Preferred Payments Company
Meridian Leasing Corporation
Lease Corporation of America
Scott Equipment Company
W.W. Cannon LLC
PNC Financial Services Group
lease process
Key Equipment Finanace
Hylant Group
Greater Bay Bancorp
G E Capital Remarketing Group
Wells Fargo Financial Leasing
Dolphin Capital
Direct Capital Corporation
IRS issues revenue rulings on PPP Expense Deductibility
Since May, when the IRS published Revenue Ruling 2020-32, indicating that the expenses paid with PPP loan proceeds would be non-deductible, there have been many unanswered questions on how the IRS intends to approach companies who may have received PPP loans and either did not apply for or did not receive their forgiveness before the end of their tax year. Given that many organizations will not know the fate of their forgiveness until 2021, it was unclear whether companies should wait to file their 2020 tax returns until their forgiveness is known, amend returns that might already have been filed with deductible expenses, or just pick up income in 2021 under the tax benefit rule once the forgiveness was granted. IRS Clarifies their Position On November 18, the IRS issued Revenue Rulings 2020-27 and 2020-51 to clarify their position – and it isn’t taxpayer-friendly. The IRS is essentially taking the position that taxpayers should be reducing the deductible expenses “in the taxable year in which the expenses were paid or incurred if, at the end of the taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan. Even if the taxpayer has not submitted an application for forgiveness” by the end of the year. The IRS cites cases where they have prevailed in disallowing deductions that were paid with the expectation of being reimbursed in subsequent years. And they also address cases where the tax benefit rule was applied, observing that the rule was applied where deductions were taken based on assumptions that an event in a subsequent year proved them erroneous. Instances “unforeseen at the time of an earlier deduction” permit taxpayers to pick up income in the subsequent year for the previously allowed expenses. The IRS contends that PPP forgiveness is not a situation to which the tax-benefit rule should apply, as covered loan recipients have been provided with “clear and readily accessible guidance to apply for and receive covered loan forgiveness.” (*stop laughing*) Thus, under Section 265, the IRS reasons that the otherwise deductible expenses from PPP proceeds are disallowed because the taxpayer has knowledge of the “amount of its eligible expense that qualified for reimbursement, in the form of covered loan forgiveness”, and has a “reasonable expectation of reimbursement.” So, what happens if your “reasonable expectation of reimbursement” ends up being more or less than the amount of forgiveness that you actually receive? That is where 2020-51 steps in. Put simply, if you don’t take deductions in 2020 for covered PPP expenses on the expectation that they will be reimbursed at forgiveness, and you don’t end up receiving that forgiveness, the IRS will allow you to either take those deductions on a 2021 return or go back and amend a previously filed 2020 return. The other question is: what happens if you have expenses that you expect to be forgiven, you extend the filing date of your 2020 return, and get less than 100% forgiveness decision before you file your 2020 return? The IRS provides a “safe harbor” in 2020-51 providing that taxpayers can deduct expenses paid with PPP funds if: The taxpayer has covered expenses in 2020 it expects to be forgiven, They submit, or intend to submit, in a subsequent year, a forgiveness application, AND In the subsequent year, part or all of the covered loan is denied forgiveness. What is Not Addressed? Even with these latest revenue rulings, there are issues still not addressed leaving open-ended questions for many of us. The IRS didn’t address how the disallowed expenses should be allocated. If you have a PPP loan of $100,000 and spent $100,000 on wages, $25,000 on rent, and $10,000 on utilities, what expenses should be reduced? All the wages? A proportionate share of each? How the forgiveness is allocated could have a significant impact for taxpayers in a QBI calculation (wages) or in multi-factor state apportionment (rent, wages) The IRS also didn’t address how a sole proprietor (Schedule C) taxpayer should treat their forgiveness. A sole proprietor that doesn’t have employees is granted forgiveness based on his/her “owner compensation replacement” along with other rent and utility expenses. There isn’t any payroll expense to reduce, so once rent and utility expenses are reduced to zero, what happens to the rest of the forgiven PPP loan? Despite the shortcomings of the rulings, the guidance should provide some amount of clarity to the IRS’s position as taxpayers approach their year-end planning. Even though we are all not-so-secretly hoping for legislative action that would make PPP funded expenses deductible and negate all of the machinations that it has created to this point.
Your plan of attack
Now that we are in the Fall of this wonderful 2020, I thought I would address planning for 2021. But sitting here 35 days before the election I find myself wondering how to address the topic I planned on covering. Considering the uncertainty on many fronts including the election, the COVID-19 mess, forthcoming stimulus programs, the rising government debt, interaction with China, mystery surrounding GDP growth, and further unrest carrying over into next year. Let us face it, this is crazy and something 99% of us never had to face before. Many of you with substantial distribution customers may find 2020 less disturbing than others. These customers may have even seen substantial growth if they play in the digital distribution business, leading to increased demand for material handling products and services. A win-win. What also helped across the board were the PPP funds and other stimulus programs that kept consumer spending at meaningful levels, which in turn kept these digital warehouse companies busy along with all other business entities that were exempt from closing. A second stimulus program is in the works as I sit here today, but one that will be for a smaller amount compared to the first which eventually could slow consumer spending, lower GDP, and thus cause those distribution companies that were at 100% capacity to slow down in Q4 and probably in Q1 of 2021. And If this slowdown turns into a recession in late 2020 or 2021 you can expect decreases in revenue and potential collection problems that could impact cash flow. The timing of these potential occurrences being the 800 lb. gorilla in the room. So where do we start with your Plan of Attack for 2021? Make an honest assessment of where you stand so far in 2020. NO BS ALLOWED. Do the same for Q4 2020. Consider tax planning and how it can help with current and future cashflow. Time is running out regarding the 100% Bonus and Sec 179. See Steve Pierson’s article in last month’s issue. Cash flow is still king. Not only breakeven cash flow but cash flow to cover debt service and bank covenants. Produce conservative revenue budgets thinking there will be a slowdown within the next six months. Adjust expenses to meet cashflow requirements using conservative revenue estimates. PUT EVERY EXPENSE ON THE TABLE FOR REDUCTION including payroll, related party contracts, and discretionary expenditures. Personally, contact every major customer to get their input regarding the balance of 20 and the full year 2021. Pay particular attention to their budgets for parts and service. Avoid additional debt from any source. Stay in touch with our OEM’s and other dealers to see how things are going and what they are doing to meet cashflow requirements. Investigate how technology can help reduce internal costs or reduce customer costs. Stay out of trouble with your banks. Understand your loan agreements. Use sensitivity analysis to guide the execution of your Plan of Attack. See what revenue silos are going to deliver the highest profits and cashflow. Keep your eyes open for opportunities, especially if you find yourself meeting your goals. Take on weak competitors who have less control of their business. Do not give up on marketing and sales programs. Be in constant touch with existing as well as potential customers. GET YOUR PLAN DRAFTED ASAP. GET HELP IF YOU NEED IT. Thinking ahead beyond 20 and 21 our total government and personal debt loads along with increases in money supply are sure to cause both overall lower GDP growth and inflation. It is the “when” we cannot currently pin down, but it is out there to impact the future. Economists I follow are talking anywhere from $40-50 Trillion of government, business, and consumer debt. I believe the more you borrow the less you can spend or buy going forward. Said another way, debt brings future revenues forward, meaning less revenues in future years. Many of you may have experienced this phenomenon in your own business when you find that adding more debt is not feasible even though the reason for taking on the debt would increase revenues. In short, the more you owe the less flexibility you have in making financial decisions. Debt increases along with a slowdown = potential tax increases at all levels. But increasing taxes during a recession only makes the recession worse. As I said earlier THIS ENTIRE SITUATION IS CRAZY AND REQUIRES MANAGEMENT TO PLAN AND EXECUTE FOR POSITIVE CASHFLOW, not only for 20-21 and beyond. To me, it looks like we will be constantly looking over our shoulder to what is coming at us. Current financial setbacks have taken three to five years to correct themselves. This one will be no different and require constant revision of your PLAN OF ATTACK for the next few years. Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry
Status report, please
Well, how is it going out there? You where you think you were going to be? Are customers still buying at your best guess rate considering COVID-19? Even though customers are still buying, how much longer can that go on considering shortages of parts and materials. Are you going to survive the PPP forgiveness test? Did you include the “forgiveness” in your income tax estimate for the current year? Remember you have one last chance to use the Bonus in 2020. And if you decide to purchase equipment towards that end, will it show up by December 31, 2020 to allow the deduction? How is your cash balance holding up? How about where you stand versus your ’20 budget? Are you closely monitoring AR and the approval process for new customers? The latest news is the Fed will hold interest rates low until there is a clear indication of a 2% average increase in inflation which could take two years to get here. Does the bank still love you? Same question regarding your OEM’s and related finance companies. Time to review your bank loan and OEM agreements. On the positive side are you seeing any “opportunities “in terms of new lines, small undercapitalized service providers, poorly operated competitors, or add-on products or services to sell to customers? Are you pursuing technology to make you more efficient, easier to do business with, and at the same time inform customers of “deals” as well as required equipment repairs? Are you in touch with dealers within your network to share ideas and information to help survive this pandemic? If not, you should. Those Currie dealer groups work! And they will put you on a path to improve profits and company value. No matter how you answered any of the questions above every dealer or service provider needs to be cautious when it comes to keeping the company solvent, profitable, and valuable. Personally, I have been updating the budgets every 60 days or so and making department managers explain any pluses and minuses relative to the existing budget in place as well as their support for the adjusted budget going forward. At the same time, I am projecting out a cash balance for the end of each quarter using historical collection results and also taking into account all debt service currently on the books as well as any contemplated for the current quarter. I then extend this review to the end of the year or six months out whichever is longer. Obviously, the key to any budget or cash flow analysis is revenue projection. Needless to say, all departments need to provide reasonable budgets and have a plan to hit the quarterly results projected. Any indication that cash flow is slipping or actual results continuously below budget indicates that certain direct and overhead expenses need to be trimmed to align with revenues. And the longer you wait to make these adjustments the more likely you will not survive the recession. Calculate what it takes to replace $1 of cash flow because I assure you once you do you will never again hesitate to adjust costs in a timely fashion again. As far as I can tell prices are feeling the impact of COVID-19. THEY ARE ALL HIGHER! How will this impact your operating results or sales opportunities? Those fixed maintenance contracts will take a hit should parts and supplies increase in cost by 10% or so. Does it make sense to increase expenses for budget purposes? You can always try to pass on these cost increases at the risk of encouraging customers to shop the market. There is no doubt that dealers with a meaningful “systems” department have an advantage. There seems to be a new warehouse going up on every block where I travel. These systems need to be designed, a budget prepared for approval, financing obtained, employees trained and a maintenance contract agreed to. Since these systems are the bread and butter of efficient warehouse operation the dealers who control these systems have a stronger bond with the warehouse user. Much easier to sell additional products and services. The Bottom Line here is your operation needs constant management with a goal of maintaining positive cash flow. Attain this goal and the rest is downhill. Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry
IRS issues guidance on Employee Payroll Tax Deferral
The economic challenges created by the COVID-19 pandemic have been felt by businesses and individuals across Chicago. Not only have unemployment numbers spiked to new highs, but the impact on economic output has been hit. It was reported by Crain’s Chicago Business that Illinois is expected to take a $76B reduction in economic output due to the pandemic. These numbers reflect the need for another federal stimulus package to help state, local government, and businesses manage. Since Congress was unable to come to an agreement, earlier this month President Trump issued several Executive Orders. One of these was the creation of an employee payroll tax deferral program designed to provide individuals with immediate relief. Unfortunately, the lack of IRS guidance made it impossible for businesses to implement it for employees. On August 28, the IRS finally issued needed guidance (IRS Notice 2020-65) providing additional details on qualifying wages, repayment timeline, and other information. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below. Applicable Wages As highlighted in the Executive Order, an employer may – but is not required to – defer the employee portion of payroll taxes between the period of September 1, 2020, and December 31, 2020. The deferral applies only to the 6.2% Social Security tax withheld as part of the Federal Insurance Contributions Act (FICA) withholding. The 1.45% Medicare tax is excluded from this program. The guidance clarifies that pre-tax compensation and wages paid for a bi-weekly pay period threshold amount of $4,000 ($104,000 annualized) qualify as Applicable Wages. In cases where the pay period duration differs, then the equivalent amount must be met. Wages and compensation that exceed this amount are ineligible. In addition, the determination of Applicable Wages is made on a pay period by pay period basis. This means an employee may have Applicable Wages for one pay period and not the next if the threshold is exceeded. Therefore, the ability to participate may change on an ongoing basis. Tax Repayment Payroll taxes that are deferred must be repaid between January 1, 2021, and April 30, 2021, otherwise interest, penalties, and additions to the amount owed will begin to accrue on May 1, 2021. Employer Liability An important term used in the guidance which businesses should carefully note is the way they address the “Affected Taxpayer”. In the guidance, the term refers to an employer and not an employee as the party making the deferral. The employer, while they can take into account the wishes of an employee, is ultimately the one making the election to take advantage of the deferral. As a result, the party responsible for collecting and paying the deferred amount is actually the business. This has caused concern for many because it is unclear how collections will work when an employee has left the company or in similar situations. The door is open to potential risk factors which carefully need to be considered. There is some concern that if Congress ultimately enacts a payroll tax forgiveness, they could draft the forgiveness to apply to only the deferred payroll taxes, and not forgive the amounts that employers elected to pay as previously scheduled. Aside from presidential remarks, there had been no legislative proposals to forgive any payroll taxes, so this remains a purely speculative anecdote. Suggested Next Steps For businesses that do decide to participate in this deferral option, it is important to ensure the following steps are taken to set expectations and manage risk. Send written communication to all employees outlining the expectation that anyone who participates in the program will be required to pay back deferred payroll taxes according to the timeline above. Consult with a business attorney to draft a contract that requires participating employees to agree to additional Social Security tax withholding during the repayment timeline. In the same contact, be sure to add language requiring the employee to reimburse the company for any deferred payroll taxes in the event they terminate employment or do not earn sufficient income. When appropriate, be sure to communicate these changes to third party payroll providers including the obligation to increase withholding in the new year. Contact Us The recently issued IRS guidance provides important details and information needed to properly administer the program. However, the number of unanswered questions has left many wondering if they should even participate. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon. About the Author: Paul Rozek provides tax research, consulting, and compliance services to closely-held businesses, tax-exempt organizations, individuals, and fiduciaries. His clients include family offices, private foundations, trade associations, charitable organizations, schools, credit unions, and other nonprofit entities.
Episode 102 – The World of Dealership Finance
In this episode, I am joined by Garry Bartecki of GB Financial services and also the cover story author of the September 2020 issue of Material Handling Wholesaler. Garry and I discuss the world of dealership finance as we get into the current state of finance due to COVID-19, financing vs. leasing vs. renting, and how operations can work with their dealers to save some money during slower times. Key Takeaways Garry has been involved in the financing world for over 40 years working with dealers in multiple different ways. In those 40 years, there has never been anything quite like what has happened in the last few months during the pandemic. Garry discusses what the current climate looks like in financing which includes banks being more strict with loans. He mentions even companies that are in good standing are getting put under the microscope for new financing. This has to lead to a shift into renting over financing. Rentals are on the rise as there is so much change going on in their current environment. Garry’s guidance is to rent for the current need and then send back the equipment when it is not needed anymore. This allows for more flexibility and also keeps you from any long term commitment that may hurt you in a slower business period. He also recommends taking a look at all your current agreements and discussing with dealers if there are any potential changes to the terms that could be beneficial to you. During the current times, Garry suggests taking a close look at all of your current equipment and what costs are associated with them. He says to prepare for the long haul and not to take on any additional debt through leasing or financing which is why he favors renting. Additionally, he suggests looking at options for your lift trucks that may reduce overall costs like switching to lithium-ion batteries. Overall, taking a magnifying glass to your costs right now is the way to protect your balance sheet and help you get through tougher times. EP 102: The World of Dealership Finance This is the 4th installment of our partnership with Material Handling Wholesaler Magazine focusing on the cover story for their September 2020 issue. Host Kevin Lawton talks to cover story author Garry Bartecki of GB Financial Services about the current state of financing due to COVID. They get into financing vs. leasing vs. renting and how operations can work with dealers to alleviate some costs in slower times. Find the new issue of Material Handling Wholesaler at MHWmag.com Read the full cover story at Material Handling Wholesaler’s website here. Connect with Garry on LinkedIn here
The World of Dealership Finance
The World of Finance at this moment is in a state of flux and will probably continue to be through 2021. I am preparing this column on July 27 just before the Cares and PPP program stimulus is set to expire at month-end. So far, the $600 per week stimulus has fortified consumer spending. The PPP program has done the same by keeping employees on the payroll. What happens if these stimulants go away? There is little doubt that jobs that were available six months ago are no longer there. Consequently, a significant number of our population will still be unemployed for the remainder of 2020 and perhaps well into 2021. Add in what is happening in the rest of the world and you can see that for many industries and personal services the outlook will be frightening. Taking this all into account, management in the material handling industry has to manage the balance sheet and cash flow, determine if results are according to plan and adjust the program as necessary to reach cash flow goals, keeping in mind that their ability to price products and services according to pre-COVID levels have and will continue to be challenged for some time to come. In this environment both cash flow and balance sheet management top the list in terms of where company managers must spend their time. This is an interesting interaction because solving to improve either goal can have just the opposite impact on the latter. For example, when you lease equipment the lease accounting reduces your earning and thus EBITDA, and in most cases is more expensive cash wise. Buy the equipment and your EBITDA and cash flow improve but makes your Debt Service and Debt to EBITDA covenants harder to reach. Me, I prefer to meet my covenants because banks today are not as friendly as they say they are. Speaking of your balance sheet and cash flow, please consider your credit policies and AR collection policy keeping in mind that a historically steady customer can become a credit risk practically overnight. Waiting until month end to review AR days outstanding could reduce cash flow if a customer credit score changed at the beginning of the month and you kept providing parts and services as if no change occurred. At our last MHW conference, a company called CREDITSAFE demonstrated how they can notify you immediately if a customer credit score has improved or deteriorated. You get a daily or weekly email highlighting which scores changed and why which is better than waiting 45 days to figure out you are not going to get paid. A very cost-effective product as well. Dave Gordon is their contact that covers both the material handling and construction equipment dealers. If you wish to stay ahead of the collection process you can reach Dave at David@dealerfinancialresources.com. Worked with Dave at AED and can assure you he knows the equipment dealer business. Let us review our Finance World in terms of leasing, rental, and financing transactions. LEASING In this current environment, I prefer to outsource as much as I can to keep costs under control and personnel spending their time on customer needs and not my internal needs. And I believe this goes for you as well as your customers. For trucks, vans, and cars needed to service customers I like to explore my options with a Fleet Management Company who can provide an analysis of what equipment I need along with the services I need to operate the equipment efficiently. I do not know about you, but a company must know their fleet and have accurate data to manage the equipment in the house. Somehow that never seems to work out the way it was planned. And with many companies having a lower employee count maintenance seems to fall by the wayside. These leases can be drafted to allow flexibility should the markets turn against your dealer activities. Current data indicates that Open-End leases are more appealing than a Closed-End lease. In any event, the FMC gets rebates for fleet transactions that lower the cost of ownership and at the same time manage the entire process to maximize uptime and expenses associated with the fleet. One-stop-shop that frees up your managers to profit from customer involvement. While leasing, as mentioned previously, currently avoids impacting the balance sheet the new Lease Accounting Rules when enacted will cause lease transactions to become a balance sheet item. That being the case I would discuss this future development with your bank to see how they will handle this change. Many bankers say they will not include the lease accounting “debt” in their calculations, but who knows if they will stick to that promise. If covenants are tight, I would try for month to month short term rentals if you believe the bank will include the leases in the calculation. And let us keep in mind this is the last year for Bonus Depreciation. If you can put the bonus deprecation to good use, you may want to purchase equipment or enter a capital lease that has be capitalized on the balance sheet. Needless to say, there is some thinking and planning that goes along with lease transactions. BANK FINANCING Any facility providing financing to your dealership is going to spend more time doing due diligence about your business. So, management beware because while banks understand that COVID has caused depressed earning and EBITDA results, they will still expect covenants and cash flow requirements to cover debt service. You would think that a customer who has always covered debt service would get a pass for Q2 20 but do not count on it. As we mentioned previously keep debt off the books and budget and execute to cover debt service for each Q of the year. Bank rates are good. For how long, who knows. Refinancing is certainly on the table if you can reduce debt service as part of the deal. But banks are nervous. Do