Expert: Plan smart to mitigate impacts of COVID-19 next year

Rehmann adviser shares tips on end-of-year tax and business strategies as pandemic stretches on.
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John Pridnia Courtesy Rehmann

Now that most of his business clients have successfully navigated the Paycheck Protection Program and taken advantage of stimulus funding options available to them, a local Rehmann expert is encouraging them to look ahead at additional strategies to mitigate the impacts of COVID-19 on their business the rest of this year and into 2021.

John Pridnia — a regional managing principal and advisory and tax services director for Rehmann in West Michigan — spoke to the Business Journal recently about the strategic questions business owners should be asking themselves about the future of their company in light of the fact that there’s not currently an end in sight for the current health crisis and resulting economic downturn.

Pridnia was one of the firm’s lead advisers for managing clients’ PPP loan and other CARES Act stimulus program applications at the beginning of the crisis, when Small Business Administration guidance on the Treasury programs was lacking and/or constantly evolving, and business owners were mired in questions and misinformation.

He said the firm was proactive in advising clients on how each course of action in their individual circumstances could interplay with another in terms of funding eligibility and tax liability ramifications. Now that “significant” levels of guidance and answers have been provided by the SBA on the PPP loan forgiveness component — although more is yet to come — “we feel pretty comfortable that (our clients) made the right choices, at least as it related to them in their specific fact pattern,” Pridnia said.

Now, Pridnia’s attention is shifting toward advising clients on what to do as they look ahead to 2021.

“What does the rest of the year mean now that you’ve got your money, you spent your money, and you’re getting ready to go through the forgiveness application? What are the various components of the money that you got through stimulus, and what is the best way to time or strategize the forgiveness process so that you have the opportunity to maximize the best cash flow after tax that is possible?” he said.

Tax strategy

The first thing Pridnia noted is that as the CARES Act law currently stands, PPP funds are a loan until forgiven and a tax-free grant once forgiven, which means that the funds are nondeductible. Although members of Congress have said they want to change the law to allow it to be a grant and allow businesses to deduct their expenses, Pridnia said he has low confidence that a vote on potential legislation to that effect will happen before the election or even before the end of the year, which means that businesses could be facing a huge hit to their operating budgets if they receive forgiveness in 2020.

“Right now, what we know is if you’ve got tax-free income and nondeductible dollars, that’s a big tax cashflow hit in the year that it gets forgiven,” Pridnia said.

With that in mind, the firm is talking to small business customers about whether to go forward with or hold off on completing and sending their loan forgiveness applications to their banks.

“We’re talking a lot with customers on how, if you submit your application right now, and the bank gets to it pretty quickly and they get it forgiven, and it gets done by Dec. 31, your (Tax Day) — if it’s a small business, usually it’s the individual that pays the tax — (come April 15) you’re going to owe a lot of tax money. If your business kind of just churned along, but because the PPP money is all tax free, and all those deductions are gone, you’re going to have a pretty big tax bill on April 15, 2021, and all the money is gone. So, you’ve got a big tax bill and no cash sitting in the coffers waiting to spend,” Pridnia said.

“But if you could wait until, let’s say, Nov. 15 or Dec. 1 to submit your application, and you’re reasonably assured that it’s going to take them longer than four, five, six weeks — probably closer to 60 days or 90 days — to process that application and grant you forgiveness, at the end of 2020, this calendar year, you’re going to have only a loan on the books that hasn’t been forgiven, so you get to deduct all of your expenses and you push that tax liability into 2021, meaning you don’t have to pay the tax until April 15, 2022.”

He said if Congress changes the law to allow deductibility, probably the worst-case scenario for businesses that don’t get their loan forgiveness applications approved until after Jan. 1, 2021 is deferring receiving their deductions for one year. On the other hand, he said that could still work out for the best if tax rates rise in 2021, because the deduction would essentially be worth more the following year.

“If my crystal ball was clear enough, I could tell them exactly what to do,” he said, but noted there are too many moving parts to determine infallible answers.

He said other strategic tax planning decisions companies could make include boosting research and development activities to qualify for those tax credits; using expensing elections and bonus depreciations to increase deductible expenses and therefore reduce tax liability; claiming employee retention credits; and seeking out federal funding such as location-based grants that aren’t necessarily tax-related but can provide additional relief.

Business strategy

Pridnia said businesses also should take the time as the end of the year approaches to assess what did and didn’t work as they grappled with COVID-19. He said answers will only emerge once employers start asking themselves tough questions.

“What are your challenges as a business? Is it employee issues? Do you have employees who are scared to come back to work, can’t come back to work, or is unemployment paying them too much money, so they don’t want to come back to work? Have you experienced a change in your business model, the way you do business? Is there an opportunity for you to look at your business differently as you move forward? What did we learn from the last six months of COVID?” he said.

“During your COVID time, did you identify other external sources, whether it be logistics, supply chain, suppliers, partners, consultants or third parties — whatever it is — did you find a different team that’s going to help you understand you as a better operational business as you move forward?”

Pridnia said most businesses, especially in the manufacturing sector, are finding the workforce piece to be the biggest struggle.

“How do they operate? Do they just raise their compensation rates? Do they pay some hardship bonuses, or COVID bonuses, as they’ve been called? Do they have to better leverage technologies? How did it impact your productivity? All your metrics and all your operational dashboards are all out of whack, whether it be one way or the other, so it makes it really hard for that business owner to manage a process that is so different than anything he or she has ever seen in the past,” he said.

“And then the bigger advisory question is, ‘How do you take that knowledge now and make a better future for you and your associates?’ …

“How do you overcome a business disruption that has taken eight months of your business operations out of the picture? Is there going to be a rubber-band effect when it comes back — if it comes back — do you have to really reconfigure your entire business model? Is there anything that you looked at and you thought you had under control and all of a sudden you realized you didn’t, and how did you adapt to it? Those are the kinds of conceptual, advisory things that are not tax-related, not really financially related, but so important in getting them to look ahead. We weathered the storm, we hopefully got our PPP, and we’re dealing with the tax stuff — now that that’s all behind us, let’s focus on what are we going to do to leverage what we learned in 2021 and forward.”

As to how clients are faring, Pridnia said it depends on the type of organization. Distributors have already pivoted to focus on what their customers are looking for, as far as PPE; health facilities are seeing a huge wave of new expenses in stocking PPE as they experience the influx of elective services being rescheduled; manufacturers are struggling to maintain productivity while bleeding talent; and restaurants are trying to find a balance between takeout and dine-in at 50% capacity while keeping employees safe and happy.

He said his role as a business adviser is to keep brokering information for clients in all industries about the various options that can be taken advantage of and strategies that can be changed day to day.

One silver lining of the madness may be that companies that do survive will emerge stronger, leaner and more confident, he said, with a new set of product offerings and a new focus. Some companies will find themselves shedding expenses as they transition to remote work and exit or downsize their building footprint, which could cause the construction and real estate industries to shift away from a commercial focus toward residential during an historic affordable housing crisis.

Other businesses may find themselves at a crossroads and ready to sell, and for those companies that are adapting well, it may be a good time to acquire.

And still others may want to look at Chapter 11 or Chapter 13 bankruptcy, liquidation or restructuring so they don’t lose everything.

Pridnia said much like during the Great Recession, he finds it incredibly rewarding to help clients through this crisis so they don’t have to take out a second mortgage on their home just to survive.

“You’re working 24/7 and trying to keep up, but it’s only for a period of time, and I know it’s going to get back to normal. If you can help your customers and all their employees still be in the game at the end of the day, what more can you ask?”

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