by NFS | Dec 29, 2020 | Archives, Blog Posts
At some point, most small business owners will visit a bank or other lending institution to borrow money. Understanding what your bank wants, and how to properly approach them, can mean the difference between getting a loan for expansion or scrambling to find cash from other sources.
Unfortunately, many business owners fall victim to several common, but potentially destructive myths regarding financing, such as:
- Lenders are eager to provide money to small businesses.
- Banks are willing sources of financing for start-up businesses.
- When it comes to seeking money, the company speaks for itself.
- A bank, is a bank, is a bank, and all banks are the same.
- Banks, especially large ones, do not need and do not want the business of a small firm.
Understand the Basic Principles of Banking
It’s vital to present yourself as a trustworthy businessperson, dependable enough to repay borrowed money and demonstrate that you understand the basic principles of banking. Your chances of receiving a loan will greatly improve if you can see your proposal through a banker’s eyes and appreciate the position that they are coming from.
Banks have a responsibility to government regulators, depositors, and the community in which they reside. While a bank’s cautious perspective may be irritating to a small business owner, it is necessary to keep the depositors’ money safe, the banking regulators happy, and the economic health of the community growing.
Each Banking Institution is Different
Banks differ in the types of financing they make available, interest rates charged, willingness to accept risk, staff expertise, services offered, and in their attitude toward small business loans.
Selection of a bank is essentially limited to your choices from the local community. Typically, banks outside of your area of business are not as anxious to make loans to your firm because of the higher costs of checking credit and of collecting the loan in the event of default.
Furthermore, a bank will typically not make business loans to any size business unless a checking account or money market account is maintained at that institution. Ultimately your task is to find a business-oriented bank that will provide the financial assistance, expertise, and services your business requires now and is likely to require in the future.
If you need assistance deciding which bank best suits your needs and provides the greatest value for your business operation, don’t hesitate to call the office.
Build Rapport
Building a favorable climate for a loan request should begin long before the funds are needed. The worst possible time to approach a new bank is when your business is in the throes of a financial crisis. Devote time and effort to building a background of information and goodwill with the bank you choose and get to know the loan officer you will be dealing with early on.
Bankers are essentially conservative lenders with an overriding concern for minimizing risk. Logic dictates that this is best accomplished by limiting loans to businesses they know and trust. One way to build rapport and establish trust is to take out small loans, repay them on schedule, and meet all requirements of the loan agreement in both letter and spirit. By doing so, you gain the banker’s trust and loyalty, and he or she will consider your business a valued customer and make it easier for you to obtain future financing.
Provide the Information Your Banker Needs to Lend You Money
Lending is the essence of the banking business and making mutually beneficial loans is as important to the success of the bank as it is to the small business. This means that understanding what information a loan officer seeks–and providing the evidence required to ease normal banking concerns–is the most effective approach to getting what is needed.
A sound loan proposal should contain information that expands on the following points:
- What is the specific purpose of the loan?
- Exactly how much money is required?
- What is the exact source of repayment for the loan?
- What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
- What alternative source of repayment is available if management’s plans fail?
- What business or personal assets, or both, are available to collateralize the loan?
- What evidence is available to substantiate the competence and ability of the management team?
Even a brief examination of these points suggests the need for you to do your homework before making a loan request because an experienced loan officer will ask probing questions about each of them. Failure to anticipate these questions or providing unacceptable answers is damaging evidence that you may not completely understand the business and/or are incapable of planning for your firm’s needs.
What to Do Before You Apply for a Loan
1. Write a Business Plan
Your loan request should be based on and accompanied by a complete business plan. This document is the single most important planning activity that you can perform. A business plan is more than a device for getting financing; it is the vehicle that makes you examine, evaluate, and plan for all aspects of your business. A business plan’s existence proves to your banker that you are doing all the right activities. Once you’ve put the plan together, write a two-page executive summary. You’ll need it if you are asked to send “a quick write-up.”
2. Have an accountant prepare historical financial statements.
You can’t talk about the future without accounting for your past. Internally generated statements are OK, but your bank wants the comfort of knowing an independent expert has verified the information. Also, you must understand your statement and be able to explain how your operation works and how your finances stand up to industry norms and standards.
3. Line up references.
Your banker may want to talk to your suppliers, customers, potential partners, or your team of professionals, among others. When a loan officer asks for permission to contact references, promptly answer with names and numbers; don’t leave him or her waiting for a week.
Walking into a bank and talking to a loan officer will always be something of a stressful situation. Preparation for and thorough understanding of this evaluation process is essential to minimize the stressful variables and optimize your potential to qualify for the funding you seek.
The advice and experience of a tax and accounting professional are invaluable. Don’t be shy about calling the office with any questions or to request a consultation.
by NFS | Dec 28, 2020 | Archives, Blog Posts, COVID
The U.S. Senate and House of Representatives overwhelmingly passed, and the President of the United States signed into law, the COVID-19 relief bill that provides stimulus payments to individuals, extends weekly unemployment benefits and provides more than $300 billion in aid for small businesses. Totaling over $900 billion, it succeeds the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief and Economic Security Act (CARES) to provide continued support during the COVID-19 health crisis and associated economic fallout.
The new bill is over 5,500 pages long and is quite similar to previously passed legislation which we invite you to read about on the
COVID-19 page on the NFS website. For your convenience, this email is to provide you with a high-level summary of the key highlights for both individuals and businesses as well as details about Paycheck Protection Program (PPP) loans for small businesses.
INDIVIDUALS
- Stimulus Checks: The legislation provides for economic impact payments of $600 for individuals with incomes up to $75,000 per year and $1,200 for married couples who make up to $150,000 per year, as well as a $600 payment for each child dependent. Eligibility and benefit levels would be based on 2019 income tax filings or 2018 tax data if 2019 information is unavailable.
- Unemployment Insurance: $120 billion has been allocated to provide workers receiving unemployment benefits a $300 per week supplement from December 26, 2020 until March 14, 2021. This bill extends the Pandemic Unemployment Assistance (PUA) program with expanded coverage to self-employed, gig workers and others in nontraditional employment, as well as the Pandemic Emergency Unemployment Compensation (PEUC) program, which provides additional weeks of federally funded unemployment benefits to individuals who exhaust their regular state benefits.
- Temporary Moratorium on Eviction Filings: The national eviction moratorium will extend through January 21, 2021 prohibiting landlords from initiating legal action to recover possession of a rental unit or to charge fees, penalties or other charges to the tenant related to nonpayment of rent.
BUSINESSES
Perhaps most important is the long-awaited funding of the second round of PPP loans for small businesses and forgiveness rule changes that are extremely favorable to borrowers including the specification that qualified business expenses paid with PPP funds are tax-deductible. This is fantastic news for PPP loan borrowers as it supersedes IRS guidance which stated that expenses paid with PPP funds were not deductible.
The bill also extends other business tax provisions including a credit to retain workers during COVID-19 related closures, changes to the tax treatment of business losses and delays in payroll tax payments which you can read about on our website. For purposes of this email, we will focus on the business stabilization fund, corresponding PPP loans and newly added provisions.
- Stabilization Fund: $325 billion in aid has been made available for small businesses struggling after nine months of pandemic-related economic hardships. The bill provides more than $284 billion to the U.S. Small Business Association (SBA) for a second round of PPP loan funding to assist small businesses, self-employed individuals and non-profit organizations during the COVID-19 pandemic (see more information below) and allocates another $20 billion to provide EIDL grants to businesses in low-income communities. Additionally, live venues, independent movie theaters and cultural institutions that have closed will have access to $15 billion in dedicated funding with $12 billion set aside to help businesses in low-income and minority communities.
- Meals & Entertainment Deduction: The bill temporarily allows a 100% business expense deduction for meals (rather than the current 50%) as long as the expense is for food or beverages provided by a restaurant and is paid or incurred after December 31, 2020 and before January 1, 2023.
- Extension of FFCRA Credits: Under the FFCRA, which went into effect on April 1, 2020, certain small employers were required to pay up to 10 weeks of qualified family leave when an adult couldn’t work because a dependent child was without school or care, and up to 2 weeks of sick leave for a variety of COVID-related issues. In turn, the employer would receive a fully refundable dollar for dollar payroll tax credit equal to the wages paid. This credit was set to expire on December 31, 2020 but has been extended through March 31, 2021.
- Extension of Employee Retention Credits (ERC): The ERC is extended to July 1, 2021. Businesses may now take the ERC and the PPP as employers who receive a PPP loan may still qualify for ERC on wages that are not paid for with forgiven PPP funds. For the first two quarters of 2021 (January 1 – June 30), the following changes apply:
- The credit percentage is increased from 50% to 70% of qualified wages.
-
- Qualified wages are increased from $10,000 in total per employee to $10,000 per quarter, per employee.
- Qualified wage restrictions apply at 500 employees, rather than 100.
- Drop in gross receipts requirement decreases from 50% to 20% over a prior quarter.
PPP2 LOAN SPECIFICS
ELIGIBILTY
- First-Time Borrowers: If a small business missed the first round of PPP funding, they will be eligible for a loan under PPP2 if they have 300 or fewer employees, making them eligible for other SBA loans. This includes sole proprietors, independent contractors and eligible, self-employed individuals. Non-profit organizations, including churches, are also eligible as are accommodation and food service operations (those with NAICS codes starting with 72) with fewer than 300 employees per physical location.
- Second-Time Borrowers (“Second Draw Loans”): Businesses who received a PPP loan during the first round of funding (PPP1) are eligible for another loan under PPP2 if they can prove to be “hardest hit” by the COVID-19 pandemic. These businesses must have 300 or fewer employees, be able to show a decrease in revenue of 25% or more in any quarter in 2020 compared to the same quarter in 2019 AND must have used or will use the full amount of their first PPP loan. The borrower can select the most appropriate quarter, and both PPP and EIDL funds from the SBA are not included in the calculation of revenue. Second-time borrowers can expect a tiered system, similar to the first round of funding, whereby certain loan amounts will only require self-certification of loan necessity (i.e. loans under $150,000 could be self-certified) while others will have documentation requirements. All loans will be subject to review by the Small Business Administration.
LOAN OVERVIEW
- Loan Amount: The maximum loan amount for a PPP2 loan is $2 million and is calculated by multiplying average total monthly payroll costs in the year prior to the loan or the calendar year by 2.5. In other words, the second round of PPP loans is meant to fund 2.5 months of payroll expenses. PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum loan amount.
- Loan Forgiveness: Qualified business expenses eligible for loan forgiveness are consistent with PPP1 and include payroll costs, covered mortgage interest, rent and utility payments with a 60/40 allocation between payroll and non-payroll expenses. They also include worker protection expenditures and facility modification costs to comply with COVID-19 federal health and safety guidelines, supplier costs essential to the borrower’s current operations and operating costs related to software or cloud computing services. Both first-time and second draw loans are eligible for forgiveness and must be spent within either 8 weeks or 24 weeks of loan origination. The legislation is simplifying and accelerating loan forgiveness for loan amounts of $150,000 or less by requiring borrowers to sign and submit a one-page form that attests to compliance with PPP requirements. The SBA must create the simplified forgiveness application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
- Tax Deductibility for PPP Expenses: The new bill specifies that qualified business expenses paid with forgiven PPP loans are tax-deductible. This supersedes IRS guidance that such expenses could not be deducted and brings the policy in line with what the American Institute of Certified Public Accountants (AICPA) and hundreds of other business associations have argued was Congress’s intent when it created the original PPP as part of the $2 trillion CARES Act. The COVID-19 relief bill clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided”. This means that both PPP loans and EIDL grants are not considered taxable income. Additionally, EIDL grants no longer reduce PPP loan forgiveness by the grant amount. Please note the deductibility guidance noted above relates to Federal income. We are awaiting guidance from Massachusetts (and most other states) regarding the deductibility of PPP loan forgiveness at the state level.
In summary, the new stimulus bill provides welcome tax relief to both businesses and individuals. While the bill has been passed by Congress and signed into law by the President, the SBA and U.S. Department of the Treasury are now tasked with providing interpretive guidance and forms for the new forgiveness rules, as well as loan applications and guidelines for second draw PPP loan borrowers. They will need time to translate the bill and will release information as they do. As always, we will keep you updated along the way. In the meantime, we recommend businesses that believe they may be eligible for a PPP2 loan should begin to prepare in order to expedite the application when it is released by the SBA.
As always, the NFS team is here to answer any additional questions you may have. We invite you to call the office at (800) 560-4637 to discuss your individual situation. And be sure to visit the
COVID-19 Update page on the QRGA website and follow us on
Facebook and
LinkedIn to stay up to date on news breaking information regarding the new stimulus bill and much, much more.
by NFS | Dec 28, 2020 | Archives, Blog Posts
Federal law requires most employers to withhold federal taxes from their employees’ wages. Whether you’re a small business owner who’s just starting or one who has been in business a while and is ready to hire an employee or two, here are five things you should know about withholding, reporting, and paying employment taxes.
1. Federal Income Tax. Small businesses first need to figure out how much tax to withhold. Small business employers can better understand the process by starting with an employee’s Form W-4 and the withholding tables described in Publication 15, Employer’s Tax Guide. Please call if you need help understanding withholding tables.
2. Social Security and Medicare Taxes. Most employers also withhold social security and Medicare taxes from employees’ wages and deposit them along with the employers’ matching share. In 2013, employers became responsible for withholding the Additional Medicare Tax on wages that exceed a threshold amount as well. There is no employer match for the Additional Medicare Tax, and certain types of wages and compensation are not subject to withholding.
3. Federal Unemployment (FUTA) Tax. Employers report and pay FUTA tax separately from other taxes. Employees do not pay this tax or have it withheld from their pay. Businesses pay FUTA taxes from their own funds.
4. Depositing Employment Taxes. Generally, employers pay employment taxes by making federal tax deposits through the Electronic Federal Tax Payment System (EFTPS). The amount of taxes withheld during a prior one-year period determines when to make the deposits. Publication 3151-A, The ABCs of FTDs: Resource Guide for Understanding Federal Tax Deposits and the IRS Tax Calendar for Businesses and Self-Employed are helpful tools.
Failure to make a timely deposit can mean being subject to a failure-to-deposit penalty of up to 15 percent. But the penalty can be waived if an employer has a history of filing required returns and making tax payments on time. Penalty relief is available, however. Please call the office for more information.
5. Reporting Employment Taxes. Generally, employers report wages and compensation paid to an employee by filing the required forms with the IRS. E-filing Forms 940, 941, 943, 944, and 945 is an easy, secure, and accurate way to file employment tax forms. Employers filing quarterly tax returns with an estimated total of $1,000 or less for the calendar year may now request to file Form 944,Employer’s Annual Federal Tax Return once a year instead. At the end of the year, the employer must provide employees with Form W-2, Wage and Tax Statement, to report wages, tips, and other compensation. Small businesses file Forms W-2 and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration and if required, state or local tax departments.
Questions about payroll taxes?
If you have any questions about payroll taxes, please call.
by NFS | Dec 24, 2020 | Archives, Blog Posts
Your friends at Northeast Financial Strategies want you to know how much your loyalty and friendship are appreciated this year and in all years past. At the holiday season, our thoughts turn gratefully to those who have made our success possible. It is in this spirit we say…
THANK YOU and Best Wishes for the holidays and a Happy New Year!
by NFS | Dec 23, 2020 | Archives, Blog Posts
In most cases, gains from sales are taxable. But did you know that if you sell your home, you may not have to pay taxes? Here are ten facts to keep in mind if you sell your home this year.
1. Exclusion of Gain. You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.
2. Exceptions May Apply. There are exceptions to the ownership, use, and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more information about these exceptions, please call the office.
3. Exclusion Limit. The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
4. May Not Need to Report Sale. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
5. When You Must Report the Sale. You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds from Real Estate Transactions. If you report the sale, you may need to pay the Net Investment Income Tax. Please call the office for assistance on this topic.
6. Exclusion Frequency Limit. Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.
7. Only a Main Home Qualifies. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
8. First-time Homebuyer Credit. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, please call.
9. Home Sold at a Loss. If you sell your main home at a loss, you can’t deduct the loss on your tax return.
10. Report Your Address Change. After you sell your home and move, update your address with the IRS. To do this, file Form 8822, Change of Address. You can find the address to send it to in the form’s instructions on page two. If you purchase health insurance through the Health Insurance Marketplace, you should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.
Questions? Help is just a phone call away.
