administration (SBA) and the Treasury a whole bunch of money, which some think was not enough, to distribute to businesses in need of help to survive the COVID-19 impact on their business. Most of these funds were to encourage employers to retain employees and keep them employed and productive. One of the many programs that came out of these funds is the Payroll Protection Program or PPP. It provides a possibly forgiven loan of up to 10 weeks of average weekly payroll if used on payroll and some rent, utilities, and a few other expenses. There was a mad rush to apply for these loans due to the possible forgivable nature of them. Round One ended with many businesses receiving the loans and many more that did not. It included loans to larger small businesses that qualified under the program but were then later publicly shamed for having taken the loan because they had access to capital markets (How dare they apply for and get something that Congress said they could?). Many returned the funds for public relations purposes not for lack of need. Round Two ended with more small businesses receiving the loans and many more that did not. With the program, we were given some general guidelines around forgiveness but few specifics. Essentially, successful applicants have been handed a flaming ball of tar and told to hold on to it until they would be given information on how to put it out in the future. To date, we have not received the final guidelines as to how to calculate PPP loan forgiveness. We have been given a set of answers to frequently asked questions that grows by a question or two every couple days but not the final regulations. This has left me and thousands of other accountants starting every answer to a question about the PPP with “Under current understanding…” and ending it with “we will let you know more when we are given more.” So…under current understanding your PPP loan forgiveness will be: Amounts paid during the eight weeks after receiving your PPP funds for Payroll Expenses:
If Payroll Expenses as described above are equal to or greater than 75% of the total loan proceeds, then you may also include the following other covered expenses in your forgiveness calculation:
You must also retain your headcount and a few other conditions to have any of it forgiven. It will also be your responsibility to track and prove each expense you are seeking forgiveness for. Some are suggesting you need a separate bank account to hold these funds, but I don’t believe you do unless you need it to help you track the spend. Another catch is that under current understanding, the business expenses paid for with forgiven loan proceeds are not deductible meaning your taxable profits go up which also means not-tax free. (The Senate has introduced a bill to change this.) It is my opinion, humble or not, that if getting the PPP loan was difficult, getting it all forgiven may be even more difficult. I think there will be many PPP loan funds that remain as loans for a variety of reasons including you may not have been able to open your business for part of the eight weeks on record. If you are not a great record keeper, now would be a good time to reach out to your accountant and engage them to help you track what you will need for forgiveness. We will get back to you when we know more. |
PurposeThis blog allows you to experience the raw, gut wrenching drama of human conflict through accounting in each of its three stages: preparing to do battle, the thrill of victory and the agony of defeat. Archives
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