While nothing could have prepared businesses for COVID-19, here’s what they need to do now to adapt and prosper post-pandemic.
No business could have been prepared for what hit them in 2020.
Even businesses who thought they were prepared for anything likely didn’t factor a global pandemic into their plans. So, moving forward, in what areas will companies feel the greatest impact from an accounting or financial planning perspective as they adjust to a never-before-seen “be prepared” approach?
“The pandemic amplified the need for flexibility and adaptability — flexibility to capitalize on opportunities and adaptability to manage competitive challenges,” says Mark R. Dreher, CPA, managing partner at Wallace Plese + Dreher. “Be it the physical workplace or staffing, businesses should focus on scaling upward or downward. Challenges will be accessibility to products and services, without the obligations of control, and minimizing inventories, minus large facilities and taking risks of ownership.”
Experts say valuation may be one of the biggest economic casualties of the pandemic, and it’s an important one because valuation is used for many purposes by banks, lenders, accountants and others.
“For accounting and financial reporting, valuation is used to address the carrying value of assets including intangible assets and goodwill,” says Chuck McLane, senior managing director at CBIZ & MHM. “Impairment of assets involves some additional accounting considerations, and could also impact the overall view of the company’s valuation. Many times valuations are based on trailing 12-month data. The most recent data is going to be skewed in a negative manner. However, this may be good for transfer of wealth in succession planning.”
David J. Cohen and CariAnn J. Todd of BeachFleischman say that while the effects of the pandemic will vary by business, the challenge for most companies is managing their liabilities, such as payments owed to vendors, suppliers, and lenders.
“For many, sales will slowly ramp up and many customers take 60-90 days to pay, while creditors don’t extend the same terms,” Cohen and Todd say. “To mitigate that concern, companies should negotiate better terms and utilize bank lines of credit to get through this cash flow issue.”
You down with PPP?
Many companies received help with cash-flow issues brought on by the pandemic in the form of the Paycheck Protection Program (PPP), a $669-billion business loan program established by the Coronavirus Aid, Relief, and Economic Security Act to help businesses continue to pay their workers and expenses through the tough times brought on by the pandemic.
“The biggest implication of the PPP will be whether or not the forgiven funds are taxable,” Cohen and Todd say. “Currently, the forgiven amount is nontaxable. However, the expenses that the forgiven funds were used for are nondeductible. Congress has expressed frustration with the IRS for taking this position since the CARES Act was very clear that forgiven amounts were nontaxable.”
While we wait for a resolution, it is challenging for companies and owners of pass-through entities to determine what estimated tax payments they should be making each quarter.
“A secondary concern for businesses that have annual financial statements prepared in accordance with GAAP (Generally Accepted Accounting Principles) will be how to account for the forgiveness,” Cohen and Todd say. “There is currently no GAAP that specifically addresses this type of income for a for-profit enterprise. Compound that with not knowing how long it will take for the lenders and the SBA to approve forgiveness applications with the pending audits for recipients of PPP funds in excess of $2 million, and preparing financial statements and related disclosures may be challenging for 2020.”
To avoid further complication, Shayne R. Neuwirth, CPA, stresses that proper record keeping and accounting is a necessity for businesses to be eligible to have the PPP loan forgiven.
“Traditionally companies would be able to deduct the cost of payroll and rent from their income, however any PPP funds that were forgiven because they were used for wages, rent or utilities is no longer allowed as a business deduction. Therefore, a business’ tax liability may be greater than expected based on past years.”
There are tax benefits
While PPP loans may increase a business’ tax liability, there are financial benefits coming on the heels of the pandemic that companies can utilize to their advantage.
“Under the CARES ACT, there are benefits for businesses and individual taxpayers,” Neuwirth says. “The Employee Retention Credit is a fully refundable tax credit for eligible employers which is equal to 50 percent of qualified wages paid to employees.”
Employers also have the ability to postpone paying the employer share of the Social Security tax, which is 6.2 percent of wages.”
There are also tax benefits for some businesses to generate additional cash by electing bonus depreciation on leasehold improvements acquired in 2018 and 2019, rather than depreciating assets over 39 years, according to Dreher.
“This reduces taxes on earnings from last year, which may not have been paid or used to obtain overpayment refunds,” he says. “If losses are generated due to bonus depreciation, the loss can now be carried back for five years to obtain refunds of taxes paid in prior years. For businesses with revenues over $25 million, there is flexibility deducting all of their interest expense in 2020.”
Another significant benefit that came from the COVID-19 pandemic is the tax change related to the use of net operating losses, McLane says.
“Previously, companies would only be allowed to use net operating losses to offset future income,” he says. “The recent rule change will allow the net operating losses to be carried backward to recover taxes previously paid. The carry-back period is three years. This could have a positive impact on a company’s cash flow if they had previous taxable income that could be offset by current losses.”
Where to go from here?
While no business could have foreseen a global pandemic tossing a spike strip onto what was previously a smooth economic road, there are things experts say companies should be doing coming out of the pandemic that could help them down the road.
Internal controls: “Companies may want to take a look at their internal controls and segregation of duties within their accounting function,” Cohen and Todd say. “What happened to those systems when everyone, or even only a few people, had to work remotely? Formulating a system that works, despite the physical location of the individuals involved, is necessary to ensure the company is protected from exposure to fraud.”
Technology: “Time management and digital technologies will be critical,” Dreher says. “Businesses should invest in cloud-based systems connecting businesses with financial professionals that will maintain real-time records and automate processes, without challenging existing IT hardware and expertise of the business. This will allow businesses to have information they need at critical times without expanding their payroll.”
Tax fund: “Start or maintain separate accounts to hold funds for when you need them or for the next rainy day, which hopefully won’t come too soon,” says Ruth Urban, president and CEO, On the Money. “A tax fund might be the first account for your business. Put up to 15 percent of your revenue there to cover estimated and 2020 income taxes so you are ready. The next account could be a game-changer for your future: Setting up a separate account for predetermined profit. It will help you mentally see why you are working so hard, and at the same time, provide some peace of mind by having a cushion in future downturns.”
Cybersecurity: “When people left their offices, they lost access to key information and data, especially paper files,” McLane says. “It is important for companies to develop systems, including accounting systems that are cloud-based and accessible from anywhere, to ensure employees and clients have undisrupted access. Security of that sensitive information is also key. With cloud-based systems and the inherent cyber risks that come with cloud access, information security protocols should be top of mind.”
Record keeping: “During these uncertain times it’s more important than ever to keep accurate, relevant and reliable financial records,” Neuwirth says. “Businesses should be aware of each stream of revenue and its associated direct costs to determine profitability. More importantly is understanding expenses so you can eliminate redundancies and increase cash flow, which will allow businesses to adapt to uncertain market conditions and remain not only operational but profitable.”
If there is one thing the pandemic taught us, it’s that business owners need to be agile and ready to adjust their business model to respond to sudden market changes, Neuwirth says. Moving forward, they should have contingency plans and diverse income streams to allow them to continue to operate under unconventional economic conditions, including virtual workplaces and online marketing and sales infrastructure.
“There is a quote by Heraclitus: ‘The only constant in life is change,’” Urban says. “Hopefully, surviving businesses will take this to heart based on the experience with COVID-19. There is no downside in being caught up and prepared.”
What should the new ‘be prepared’ approach look like post-pandemic?
From an accounting and finance perspective, here’s what experts say he new ‘be prepared’ approach should look like for companies post-pandemic:
Mark R. Dreher, CPA, managing partner, Wallace Plese + Dreher: “Businesses should embrace automation, seek opportunities to reduce facility commitments, and evaluate staffing that can be performed by specialized services. Our Client Accounting Services provides a blended model of traditional accounting and cloud-based automated processes for accounts payable, cash management, general ledger and financial reporting, and analysis. Product specialists offer business coaching and advice. Our services reduce business space, provide continuous, real-time data, and accurate information for decision-making.”
Chuck McLane, senior managing director, CBIZ & MHM: “The ‘be prepared’ approach to anything requires advanced planning. Companies should take the opportunity to document their thought processes related to sudden change. This means that they should be thinking about appropriate communication protocols related to their teams both internally and externally. Communication with employees, suppliers, vendors and customers is critically important. Many companies lost the ability to communicate with these key groups or did not have a process in place to develop and deliver messages to these key groups.”
David J. Cohen, CPA; and CariAnn J. Todd, CPA; BeachFleischman: “We were due for a recession as it’s part of the normal business cycle and while no one foresaw the sudden loss of all revenue in a matter of days, it emphasized the need for all businesses to maintain reserves and have low levels of debt where possible. By nature, many of us live beyond our means and it’s very painful when there is zero income but lots of debt. Fortunately, many mortgage lenders and landlords offered forbearance programs, but most were deferrals and not abatement. I’d also suggest that businesses establish more than one banking relationship as we saw first-hand that their long- established connections were often of little help when applying for the PPP loan. Lastly, many companies realized the strength of having great tax, legal, and insurance advisors when they needed them the most.”
Shayne R. Neuwirth, CPA: “Business owners will need to be able to be agile and ready to adjust their business model to respond to sudden market changes. Companies should consider having higher cash reserves to withstand variations in business volume. They should have contingency plans and diverse income streams to allow them to continue to operate under unconventional economic conditions, including virtual workplaces and online marketing and sales infrastructure.”
Ruth Uban, president and CEO, On the Money: “A new “be prepared” approach should involve a focus on cash flow. Many business owners review their income statements and balance sheets and stop there. Cash flow is just as important, if not more so. This means proactively evaluating where to reduce or increase cash. Companies should also consider options such as canceling unnecessary expenses (both business and personal) and renegotiating terms with one-time/recurring overhead expenses as well as purchases from suppliers.”